Commerce Commission Investigations under the CCCFA

17 Nov 2009

The Credit Contracts and Consumer Finance Act 2003 (CCCFA) is regulated and enforced by the Commerce Commission.  This is a new role for the Commission and in its 2005/2006 Statement of Intent it identified the investigation of breaches of the CCCFA as a short term goal with a medium term goal being to use "… court actions to establish precedents which will be used to educate credit providers on their obligations".

In light of this, Simpson Grierson's banking and finance and competition law experts have collaborated to design this handbook to provide you with a brief overview of the purpose of the CCCFA, the role and powers of the Commerce Commission under that Act, and what you really need to know to survive a Commerce Commission investigation.

The guide presents real life "survival" scenarios such as what to do when the Commission calls you, and tips for a Commerce Commission interview and for responding to requests for documents.

Finally, this guide provides an overview of the potential worst case scenario outcomes for you and your business. You need to know the risks under the CCCFA if enforcement action is taken as a result of an investigation by the Commerce Commission. We also explain how those risks can be prevented and/or minimised.

We hope that you find this guide to be a useful introduction to the investigative powers and role of the Commerce Commission under the CCCFA. Do not hesitate to contact us if you need advice in relation to any CCCFA matter.

 

Part I: Know Your Environment - The CCCFA and the Commerce Commission

Essential to any survival plan is to be keenly aware of the environment; the rules, parameters, policies and organisations.

THE CCCFA
The CCCFA targets credit contracts, consumer leases and buy-back transactions of land and has the single purpose of protecting consumer interests. It is designed to prevent oppressive contracts from being entered into, and to prevent creditors from behaving in an oppressive way.
It also requires consumers receive specified information about consumer credit contracts and leases, so they have the opportunity to become informed at the time of entering into the contract and throughout its duration.

The CCCFA establishes rules about the way in which interest is calculated and charged, the reasonableness of fees, and the way payments on credit contracts are to be accepted by creditors. Consumers are also allowed to seek changes in their contracts on the ground of unforeseen hardship.

There are also a number of consequences outlined which may apply if you or your company breaches the CCCFA, including criminal prosecutions.

THE COMMERCE COMMISSION
Simply put, the Commerce Commission is the government agency which is authorised to promote and enforce compliance with the CCCFA.
The Commission's responsibilities extend to making available information for the guidance of consumers, creditors, lessors, and transferees of land. Such information can be accessed on the Commission's website.

However, the Commission is also responsible for taking both criminal prosecutions and civil (non-criminal) claims for money where the CCCFA is breached. It is when the Commission is acting in this capacity, as an enforcer, that your business may become the subject of an investigation.
Investigations can arise if, for example, one of your clients or competitors makes a complaint. Occasionally former employees leak information to the Commission. Sometimes the Commission initiates the investigation itself.

In any of the circumstances above, the Commission has similar powers and investigative tools to traditional law enforcement agencies such as the police.

The Commission can ask people to voluntarily answer questions and provide information to assist with an investigation. Additionally, the Commission can compel people to be formally interviewed. They may serve individuals and/or businesses with search warrants and enter a premises to seize documents.

They also have a tool that businesses should be aware of – the "section 98 Notice," which can be used to require formal interviews or the disclosure of company documents.

TOOLS OF THE COMMERCE COMMISSION: "ASKING NICELY"
Like all good investigators, Commission staff know that much of their information can be gathered if only it is requested. The Commission's most common means of getting information is to "ask nicely" for it. Nine times out of ten people will volunteer information. If they don't, the Commission has the power to compel the provision of information.

TOOLS OF THE COMMERCE COMMISSION: THE SECTION 98 NOTICE
A section 98 Notice can require the disclosure of company documents or the provision of answers to written questions. It can also be used to require attendance at a formal interview with the Commission. If you receive a section 98 Notice requesting documents, you are compelled to provide those documents outlined in the Notice. In fact, it is a criminal offence to fail to comply with a section 98 Notice in the absence of a reasonable excuse and fines of up to $10,000 for individuals or $30,000 for a business could be payable on top of a summary (criminal) conviction.

