Credit Contracts and Financial Services Law Reform Bill Initial briefing to the Commerce Committee 24 October 2013

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Table of Contents 1. BACKGROUND AND SUMMARY ................................................................................. 4 1.1 Consumer credit......................................................................................... 4 1.2 The design of the Credit Contracts and Consumer Finance Act (CCCFA) 5 1.3 The Consumer Credit Market in New Zealand ........................................... 5 1.4 The Credit Review ..................................................................................... 6 1.5 Problems .................................................................................................... 8 2. KEY AMENDMENTS IN THE BILL .............................................................................. 10 2.1 Purpose Clause ....................................................................................... 10 2.1.1 Pre-existing Policy ....................................................................... 10 2.1.2 Problems ..................................................................................... 10 2.1.3 Evidence ..................................................................................... 11 2.1.4 Solutions in the Bill ...................................................................... 11 2.2 Responsible Lending ............................................................................... 11 2.2.1 Pre-existing Policy ....................................................................... 11 2.2.2 Problems ..................................................................................... 11 2.2.3 Evidence ..................................................................................... 12 2.2.4 International Experience .............................................................. 12 2.2.5 Solutions in the Bill ...................................................................... 12 2.2.6 Responsible Lending Code ......................................................... 13 2.2.7 Responsible Lending Enforcement.............................................. 13 2.3 Disclosure ................................................................................................ 15 2.3.1 Pre-existing Policy ....................................................................... 15 2.3.2 Problems ..................................................................................... 15 2.3.3 Evidence ..................................................................................... 16 2.3.4 Solutions in the Bill ...................................................................... 16 2.4 Unreasonable Fees.................................................................................. 17 2.4.1 Existing Policy ............................................................................. 17 2.4.2 Problems ..................................................................................... 18 2.4.3 Evidence ..................................................................................... 18 2.4.4 Solutions in the Bill ...................................................................... 19 2.5 Default Interest......................................................................................... 19 2.5.1 Pre-existing Policy ....................................................................... 19 2.5.2 Problems ..................................................................................... 20 2.5.3 Evidence ..................................................................................... 20 2.5.4 Solutions in the Bill ...................................................................... 21 2.6 Credit-related Insurance .......................................................................... 21 2.6.1 Pre-existing policy ....................................................................... 21 2.6.2 Problems ..................................................................................... 21 2.6.3 Evidence ..................................................................................... 22 2.6.4 Solutions in the Bill ...................................................................... 23 2.7 Unforeseen hardship ................................................................................ 23 2.7.1 Pre-existing Policy ....................................................................... 23 2.7.2 Problems ..................................................................................... 23 2.7.3 Evidence ..................................................................................... 24 2.7.4 Solutions in the Bill ...................................................................... 24

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Repossession .......................................................................................... 25 2.8.1 Pre-existing Policy ....................................................................... 25 2.8.2 Problems ..................................................................................... 25 2.8.3 Evidence ..................................................................................... 26 2.8.4 Solutions in the Bill ...................................................................... 26 2.9 Oppression............................................................................................... 27 2.9.1 Pre-existing Policy ....................................................................... 27 2.9.2 Problems ..................................................................................... 27 2.9.3 Evidence ..................................................................................... 27 2.9.4 Solutions in the Bill ...................................................................... 28 2.10 Financial Service Providers (Registration and Dispute Resolution) Act amendments ....................................................................................................... 28 2.10.1 Pre-existing Policy ....................................................................... 28 2.10.2 Problems ..................................................................................... 29 2.10.3 Evidence ..................................................................................... 29 2.10.4 Solutions in the Bill ...................................................................... 29 3. OTHER MATTERS THE COMMITTEE MAY WISH TO EXAMINE ....................................... 31

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1. Background and Summary 1

The Consumer Credit and Financial Services Law Reform Bill reforms the legislation that governs consumer credit contracts, from before their inception until their termination or enforcement. This Bill amends the Credit Contracts and Consumer Finance Act 2003 (CCCFA). It also repeals the Credit (Repossession) Act 1997 and incorporates its provisions in an expanded CCCFA, and provides for repossession agents to be licensed under the Private Security Personnel and Private Investigators Act 2010. The Bill also makes technical amendments to the Financial Service Providers (Registration and Dispute Resolution) Act 2008 (FSP Act).

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The Bill represents a modernisation and significant enhancement to the laws that govern consumer credit. However, there are some particular highlights that are anticipated to have a significant effect on the consumer credit market. The main features of the Bill are: 

The introduction of responsible lending obligations.

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Improvements to existing consumer protections in the CCCFA.

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Incorporating credit repossession law into the CCCFA, including the improvements recommended by the Law Commission.

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Removing the financial dispute resolution reserve scheme from the FSP Act, and making other technical improvements to that Act.

