FSF: How to fix finance law
An open letter has been sent by the Financial Services Federation (FSF) to the powers-that-be outlining what it believes needs to be done to sort out the chaos caused by changes to legislation.
The correspondence, which runs to 13 pages, outlines why changes to the Credit Contracts and Consumer Finance Act (CCCFA), which came into effect December 1, are simply not working.
The letter, which also details what the government can do to fix the problems, has been sent to David Clark, Minister of Commerce and Consumer Affairs, Duncan Webb, chairman of the finance and expenditure select committee, the Council of Financial Regulators (CFR), Andrew Bayly, National’s spokesman for commerce and consumer affairs, and David Seymour and Damien Smith, Act leader and Act’s spokesman for finance and expenditure respectively.
The FSF’s letter starts by saying the federation is pleased Clark has called for the CFR to bring forward a scheduled investigation into whether lenders are implementing the CCCFA as intended. What follows is an edited version of that letter.
The following are the key points of this letter:
• The changes to the CCCFA that took effect from December 1 are not working for consumers, lenders or intermediaries such as brokers. An urgent review into what is wrong with the regime is required.
• The changes apply to all lenders, not just to banks, and are affecting business customers (particularly SMEs) – not just consumers.
• The changes will not just affect housing lending, but lending for essential items like motor vehicles and household appliances.
• The FSF made many submissions while the regime was being developed stating the proposed reforms were moving too far in the wrong direction from the principles-based regime put in place by the 2015 CCCFA reforms given the vast majority of lending carried out in New Zealand was already being done responsibly.
• The problems of vulnerable consumers being preyed on by irresponsible or unscrupulous lenders would not be solved by further legislation, but by enforcement of the existing legislation.
• The FSF does not believe that officials developing changes to the law, the new regulations and revised responsible lending code took into sufficient consideration the concerns of lenders voiced throughout the change process in spite of many opportunities afforded to lenders to voice these concerns.
• The implementation timeframe from the time the total regime was confirmed (February 2021) until the time it took effect (December 1– admittedly later than the original October 1 date) caused significant stress and pressure for lenders to ensure 100 per cent compliance, particularly in light of overly punitive personal liability attached to senior managers and directors of lenders for not being in compliance.
• The key problem with the regime lies with the overly prescriptive nature of the regulations for assessing loan affordability (regulation 4AA-4AO), the granular nature of enquires required of consumers under these regulations, the requirement that a “reasonable” buffer or surplus be applied over and above the granular expense assessment, and the lack of any ability on the lender’s part to trust the information provided by the borrower since the repeal of lender responsibility principle 9C7.
• These regulations have the effect of treating every consumer as a “vulnerable borrower” when the significant majority would consider themselves to be no such thing.
• The issue does not lie with the way in which lenders are interpreting these regulations as they have been written so as to leave no room for interpretation and lenders will not risk deviating from the prescriptive nature of requirements of the regulations for fear of incurring significant personal liability against their senior managers and directors.
• The FSF believes the affordability regulations 4AA-4AO should be repealed and lender responsibility principle 9C7 reinstated immediately. Beyond this the government and officials need to engage with lenders, consumers and intermediaries to determine a way forward to ensure New Zealand’s consumer credit legislation is fit for purpose for the future.
• The FSF is eager to be part of such further engagement.
Application of CCCFA changes to all lenders
The FSF notes that since the implementation of the substantive changes to the CCCFA as of December 1, there has been a lot of media commentary about the effects these changes have had – particularly on consumers seeking lending for house purchases.
This commentary has become more frequent and vocal over the holiday period, and has centred mainly on the fact these changes have been brought about by banks.
The FSF would like to point out the changes apply to all lenders – not just to banks – and they are having adverse effects on the ability for consumers to borrow.
This creates issues for consumers wishing to access credit to purchase motor vehicles, home appliances, all manner of other essential goods or services – indeed, for any lending purpose at all.
The FSF will be gathering data from members over coming months to quantify the effect of the changes on the time it’s taking lenders to assess credit applications and whether the number of declinatures has increased as a result of the changes.
The FSF has, however, received sufficient anecdotal information from members to understand the time to assess applications and declines have increased dramatically since December 1.
The FSF notes members already had a high average rate of declinature reporting only 55 per cent of applications approved in the year to February 28, 2021.
It is also worth noting the average percentage of loans in arrears across the FSF membership as of February 28 had decreased to 4.4 per cent from 5.8 per cent in 2016, which suggests the changes made to the CCCFA in 2015 introducing the lender responsibility principles were working.