Likewise, it is a criminal offence to attempt to deceive or knowingly mislead the Commission. Section 98 Notices need to be taken seriously and legal advice sought on how best to handle them.

The section 98 Notice may be addressed to a person within the organisation who then becomes personally responsible for compliance.
Section 98 Notices typically include requests for emails and other computer generated or stored documents. You must ensure documents are not destroyed or deleted from your systems after the investigations is launched in case they become relevant.

TOOLS OF THE COMMERCE COMMISSION: SEARCH WARRANTS
The Commission can ask the District Court for a search warrant where it considers a business has been engaging in conduct that breaches the CCCFA.  The Commission can then arrive unexpectedly at your premises to seize documents. Although you can request the Commission to wait until you have contacted your legal counsel, the Commission is not obliged to wait for legal counsel to arrive before executing the search.

It is important all staff comply fully with the requests of Commission officials executing a search warrant, including providing access to any keys, computer passwords, or other items necessary to access the information they seek. It is a criminal offence to resist, obstruct or delay Commission officials when a search warrant is being executed. A person who resists, obstructs or delays the search can be liable to pay a fine of up to $10,000 while the business can be liable to pay a fine of up to $30,000.

It is also essential any information given to the officials (verbally or otherwise) during the course of the execution of the search warrant is correct and complete and all documents are submitted in their entirety. Typically, the Commission will remove computer disks and hard drives so it can review the documents held on them.  Unless there is time to copy key documents this can cause real practical problems for a business.
The Commission is not entitled to seize documents which contain legal advice as this advice is protected by legal processional privilege.

 

Part II:  Survival Scenarios - The Investigation Process

Now that you are aware of the environment, we will look at the actual investigation scenarios and recommended actions for each.

{SURVIVAL SCENARIO ONE} THE COMMISSION PHONE CALL
If the Commission calls you, first of all, be co-operative but do not let the Commission take you by surprise and elicit responses you have not fully thought through.

Only senior management should deal with the Commission over the telephone and preferably after obtaining legal advice.

If you are not the appropriate person to field the call, you should ask the investigator for their name, telephone number, and details of what their query relates to, and advise them that a senior manager will call back shortly.

Ask if the company is under investigation and, if so, what for.

The Commission staff may, and probably will, take a full note of any call so you should make sure you take detailed notes of what the investigator is asking.  Ask for the investigator's name and contact telephone number. In most circumstances, it is best to ask them to put their request in writing to which you will respond.

Do not try and answer if you're not 100 percent sure of the answer. It is an offence to mislead or to deceive the Commission.  Therefore you should not speculate and only respond on matters you know to be fact.

{SURVIVAL SCENARIO TWO} THE SECTION 98 NOTICE
If you receive a section 98 Notice, there are a number of actions we recommend to make the process and outcome as positive as possible.
When the Notice arrives, note the time they've allotted for a response. Do not sit on the response.  Act promptly to assemble the necessary information.

If the Notice requires you to provide quite a number of documents, prepare a written action plan identifying which staff (including ex-staff if relevant) have to provide documents and what categories of documents are required.  Make sure those staff understand the seriousness and potential consequences of non-compliance.  Carefully consider where all the relevant documents may be. Are documents archived in a storage facility? Ensure that the search is thorough and includes both hard copy and computer generated and stored files.

Ensure documents are not destroyed once an investigation has been notified.

Consider whether the Commission has given you a sufficient indication of the material that it requires you to provide. If the Commission's request is not sufficiently clear as to what it requires, you can go back to them for more detail.

Consider whether you are likely to meet the time limit set by the Commission.  If it is unlikely that it will be met, seek an extension of time.  The Commission may accept requests for extra time to provide documents if the request for an extension is made a reasonable time before the expiry of the deadline for compliance with the notice. These request can be made, if, for example, the volume of documents is large and it is necessary to respond in batches.

