11 minute read
CCCFA
Banks speak on CCCFA
The lowdown on what the major banks will expect from advisers following the impending CCCFA changes.
BY PHILIP MACALISTER
Kiwibank chief executive Steve Jurkovich says the impending CCCFA changes will be quite hard, but people will get used to it.
“Customers will be frustrated by what they perceive as extra hoops they have to go through,” he says.
“It will support the growth of the adviser market,” he says. “The adviser will do all the mahi.”
Jurkovich describes it as a “once in a generation change” and the fact that liability sheets home to directors and bank officers “sharpens the focus”. That has been the experience in the Australian market.
But he says: “Ultimately satisfying the customers can afford [the loan] and being responsible is not a bad thing.”
Jurkovich warns that when borrowers get to the end of a fixed rate period and want to check out their options they won’t just be able to rollover a loan.
Lenders will have to ask for more information than they do currently, even if it is the same lender.
Jurkovich, overall, is not too concerned. “We will get through it and in a year’s time we will be wondering what all the fuss was.”
He compares it to when AML came in. “It’s a bit harder but people get used to it.”
The good thing is that it’s uniform for the whole industry and no one will get an advantage.
ASB chief executive Vittoria Shortt takes a different view. She is “worried” and warns there may be “unintended consequences” of the new legislation.
She says if that is the case then she will “call them out”.
“If there are outcomes which don’t make sense from the customers’ perspective then I think we have to call them out.”
Shortt says Australia proposed similar legislation but subsequently did not implement it.
She says it will take longer to process a loan application, and there may be unintended consequences.
“That is why Australia did not go ahead with it.”
She warns the CCCFA changes are material and impact not just home loans, but all lending including credit cards and personal loans.
“It will be significant for the whole market,” she says. “We have to keep a really close eye on it.”
What advisers will have to do
Representatives from the four big banks told a Financial Advice New Zealand webinar that there will be changes advisers need to adapt to.
The key message was that advisers will have to have conversations with clients about income and affordability.
This information will need to be recorded and validated. Just saying the conversation has been had with a customer will not be good enough.
BNZ general manager, third party, Adam Ward says if information is not recorded and validated then in the regulator’s eyes it didn’t happen.
There will also be changes to UMI calculators and greater detail required about a client’s income. Just putting a number into the “other” field will not be good enough.
Steve Jurkovich
ASB head of third party banking Amanda Young said the bank is making 10 key changes to its process; some will have no or a low impact and others “moderately high”.
The bank has developed tools to capture the new obligations, an adviser declaration form as a way of attesting to CCCFA obligations and a redesigned adviser guide book.
Westpac head of third party banking Liz Cannon said the responsible lending declaration form the bank introduced three years ago had served it well and helped ensure the bank was doing the best it could to meet its obligations.
Vittoria Shortt
For advisers who submit deals to Westpac CCCFA “won’t be a major change”.
ANZ will have an upfront declaration form that advisers will have to provide before assessment of a loan application can start.
In essence advisers will have to share detailed information of the conversations they are having with clients with lenders. ✚
How will CCCFA changes impact lenders?
Changes to the Credit Contracts and Consumer Finance Act 2003 will be felt across the mortgage market. Here’s what we know ahead of their implementation on December 1.
On December 1, amendments to the Credit Contracts and Consumer Finance Act 2003 and CCCF Regulations 2004 will come into force. The changes will influence how lenders assess borrowers, keep records, and place greater responsibility on directors and senior managers within credit firms.
The changes come into effect alongside the updated and tightened Responsible Lending Code, as part of a Government drive to reform credit regulations and reduce risky borrowing.
The amendments are part of a broader Government push to reduce highrisk lending to vulnerable customers, following tightened LVR limits and moves towards debt to income ratios.
The CCCFA emphasises the importance of putting policies, procedures, and training in place to ensure ongoing compliance. It also includes guidance on monitoring and training.
The first tranche of changes under the revised CCCFA will require directors and senior managers of creditors to exercise “due diligence” to ensure compliance. Directors will face harsher sanctions and penalties for non-compliance.
Directors and senior managers will need to be certified by the Commerce Commission as “fit and proper”. “Due diligence” will mean lenders:
• require their employees and agents to follow procedures (including automated procedures) that are designed to ensure compliance
• need methods in place to identify and remedy deficiencies in the effectiveness of those procedures.
Every director and senior manager will need to comply with the new due diligence obligations.
Consumer lenders will also need to be certified by the Commerce Commission after October 1.
Certification will only be granted if senior managers are deemed “fit and proper” by the Commerce Commission. Some entities are exempt from the certification requirement, including registered banks, licensed insurers, and qualifying financial entities under the Financial Advisers Act 2008.
Suitability and affordability changes
Advisers will feel the most significant changes through amendments to the Credit Contracts and Consumer Finance Regulations 2004. The changes will prescribe minimum standards for lenders as they assess the suitability and affordability of a borrower. They include:
• an express list of enquiries to establish that a loan is suitable for a borrower
• requirements for lenders to estimate borrowers’ income and expenses and verify expenses (including benchmarking in some cases) to establish that a loan is affordable for a borrower.
The new rules will make lenders adopt stricter affordability criteria. Lenders will be required to place more scrutiny than ever on borrower affordability.
