News & Thinking

“Fit for purpose” financial services reform

Contributed by:

Nick Summerfield

Read more from
Nick Summerfield

Daniel Nelson
Senior Solicitor

Read more from
Daniel Nelson

Lucy King

Read more from
Lucy King

After first signalling the proposals in January, the Government has published three discussion documents under the tagline “fit for purpose”.

Together, these detail the Government’s proposals to further amend consumer lending laws, change elements of the conduct licensing regime (and broader Financial Markets Authority licensing framework), and possible ways to achieve more effective external dispute resolution.

Consumer lending will see the most significant change

Cabinet has already agreed that responsibility for the oversight of consumer lending will move from the Commerce Commission to the FMA. The current structure is something of a historic anomaly, and the change will reinforce New Zealand’s “twin peaks” regulatory model with the Reserve Bank of New Zealand overseeing prudential matters and the FMA overseeing conduct.

Currently, consumer lenders that are not otherwise licensed by the Reserve Bank or FMA need a fit and proper “certification” from the Commission to conduct their business. The Ministry of Business, Innovation, and Employment’s preference is to replace the current certification regime for consumer lenders with a conventional FMA market services licence, covering consumer lending. As an alternative (but not preferred) option, the current certification regime would be retained but with FMA oversight.

Moving to a licensing regime for consumer lending makes sense. It means consistency across the universe of entities licensed by the FMA and aligns with the single conduct licensing proposal (more on this below). However, it would be a step up from the current certification regime, both in terms of the likely regulatory scrutiny before granting a licence (albeit there would be a transitional relief), and in ongoing oversight.

Limiting director and senior manager liability

MBIE rightly points out that the Credit Contracts and Consumer Finance Act 2003’s director and senior manager due diligence duty has caused concern. A breach of the due diligence duty can result in personal liability, which cannot be indemnified or insured against.

The current rules are problematic, particularly for large organisations, and has resulted in some lenders adopting more conservative lending practices. In fact, some lenders have ceased providing consumer credit altogether, although not just for this reason.

Two options are proposed (in addition to the status quo). The first is to retain the current due diligence duty but allow lenders to indemnify directors and senior managers for pecuniary penalties and enable them to insure against liability.

The second option is to remove the due diligence duty for FMA-licensed lenders, but with liability remaining for knowing or deliberate contraventions. Initially, this may only benefit financial institutions licensed under CoFI. However, assuming a licensing framework is adopted for all consumer lending (which we expect will be the case), this change would benefit all consumer lenders.

We prefer option 2. Option 1 would simply redistribute costs and liability rather than reduce them. Although, that would still be better than the status quo.

Potential changes to disclosure rules and the penalties for incomplete disclosure

The CCCFA discussion document seeks feedback on potential changes to the content of required disclosure, how information is disclosed, or both. MBIE concede that the role of disclosure has been “diluted” due to the CCCFA’s lender responsibility principles, and that in some cases, too much information is disclosed.

We welcome simplification and a more targeted approach to disclosure that focuses on the matters of greater relevance to borrowers. However, our sense is that MBIE are not contemplating wholesale changes to the design of the disclosure regime, and we see no real prospect of significant changes to initial, variation, or continuing disclosure requirements at least.

There could be change, however, to the penalties for incomplete disclosure. The CCCFA has a highly punitive regime for disclosure breaches, including the forfeiture of all interest and charges when a lender does not make complete initial or variation disclosure. Lenders can apply to court for relief, but only from the consequences of incomplete disclosure from 2019 when the section allowing lenders to seek relief was added.

MBIE’s preferred option is to amend the CCCFA so that there is a forfeiture of interest and charges only where incomplete disclosure breaches are material or have the potential to mislead. However, they have also asked for feedback on other options, such as a limit on total liability or removing these sections entirely.

We would like to see a more holistic review of the penalties regime. There are also significant (but not quite as onerous) consequences for other disclosure breaches, which are not addressed at all in the discussion document.

We agree that serious maximum penalties are needed to deter poor behaviour and ensure that lenders are incentivised to comply. However, we are regularly asked to advise clients on inadvertent or technical breaches of CCCFA disclosure requirements, and almost invariably the potential consequences are disproportionate.