Consider asking for confidentiality orders over any commercially sensitive information. As part of complying with a section 98 Notice, you may need to turn over confidential commercial information to the Commission.  Although the Commission is careful not to use documents received for purposes other than the investigation, third parties (such as competitors) may apply under the Official Information Act for copies of the documents obtained by the Commission. To prevent this from happening, ask the Commission for a confidentiality order which protects the documents from disclosure. Confidentiality only applies for the length of the investigation and the Commission can refuse to make confidentiality orders if it considers that it needs to discuss your information with a third party.

Seek legal advice from solicitors who have experience dealing with the Commission.

{SURVIVAL SCENARIO THREE} THE COMMISSION INTERVIEW
The Commission may request a voluntary interview or, using a section 98 Notice, require a mandatory interview.

If the Commission requests an interview, fully prepare for the interview with your legal advisors. The Commission may choose to provide you with a list of questions they intend to ask in advance of the interview so that preparation is possible. If not, you may ask for one.

Have your legal advisors attend the interview with you to ensure your position is protected.

Interviews are typically conducted by one or two Commission investigators at the Commission's premises and, if it is a formal section 98 interview, a Commissioner will also be present.

Use your best judgment in a voluntary, informal interview. What you say can later be used against your business and against you personally. Remember – when the interview is voluntary you may refuse to answer questions.

If the interview is formal, however, you cannot refuse to answer questions. As you may then incriminate yourself, there is a statutory protection which applies to ensure what you say cannot later be used against you as an individual. You are entitled to have your lawyer present with you at either type of interview. The Commission digitally records interviews so transcripts can be made should they be needed.

Depending on what the Commission is investigating, the Commission may interview people outside of your organisation such as clients and other entities with which you do business.

Commission staff have almost always done their homework before an interview and ask detailed questions. They are skilled interviewers and investigators.

{SURVIVAL SCENARIO FOUR} THE SEARCH WARRANT
If the Commerce Commission come knocking, with a search warrant in hand, a senior member of management should help facilitate and handle the search.

Contact legal counsel immediately and ask them to attend at your offices as soon as possible.
Ask for the Commission officer executing the search to identify himself/herself: Ask to see the officer's official Commission credentials (ie Commission personal identification card).

Ask for the warrant to be produced and keep a copy. Check the accuracy of the warrant. The search must be carried out within 30 days of the date of issue of the warrant and the warrant can be used on one occasion only.  You should check that this is the case, and that the warrant allows a search of the premises.

Check what conduct the warrant specifies is alleged to constitute the breach.

Ask for the names of all officers attending the search.

Ask what the purpose of the search is. Attempt to draw out as much information as possible as it may help ease the process.

Do not attempt to block the process; co-operate with the officers.

Remove any legal advice from files. Documents that contain legal advice should not be provided to the Commission. Obtain input from your legal advisors on this.

Seek to copy on the premises any important documents that the Commission is planning to remove, ie documents that are relevant to the company's day-to-day operation or documents that will be relevant to the business's legal counsel to advise.

Instruct staff to assist where necessary but not to engage in any discussion with Commission officers about the subject of the search.  The Commission may not compel on-the-spot interviews with any business personnel.

Request a list of the documents removed and from where they were removed.

 

Part III:  Risks under the CCCFA

Despite taking all necessary precautions and managing the process to the best of your ability, you're not yet in the clear.  Once the Commission staff complete their investigation they usually run their conclusions past their legal team and ultimately send the report to the Commerce Commissioners themselves who make a final determination what enforcement action, if any, to take. If the Commission takes enforcement action and you or your business is found to be in breach of the CCCFA, a range of significant consequences can result.

OPPRESSIVE CONTRACTS
Oppressive contracts are defined as those that are harsh, unjustly burdensome, unconscionable, or in breach of reasonable standards of commercial practice.  Should either the Commission or a party to a contract consider that a contract is oppressive, they can apply to the Court to reopen the contract.  If the contract is reopened, the Court can change the contract and the obligations under it; change ownership of property; and direct payments of money to be made as the Court sees fit.

PROHIBITED ENFORCEMENT
If you do not disclose required information to clients, you cannot enforce the contract.

