Government accidentally killed off loan sharks, review finds

High-cost lending provisions introduced in 2020 may have been too effective in killing off loan sharks, according to a discussion paper released by the Government this week.

Sold as “taking a bite out of loan sharks”, the Credit Contracts Legislation Amendment Act introduced provisions to reduce problem debt and high-cost loans, which it defined as an annual interest rate of 50 percent or higher.

The provisions didn’t outright ban these high-cost loans, rather putting measures in place applying to them, including the cost of borrowing not exceeding the loan advance, repeat lending restrictions, capping the daily rate of charge (including interest and fees) at 0.8 percent and prohibiting compound interest.

Enacting the law, the Ministry of Business, Innovation and Employment (MBIE) and the then-minister of commerce and consumer affairs Kris Faafoi estimated it would reduce the number of consumers accessing high-cost loans from around 150,000 each year to about 90,000.

But the bite it took out of the loan sharks was larger than expected.

Not a single consumer accessed high-cost loans last year, according to a statutory review of the provisions released by the ministry yesterday.

These high-cost loans were typically smaller sums most commonly taken out for vehicle repairs, followed by groceries and personal items or gifts.

There were 21 high-cost lenders in March 2020. During the statutory review, the ministry identified 12 of those lenders had exited the market.

As far as the review was aware, none of the nine former high-cost lenders still operational offered high-cost products but had restructured their products so the maximum annual interest rate was just below 50 percent.

In 2019, 13 lenders were offering annual interest rates of between 30 and 50 percent. In 2023 there were 26 lenders identified as operating in this band.

Unexpected impact

The review said the extent of the changes (going from 150,000 to zero high-cost loans) wasn’t anticipated when the provisions were put in place and it was considered that “high-cost lending should still be an option for consumers”.

This line was attributed to Faafoi, who in an August 2019 note said he opted against a hard ban on interest rates above 50 percent because it would effectively prohibit all high-cost lending.

“My view is that high-cost lending should still be an option for consumers who have a genuine financial need, and who can afford the repayments.”

The report said some former high-cost lenders had commented that the rules made it uneconomic to offer high-cost loans for “various reasons”, including struggling to cover their costs due to the low 0.8 percent daily rate of charge cap and that New Zealand was the only jurisdiction to combine the measures that it did.

The options

The discussion paper comes as part of a commitment in the Bill to review it as soon as practicable after three years with a focus on loans that charge between 30 and 50 percent interest – a space that has doubled from 13 to 26 lenders since the provisions were put in place.

Options put forward included maintaining the status quo, applying the options to loans with interest rates above 30 percent or loans with interest rates above 45 percent.

The status quo option was regarded as being effective in safeguarding consumers from the harm caused by high-cost loans.

The 45 percent option would see the provisions applied to 13 lenders, and MBIE suspected lenders would just drop interest rates by up to 5 percent, but some might remove products entirely.

The lower 30 percent threshold, advocated by financial mentoring groups back in 2019, would affect the entirety of the 26 providers in the 50 to 30 percent band.

Debtfix co-founder Christine Liggins said as it was, the Bill had taken a lot of high-cost loans out of the market, but called for it to come down, particularly as many lenders simply lowered their interest rates by the bare minimum.

“If the Government’s scared, then you know, let’s go down to 45 percent and do it in stages, but there’s no need for high-cost lending.

“With high cost loans, you’ve got to ask who’s your target market? And actually, if it’s our most vulnerable, then why are you charging them so much interest?”

She says arguments against lowering the threshold don’t hold water.

“I’ve heard several anecdotes of ‘Someone can’t get $500’. There’s something wrong if you can’t get $500. Work and Income are there and so are the likes of Good Shepherd and Ngā Tāngata Microfinance and so is an overdraft with a bank.”

The review of the high-cost lending provisions is taking place as part of a wider reform of the Credit Contracts and Consumer Finance Act, after a series of changes made by the previous administration were accused of stifling access to credit.

Supporters of the Bill have taken something of a ‘can’t make an omelette without cracking a few eggs’ approach, saying that despite general complaints, it had been successful in stemming the flow of harmful debt.

The Government’s reform of the Bill comes as funding for financial mentoring groups runs out next month, despite a 2022 external review commissioned by the Ministry of Social Development finding the organisations provided “immense value” and strongly urging their continued funding.

Submissions on high-cost credit contract and the wider financial services reforms are due by June 19.