The Credit Contracts Legislation Amendment Bill (Bill) aims to protect vulnerable consumers from harm arising from problem debt. But the headline grabbing caps on borrowing costs are only a small part of what is proposed.
The Bill will affect the wider lending market, and it is not the “high cost” lenders who will bear the largest burden of the amendments – a factor the lawmakers need to keep in mind.
We see two categories of potential issues that may work against the Government’s policy goal.
- Unintended consequences – strengthening responsible lending obligations may result in lower-cost lenders making fewer loans – potentially driving a new group of customers towards high-cost lenders.
- Incentives – creating personal liability for directors and senior managers of lenders may seem like a valuable tool in the context of small lending operations. But what does it mean for the willingness of skilled people to act as directors and senior managers of banks and other large lenders?
The Bill in detail
1. Responsible lending – reliance on information provided and enforcement
It is clear from the Bill that future regulations will provide detail on advertising standards and suitability/affordability enquiries that lenders must make. These details are important, and should be made available for consultation as soon as possible.
The Bill also removes lenders’ ability to rely on information provided by the customer for the purposes of assessing suitability and affordability – even if the lender has no reason to doubt the reliability of the information provided.
These changes will force lenders to require additional information from independent sources, adding time and cost to loan application processes. Lenders will also be obliged to keep records of how they have concluded that an arrangement is suitable and affordable for the customer.
And there will be new pecuniary penalties for a breach of lender responsibility principles.
These added processes will increase the cost of assessing loan applications, which may lead to some loans not being made available even when no responsible lending issues would arise. It is also likely to drive some customers towards less scrupulous lenders – the opposite effect of that intended by these changes.
2. Directors and senior managers – duties and liability
Directors and senior managers of a lender (such as a CEO or CFO) will have a new statutory duty to exercise due diligence to ensure compliance with the Credit Contracts and Consumer Finance Act 2003 (CCCFA). This due diligence requirement will include taking reasonable steps to ensure the lender:
- requires employees and agents to follow compliance procedures (or alternatively has implemented automated compliance procedures)
- has methods in place to systematically identify deficiencies in the effectiveness of its compliance procedures, and
- promptly remedies any deficiencies discovered.
However, the precise extent of diligence required from any particular person is unclear – it will depend on the nature of the lender’s business and the individual’s role. This puts directors and senior managers in a very difficult position, particularly when they are part of a very large organisation (such as a bank) and have little day-to-day involvement in lending processes.
Compounding this difficulty, directors and senior managers found to have breached their duty are potentially liable for pecuniary penalties of up to $200,000 per act or omission. Directors and senior managers cannot be insured or indemnified against this liability.
In our view, context is critical. Where a director is closely involved in the operation of the lender, and may also be the sole or majority shareholder, the above position may well be reasonable.
But for extremely large lenders, making thousands of loans through delegated authorities and processes, the potential for liability may be overwhelming for even the most diligent director or senior manager. This is not an outcome that benefits consumers.
The pecuniary penalties regime also catches other persons who are involved in a contravention of certain sections of the CCCFA (including a breach of lender responsibilities). While this is similar to the wording of the equivalent regime in the Financial Markets Conduct Act 2003 (FMCA), the CCCFA provision goes further.
It prohibits any insurance of any person who is involved in the contravention. The FMCA prohibition, in contrast, applies only to the FMCA entity and only in respect of the directors and employees of that entity.
Again, this breadth seems to exceed what is reasonable in some contexts.
3. Certification for all creditors
The Bill proposes a certification requirement for all lenders under consumer credit contracts, which in substance is a “fit and proper” assessment of the lender’s controlling owners, directors and senior managers. There is scant detail about what this assessment will consider, or what changes must be notified – we must wait for draft regulations to see that.
We are concerned that this certification requirement may deter some business operators from offering credit to their customers as an ancillary service to their primary business – a service that is likely to be highly valued by those customers. This includes businesses that may provide credit to only a small number or proportion of their customers.
We therefore see the certification requirement as more appropriate for lenders whose principal business is lending.
Separately, we note that the Bill extends the certification requirement to mobile traders, as well as requiring such traders to be registered under the Financial Service Providers (Registration and Dispute Resolution) Act 2008. It will not apply to lenders who are separately licensed – such as banks and non-bank deposit takers.
4. Power to declare arrangements to be “consumer credit contracts”
The Bill proposes that an arrangement or facility that is intended to have the effect of a loan or deferred payment can be declared to be a “consumer credit contract” by regulation. The effect of such a declaration is that the full weight of the CCCFA applies to that arrangement. Similarly, a person can be declared by regulation to be a “creditor” for the purposes of the CCCFA.
Conceptually, this is similar to the Financial Markets Authority’s power to declare securities and financial products to be of a particular nature for the purposes of being regulated under the FMCA.
The declaration power inevitably operates to create a grey zone, as there must be boundaries within the CCCFA that cannot be overridden without amending legislation (e.g., that loans for investment purposes are not “consumer credit contracts”).
However, the lack of clarity as to the boundaries causes uncertainty, which could stifle innovation in developing new structures to provide services to customers.
For example, it appears that a pure business overdraft to a sole trader could be declared to be a “consumer credit contract” if the Minister recommended it. This is despite it being a stated requirement in the definition of “consumer credit contract” that credit under the contract must be used (or intended to be used) for personal, domestic or household purposes.
5. Debt collection requirements
The Bill introduces requirements for a disclosure to be made prior to debt collection starting. These rules seem unusually broad in that they apply to debt collection in relation to all “credit contracts” entered into by natural persons.
This includes business loans, as well as credit arrangements under which there is no interest, credit fees or security. It is unclear why this provision is so broad, as the responsible lending rules only apply to consumer credit contracts and credit contracts with security over certain items.
6. Issues left to regulations
Much of the detail has been left to regulation. We expect a draft of these regulations to be available later in the year, and it will not be until then that we can fully assess the likely impact of the Bill.
Areas still to be fleshed out include:
- the certification process for lenders, including how the “fit and proper” assessment is to be made, conditions of certification and other matters
- mandatory inquiries in respect of responsible lending compliance – including the substance of matters investigated and the manner in which the information gathered must be used
- advertising standards for credit advertising
- disclosures required before debt collection processes start
- contracts declared to be a “high-cost consumer credit contract” or “related consumer credit contract”, and
- any persons declared to be “creditors” and/or arrangements declared to be “consumer credit contracts”.
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