Predatory lenders won’t be able to charge more than the value of the original loan in fees and interest costs, as part of Consumer Affairs Minister Kris Faafoi’s crackdown.
But consumers being fleeced will likely have to wait until 2020 for any change.
Announcing the measures with Prime Minister Jacinda Ardern, Faafoi confirmed plans to cap the accumulated interest and fees on high-cost loans at 100 percent of the principal amount. This means someone who borrows $500 won’t pay more than $1,000. The cap is one of a number of measures imposing tougher oversight on so-called payday lenders and mobile shopping trucks, which have been criticised for setting loan terms that keep cash-strapped borrowers in almost perpetual debt.
The revised legislation will also impose bigger penalties on loan sharks who break the law.
“These new measures will halt the very worst of those preying on vulnerable and desperate people, while enabling borrowing that meets their needs in an affordable way,” Ardern says. “They will protect families through capping the total interest and fees charged on loans, introducing tougher penalties for irresponsible lending, and raising the bar for consumer lenders to register as a financial service provider.”
In a 2017 Commerce Commission survey of 217 lenders, 22 were advertising interest rates of more than 100 percent a year; five of those had interest rates at more than 500 percent.
These sky-high rates are usually charged on short-term or “payday” loans for people needing money to get them through until they are paid. But often high interest rates and lenders pushing back-to-back loans mean people end up racking up unmanageable debt. One budgeting service reported clients who bought a car worth $3000 and ended up with a debt of $9000.
In June, Faafoi sought feedback on ways to tighten money lending regulations, after deciding a review of the Credit Contracts and Consumer Finance Act by the previous administration didn’t go far enough. He’s been focused on improving the lot for consumers, and put his hand up for the commerce portfolio to address some of the issues he sees in his electorate, the Wellington suburb of Mana.
Limiting the accumulation of loan-related interest and fees only applies to high-cost lenders, Faafoi says. The measure aims to prevent debt from spiralling out of control and causing serious financial hardship.
Some consumer groups and banks were pushing the minister to restrict the interest rate lenders could charge, with the aim of forcing predatory lenders out of business. But Ministry of Business, Innovation and Employment officials and budgeting agencies warned that could significantly reduce credit access for people who really need it.
The other major reforms include requiring consumer finance firm directors and executives – including people running mobile shopping trucks offering credit – to meet a ‘fit and proper’ test as a requirement of registration.
The government also plans to increase penalties to $600,000 for a corporate and $200,000 for an individual and impose a duty on directors and management to ensure a firm meets its obligations.
Faafoi will also introduce powers allowing the Government to set standards for loan affordability and suitability, and for responsible advertising.
“We listened to consumer advocates and the finance sector’s feedback and will also be seeking increased resources for enforcement and monitoring to ensure lenders who break the law are detected and stopped,” he said. The increased oversight is expected to cost the Commerce Commission an additional $3 million a year.
However families facing crippling debt can’t expect relief any time soon. The new measures aren’t expected to come into effect until 2020, and even that is subject to Parliamentary timeframes.
Faafoi will also get a new power to adjust the scope of the law to deal with harm that comes from unregulated products in the future.
“These powers could be used to address avoidance, and also to clarify the treatment of particular credit products (for example, to clarify that a new product is not a consumer credit contract),” the Cabinet paper says. “These powers would be similar to the designation power the FMA has under the Financial Markets Conduct Act. This enables FMA to declare that a product is a regulated financial product and also to declare that product is not a regulated financial product.”