|
Two Years On: An Update on the Commerce Commission's Enforcement Actions under the CCCFA
The Commerce Commission took on a new role in 2005: enforcing the Credit Contracts and Consumer Finance Act 2003 (the CCCFA or Act). The Commission has taken this new role seriously and, particularly over the last 12 months, has taken numerous enforcement actions against those who have contravened the Act. The Commission has concluded at least two prosecutions against companies who have committed offences under the Act, has entered into settlements with at least four others, and has obtained fines, and refunds to customers, ranging between $50,000 and $790,000. This FYI takes a snapshot of where the Commission is headed two years into its role of enforcing the CCCFA.
The Focus of the CCCFA
The CCCCFA came fully into force on 1 April 2005, repealing the Hire Purchase Act 1981 and the Credit Contracts Act 1981, and setting out new rules governing lending
practices.
The Act primarily focuses on three types of financing transactions: consumer credit contracts (including mortgages, hire purchase agreements, and personal loans); buy back transactions of land; and leases of consumer goods. The CCCFA therefore principally applies to financiers or creditors, buy-back operators and/or promoters, and lessors.
The Commerce Commission's Role
The Commerce Commission, which acts as a consumer "watch dog" and regulatory agency, was made responsible for promoting and enforcing compliance with the CCCFA. The Commerce Commission's statutory role is to:
- Monitor trade practices in the provision of credit;
- Take prosecutions under the Act;
- Take civil proceedings for breaches of the Act; and
- Make available information for the guidance of consumers, creditors and other interested parties, to promote compliance with the Act.
Since the introduction of the CCCF A , the Commerce Commission has devoted considerable resources to its new role under the Act. As noted in the Commission's recently released 2007-2010 Statement of Intent:
"In relation to the Credit Contracts and Consumer Finance Act, litigation remains a priority as much of the Act remains untested and credit providers would like greater certainty about their obligations. It is also important at this stage to demonstrate that the Commission will prosecute those who do not comply with the law."
The Commission's Statement of Intent says that its "focus points" for enforcement of the CCCFA are:
- Taking litigation to send the strongest possible message to credit providers about the need to comply with the disclosure provisions;
- Establishing precedents with respect to the reasonableness of fees and credit-related insurance provisions;
- Working with front-line organisations and developing a pro-active surveillance capability to improve the Commission’s knowledge of breaches;
- Targeting credit providers operating at the lowest end of the market and using the full extent of the Commission’s information gathering powers when necessary to encourage compliance with the legislation; and
- Communicating with vulnerable consumers through front – line consumer organisations.
The Commission anticipates investigating between 35-40 cases under the CCCFA over the next three years, and to judge from the focus points listed, is also signalling further Court action with the goal of setting precedents during that time.
Practices Targeted by the Commerce Commission to Date
So what non-compliant practices has the Commission focused on to date? First and foremost, the Commission has targeted creditors, and in particular, car finance companies, who have failed to provide adequate disclosure to customers as required by the Act.
Under s17 CCCFA, creditors must disclose key information to all customers entering into a consumer credit contract. This includes telling customers of their right to cancel the contract, the level of interest, and applicable fees and charges. Disclosure must occur either before the contract is entered into, or within 5 working days of it being made. Failure to make appropriate or timely disclosure to customers is an offence.
The non-compliant disclosure practices exposed by the Commission include:
a. Failing to provide copies of the credit contracts to guarantors.
b. Failing to include on contracts key information as required by the Act (including how fees and charges apply, how interest was calculated, and how to pay off the loan early); and
c. Failing to provide legible contracts to customers.
Liability for Non-Disclosure
A feature of the CCCFA is the layers of liability for conduct which offends against the Act. For example, failing to adequately disclose to customers is an offence under the Act, and accordingly, a contravening party can be criminally prosecuted. This may result in a criminal conviction attracting penalties of up to $30,000 per contravention. However, this conduct also opens an offender to a claim made by either the Commission on behalf of affected customers, or brought by the customers themselves, for statutory damages. These are available regardless of whether the customer has suffered any loss or damage, and are calculated on a statutory formula, typically the lesser of $3,000 or 5% of the amount financed by the particular customer.
Claims may also be brought for refunds or damages where a person has suffered loss or damage because of the contravening conduct. A Court can even order exemplary damages to be paid, although this is not permitted where a criminal penalty has already been imposed. Refunds have been made in some of the cases discussed below.
Finally, as a consequence of failing to adequately disclose to customers is that the contract is unenforceable (s99 CCCFA), the Commission has been willing in cases of nondisclosure to also bring proceedings under the Fair Trading Act (FTA). Creditors who have attempted to enforce inadequately disclosed contracts have fallen foul of the FTA by telling customers their contracts are enforceable when they are not. As offences under the FTA attract penalties of up to $200,000 per offence, prosecuting under this Act, in addition to the CCCFA, increases the scope of penalties which can be ordered by the Courts for inadequate disclosure.
To date, penalties for non-disclosure have been in the range of $50,000 to $100,000, while statutory damages ranging from $13,700 to $46,000 have also been ordered.
