Credit Contracts and Financial Services Law Reform Bill

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Commentary

Recommendation

The Commerce Committee has examined the Credit Contracts and Financial Services Law Reform Bill and recommends that it be passed with the amendments shown.

Introduction

The bill is an omnibus one that seeks to amend the Credit Contracts and Consumer Finance Act 2003 (CCCFA), the Financial Service Providers (Registration and Dispute Resolution) Act 2008 (FSPA), the Private Security Personnel and Private Investigators Act 2010 (PSPPIA), and the Personal Property Securities Act 1999. The bill also proposes to repeal the Credit (Repossession) Act 1997, and incorporate its provisions into an expanded Credit Contracts and Consumer Finance Act. The principal amendments proposed in this bill would

  • establish the protection of consumers as the primary purpose of the CCCFA

  • require lenders to adhere to responsible lending provisions

  • establish a Responsible Lending Code to provide guidance and elaborate on lenders’ responsibilities

  • increase the disclosure requirements for consumer credit contracts

  • make clearer the tests for unreasonable credit fees and default fees

  • require all repossession agents to be licensed under the PSPPIA

  • clarify the guidelines for the Courts to reopen “oppressive” credit contracts under the CCCFA

  • introduce an infringement regime for minor offences, and significantly increase the penalties for major offences.

Our commentary covers the key amendments we recommend to the bill. It does not discuss minor or technical amendments proposed to improve workability, clarity, and legal efficacy.

Commencement

We recommend amending clause 2 to stagger the commencement of the bill’s provisions. The commencement dates for clauses that do not come into force on the day after the legislation receives the Royal Assent will be appointed by Order in Council by the Governor-General; all provisions will be required to come into force within 12 months of the date of Royal Assent. We believe staggered commencement is needed to allow time for the development of the Responsible Lending Code, and for the necessary changes to be implemented in the credit industry.

Interpretation

We recommend amending the definition of “standard terms” in clause 6 to refer to “standard form contract terms that are intended to be contained in a class of agreements”. We consider that this amendment reflects more closely the intent of the bill regarding the standing disclosure requirements.

We recommend amending the definition of credit fees to include fees payable to third parties associated with the creditor, making them subject to the unreasonable fees provisions.

Meaning of consumer credit contract

Clause 11 of the bill proposes amendment to section 11 of the CCCFA to define a consumer credit contract as one involving credit that is to be used, or intended to be used, “wholly or predominantly” for personal, domestic, or household purposes. We recommend amending this section to make it clear that it is the debtor’s intention for the use of the credit which determines whether they have entered into a consumer credit contract.

Fair Trading Act

We recommend an amendment to add new section 34B(5) to the Fair Trading Act 1986 (Schedule 3). Currently, the Act does not define “layby sales” as a consumer credit contract; this amendment would allow layby sales to be classified as a consumer credit contract if interest charges or credit fees are payable.

Lender responsibilities

A number of provisions in this bill would require lenders to act with care, diligence, and skill when advertising consumer credit, when entering into a consumer credit contract, and in subsequent dealings with the borrower; these are the “lender responsibility principles”. Our recommendations relating to the principles are set out below.

Scope and significance

We recommend inserting new section 9AA (clause 9) to the CCCFA, an outline provision explaining the relevance of the lender responsibility principles, and when they apply. The bill introduces the concept of responsible lending to New Zealand credit legislation for the first time, and we believe this amendment would be helpful for lenders and consumers. We recommend removing “lessor” from the definition of lender, as the bill does not seek to apply the lender responsibilities to consumer leases.

We recommend amending new section 9B(2)(a) to make it clear that the lender responsibility principles would apply to agreements as they are defined in new section 9A. We have five principal recommendations relating to new section 9B(3). We suggest inserting the word “including” before “by ensuring” in several of the paragraphs to prevent the misapprehension that responsible lending is limited to the assistance referred to in those paragraphs.

