Credit Contracts and Consumer Finance Bill

This part is very important and we will seek to take a number of calls on it, because we have quite a lot of substance to cover in this part.

We have moved some amendments in respect of the commencement date. It is clear from the submissions from business that it is concerned about the additional compliance costs associated with the bill. This bill will require financial institutions to get new contracts drawn up, to put new procedures in place, to train their staff, and to seek additional legal advice about how they deal with the fact that people can now make a claim to the court to set aside a credit contract if there is some sort of ground to do so. There is a phrase in the bill about “some other reasonable cause” for people to do that. So, there needs to be a significant amount of time to allow that work by the financial institutions to happen. The Government has almost accepted that that is a valid point, because in the amendments to the bill—and the Minister may want to take a call on this—the provisions in respect of the new credit contract procedures are split out, and clause 2 states that they can be brought in at a later date.

The National Party believes that Parliament should set—I will wait until the Minister has finished conversing with the Chair—a date for that provision to come into force. We have moved an amendment stating that it should not happen until 2 years after the bill obtains the royal assent, because we believe that is an appropriate time in which to allow business to get its procedures up to speed. We have talked to a lot of business people and they say 18 months would do it, but we think 2 years would play it safe. We know the Government accepts that something needs to happen, and we agree with immediate action on buy-back schemes. But this is an arrangement that will affect every finance company in New Zealand. We think that we should state in the law what the time line is, so we have moved an amendment on that.

We have also moved a number of other amendments to this part. The most important amendments, which I want to draw to the Minister’s attention, relate to clause 5. Declaring the fees associated with a credit contract is fundamental to this bill, because it is premised on disclosure. The Minister wants to disclose as much as possible. Yet the bill does not disclose the fees that brokers charge for their involvement in a financial arrangement. So, for example, if a person borrows $5,000 from Easy Loans or somewhere like that, every charge that Easy Loans makes will be declarable. But if a person goes to a broker—who may want 10 percent of the charge—that charge is not included in the disclosure regime. Nowhere in the bill does a broker’s charge have to be disclosed.

National Party members think that is a big loophole, because we have been advised that most finance companies in New Zealand that deal with consumer finance will consider moving to broker arrangements, rather than keeping their branch offices. That is because the broker’s fee does not have to be included—it is not part of the credit arrangement. But we say it should be. The broker is not party to the contract, but the broker’s 10 percent fee is a cost of the credit, and its disclosure is not included in the bill. So if what we are trying to show people is the full cost of their borrowing—and that is what we are trying to do—we should have a requirement that when a finance company knows about a broker’s fee it should be included in the classification.

We know that finance companies are getting ready. I spoke to someone today, and I was told that within 48 hours the finance companies could change the whole way in which they run their business, in order to have everybody become a broker. When people line up for financial arrangements and look at the official documentation that the Minister is proposing on disclosure, the broker’s fee is not included. Some brokers’ fees are taken without the finance companies being aware of it, but some companies are aware of those fees. We have put up an amendment that will mean that if a financial institution is aware of a broker’s fee that should be a credit fee that is disclosed, because it is part of the overall cost of borrowing the money. Some financial institutions tell me that 90 percent of their business comes through brokers; others have hardly any of that business.

We think that if the Government seriously wants to deal with its purpose of disclosure, it needs to make amendments to this bill. We are prepared to have this debate suspended for a day, so that correct amendments can be drawn up. I say to the Minister that I have noticed the officials nodding the whole way through my point about that.

I am delighted to speak on the bill. My learned colleague the Hon Tony Ryall has drawn the attention of the Committee to what we believe is a significant loophole in the bill. If his legal advice is correct—and we have no reason to believe that it is not—the loophole almost totally negates the purpose of the bill.

There is not much doubt that our consumer credit law in New Zealand needs updating. For that reason, the National Party is basically willing to support some updating of the legislation, but it is crucially important that in doing that we achieve what we want to achieve. Clearly, that is not being done at the moment in the way the bill has been drafted. My learned colleague has suggested amendments to the bill that we believe would more accurately reflect the desire of this Parliament. I also support the notion that the best way of dealing with consumer credit is to mandate a high level of disclosure, and not to mandate a lot of silly rules and regulations.

I express my regret that, notwithstanding the support of that principle, a huge increase in compliance costs is involved in putting this bill into place. People such as the members of the Financial Services Federation have expressed their considerable concern about the compliance costs involved in the legislation. In some respects we should not be too surprised at the compliance cost increase, because this Government has a sad record of increasing compliance costs in almost every bill it brings down.

