Credit Contracts Legislation Amendment Bill

I move, That the Credit Contracts Legislation Amendment Bill be now read a third time.

This is an important piece of legislation that amends the law around the provision of credit in New Zealand. Credit is important to almost every New Zealander in some way and at some point in their life. However, when provided irresponsibly, credit can quickly result in debt spirals and hardship. Under current credit laws, consumers are sadly still experiencing harm from predatory lending practices and credit terms, and this disproportionately harms our most vulnerable consumers. As a result, the Government introduced this bill to better protect New Zealanders from these harms. This bill has been one of my key priorities in my commerce and consumer affairs portfolio, and I’m confident that the changes in this bill will help to protect and improve the wellbeing of New Zealanders.

The bill introduces a number of changes which will make significant improvements to lending practices. Not only does the bill cap interest and fees on high-cost loans to 100 percent of the principal but it will also cap the rate of charge for interest and fees. Both of these caps will go a long way to limiting the harm that irresponsible high-cost lending causes in our communities.

The changes will also improve the implementation and enforceability of rules around responsible lending by allowing for clear minimum standards to be set and strengthening the penalties for breaches. For example, lenders will be required to keep records that demonstrate they have made inquiries to ensure their loans are affordable and suitable, and, where these requirements are breached, lenders can be subject to tough financial penalties.

The bill also raises the bar for becoming a lender by ensuring that persons at the top levels of creditor companies and mobile traders meet requirements for being a fit and proper person. This will reduce the number of unscrupulous individuals who are operating in lending businesses in our communities.

Speaking of mobile traders, the bill will now treat mobile traders as creditors under the consumer credit contracts and require them to comply with the Act. This means that they must ensure that the products and the services that they provide are affordable and appropriate and that the right information is disclosed to the purchaser and borrower.

Finally, the bill improves transparency and access to redress during debt collection. It will make the debt collection process more transparent from the start, as well as giving debtors the key information that they need so they can ask for help.

At the second reading of the bill, I welcomed the changes from the Finance and Expenditure Committee. The most significant of these is the decision to include the Government’s proposed rate cap on interest and fees. I proposed this change after I heard the overwhelming number of submissions to the Finance and Expenditure Committee from people who work on the front line with vulnerable borrowers and see the everyday harms and irresponsible high-cost lending damage that can be caused. These submitters said that a rate cap was a critical change that could be made to the law to protect consumers, and the rate cap of 0.8 percent per day will complement and strengthen the total cost of credit cap that’s already in the bill since its introduction.

There’s been some concern about this rate cap, in that it will serve as a target for lenders. However, some lenders currently have interest rates over twice as high as the proposed rate cap. Given the significance of this change, it will be important to review the rate cap and the total cost of credit cap after they have been in place for three years, which is included in the bill. This will allow us to evaluate how well the current cap level is working.

Before I finish up, I’d like to thank all those people who have contributed to the bill. This includes those parties that made submissions to the Finance and Expenditure Committee and the members that considered the bill on that committee and also the many officials who have provided advice. I think through this bill we will be helping to contribute to improving the wellbeing to thousands of New Zealanders who have experience of problem debt, and I truly believe that as a result of the changes that we are making here today, fewer New Zealanders will be given loans that cause or deepen hardship. Problem debt is the source of ongoing mental, emotional, and financial stress for families and does contribute to lasting health problems, and reducing the highest interest rates and irresponsible lending is necessary to support public health and will have significant overall benefits to New Zealanders.

Can I also thank those who submitted to the select committee for the passion for their work—[Andrew Bayly waves]—and you too, Mr Bayly—as I do believe their passion for this subject made meaningful changes at that stage. I’m very proud to commend this bill to the House for the third time.

Thank you, Mr Speaker. It’s a pleasure to rise on this, the third reading of the Credit Contracts Legislation Amendment Bill. When this bill was introduced into the House, we held a view that there were a number of things that it was doing that were positive—things such as further regulation of mobile traders, fit and proper person tests—and while we generally have issues with creating new regulations, we did agree that in this instance a regulation-making power to allow the Government or the Minister in the future to determine that certain payment arrangements should be deemed to be credit contracts for the purposes of the legislation, we thought, was a very, very good idea.

We were a little sceptical, not on the idea of a total cost of credit cap but about just what it might mean in terms of the availability of credit for those who genuinely need it. Let’s be fair, I mean, people find themselves in enormous difficulty in some occasions, but everyone enters into their first loan, at least, under these high-cost lenders on the basis of need. It’s not purely a discretionary desire. So we were a little bit mindful that there was potential that a regime that was too hard or too harsh might actually create other harms for people—fix some but exacerbate others.

We were also concerned at the change to the obligations on lenders, not just high-cost lenders, about establishing the bona fides of affordability for borrowers. It’s fair to say that that one at least was handled very well by officials in the select committee stage, and we are comfortable with it.