We recommend amending new section 9B(3)(b) to require lenders to help borrowers to be “reasonably aware” of the full implications of entering into a credit contract. We consider that the addition of the word “reasonably” provides more legal certainty for enforcement purposes, and strikes an important balance between the reasonable obligations of lenders and the protection of consumers. We also recommend requiring lenders to express in “plain language” the terms of agreements and any subsequent variations to agreements, to help borrowers and guarantors to reach informed decisions.

We recommend amending new section 9B(3)(e) to expand on “problems”, defining them as situations where a credit contract has been breached, or may be breached. We also recommend requiring lenders to treat borrowers “in an ethical manner” instead of “with respect”. We believe this wording is stronger, more certain, and consistent with other legislation.

Guarantees

We recommend the addition of new section 9B(3A) to provide detail on how the lender responsibility principles would apply to guarantees and the treatment of guarantors, and supplementing this amendment by inserting a definition of “relevant guarantee” in new section 9A. We consider it necessary to make it clear that the principles would cover guarantors. Guarantors incur risk when giving guarantees of obligations under credit contracts and therefore require similar protections regarding entering into transactions, disclosure, and oppression.

Credit-related insurance

We recommend removing “insurer” from the definition of “lender” in section 9A (clause 9). We consider that insurers perform a function distinct from those of lenders and should not be subject to the lender responsibility principles. However, we are aware that credit-related insurance products often contribute to problem debt, and consider they should be addressed in the legislation.

We recommend inserting a definition of “relevant insurance contract” in section 9A. If the lender arranges credit-related insurance, we consider they should be subject to relevant lender responsibility principles, and recommend adding new section 9B(3B) accordingly.

Proceedings for breach of legal obligations under other Acts

We recommend the insertion of new section 9BA to prevent potential double jeopardy, or duplicate concurrent proceedings, if proceedings are taken against a creditor under another Act.

Responsible Lending Code

The bill introduces the Responsible Lending Code (clause 9), an instrument setting out detailed guidance for lenders on complying with the (legally binding) responsible lending principles. We have a number of recommendations about the Code, as discussed below.

Status and content

We recommend amending new section 9C to clarify the Code’s status as non-binding. We recommend amendments to section 9D to ensure the content of the Code accurately reflects the intent of the responsible lending principles set out in section 9B. We particularly draw attention to section 9D(1)(b)(iii), which refers to lenders giving assistance to borrowers and guarantors for whom English is a second language. We believe this amendment would mitigate the risk of borrowers entering contracts for credit they do not understand and may be unable to afford.

Preparation of the Code

We recommend the addition of transitional provisions (new clause 1A of Schedule 1AA) in Schedule 1 of the bill to allow the Minister to prepare the Responsible Lending Code before the principles come into force. We consider this amendment necessary, as the Code sets out detailed guidance to lenders on how to comply with the responsibility provisions; therefore it would be beneficial for the Code to be prepared in advance so as to be ready to come into force at the same time as the lender responsibility principles.

Disallowable instruments

The Regulations Review Committee reported to us on the regulation-making powers contained in clause 9 (see proposed section 9F). We have recommended amendments to this section which would make the Responsible Lending Code a disallowable instrument under the Legislation Act 2012, thus requiring that it be presented to the House of Representatives. As per the amendments we recommend to this bill, the Code would have to be prepared by the Minister, and its legal status would be non-binding. However, compliance with the Code would be evidence of compliance with the responsible lending principles; therefore it is significant enough to justify being subject to parliamentary oversight.

Disclosure

The disclosure provisions in the bill are crucial to increasing consumer protection. However, we believe a number of amendments are needed to make the disclosure requirements wholly effective, and our recommendations are set out below.

Initial disclosure

We recommend amending clause 13 to make it clear that all initial disclosure, including disclosure of the terms of the contract, must occur before a credit contract is entered into. We recommend an amendment to clause 68 to also require the disclosure at this point of a creditor’s trading name and registration number under the Financial Service Providers (Registration and Dispute Resolution) Act 2008.

Publication of standard form contract terms and costs of borrowing

This bill adds “standing disclosure” to the existing disclosure requirements in the CCCFA. Standing disclosure is intended to inform the wider market about a lender’s standard form contract terms and the costs of borrowing.

