Credit and Hardship - Could the Australian Senate Report prompt further changes to New Zealand’s consumer credit landscape?
15 March 2019
The Australian Senate Economic References Committee (SERC) released its report on credit and financial products targeted at Australians at risk of financial hardship on 22 February 2019.
The SERC inquiry and report follows on the heels of the Australian Royal Commission into misconduct in the banking, superannuation, insurance and financial services industries in Australia (see our article on the Royal Commission's report). The themes that emerge from the SERC report - financially vulnerable borrowers being targeted with, and trapped by, high cost credit products - are the same as the concerns expressed by the Minister of Commerce and Consumer Affairs, Kris Faafoi, and which caused him to initiate the review of the Credit Contracts and Consumer Finance Act 2003 (CCCFA) in New Zealand in late 2017.
The SERC report includes 20 recommendations to address and improve the terms on which products such as payday loans are offered to Australians at risk of financial hardship. While a number of these recommendations echo the recommendations for changes to the CCCFA in the 2018 Cabinet Paper from the Minister, some of them go further.
We set out below a summary of four key recommendations in the SERC report not covered in the New Zealand Cabinet Paper together with our comments on whether they are likely to be picked up in New Zealand.
Australian SERC report: The government provide additional funding to strengthen the capability of the Australian Securities and Investments Commission (ASIC) to police the small and medium credit contract and consumer leasing sectors.
New Zealand Cabinet Paper: Not covered.
Buddle Findlay comment: The Cabinet Paper includes a recommendation that the enforcement provisions in the CCCFA are strengthened to enable more efficient enforcement by the Commerce Commission. However, the Cabinet Paper also notes there has, to date, been insufficient enforcement of the lender responsibility principles. It remains to be seen whether the Commerce Commission has sufficient resources and funding to take more enforcement action under the CCCFA.
Australian SERC report: ASIC, the Australian Competition and Consumer Commission and the Australian Financial Complaints Authority undertake a review to assess what systems and mechanisms would counteract the chronic underreporting of malpractice and how best to allow consumers to make complaints about the behaviour of payday lending providers.
New Zealand Cabinet Paper: Not covered.
Buddle Findlay comment: This was not identified as an issue with the current legislative framework in the June 2018 Review of Consumer Credit Regulation Discussion Paper, notwithstanding that it acknowledged that the principles-based nature of the lender responsibilities and Responsible Lending Code makes it difficult [for consumers] to know what is prohibited, and when to complain about conduct to the Commerce Commission or dispute resolution schemes. We suspect that the same issue identified in the SERC report is likely to exist in New Zealand.
We note that all credit providers in New Zealand are required to be registered on the Financial Service Providers Register and be a member of an approved dispute resolution scheme, to which customers can complain directly and at no cost. While this is important infrastructure, it may be that further education of, or disclosure to, borrowers is needed to ensure that our complaints infrastructure is accessed readily and appropriately, particularly by vulnerable borrowers.
Australian SERC report: The government consider, in consultation with ASIC, consumers and industry, what regulatory framework would be appropriate for the ‘Buy Now, Pay Later’ (BNPL) sector, including regulation to ensure that:
- Providers consider consumers' personal financial situations before providing the product
- Consumers have access to dispute resolution mechanisms
- Providers offer hardship provisions
- Products are affordable and offer value for money
- Consumers are properly informed, prior to entering into agreements, about their terms and conditions.
New Zealand Cabinet Paper: The Minister has stated, in the Cabinet Paper, that there is limited evidence of harm from BNPL products and that, as they are already subject to protections under the Fair Trading Act 1986 (FTA), he does not consider there is any need to bring them within the scope of the CCCFA at the moment.
Buddle Findlay comment: In New Zealand, BNPL providers are required to be registered on the Financial Service Providers Register and a member of an approved dispute resolution scheme. They are also subject to the FTA (ie they cannot engage in misleading or deceptive conduct and are subject to the unfair contract term regime).
However, BNPL products and providers do not have to comply with most of the requirements in the CCCFA (including lender responsibility principles, disclosure, reasonable fees etc) because of the way these products are typically structured.
It will be interesting to see where Australia lands in terms of regulating the BNPL industry. Given the Minister's concerns around irresponsible lending, we expect that, in the future, BNPL schemes in New Zealand will be subject to (at least) parts of the CCCFA, including the lender responsibility principles and restrictions on reasonableness of default fees.
Australian SERC report: ASIC review how financial products and services (including credit) are advertised and issue an updated regulatory guide to deal with how credit products interact with consumers in an online environment.
New Zealand Cabinet Paper: The Cabinet Paper recommends that there be a new regulation-making power that would allow mandatory standards to be prescribed in relation to advertising responsibly.
Buddle Findlay comment: It seems likely that any mandatory standards for advertising would mirror the current requirements in the Responsible Lending Code (RLC).
The SERC report acknowledges that many customers access credit, or are exposed to credit advertising, online and that lenders are able to, through use of data analytical resources, target advertising at those who are most likely to use the relevant financial products and adapt their credit offerings depending on consumer responses.
This form of advertising allows providers to target products to individuals for whom the product may not be suitable. We do not consider that the current guidance in the RLC would address this issue. We think that greater scrutiny will be applied by the Commerce Commission and it is only a matter of time before greater restrictions are placed on creditors in relation to online advertising and use of this form of advertising to target specific customers or customers that fall within a predetermined category.