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The Bill has two parts. Part 1 contains the substantive amendments to the CCCFA (including the credit repossession provisions). Part 2 contains the amendments to the FSP Act.

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The Government released an Exposure Draft of the Bill in April 2012 and received 90 written submissions from interested parties. The Law Commission undertook a separate process of reviewing credit repossession law, releasing a discussion paper for consultation and finalising its report (also in April 2012). The proposals in Part 1 of the Bill have therefore been tested with stakeholders. There is broad support for most of the policy decisions reflected in the Bill, although some of the details remain controversial with some lenders. Some consumer advocacy groups would also like the Bill to go further in some areas.

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This briefing provides background on consumer credit and the design of the CCCFA. It explains the existing law in key areas covered in the Bill and the problems with the existing law, comments on the evidence about these problems, and describes the solutions proposed in the Bill.

1.1 Consumer credit 6

The availability of credit – both for businesses and consumers – is fundamental to the sound operation of a modern economy. Many goods and services are purchased through consumer transactions that are partly or completely financed by credit. Without credit, such purchases would not occur and consumers and businesses would be worse off. Accessible consumer credit can make a significant contribution to the welfare of consumers and the prosperity of business.

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When consumer credit markets are working well, consumers are able to make informed choices about credit products which assist in incentives for lenders to compete to provide credit products at competitive prices that reflect the risks associated with different types of borrowers.

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Notably, the market for consumer credit is characterised by information asymmetry between lenders and borrowers. The impact of this information asymmetry can often be compounded by irresponsible lending practices and borrowers‟ lack of financial literacy.

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In assessing the appropriate regulatory design for the regime for consumer credit contracts, the key trade-offs and issues are in considering: 

The costs of the market failure associated with ill-informed consumers and irresponsible lending practices.

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The benefits of regulation in addressing market failure through setting consistent standards across the market for consumer credit through responsible lending requirements that impose explicit requirements that include taking into account the circumstances of the borrower in providing credit, as well as better information disclosure requirements.

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The potential that regulation could unnecessarily restrict access to credit and push some third tier lending underground.

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The risks that increased compliance costs from regulation increasing the costs of credit to all borrowers.

1.2 The design of the Credit Contracts and Consumer Finance Act (CCCFA) 10

The CCCFA came into force in April 2005, replacing the Credit Contracts Act 1981 and the Hire Purchase Act 1971. The intention of the CCCFA was to provide better protections for New Zealand consumers. All lenders, from banks to third tier lenders, are bound by the CCCFA. The Act regulates all forms of consumer credit, including personal loans, credit sales, credit cards, long term leases, mortgages and housing buy-back schemes, and thus affects most New Zealanders. The CCCFA is focussed on promoting competition among consumer credit providers and enabling consumers to make informed decisions.

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The information disclosure requirements in the Act are intended to empower consumers and boost competition by providing consumers with real choices, accurate information and transparency.

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The CCCFA also includes some provisions that protect consumers in circumstances of unforeseen hardship, and against oppressive credit contracts and unreasonable fees. These are second-order protections under the CCCFA; the primary focus is on disclosure, with a cooling-off period for borrowers to change their mind in the 3 days after initial disclosure is made.

1.3 The Consumer Credit Market in New Zealand 13

The Credit Industry can be categorised in a number of ways. The Reserve Bank Household Financial Liabilities Report from March 2013 shows $180b housing loans, $9b bank consumer loans, and $3.9b non-bank consumer loans.

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In 2011, Colmar Brunton produced a report for the Ministry of Consumer Affairs entitled „Using a Third Tier Lender: Experiences of New Zealand Borrowers‟. This report defined the three segments in the consumer credit market as first tier lenders, second tier lenders and third tier lenders. 

First tier lenders include registered banks.

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Second tier lenders include building societies, credit unions, the Public Service Investment Society and other deposit taking financial institutions.

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Third-tier lenders are providers of personal non-mortgage credit which are not banks, credit unions, building societies, deposit taking institutions or credit card providers. Third-tier lenders include finance companies, payday lenders and money lenders.

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In 2011, the Reserve Bank identified $517m consumer loans outstanding to nonbank institutions with assets under $100m (excluding building societies and credit unions). These $517m consumer loans are likely to be from third tier lenders.

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Some third-tier lenders are quite large organisations with multiple outlets. However most are single outlet, small operations. Third-tier lenders have tended to focus their business in lower income areas. A number of lenders operate solely via the telephone, internet and/or brokers. Third-tier lenders are seeing opportunities and increasing demand for more accessible loans which is not being met by the banks and other credit providers. Third-tier lenders operate in a market where it is easier to engage in practices that potentially take advantage of vulnerable consumers, because many of the borrowers have lower levels of financial literacy, are on low incomes, and do not have access to affordable credit.

