Government announces further changes to the CCCFA regime
18 August 2022
On 2 August 2022, the Government announced further changes to the Credit Contracts and Consumer Finance Act 2003 (CCCFA) regime that are expected to come into effect in March 2023, with the announcement noting that these changes were made in order to "ensure borrow-ready kiwis aren’t being unfairly penalised when applying for a loan".
These changes are a result of an extensive investigation into the unintended consequences of the December 2021 amendments to the CCCFA regime.
The Ministry of Business, Innovation and Employment (MBIE) will consult on the details of these changes through the release of an exposure draft of amendment regulations, with public consultation expected to open on 22 September 2022.
This article provides background, summarises the changes in this latest announcement and sets out the next steps for changes to the CCCFA regime.
If you require guidance in understanding how these changes might impact you or require advice on how to remain compliant with the CCCFA, please contact a member of our financial services regulation team.
Background and initial changes
In December 2021, a wide range of amendments to the CCCFA regime came into force that were designed to protect vulnerable borrowers from predatory lending. However, the amendments have attracted criticism for being overly prescriptive. For a detailed overview of the December 2021 changes to the CCCFA regime, please see our previous article - CCCFA - the case for a more 'principles-based' approach to affordability requirements.
Following this criticism, in January 2022 the Government announced an investigation into the impact of the changes to the CCCFA led by MBIE and the Council of Financial Regulators (Investigation). For more information on this, please see our previous article - CCCFA investigation fast-tracked due to wide-spread concern.
On 11 March 2022, the Government announced that, while the Investigation was ongoing, Cabinet had agreed to initial changes to the Credit Contracts and Consumer Finance Regulations 2004 (Regulations) and the Responsible Lending Code (RLC) "to address some of the concerns that have been heard in the investigation so far".
In April 2022, the Government released an exposure draft of the initial changes to the Regulations and RLC and MBIE ran a short public consultation on these proposed changes. On 9 June 2022, the Government announced that it had finalised the proposed initial changes to the Regulations and RLC to reflect the feedback from this consultation.
Overview of the initial changes
The initial changes to the Regulations and the RLC that were announced on 9 June 2022 and came into force on 7 July 2022 were primarily focused on addressing interpretational issues and were as follows:
- Removed regular 'savings' and 'investments' as examples of outgoings that lenders need to inquire into when assessing a borrower's likely expenses
- Clarified that when borrowers provide detailed breakdown of future living expenses, and these are benchmarked against robust statistical data, there is no need to inquire into current living expenses from recent bank transactions
- Clarified that when lenders estimate expenses from recent bank transaction records, they can ask the borrower about how expenses are likely to change once they enter into a loan agreement
- Clarified that the requirement to obtain information in 'sufficient detail' only relates to information provided by borrowers directly rather than relating to information from bank transaction records
- Provided further guidance in the RLC that a 'reasonable surplus' is not required if a lender has applied adequate buffers and adjustments to incomes and expenses
- Provided alternative guidance and examples in the RLC for when it is 'obvious' that a loan is affordable.
Investigation final report and further changes
In June 2022, the Investigation's final report (Investigation Report) was provided to the Government along with a Regulatory Impact Statement (RIS). On 2 August 2022, the Government publicly released these two documents along with a copy of the Cabinet paper on the Investigation (Cabinet Paper) and the Cabinet Business Committee's minutes agreeing to certain changes to the CCCFA regime in light of the Investigation Report's findings.
The Investigation Report acknowledged that the December 2021 changes to the CCCFA regime "are having some unintended impacts" such as borrowers "across all lending types" being declined for loans, being subject to "reductions in credit amounts" and facing "unnecessary or disproportionate inquiries".
The Investigation Report concluded that these unintended impacts were due to the "prescriptive nature of the CCCFA changes", the wide application of the changes impacting lending "outside of high-risk lending" as well as "interpretational difficulties" resulting in lending processes that were more restrictive and onerous than expected when the changes were made.
Finally, the Investigation Report set out 15 potential further changes, in addition to the initial changes, to address these unintended impacts, that can be grouped into five options:
- Option 1: Retaining the initial changes and taking no further action
- Option 2: Targeting the scope of affordability regulations to specific types of loans (eg personal lending and motor vehicle lending), specific types of borrowers (eg low credit score or borrowers with a record of personal insolvency) and specific types of lenders (eg excluding lenders regulated by the Reserve Bank of New Zealand)
- Option 3: Amending the design of certain affordability regulations (relating to borrower expenses, surplus requirements and exceptions)
- Option 4: Amending the penalties and liability regime under the CCCFA (eg by reducing the penalties for breaches under the CCCFA and allowing directors to indemnify themselves against liability)
- Option 5: Repealing the December 2021 changes to the CCCFA in order to return to a more principles-based model.
In the accompanying RIS, MBIE recommended further investigation of options 2 and 3, however, option 2 was rejected in the Cabinet Paper on the basis that targeting the scope of affordability regulations would "reduce consumer protection" and that the benefits "would be marginal".
The Cabinet Paper specifically rejected option 4 (changing liability settings), stating that it would "disincentivise compliance" and option 5 (repealing the December 2021 changes), stating that this would "reduce consumer protection", also noting that "while these changes may ease access to credit in some cases, they would reverse key policy decisions Cabinet took in 2018".
Overview of the proposed further changes
On 2 August 2022, in response to the Investigation Report, the Government announced that it would make further amendments to the CCCFA regime to address the issues with the design of Regulations under the CCCFA regime (ie option 3).
Specifically, Cabinet decided:
- To narrow the scope of expenses to be estimated by lenders to explicitly exclude discretionary expenses, with lenders only required to estimate expenses that are essential or which borrowers would be "unwilling to give up if faced with hardship"
- To reduce "double counting"' of expenses associated with revolving credit contracts such as credit cards and buy-now-pay-later schemes, particularly for borrowers "who use these facilities for day-to-day transactions and pay them off quickly"
- To expand a current exception to the full affordability assessment under regulation 4AH of the Regulations for lenders refinancing an existing loan so that borrowers will be able to refinance with lenders other than their existing lender where this is in the best interests of the borrower.
The Cabinet Paper also stated that many of the concerns identified related to insufficient information about borrowers and could be addressed through a consumer data right (CDR), noting that Cabinet agreed to introduce a CDR in July 2021.
The Cabinet Paper sets out an indicative timeline for changes to the Regulations.
An exposure draft of amendments regulations that incorporate the changes proposed by Cabinet will be released on 22 September 2022 for public consultation which will run until 20 October 2022.
Cabinet will then make a decision in early February 2023, with the changes expected to come into force by mid-March 2023.