Commerce Commission says Responsible Lending Code should be adaptive to innovative products and practices from lenders

By Gareth Vaughan

New Zealand's small size in comparison to the likes of Britain and Australia shouldn't be used to justify diluting transferable responsible lending guidance from overseas, the Commerce Commission says.

The consumer watchdog makes this point in its submission on the Government's proposed Responsible Lending Code. It also argues given New Zealand consumer credit markets are lightly regulated, our government is placing more reliance on lender responsibility principles than comparable countries.

The Responsible Lending Code is being developed by the Ministry of Business, Innovation and Employment (MBIE) following Parliament's passing of the Credit Contracts and Financial Services Law Reform Act in May. It follows the adoption of similar codes in Australia and Britain.

Although the Code will be non-binding, evidence of compliance with the provisions of the Code will be treated as evidence of compliance with lender responsibility principles set out through the Credit Contracts and Consumer Finance Amendment Act.

MBIE says it'll publish a draft Code for public comment late this year, with feedback from the submissions used to help its staff prepare the draft Code. The actual Code is then expected to be issued next March and come into force next June.

"We would not like to see the small scale of the New Zealand credit market being used to justify a dilution of otherwise transferable responsible lending guidance from overseas agencies," the Commerce Commission says. "This would undermine the effectiveness of the lender responsibility principles and the Code."

'Lightly regulated'

The submission also makes the point that, even with new laws being introduced, New Zealand's consumer credit markets are relatively lightly regulated compared with other countries.

"Many other countries that have responsible lending obligations also have various forms of cost of finance (interest rate) caps or price controls. The Government has said that cost-of-finance caps are unnecessary in New Zealand because, among other things, the lender responsibility principles are being introduced. This means New Zealand is placing greater reliance on the lender responsibility principles than is the case in the comparison countries."

"Therefore the Code needs to provide very clear guidance so that lenders are aware of what they need to do to satisfy the lender responsibility principles at all stages of the contract, and so that the (Commerce) Commission can take action where appropriate to achieve the primary consumer protection purpose of the legislation," the Commerce Commission says.

'Real concerns about scalability'

Meanwhile, the watchdog also says it has "real concerns" about the concept of scalability. MBIE's discussion document on the Code suggests some guidance could be scalable in that what constitutes compliance with the principles may differ according to the circumstances and the type of lender or borrower agreement involved.

"In our view the guidance in the Code should be tailored for specific situations, but the lender should not decide what are the appropriate processes, practices, or procedures in different circumstances. This would decrease the clarity of the guidance, and work against the effective implementation and enforcement of the responsibility principles."

Instead, tailored guidance in the Code for differing circumstances should be used to do the work of scaling what compliance looks like, the Commerce Commission says. This would leave little lender discretion to determine what compliance should include.

Tailored guidance

The Commerce Commission also suggests the Code ought to provide tailored guidance for a range of products, loans to vulnerable borrowers, and methods of lending including online, in person, and point of sale.

Examples of specific lending that should have tailored guidance include; mortgage lending, reverse equity mortgage lending, credit card lending, store credit facilities, point-of-sale lending, online lending, truck shops and other mobile lending, high cost short term, or payday, loans, and lending to vulnerable borrowers, the Commerce Commission says.

"Because this list cannot hope to be complete, and because lenders are innovative in their product offerings and methods of transacting, we recommend that the Code provide additional default guidance for the category of 'other' situations. This generic guidance would elaborate on how, for example, in other situations a lender might go about making reasonable enquiries, or assisting a borrower."

"This default guidance would capture any non-tailored situations, and allow for the Code to be flexible and adaptive to credit methods. When 'other' practices develop to the point of being common, the Code should be updated to provide tailored guidance on those common situations," the Commerce Commission says.

The Commerce Commission's full submission is here. And here's MBIE's discussion document.

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