Hon Heather Roy opening address to Financial Summit 2009; Otara Music and Arts Centre; cnr Newbury St & Bairds Rd, Otara Town Centre, Otara, Auckland; Friday, September 25 2009.

Thank you for the introduction Arthur.  I would like to echo your comments in welcoming everyone who has taken the time to be here - and to thank everyone for joining me today at Financial Summit 2009 to discuss issues related to credit, credit affordability and responsible lending and borrowing.

It is pleasing to have so many here today from the finance industry, and I also wish to acknowledge the presence of representatives from so many community groups who have freely given their time to be here today.  The work you all do in providing advice and support makes a strong and vital difference to the lives of so many people.  I applaud your efforts.

We are here today because you and your groups work at the grass roots level and know what is going on in your communities.  The information so many of you have already provided to the Ministry over the past 18 months has had a significant influence on the recommendations in the discussion paper.

The events that have occurred over the past 12 months have been a salient reminder that the availability of credit - both for consumers and businesses - is fundamental to the sound operation of the national economy.

For most Kiwis, credit is necessary in order to buy a home and for many it allows for the purchase of other 'big ticket' items - such as a car, or larger appliances or equipment that are too expensive to pay for outright.

While credit provides consumers with flexibility to access goods and services and enables increased participation in the market, the current economic climate has seen many consumers facing greater challenges when it comes to accessing, using and repaying credit.

The question that needs to be asked is: what are the essential elements of a good consumer credit market
The hallmark of a well-functioning consumer credit market is the successful management of credit by the consumer.  An important start is the need for responsible credit providers - providers who value consumers, and who recognise the importance of developing and maintaining good relationships between themselves and borrowers.

Care is needed to ensure that consumers continue not only to have access to credit, but are able to use and manage that credit appropriately.

For consumers or borrowers there must be easy access to adequate information that allows for good decision-making to suit the individual's circumstances.

This is especially true given the ease with which credit can now be obtained - sometimes in forms inappropriate to the borrower's individual circumstances.

Our task is to make sure the Credit Contracts and Consumer Finance Act is capable of keeping up with changes in technology and new lending means and that these practices are not causing detriment to consumers.

As an aside, I'm well aware that the internet is full of online scams.  The Ministry of Consumer Affairs keeps a close on such developments, and I will put in a plug for the Ministry's 'Scamwatch' website.

Government also has a role in this market.  The consumer credit market needs to be underpinned by sound legislation that is clear, understandable, enforceable, and routinely enforced - as all law should be.  Principle-based legislation that is not over-prescriptive about individual situations will result in a sound basis for consumers and industry.  Government's role is to provide the right environment - that is my yardstick.

While New Zealand has had credit legislation in place for many years, our current Credit Contracts and Consumer Finance Act (CCCFA) came into effect in 2005, making it fairly new legislation.

The CCCFA is principle-based legislation that seeks to balance consumers' needs for adequate information and for basic protections against less scrupulous lenders, with the needs of industry to not face unnecessary compliance costs or regulatory imposts.  It also provides for enforcement of the legislation by the Commerce Commission.

This period of economic uncertainty provides a timely opportunity to review our consumer credit legislation.  The objective is a CCCFA that delivers good outcomes for New Zealanders now and into the future.

So does this legislation meet the good regulatory test model of being clear, understandable and enforceable?

Over the past two years the Ministry of Consumer Affairs has undertaken a review of the CCCFA - I hope you all have a copy of the review discussion paper outlining the review and its findings.

Many of you have contributed to this review - including through your attendance at the 2007 Financial Summit.

The review was undertaken - in accordance with good regulatory practice - to see whether, after three years of operation, the legislation is meeting its objectives.  I welcome such reviews: legislation that is not effective is highly likely to be costing us both economically and socially.

The CCCFA applies to all forms of consumer credit.  It is based on the premise that well-informed consumers are best placed to make wise borrowing decisions to suit their own particular circumstances.  It has a strong emphasis on disclosure.  It also implicitly assumes that consumers should be responsible for the decisions they make, for better or for worse.

I know that, for many of you, the latter may seem to be a tough call and I welcome discussion on this.

Along with informing consumers the Act's information disclosure requirements aim to promote competition, efficiency and good practice in the credit market.  The CCCFA also provides lenders with flexibility in setting interest rates and fees.

