A Commerce Commission inquiry has been warned that Kiwi borrowers will be unable to shift to more competitive lenders because of tough new credit rules
HSBC, Goldband Finance and Mutual Credit Finance have all made the decision to exit home, car and consumer lending, saying compliance costs have made it financially unsustainable.
Global bank HSBC has announced its phased withdrawal from wealth and personal banking in New Zealand, winding down its involvement over several years. It agreed this month to sell its $1.4 billion mortgage portfolio to a local subsidiary of Australia's Pepper Money.
Christchurch-based finance companies Goldband and Mutual Credit have made similar decisions to exit, faced with the cost and risk of lending under the new Credit Contracts and Consumer Finance Act.
The Commerce Commission banking market study has been warned that Kiwi borrowers will be trapped in a "mortgage prison", unable to shift to a more competitive lender because of the tough new rules.
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Eugene Bartsaikin, director and mortgage adviser at Twine Financial Advisers, has told Mortgage Professional Australia magazine that amid interest rate rises and a decline in property values, the incidence of mortgage prisoners has increased – especially among HSBC customers pushed onto higher floating rates from this week, but unable to refinance elsewhere.
His concern is echoed by Lyn McMorran, the executive director of the Financial Services Federation, in a submission to the Commerce Commission, which she also supplied to Newsroom.
Her organisation represents non-bank lenders and deposit-takers, including credit unions, building societies, small business lenders and finance companies. It calls its members the "responsible non-bank sector".
"Competition is healthy, it's good for the consumer. Providing people with alternatives that might be more niche and more suited to their needs is something that we don't want to squash." – Lyn McMorran, Financial Services Federation
She describes the Credit Contracts Act regime as "overly prescriptive", creating a significant barrier for consumers wanting to change providers to obtain a better deal. "It has effectively created mortgage prisoners where the granular and intrusive assessment of all household expenses, rather than just the individual’s fixed outgoings, renders their loan 'unaffordable' to a new provider, even though they may be meeting higher existing commitments with their current lender."
It reduces their ability to switch between banks and other lenders like credit unions and building societies, to obtain a better deal. That's exacerbated by providers that have decided to exit the market.
"It has also led to lenders quitting the consumer lending market altogether to focus on less heavily regulated business lending, which is certainly not helpful to promoting a competitive market," she warns in the federation's submission.
Some of the federation's smaller members, like a credit union with just 13 staff, nonetheless have the same compliance requirements as a bank with 9,000 staff, she says.
She acknowledges that the small size of some of the federation's member organisations may be as much a deterrent to consumers as the difficulty shifting from their existing banks. "Certainly there is there is likely to be more risk with a smaller organisation. But we are talking about organisations that have been trading now for well over 100 years. They are good at what they do, because they do manage the risk."
The small size comes with benefits – customers can just call up their manager, or even the chief executive. "I started with Westpac in 1985 – you wouldn't have got the Westpac CEO on the phone, even back then. And he was certainly much more accessible then. It was a he, of course!"
"Competition is healthy, it's good for the consumer. Providing people with alternatives that might be more niche and more suited to their needs is something that we don't want to squash."
Newsroom phoned the leadership of Goldband and Mutual Credit Finance, both of which have decided to stick to their knitting of business-lending, and step away from the riskier world of personal lending. One leader had his cellphone on the company website; another's home number was listed in the White Pages.
They're not the only one to exit. Smaller lenders have also left in the past few months: Zip has decided to revert to its core buy-now-pay-later business; Fisher & Paykel Credit Union has shut its doors and handed over its $2.7m loans book to First Credit Union, citing a shrinking workforce at F&P Healthcare, Covid-19 restrictions and "regulatory impacts".
Since the new credit contracts rules came into force, the Commerce Commission says high-cost lenders have also exited the lending market or reduced their interest to below 50 percent – they're less likely to be missed.
"We just couldn't see the point of being part of that regime, that was just so complicated, and so fraught with risk." – David Tier, Mutual Credit Finance
“These changes have been encouraging to see, particularly as some lenders traditionally charged up to 800 percent in interest," says Louise Unger, the commission's general manager for credit. "The reduction of interest rates has led to a cheaper cost of finance for borrowers and prevents potential harm and financial detriment.”
The departure of more established, respected lenders such as HSBC, Goldband, and Mutual Credit is more worrying.
Mutual Credit Finance chair David Tier says the 60-year-old business started in consumer finance, predominantly motor vehicles, but had evolved into a business lending organisation. "But when the CCCFA [Credit Contracts and Consumer Finance Act] came out, it just got harder. Too complicated, too difficult," he says.
"We just couldn't see the point of being part of that regime, that was just so complicated, and so fraught with risk."
When it quit personal lending, it had only 12 personal loans left on its books, mostly car loans. Rather than selling them off, they have simply run them down to maturity.
"There were valid reasons for bringing in the consumer credit legislation with the loan sharks and things that were around at the time. For the banks it was about mortgage funding, but the rest of it also got very hard for everybody."
"There are non-bank lenders like NBS, Mutual Credit and Goldband that I think are reputable. It's not like we're payday lenders or anything like that. But it's just got harder and harder, in terms of the compliance reporting." – Martin Brennan, Goldband Finance
At Goldband, chief executive Martin Brennan says the move away from personal lending has been a gradual, unspoken decision. He would consider each application for a loan and judge it on a case-by-case basis but, with the advent of the credit contracts rules, none of the loans was worthwhile to the company any more.
"The regs are too restrictive and frankly leave us too vulnerable," he says. "I mean, some of the fines and so forth are quite high, and I could lose my career if I made the wrong call.
"Frankly, people's perceptions of lenders is that if you're not a bank, you must be a bad, evil lender. But there are non-bank lenders like NBS, Mutual Credit and Goldband that I think are reputable. It's not like we're payday lenders or anything like that.
"But it's just got harder and harder. In terms of the compliance reporting, the risks of getting it wrong are so high that it's just not in our interests to do it, frankly."
He says Goldband is a small finance company, with just eight staff. Three of those are dedicated to dealing with the firm's legal compliance obligations.
"In a weird way, my clients are paying for that. Now you could make an argument that's protecting them – but I would say that as a percentage of my salaried staff, that's a lot of compliance work. And the credit unions have the same challenge."
Brennan argues that over-regulation is a bigger problem to Kiwi borrowers and depositors than anti-competitive behaviour by the big banks. “But I’d be stunned if the Commerce Commission turned around and said, 'well, government' you’re part of the problem not part of the solution'.”
Even some mid-sized banks, such as NZX-listed Heartland, express frustration at the compliance costs.
"Certain regulatory regimes, like the CCCFA, are so complex and uncertain that lenders are forced to adopt conservative business approaches to ensure compliance; stifling innovation and dynamism in important banking product markets," says Heartland Group's general counsel Phoebe Gibbons, in the bank's submission to the Commerce Commission inquiry.
"'Fixed' regulatory compliance costs are significant for smaller banks," she adds. "Heartland, for example, faces far greater costs (proportionally) to comply with prescriptive regimes like the CCCFA and the Reserve Bank’s prudential banking requirements than larger organisations with more resources."