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Fringe Lenders are the portion of third-tier lenders whose practices could be considered irresponsible or unscrupulous and often cause detriment to consumers.

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Since December 2010, all financial service providers are required to be registered on the Financial Service Providers Register and financial service providers that offer consumer credit must also be members of an approved disputes resolution scheme.

1.4 The Credit Review 19

The CCCFA was passed in 2003, and came into force in 2005. A review of the CCCFA started in 2007 with the aim of determining whether the Act was delivering good outcomes for New Zealanders and whether it would continue to do so in the future.

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There have been four “financial summits” held by Ministers of Consumer Affairs to gauge the effectiveness of the CCCFA, and to assess potential solutions to the problems identified. The financial summits were held in 2007, 2009, 2011 and, most recently, on 18 October 2013.

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The first two summits focussed on the specific problems with the CCCFA, such as: 

Unforeseen Hardship o Lack of awareness of the unforeseen hardship provisions o Consumers in hardship are often focussed on other matters rather than their credit obligations and can easily fall into default o Consumers not receiving timely responses to hardship applications

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o Hardship application fees are inconsistent with the objective of hardship provisions 

Credit repossession o Broad security clauses o Consumers are unaware of what can be repossessed o Credit (Repossession) Act provides lenders greater entry rights than the Police or an Official Assignee

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Disclosure o Delayed disclosure and terms which are different to what the consumer expected o Prepayment fees higher than expected o Consumers are unaware of the implications of making minimum credit card repayments o Pawnbrokers have different disclosure requirements under the CCCFA and the Secondhand Dealers and Pawnbrokers Act which were causing confusion and unnecessary compliance costs.

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Unreasonable Fees o Determining what is an unreasonable fee o Fees being charged upfront for future services o Concern around third party fees being charged from and related party to get around the unreasonableness provisions.

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The Credit Review took a more holistic direction in 2011, and was broadened to consider the need for reforms to credit laws to achieve improved consumer protection in the same manner as other financial sector reforms. Reforms such as the Financial Advisers Act and the FSP Act are based on achieving responsible conduct and sound competence of financial service providers.

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The 2011 Financial Summit was hosted by Hon Simon Power, and the focus was strongly on responsible lending practices. The 2013 meeting had the theme of “Responsible Lender, Informed Borrowers”. The amendments to the CCCFA proposed in the Bill were welcomed across a broad range of stakeholders, but it was clear that regulatory settings can only go so far in improving market behaviour by some lenders and better protecting consumers.

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Effective enforcement has been identified by stakeholders as being crucial to the success of the reforms. One of the problems with the CCCFA has been that parts of it have been difficult for the Commerce Commission to enforce (e.g. the unreasonable fees provisions), and improvements to the ease of enforcing the CCCFA will be important.

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Broader societal issues and the need to improve the financial literacy of consumers have also been identified as being vital, and they are outside the ambit of the CCCFA.

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1.5 Problems 26

In addition to the Credit Review process, a number of social research reports identified problems with the operation and effectiveness with the CCCFA. In particular, it was found that the CCCFA had not been very effective in enabling some consumers to make informed decisions. Social research points out that poor consumer decisions and irresponsible lending practices in relation to consumer credit (which the CCCFA had not helped) contributed to spiralling debt and financial hardship, especially for vulnerable consumers.

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The underlying causes of problem debt and financial hardship stem from a number of factors that include low wages, a lack of financial literacy, increased consumerism as well as irresponsible lending practices. The Bill on its own does not propose to address all of these issues and is focussed on the latter.

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We have set out below some of the research reports that outlined some of the issues in the credit market around irresponsible lending practices. Note, most of the research is focussed on the practices in the fringe-lending market for credit. Thus, in designing the regime, it will be important that the standards set for responsible lending do not unnecessarily impose compliance costs on those who may already be responsible lenders.

Pacific Consumers' Behaviour and Experience in Credit Markets, with Particular Reference to the "Fringe Lending" Market: Research Findings (July 2007) 29 Research into Pacific Debt commissioned by the Ministry of Consumer Affairs in 2007 noted the social cost involved in the irresponsible provision of credit. The research identified cases of irresponsible lending where,

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consumers who fall behind in payments may end up paying back the principal of the loan many times over

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credit providers exploit poor decision-making, resulting in consumers being worse off than if they did not have access to credit, and

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decisions as to who to borrow from are based primarily on the need for quick cash “no questions asked”.

Respondents to the research note that lenders need to be more accountable for ensuring consumers have the ability to meet payments and understand what the contract means.