The CCCFA review has found that the general principles of the Act are working well and that it is meeting its objectives in the most part.

The review has also found that there are areas where the Act could be enhanced to reduce compliance costs and improve its clarity, operation and overall effectiveness.  The discussion paper, I referred to a moment ago outlines a number of proposals to this effect.

Our agenda today focuses on four key areas covered by these proposals: the CCCFA hardship provisions; credit and repossession; and disclosure.  The review also includes discussion of fringe lending practices and ways to address negative aspects of these practices.  This topic is our fourth key area for discussion today and will be covered in our afternoon session.

To my mind one of the more significant proposals in the discussion paper is to extend the hardship provisions so that consumers in default can apply for hardship relief - at the moment, the law precludes this - and also to improve the procedures for dealing with hardship applications.  These proposals go hand-in-hand with the proposal for inclusion of information on the hardship provisions in the credit contract disclosure information.

Our opening session today is to discuss whether we have these proposals right and asks:

* has an adequate balance between struck between borrowers and lenders?
* are there any unintended consequences?

The review also highlights concerns with the taking of security under credit contracts and the way in which security is being repossessed.  In many instances security clauses are very broad and do not indicate to the consumer what may be repossessed.

A proposal has been put forward to ensure that consumers are fully aware of what security is being taken and, therefore, what may be repossessed.  While not directly part of the review, your views are sought on aspects of the Credit (Repossession) Act, which I expect will feed into a wider review of that Act.

Although the review concludes that the CCCFA is generally working well, there are a number of barriers that appear to adversely affect its operation.  These include consumer behaviours, biases and financial knowledge and particular practices employed by some lenders around the margins.  These practices are, however, not limited to the margins.

The CCCFA can only go so far in addressing these barriers as the legislation is not intended to single out particular sectors of the market, behaviours or practices.  But there are other legislative developments progressing or in the pipeline that are expected to have a positive outcomes in these areas.

These developments include the Financial Service Providers legislation that will introduce a registration regime and requirements that all financial service providers - including credit providers - must belong to a free-to-the-consumer disputes resolution service.  Under this regime consumers will have improved access to a low cost avenue for disputes resolution.

The Ministry of Consumer Affairs is progressing the development of the financial sector dispute resolution framework.  All financial service providers will be required to be registered by December 1 2010 and, from this time, consumers with disputes will all have access to a third party disputes resolution service.

In a similar vein, the recent increase in monetary limits for the Disputes Tribunal - from $7,500 to $15,000, with both parties' consent, or from $12,000 to $20,000 - will also enable more consumers to seek resolution via this low cost mechanism.  I was very pleased to support this legislation and am also supporting a further review of the Disputes Tribunal Act, which will hopefully consider making Disputes Tribunal findings more accessible.

Policy responses applied overseas for credit and over-indebtedness issues - such as interest rate caps and responsible lending - are also outlined in the discussion paper.  From my perspective, both interest rate caps and responsible lending represent significant regulatory interventions.

I don't support interest rate caps because history has shown, time and time again, that price control does not work and usually causes worse market distortions - most often having a negative affect on those in lower socio-economic groups.

Setting an interest rate cap also effectively sets lenders a target at which to set their rates - resulting in an overall cost of credit to those who need it most and who are least able to afford high interest repayment rates.  There is also the risk of credit exclusion as some lenders may not wish to operate at certain interest rates - while others may operate in the black market, 'picking up' credit-excluded customers and attempting to operate outside of the eyes of enforcement authorities.

With regards to responsible lending, I note the Australia is introducing this concept to its lending law.  The Ministry will keep a watch on the implementation of this to determine the costs and benefits to New Zealand consumers from such an approach.

Again thank you for attending today.  This is an opportunity to share your views with industry and support agencies, and with the Ministry of Consumer Affairs.  I particularly welcome your views on the proposals and issues outlined in the discussion document.

I would like to take a moment to thank Arthur Grimes for kindly agreeing to chair today's Summit. 

Arthur expertly chaired the Financial Summit in 2007 and has kindly agreed to chair the Summit again this year.

As Chair of the Reserve Bank Board of Directors, Senior Fellow of the Motu Economic and Public Policy Research Trust, and Adjunct Professor at the University of Waikato, he is excellently placed to provide continuity and pose challenging questions on what has been progressed in the past two years.