Rob Collins: Lessons we can learn from the Credit Contract and Consumer Finance Act

Minister David Clark. Photo / Dean Purcell

Opinion

OPINION:

While all the attention and column inches over the past few months have been devoted to the negative impacts of the Credit Contract and Consumer Finance Act (CCCFA) changes introduced last December, the story behind how the changes came about has been relatively unrecorded.

The changes were billed in the introductory General Policy Statement as "the result of a review that identified ongoing issues in the credit market and significant harm to vulnerable consumers from problem debt. The issues identified included the excessive cost of some consumer credit agreements; continued irresponsible lending and other non-compliance, including by mobile traders; unreasonable fees; and irresponsible debt collection practices."

All are laudable objectives but the only lenders called out were mobile traders and those with unreasonable fees or poor collection tactics. What happened to the policy then, that it became so distorted that the changes caught every lender and has prevented thousands of credit-worthy and responsible borrowers from financing legitimate expenditure through registered and responsible lenders?

The simple answer is that regulators went into the process with preconceived ideas of market behaviour and ascribed such bad behaviour to every lender. Then they only "discovered" what they needed to, to find to confirm their thinking. Submissions of contrary behaviour and warnings of unintended consequences were ignored.

The officials who reported back to the Select Committee on those submissions even stated that "as a financial service, lending carries greater risks for consumers than the majority of other commercial activities."

Really – worse than "the majority of other commercial activities"?

It appears that such a huge generalisation went unchallenged and it has since been reported that one member (possibly more?) of the Committee understood the legislation only applied to loan sharks. But it gets worse.

The good guys in the financial services arena - Credit Unions and Building Societies (CUBS) – have been maligned more than any in the sector. As co-operatives, they have a legislative responsibility to look after the interests of their borrowers who are in fact, also their owners. The "people helping people" philosophy of the CUBS has been ignored by the regulators in their drive to corral the whole financial services marketplace into one straightjacket.

This one-size-fits-all approach seen to such explicit clarity in the CCCFA changes is also being played out in another major Bill being sponsored by Minister David Clark and MBIE – the Financial Markets (Conduct of Institutions) Amendment Bill. Unfortunately, the pattern seen with the CCCFA changes is being followed here and will probably lead to the same negative consequences for consumers.

The Bill is being promoted as another answer to supposed poor conduct among the financial services industry. The introduction to the Bill states: "This bill is one of the Government's responses to recent reviews of financial institutions which identified significant weaknesses in the conduct and culture of institutions in New Zealand's financial sector".

Remember, this is the same sector that the officials are on record as claiming to be responsible for greater harm "than most other commercial activities".

But who were reviewed and who will the Bill cover? You might think that all sectors were reviewed and the Bill would cover loan sharks, mobile traders and other high-cost lenders that MBIE previously identified as deserving of greater oversight.

But no – the only sectors covered will be registered banks and insurers, CUBS and a few finance companies – barely 10 per cent of registered financial services providers. What is worse is that CUBS were not even surveyed or consulted about their behaviour or policies around consumer protection. It was just assumed that if banks and insurance companies in Australia had some questionable activities, so did CUBS in NZ.

This is not just uninformed but stubbornly blindfolded to the realities of the legislation covering CUBS and the positive social and community-minded activities of the sector.

While MBIE claim to have already identified loan sharks, mobile traders and high-cost lenders as causing harm, they have deliberately left them out of the Bill's scope. To avoid the same mistakes that have happened with the CCCFA changes, the Conduct of Institutions Bill needs a substantial rewrite to exclude those in the financial services industry who are already covered by their own Acts of Parliament or the conditions of an existing licence and to bring into its provisions those currently outside the scope.

There is a strong argument that the Bill should be withdrawn completely and independent advisers appointed from within the financial services sector to undertake fresh consultations with the Minister to confirm that the proposed legislation is actually required and, if so, fit for purpose.

To do otherwise is to ensure that in 12 months we will be having the same protests and media stories about regulatory overreach, unintended consequences and "we didn't understand who would be covered".

- Rob Collins is a director and secretary of CUBS NZ (an independent association representing the interests of Credit Unions, Building Societies and charitable institutions in the co-operative financial services sector).