Using a Third Tier Lender: Experiences of New Zealand Borrowers (August 2011) 31

This research was designed to find out more about what lies behind borrowers‟ decisions to use third tier lenders, borrowers‟ experiences of third tier lenders and the practices of these lenders. The report identified that borrowers were attracted by messages such as “we lend to beneficiaries”, “no security required”, and “no credit check”.

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Banks were described by respondents as being inflexible and their processes and decision making take a long time. This was problematic for people who required money quickly, for example in emergency family situations. Respondents noted that applying for a loan from a third tier lender was more straightforward and faster. This ease and speed was helpful for emergency situations (such as sickness or a death in the family), to pay an urgent bill or for cash flow problems.

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Even respondents who could access a loan through their bank chose instead to approach a third tier lender because they knew that the process would be easy and quick.

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Where a third tier lender is a borrower‟s only option, there is little choice in relation to high interest rates and accepting a range of administration and other fees.

Law Commission Review of the Credit (Repossession) Act 1997 (April 2012) 35

In response to a request from the Ministry, the Law Commission conducted a review of the Credit (Repossession) Act in 2011/2012. The Law Commission recognised that even if consumers have all the relevant information, they may be unable to make good decisions because they are unable to understand the information.

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The Law Commission found consumer credit contracts containing very broad security clauses, known as drag-net clauses that allow repossession of any goods from the homes of borrowers in default and for repossession agents to return to take more household effects if the sale of goods does not clear the debt. Borrowers often signed up to harsh contractual terms due to desperation and a lack of options.

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The Law Commission recommended that the ability for a repossession agent to enter someone‟s home should be regulated to prevent this power from being abused or exercised in an unreasonable manner.

Families Commission Report: Pacific Families and Problem Debt (Nov 2012) 38

This report follows a 2010 environmental scan prepared by the Families Commission. It found that Pacific peoples are particularly vulnerable to problem debt because of cultural factors such as the expectation placed on Pacific families to contribute to cultural events, including funerals. The illusion of free money and exposure to a consumerist culture for new migrants to New Zealand also make Pacific communities vulnerable to problem debt.

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The Families Commission noted that borrowers were not aware of their responsibilities as outlined in their contracts and the potential outcomes of not keeping up with repayments. The majority of participants in the Families Commission research struggled with advice to either limit the amount of money or say no to extended family, church or community events.

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Comments were received on the tailored advertising campaigns used by finance and car companies. Advertisements featuring prominent Pacific role models and on Pacific radio stations use slogans such as “its ok if you‟ve got bad credit, no drivers licence, we‟ll help you.”

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2. Key Amendments in the Bill 41

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There are key amendments in the Bill in the following areas: 

Purpose clause

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Responsible lending (including the responsible lending code and enforcement)

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Disclosure

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Unreasonable fees

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Default interest

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Credit-related insurance

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Unforeseen hardship

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Repossession

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Oppression

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Financial Service Providers (Registration and Dispute Resolution) Act amendments

These areas are listed broadly in the order in which they appear in the Bill. For each of these areas, this briefing includes 

a summary of the pre-existing policy in the CCCFA

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a description of the problems that are being addressed in the Bill

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comments on the evidence about these problems

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a description of the solutions being proposed in the Bill.

2.1 Purpose Clause 43

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2.1.1 Pre-existing Policy The CCCFA is the main law that applies to consumer credit providers. Its current purpose clause lists protecting the interests of consumers as its first purpose, alongside a list of the provisions of the CCCFA. 2.1.2 Problems Disclosure as the primary protection in the CCCFA seems to work reasonably well for financially literate borrowers who are in circumstances, and have the capacity, to act in their own best interests. The design of the second-order protections in the CCCFA (e.g. unforeseen hardship, oppression and unreasonable fees), have been of limited use (see discussion further in Parts 2.4, 2.5, 2.7 and 2.9). However, disclosure does not provide protection for consumers who lack financial literacy, who are in circumstances where they need credit but have little choice as to where they borrow it from, and who are subject to irresponsible lending practices. Research noted that some creditors have business models which deliberately target vulnerable borrowers and impose severe costs if borrowers do not meet their repayment obligations.

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2.1.3 Evidence There is widespread anecdotal evidence that the disclosure protections in the CCCFA are not sufficient to protect consumers who are vulnerable to predatory lending practices. This reflects the complexity of credit products, problems with financial literacy and financial exclusion among borrowers with poor credit histories, and a lack of real competition among smaller third tier lenders. Whilst there have been examples where the Commerce Commission has reached settlements or issued warnings to first and second tier credit providers under the CCCFA, overall, there is less evidence that reliance on disclosure is causing detriment to consumers who are customers of larger first and second-tier credit providers. 2.1.4 Solutions in the Bill The Bill provides that the primary purpose of the CCCFA will be to protect the interests of consumers in connection with credit contracts, consumer leases and buyback transactions of land (section 3). The primacy of this purpose is new, and reflects the other changes in the Bill (i.e. responsible lending, and improvements to disclosure and other consumer protections). The purpose section also refers to the confident and informed participation of consumers in markets for credit, and facilitating their fair, efficient and transparent operation. This is consistent with enhancing the existing protections in the CCCFA (including disclosure), as well as adding new protections in relation to responsible lending and repossession.

