11 Oct 2018

Cap on loans not the solution for spiralling debt - Kris Faafoi

10:38 am on 11 October 2018

Introducing a cap on how much money consumers can borrow would be a step too far, Minister of Consumer Affairs Kris Faafoi says.

Commerce Minister Kris Faafoi said any lenders breaching the rules would face fines of up to $600,000.

Commerce Minister Kris Faafoi said any lenders breaching the rules would face fines of up to $600,000. Photo: RNZ / Sarah Robson

Under the new measures announced yesterday, which are expected to come into effect in 2020, interest and fees on loans will be limited to 100 percent of the amount borrowed.

That means if someone borrows $500, they will never have to pay the lender back more than $1000, including all fees and interest.

Mr Faafoi told Morning Report the law would help the most vulnerable New Zealanders, who needed loans, not to spiral into debt.

However, he said enforcing a limit on how much people can borrow wasn't necessary.

"I think that's going a step too far," he said. "We've got to put in some measures that across the board protect these vulnerable consumers and making sure that we can cap it at a decent amount to make sure that it doesn't spiral out of control is what we've seen fit to do."

Mr Faafoi said about 200,000 people borrow from high-cost credit lenders each year.

About one in eight default and spiral into debt, he said.

"I would like to see that number reduce significantly when these changes come into force," Mr Faafoi said.

The new restrictions follow a review of changes made to the Credit, Contracts and Consumer Finance Act in 2015, which the government said did not go far enough.

The crackdown measures also include a 'fit and proper person' test for mobile traders and the heads of companies offering consumer credit contracts.

The Good Shepherd, an anti-poverty trust said the government's crackdown on loan sharks was not going to solve all the problems in the sector but it was a good start.

The former Retirement Commissioner and chair of The Good Shepherd, Diana Crossan, told Morning Report she recommended interest and fees on loans to be limited to 50 percent instead.

She said the new laws also did not address the issue of borrowers taking out multiple loans but she was pleased the government had taken some action.

"It is part of the package... some of us have been working on for a long time," she said.

"This one piece of legislation isn't the panacea."

Auckland budget adviser Adrienne Gallie, of the Pakuranga and Howick Budgeting Service, said the proposed cap on the interest charged by loan companies would still be far too high for poor people.

However, she said the cap was excessive, and one of 25 percent would be better.

"They don't have a lot of money anyway, you know, and what happens next week when they need another $300 because they can't buy food or they need to pay down some debt...? So it doesn't seem right to me."

The law will also be strengthened to give consumers clearer powers when asking uninvited salespeople to leave their premises, including by strengthening the legal status of 'do not knock' stickers, Mr Faafoi said.

Consumer New Zealand launched a 'Do Not Knock' campaign in 2014 after repeated complaints about door-to-door traders who pressure vulnerable consumers into buying things they don't want and can't afford. It has handed out about half a million stickers since then.

Consumer New Zealand's chief executive Sue Chetwin said the organisation welcomed the move on stickers and also backed the plan to cap interest on high-cost loans.

"I think this is a big step forward once the legislation comes into place to give consumers some protection against these people who do come knocking on their doors."

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