We recommend amending sections 9H and 9I (clause 9) to require lenders to provide a copy of standard form contract terms and information about costs of borrowing, free of charge and on request. Lenders could also supply this information electronically with consent from the consumer.

We also recommend that lenders be required to display this information prominently on any website they have, and, if operating from business premises, display a notice which clearly states that this information is available on request. This amendment would prevent any misapprehension that all the terms of all credit contracts would have to be displayed on a lender’s premises.

Extended meaning of business premises

We recommend inserting new section 9IA (clause 9) to extend the meaning of business premises. We understand that some lenders operate from a non-fixed location such as a stand, stall or vehicle (such as a truck shop), and we wish to ensure the new standing disclosure provisions apply to them equally.

Content of continuing disclosure statement

We recommend inserting new clause 13A, to provide for regulations to prescribe a minimum repayment warning on credit card statements. The warning would detail to the debtor the consequences of paying only the minimum monthly payment on credit card debt, such as higher interest costs over time. The CCCFA already provides for continuing disclosure of revolving credit products, and we consider this amendment is crucial to facilitating financial literacy among borrowers.

Mandatory disclosure forms

We recommend amending clause 22 to add new section 32(1A), to make it clear that using prescribed mandatory forms for disclosure would meet the disclosure standards under the CCCFA. We also recommend inserting new clause 22A to make the use of model disclosure statements clear and to distinguish them from prescribed mandatory disclosure forms. Both mandatory forms and model disclosure statements are to be set out in regulations.

Disclosure of transfer of a creditor’s rights under a consumer credit contract

We recommend that clause 19 be amended to provide for regulations to be made to exclude securitisation and covered bond arrangements from the new transfer disclosure requirements. This is because in these cases the initial lender usually remains the first point of contact for the debtor, even though the creditor’s rights under the credit contract are held by another party.

Pawnbroking contracts

We recommend the insertion of new clause 12A to exempt pawnbroking contracts from Part 2 of the CCCFA, because disclosure is already provided for in the Secondhand Dealers and Pawnbroking Act 2004. Pawnbrokers would remain subject to the responsible lending provisions.

Effect of cancellation

We recommend an amendment to clause 21 regarding the cancellation of a contract during the “cooling-off” period. We wish to set out clearly the calculation that creditors undertake to determine the amount owed by each party; debtors and guarantors should not be liable for any interest, fees, or other charges specified in the contract except as provided for in new section 30.

Fees and charges

We are aware that unreasonable fees and excessively high interest rates and charges can contribute to high and sometimes spiralling household debt levels. The bill as introduced includes a number of significant amendments to constrain the charging of unreasonably high fees and default interest; our amendments to these provisions are discussed below.

Default interest charges

Clause 23 as introduced would prevent creditors charging default interest on an amount greater than the amount of the default. At present, if a debtor defaults on a payment, lenders may be able to specify an amount as being payable earlier than would be the case if there had not been a default (under an acceleration clause). We recommend amending clause 23 to disallow default interest charges on an earlier payable amount, and consider that this would reduce the likelihood of debt levels increasing at a rate that might be unmanageable for borrowers.

We recommend exempting on-demand credit facilities, such as an overdraft on a cheque account, from this clause as the nature of such facilities allows creditors to demand full repayment at any time (new clause 23(2)).

Prepayment fees

We recommend amending clause 25 to state explicitly that a fee for repaying a loan before term is unreasonable if the amount charged exceeds a reasonable estimate of the loss of the creditor from the prepayment of the loan. Prepayment fees (as defined in the clause) would apply exclusively to fixed-rate consumer credit, where full or part payment of the loan before the due date results in a loss for the creditor.

We also recommend an amendment to this clause to separate administration costs from the prepayment fee and specify them separately. (Whether such an administration fee is unreasonable is to be determined under new section 44.) We believe these amendments would restrict prepayment fees and provide greater certainty for the Courts in determining whether or not they are reasonable.