2.2 Responsible Lending 50

2.2.1 Pre-existing Policy The CCCFA employs disclosure obligations as its primary mechanism to ensure competitive markets for credit and assist in consumer protection. The CCCFA also includes some other consumer protections (e.g. unforeseen hardship, unreasonable fees, oppression).

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There is no specific statutory obligation for credit providers to take into account the needs of consumers seeking to use their products or the ability of the consumer to repay any loan.

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Both Australia and the UK have responsible lending legislation. In both countries these obligations are tied to a licensing regime for credit providers. The Financial Service Providers (Registration and Dispute Resolution) Act 2008 applies in New Zealand, and it is being amended by the Bill, but it is not a licensing regime.

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2.2.2 Problems There is no specific obligation in any laws that credit providers must take into account the needs of consumers seeking to use their products or the ability of the consumer to repay any loan. The general presumption is that credit providers will lend responsibly because they have an incentive to ensure borrowers are able to repay their loans. This presumption is not always correct. Some unscrupulous lenders appear to have established their business model on borrowers not being able to repay the loan and therefore paying high fees and default rates.

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2.2.3 Evidence There is clear evidence from the various elements of the Credit Reviews since 2007 and the other research that has been conducted that some borrowers get into spiralling debt traps and that vulnerable borrowers are harmed by very expensive credit. 2.2.4 International Experience The UK has required credit providers to be licensed and to meet responsible lending requirements since 2006. Australia‟s national licensing regulation of credit providers came into effect In July 2011. The Australian responsible lending requirements were put in place as a principles-based approach to facilitate good lending behaviour. The objective of the responsible lending obligations in Australia is to ensure that the credit contract or lease is „not unsuitable‟ for the consumer.

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2.2.5 Solutions in the Bill The Bill introduces new „Responsible Lending‟ provisions in the CCCFA, requiring lenders to exercise the care diligence and skill of a responsible lender, and requiring lenders to comply with specific lender responsibilities.

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The duty to exercise the care, diligence and skill of a responsible lender will apply, o o o

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in any advertisement for consumer credit before a creditor enters into a credit contract, and in all subsequent dealings with the borrower.

The specific lender responsibilities lenders will be required to comply with are set out in section 9B(3) and they relate to (in summary), o

initial inquiries for the lender to be satisfied that the agreement will meet the borrower‟s requirements and objectives, and payments can be made without the borrower suffering substantial hardship

o

assisting borrowers to reach informed decisions entering into agreements and in all subsequent dealings with the lender (including by ensuring advertising and other information provided to borrowers is not misleading, deceptive or confusing, and agreements are clear, concise and intelligible)

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assisting guarantors to reach informed decisions

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treating borrowers reasonably and with respect (including in relation to any repossession action)

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ensuring the terms of the agreement, the circumstances in which it is entered into, and the exercise of lenders‟ rights, are not oppressive, and

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complying with all legal obligations.

The submissions on the Exposure Draft of the Bill indicate that some aspects of the drafting of the lender responsibilities will be controversial with some lenders (e.g. the reference to substantial hardship, and the requirements that the terms of agreements be expressed in a clear, concise and intelligible manner – which is the Australian and UK wording).

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2.2.6 Responsible Lending Code The purpose of the responsible lending code will be to elaborate on the lender responsibility principles in section 9B(2), and to provide guidance on how the principles may be implemented. The responsible lending code will need to be structured around the responsible lender principles and the more specific lender responsibilities set out in section 9B(3).

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The responsible lending code will not be binding, but the Bill provides that compliance with the code will be treated as compliance with the responsible lender principles. This safe harbour approach is consistent with the approach of the CCCFA in other areas (initial disclosure, prepayment fees).

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The responsible lending code is intended to apply to consumer credit contracts, buyback transactions, guarantees of consumer credit contracts, credit contracts secured over consumer goods, and credit-related insurance contracts. Insurers under creditrelated insurance contracts will be treated as lenders, and the responsible lending obligations will apply to them.1

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The Minister of Consumer Affairs will be responsible for developing, consulting on and Gazetting the responsible lending code. The responsible lending code will set out the processes, practices and procedures that lenders will be expected to follow to meet the lender responsibility principles. Those processes, practices and procedures will reflect best industry practice for different categories of lenders and borrowers across consumer credit markets.

