On 4 September 2024, at the Financial Services Council Gala Dinner, the Minister for Commerce and Consumer Affairs (the Minister) announced that policy decisions had been made in respect of reforms to the New Zealand financial services landscape.
On 5 September 2024, the Government released a cabinet paper with details of these reforms. Among the most significant of these are:
- Further confirmation that the Financial Markets Authority (FMA) will take over the regulator function of the Credit Contracts and Consumer Finance Act 2003 (CCCFA) from the Commerce Commission and how this will occur
- Removing the current certification requirement under the CCCFA for providers of consumer credit contracts and replacing this with a new form of market service licence under Part 6 of the Financial Markets Conduct Act 2013 (FMCA)
- Amending the CCCFA, including removing the personal due diligence duty for directors and senior managers and limiting the situations where a borrower will not be liable to pay the costs of borrowing in relation to non-compliant disclosure
- Streamlining the requirements for fair conduct programmes (which certain financial institutions will be required to implement prior to the Financial Markets (Conduct of Institutions) Amendment Act 2022 (CoFI Regime) substantially coming into force).
Further to the cabinet paper, the Government released the proposal for the reforms given by the Minister to the Cabinet Economic Policy Committee which sets out further detail on the rationale of the Minister in recommending the reforms. In particular, the Minister stated that reform of the New Zealand financial regulation regime is necessary for three reasons:
- "New rules and requirements over the past decade has led to a duplication of the roles of the RBNZ and FMA"
- "Unnecessary compliance burden for businesses"
- "Overly prescriptive lending rules resulting in unintended impacts on consumers".
The Minister also stated that he intends to "come back to Cabinet later in the year to seek additional policy decisions" in respect of consumer credit legislation, indicating that additional amendments to the CCCFA may be under consideration.
Change of oversight of the CCCFA to the FMA
It was again confirmed that the FMA will be taking over the regulatory function of the CCCFA from the Commerce Commission as the Government moves towards having a dedicated prudential regulator (the Reserve Bank of New Zealand) and a dedicated conduct regulator (the FMA) for the financial services sector. The Government announced that in order to effect this change smoothly, ancillary amendments will be made to the FMCA, Financial Markets Authority Act 2011 (FMA Act) and Financial Service Providers (Registration and Dispute Resolution) Act 2008. However, it is not yet clear what these changes will be.
Separately, the fair dealing provisions in Part 2 of the FMCA will apply to consumer credit (instead of the Fair Trading Act 1986 which currently applies in respect of the fair dealing of consumer credit). These provisions are substantially similar, and this will likely not result in a substantial change for providers of consumer credit.
Please see our previous article for further information on how the change of oversight of the CCCFA may impact regulated entities here.
Providing consumer credit contracts to be a market service under the FMCA
The current certification requirement under the CCCFA for providers of consumer credit contracts is being removed and instead being a provider of consumer credit contracts will be a market service requiring licencing under Part 6 of the FMCA. The Government has additionally confirmed the following:
- Those entities who are presently exempt from certification as a result of the Credit Contracts and Consumer Finance Regulations 2004 will be exempted from the obligation to hold a market service licence
- Those entities who are presently exempt from certification as a result of being an otherwise licenced entity will not be exempt from the obligation to hold a market service licence
- Those entities who are presently certified under the CCCFA (or are otherwise exempt due to being an otherwise licenced entity) will be deemed to have the corresponding market service licence (rather than being required to reapply for a market service licence).
The FMA has a broader set of powers under the FMCA and the FMA Act in relation to entities who hold a market service licence than the Commerce Commission has in respect of certified entities under the CCCFA. This includes powers to require reporting by licenced entities, a power to give directions to a licenced entity where there has been a breach of the licence, and requiring a licenced entity to submit an action plan to the FMA detailing how the entity intends to remedy or avoid contravention.
The Government has also agreed to provide the FMA with a new power to ensure financial markets participants are complying with their conduct obligations. At any reasonable time and without prior notice, the FMA may conduct an on-site inspection of a financial markets participant (at their premises) to monitor the entity's compliance with those conduct obligations.
Changes to the CCCFA
The personal due diligence duty for directors and senior managers (currently section 59B of the CCCFA) will be repealed, the Minister's reasoning being that there are equivalent obligations which also incur personal liability under the FMCA. Personal liability under the FMCA is however only incurred when an individual is "involved in a contravention" and this requires a sufficient nexus between the contravention by the entity and the actions of a director/senior manager. This is contrary to the due diligence duty under the CCCFA which created a positive obligation on directors and senior managers to "exercise due diligence" to ensure that the entity complies with the CCCFA.
Section 99(1A) of the CCCFA, which states that a debtor is not liable for costs of borrowing (meaning any interest or fees in connection to the borrowing) in relation to any period where the creditor has failed to make compliant initial disclosure (under section 17) or agreed variation disclosure (under section 22), will be limited to only apply where it can be shown that the borrower "was harmed by the failure to make initial or agreed variation disclosure". It is not yet clear what standard of harm will need to be shown for section 99(1A) to apply.
Streamlining the requirements for fair conduct programmes
Under the CoFI Regime "financial institutions" are required to prepare, implement and maintain fair conduct programmes which set out how that "financial institution" will comply with the fair conduct policy. Under the CoFI Regime there are certain minimum requirements which a fair conduct programme is required to meet. The Government has agreed to amend the minimum requirements for fair conduct programmes in the following ways:
- Removing the requirement to include policies, processes, systems and controls for how the entity will meet all of its legal obligations to customers
- Making the requirements relating to training, supervising and monitoring of employees less prescriptive
- Removing the requirement to include (in the fair conduct programme itself) the methods for how the fair conduct programme is regularly reviewed and how deficiencies are identified
- Inserting two additional requirements to include policies, processes, systems and controls relating to applying, disclosing and reviewing fees and recording/resolving customer complaints.
Other reforms announced
Other reforms announced by the Government include:
- Amending the FMCA to require the FMA to issue one single market services licence (which encompasses all market services the entity is licenced to provide) rather than issuing separate licences
- Amending the FMCA to require licensed market service providers to obtain approval from the FMA prior to a change of ownership/control of the licensed entity taking effect
- Exempting Buy Now Pay Later lenders from being required to comply with the unreasonable fees provisions in the CCCFA.
Who is affected by these reforms and what are the impacts?
These reforms are wide-ranging and will have varying impacts on different financial service providers and financial markets participants. In particular, the changes to the CCCFA (including the change of oversight to the FMA and being required to hold a market service licence) may have significant impacts for providers of consumer credit.
Next steps
The Minister has been authorised to issue drafting instructions to the Parliamentary Counsel Office to give effect to the announced reforms. It is not yet clear the timing of when these reforms will come into force, or whether there will be further consultation on any exposure drafts.
If you are a financial service provider or you are considering providing consumer credit we recommend you familiarise yourself with the announced reforms and consider their impact on your business. If you wish to discuss any of the announced reforms, or any aspect of the New Zealand financial services landscape, please get in touch with our financial services regulation team.
This article was co-authored by Andrew Suggate (senior associate) and Thomas Carr (solicitor).
