Credit Contracts Legislation Amendment Bill

It is a pleasure to begin proceedings on Part 1 of the Credit Contracts Legislation Amendment Bill.

The bill before us amends the law which regulates the provision of credit in New Zealand to better protect New Zealanders from harms. Before I do get on to some of the details within Part 1, this is in response to a lot of harm that, I think, certainly colleagues on our side of the Chamber have seen through either constituency work or interaction with the likes of budget services in our communities where we have seen high-cost lending have a pretty detrimental effect on the lives of extremely vulnerable consumers. High-cost lending, as it is within this piece of legislation, is anything above an annualised rate of 50 percent.

This piece of legislation has been on a journey from when it first set out to deal with debt spirals getting out of control for some of these vulnerable consumers, and through the select committee process. I want to acknowledge the select committee around the introduction of an interest rate cap.

The credit laws impact almost every New Zealander in some way at some point in their life. But be it through a credit card or home loan or car loan or overdraft, in some way, shape, or form borrowing and lending does play an integral role in New Zealand’s economy. So borrowing does play a big part. It’s at the sharp end, or third-tier lenders or loan sharks, where we’ve seen a lot of harm caused. And certainly, as a local member of Parliament in Mana, through the electoral office in Porirua, we have seen quite a lot of case work, certainly over my time as the member of Parliament.

I did want to point to some of the features of Part 1 and straight to the new clause 10, which does go through some of the lender responsibility principles that are going to be inserted by this legislation, which will make obligations for lenders much more stringent. They do pertain to advertising standards for those who are lending and also about borrower information around languages for contracts of credit that lenders will have with their customers.

Clause 10(1A) talks about the reasonable steps that should be taken to offer the borrower information about the agreement in another language, or language A, if the advertising that has sent or caused the borrower to go to the lender “is wholly or significantly in language A is being, or within the preceding six months has been, distributed to the public or a section of the public; and (ii) the steps are necessary to ensure that the borrower can reach an informed decision (for example, if the borrower may not have a good understanding of the language in which the lender is otherwise providing information to the borrower under this Act);”.

Without going too much further, that particular feature of that clause is to ensure that if something is advertised in a language—and I’ll just use one example; i.e., Samoan—the offer that is made in their advertising must also be used in the process of the formation of the credit contract between the borrower who understood the advertising in that language and the lender, in order for the consumer to make an informed decision. This is just one example of some really practical changes that I think we’re making in this piece of legislation, which I hope will enable those who do go to third-tier lenders again to make what I would call a wise, informed, and motivated financial decision, because I think we’ve certainly seen in the past a deal, a degree, of confusion at the consumer end and, in some cases, some of the lenders preying on that confusion and signing some borrowers up to credit contracts that they didn’t fully understand.

That’s what we’re trying to stop, as well as—and we’ll come to it at a later stage—some of those misunderstandings or confusion turning into large quantities of debt that those families can’t afford. But we’ll get to that at some stage during the debate.

Thank you, Madam Chair. I rise, as we have, to ask the Minister a few questions as we work through this detailed committee stage. I’ll just apologise if I start coughing and hacking during the middle of this. I have a wee dose of man flu, which is troubling me slightly. Believe me, if I start hacking, it’s hurting me more than it’s hurting you.

Minister, we have supported through the process, through the first reading, through select committee, and through the second reading, the core elements of changes in this bill, including—if we look at clause 22, which inserts new subpart 6A—elements of total loan cap around high-cost lending.

But I have some questions that arise, actually, from the select committee process that was undertaken. The first of those concerns the fact that submissions that we heard in the Finance and Expenditure Committee raised questions—actually, allegations is a better way of putting it—that the Commerce Commission (ComCom) had failed to enforce the current legislation, which admittedly is more educative, which is about ensuring that borrowers can understand the conditions under which they borrow and the terms under which high-cost lenders can lend but equally also ensuring that high-cost lenders adhere to what they are permitted under law and particularly to the responsible lenders code.

So the evidence we heard in submissions—from some submitters at least—was that in their view, the Commerce Commission was not proactively seeking to investigate high-cost lenders to determine whether or not they were operating properly in a general sense, if not even in some specific instances. So, on the basis of that—and no cause to fundamentally query those submitters—one could question why there is a large-scale move to so—I won’t say radically—substantially amend the rules around high-cost lending if, indeed, there’s this possibility that the regulator has not been enforcing or exercising their authority under the current legislation to the extent which they possibly could.