Other credit fees and default fees

We recommend an amendment that replaces sections 44 and 44A (of clause 26) to establish reasonable standards of commercial practice as a consideration for the Courts when determining whether credit fees or default fees reasonably compensate creditors for costs or losses. Our proposed amendment would restore some of the wording in the CCCFA; for example, it refers to “reasonably compensating” the creditor, where the bill as introduced referred to a “reasonable estimate of the creditor’s reasonable average costs”. We consider that the amended wording would provide more certainty for creditors. However, we consider that the reasonable standard consideration should be subordinate to the principle that credit fees and default fees should only reasonably compensate the creditor. Our amendment confirms and makes it clear that reasonable standards of commercial practice are not intended as a separate basis for calculating credit or default fees, but only to inform the main test (which concerns costs and losses). We also recommend the addition of new section 44B “Compliance with the Code is evidence that the fees are not unreasonable”, which would allow further guidance on credit and default fees to be incorporated into the Code.

Fees and charges passed on by creditor

We are aware that many lenders sell credit-related insurance products to borrowers, upon which they can charge a reasonable commission. We recommend amending clause 27 to prohibit this charge if the borrower is required by the creditor to buy insurance from a particular insurer, or particular insurers, or the insurance is to be financed by the credit contract with that lender. Without seeking to limit the charging of reasonable commissions by lenders, we consider that they should not be able to gain financially from a transaction in which the borrower cannot exercise choice.

Recovery of payments

We recommend inserting new clause 27A to require lenders to refund, or credit against any outstanding balance, any payments received from a debtor to which the lenders were not entitled. This would prevent a creditor (for example a truck shop operator) from giving debtors a “credit” which must be used to acquire goods or services from the creditor.

Unforeseen hardship

Under the CCCFA borrowers can apply to their creditor to change their loan term, or reduce or postpone payments on the grounds of unforeseen hardship. We recommend amending section 55(1A) (clause 31) to clarify what the debtor must specify in their written application. We recommend amending section 55(1B) to make it clear that a debtor who has made an application cannot make another application in relation to the same credit contract within 4 months of the date of the previous application, unless the reasons are materially different. Our amendment is intended to mitigate the risk of multiple applications being lodged by a debtor for the purposes of stalling enforcement action by the creditor.

Obligation of creditor and treatment of notices

We recommend amending clause 33, which sets out the obligations of lenders in their treatment of unforeseen hardship applications. We are recommending drafting improvements to make it clear that a creditor may not commence or undertake any enforcement action whilst such an application is being considered. We also recommend requiring creditors to notify borrowers of their receipt of the application, any request for additional information required to consider the application, and their decision by written notice; we recommend inserting clause 34A which sets out in detail how these notices may be given to the debtor.

Repossession

The bill as introduced proposes a number of significant provisions relating to repossession, which would have the effect of introducing a regulator and offences for repossession agents, and would require the licensing of repossession agents under the PSPPIA. We have suggested a number of amendments to the repossession provisions which are set out below.

References to credit contracts include security agreements

We recommend the addition of new section 83AB (clause 43) to make it clear that agreements in which security interests are taken in connection with a credit contract were to be treated as part of that credit contract. This amendment would ensure that if a separate security agreement existed the repossession provisions would still apply. We recommend inserting new section 83BA to make it clear that this Part of the Act does not itself create the right to repossess consumer goods.

Prohibitions relating to security interests

We recommend moving clause 8 to clause 43 (inserting section 83ZGA) and clarifying its intent. New section 83ZGA would prohibit security interests being taken over certain essential consumer goods including bedding, medical equipment, identification documents, and cooking equipment. We consider this to be a crucial consumer protection. We note here that items of cultural significance and children’s toys were not included as they can be difficult to define, and we do not wish to impede consumers’ access to credit.

