This Pro Talks interview is made with the support of Spark and BNZ
Unresolved problems with the credit contracts law could be addressed by better targeting lending restrictions to problem lenders, says BNZ's chief executive
Small businesses are still exposed to worrying lending constraints, despite work by the Government and finance sector to tidy up the new Credit Contracts and Consumer Finance Act.
Dan Huggins, who leads the 160-year-old BNZ, supports targeting high-interest lenders, rather than sweeping checks on all borrowers. He talked live with Newsroom Pro managing editor Jonathan Milne and answered questions from Pro subscribers.
It comes after concerns that banks had been required to ask intrusive questions, like how much borrowers had spent at KFC in the previous three months. The new rules were intended to protect vulnerable households from predatory loans companies, but their broad net had caught up home loans and some business lending too, especially small companies whose directors borrowed against their homes.
In a report to the Commerce Minister, MBIE officials have recommended further investigation into targeting the lenders.
"I think that's right," says Huggins. "Organisations that adhere tightly and specifically to the rules, they'll adhere specifically to this. Those that weren't bothering previously, perhaps won't bother now."
According to MBIE guidance, some aspects of the Act cover all credit transactions, including business transactions, by protecting borrowers from oppressive behaviour by lenders. These are loan contracts that are "oppressive, harsh, unjustly burdensome, unconscionable, or in breach of reasonable standards of commercial practice".
The new law did, and does, require much more intrusive investigation and discussion with customers. "Many customers, when we ask for that sort of information, are a little bit surprised about that," Huggins says. "Hang on a second, I've been banking with you for 20 years. What do you mean, you need that information? That's crazy."
But there are lenders that don't play by the rules. "So you can end up with a perverse situation where actually you've reduced the number of people who are getting credit from those people who are adhering to the rules, and more people going to those other players."
He notes that other countries including Australia have taken a more targeted approach to scrutiny of loan applications, and New Zealand could follow that lead. "Importantly, it doesn't distract from the the intent of the law, which is absolutely right."
At business lending firm Prospa, chief executive Adrienne Begbie is sympathetic to Huggins' arguments for better targeting the CCCFA restrictions. "I don't disagree with that," she says. "It was really aimed at payday lenders and truck lenders and predatory lenders – but it took a very broad-brush approach."
Her firm surveyed 520 New Zealand SMEs about their access to finance this year, revealing they are finding it difficult. It shows that of companies that applied for funding in the past six months, 11 percent were declined, and 32 percent received a smaller loan than they applied for – though it's not quite as tough as at the height of the pandemic.
"The fact that the consumer spends $100 per month on caviar throws no light on whether a given loan will put the consumer into circumstances of substantial hardship. Nor for that matter does knowing that the consumer spends $500 per week on basic food items." – Justice Nye Perram, Federal Court of Australia
Those most likely to have difficulty borrowing are in construction, retail, or wholesale trade and warehousing.
Begbie says small businesses had always found it difficult to borrow, because most lenders ask them to use their homes as security – many young people starting businesses don't own homes. But this year it's been getting more difficult still.
"You've got to put the responsibility back to the lenders," she says. "A regulator can oversee it, but everyone's got the responsibility to their customers to their boards, to their investors, to do lending right, and not lend to people who can't afford it."
Like the banks, Prospa has taken an interest in the development of the Government's new lender responsibility principles, which are not binding but provide good rules of thumb. "We don't take a mortgage over somebody's home, we're looking at lending based on the business strength," she says. "But we all have responsible lending expectations."
In Australia, the Federal Court rebuffed attempts by the regulator, the Australian Securities and Investments Commission, to extend responsible mortgage lending rules to business lending. As in New Zealand, the banks had been concerned about an overlap between mortgages and business loans, because many small business borrowers use residential property as collateral.
The commission had accused Westpac Australia of breaking responsible lending laws 261,987 times between 2011 and 2015, because it did not properly assess whether loans were suitable as required by the Credit Act.
"We see the intent of the CCCFA as being the right intent. You want to ensure that customers can afford their loans – that's in everyone's interest. It's in a customer's interest and it's certainly in my interest to make sure the customer can afford to pay their loan back." – Dan Huggins, BNZ
The case became known as the "shiraz and wagyu case" after Justice Nye Perram ruled that consumers' past habits were not relevant to their future habits, and that taking on a loan would change spending decisions. "I may eat wagyu beef every day washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare," he said.
"The fact that the consumer spends $100 per month on caviar throws no light on whether a given loan will put the consumer into circumstances of substantial hardship. Nor for that matter does knowing that the consumer spends $500 per week on basic food items."
That same issue was debated in New Zealand – albeit with reference to KFC rather than wagyu beef. Eventually, Commerce Minister David Clark agreed to make changes to the new law, so banks and other consumer lenders weren't automatically required to scrutinise every line of expenditure on potential borrowers' bank and credit card statements.
At BNZ, Huggins is very clear that he and the bank are 100 percent supportive of the objectives of the new credit contracts law, but there remain a few wrinkles still to smooth. "We see the intent of the CCCFA as being the right intent. You want to ensure that customers can afford their loans – that's in everyone's interest. It's in a customer's interest and it's certainly in my interest to make sure the customer can afford to pay their loan back.
"I think New Zealand banks traditionally have been very good at that. We haven't seen huge arrears, when you compare the New Zealand banks and the BNZ to others globally."
But the regulations still limit, quite substantially, banks' discretion on lending decisions. "And so that knowledge that we've built up over 160 years, of what is a good thing to do, is restricted under the new legislation. And it means that credit availability is lower."
Now he just needs to persuade the Commerce Minister of the merits of better targeting the lending constraints to loan sharks.
Clark acknowledges his officials' advice that the Government should explore targeting the scope of the affordability regulations to higher-risk lending on the basis of product type, class of lender, or the characteristics of the borrower. They say this would be consistent with the original policy intent and would address a key underlying driver of the unintended impacts, which is that the regulations apply to almost all consumer lending with limited exceptions.
But Clark isn't following that advice. "I am concerned that any further changes to target the scope of the affordability regulations would significantly reduce consumer protection and that the benefits of doing so would be marginal," he argues, in a Cabinet paper. "While there may be certain lenders, product types, or borrowers where there is greater risk of irresponsible lending, this does not preclude those not captured under the targeted scope from irresponsible lending as well."
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