“Our banks take compliance with the law extremely seriously and have spent significant time and resources to develop and implement their FCPs. They’ll also continue to work closely with the FMA on the takeaways for banks raised in the report.”

“Between 2015 and 2019 any lender who even made a small mistake in the information provided to customers, like getting their phone number wrong, could, on one interpretation, be required to repay all the interest and fees paid until the error was corrected,” Beaumont said.

“The Reserve Bank’s analysis helps to quantify the potential risk to New Zealand’s financial system if the law is not corrected. It reveals a risk of almost $13 billion in cases of incorrect disclosure where consumers may have suffered no harm. That’s money that cannot be used to lend to consumers, businesses, and farmers.”

Modelling by the Reserve Bank estimates current consumer lending law could have a $12.9 billion impact on the financial system, with the potential for an even more severe impact.

Under the Credit Contracts and Consumer Finance Act lenders must provide borrowers with information about their loan. Between 2015 and 2019 any lender who even made a small mistake in the information provided to customers, like getting their phone number wrong, could, on one interpretation, be required to repay all the interest and fees paid until the error was corrected. That consequence would be totally out of proportion with the technical legal breach, especially if there was no harm to the consumer.

A summary of Reserve Bank modelling in a ministerial briefing outlines three scenarios which estimate the potential impact of incorrect loan information disclosure on the ability of banks to meet their capital requirements. The third scenario estimates a financial system impact of $12.9 billion, and the Reserve Bank goes on to say they considered other scenarios where the potential impact would be “much more severe”.

New Zealand Banking Association chief executive Roger Beaumont says: “We support proposed changes to fix this anomaly in the consumer lending law. The Reserve Bank’s analysis helps to quantify the potential risk to New Zealand’s financial system if the law is not corrected. It reveals a risk of almost $13 billion in cases of incorrect disclosure where consumers may have suffered no harm. That’s money that cannot be used to lend to consumers, businesses, and farmers.

“At a time of economic recovery and global uncertainty, the last thing New Zealand needs is the risk of this scenario playing out. It shows why the law is bad and needs to be fixed.

“It’s important to remember that the proposed law change does not stop consumers or regulators taking action against lenders for information disclosure breaches. Nor does it stop any cases currently before the courts. Rather, it would simply ensure that any remedy would be just and equitable. It would be up to the courts, as it should be.”

ENDS

“In a worst-case (but not fanciful) scenario, an error in a disclosure document, which has not caused any harm to consumers, could create a liability that threatens the solvency of the lender with adverse outcomes for depositors, shareholders, and the New Zealand financial system as a whole,” the association told the minister at the time, Andrew Bayly.

“The law aims to stop people trying to disguise the origin of criminal profits, such as drug trafficking or fraud,” he said. “Under the law, there are rules about verifying the source of the funds, and the identity of the person paying and the recipient.

“There are several options that banks may offer in providing assistance to these customers, depending on their particular circumstances. That may, for example, include temporarily moving to interest-only repayments or suspending all repayments.”

External Reporting Board (more…)

The good news is that the New Zealand Banking Association is introducing new protections by November. Changes include banks being required to reimburse fraud victims up to $500,000 if they meet certain criteria, and new technology to identify risky or unusual customer transactions.

Financial Markets Authority (more…)