Likewise, looking into the heart of the discussion document that led up to the introduction of the bill, and then later confirmed in discussions with officials, it really looked like they had structured the total interest cap in a manner that wasn’t meant to knock out large swathes of commercially available high-cost lending products today. It was instead more focused on not allowing those things to expand or get worse. So we had reached a degree of comfort in that area as well, although we still have lingering concerns.

There will be a change to availability of credit for people in need under this bill when it is passed, and that will force some people into other areas of harm. It may not be black market lending, but one thing—for instance, it was postulated by officials that in the UK, up to 30 percent of people unable now to get a high-cost loan will borrow from family or friends as well. But when pressed on that, officials accepted that in most circumstances, those families or friends that they seek to borrow from will be in very similar circumstances to the person who’s already in financial trouble. So there is a real risk that that simply spreads a bit of misery around rather than genuinely solving a problem. But for all of that, we had determined that the changes weren’t a great evil, and we were comfortable enough to support the bill.

But then out of the blue, of course, came this daily interest rate cap, which came out without official advice. The officials weren’t even asked to give advice on the merits of it. Before the bill’s introduction, they had been asked and had given advice that it was a bad idea and that the consequences of it couldn’t be accurately predicted. Their advice at the time, that the Minister accepted at the time, was don’t do it. Then, in the w-e-a-k of delivery, out of the blue on Tuesday, all of a sudden: a daily interest rate, which the Minister hadn’t bothered talking to officials about. This will exacerbate this issue about will this constrain availability of credit to those who actually need it, and what will that then lead to in terms of their borrowing habits and the financial straits they may find themselves in?

For that, though—for all of that—the question for us then was: if we have an issue, particularly with this daily interest rate cap and the manner in which it was introduced, is that issue sufficiently serious that we would refuse to support the bill? Although the reservations persist and are real, with the review in three years, we think there are sufficient grounds that if it doesn’t work well, it can be removed. So we will continue to support this bill through to its conclusion in this, the third reading.

It heartens me to hear the words from Mr Hudson, who has spoken just now, that, on balance, the Opposition will support this bill. I hear the concerns of the Opposition. Nevertheless, the interest rate cap was introduced for good reason. It was introduced not out of the blue but because so many of the people working in this sector, in the financial advisers sector, came to us and said, “Good work, everyone, good work—but actually, we need a bit more in this space. We need an interest rate cap.”

In fact, people who came to us wanted straight out 50 percent cap, a very flat cap on interest rates. In the end, we settled on a slightly different model, a cap of 0.8 percent per day. This is based on what is happening in the United Kingdom, so it hasn’t just come out of the blue, as though it was dreamed up de novo. It is actually a model that is working elsewhere.

As Mr Hudson has said, for further reassurance, there is a review of the workings of this Act scheduled for three years’ time. Should there be problems with people being unable to obtain finance, should there be problems with people perhaps seeking black market finance or getting into worse trouble, then that should come to light in the review and changes can be made as necessary. So, on the whole, this is good legislation and it came through what I thought was a good, robust select committee process.

I don’t wish to speak for long, but I wish to quote some amazing women who came to present to us, some radical nuns from Gisborne. Sisters Carmel, Adrienne, and Marie talked to us about debt and what it did to people’s lives. In their written submission, they concluded with a quote that “Debt is the Slavery of the Free”. From there, they said people who get into horrendous debt are, in effect, enslaved. They are no longer free; they cannot order their lives as they will. Their daily behaviour is threatened by the spectre of outrageous debt hanging over them.

Now, of course, we all need debt to smooth the way from time to time, and it’s typically used for mortgages and the like. Debt can be a very effective tool, but it can also enslave us. This bill seeks to strike the balance between debt as a tool and debt that enslaves us. I think we’ve struck the right balance and I am proud to commend this bill to the House.

Kia ora, Mr Speaker. Ngā mihi nui ki a koutou. Kia ora. I rise a little bit earlier than I was anticipating, to speak on this legislation—

💬 Hon Andrew Little: You came well equipped with your devices, Gareth. That’s a good thing.

Well equipped with my devices, the Minister says. Look, there are many bills that this House passes in the course of a week or a month or a year. Many of them are technical, many of them are fixing regulations, some are historic—I’m thinking of things like marriage equality—and some legislation you can make a real difference for real New Zealanders’ lives. I think this is in that category.

This legislation, this great legislation, will make a real difference to people. All of us are familiar with the stories of lives and families torn apart by the cost of high-interest borrowing. We’ve heard of cases of 600 percent annual interest rates. We’ve heard of cases of 800 percent interest rates. We’ve heard cases of 2,000 percent annualised interest rates that have been ripping apart New Zealand families.

Now, in the last speech, I talked about how this is a relatively modern phenomenon. The Speaker actually sent me a note saying this has always happened in New Zealand, and that’s true. But the modern form of pay-day lending is a relatively modern thing, only this century, and it’s had a huge impact.

