As of 1 July 2026, consumer credit providers are licensed under the Financial Markets Conduct Act 2013 (FMCA), with the Financial Markets Authority (FMA) taking over regulatory responsibility from the Commerce Commission. With that transition comes a suite of obligations that many consumer lenders will not have previously encountered. One of the most consequential is the obligation to proactively report compliance issues to the FMA under section 412 of the FMCA.
This article sets out what the obligation requires, identifies the key challenges it presents, and suggests some questions lenders should be asking now.
What does Section 412 require?
Section 412 imposes two distinct requirements on licensed consumer credit providers.
First, every licensee must ensure that effective methods are in place for monitoring compliance with market services licensee obligations. Under the new law, for consumer lenders, obligations under the Credit Contracts and Consumer Finance Act 2003 (CCCFA) are market services licensee obligations.
Second, if a licensee forms a belief that it has contravened, may have contravened, or is likely to contravene a market services licensee obligation in a material respect, it must send a report to the FMA as soon as practicable after forming that belief.
It is particularly noteworthy that the reporting duty is not limited to confirmed breaches. It is triggered by a belief that a breach may have occurred, or may be likely to occur. A lender that identifies information suggesting a material compliance issue has arisen may already be at the point where it is required to report, even if the full picture is not yet clear.
Contravention of section 412 is itself a civil liability provision that gives rise to the possibility of a pecuniary penalty of up to $600,000. Directors who have actual knowledge of material breaches of this nature which are not reported could potentially be “involved in a contravention” of the FMCA and be subject to a pecuniary penalty.
A central challenge: What is "material"?
As previously reported, the FMCA does not define "material", and there is no prescribed test for assessing materiality. Lenders must make a materiality assessment in real time, on incomplete information, under time pressure, and at a point when the investigation into a potential issue may be far from finished.
The consequences of getting that assessment wrong run cut both ways.
A lender that fails to report an issue the FMA later considers material faces the risk of a separate breach of the notification obligation itself, as well as the loss of any mitigating credit it might otherwise have earned.
At the same time, ‘over-reporting’ of every potential compliance concern is not without its own costs – and may result in scrutiny that is ultimately unwarranted, including notices from the FMA to provide information under s 25 of the Financial Markets Authority Act 2011, that can be time-consuming and costly.
Whether something is ‘material’ is plainly a fact-specific assessment, and the weight to be given to any particular factor will depend on the circumstances. Thought will be required to calibrate and balance those factors carefully. The question of what makes a compliance issue material in the consumer credit context, particularly where (for example) large numbers of customers can be affected but where individual impacts can be modest, is one that will require careful consideration and, in many cases, legal and other expert input.
Why self-reporting matters: The enforcement dimension
Self-reporting and co-operation with a regulator can have a material influence on enforcement outcomes. While the FMCA does not prescribe a formal discount for either, courts applying the penalty framework in FMCA cases have consistently treated them as mitigating factors that can warrant an adjustment to penalty ‘starting points’.
The FMA’s Enforcement Policy acknowledges that ‘openness and co-operation’ including the extent to which a compliance problem is reported is relevant to its assessment of the appropriate enforcement response.
The case law in this area is also helpful, though it also carries a note of caution. Meaningful discounts have been recognised where a licensee has self-reported, co-operated fully, and taken genuine steps to remediate – in some cases up to 30–35% of the starting penalty – however the percentage discounts attributable to early self-reporting itself can be relatively modest (e.g. 5%).
Courts have in some cases treated a licensee's prior knowledge of a breach combined with delayed reporting as an aggravating factor rather than a mitigating one.
Questions lenders should be asking
For lenders navigating this obligation for the first time, the following questions provide a useful starting point:
Monitoring: Do your current compliance monitoring, audit and assurance programmes have the capability to identify potential breaches at an early stage? Could a self-reporting decision be made within a timeframe consistent with the "as soon as practicable" standard?
Governance: When a potential compliance issue is identified, who is responsible for assessing it, and at what level of the organisation is a self-reporting decision made?
Materiality: Do you have a documented framework for assessing materiality, and is it calibrated for the types of issues that arise in consumer lending?
Operational teams: Are the people most likely to first encounter a compliance issue trained to recognise it and to escalate promptly?
Guidance from the FMA is also expected.
If you have questions about the section 412 obligation, the materiality assessment in your specific context, or how to structure your compliance framework for the new regime, please don’t hesitate to get in touch with our team. We have considerable experience in other contexts of navigating section 412.
This article was co-authored by Maddy Clarke a Law Clerk in our Banking and Finance team.
Key contacts
Speak with one of our experts.
