CCCFA changes could remove personal liability on directors and senior managers

The changes the government is considering making to the Credit Contracts and Consumer Finance Act (CCCFA) aren't the things that have made headlines, such as coffee and Netflix habits disqualifying borrowers from getting mortgages, since changes to the law came into effect in December 2021.

Instead, the focus is on whether directors and senior managers of financial institutions should be able to be indemnified or to insure against penalties for breaching their due diligence duty and whether disclosure obligations and penalties for their breaches are fit for purpose.

The government is also looking at effectively reducing penalties on financial institutions that don't provide required disclosure or provide inaccurate disclosure to borrowers.

The government is also looking at lowering the threshhold for the high-cost credit provisions – currently, the law captures lending with interest rates of 50% and above and the government is looking at lowering that to 30%.

While interest rates generally are currently regarded as high, the Reserve Bank's official cash rate is 5.5% and mainstream floating mortgage rates are below 9%.

A discussion paper on the proposed changes that the Ministry of Business, Innovation and Employment (MBIE) has released notes that currently directors and senior managers currently can't be either indemnified by their companies or covered by insurance for breaches of their due dilligence liability.

In other words, directors and senior officers are currently personally liable if they breach their due diligence duty.

“Highly conservative interpretations”

“While these settings were intended to increase accountability for for directors and senior managers, we have also seen signs of them causing lenders to take highly conservative interpretations to requirements relating to affordability and a reluctance to exercise discretion as intended,” MBIE's paper says.

It notes that “some larger lenders” have argued that they are disproportionately affected because their directors and senior managers have less control over the activities of employees.

The proposed changes to disclosure requirements cover removing duplication, removing information “unhelpful or unlikely to ever assist borrowers to reach informed decisions,” and to remove the potential for confusing consumers or overwhelming them with information.

One possiblity is to remove the requirement on a lender to make disclosure before they embark on debt collection because this is “perceived by some lenders as causing borrowers further distress or confusion.”

The CCCFA currently provides that lenders forfeit the right to any interest or charges for any period in which disclosure is not properly made.

There is currently a class action against ANZ Bank NZ relating to a faulty mortgage calculator and against ASB Bank for failing to provide required information.

The MBIE paper says the law was amended in 2019 to recognise that such a penalty could be “out of proportion to the degree of harm caused to consumers.”

The amendment allows lenders to apply to a court for relief in such circumstances.

The government has decided to hand enforcement of the CCCFA to the Financial Markets Authority, removing the Commerce Commission from that role, and the paper also covers transition measures that will require.

Submissions on MBIE's proposals are due by June 19.

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