The Credit Contracts and Consumer Finance Amendment Act 2014 (the CCCF Amendment Act) received the Royal Assent on 7 June 2014 (refer to our earlier Update here for a review of the key amendments). One of the most significant changes is the introduction of new “lender responsibility principles” and provision for the development of a Responsible Lending Code (which will elaborate on the lender responsibility principles). The Ministry of Business, Innovation and Employment issued a discussion document today, inviting comments on how the Responsible Lending Code should be drafted. Comments must be submitted by 13 August 2014. Submissions may be made by visiting: www.consumeraffairs.govt.nz.
This Update provides an overview of the lender responsibility principles and an initial indication of the content of the Responsible Lending Code.
Lender Responsibility Principles
When the new “lender responsibility principles” come into force, lenders under consumer credit contracts will be required to comply with certain conduct obligations, including to:
- exercise the care, diligence, and skill of a responsible lender when entering into a credit agreement or taking a guarantee, and when advertising credit or finance;
- make reasonable inquiries to be satisfied that it is likely that the credit provided, as well as any “relevant insurance contract” (such as credit-related insurance), will meet the borrower’s requirements, and that the borrower will make repayments without suffering substantial hardship;
- assist the borrower to reach an informed decision as to whether or not to enter into the agreement and to be reasonably aware of the full implications of entering into the agreement;
- assist the borrower to reach informed decisions in all subsequent dealings in relation to the agreement;
- treat the borrower and their property reasonably and in an ethical manner;
- ensure that the agreement is not oppressive;
- meet all the lender’s legal obligations to the borrower under relevant statutes (including the new unfair contract terms provisions of the Fair Trading Act 1986); and
- make reasonable inquiries, in relation to any applicable guarantee, that the guarantor will be able to comply with the guarantee without suffering substantial hardship and to assist the guarantor to reach an informed decision as to whether or not to give the guarantee and to be reasonably aware of the full implications of giving the guarantee.
Why are these changes important?
This is a significant change in approach to the regulation of consumer lending. Currently, the obligations on lenders under the CCCFA are disclosure based and, provided that consumers are given all relevant information, lenders are not directly responsible for consumers’ decisions. When the lender responsibility principles (and the Code) come into force, lenders will have to take a much more active role when considering the ability of an applicant to repay a loan and the suitability of the relevant product and any associated insurance contracts. If a court finds that a lender has breached the principles, it can order the lender to refund the consumer credit repayments to which the creditor is not entitled, compensate customers for any loss, or to pay exemplary damages.
Responsible Lending Code
The CCCF Amendment Act requires the Minister of Consumer Affairs to prepare and issue a Responsible Lending Code, which elaborates on the lender responsibility principles and offers guidance on how those principles may be implemented by lenders. The Code will be non-binding. However, compliance with the provisions of the Responsible Lending Code will be treated as evidence of compliance with the lender responsibility principles.
In developing this Code, the Ministry of Consumer Affairs has indicated that it will have regard to the Lending Code in the United Kingdom and the guidance provided in Australia. We summarise the key features of each below.
The UK Lending Code is a voluntary code of practice which covers lenders’ dealings with consumers and “micro-enterprises” (employers of fewer than 10 persons with a turnover or annual balance sheet of €2 million or less) and charities with an income of less than £1 million.
The Lending Code is administered by the UK Lending Standards Board and obliges lenders to (among other things):
ensure their advertising and promotional material is fair, clear and not misleading;
provide clear information about their products and services – how they work, their terms and conditions and the interest rates and charges that apply;
provide regular statements, and tell customers about changes to interest rates, charges or terms and conditions;
lend money responsibly; and
act sympathetically and positively when considering customers’ financial difficulties.
As part of the obligation to lend money responsibly, the UK Lending Code provides that a credit provider should assess whether the customer will be able to repay a loan in a sustainable manner by considering information from credit reference agencies. Considerations may include the type and amount of credit being sought, the customer’s credit history, the customer’s income, the reason for the loan and any security provided.
The Australian Securities and Investments Commission’s (ASIC) Regulatory Guide sets out ASIC’s expectations for meeting the responsible lending obligations in Australia. For example, lenders must conduct an assessment that the credit contract is “not unsuitable” for the consumer. A credit contract will be assessed as unsuitable where, at the time of the assessment, it is likely that the contract does not meet the consumer’s requirements and objectives or the consumer will be unable to meet their payment obligations.
In undertaking the assessment, a credit provider must make reasonable inquiries about the consumer’s requirements and objectives, and take reasonable steps to verify the consumer’s financial situation.
The inquiries that might be considered “reasonable” vary depending on the circumstances, including the potential impact on the consumer, the complexity of the credit contract, and the capacity of the consumer to understand the credit contract.
In assessing the suitability of providing credit, the recommended considerations include: the consistency and source of the consumer’s income; the consumer’s credit history and existing debts; and their personal circumstances. Additional enquiries will be needed where a consumer provides information that is inconsistent or outside the standard range for that consumer. Adequate processes must be in place to ensure reasonable inquiries can be made.
Following the current consultation phase, a draft Code is expected to be released to the public for consultation. There will then be a further consultation process before a revised Code is issued. The revised Code will be submitted to the responsible Ministers for comment before the final Code is issued. The Code must come into force by 6 June 2015.