In February 2007 the Commerce Commission issued a warning to a finance company for overcharging interest to customers who repaid their loans early. The Commission said the company was charging interest to customers for the whole of the month in which the loan was repaid, rather than just to the day on which repayment was made as required by s51 CCCFA. Following the warning the company refunded $49,000 to affected customers.
- Requiring Insurance Where Not "Reasonably Necessary"
In May 2007 the Commerce Commission targeted a car finance company which had required unemployed customers to take out loan payment insurance which protected against the risk of redundancy. A clause in the contract meant that even if the customer found a job after entering into the contract they would not be insured if made redundant. The customers therefore received no benefit from taking out the insurance.
Section 69 CCCFA provides that a creditor must not make any "unreasonable requirement" as to the terms on which a customer takes out insurance. A requirement will be unreasonable if "it is not reasonably necessary for the protection of the legitimate interests of the creditor". The Commission was of the view that requiring redundancy insurance was not "reasonably necessary", the Commission's Director of Fair Trading stating that "it is hard to think of anything more unnecessary than this kind of redundancy insurance for the unemployed". The Commission entered into a settlement with the company requiring refunds to 1,564 affected customers of the full amount paid for the insurance, which totalled $788,000.
In August 2007 the Commission entered into a settlement with a car finance company that failed to correctly rebate insurance to clients who repaid their loans early. Under ss51 & 52 CCCFA, on early repayment of a loan, a finance company must rebate to the customer a proportionate part of any premium paid for consumer credit insurance (eg Payment Protection Insurance or PPI). Failure to do so is an offence against the Act and may also result in an application being made to the Court for refunds.
As part of the settlement with the Commission, the finance company returned over $50,000 to 2,303 affected customers and was required to amend its practices.
- Calculation of Creditor's Loss Fees
Under s51 CCCFA a creditor is permitted to charge a customer who repays their loan early a sum "that does not exceed a reasonable estimate of the creditor's loss" arising from the early repayment. A formula for calculating the creditor's loss is specified by the Act. Alternatively, the creditor must use an "appropriate procedure" for calculating the loss.
On 26 June 2007 the Commission announced in the New Zealand Herald that it was commencing proceedings against a finance company alleging that the creditor's loss fees it charged were greater than a reasonable estimate of its loss. This prosecution, which is still pending, will be the first test of this provision, and may establish a precedent as to how creditor's loss should be calculated under the Act.
- Next up – Reasonableness of Fees?
The Commission issued a letter to the finance industry in November 2004 explaining the Commission's approach to s45 CCCFA. This section relates to third party fees or charges that are passed on by a creditor to a debtor under a consumer credit contract, and stipulates that such charges or fees must not exceed the amount paid by the creditor to the third party. The section however does not prevent a "reasonable commission" from being paid to a creditor in connection with credit-related insurance taken out by the customer (eg PPI or GAP Insurance, (GAP)).
The Commission in its letter expressed the view that a commission on such insurance would be "reasonable" if it was "20% or less of the gross premium paid by the debtor". This view was expressed in the absence of any statutory guidance or decision from the Courts on what the words "reasonable commission" mean.
Undoubtedly the Commission is in the process of investigating the finance industry to determine if creditors are receiving commissions higher than 20% of the gross premium paid for PPI or GAP insurance. Given the focus points indicated by the Commission in its Statement of Intent, it is likely going to want to bring a precedent setting case to establish the level of reasonable commissions. We are yet to see what the outcome on this issue may be.
What Does This Mean For Creditors?
These Commerce Commission enforcement actions indicate that the Commission is maintaining vigilance over a number of aspects of the CCCFA, and is actively targeting creditors it considers to have contravened the Act. It has a stated intention to continue with current levels of enforcement activity in the near future, a recent media release stating that "enforcing the Credit Contracts and Consumer Finance Act is a priority for the Commission in 2007".
The Commission has been successful so far in its prosecutions resulting in significant penalties for contravening parties. Refunds, or statutory damages awarded to customers, are also on the Commission's agenda. In addition, the Commission is maintaining a high public profile in the media and is not shy about publicly announcing the names of parties it is prosecuting.
Establishing a compliance program may reduce the likelihood of a business being the target of any enforcement actions taken by the Commission. Establishing a compliance programme will highlight the areas of a business which are falling short of compliance with the Act, and allow appropriate rectification measures to be made in good time. In addition, the existence of a compliance programme is a factor which must be taken into account by a Court when assessing the level of statutory damages a creditor may be liable to pay, and is also relevant to assessing whether a creditor can claim a defence of reasonable mistake on prosecution for non-compliance with the Act.
Should you require any further information on the CCCFA or establishing a compliance programme for your business, we are happy to help. Simpson Grierson's banking and finance specialists have teamed with our experts on Commerce Commission investigations to create a specialised team which focuses on this Act. In the first instance we suggest you direct any questions to Andrew Harkness, the Partner who heads Banking and Finance or Anne Callinan, Partner, who deals with Commerce Commission investigations.
This newsletter is produced by Simpson Grierson. It is intended to provide general information in summary form. The contents do not constitute legal advice and should not be relied on as such. Specialist legal advice should be sought in particular matters.
|
