Roy Heather: Credit Reforms (Responsible Lending) Bill — First Reading 
Text is incorporated into the Bound Volume 
Roy Heather: Credit Reforms (Responsible Lending) Bill — First Reading 
[Sitting date: 21 July 2010. Volume:665;Page:12580. Text is incorporated into the Bound Volume.] 
Hon HEATHER ROY (Minister of Consumer Affairs) 
: 
 Although the Government does not support the Credit Reforms (Responsible Lending) Bill I would like to begin by commending Carol Beaumont for her desire to protect New Zealanders from some of the problems that arise from over-indebtedness and for bringing this well-intentioned bill to the House. 
Credit is an important part of everyday life. It provides flexibility for consumers to access goods and services and enables increased participation in the market. But in the current economic climate many consumers face greater challenges in accessing using and repaying credit. Care is needed to ensure that consumers can access credit and also use and manage that credit appropriately. 
Consumers are protected in credit contracts by the Credit Contracts and Consumer Finance Act or the CCCFA as it is routinely called which covers all loan arrangements that are primarily for personal domestic or household purposes. The Ministry of Consumer Affairs monitors the effectiveness of credit legislation. The ministry’s monitoring of the operation of the credit market resulted in a discussion paper  
The Review of the Operation of the Credit Contracts and Consumer Finance Act 2003 
. The paper was released in 2009 and addressed many credit-related matters including the ones raised in Ms Beaumont’s bill. 
This bill is promoted as a solution to the problems in the area of fringe lending. It has four main features. The first is introducing a cap on interest rates. The second feature requires lenders to reasonably believe that borrowers will be able to repay loans. Thirdly the bill limits what lenders can recover should a borrower default on loan repayments. Lastly the bill allows pawnbrokers to charge administration fees. I would like to address each of these four parts in turn. 
Ms Beaumont argues that capping interest rates will prevent excessive or exploitative profits from being made from disadvantaged and vulnerable groups and she points to caps on interest rates in other jurisdictions as we have just heard such as the United States the United Kingdom and most Australian states. But the Australian Government is currently reviewing the effectiveness of interest rate caps and has stopped the introduction of further caps in order to monitor the effects of the ones already in place. The Ministry of Consumer Affairs is monitoring the outcome of this review. 
The ministry’s research into interest rate caps has also found that those most likely to be affected by caps will be the disadvantaged and vulnerable borrowers whom the bill aims to protect. A possible unintended consequence of interest rate caps is that if the cap is set too high—and I would suggest that 48 percent as Ms Beaumont promoted as a reasonable amount is too high—it could become a target. In fact if a Government-approved target is set too low the cap could result in a decrease in the supply of credit which would disadvantage those who most require it. 
Hon Members 
: Rubbish! 
Hon HEATHER ROY 
: It seems that Opposition members do not really pay much attention to what the Government wants to do despite Ms Beaumont’s intention to hear that. 
Ms Beaumont’s bill also proposes the introduction of responsible lending obligations to ensure that credit providers do not provide or suggest unsuitable credit. Providers would have to ensure that the credit meets the consumer’s requirements and that the consumer is able to service his or her loan obligations. There are difficulties with this approach. A difficulty in implementing such specific responsible lending provisions is that being new and untested they can create uncertainty for lending agencies. This in turn leads to less credit being available to those who already have difficulty in obtaining access to credit from mainstream providers. Existing legislation includes specific protections against oppressive conduct. Important and immediate developments from the courts indicate that these provisions already protect against irresponsible lending. There are also examples of disputes tribunal referees using the oppression provisions in the Credit Contracts and Consumer Finance Act to deal with oppression and exploitative secured loans or consumer credit contracts. 
To strengthen the protection available to consumers the Government requires all financial service providers to belong to free-to-consumer dispute resolution schemes. The Ministry of Consumer Affairs is also considering the introduction of protections against unfair contract terms in the Fair Trading Act. 
The third feature of the bill seeks to limit the value of a debt owed to the value of the goods at the time of enforcement. Ms Beaumont argues that this will curb some of the excessive actions of fringe lenders and repossession agents. This is simply misguided. For example if a consumer buys a $3000 TV under a no payments for 2 years interest-free finance deal and then reneges after 2 years the creditor would be able to recover only the current value of the TV which by that point in time would be valued at about only $1500—half of what it was. The retailer would have effectively paid the consumer $1500 to look after its TV and provided a free pick-up service to get it back. What would the incentive be if this was put in place? No one would bother paying anything. Such a clause could encourage the non-repayment of loans and potentially cause a collapse in the consumer finance market. 
As part of the ministry’s Credit Contracts and Consumer Finance Act review the Government is looking at better listing and description of security items in order to prevent lenders seizing anything and everything. Proposals include giving responsibility for the enforcement of the Credit (Repossession) Act to the Commerce Commission. 
The bill’s final feature seeks to allow registered pawnbrokers to charge administration fees removing the need for higher interest rate charges. Pawnbrokers currently charge a single fee for redeeming a pledged good. This is called an interest charge and covers both the fee for the pawnbroking service and the interest charged. It is non-contentious. Pawnbroking charges have existed in this manner for years and there is no reason to change and complicate this accepted approach to pawnbroking. 
Although Ms Beaumont should be applauded for highlighting the issues confronting vulnerable borrowers the fact is that this is a very complex area that requires comprehensive solutions not just a band-aid solution as this bill proposes. However the Credit Reforms (Responsible Lending) Bill proposes superficial band-aid solutions and has the potential to wreak even more havoc on the very people it is trying to protect. As the Minister of Consumer Affairs I do not support this bill and the ACT Party does not support the bill. It has fundamental flaws and contains provisions that could result in dramatic and perverse consequences. 
Opposition members have asked what the Government will do. [ 
Interruption 
] If they stop talking they might hear. The Government is currently considering comprehensive measures to address these issues with real solutions—real solutions that include reviewing the Credit Contracts and Consumer Finance Act as is currently happening. This project has not been deprioritised. It has been reprioritised in favour of the consumer law reform which also will address some of the issues in this bill. 
Implementing the Financial Service Providers (Registration and Dispute Resolution) Act is another measure that the Government is currently working on and one that was introduced by the previous Government. Each financial service provider or financial adviser must from 1 December be registered. It must also in order to be registered belong to a dispute resolution scheme which will give consumers far more protections than they have ever had previously. Quite why the previous Government did not put this in place much sooner is beyond me. 
We are of course undertaking a major review of consumer law and this too will cover many of the provisions proposed in this legislation. A discussion document is out at the moment and the submission process is under way. I look forward to people such as this bill’s promoter putting forward a written submission on this discussion document. 
The last thing which is extraordinarily important and which the Ministry of Consumer Affairs and other Government agencies are putting a lot of effort into is improving financial literacy. Arming consumers with the means and the wherewithal to recognise for themselves the sorts of credit provisions that they should entertain and those they should not will go a huge way to dealing with the unscrupulous lenders that we know do exist. As I have just said a discussion paper has been released that suggests carefully considered amendments to the legislation that the bill seeks to amend. There is little point in progressing this bill further while that paper is out for consultation. The issues are complex— 
Mr DEPUTY SPEAKER 
: I am sorry to interrupt the honourable member; her time has expired.