That relates even more so—if that’s a general element—to the very late decision to introduce an interest rate cap. So if we have a situation where some submitters are saying, “Well, ComCom haven’t really been doing all they could do under the current legislation, so that could raise a question of why there is substantive change.”, it raises even more of a question of: even if you went that far, why would you suddenly, in the absence of them potentially not having enforced their responsibilities to the extent they could have, add that interest rate cap?

This leads on to the second area of questioning—I have four. The second area of question is: why was the interest rate cap introduced so late in the select committee process? There was no hint of an interest rate cap coming in at any point until right at the very end. In fact, during a week that the Government, I think, tried to stylise as a week of delivery—and the Opposition might agree that it was a week of delivery, but it was a “W-E-A-K”, “weak”, of delivery. In that—on day two, I think it was—the Minister stood, I believe—or the Prime Minister—and said we’ll have an interest rate cap, thank you very much, in this bill.

But that flew in the face of official advice. Official advice, which was in the regulatory impact statement and confirmed to the select committee by officials, was that an interest rate cap was not a good idea—that there was uncertainty about what impact it would have and what consequential impacts it might have. At least at the introduction of the bill, the Minister agreed with his officials. He didn’t seek to introduce an interest rate cap then, and it was only very late, as I say, in the select committee process, that all of a sudden, all of a sudden, it mysteriously appeared out of nowhere.

So my question is fundamentally: why? I then queried the officials and asked them, after the Minister had already declared that it was going to happen, what additional advice they had given to him about the interest rate cap and whether or not it was a good idea. They confirmed that not only had they not given any advice—further advice—on an interest rate cap beyond that which they had given prior to the introduction of the bill but they weren’t asked to give any additional advice either.

So, Minister, my question there is: where does this interest rate cap come from? Why was it suddenly introduced so late in the piece? Why did you not listen, Minister? Minister, why did you not listen to officials’ advice? Why did you not seek further advice from your officials? There’s no indication—officials beyond that point were only asked to give advice as to how it would be implemented, not whether or not it was a good idea or could even work. So, Minister, why did you not seek further advice from officials as to the worthiness of the interest rate cap idea?

That then moves on to another element which has come up quite recently, and I referenced this in my second reading speech. It’s something that came through a piece of correspondence from one of the submitters, which I believe the Minister has also got a copy of. That submitter claimed that officials were working on regulations that would have a significant bearing in the area of the obligations on the lender of the affordability test. They were about elements of expenditure that the lender had to make room for, even though they were discretionary.

So the first question in this area for the Minister is: are officials working on such regulations already; and if they are, why are they doing so when Parliament has not yet agreed to grant the authority to do so? We’re at the committee of the whole House stage; we have a bill that is suggesting certain regulations, things that will need to be worked through, but as of now, Parliament has not agreed that officials can or should and will be able to look at such regulations and make advice to Government to do so through an Order in Council. So are they doing so? And why are they doing so before Parliament has agreed to permit them to do so?

This leads us on to that point of the substance of that submission that I think, Minister, you and I both have received from that submitter. And that is: if they are working on these regulations—at least some of them—will they require lenders to allow or to factor in recurring discretionary expenditure of the potential borrower in establishing affordability? Put another way, does the lender have to—can the lender not account for, allow, or speculate, or require that the borrower actually reduce some expenditure somewhere else? And, look, the example I heard, and I think that, you know, it might be a purely speculative example, but the example in the correspondence, I think, was the like of a monthly Sky subscription, for instance. Does the lender have—if those regulations are being worked on and they are promulgated in the sense of how the submitter believes they will be, will that require that the lender has to give the headroom in assessing affordability for the borrower to have recurring expenditure, which is discretionary and therefore could be curtailed, if not cut? And the question, if that is the case, is: why is that an obligation on the lender?

We know in a high-cost loan, a borrower or borrowers have already got themselves into a degree of difficulty. That’s why they go for the nature of these loans. Are we looking, potentially, through regulations to place what amounts to—because there is greater responsibility on lenders to make sure that they can establish affordability, and there is a responsibility on them, greater than is under current law, in order to establish the facts around affordability, could we end up in a situation where the lender who’s obviously looking to run their business—and some of them, as we know, are a little more thoughtful of their customers than others, but let’s just take an example of ones that are fundamentally good-faith providers. Are we potentially providing a situation where those lenders have to either turn away a customer who’s seeking a loan for a need or have to permit this headroom, as I say, for discretionary expenditure?