The changes outline requirements for lenders as they estimate borrowers’ income and expenses.
Pauline Ho, special counsel at Dentons Kensington Swan, said the new regime would be “more prescriptive in terms of what banks need to check off as they process applications”.
“It sets out the things they need to ask about; the breakdown of outgoings and what those outgoings are comprised of, not just utilities, but things like school fees and other expenses as well.”
Kate Lane
Lenders will need more evidence of expenses, and borrowers and advisers will need to turn over more documentation. The amended law requires lenders to keep records on affordability and suitability. Customers and the Commerce Commission will be able to access these records.
According to Kate Lane, a partner at MinterEllisonRuddWatts, the changes “set a baseline as to what analysis lenders must do in relation to suitability and affordability”.
Lane says they could impact the way non-standard borrowers are treated.
“As the regulations basically take a one-size-fits-all approach, potential borrowers who are non-standard might find that they fall in the too-hard basket for some lenders given the detailed verification work required on income and expense information.”
Pauline Ho
Lane says the regulation will make applications “very time consuming” for lenders.
Larger lenders with more sophisticated compliance departments should be able to weather the storm. Ho doubts the changes will lead to a “complete overhaul in how the main banks approach things”.
“They should already have robust processes in place in terms of suitability and affordability. Generally, they are already above and beyond what the legislation requires,” Ho says.
However, smaller lenders, such as second-tier non-banks, may find CCCFA compliance more difficult.
“The finance companies on the margin might not have as much of a buffer [in their affordability assessments],” Ho adds.
The extra compliance burden could force smaller lenders out of the market, Ho says.
“Compliance costs may become too high, with the certification requirements and so forth. There will be an ongoing compliance burden and greater penalties for liability.”
Lenders have already begun to adjust their processes ahead of October 1. The changes have already been felt in the market.
According to independent economist Tony Alexander’s August market report, banks have begun to pay more attention to the short-term debt of borrowers, particularly first home buyers.
Alexander said lenders had begun to monitor borrowers’ credit more closely – particularly debt held through pay-later services such as Afterpay.
“There is a general tightening of criteria as banks get ready for the new Credit Contracts and Consumer Finance Act (CCCFA) changes,” Alexander said. “This legislation requires lenders to be certain the borrower fully understands what they are signing up to.”
Advisers say the banks have contacted brokers to explain the new rules, and have warned of potential changes to the loan application process.
David Green of AdviceHQ said banks were “in some cases applying the changes” already.
“What this means is a further tightening of lending conditions and more hoops for clients to jump through,” Green warns.
Green says the main banks have begun to ask more questions about home loan terms and borrowers’ expenses.
Lenders are asking whether customers can pay off their debt before retirement or afford to pay off shorter terms with larger repayments.
“Two key areas in focus are loan terms and expenses,” Green adds. “We can only hope banks take a pragmatic approach in these areas, as opposed to a simplistic view, for example calculating loan terms using 65 years less their current age. CoreLogic calculated the median length of time Kiwis hold a home is 7.4 years which means the full loan term is never reached.”
On August 16, the Commerce Commission published new guidance for lenders on their disclosure obligations under the CCCFA, covering the various types of disclosure required under the new regime.
Law firm MinterEllisonRuddWatts said the guidance would put compliance departments under strain across the lending market, and would serve as a reminder “to all consumer lenders of the need to review policies and procedure”.
Covid delay
In September, banks were given more time to implement the CCCFA changes as the Government agreed to delay the changes by two months. The original deadline of October 1 was pushed back to December to give lenders more time to adapt during lockdown restrictions.
The Ministry of Business, Innovation and Employment (MBIE) confirmed it would “extend the compliance date for most of the new credit law changes”.
“Of significance to lenders and borrowers, the Government has agreed to a short delay to the full commencement of the Credit Contracts Legislation Amendment Act 2019 (the Amendment Act) by two months, to December 1, 2021.
“This is considered necessary due to the impact of recent Covid-19 alert levels on lenders’ implementation of the reforms, which has disrupted training and other preparations and forced a reprioritisation of resources to support existing customers,” MBIE said.
“This delay will include the regulations that were due to come into force on October 1, 2021, such as the Credit Contracts and Consumer Finance (Lender Inquiries into Suitability and Affordability) Amendment Regulations 2020.”
However, the Commerce Commission says new certification requirements will still come into place on October 1, and “the Commission’s guidance for when lenders need to be certified still applies”.
“Lenders will now have until December 1, 2021 to comply with the remaining changes in relation to responsible lending, due diligence, disclosure, and fees and advertising requirements,” the Commerce Commission said.
David Green
“The Government remains committed to implementing the credit reforms in a timely manner for the benefit of consumers,” MBIE said. “Decisions around a delay have not been made lightly, and the Government has a strong expectation that the Credit Contracts and Consumer Finance (Lender Inquiries into Suitability and Affordability) Amendment Regulations 2020 be implemented by no later than December 1.”
The new Responsible Lending Code will be updated to reflect the new start date, while the Commerce Commission will also update its guidance.
MBIE will undertake a brief public consultation on reissuing the addendum to the Responsible Lending Code, which elaborates on and offers guidance on how lender responsibility principles and lender responsibilities may be implemented by lenders while dealing with borrowers who have been impacted by Covid-19, it said. ✚
