Bankers’ personal liabilities under CCCFA to remain

Commerce and Consumer Affairs Minister Andrew Bayly is retaining the CCCFA’s director and senior management liability provisions.

Monday, August 5th 2024, 10:13AM

Despite saying earlier he would look at the $200,000 fines for individuals and $600,000 for corporate entities, after removing 11 pages of overly prescriptive regulation, he has decided to keep the penalties.

He told Law News that removing the penalty on entities was never on the agenda and he considered axing the personal liability provision but chose to keep it.

“I’ve left it in as a deliberate decision, to be honest,” he says. “We want to make sure that people are still accountable for poor lending decisions.

“I was conscious that if I’m going to loosen things up, I want to make sure we still have good protections in place against bad practices.”

Bayly says feedback from creditors was focused on excessive affordability regulations, not liability issues.

“What I’ve heard when I’m talking to lenders… none of them are sitting there going ‘I’m worried about personal liability’,” he says. “What they’re saying to me is, ‘for God’s sake, why are we having to go through this long process.’

“Most people are reputable, they know they have an obligation to do a proper affordability check where it’s appropriate. We’ve given them flexibility to be able to use their discretion to make a decision about what they need to do.”

Barrier for banks

Industry groups support the changes to the prescriptive regulations, but want further amendments to fix the CCCFA’s disclosure and penalty regime.

“There remain barriers in the CCCFA to banks providing access to consumer credit efficiently and safely,” Roger Beaumont, New Zealand Banking Association chief executive told Law News.

“In a couple of cases, the effect of the regulation would be completely disproportionate to any potential consumer harm.”

The rules hold directors and senior managers personally liable if found to have acted without due diligence, meaning individuals face fines of up to $200,000 and/or any court-ordered damages.

Individuals cannot take out insurance to indemnify themselves from this personal liability.

As a result, creditors became far more risk averse leading to a credit crunch which, combined with a global economic downturn, caused a crash in property prices that the New Zealand market is yet to recover from.

Significant issue

The Financial Services Federation (FSF), which represents non-bank lenders, says personal liability remains a significant issue, particularly for managers and directors at smaller finance companies.

“A $200,000 personal liability could potentially mean them losing their house. It’s just not proportionate at all,” Lyn McMorran, FSF executive director says.

“I don’t know why people working in consumer credit have to have this personal liability that they can’t insure themselves against which people working in other sectors don’t have.”

McMorran says such personal liability makes lenders more risk averse when issuing credit – something the latest CCCFA changes are meant to remedy – and discourages people from becoming senior managers or directors.

“It’s a deterrent for good people to enter the sector and those already there to put up their hand for senior roles,” she says.

“This is not serving New Zealand’s financial services sector well, especially when we need to be boosting an environment for competition.”

The NZBA’s Beaumont also has concerns around personal liability and its impact on lending decisions.

“This likely creates a zero-tolerance for any potential breach, which could result in an overly conservative approach to lending under the [CCCF] Act, and may in turn make accessing consumer credit unnecessarily difficult” he says.

“It could also mean consumers who could otherwise afford to borrow may be declined.

“We think banks should be accountable for CCCFA compliance as entities, rather than having liability targeted at individuals.”

Beaumont says disclosure obligations, which include punitive penalties even when there is no material impact on the borrower, are another problem.

He says lenders could find themselves liable for all the costs of borrowing if disclosure documents inadvertently contain a typo such as an incorrect phone number.

“The potential consequences could be way out of proportion for any lender,” he says.

“It could potentially put a smaller lender out of business for no good reason and could possibly lessen competition in the market.

“For a larger lender, it could cause them to breach their capital requirements and effectively reduce New Zealand’s financial stability.”

Tags: CCCFA