Final tranche of consumer credit reforms is now live

Before the current COVID-19 Delta outbreak, the final round of CCLAA amendments and its related regulations were due to take effect on 1 October 2021. Following a further two-month delay the final tranche of consumer credit reforms went live on 1 December 2021.

The CCLAA reforms go beyond their initial main purpose to ensure better protection for vulnerable consumers against unscrupulous or predatory lenders. In practice, these are wide ranging reforms which already have had, and will continue to have, deep implications for all lenders in the consumer credit market.

For prospective lenders looking to enter this market, it is difficult to see how the new enhanced suitability and affordability assessment requirements, record keeping obligations, mandatory certification and personal due diligence duties for directors and senior managers would not be considered material barriers to entry in a cost-benefit analysis. It is doubtful that due and proper compliance under the CCCFA can be realistically achieved without sizeable investment and resources to ensure that robust operational compliance systems and processes are in place.

Only time will reveal the extent to which the CCLAA reforms will impact borrowers, but we will be watching the below issues with interest:

• The increased administrative burden due to the enhanced suitability and affordability assessment requirements, and the time and cost implications of this in the provision of loans. Time delays will frustrate both lenders and borrowers and is not conducive to efficient transaction execution. Increased administrative costs borne by lenders may ultimately have to be passed on to consumers.
• The extent of evidence gathered by lenders to demonstrate how they have satisfied themselves as to the enhanced affordability and suitability requirements. The evidence and records kept should show that a robust assessment of affordability and suitability has been conducted, and that the right internal processes have been put in place to ensure this. In the event of investigation, much will hinge on a lender proving it has got its systems right, with a good outcome no defence for a poor process.
• Given the enhanced penalties for CCCFA breaches, lenders may naturally take a more cautious approach in their suitability and affordability assessments. Credit could become increasingly difficult to access for consumers, and particularly for consumers to which more complex or non-vanilla circumstances apply.
• The Regulations provide that a suitability and affordability assessment may not be required if is objectively considered “obvious in the circumstances” that the borrower can meet the repayments without suffering financial hardship. This is intended to be a high test. The limited scope of this exception may restrict lenders from supporting good customer outcomes. For example, a long-standing customer of a lender may find it unnecessarily cumbersome to be subjected to a full income and expense on requesting any increase (regardless of how material) to an existing credit limit.

While the heart of the consumer credit reforms focuses on the protection of the consumer, the real test will be whether the additional legislative protections and obligations for lenders are proportionate and at the right settings. It remains to be seen if a workable balance can exist between these and servicing consumer demand for credit, enabling healthy competition amongst credit providers (including entry of new providers), and ensuring that credit remains reasonably accessible for the benefit of all consumers and the wider economy.

This article was provided by Dentons Kensington Swan.

Pauline and Liz are both senior members of the Dentons Kensington Swan banking and finance team.

Pauline is a special counsel with more than 15 years’ experience acting for lenders and borrowers across a wide range of syndicated and bilateral financing arrangements. She holds specialist expertise in corporate and structured lending, funds and financial institution-based finance and real estate finance.

Liz is a partner with more than 15 years’ New Zealand and international experience acting for originators, borrowers, funders and trustees. She holds a particular expertise in acquisition finance, asset and lease financing, property and construction finance, syndicated and club lending, and securitisation. Liz leads Dentons Kensington Swan’s banking practice.