Tougher consumer credit laws target loan sharks

The Government plans to overhaul consumer credit laws to protect unwary consumers being preyed on by unscrupulous credit companies, Finance Minister Bill English says.

“There has been significant and much-needed reform of the investment side of the financial sector over the past three years,” Mr English says.

“However, credit providers remain largely unregulated and have no conduct requirements, leading some to exploit vulnerable people, resulting in severe financial hardship and spiralling debt. This is not acceptable.”

Cabinet has approved a package of changes including:

• Strengthening the Consumer Contracts and Consumer Finance Act (CCCFA) by adding new responsible lending requirements including that:
• The borrower must be reasonably expected to repay the loan without substantial hardship.
• The lender must be honest and transparent in dealing with the borrower.
• Creating a Code of Responsible Lending that sets out the types of practices accepted as meeting the principles of responsible lending.
• Giving the Financial Markets Authority (FMA) the power to issue formal warnings and cancel a person’s financial service provider registration if they fail to comply with the code and other relevant legislation.
• Provide that borrowers are not liable for the costs of interest or fees if their lender is not registered, as required, on the Financial Service Providers Register (a recent survey found 35 per cent of third-tier lenders were not registered).
• Amend the CCCFA to stipulate that advertising must not be misleading, deceptive, or confusing and must comply with the code, and allow the regulator to prohibit advertisements that fail to do so.
• Protect important goods, such as tools of trade, necessary household items, and motor vehicles with a value of up to $5000, from being used as security against a loan (except if the credit contract is for the purchase of such an item).
• Extend the 'cooling-off period', where a consumer has the right to cancel a credit contract, from three to five working days.
• Improve disclosure requirements, including that disclosure of key information and full terms and conditions must occur before the contract is made (presently this can happen up to five days after).
• Changes to the rules around oppressive credit contract provisions and hardship applications to provide increased consumer protection.

The package of reforms has been shaped by the Government’s Financial Summit, held in August, which brought together 250 people from community groups, budgeting services, NGOs, banks, financial regulators, and credit companies to look at ways of tackling irresponsible lending.

Because this is a complex area, the Government intends to release draft legislation for consultation on the proposed changes in advance of introducing final legislation to Parliament.

“These changes represent a multi-pronged approach towards promoting responsible lending by increasing consumer protections, requiring lenders to give borrowers more information and beefing up the powers of enforcement agencies.

“People need access to affordable credit. For some people who are a higher lending risk, the cost of credit will always be higher but that does not justify the highly exploitive and irresponsible lending practices of some lenders,” Mr English says.