Wins and pitfalls for lenders in CCCFA overhaul

Simplifying lending laws proposes opportunities for the financial sector, but also potential pitfalls for lenders.
Last week Commerce Minister Andrew Bayly released more details on the scope of his second stage of reforms to the Credit Contracts and Consumer Finance Act 2003 (better known as the CCCFA).
Once legislated, these changes will include getting rid of personal liability for directors and senior managers for due diligence breaches and a change to a more flexible penalty regime for failing to meet disclosure obligations.
A particularly notable change is a transfer of responsibility for the CCCFA from the Commerce Commission to the Financial Markets Authority which will see the watchdog given “material new powers”.
Earlier changes in July repealed “rigid” affordability assessment requirements that had been accused of being overly invasive and stifling access to credit.
Bell Gully partner Richard Massey said the changes removed some “quite burdensome” aspects of the regime for lenders, but said these improvements didn’t weaken the key protections for consumers.
“There have been improvements in the regime as a result of the recent announcement and the changes that took effect in July to affordability regulations.
“Importantly, though, those are only partial improvements, and the CCCFA remains a significant piece of legislation that requires robust compliance programmes.”
Massey said those partial improvements were still “a valuable reduction” in the regulatory burden that financial service providers.
But he warned that lenders must think carefully about how they make the most of those opportunities.
“For example, with the affordability regulations being repealed, there are still overriding obligations to make reasonable inquiries into the affordability and suitability of loans.
“Lenders should think carefully about how they discharge that obligation, which continues to apply even the absence of the regulations.
“So even though there is, overall, a simplification, the process of taking that opportunity is actually quite a complex one.”
He said lenders have already developed compliance processes to comply with the previous legislation around due diligence and affordability and it wasn’t a case of just doing away with these.
“Lenders have to think carefully about what they replace them with and what simpler version of similar documents they use, so that in removing aspects of their compliance programmes they don’t cause any unintended consequences for other interrelated processes.”
The responsible lending code sets the threshold for reasonable enquiries into a loan’s suitability and affordability.
Massey said the code’s significance had increased as Bayly had repealed existing rules: “It is now the main touchstone for lenders in working out how to ensure that they’ve made adequate enquiries.
“It’s not a safe harbour. Following the code doesn’t mean you’re automatically immune, but if you follow that guidance that will be evidence of having met the responsible lending requirements.”
This leads into another major change in the removal of the due diligence duty under the CCCFA, and the removal of personal liability for directors and senior managers of lenders.
Bayly said personal liability could negatively impact access to credit and increase compliance costs which were passed along to consumers.
Massey says the change would come as welcome relief for lenders and should support greater flexibility in decision-making at the management level, allowing senior staff to focus on operations without the risk of personal repercussions for technical breaches.
“The reform is expressly intended to support a less conservative lending environment, which may in turn improve access to credit for consumers within the remaining obligations under the responsible lending framework.”
But meeting the overarching obligation for responsible lending may be more important than ever before with the transfer of power from the Commerce Commission to the FMA.
Massey said the switch in regulators was intended to find efficiencies through streamlining regulatory oversight of the financial services industry.
The FMA is going to be granted new powers as a part of the change, including the ability to conduct on-site inspections. “The right to conduct on-site inspections is a fairly eye-catching change for some firms who might not have considered that to be a necessary step.”
The minister has said he expects that these searches would only rarely be used on a “without notice” basis and would have to take place at a reasonable time of day and never in private dwellings.
The CCCFA isn’t the only bit of legislation facing change, with Bayly also announcing amendments to the Conduct of Financial Institutions (or COFI) reforms under the Financial Markets Conduct Act.
This aspect of the reform proposes to clarify and adjust the minimum requirements for fair conduct programmes, with fair conduct programmes now needing to include how fees and charges are applied, disclosed and reviewed, as well as covering off how complaints are recorded and resolved.
Other aspects, including duplicative requirements relating to training, supervising and monitoring employees, are being removed.
Massey said the package of changes to CoFI and the CCCFA would have very little practical impact on consumers, although the affordability changes in July should mean borrowers have a more streamlined pathway to access finance without having to answer “detailed, and sometimes invasive, questions” about their financial situation.
The bill enabling these changes will be introduced later this year, likely December, which Massey said would give more clarity as to how the changes would be implemented.
There are also potential changes to aspects of the disclosure regime in the future relating to agreed loan variations and debt collection. “There have been some concerns expressed about aspects of those current requirements and the impact on borrowers.”