Rules that apply before repossession

We recommend amending new section 83C (clause 43) to require creditors to comply with the responsible lending principles that relate to repossession. We recommend moving section 83B(2) to section 83CA and clarifying its intent. New section 83CA would require all consumer goods given for a security interest to be specifically identified by item (rather than by kind) in the credit contract. This is a significant change from the current legislation, which allows all present and future acquired goods to be repossessed. Our amendment would prohibit repossession of more items than the security interest specifically identifies.

We recommend extending the repossession warning notice expiry date in subsection 83D(4) from 28 to 60 days; we consider that this would allow enough time for creditors and borrowers to attempt a resolution and for repossession agents to locate missing goods. We recommend amending section 83E, which would allow debtors to voluntarily deliver goods to creditors, to apply to all consumer credit contracts, not just credit sales (as might be inferred from the reference to “returning” goods).

We recommend three main amendments to section 83G. They would require complaints to be in writing; clarify the meaning of an enforcement action; and make it clear that if a complaint about enforcement action had been made, and no agreement reached, the complaint would be taken as resolved unless the debtor referred it to a dispute resolution scheme within 14 days of notice being given by the creditor. We also recommend the addition of new section 83GA to prevent subsequent complaints being lodged by a debtor for the purposes of stalling enforcement.

We recommend adding new section 83HI to ensure that obligations on lenders using disabling devices are enforceable.

Rules that apply at time of repossession

We recommend the addition of new section 83JA (clause 43) to set out clearly the obligations regarding repossession if the borrower is not home at the time of the repossession. Our amendment requires that the premises not be left obviously open and that a written notice be left for the borrower. We are aware that securing the property would not be possible if entry had been forced; however the appearance of a closed property would lower the risk of theft. We recommend amending section 83M to prohibit repossession on Sundays and public holidays. Section 83N requires creditors to be registered under the FSPA in order to exercise repossession rights. We recommend amendments to make it clear that any persons carrying out repossession would be required to be licensed (or otherwise certified) under the PSPPIA, regardless of the registration status of the creditor.

Rules that apply after repossession takes place and notices

Section 83T (clause 43) sets out requirements for lenders when selling repossessed goods; we recommend an amendment requiring them to obtain the best price reasonably obtainable at the time of sale (for consistency with wording in the Property Law Act 2007). We recommend clearly defining the amount a debtor would be liable to pay when reinstating a credit contract for repossessed goods under section 83V. New subclause 83V(3) makes it clear that calculation of creditor’s costs would be subject to the rules governing the unreasonable fees provisions. We recommend allowing creditors to serve notices (except the repossession warning notice and post-repossession notice) electronically if a borrower has provided an email address for this purpose.

Enforcement and remedies

It became apparent to us that there is a lack of awareness among consumers that remedies for breaches of the CCCFA can be sought through the Courts, disputes tribunals, and dispute resolution schemes; we recommend amendments to clauses 44, 45, and the insertion of new clause 45A to clarify the jurisdiction of each. We recommend removing the reference to the Responsible Lending Code in clause 49(2) to prevent civil remedies being sought regarding a non-binding instrument.

We recommend increasing the cap on statutory damages in sections 89(1)(c) and (d), and 89(2) to $6000, to provide a more effective deterrent (clause 47). We recommend increasing the limits on penalties for offences, as set out in section 103 of the CCCFA, to $200,000 for an individual and $600,000 for a company (clause 58). This amendment would align the penalties with those set out in the Fair Trading Act 1986.

We recommend the addition of new section 108(1A) (clause 60), which would provide a definitive test for when the Court should disregard convictions and other misconduct when considering making a banning order. This test is similar to a test in the Sentencing Act 2002. We also recommend that the offence of obstruction of repossession be removed from the bill.

Infringement offences

We consider that many minor breaches of the CCCFA are difficult to enforce, as they require remedies to be sought through the Courts, which can be costly and time-consuming. We therefore recommend the introduction of an infringement notice regime (new sections 102A (clause 58), 105A to 105F (new clause 59A)), under which infringement notices could be issued by the Commerce Commission. We have restricted infringement offences to breaches involving a minor misconduct and straightforward issues of fact.