Now, what this legislation is going to do is cap the total cost of borrowing and cap interest rates for these loans. What we know is there is $120 million being sucked out of some of our poorest and most vulnerable communities by lenders, many of which I’d categorise as predatory, which are charging such incredibly high interest rates, I think taking advantage of information asymmetries where they have more information about it. It’s a real cost coming out of New Zealand families. So what this legislation is doing is capping the interest for these high-cost loans at 0.8 percent.

It’s wonderful that the select committee and the Government have been able to amend this legislation in the committee. The total cost of borrowing was a good first step. However, what the expert advice we received—and at this point I’d like to acknowledge the work of the FinCap organisation of financial advisers, the Salvation Army, the Council of Trade Unions, individual experts such as Andrew Shand, who’s been working on this issue for many years. What they said is that if you only cap the total cost of borrowing, what you’re going to see is these lenders further taking advantage by rolling over multiple loans, essentially seeing an incredibly high interest rate.

What this legislation is doing is moving New Zealand into line with literally dozens and dozens of other jurisdictions, including the countries that we most identify with—from Australia, the United Kingdom, Canada, the United States—where they’ve capped interest rates. So I think it’s incredibly great that the Government has taken this step. It’s something the Green Party was insisting on right from the get-go. From the earliest days of this legislation we thought that interest rates had to be capped. Obviously, this was something we’d voted for previously when Carol Beaumont, a former member who’s departed this House, introduced legislation to enact many years before. It’s something where we’ve drafted a Supplementary Order Paper (SOP). It’s wonderful that we weren’t needing an SOP, because the committee has taken this strong step to include interest rate caps.

Now, we still wonder if the interest rate cap set upon is too high. This will be reviewed. We do note there will be a review in the future. We also think the next step, once we pass this historic legislation where New Zealand’s joining a host of other countries by capping the total cost and interest rates, is actually more practical steps that this Government or future Governments can take to support New Zealand families facing high-cost borrowing.

Why do people have to go out to the market with such high interest rates for such short-term borrowing costs? Is there a role that the Government could take to support those families? Obviously, supporting through financial literacy packages, support for financial planning advice, but is there another step the Government could take in the future to support these families?

I won’t take long, except to reiterate the Green Party’s strong support for this legislation. The fact is that this will make a tangible difference for people who find themselves, in many cases through no fault of their own, facing, I think, usurious interest rates that have had such a catastrophic impact. This is positive legislation. Look, if this is the legislation we’re passing this week, it’s a wonderful highlight for which to finish this week.

I’d like to thank the Minister, Kris Faafoi. He’s been wonderful to work with. He’s had an open door. He’s taken a very considered, very interested approach to this legislation. I’d like to thank the National Party as well for their support tonight. This is a good example of Parliament at its best, and the Green Party wholeheartedly supports it. Kia ora koutou.

I’d just like to rise on behalf of New Zealand First to support this Credit Contracts Legislation Amendment Bill, and I just would endorse the words of the previous contribution of Gareth Hughes. This will make a difference for actually some of our poorest and most vulnerable New Zealanders who, maybe through no fault of their own or actually in some cases just through a lack of financial literacy, get themselves into some of these high interest-bearing loans at exorbitant rates—up to 800 percent at times. So putting this 0.8 percent per day cap and, I think importantly, a total of 100 percent of the original principal is a really good move.

It’s not to say that these loans aren’t in some cases necessary and a part of the lending ecosystem. There are times when people are caught a bit short, and we don’t want to stifle the ability of that part of the lending spectrum to be taken out. But we do want to make sure that it is fair and equitable. And I think we’ve seen any amount of examples of people getting taken for a ride and usury interest rates and getting into a debt spiral that just simply is impossible to get out of and the wider social consequences that come with that. So anything that can address that—and Minister Faafoi is to be commended for bringing this to the House and getting it through, and bringing us up to speed with where so many of the other jurisdictions that we would consider our comparators are already at and have been for a long time in some cases.

I won’t draw this out any longer, except to reiterate New Zealand First’s strong support for this bill. Thank you.

I had the pleasure of sitting on the select committee. We heard some terrible stories. It was summed up by one submitter who said, “No one can afford their last loan.” This legislation is about ensuring that that last loan that does drag people into that downward spiral, when all the indicators would say they should never get it, doesn’t occur. So this is good legislation. I commend it to the House.

As you walk down the street in South Dunedin, there are a range of lending organisations which charge high rates, interest rates. If you drive around in the suburbs in some of the hill suburbs in Dunedin at certain times of the week, you’ll see the pay-day loan buses driving around. They’re all a reminder of the exploitative practices that happen in our country still, that exploit people on low incomes who find that they get into these debt traps. And despite several attempts—and thank you to Gareth Hughes for outlining some of the previous attempts—to change the legislation in this space, we still hadn’t got it right. So I commend the work that Kris Faafoi has done on this in particular, to introduce an interest rate cap of 0.8 percent a day and the cost of credit cap on high-cost loans to 100 percent of the original loan, which means that one can never be charged more than 100 percent on any additional fees or charges.

When I sat on the Commerce Committee several years ago, the previous Government never went that far and, thankfully, this one has. So I commend the bill to the House.

Bill read a third time.