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The intention is that the lenders which are already following best industry processes, practices and procedures (such as banks) will already be complying with the responsible lending code, and their compliance costs should be minimal. The compliance costs for lenders which are not following industry best practice are more likely to be material, but these will be the costs necessary to improve market behaviour.

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There is also likely to be some comment on the design of a Code. The CCCFA is a code which applies to all consumer credit contracts, and the Bill provides that responsible lending will also apply to all lenders. The intention is to provide certainty and consistency for all lenders and consumers in relation to the mandatory standards to be met across the industry.

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We note the New Zealand Bankers‟ Association has expressed an interest in the law allowing for the ability for a separate responsible lending code for banks that would be approved by the Minister. 2.2.7 Responsible Lending Enforcement Pre-existing Policy

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The responsible lending amendments will only be effective if they are enforceable. There is a range of existing remedies in the CCCFA.

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The responsible lending principles and code are not intended to apply to “consumer leases”. Consumer leases are a defined category of transactions under section 60 of the CCCFA, and which do not include a “credit” element. Under a consumer lease (as defined) the consumer pays less than the cash price of the goods, and does not “purchase” the goods through the lease agreement. Leases where the consumer does pay the cash price of the goods are separately treated as consumer credit contracts under section 16 of the CCCFA, and responsible lending principles and code will apply to them. MBIE-MAKO-5343289

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The civil remedies in the CCCFA are available to “any person” (which includes borrowers and the Commerce Commission if it acts on their behalf). The offences in the CCCFA are enforceable by the Commerce Commission alone.

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The civil remedies include orders for refunds, payments, damages, exemplary damages and consequential losses. There are also more tailored civil remedies in the CCCFA. These include a prohibition on enforcement and statutory damages for disclosure breaches, and powers for the court to grant injunctions and to make an order prohibiting a person from being a creditor (or a director or employee of a creditor). The power of the court to “re-open” oppressive credit contracts (and effectively re-set their terms) is a narrowly targeted civil remedy under the CCCFA.

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Most breaches of the CCCFA are also offences, and the offences are punishable on conviction by a fine of up to $30,000. Responsible lending enforcement in the Bill

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The Bill provides that the courts can make the standard CCCFA civil orders for refunds, payments, damages, exemplary damages and consequential losses if a person has suffered loss or damage from a breach of the responsible lending principles. These orders may be made on the application of the Commerce Commission or a borrower.

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The Bill also amends the CCCFA by adding reference to the responsible lending principles to the provision that says creditors which have failed (more than once) to comply with the CCCFA are liable to be prohibited from being in the business of providing credit. This is a systemic-type remedy, which is more likely to be used by the Commerce Commission as the regulator of the credit market generally, rather than individual borrowers.

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Another remedy in the Bill is to add compliance with the responsible lending principles as an additional criterion for considering whether a credit contract is oppressive. An oppression claim is primarily a remedy available to individual borrowers, although the Commerce Commission can also take oppression claims. The Commerce Commission has not taken any claims so far, but they may be more willing to do so if the test is more achievable.

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The Bill does not extend the injunction powers in the CCCFA to apply to breaches of the responsible lending principles. Injunctions apply to future conduct which will be a breach of the CCCFA (including the new credit repossession provisions). The responsible lending principles will only be enforceable ex post (following an alleged breach), so it does not seem necessary to include them within the scope of the courts‟ injunctive powers.

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The Bill also does not make it an offence under the CCCFA for creditors to breach the responsible lending principles. This is deliberate. The general obligations under the CCCFA which are enforceable through civil orders are also offences under section 103. However the principles-basis of the responsible lending principles makes them inappropriate as potential offences.

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The Bill also requires creditors to comply with the credit responsibility principles when they and their repossession agents carry out credit repossessions. There are offences among the new credit repossession provisions, and these include carrying out repossessions in breach of the relevant lender responsibility principles.

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2.3 Disclosure 79

2.3.1 Pre-existing Policy The CCCFA primarily established a disclosure regime. It remains important for the disclosure rules to be as effective as possible.

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There are 4 types of consumer credit disclosure under the CCCFA (initial, continuing, variation and request disclosure).2 In the case of initial disclosure, the terms to be disclosed are prescribed (the amount of credit, annual interest rate, amounts of credit fees and charges, payments required, security interests, debtor rights).

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There is a 3 working day cooling off period following initial disclosure for the borrower to cancel the consumer credit contract, although any borrowing needs to be repaid (or refinanced) if the contract is cancelled during the cooling off period.

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Continuing disclosure effectively requires a 6 monthly statement (or 45 days for revolving credit, like an overdraft facility or credit card).

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Disclosure of credit-related insurance, repayment waivers and extended warranties is required within 15 working days of the policies being arranged.

