BEWARE LENDERS: New due diligence duty & fit and proper person certification for directors and senior managers

From 1 October 2021, directors and senior managers of lenders (i.e. a person or business providing credit under a consumer credit contract, including some mobile traders), must comply with new due diligence duties and obligations under the Credit Contracts and Consumer Finance Act 2003 (the “CCCF Act”).

The new due diligence duty arises as part of the changes to the CCCF Act, and “obliges and incentivises individual corporate officers to drive a culture of compliance with the CCCF Act from the top down”[1]. 

Who are directors and senior managers?

A director is any person who is elected or appointed to manage a company or business’ affairs.  For the purposes of the CCCF Act, directors include those who are registered on the Companies Office, and non-registered individuals who hold the same powers and functions of a director.  All directors, including those that do not have any direct involvement in the management of the lender (i.e. silent directors), are subject to the CCCF Act due diligence requirements. 

A senior manager is any individual, other than a director, who exercises significant influence over the management or administration of an entity.  Whoever is considered a senior manager of a lender depends on the role that person performs. Essentially, it all comes down to whether the employee concerned exercises significant influence over the lender.  For small lenders, senior managers may include all or most of the senior staff.  Some staff members may not hold a position title that reflects the seniority of their role (for example, Chief Financial Officer or Senior Lending Manager).  For large lenders, a senior manager is likely to include employees at top level management (for example, the Chief Executive Officer and those who report directly to the Chief Executive Officer). 

What is due diligence?

Due diligence means taking reasonable steps to ensure that lending procedures are established and structured in a way to ensure compliance of the CCCF Act and Credit Contracts and Consumer Finance Regulations 2004. 

Due diligence includes (but is not limited to): 

• making sure staff (including employees and agents) follow procedures; 
•  conducting adequate supervision to ensure procedures are properly implemented and maintained;
•  undertaking reasonable checks on whether procedures are being used correctly and doing what they are designed to do; and
•  establishing reasonable methods to detect deficiencies, and promptly remedying any deficiencies.

Further information on due diligence duties can be found here.

Fit and Proper Certification

Under the CCCF Act, directors and senior managers must now obtain certification that they are fit and proper persons to hold their positions.  The purpose of certification is to set a high standard of personal and professional integrity for directors and senior managers. 

Directors and senior managers must be certified by the Commerce Commission and registered on the Financial Services Provider Register (“FSPR”) from 1 October 2021. From 1 June 2021, applications for certification can be made via the FSPR.

A fit and proper person is considered to be financially sound, honest, reputable, reliable and competent to perform his or her job.  There are, however, no legally prescribed considerations to determine the fitness and propriety of an individual.

Notwithstanding this, the Commerce Commission have established an assessment criterion which falls into two categories: propriety, reputation and financial integrity, and competency and capability. 

Further information on fit and proper person certification can be found here.

What happens upon breach?

Due Diligence Duty

Directors and senior managers are personally liable for any breach of their due diligence duty.  In the event of a breach, the Court may order the breaching individual to pay a pecuniary penalty of up to $200,000.00.

Fit and Proper Person Certification

If a corporate entity breaches the fit and proper person certification, it may be ordered to pay up to $600,000.00.  A breaching individual may be ordered to pay up to $200,000.00.

If you are a lender and have any questions regarding the new due diligence duty or fit and proper certification, please do not hesitate to contact Sarah Churstain or Jono Cole.

[1] Commerce Commission Chair , Anna Rawlings.