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Small payday loan fees, interest to be capped in Faafoi's loan shark clampdown

Wednesday 10th October 2018

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Small payday loan costs will be capped at 100 percent of the original amount borrowed, as part of Commerce and Consumer Affairs Minister Kris Faafoi's crackdown on predatory lenders. 

But consumers being fleeced will likely have to wait until 2020 for any change.

Announcing the measures with Prime Minister Jacinda Ardern, the minister 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 and criteria on so-called payday lenders, and threatening bigger penalties if they get it wrong. 

"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 said in a statement. "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." 

Faafoi sought feedback on ways to tighten money lending regulations in June, 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 Mana electorate. 

Limiting the accumulation of loan-related interest and fees only applies to high-cost lenders, he said in a Cabinet paper. The measure aims to prevent debt from spiralling out of control and causing serious financial hardship,  Options to limit the rate of interest that can be charged weren't recommended by Ministry of Business, Innovation and Employment officials, who warned that could significantly reduce credit access for people who really need it.  

Several stakeholders, including budgeting agencies and finance companies favoured the proposed option, although some consumer groups and banks supported forcing high-cost lenders out of business by restricting the interest rate. 

The other major reforms include requiring consumer finance firm directors and executives to meet a 'fit and proper' test as a requirement of registration. This will be extended to mobile traders offering credit. MBIE officials said the regime would impose moderate costs on lenders that might be passed on to consumers, but noted the majority of stakeholders wanted greater registration or licensing requirements. 

The government 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 new measures are expected to come into effect in 2020 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 said. "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."

The increased oversight is expected to cost the Commerce Commission an additional $3 million a year. 


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