If we’re in a situation like this, isn’t it appropriate the lender says, “Well, actually, you’ve got some expenditure. You can cut it, curtail it, and therefore, the loan might then be affordable.”? Now, I don’t say that as an allegation, Minister, an attestation of fact. All I know is I’ve had a submission, and I suspect you’ve had the letter as well, from a submitter which suggests that that’s what’s happening. I’m really keen to understand if officials are working on such a regulation. If so, why, given we haven’t passed the bill? If that is the case, is that the nature of where the regulations are headed? If it isn’t, can we please have some confidence about where that is going so that it doesn’t create too much of an issue.

Thank you, Madam Chair. I usually sit on the Economic Development, Science and Innovation Committee—

💬 Hon Member: Where this bill should have gone.

—rather than the Finance and Expenditure Committee. Exactly—where this bill should have gone, actually. It is a commerce bill, and it is from the commerce Minister, so it should have come to the Economic Development, Science and Innovation Committee, but it did go to the Finance and Expenditure Committee.

I was very pleased I was able to sit in on some of those submissions during the bill because, for me, it was quite enlightening. I’ve been a member of Parliament now for two years, and I’ve certainly seen, unfortunately, in that time, far too many cases of predatory lending by people in our community, and particularly targeting people who can least afford it.

So I was really pleased to sit on the select committee, particularly hearing from some of those budget advisory services who listen to or have to help some of the people who get caught up from time to time in the web of predatory lenders. So it was very good to hear those submissions. I was happy to sit down and listen to them in Wellington. Unfortunately I couldn’t make it along to Auckland, where I understand the select committee also travelled to, and heard from quite a range of submitters. I think the select committee made the bill a lot better. There’s some changes in there in relation to clause 22, which will ensure that consumers will not be able to refinance one high-cost loan with another high-cost loan.

But one change that Brett Hudson has touched on, which I’d like to ask the Minister Kris Faafoi about while he’s in the chair, relates to the interest rate cap that was brought in quite late in the piece during the select committee process. I’d like to ask him because, as we’ve heard, advisers or officials, when the bill first came to the select committee, suggested that there shouldn’t be an interest rate cap and certainly not a daily interest rate cap. So I’d like to ask the Minister how he came to form a view that there should be an interest rate cap, and particularly a daily interest rate cap, and how it is he came to choose the number of 0.8 percent as a daily interest rate. We’ve heard from the UK, for example, where unfortunately it seems that the daily interest rate cap that they’ve brought in in the UK has become more of a default setting. Rather than simply as a maximum figure, it’s become the default. As Jonathan Young says, it is the target.

So I’d like to understand from the Minister why it is specifically that he chose 0.8 percent as the daily rate, and, following on from my colleague Brett Hudson, what advice he received from officials about whether or not that 0.8 percent figure was actually appropriate or not. Why, for example, wasn’t it slightly lower or why wasn’t it slightly higher? Why is it that 0.8 percent is, in his view, I suppose, the Goldilocks figure? Is it something that he thinks should be looked at in the future? Is it something that a future Minister or future Parliament should consider—whether or not we should move that rate around based on predatory lending in the future, if it goes on to continue? So I’d like to know why it is that he came to choose the 0.8 percent figure, where it came from, and what advice he received from officials on that rate specifically.

Perhaps I can be the trifecta in asking the Minister to explain to us the interest rate cap, because I’d have to say that back in 2014, when Minister Faafoi and I were both on the Commerce Committee, we actually investigated this issue around interest rate caps. At that point in time, I think we probably listened to officials and decided not to. I’d be very keen to hear what’s changed because, you know, there are some consequences to interest rate caps, which I think the officials would have given advice on if they’d been asked. Certainly, we considered back in that period of time that when you have very small loans for very short periods of time, yes, the interest rates can appear to be high, but if they don’t have that higher interest rate, then no lender would actually give that loan because there would be a detrimental cost to the lender at that particular point in time. So what would happen is that those small loans become unviable. Therefore, they can’t borrow. Therefore, they either have to have longer loans or bigger loans and they end up borrowing more than is needed or for longer than is needed in order to actually transact some part of their life. So that creates a greater total cost and an ongoing burden.