Changes to the CoFI framework

Financial institutions (banks, insurers, and non-bank deposit takers) with retail clients must obtain a conduct licence from the FMA by 31 March 2025. Most financial institutions are well advanced in their plans, and in our view, all financial institutions should be looking to lodge their licence application by no later than October this year.

There is general acceptance that the CoFI framework works fine overall. But, there is always room for improvement. MBIE have sought feedback on two points: potential changes to the minimum content required in fair conduct programmes; and potential changes to the fair conduct principle itself.

Fair conduct programmes operationalise the fair conduct principle by setting out the detailed policies and procedures a financial institution will follow to treat consumers fairly. MBIE’s preferred option is to remove some of the minimum requirements, particularly where they are repetitive or too detailed. Feedback has also been sought on adding new minimum requirements around fees and charges, and complaints (we believe both points are of particular interest to Minister Bayly).

The fair conduct principle will require a financial institution to treat consumers fairly. The Act sets out various matters that this “includes” (such as acting ethically, transparently, and in good faith). The breadth of the concept, and the fact it is open-ended, means it has been criticised for adding uncertainty. MBIE are seeking feedback on making this an exhaustive list, but that is not their preferred option. We support this change, even though in practice we don’t think it will make too much of a difference.

The biggest issue with any changes to the CoFI framework is timing. As mentioned above, the CoFI regime commences next March. However, legislation resulting from the MBIE review is not expected to be in place until 2026.

This means financial institutions will move into the regime with the current rules, and then may need to make further changes later. This is unfortunate, but probably not a significant point given any changes should be minor.

Changes to simplify the licensing framework

Over the years, the FMA’s licensing remit has expanded and as a result, there are now eight different market service licences. This would increase to nine, if a separate consumer credit licence is adopted.

There is inherent duplication in this model, as the FMA considers some of the same points across different licence types. There is also duplication insofar as the FMA and Reserve Bank each make fit and proper assessments, and in some areas like outsourcing and business continuity arrangements.

MBIE propose to require the FMA to issue a single consolidated licence for different classes of market services licence. They also propose to allow the Reserve Bank and the FMA to rely on the other regulator’s assessment of matters where appropriate. These are well-signalled changes that we strongly support. In our view, they will have a significant impact in reducing the regulatory burden on entities with multiple licence types.

Feedback has also been sought on potential additions to the FMA’s powers. The most significant of these is a potential requirement for the FMA to approve a change in control of licensed firms. At present, there is a requirement to notify the FMA of a pending change in control, which in our experience can lead to engagement with the FMA, but there is no formal approval requirement. We don’t have a strong view either way on this proposal. We can see the logic, but are concerned about the additional compliance requirements, and additional deal complexity.

Other changes

The discussion documents cover various other points not mentioned above. The CCCFA discussion document contains a review of the high-cost lending provisions introduced in 2020 (which, if anything, appear to have been more successful than expected in removing high-cost lending). One option of note here is the possibility of reducing the threshold for “high cost” lending, and the corresponding restrictions, to an interest rate of 30% (currently 50%).

A third discussion document covers options for improving consumer access to, and the effectiveness of, the financial dispute resolution system. This is a smaller more high-level paper focused on consumer interests. MBIE has not considered the detail of scheme rules or operations (separate changes to ensure alignment in some key areas commence on 18 July 2024) and does not propose any fundamental changes to the overall scheme model.

Next steps

Submissions are being sought until 19 June, and we encourage anyone with an interest in these issues to have a say.

Each document includes an open-ended question asking for other feedback, so there is a chance to comment on wider matters not specifically covered in the documents (although there may not be much interest from MBIE in considering other matters).

Legislation for the CoFI changes is expected to be introduced to Parliament by the end of this year, with changes to take effect in 2026. While it is not clear from the documents, we assume the CCCFA changes will follow similar timing.

We will be looking to see sensible transitional arrangements, particularly for lenders currently certified by the Commission and needing to transition to (we expect) an FMA-issued licence.

Get in touch

Anthony Harper’s internationally recognised financial services team is actively supporting clients across the financial services sector on conduct licensing, consumer lending, and law reform. If you have any questions, or need help with your business, please get in touch.