David Seymour calls for inquiry into 'unintended consequences' of loan law changes

Friday, 7 January 2022

ACT leader David Seymour has called for an inquiry into how new laws supposed to protect vulnerable borrowers from unscrupulous lower-tier lenders came to disrupt bank lending.

The changes to the Credit Contracts and Consumer Finance Act came into force on December 1, increasing the penalties for irresponsible lending, and requiring lenders to do deeper dives into borrowers’ finances before granting them loans.

But critics allege they have driven up lending costs, increased the administrative burden for lenders, borrowers and mortgage brokers, and made it harder for ordinary people to get loans..

“A Parliament that seeks to be a good lawmaker should not allow such laws to stand,” Seymour wrote in a letter to Commerce and Consumer Affairs Minister David Clark​, and MP Duncan Webb​, the chair of Parliament’s Finance and Expenditure Select Committee​.

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Seymour says he has gone back over records of debates, and committee hearings, and found disruptions to the financing market were not properly considered.

Andrew Bayly,​ National’s consumer affairs spokesman​, shares Seymour's concerns.

“The unintended consequences of it have proven to be much worse and much more pernicious than anyone contemplated,” he says.

“One of the critical things (for a government) is to ensure the financing market operates properly, and what we've ended up doing is swinging to the opposite side of the line,” he said.

“I think we’ve got a real issue with this,” he says.

“It will need change.”

Data from credit bureaus, banks and the Reserve Bank covering the market since December 1​ has yet to be published to indicate the scale of the impact of the law changes.

But if they turn out to be as significant as critics claim, MPs shouldn’t be surprised, because they were warned by ANZ chief executive Antonia Watson in June 2019 during a public consultation on the proposed law.

“The changes will lead to conservative lending practices and a tightening of credit access, which will disproportionately impact our most vulnerable,” she said.

While the New Zealand Bankers Association warned in its submission that proposed laws changes “may” lead to more conservative lending, Watson told MPs it was inevitable.

Those who were most likely to struggle to get loans under the new laws would be lower-paid people, immigrants, refugees, first-home buyers, and those trying to rehabilitate their lives, she said.

Lenders would become more conservative because the proposed laws would stop executives like herself, as well as company directors, from insuring themselves against civil fines imposed by courts, should the lenders they work for accidentally breaking lending laws.

“The proposed penalties place directors’ and senior managers’ personal lives and families at severe financial risk,” she said.

Rather than risking that, they would be conservative, and not allow lending to people, even if those people wanted it, and it was in their best interests, she said.

Mortgage broker John Bolton says this is exactly what has happened, with banks becoming “ultra-conservative”, and declining loans they would have approved before December 1.

“Banks are increasingly reluctant to lend. And as a result, borrowers having to go into more expensive second-tier options,” said Bolton, whose petition on Change.org has now gathered just under 9000 signatures.

The Institute of Directors also warned against the consequences of banning insurance for directors, and lender Harmoney said it would make it harder for lenders to find non-executive directors to increase the diversity of their boards.

But in an August 2019 report prepared for the Finance and Expenditure Committee, which was examining the bill, officials from the Ministry of Business, Innovation and Employment (MBIE) only noted banks had warned of a “potential chilling effect” on lending, without expanding on the risk.

An MBIE spokesman acknowledged the changes “may increase the processing time for some loan applications”, but they would improve the quality and robustness of loan assessments.

“That said, officials will be engaging with lenders and consumer advocates once the new requirements have bedded in to assess their impact and if any adjustments are needed,” he said.

In his letter to Clark and Webb, Seymour asked that MBIE officials not be the ones to conduct the inquiry he was calling for.

Both Seymour and Bayly sat on the select committee that scrutinised the bill, and both recall the emotive debates.

“In my mind, and I feel a bit guilty about this, the whole committee fell into the same trap. It was a very lively and intense period of discussion, but it was all about these horrible people selling terrible things to financially illiterate people in South Auckland,” Seymour says.

A drama played out after Seymour texted a lower tier lender, and was bombarded with text offers of loans.

“They were relentless. They sent me texts for months,” he recalls.

Bayly says: “We were targetting dodgy pawn shops, but what we’ve done is inadvertently capturing the whole sector.”

The process of lawmaking was interrupted by an eleventh hour introduction of an interest rate cap, which Parliament’s records show became the overwhelming focus of debates.

“They introduced this new idea, and dramatically shortened the effective time to consider it. It acted as a distraction from the issue we now face,” Seymour says.

“Everyone was focused on the 50 per cent cap. That’s where the emphasis was, not on Joe Bloggs down the road who just wants a hire-purchase to buy a car,” Bayly says.

Banks and other lenders were asked to respond in days to a snap second consultation just weeks before the bill was to become law, though the Financial Services Federation of lenders, an industry lobbying group for lenders like Avanti Finance and Instant Finance, only found out by accident it was happening.

Lyn McMorran, the federation’s executive director, told MPs in her submission that she had only four days to put a submission together.

Seymour and Bayly feel there are weaknesses in the select committee system.

These committees are there to study proposed laws, and identify potential problems with them, but under a government with a strong majority, they are dominated by MPs from the ruling party, says Seymour.

“One thing generations of backbenchers have realised is it doesn’t help your career prospects, if you examine the bill, and challenge it in a way that’s not endorsed by the minister,” he says.

This weakens their effectiveness, he says.

He's proposed law change to give governments terms of four years, but as a quid pro quo face select committees whose membership was proportional to non-executive members of Parliament.

By non-executive, Seymour means MPs who are not ministers.

That system is used in Britain, says Bayly, with backbenchers electing committee chairs.

“You have to have the trust of the entire cross back bench,” he says.

“You have to be a chair that is willing to have a go at a minister, and you have to be a chair that’s willing to be fair to people. It's a totally different approach.

“The executive really gets held to account, whereas you could argue that in New Zealand it’s a bit of a whitewash,” Bayly says.

Seymour also wants a law requiring a cost-benefit analysis on all proposed laws, which would require a level of lawmaking rigour that’s not always apparent.

The costs of the new lending laws appear to substantially outweigh any benefits, he says.