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Creditors are prohibited from enforcing consumer credit contracts if disclosure has not been made. There is a statutory damages system for creditors which breach their disclosure obligations. Generally statutory damages are limited to 5% of principal, or $3,000.

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2.3.2 Problems Part of the problem with the current information disclosure regime is while there are information disclosure requirements, the way in which the information is disclosed varies across creditors. There are no mandated disclosure forms provided for in the CCCFA. This hinders the ability of consumers to make comparisons between products.

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There are also timing problems. The CCCFA currently says initial disclosure can occur up to 5 working days after a credit contract is entered into. This assumes borrowers will be protected by their cancellation right during the 3 working day cooling off period after initial disclosure, rather than being protected by disclosure before they enter into the contract. Three working days is a very short cooling off period (the UK has 14 days).

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In addition, the information available to the market generally on the cost of credit is limited because disclosure information is transaction-specific, and essentially private. Banks tend to advertise their interest rates, but other lenders are more reticent. Headline interest rates can be misleading when the cost of credit also includes fees, which can be a significant additional cost.

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Credit-related insurance and similar products can be a significant additional cost, and disclosure of the terms of these policies is not required until 15 working days after the contract is entered into.

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There are also rules in the CCCFA for the disclosure of guarantees and credit-related insurance policies.

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Loans can be transferred from one creditor to another without borrowers knowing they have to deal with a new creditor. This can lead to confusion for borrowers, and make it more difficult for them to enforce their rights through financial dispute resolution services. 2.3.3 Evidence It is clear that many borrowers do not understand the disclosure information provided to them. This is partly a financial literacy issue, but it is also an issue of how the information is presented.

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Dispute resolution services have asked for reference to borrowers‟ rights to complain to them (and to the strengthened unforeseen hardship rights) to be added to initial disclosure.

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Budget advisers have complained that they cannot tell what the current terms of credit contracts are because of the variation disclosure exceptions. Budget advisers have also cited examples where it is difficult to know who to deal with because the debt has been transferred to another creditor.

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We are not aware of any complaints about insurance contracts being disclosed up to 15 working days after they are arranged.

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2.3.4 Solutions in the Bill The Bill: o

Requires initial disclosure (and disclosure of the terms of credit-related insurance contracts) to be made before contracts are entered into.

o

Requires standing disclosure of the creditor‟s costs of borrowing and standard terms to be publicly available on-line and at the lender‟s premises. “Standing disclosure” is intended to inform the market, rather than being targeted to individuals and individual loan agreements. There are compliance issues around how costs of borrowing and standard terms will be required to be presented.

o

Adds reference to dispute resolution and unforeseen hardship to the key information for initial disclosure.

o

Extends the initial disclosure cooling off period from 3 to 5 working days to provide more time for consumers, as well as consistency with cooling off periods in other consumer laws.

o

Adds a regulation-making power so mandatory disclosure forms can be prescribed in future.

o

Removes some of the exceptions for variation and continuing disclosure so all current terms of consumer credit contracts are disclosed.

o

Provides that variations (like increased credit card or current account limits) can be disclosed with the next continuing disclosure statement.

o

Provides for transfer disclosure. We are aware that transfers of credit contracts for the purposes of securitisations where the borrower continues to deal with the initial creditor will need to be exempted from the new transfer disclosure requirement.

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2.4 Unreasonable Fees 95

2.4.1 Existing Policy The CCCFA currently prohibits charging “unreasonable” credit fees on consumer credit contracts. The origin of this policy relates to the Credit Contracts Act 1881, which required an “annual finance rate” to be disclosed. The annual finance rate included both fees and interest, but proved to be unclear and of limited help for consumers in understanding the true cost of credit. Some fees were excluded from the annual finance rate, while the status of others was unclear. Some lenders would make efforts to exclude fees from the annual finance rate where possible, resulting in annual finance rates generally understating the cost of credit.

96

The CCCFA repealed the Credit Contracts Act and the annual finance rate in 2003. The annual finance rate was replaced with separate disclosure of annual interest rates and the dollar value of credit fees that were known, supported by the prohibition of unreasonable credit fees.

97

The justification for the policy of regulating unreasonable credit fees was that these type of fees tend to be non-transparent and consumers tend to focus on headline interest rates when making decisions on credit products. It was also a recognition that it is relatively difficult for consumers to make comparisons between bundled interest rates and fees for competing credit products, and consumers are easily confused about the actual costs of credit. The unreasonable credit fees provisions in the CCCFA were intended to minimise this risk by steering the cost of credit towards interest.

