The new code is the guidance part of the Government’s changes to the Credit Contracts and Consumer Finance Act.
The government is reforming financial services to improve access to home loans and other lending, and strengthen customer protections.
Under the first phase of the reforms, lenders will still have to act responsibly and ensure lending will not cause hardship but they will not have to follow a prescriptive, one-size-fits-all process.
The government has also improved dispute resolution to better protect consumers; exempted councils from the Credit Contracts and Consumer Finance Act (CCCFA) so they can offer low-risk financial products to help households improve their energy efficiency by installing heat pumps and insulation; and removed duplicate reporting requirements.
The Financial Services Federation says it is pleased to see no nasty surprises in the new version of the code, and that the commitment has been kept to balance consumer protection with the ability for New Zealanders to access responsibly provided credit when life calls for it.
FSF executive director Lyn McMorran says Commerce and Consumer Affairs Minister Andrew Bayly and officials can be congratulated on getting the new code out within the tight timeframe set to revoke the CCCFA affordability regulations, which were announced a couple of months ago.
The code has been approved by cabinet and will come into effect on 31 July. McMorran says the requirement of a 28-day period for the code to be gazetted will provide lenders with the certainty they’re looking for in what level of discretion they will be allowed in their affordability assessments from the end of July.
When the affordability regulations were introduced into the CCCFA in December 2021, they threw a bucket of cold ice over banks and financial providers by prescribing minimum steps to assess the affordability of a loan.
A series of tweaks to the CCCFA by the previous Labour Government regulations were intended to clarify what constitutes “reasonable inquiries” when assessing customer affordability, however, in practice the requirements were still considered highly prescriptive.
Overly arduous checks meant the time it took to process loans dramatically increased. In many cases a small loan that used to take two hours to process suddenly took up to eight hours.
This meant it was no longer affordable for many providers to offer small loans. It became difficult for people, who needed $500 to fix their broken-down car, to access a safe line of credit. They were effectively frozen out of the market and many vulnerable Kiwis were instead forced to borrow from high-interest loan sharks,” Bayly said when announcing the regulatory changes.
McMoran says under the new code lenders will still need to make “reasonable inquiries” when assessing customer affordability.
However, rather than working through a prescriptive checklist, lenders will instead be guided by the responsible lending principles when designing affordability assessment procedures that are fit for purpose.
“We are supportive of targeted measures to protect vulnerable consumers, such as introducing a definition for what constitutes a high-cost lender. But a regime where lenders aren’t required to treat every customer as vulnerable by default, is a return to commonsense.”
Under the second phase of the CCCFA changes, areas of under-performance, including the liability settings and disclosure obligations will be reviewed as will the high-cost credit provisions to ensure there is adequate regulation surrounding these lending practices.
