Due diligence duty for directors and senior managers - consumer credit contract reform

Significant amendments were made to the Credit Contracts and Consumer Finance Act 2003 in 2019. The new provisions are intended to address issues in the credit market including strengthening requirements to lend responsibly and addressing harm to vulnerable customers.

Directors of creditors (lenders) subject to the Act need to be aware of their new responsibilities and potential liability. The changes include:

• a new duty on directors and senior managers of a lender to exercise due diligence to ensure that the lender complies with its duties and obligations under the Act and associated regulations. They will be required to exercise the care, diligence, and skill that a reasonable director or senior manager would exercise in the same circumstances, taking into account:
  • the nature of the business (for example, its size and the nature of the credit provided)
  • the position of the director or senior manager and the nature of the responsibilities undertaken by the director or senior manager.
• “Due diligence” includes taking reasonable steps to ensure that the creditor:
  • requires its employees and agents to follow procedures, or has implemented automated procedures, that are designed to ensure compliance with the Act and regulations
  • has in place methods for systematically identifying deficiencies in the effectiveness of the procedures for compliance
  • promptly remedies any deficiencies discovered.
• new pecuniary penalties of up to $200,000 for an individual and $600,000 in any other case
• restrictions on indemnities and insurance in relation to pecuniary penalties including for directors and senior managers
• directors and senior managers of a lender offering consumer credit contracts will have to meet a ‘fit and proper’ test in order for the lender to register on the Financial Service Providers Register. Certification becomes compulsory from 1 October 2021. The Commerce Commission has released guidance explaining the criteria for determining whether someone is fit and proper to perform their role.