It is an unfortunate fact there will always be some borrowers whose lending falls into arrears, not because the original lending decision was irresponsible but due to changes in the borrower’s circumstances etc.
Only a very small percentage of accounts in arrears become defaults or lead to the lender taking recovery action against the borrower as this almost always leads to losses for the lender and the worst possible outcome for the borrower.
Rather, responsible lenders such as FSF members prefer to work with their customers (and their financial mentors) to come to the best possible solution for both parties to maintain the relationship with the borrower for the longer term. For this reason, the FSF has always been fully supportive of the formal hardships process implemented by the 2015 changes to the CCCFA.
Effects on customers of non-bank lenders
FSF members as of February 28, 2021, provided almost half of personal lending taken out by New Zealand consumers in the previous year, with the remainder being provided by the banks.
The FSF membership has grown considerably – by nearly 40 per cent – in the months since February 28, largely because of the serious concern all responsible lenders have with respect to the significant penalties attached to not just the company itself but its senior managers and directors if they were not 100 per cent compliant with the requirements of the revised CCCFA, and the need for them to be sure they were across all requirements given their substantive and complex nature.
It is, therefore, likely that personal lending provided by non-bank lenders now exceeds that of the banks.
For customers of responsible non-bank lenders, the inability to access credit when they apply will mean they will not be able to replace essential household appliances when required, which could result in substantial hardship.
Many FSF members are heavily involved in lending for the purchase of motor vehicles, new and used.
You will be aware New Zealand has one of the oldest fleets in the OECD at an average age of 14.4 years according to Ministry of Transport data. This makes New Zealand’s fleet among the most unsafe and the most fuel-emitting in the world.
Most New Zealanders require a vehicle to transport themselves and their families to work, school, shops and medical appointments etc. Many rely on access to their vehicle to be able to sustain their employment and their income.
The vast majority of consumers require credit to be able to purchase a motor vehicle. Again, restricting such access will result in substantial hardship for many families.
The FSF also believes the less consumers can have access to finance to upgrade their vehicles when they feel it is appropriate, the longer they will retain their existing vehicle or the more they will be forced to purchase older vehicles with fewer safety features and less fuel efficiency.
This will only make New Zealand’s situation worse with respect to the safety of the vehicles on roads and the amount of carbon emissions for which they are responsible, and will make the government’s objectives with respect to conversion of the fleet to electric vehicles impossible to achieve.
FSF members are also reporting that their business customers, particularly small to medium-enterprise customers, are being adversely affected by the CCCFA changes. Whilst business lending is not directly covered by the CCCFA changes, they are impacting indirectly on business lending applications.
Even when the primary purpose of lending is for business, where the business is closely held by directors with concurrent consumer debt also serviced by income from the business, lenders feel it is necessary to consider the effect of the new CCCFA affordability requirements on existing consumer debt to determine if the business is providing sufficient income to meet those requirements and any additional business debt.
This is to ensure that not only can the business afford its debts, but that the consumer borrowers linked to the business can also afford theirs under the overly prescriptive requirements of the new affordability assessment regulations.
Unfortunately, the FSF believes the CCCFA changes are likely to have the opposite effect to the purposes of the CCCFA to promote and facilitate fair, transparent and efficient markets for credit, and to protect the interests of consumers under credit contracts.
The FSF believes the changes are already causing responsible lenders to decline applications from people who they would have been able to help in the past because they do not meet the prescriptive criteria that now apply to those lending entities who have always behaved responsibly and compliantly.
If these consumers are unable to access credit from responsible providers and they have a need for such access, their only alternative will be those lenders for whom compliance and responsible behaviour have never been a concern, possibly placing vulnerable consumers back where they started with irresponsible players in the market as these will be the only choices left for some.
How FSF members have worked with customers since Covid-19
Since the onset of the pandemic within New Zealand’s borders, many consumers have experienced – or have been concerned they might experience – financial stress because of reduced hours or loss of income due to lockdowns and changes to alert levels.
From the beginning of the first lockdown in March of 2020, FSF members have been inundated by calls from customers seeking assistance due to the financial stress experienced because of the effects of Covid-19 and subsequent lockdown(s).
FSF members provided assistance to customers knowing that technically they could be in breach of the CCCFA as it stood in 2020, but did so because it was the right and moral thing to do.
This is despite banks were provided with an exemption via regulation from CCCFA requirements to assess the affordability of loan variation when they extended terms, deferred repayments or converted the loan to interest only as a result of the mortgage repayment deferral scheme, while this same accommodation was not afforded to all lenders until some three months later through an addendum to the responsible lending code.
FSF members have continued to work with customers – both consumer and business – to develop solutions to help them through uncertainties Covid-19 continues to throw at us.
