Should it take a regulatory change for banks to issue emergency finance?

A commercial lawyer says the fact the Government had to tweak regulations under the Credit Contracts and Consumer Finance Act (CCCFA), to ensure the law doesn’t prevent people from accessing emergency credit, shows it isn’t fit for purpose.

The Government, following flooding in the upper North Island, introduced an exemption under the consumer protection law to temporarily excuse lenders from doing affordability tests on people who need emergency finance.

The aim was to allow banks and other lenders to quickly get funds to weather-affected customers in desperate need of cash.

The exemption enables individuals to get an overdraft or home loan top-up worth up to $10,000. The debt needs to be taken out before March 31 and repaid within a year in the case of an overdraft, or within a “reasonable period” in the case of a home loan. Conditions apply to prevent borrowers from getting into costly spirals of debt.

Buddle Finlay consultant Simon Jensen criticised the exemption.

Jensen argued that the fact the Government had to swoop in to make ad hoc changes to the law highlighted how flawed it is.

“If somebody’s in hardship and you have to give an exemption so the banks can help them, isn’t that a problem?” he questioned.

Jensen said there will always be people who come to banks in hardship - including those affected by floods in Westport and Nelson, for whom an exemption wasn’t created.

“Those people still needed help,” he said.

He also commented on the messiness of the changes.

The exemption initially only applied to borrowers affected by flooding in the upper North Island. But after Cyclone Gabrielle hit, the Government had to make a second amendment to regulations to expand its coverage to Gisborne, Hawke’s Bay and Tararua.

The Herald put Jensen’s criticism to Finance Minister Grant Robertson. He said the exemption illustrated the Government’s flexibility, responding to a specific set of circumstances.

Robertson said the temporary change dealt with one part of the CCCFA and didn’t speak to its effectiveness more broadly.

Jensen, whose clients include lenders, also raised his concerns in a letter to the new Commerce and Consumer Affairs Minister Duncan Webb.

He said the CCCFA had to strike a better balance between supporting efficient markets (where consumers don’t end up paying for deadweight compliance costs), financial inclusion, and protecting the vulnerable from unscrupulous lenders.

Jensen questioned whether the pendulum had swung too far, and said the CCCFA was too focused on protecting a minority from harm at the expense of the majority, who shouldn’t struggle to access credit.

Webb responded to Jensen, saying: “I think most would agree that regulatory oversight of lending is needed, and many forget that the legislation has been very effective in limiting payday lenders who were frequently offering loans at many hundreds of per cent interest.”

Indeed, FinCap senior policy adviser Jake Lilley said the financial mentors the non-government organisation (NGO) worked with had reported good outcomes from the CCCFA and experienced fewer run-ins with lenders they’d had issues with in the past.

Nonetheless, Webb recognised there were parts of the CCCFA that “have not landed perfectly”.

He said “some of the rules imposed onerous duties on lenders and unnecessary information demands on borrowers”.

“Work is continuing in that regard.”

The emergency finance exemption aside, the CCCFA has undergone a fair bit of slicing and dicing since new affordability and suitability requirements for loans were introduced in December 2021.

The Government made one round of changes in July last year. A second set of tweaks is being drafted and is expected to take effect in the coming months.

The New Zealand Bankers Association in October submitted to the Ministry of Business, Innovation and Employment about introducing a permanent exemption to enable banks to provide customers with emergency credit in cases like natural disasters.

Webb didn’t get into the details of the emergency exemption in his response to Jensen, but concluded: “Striking the right balance between protecting those who need it, and not creating systemic costs by protecting those who don’t need it, is an ongoing challenge. Part of that is getting the right mix of principle-based legislative guidance, or details-based rules.”