Beyond the Shadow of Debt | Shining a light on high-cost lending
Many vulnerable families and communities continue to be exploited through irresponsible and harmful lending practices, most often through short-term high-cost loans.
For many New Zealanders the consumer credit lending experience is generally positive, with many credit lenders complying with regulations. Credit law reforms including the recent changes to regulations signal a commitment from the government to ensure lenders are diligent in their duty of care towards consumers. However, our concern, despite the current credit laws, many vulnerable families and communities continue to be exploited through irresponsible and harmful lending practices, most often through short-term high-cost loans.
Changes to consumer credit regulations have gone some way towards increasing protection for borrowers and ensuring a safer consumer credit lending environment for individuals, whānau, and communities. But regulatory gaps remain, leaving opportunities for lending practices that contribute towards financial hardship and unmanageable debt to continue. On the contrary, these are opportunities for policy changes and for us to do better.
This Issues Paper examines the consumer credit market identifying the ongoing issues despite the recent changes to consumer credit regulations.
The following are ongoing areas of concern that require attention and policy changes.
- Irresponsible lending practices – Current evidence of irresponsible lending practices include failing to exercise care and due diligence in dealings with borrowers, non-compliance with affordability assessments such as providing loans with minimal consideration for a borrower’s ability to repay debt.
- Poor debt collection practices – Debt collection encompasses all recovery actions undertaken by a lender in the event of missed payments and after a borrower defaults on a consumer credit contract. Debt collectors and agencies either act on behalf of the person or company seeking owed money, or purchase the debt to recover on their behalf. There is very minimal regulation of the debt collection industry or debt collection practices in New Zealand.
- Financial exclusion: Lack of accessible and safe credit – The concept of financial exclusion is often narrowly defined as an inability to use mainstream banking and financial services. People who experience financial exclusion have less agency in financial options, leaving them more likely to seek harmful lending sources that offer more complex financial products and more aggressively advertised services. They are more susceptible to high-cost loans and lack the assets, savings, and financial safety nets for buffering emergencies.
- Buy-now-pay-later (BNPL) schemes – Unlike traditional loans credit cards, BNPL is a modern-day version of traditional lay-buy. Essentially a hybrid version of a credit card with less administration and without interest. At present there is no direct regulation of BNPL schemes. The easy access to interest-free credit is a slippery slope for encouraging unaffordable spending and is a pathway to problem debt.
Our recommendations in full:
- Increase investment in Microfinance credit with wrap-around support—Microfinance provides alternatives to high-cost credit helping people meet their financial needs while minimising risks of them falling into unmanageable debt. Borrowers are provided with financial support and credit with terms and conditions that are fair and affordable.
- Maintain increased government funding for core Building Financial Capability (BFC) services—The increased financial government support from government throughout the COVID-19 pandemic should be retained to resource services under the BFC sector that includes financial mentoring services, community organisations and iwi that deliver budgeting services and financial education.
- Include Buy-Now-Pay-Later in the scope of the Credit Contracts and Consumer Finance Act 2003 (CCCFA)—The Minister of Consumer Affairs and Ministry of Business, Innovation and Enterprise should review out of scope lending such as Buy-Now-Pay-Later schemes to be included under the CCCFA’s regulatory scope. Regulation of the BNPL industry would mean increased consumer protection.
- Develop a licensing framework for debt collection agencies and collectors—The Commerce Commission should develop a national licensing scheme for debt collection agents and agencies with lead oversight from the Commerce Commission, and working alongside dispute resolutions schemes.
- Increase the regulatory functions of the Commerce Commission—Strengthen the regulation of consumer credit lending requires an expansion of the Commerce Commission’s regulation responsibilities to include a regular or annual audit of all high-cost credit lenders.
- Develop a centralised database for high-cost loans—To support the function of new legislative regulations to the Responsible Lending Code, the Ministry of Business, Innovation and Enterprise should develop and introduce a national database of high-cost, short-term loans.
- Maintain ongoing support for the National Strategy for Building Financial Capability (BFC) 2021-2024—We recommend ongoing government and finance industry support for nationwide solutions such as the National Strategy for Building Financial Capability (BFC) 2021-2024 led by Te Ara Ahunga Ora: Retirement Commission.
Changes to consumer credit laws since the enactment of the primary legislative and regulatory framework demonstrate that in the absence of fit-for-purpose statutes and regulations, conditions for harmful lending practices can leave the lending landscape a bit like the Wild West. The policy recommendations we outline in this paper seek a responsible, fair, and more effective lending environment. We offer practical measures that bolster existing policies where they are succeeding, and regulatory mechanisms to increase consumer protection and reduce financial hardship where they are needed.
Maxim in the Media
Below you’ll find the various coverage of this paper in various media outlets.