Just a few weeks back—in fact, about 10 days ago—KPMG and Business New Zealand released a major piece of work dealing with the compliance costs faced by 760 businesses in New Zealand. They discovered that 98.2 percent of those 760 businesses believed that over the previous 12-month period compliance costs had increased. Only four of the 760 businesses believed that compliance costs had gone down. It seems to me that this bill will continue in the pattern of significantly increasing the compliance costs that businesses—in this case, financial institutions—will face, and I am bound to say that that is a matter of considerable regret. The faster we force financial institutions to put the bill into practice, the greater those compliance costs are likely to be. I certainly support my learned colleague in recommending a transitional period of 18 months to 2 years for bringing in key parts of the legislation.

I point out one other important part of this bill, which worries me a great deal, and that refers to the hardship provisions. I was not able to catch your eye, Mr Chairman, when speaking on the title, but I think it is important I make the point that although the addition of these hardship provisions sounds as if they are something useful and constructive for borrowers in New Zealand, in fact the result will almost certainly be the reverse. By giving borrowers the right to renegotiate their loans, rather than leaving that to the discretion of the lender, we are significantly increasing the risk that financial institutions face when they make loans. What will they do in response? There is only one thing they can do, which is to turn down loans they judge to be risky. They will also increase the costs of loans they make, because the bill as drafted will be increasing the risk they face. I think that that is a seriously retrograde step.

It is very similar to what the Government is also proposing to do with redundancy payments. It is proposing to give greater security for a larger lump of redundancy payments. What effect will that have? It will put secured creditors at greater risk. So what will they do? They will pull the plug more quickly because they will recognise there are more charges ranking ahead of them. I think that increasing the risk that lenders face is a serious issue. Although it may seem like a sensible, helpful thing to do for New Zealand borrowers, the reverse is almost certainly the effect.

It is my pleasure to rise on behalf of United Future, which will be supporting this bill. I personally believe that it is a very important bill, as it affects the vast majority of New Zealanders. We can ask people about the many powers that work in their life, but most people will never mention the power of interest. They will often mention the power of love, they may mention the power of a dream or many other powers, but they will very seldom mention the power of interest.

This bill is about the consumer. It is called the Credit Contracts and Consumer Finance Bill. I agree with the previous speaker that compliance cost is an issue, but with this legislation we are really trying to bring to people’s attention the issue of interest costs—so that they really do know exactly what they are getting into. We are trying to show them the full cost of borrowing. I believe that, if we are honest, the majority of members often do not understand the true costs of borrowing.

Let me give an example, because I think this legislation is good, and very important. But on the other side of this coin, I also think we have a responsibility to educate people and to show them what they are really getting into. Let us have a look at credit card debt. Let us say that a person has a credit card balance of $3,900. People may say that that is not a problem, and I believe that our current national average balance is normally far higher than that. Apparently, our national average credit card debt today is around $4,500 to $5,000, but I have done my calculations, to be conservative, on the amount of $3,900. The person will make just the minimum monthly repayments until the balance is paid off. Those minimum monthly repayments will be at the rate of 2 percent of the unpaid balance. How long do members think it will take to pay off that amount, at an average interest rate of 18 percent? Most interest rates on our major cards are still around the 18.75 percent mark. Well, it would take 37 years and 7 months to pay it off—if that person were still alive. He or she would have paid a total of $10,931, of which $7,931 would be interest and $3,000 principal. If that person were educated to pay even at the rate of 4 percent of the minimum balance, the time factor for paying off that card would be reduced to 10 years, and he or she would save $6,200 in interest.

Interest is an incredible cost to people. If we could just encourage them, as many have spoken of, to start saving—and I realise that this is not to do with the bill—and if they managed to put that same $3,000 into a bank account at 10 percent interest without adding anything else to it, at the end of the same period of time they would have $126,454. People need to understand the cost of interest in their consumer contracts when they enter into them. Most people never ponder the power of interest.

Another trap, and I do not know whether we can cover it adequately in legislation, is that many people will top up their home mortgage as the next-best thing to free money. A person who has a $150,000 mortgage at an interest rate of 11.5 percent, can go to a bank and say that he or she wants to borrow $10,000 to buy a boat. The bank will say: “No problem, at all. You don’t even have to increase your repayments. We will just extend the length of your mortgage by 9 months.” People often think that that is the nearest thing to free money they will ever get, but what actually happens?

💬 Deborah Coddington: Do banks do that?