This demonstrates the ongoing commitment of FSF members to provide responsible lending and empathetic consideration of the individual circumstances of all their customers.
Problems with the CCCFA in its current form
The FSF has set out our concerns on this reform and new regulations in many submissions throughout consultation over the past three years.
Essentially, the FSF has said right from the very beginning since the announcement of the reform process by then Commerce and Consumer Affairs Minister, Kris Faafoi, at the FSF’s annual conference in October 2018 that the changes were unnecessary if the existing regime was being enforced with sufficient rigour.
Throughout the consultation period, the FSF reiterated that the reforms were swinging far too far in the wrong direction by moving from the principles-based approach changes made to the CCCFA effective 2015 brought in with the lender responsibility principles (S9C), to that of a highly prescriptive one that was always going to be very manual and time-consuming from the lenders’ point of view and intrusive and time-wasting from that of the consumer – particularly with respect to regulations regarding the way in which affordability assessments would be required to be carried out.
The FSF continually voiced the belief that the vast majority of the lending carried out in New Zealand was already being done so responsibly and that, without enforcement, the proposed changes would do nothing to protect vulnerable consumers being preyed on by unscrupulous lenders.
The FSF also stated repeatedly that we did not believe most consumers accessing credit as required from responsible lenders wanted these changes and we consider that we have proven to have been right in this belief.
Indeed, no notice of the changes or the effect they may have on consumers has been provided to the public by the government nor any justification as to why the process for them to access credit has now become so difficult.
It has been left to the FSF and the NZ Bankers’ Association, in association with FinCap, for a consumer resource to have been developed to explain the reasons why the process has now become so fraught.
The FSF supported the changes to the CCCFA made by the Credit Contracts Legislation Amendment Bill 2019 (CCLAB) that placed into law a definition of what constitutes a “high-cost lender” or “high-cost loan” – being a loan provided at an annual interest rate of more than 50 per cent.
The FSF also supported the introduction of a limit on the amount of fees and interest that could be charged by high-cost lenders to 100 per cent of the loan amount –when, if a loan of $500 is provided, the maximum the lender could charge in interest and fees would be $1,000.
The FSF further supported the amendment to CCLAB at select committee stage that introduced an interest rate cap of 0.8 per cent per day per annum on all high-cost loans (meaning high-cost lenders could not charge an interest rate greater than that equivalent to 292 per cent per annum) – despite only being given four days to respond to the consultation on the cap’s introduction.
However, as stated previously, the FSF has always believed the issue of vulnerable consumers continuing to be victims of irresponsible lending practices lies not with a lack of preventive legislation but more with a lack of enforcement of legislation already in place.
The FSF would have liked to have seen far more of the types of enforcement activity that the Commerce Commission has undertaken against the likes of payday lenders and mobile traders to substantially penalise them for unethical behaviour or to put them out of business.
The FSF also believes the major cause of lenders’ concerns and poor experiences for consumers since the December CCCFA changes lies less with the act itself, but with the regulations supposed to support these changes.
The FSF has always strongly submitted that regulations, particularly those with respect to how the assessment of the affordability of a loan was to be conducted (regs 4AA-4AO), took too much of a “one-size-fits-all” and an overly prescriptive approach.
The FSF acknowledges the views of members were widely sought by MBIE officials developing these regulations and the subsequent guidance provided in the responsible lending code over many consultations, meetings and through the provision of multiple submissions throughout much of 2020 before the regulations and code were finalised in February 2021.
However, the FSF has always felt that, while officials listened to these views, members’ serious concerns were never taken into sufficient consideration by them. The fact that the concerns raised in these submissions are now coming to fruition so early in the new regime does not give FSF members any sense of satisfaction.
The FSF believes the regulations should never have had the effect of making access to credit difficult for all consumers, or of excluding some that have previously proven they can afford to meet loan commitments but do not now meet the prescriptive affordability requirements – as is becoming increasingly obvious.
Rather, it should have been made harder for irresponsible lenders to provide credit to consumers in vulnerable circumstances that would leave these consumers in significant financial hardship or a worsening spiral of debt, and easier for the Commerce Commission to enforce the law against such lenders.
The FSF does not believe the problem lies with the way in which lenders are interpreting these regulations.
The regulations are so prescriptive as to leave absolutely no room whatsoever for interpretation. They must be complied with as written – no matter how poorly – and that is what lenders are doing. The liability of not doing so is so punitive as to leave lenders with no choice with respect to any kind of interpretation or judgement.
