OPINION:
David Clark's inquiry into new credit laws may have slowed the headlines about customers being rejected for loans due to regular spending habits, but the probe will not avoid awkward questions for the Commerce Minister and his advisors.
On the back of days of stories about how the new Credit Contracts and Consumer Finance Act (CCCFA) was causing customers to be turned down for loans on the basis of what appear to be very normal spending, Clark said the Council of Financial Regulators will investigate whether banks and lenders are implementing the legislation "as intended".
It would be unfair to assume that the minister chose the word "intended" to try to avoid the council's members (which include MBIE, the Commerce Commission and the Reserve Bank) having to explain whether the impacts are a surprise.
Clearly, with some commentators suggesting the legislation may amount to a mini credit crunch, it is not working as the regulators intended.
The question is whether events are playing out exactly as the banks had warned, namely that the regulations are so prescriptive, that bank staff need to undertake the same rigorous examination whether they are dealing with an established customer seeking a $1000 temporary overdraft than a new customer seeking a $1 million mortgage.
If the answer turns out to be yes, the regulators - and the minister - may be in an awkward position.
One banking figure said this week that they wanted to call MBIE and ask them to reread their submissions and "tell us what you didn't understand".
Earlier this week the Herald documented the many extensive warnings that were received by the Government (mostly through submissions to MBIE) on the possible consequences of the CCCFA.
Originally an attempt by Clark's predecessor, Kris Faafoi, to crack down on predatory lenders (loan sharks), banks, their lobby groups and law firms warned at some length that the legislation was likely to have more of an impact on registered banks than on payday lenders.
It is likely that in the month leading up to the legislation coming into force that the lobbying intensified.
How the regulators responded to the warnings should be central to any investigation, as should whether all financial regulators that should have been across the issue, were.
The Reserve Bank has repeatedly lectured banks about the need to support customers through Covid-19, calling for the institutions to be "courageous" when deciding whether to lend.
Was the central bank aware that another member of the Council of Financial Regulators was implementing legislation that could make banks feel unable to lend to new customers? Given the impact on credit, hopefully the investigation will shed light on it.
The Minister, for his part, is refusing to comment until he has "heard back" from the Council of Financial Regulators.
Some figures involved speculated that Clark, who inherited the legislation from Faafoi, seemed keen to move the legislation forward and therefore get it off his desk, rather than send it back for further changes.
Had he looked further back he might have noticed that a similar episode played out in 2015, the last time the CCCFA was amended. Then Commerce and Consumer Affairs Minister, Paul Goldsmith faced a similar proposal to create prescriptive regulation, but instead opting for a principle-based Responsible Lending Code.
Goldsmith typically favours light touch regulation, so the move should not be a surprise. But his explanation of why he heeded warnings that regulations could reduce access to credit should serve as good advice for the minister, given what has happened.
"There's always officials and lobby groups who think the answer to any problem is more regulation," Goldsmith said.
"Especially in this kind of area, half the legislation passed achieves the exact opposite of what it sets out to do."