Most banks will do that. Let us have a look. The mortgage repayments would be about $1,600 per month, so someone who borrowed an extra $10,000 would have already paid $51,895 in interest at the end of the third year, and only $2,674 in principal. When the bank gives the person the $10,000 sum, the mortgage repayments remain the same. Before the mortgage is altered, the total interest to be paid over the whole contract would be $234,064, but because the person has now topped up the mortgage, the interest paid over the 20 years and 9 months will be $314,948. I hope that the person who buys a boat with an extra $10,000 catches a lot of fish, because the extra borrowing is going to cost $90,884!

We really need the legislation we are dealing with now, to try to show people the true cost of interest. We have educated them to be borrowers instead of savers, and I think many would agree that that is a mistake. United Future believes that this legislation goes a long way to showing people the pitfalls and traps in borrowing.

The first point I would like to raise with the Minister has to do with the commencement date. The Commerce Committee heard a large number of submissions from the banking industry, the finance industry, and all sorts of major industries in this country to the effect that the commencement date needs to be extended for 2 years, minimum, so that they can get their software installed and their systems in place and so be able to handle these changes. I hope that the way this bill is written means that the Order in Council will allow a 2-year delay.

💬 Mark Peck: Have you read the Supplementary Order Paper? The Supplementary Order Paper actually does it.

That is wonderful. I thank the member. It sounds like we might be doing that, but I am just making the point that—[Interruption] I will not take his word for it at this point. I am making the point that a delay of at least 2 years is needed to allow the finance industry to bring in these changes.

The next part I would like to refer to is the definition of credit contract. For some reason, that definition has been removed from the definitions clause and put into a new clause—clause 6A. This clause precedes clause 6B, which defines buy-back transactions. Why these two definitions were separated from the definitions clause and put into separate clauses, I am not quite sure. I would like the Minister to clarify that for us. It seems a rather odd way of doing it, but I hope the Minister will take a call and give us an explanation.

I refer now to the definition of cash price. Cash price, as stated in the bill, is the lowest price at which a person could have bought property or services had he or she paid cash, or, if a person could not pay cash, it is the fair market value. We all know how cash deals can be discounted, but a fair market value is something that could be disputed. A clearer description should have been given. Also, we have heard quite a lot about compliance costs. This bill does require quite a lot of compliance costs, but I think that the way the legislation is going to handle a number of very serious credit issues is good. Therefore, compliance costs will probably be balanced out with fewer loans being forfeited.

I have been searching through this bill, and I find that there is one more issue that has not been raised—that is, loans to students. Student loans are not covered in this bill, and surely students should have the interest rate on their loans explained to them right upfront. Many of them are paying off the interest and are not getting anywhere with the loan itself. That is a huge millstone around students’ necks. It is something that I think should have been incorporated in this bill so it is made very clear to students how much their loans will cost them in the long term. We heard some extensive figures from Paul Adams. I am not quite sure that those figures are correct, but certainly I know that the figures in relation to student loans mean that students are left paying off just their interest for a long time before starting to get on top of their actual loan. That is a huge disincentive for them to stay in this country and to continue to work here.

So I summarise by saying that this part of the bill could have had a few improvements made to it. If those improvements had been made, the bill would have been a lot better. However, I am glad that the meaning of the buy-back scheme is covered, because that is an important and a serious part of the bill.

I move, That the question be now put.

I rise to address Part 1, which deals with the purposes of this bill. One of the purposes—and I have to agree with the National Party on this; it has discovered a serious loophole in this legislation—is to provide for the disclosure of adequate information to consumers. What that does not deal with is a situation where a broker is involved in a deal. Let us suppose that a consumer wants to borrow $5,000 and goes to a broker. The broker takes 10 percent—$500—and the borrower or consumer gets $4,500. How that works is that the person who is actually lending the money sends a cheque for $500 to the broker. That $500 does not get declared, so the purposes clause is inadequate. There is no ceiling on the percentage commission a broker can charge.

I have been told of a brokerage in Hawke’s Bay that routinely charges 20 percent commission. That 20 percent commission will never be declared, so there is no way that this bill should proceed as currently written, because every small finance company will now set up its own brokerage.

💬 Mark Peck: No, we won’t. Has the member read the bill?

The little member over there says: “No, we won’t.” Perhaps he can take a call. [Interruption] If he would like to wait, he could take a call and explain to the Committee why they will not want to do that. If I was a small finance company, that is exactly what I would be doing. Those percentages will not be declared, and this bill will not protect consumers. The Hon Tony Ryall raised a very valid point, and that is why we have the Committee of the whole House to address these matters clause by clause. It is not for the chairman of the select committee to pipsqueak away saying: “No, we won’t! No we won’t!”