Additionally, once the regulations and the code were finalised in February 2021, lenders initially had until October 1 to implement them. (However, the FSF gratefully acknowledges the minister’s extension of this deadline to December 1 as a result of the August lockdown).
Even with this extension, the FSF has always maintained the prescriptive nature of the regime, and the significant company and personal liability attaching to senior managers and directors of lenders if found to be in breach, required such significant changes to lenders’ systems and processes as to make this date virtually impossible to meet.
In the absence of any further leeway concerning the commencement date, lenders have had to do what they can to ensure compliance and the addition of any nuance or allowance for judgement of any kind was unable to be accommodated.
The delivery of these changes, including significant changes to systems and processes and training of staff and intermediaries in new processes, were further challenged by the longest lockdown in New Zealand’s largest market, Auckland.
What is wrong with the affordability regulations
Previously, it was acceptable for lenders to obtain information from borrowers about their fixed financial commitments, such as rent/mortgage, other debt, insurance costs, power, phone/internet etc. Then to determine reasonable allowable amounts for other costs such as food and transport (depending on the borrower’s circumstances). And then to allow for some discretionary expenditure (without having to have all such expenditure itemised) to ensure the loan’s affordability.
This is no longer the case. Nor is it any longer the case that the lender can rely on information provided by the borrower unless they have reason to believe this might be unreliable – as was allowed under lender responsibility principle 9C7, which was repealed under CCLAB much to the protest of the FSF.
The regulations now require that lenders should obtain information about the borrower’s fixed commitments and all discretionary expenditure, verify these where possible and interrogate the customer as to what, if any, discretionary expenditure they would cease to make the loan more affordable.
The lender is then required to apply a “reasonable” surplus or buffer over and above this expenditure to consider the fact the income might have been overstated or expenditure understated – in spite of whether or not income and expenditure has been verified.
It used to be that lenders could trust borrowers to make their own decisions as to what expenditure they would continue and what they would stop to ensure they met their loan commitments.
These regulations require lenders to start off an essentially non-trusting relationship with customers by asking them to provide so much detailed and personal information – and verification of this information – with respect to spending habits.
Clearly, there are consumers in vulnerable circumstances who might not be able to make the most appropriate judgement with respect to their own circumstances, and lenders have since 2015 had an obligation to identify such borrowers and treat them with special care and attention.
Treating all consumers as being vulnerable, which is what these regulations are requiring lenders to do, is entirely unreasonable when most consumers are capable of making decisions for themselves as to whether a loan is appropriate for their circumstances.
What should be done to improve the CCCFA regime
The FSF would value any opportunity to work constructively with government and officials to ensure better outcomes for all consumers seeking access to consumer credit provided by responsible lenders whether they be banks or non-bank lenders.
However, the FSF believes the regime in place currently is significantly flawed and the FSF’s biggest concerns throughout the process of the development of the regime are being realised only weeks into its commencement.
The FSF strongly supports an immediate and comprehensive review of what is working with respect to the regime and what is not.
The FSF believes that this time around the review needs to take into consideration the views and financial expertise of responsible lenders and more consumers wishing to access credit responsibly.
The FSF believes that a fundamental problem with developing the 2021 CCCFA changes is that they have come as a nasty surprise to most consumers who, if they were aware that there were problems with the existing CCCFA regime, it was because of “loan sharks”.
The current regime now treats all consumers as being either “vulnerable” or incapable of making their own rational borrowing decisions, which is frankly insulting to the majority of New Zealanders as the vast majority would not see themselves as either dealing with loan sharks or as being a vulnerable consumer.
The FSF would like to see the review firstly, and most urgently, repeal the affordability regulations, Regs 4AA-4AO, and return to the principles-based regime of the 2015 CCCFA reforms – including the reinstatement of lender responsibility principle 9C7 to allow lenders to rely on information provided by the borrower unless they have reasonable grounds to believe the information is unreliable.
Further, there needs to be a willingness from government and officials to undertake to listen this time around to responsible lenders as to what further improvements could be made to the regime to protect access to credit for consumers and ensure that it is provided to them by responsible lenders.
Where to from here
The FSF is eager to be part of any such further investigation. Members are available to talk to government and officials about their experiences and those of their customers, and are hoping they will be acknowledged and considered.
We remain optimistic in hopes to finally achieve a level of understanding between the regulator and industry as we both strive to achieve the same objectives – reasonable access to credit provided responsibly by all lenders, and protection of those who are vulnerable – which can be constructively and more efficiently achieved this time around.
Further information. Full version of FSF’s open letter to government. Link to FSF’s membership. Link to how FSF members, excluding affiliates, contribute to consumers, society and business.