Certainly, the National Party’s point of view is that we do question the late insertion of the interest rate cap—as Andrew Falloon just said—of 0.8 percent a day into the bill, and we are very keen to hear the Minister’s response in terms of why it was introduced so late—and also, as my colleague Brett Hudson made the comment, when he asked officials what sort of advice they had given, they stated to him they hadn’t been asked for advice and they could therefore give no advice. Therefore, we have to say this is a political insertion into the bill, and we think it’s actually counterproductive. We actually don’t think it’s going to work for those vulnerable lenders because it creates constriction into what they’re able to borrow and they end up borrowing larger amounts for longer periods of time, which does not work in their favour.

So, look, as the third speaker asking this question to the Minister, I leave it at that, and perhaps the Minister could illuminate exactly the rationale. That would be most appreciated. Thank you.

I’ll try and go systematically through some of the questions that were raised by members of the Opposition. I think the first point that was raised by Mr Hudson was the allegation from some submitters that the Commerce Commission, essentially, wasn’t doing their job in policing any of the bad behaviour that was occurring in the higher-cost lending space and, therefore, the lack of enforcement didn’t necessarily mean that the beefing-up of legislation, which is happening here, was required. There is some fairness to some of that criticism. We certainly want the Commerce Commission to do much more in terms of front-line grassroots interaction with the likes of the people who came to the Finance and Expenditure Committee with serious concerns.

I do note that Mr Young also noted that we went through some changes to this legislation in 2014. Our concern back then was that the legislation (a) didn’t go far enough; and (b) really did need to be backed up with resources at the front line in order for it to—the previous Government’s legislation—have any effect. The combination of what we think was legislation that didn’t go far enough, necessitating the changes in this bill, and a lack of resources for the Commerce Commission meant that some of the behaviours that the 2014 changes set out to stop didn’t, in fact, happen.

That is why this Government, after reviewing the changes that were made in 2014, is doing two things: the first thing is that, obviously, we are here debating the legislation and changing it and making the ability for the Commerce Commission to enforce some of these changes—again, at a very basic level—much stronger. I think that that legislation will in essence give the Commerce Commission more ability to do the policing so that I think some of the allegations that Mr Hudson may have heard at the select committee will now be followed up on. The second thing is that we’re actually going to give the Commerce Commission the funding to resource that properly—

💬 Brett Hudson: We already did that.

Well, I would disagree with that, because the level of resourcing that the Commerce Commission currently has, the current Government believes, is woefully inadequate to enforce and to patrol the predatory lending that is going on.

I want to acknowledge the people at the Commerce Commission that are doing the hard grind with community budgeting organisations right now, but that really do struggle because the Commerce Commission is resource-constrained. I want to thank the finance Minister for backing these changes and budgeting $4 million extra per annum in order to make sure that the Commerce Commission does have the resources to effect a change that is necessary, which, I think, a lot of the submitters—as Mr Hudson said—were concerned wasn’t happening both under the legislative settings under the previous Government and also the resource settings under the previous Government.

So I’m proud to stand here to say that we’re going to deal with some of the issues that those submitters raised, and the concerns that they raised, and that Mr Hudson has, I think, quite rightly raised, that we have got the legislation, and the resources in order for some of those community organisations, like Vaiola in Māngere, like the budgeting services that were visited around the country, to make sure that they do have a solid relationship with the Commerce Commission not just at the time when things go wrong but also reforming those budget services of other services that may be available to them.

I think Mr Hudson also raised a second point about why the Ministry of Business, Innovation and Employment (MBIE) may have been talking to parties about regulations, and why they may be doing that ahead of the passage of this piece of legislation. MBIE has released an exposure draft of regulations for public consultation. We think it’s important to consult as early as possible to give the industry time to make changes before the bill comes fully into force. I get a funny feeling that this will have been a case of damned if you do, damned if you don’t if we had consulted—now Mr Hudson’s saying “Why are you doing this before the legislation is passed?”, and if we hadn’t, he’d say, “Well, why aren’t you talking to industry stakeholders to make sure that they are fully informed of what’s going on?” So I think we’ll take that as a bit of politics to fill out time in the committee stage, but we do believe it’s important to make sure that we are fully consulting with industry to give as much time as possible to work with officials so we can understand the implication that those regulations may have for them.

Mr Hudson also made a political point around—

💬 Brett Hudson: It was a fair question.

Well, yeah, I’m moving on to another issue now.

I’m sorry to interrupt the member, but the time has come for me to report progress.

House resumed.

The Chairperson reported progress on the Credit Contracts Legislation Amendment Bill.

Report adopted.

The House adjourned at 9.56 p.m.