The other issue I want to deal with under the purposes clause is the hardship provision. The select committee wrote to all submitters and asked them to come back on that provision. The creditors were uniformly opposed to it, but we have seen it come through anyway. That is increasingly how this Labour Government operates. It has a farce of a submissions process, and the submissions are ignored. What we will see is a drastic change to credit in this country, whereby if debtors decide that it is all just a bit too hard and they cannot pay back what they borrowed, then they can apply to have the terms of their contracts changed.

💬 Darren Hughes: What are the rules in Cambridge?

That member talks about Cambridge. I do not think that he would ever be invited to go a university like Cambridge or Oxford.

The bill refers to any hardship such as illness, injury—[Interruption]—what is more, they want me to go back—loss of employment, or the end of a relationship. United Future, the family party, supports this bill.

What will we see from this bill? We will see more relationships ending so that people can claim that as a reason for getting out of paying their debts. If the creditor declines their application, what do they do? They can claim—

💬 Darren Hughes: We’ll show this Hansard to your husband.

I do not have a husband. They can apply to the court to have the terms of the contract set aside. This Labour Government might be genuine; I will give it the benefit of the doubt. Those members might be genuine in trying to help consumers, but in the long run those hardship provisions will not protect consumers. The cost of credit will go up, and consumers will be hurt by that.

I move, That the question be now put.

💬 Sandra Goudie: This is an important debate.

The CHAIRPERSON (Hon Clem Simich): Yes. I call Sandra Goudie.

Thank you, Mr Chairman.

💬 Darren Hughes: I thought you said it was important.

Absolutely! Every contribution made in this Chamber is important, particularly in light of the fact that some very substantive points have been raised by a number of people on this side of the Chamber. The Minister and her colleagues would do well to listen to what is being said, and maybe seriously consider the recommendations of Supplementary Order Papers on this bill.

I refer to the purpose of the bill. After all, it is all about disclosure, and I made that point in my speech on the title. The whole deal around this bill is about full disclosure, but that is not absolutely apparent. When we look at the definition of “full costs”, we see that it does not necessarily include the brokerage fee. The opinions we have sought to substantiate the points raised by my learned colleague the Hon Tony Ryall say that brokerage fees are excluded from the definition of “full costs”.

💬 David Benson-Pope: Oh! Ten-dollar Ryall!

I invite the member to read the bill and take a call. Perhaps the Minister would care to take a call and give us her interpretation of the definition of “full costs”, and whether it includes brokers’ fees. That is a fundamental point. I see the Minister nodding, so it is great that she is taking that on board. Hopefully, we will see a more positive response to the Supplementary Order Papers from my learned colleague the Hon Tony Ryall.

💬 Darren Hughes: Nobody takes him seriously.

QC!

I want to raise another aspect of the purpose of the bill, which is to protect the interests of consumers in connection with credit contracts. What we are looking at doing is providing full disclosure to persons entering into consumer credit contracts, because often they do not understand what they are entering into. As a result, community law centres are being inundated with people who are unable to fulfil their obligations to the consumer credit contract. There are times when they are being ripped off, and they do not understand.

Kingdom Resources was one of those who mentioned the need to educate these people. Legislation will protect them from themselves only to a certain degree—at the end of the day, it is their responsibility, so consumer education has been identified as an ongoing issue. Although disclosure is great, how will that information be relayed to consumers so as to educate them about the broader services that will be available to them? That has not been clearly expressed in the purposes clause of the bill, in the overview, or the interpretations. One wonders what consumer education will be entered into, and what funds will be put aside to provide some sort of educational services for consumers entering into consumer credit contracts.

I notice that substantial funds have been put aside so far for the Commerce Commission, but I do not believe that any of it relates to the education of consumers. It is an ongoing issue, and it will continue to be an issue with the introduction of this Act, despite the best efforts of many people to try to protect these people from themselves. Essentially, it is protection from themselves, because they do not necessarily have the education, the understanding, or even the language skills to protect themselves when entering into these contracts.

Will this bill really do it for them? At the end of the day, what will be materially different for them—apart from the fact that they will be able to challenge a contract through the hardship provisions, or if there is a lack of disclosure? I put it to the House that in so far as it is provided by this bill, disclosure will be there, but those people will still have a problem. There will still be people entering into consumer credit contracts who do not understand what they are doing. There will still be a continuing problem, because they do not understand the cost of what they are purchasing.

One example was given of a lady who went to what is called a “beat the budget blues” course. She did not believe what she was being told—

I move, That the question be now put.