STATUTORY DAMAGES
Statutory damages can be awarded to debtors for certain breaches of the Act by creditors. For example, statutory damages can be awarded if disclosure of the terms of a contract is not made to a debtor either at the time a contract is made or within 5 working days. Actions to recover statutory damages can be brought by either the Commission or a party to the contract.

The CCCFA sets out the sum of money that may be payable.  In most cases, you will have to pay the lesser of $3,000 or 5 per cent of the total of all advances under the contract.

DAMAGES AND OTHER ORDERS
The Court can make orders where creditors have breached the CCCFA. These orders are designed to compensate a debtor if they have suffered any loss. For example, damages can be awarded to a debtor if a creditor requires a debtor to take out credit-related insurance when it is not reasonably necessary to protect the interests of the creditor.

The Commission or a party to the contract may apply to the Court for these orders, which include: orders for refunds; damages; and exemplary damages (designed as punishment rather than compensation). Unlike statutory damages, the sum to be paid by the creditor is not fixed by the CCCFA.

CRIMINAL PROCEEDINGS
It is a criminal offence to breach certain provisions of the CCCFA.  For example, it is an offence to charge a debtor an unreasonable default fee.
The Commission can prosecute creditors for breach. In most cases, a creditor will be liable to pay a fine of up to $30,000 and will face a criminal conviction.

  

Part IV:  Prevention and Minimising Risk

Just as you wouldn't go into the bush without the right tramping gear or out to sea without adequate lifesaving equipment, you shouldn't conduct business without taking steps to minimise the risks of breaching the CCCFA.

Given the penalties for breaching the CCCFA can be significant and could include adverse publicity accompanied by difficult-to-reverse reputation and brand damage, what can you do to minimise your risk of a civil action or a criminal conviction?

DOCUMENT REVIEWS
Ask your legal advisors to review your company's documentation or changes to your company's documentation to make sure that it complies with the CCCFA. Clients must be made aware of particular information before they enter into a contract with you. Make sure that this information is properly disclosed to them.

Consider using the model forms and formulas set out in the CCCFA or a formula as close to these as practicable. The CCCFA provides model disclosure statements and calculations for a creditor's loss when a debtor makes full and early repayment of their debt.  Using these models will reduce your potential risks as those persons that do use them will be treated as having complied with the CCCFA.

Get legal advice when you make changes to your documentation to ensure that those changes will not result in a breach of the CCCFA.

COMPLIANCE PROGRAMMES – PREVENTION RATHER THAN CURE
Put in place a compliance programme. That is, require your employees to follow certain procedures, or implement automated procedures that are designed to ensure compliance with the CCCFA.  Make sure that you can identify any deficiencies in the procedures and remedy them quickly. Document what you have implemented.

Such compliance programmes are looked on favourably by the Commission and the Court should any breach of the CCCFA lead to legal action.  For example, a Court when considering if it should reduce a sum of money payable for statutory damages, must take into account whether a creditor has a compliance programme.

Raising awareness and understanding the risks should reduce mistakes in the workplace, with for example, disclosure of information to clients.  A compliance seminar could be presented annually or at least by-annually to ensure that all of your employees remain aware of the obligations and risks under the CCCFA.

APPLICATION OF CO-OPERATION POLICY
If you do consider that you have breached the CCCFA, an application can be made to Commerce Commission for leniency under the Commerce Commission's Co-operation Policy.  Under the policy, the Commission has complete discretion to take a lower level of enforcement action, or no action at all against an individual or business in exchange for information and full, continuing and complete, co-operation. Lower enforcement action may include a settlement, or a submission by the Commission to the Court recommending a reduction in penalty. Any agreement with the Commission under the policy does not prevent a third party from making a claim. Applications made under the policy are kept confidential if that is possible.

 

DISCLAIMER:

This handbook is produced by Simpson  Grierson. It is intended to provide general information in a summary form about the CCCFA.  Its contents do not constitute legal advice and should not be relied upon.  Specialist legal advice should be sought on particular matters.