It’s hard to ignore the signs of an impending recession.
Rising cost of living, rising gasoline prices and inflation at rates we haven’t seen since the days of the Global Financial Crisis (GFC).
New Zealanders are feeling the financial crush more than ever. While some will weather the coming economic storms, others will turn to other high-cost loans to manage financial hardship. More and more New Zealanders will be exposed to greater personal debt and the unregulated “Wild West” of debt collection and Buy-Now-Pay-Later (BNPL).
Both industries are often overlooked aspects of consumer credit, despite mounting evidence of their harm. Poor debt collection practices include the use of intimidation tactics (such as debt collectors disguised as police or court officers) when showing up at people’s homes. Other practices include falsifying documents to look like judicial attachment orders requiring borrowers to make immediate repayments. Although BNPL’s services are innovative, without the checks and balances of standard loans, it is a fast track to unmanageable debt.
Without direct regulation, BNPL companies can decide whether credit checks are performed, and consumers can easily register for all six BNPL services.
With the tidal wave of economic hardship looming on the horizon, we need to pay attention to these overlooked aspects of lending. Recent changes to lending laws have drawn hostility and half-hearted responses from banks, mortgage brokers and parts of the lending ecosystem. The ability to obtain financing for a home is important. However, mortgages are only part of the picture and a balanced assessment of new lending laws is essential.
The CCCFA and its effects
The recently amended Consumer Credit Agreements and Finance Act 2003 (CCCFA) aims to tackle irresponsible lending practices, including poor debt collection practices. The objective is to protect all borrowers and particularly vulnerable borrowers.
Consider safety proofing for appliances, for example toasters. Safety ratings ensure that the toaster you buy is fit for purpose, not defective, or causing an electrical fire. By analogy, the CCCFA provides for a security check for all consumer loans.
Our record of consumer credit reforms demonstrates that our lending landscape operates like a Wild West in the absence of sound regulation. History has much to teach us in the present if we listen to it. Edmund Burke said it well, “Those who do not know history are destined to repeat it.”
Changes to consumer credit regulations have helped increase borrower protection and ensure a safer consumer credit environment for individuals, whānau and communities. But regulatory loopholes remain, leaving opportunities for lending practices that contribute to financial hardship and unmanageable debt to continue.
Sound regulation that balances consumer protection and competition in the credit sector is not impossible. However, it requires the same teamwork and enthusiasm that helped navigate the Covid-19 pandemic. This calls for imaginative thinking around solutions and the role we all play, from government, policymakers and the financial capacity-building industry to nonprofits, to ensure our consumer credit landscape is safe, responsible and fair.
‘Alapasita Teu is a researcher at the Auckland-based Maxim Institute.
Global Finance, one of New Zealand’s leading mortgage and insurance advisers, helps clients properly structure their debts and manage their loans well (Photo from GF website)