More serious offending should lead to a conviction under section 103 (clause 58). Accordingly, we consider that infringement notices would most appropriately be used in response to minor breaches of the disclosure provisions, such as failure to comply with a request for a copy of a creditor’s standard form contract terms.

Oppression

The CCCFA contains provisions for Courts to “reopen” credit contracts where they are found to be oppressive; these provisions relate to all credit contracts. Reopening a credit contract enables the Courts to readjust payments and order the transfer of property between the parties. We recommend amending clause 63 which sets out the matters the Courts must consider when deciding whether to reopen a contract. New paragraph (da) of section 124 would add whether a credit contract is a consumer credit contract as a consideration. Although this section applies to all credit contracts, consumers are more vulnerable than businesses and require greater protection. The amendments to paragraph (g) replace the reference to “comparable arrangements” offered by other creditors with one to “the same or substantially similar” arrangements. We consider this wording provides greater legal certainty. We recommend amending paragraph (j) to align it with the wording in the lender responsibility principles relating to whether agreements are expressed in a clear, concise, and intelligible manner. We recommend amending paragraph (n) to refer to creditors acting “lawfully” rather than “reasonably”.

Financial Service Providers (Registration and Dispute Resolution) Act 2008

The FSPA requires financial service providers (this includes persons providing credit under a credit contract) to be registered. One of the requirements for registration is for providers to become members of an approved dispute resolution scheme. We recommend amending section 5 (new clause 74A) to require persons who are creditors under a credit contract (rather than just those who only provide credit) to be registered. This would ensure that consumers had access to dispute resolution where debts had been on-sold, for example to a debt collection agency.

We recommend inserting new sections 15AA and 18AA (clauses 80 and 84) to clarify the extent of the Financial Market Authority’s powers. This amendment would allow, for example, the authority to prevent overseas financial service providers registering in New Zealand solely to bolster their reputation; we consider this would strengthen New Zealand’s financial regulation regime. We recommend allowing the FMA to act on its own discretion when considering deregistration of a financial service provider; this has resulted in a proposed amendment to section 18A (clause 84). Our recommended amendment to section 34 in clause 87 would allow the Registrar of Financial Service Providers to share information with the Commerce Commission, for, among other purposes, enforcement.

We recommend amending subclause 98(4) to allow requirements for approved dispute resolution scheme rules to be introduced through regulations. New subclause 98(8) is intended to ensure that approved dispute resolution schemes can impose compensation for non-financial matters in relation to repossession complaints. We also recommend that clause 100 be amended to require dispute resolution schemes to communicate with the Commerce Commission if they receive a series of complaints about a single creditor or a class of creditors.

Regulations

Clause 65 of the bill details the regulation-making powers contained in the legislation. The Regulations Review Committee reported to us on the exemption powers contained in new section 138(1)(ab). We have recommended the insertion of new section 138(1AA) which sets out clearly the circumstances in which the exemption power could be exercised. This amendment would ensure that an exemption from the Act’s provisions would be granted only in appropriate circumstances. In line with advice received from the Regulations Review Committee, we recommend inserting a requirement for the Minister's reasons relating to an exemption in regulations made under new section 138(1)(ab) to be published with the regulations.

Application of amendments to existing agreements

We recommend Schedule 1 be amended to clarify that the bill does not apply to existing agreements except in the certain specified circumstances, including the following:

  • disclosure, where a request, variation to an agreement, transfer of a creditor’s rights, or the issue of a continuing disclosure statement occurred on or after the commencement date of the relevant provisions

  • hardship applications made on or after the commencement date of the relevant sections

  • lender responsibility principles where a variation to a contract occurred on or after the commencement of clause 9.

These transitional provisions mean that overlapping regimes will be operating for some time, particularly in the credit fees and repossession areas. However, we point out that repossession is mostly used under short-term credit contracts only, and best practice guidelines enjoin caution before imposing new legal requirements on existing contracts.

Other matters

We gave careful consideration to a number of other matters that did not result in amendments to the bill. Our comments on two of these matters follow.

