Government announces further changes to the CCCFA regime

Jan Etwell, Scott Abel, Rebecca Green, Shane Johnstone, Simon Jensen, Aaron Ni

27 April 2023

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.

On 22 September 2022 the Ministry of Business, Innovation and Employment (MBIE) called for public submissions on exposure drafts of amendment regulations and changes to the Responsible Lending Code (RLC). These submissions closed on 20 October 2022.

On 6 April 2023 the Government published the Credit Contracts and Consumer Finance Amendment Regulations 2023 (2023 Amendment Regulations), which will come into force on 4 May 2023. As expected from the September 2022 consultation, MBIE released an amended RLC, which also comes into force on 4 May 2023.

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 changes to the December 2021 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 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.

Consultation - Proposed changes to Regulations and RLC

On 22 September 2022, MBIE released a consultation paper proposing further changes to both the Regulations and the RLC (Consultation Paper), as well as exposure drafts for the proposed amendments to the Regulations and RLC. These changes seek to address 'the unintended impacts of the December 2021 changes' to the CCCFA regime and implement changes proposed by Cabinet in light of the Investigation Report. MBIE set a deadline for submissions on the Consultation Paper of 20 October 2022.

The Consultation Paper sets out the following proposed changes to the CCCFA regime:

Treatment of discretionary expenses

The Consultation Paper proposes amending the definition of "relevant expenses" and "listed outgoings" in the Regulations. The purpose of these proposed amendments is to provide lenders with greater discretion so that lenders can exclude certain discretionary expenditure which lenders can "reasonably expect" borrowers to cease or reduce in times of financial hardship. The Consultation Paper sets out two options for implementing this change:

Option one requires lenders to take a broad assessment of all of a borrower's expenses. Option one includes a list of assumptions for lenders to have regard to for determining whether expenses are discretionary. The Consultation Paper includes a "borrowers social or moral obligations … such as tithing or remittance" as an example factor in determining whether an expense is discretionary. The purpose of this option is to ensure that lenders take into consideration the individual borrower's circumstances with sufficient detail, such that they may accurately ascertain which expenses are discretionary
Option two permits lenders to take a narrower assessment of a borrower's expenses. Option two allows lenders to presume that all expenses are discretionary, except for those expenses specifically mentioned as not discretionary in the draft RLC.

The draft RLC states that expenses which are fixed financial commitments, payments of debt, essential living expenses and regular outgoings associated with tithing, remittances to a family member overseas and pets. The benefit of this option is to reduce the level of inquiry that lenders must make in consideration of borrower's expenses, but the concern is that this may lead to expenses being blanketed as discretionary when, if deeper inquiries were done, these expenses should instead be treated as non-discretionary.

Treatment of revolving credit contracts

The Consultation Paper proposes amending the Regulations to reduce the 'double counting' of expenses. The amendment allows lenders to disregard borrower repayments on a credit card as relevant expenses, so long as the borrower has not had any interest charged on the credit facility in a recent period. This makes it so that the initial expense paid by the credit card and repayment of the credit card are not both counted against borrowers as relevant expenses.

Variations and replacements of existing credit contracts

The Consultation Paper proposes two options for an expansion of the exclusions to regulations 4AF and 4AI of the Regulations.

Regulations 4AF and 4AI require lenders to make "reasonable inquiries" into both a borrower's likely income and likely relevant expenses to be satisfied that a borrower will not suffer substantial hardship as a result of a credit contract. There is currently an exception to regulations 4AF and 4AI. The current exception applies when a borrower is varying or replacing an existing consumer credit contract with the same lender, and the borrower's total credit limit will not increase following the variation or replacement of the consumer credit contract.

The proposal is to extend regulation 4AH to situations where there is a variation or replacement of an existing credit contract from one lender to another lender. The options provided for implementing this proposal are:

Under option one, where the total monthly repayments of the new credit contract are less than that of the existing credit contract, or
Under option two, where the borrower's credit limit will not increase and the total daily interest of the new credit contract will not increase from the previous credit contract.

Both options have the purpose of providing an exception to regulations 4AF and 4AI when a borrower replaces an existing credit contract with a new credit contract from a different lender. The options are different in that they have different requirements for when the exception to regulations 4AF and 4AI are available. The exposure draft of the RLC contains proposed guidance relating to both options. Public consultation on the proposed changes to the Regulations and RLC closed on 20 October 2022.

2023 changes to Regulations and RLC

On 6 April 2023 the Government announced that changes to the Regulations will come into force on 4 May 2023, publishing the 2023 Amendment Regulations. These changes are a result of the previous consultation in September and October 2022. As expected MBIE has published an amended RLC, which will also come into force on 4 May 2023.

The 2023 Amendment Regulations largely follow the recommendations made in the Consultation Paper, however there are some changes from the Consultation Paper. These changes are as follows:

The proposed changes in relation to treatment of revolving credit contracts have been excluded, other than in relation to buy now, pay later contracts
For the proposed changes on treatment of discretionary expenses, amendments have only been made to the definition of listed outgoings. Paragraphs (c) and (d) of the definition of listed outgoings now specifically refer to "necessary" expenses and "non-discretionary" recurring outgoings. This change will provide lenders with greater discretion to exclude discretionary expenses when making affordability assessments of borrowers
In relation to the proposed changes on variations and replacements of existing credit contracts, a hybrid approach combining both options one and two (as described above), which considers both the total monthly repayments and total daily interest of the new credit contract, has been preferred for determining when the regulation 4AH exception can be applied.

The amended RLC again largely follows from the draft RLC, however in relation to the treatment of discretionary expenses, the amended RLC does not include specific guidance or examples about which borrower outgoings a lender may omit. The amended RLC has removed guidance in relation to keeping records if the lender relies on the new Regulation 4AH(3) exception, in relation to variations and replacements to existing credit contracts.