Interest-rate caps

We are aware that interest-rate caps have recently been implemented in Australia and that similar legislation has been introduced in the United Kingdom. Caps offer a form of consumer protection by setting an upper limit on the amount of interest which can be charged on consumer credit. Whilst restricting interest rates may offer consumers protection from one form of high-cost credit (short-term, high-interest-rate compounding loans) we consider that it may also have unintended consequences. They include restricting access to credit for consumers, and also that the interest-rate which is the upper limit coming to be viewed as a target or “reasonable”. We consider that the provisions included in the bill (and our amendments), especially as they relate to disclosure, unreasonable fees, and responsible lending, would reduce the risk of lenders offering unaffordable credit.

Introducing the Department of Internal Affairs as a regulator of repossession agents

The bill as introduced requires all repossession agents and repossession employees to be licensed, or hold a certificate of approval, under the PSPPIA. This would have the effect of making the Department of Internal Affairs the regulator of the licensing requirements for repossession agents. We understand that this change might cause concern, as private security personnel and private investigators are perceived as having functions distinct from repossession agents. Repossession agents and other occupations included under the Act undertake operations regarding property (including entry to houses) which might put peoples’ property or safety at risk—for example, security alarm consultants are included in the Act. In addition, we understand that some firms which carry out private investigations and security services also carry out repossession services. We therefore consider using the existing licensing regime is appropriate, and point out that regulators would, if required, have the backup of the Police during enforcement.

Labour and Green Party minority view

Labour and Green members welcome this legislation as the long awaited outcome of the review of the CCCFA which was commenced in 2008. This legislation provides greater protection for consumers and we support the significant majority of the provisions in the bill. We continued to be concerned about the delays in providing greater regulation and protection in the consumer credit market. Many vulnerable consumers have been trapped in cycles of debt and despair as a consequence of these delays.

Other credit and default fees

We are disappointed that the provisions in the bill as introduced to clarify the tests for unreasonable credit fees and default fees have been amended in a way that risks a continuing lack of clarity in this area and reduced consumer protection. We believe this is an area that should be reviewed by the Ministry of Business, Innovation and Employment after a couple of years of operation.

Interest-rate caps

The biggest gap in the bill is the failure to include interest-rate caps for third-tier lenders. Interest-rate caps have been introduced in an increasing number of jurisdictions including Canada, the United States, Australia, South Africa, many European countries and Japan. The United Kingdom announced as recently as December 2013 that they would be introducing interest-rate caps on pay-day loans. Interest-rate caps are a necessary element of provisions to protect consumers from predatory and unscrupulous lenders who charge excessive interest rates. Labour and Green members note that it is not uncommon in communities that annual percentage interest rates of over 50 percent, 100 percent, or even higher are standard practice for third-tier lenders. This bill fails to directly address this issue. The stated reasons for not including interest-rate caps do not seem to have been problematic in other jurisdictions. While other elements of the bill will provide greater protection to consumers, the omission of an interest-rate cap will allow excessive interest rates to continue to be offered to some of our most vulnerable consumers.

Enforcement

To ensure the protections provided in the Credit Contracts and Financial Services Law Reform Bill actually improve the conduct of the consumer credit market will require adequate resources provided to inform lenders and borrowers of the changes and to the Commerce Commission to enforce the legislation.

Appendix

Committee process

The Credit Contracts and Financial Services Law Reform Bill was referred to the committee on 17 September 2013. The closing date for submissions was 1 November 2013. We received and considered 70 submissions from interested groups and individuals. We heard 44 submissions, which included holding hearings in Auckland and Wellington.

We received advice from the Ministry of Business, Innovation and Employment. The Regulations Review Committee reported to the committee on the powers contained in clause 9 and clause 65.

Committee membership

Jonathan Young (Chairperson)

Kanwaljit Singh Bakshi

Hon Clayton Cosgrove

Clare Curran

Kris Faafoi

Julie Anne Genter

Mark Mitchell

Hon Chris Tremain

Dr Jian Yang

Carol Beaumont and Alfred Ngaro participated in this item of business.