98

There are four types of credit fees that the unreasonable credit fees provisions apply to,

99

o

Establishment fees

o

Prepayment fees

o

Default fees

o

Other credit fees (a residual category covering any other type of credit fee charged)

There are different tests in the CCCFA for whether the different types of credit fees are unreasonable. The test for unreasonable establishment fees refers to the creditor‟s reasonable costs in connection with the application for credit. The tests for part and full prepayment fees refer to the creditor‟s loss. The test for default fees and other credit fees is combined and refers to reasonable compensation for costs and losses, and reasonable standards of commercial practice.

100 The common feature of the various tests is that they are designed to restrict fees to

the recovery of costs or losses (as opposed to including elements of profit). The policy intention is that lenders‟ costs of capital and profits are built into the interest rate.

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2.4.2 Problems Enforcement Difficulties 101 The Commerce Commission reports that the wording of the existing fees provisions makes these provisions difficult to enforce. In particular, the combination of default fees and other credit fees in one section (section 44), with different tests that do not match each type of fee, makes it difficult to identify an unreasonable default fee or other credit fee. The inclusion of “reasonable standards of commercial practice” in section 44 exacerbates the enforcement problem for these fees. 102 Default fees are often a source of problems for consumers, and are quite different

from other credit fees, as these fees are often the ones that consumers expect not to incur, and in addition may be difficult to see upfront. 103 The Commission has also indicated that the “reasonable standards of commercial

practice” test is difficult to apply. Some lenders‟ responses to the current drafting has often been to set fees without reference to the costs connected with the activities related to fees or by reference to other lenders, rather than to undertake an analysis of actual costs or losses in particular circumstances. 104 In addition to the above, there remain questions about what costs can be included

and how they are calculated. The distinction between fixed costs and variable costs, and the inclusion (or not) of an estimated portion of business overheads are particularly difficult issues. Limitation Period Preventing Access to Justice 105 The limitation period for proceedings in respect of unreasonable fees is time barred to one year. This is an unusually short limitation period relative to the limitation period applying to other provisions in the Act (3 years) and puts impractical pressure on the Commerce Commission to investigate complaints it receives very quickly. It is unclear why the prohibition on unreasonable credit fees warrants an unusually short limitation period. 106 In addition, it is not clear whether the “clock starts” when the contract is signed (and

therefore the unreasonable fee provision is potentially breached) or when the fee itself is actually charged. The former seems to be the prevailing interpretation. This means consumers are left unable to challenge a fee, even though it might never have actually been applied to them until long after the expiry of the limitation period (for example, fees connected with a default will only become relevant when a default actually occurs). 2.4.3 Evidence 107 The Commerce Commission has indicated that it finds the current provisions in the CCCFA very difficult to enforce. It particularly has problems with the uncertainty of the wording of the tests (especially the default fees and other credit fees test), and the one year limitation period. Since enforcement began in 2005, the Commission has undertaken 136 investigations into unreasonable fees. Most of these investigations resulted in warnings. 108 The Commission advises that the extent of the forensic accounting exercise it must

undertake investigating fees issues and the one year limitation period means that opportunities to pursue investigations have been lost.

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109 A particular example of the fees provisions in action is the recent Commerce

Commission v Sportzone Motorcycles and Motor Trade Finance case in the High Court.3 The High Court agreed that certain establishment fees, account maintenance fees and default fees were unreasonable because there was not a sufficient connection between the actual transactions and the costs being recovered through the fees. The creditor was recovering general costs through its fees, and the High Court held that indirect and fixed costs should be recovered through interest rather than fees under the CCCFA. 110 This case illustrates the difficulty faced by the Commission in enforcing the

unreasonable credit fee provisions. The investigation into Motor Trade Finance began in 2006. The Commission decided a test case was necessary because of the uncertain drafting of the CCCFA. The High Court decision has taken six years to obtain, and Motor Trade Finance has announced it is appealing the decision. The Commission estimates its litigation costs for this case at $1.6m. Motor Trade Finance‟s costs to date are estimated at no less than $1m. 111 The proposed changes in the Exposure Draft of the Bill were generally supported by

consumer/community organisations (e.g. community law centres, budgeting services, Child Poverty Action Group) though some submitters suggested greater clarity was needed in relation to the types of costs that could legitimately be built into different fees. The Bill takes these submissions into account. 112 Banks and other creditors oppose the changes to the unreasonable fees provisions,

and the Commerce Commission‟s interpretation of the existing provisions in the CCCFA. 113 One of the concerns raised is that changes in the Bill could unnecessarily impede

product innovation, where credit providers may for example, what to offer a credit card with a low interest rate but high fees. 2.4.4 Solutions in the Bill 114 The Bill, o

Splits the default fees and other credit fees provisions.

o

Removes the one year limitation clause from the unreasonable fees provisions.

o

Removes “reasonable standards of commercial practice” considerations for unreasonable default fees and other credit fees.

o

Adjusts the wording of the unreasonable fees provisions to be clearer, particularly requiring credit fees to relate directly to the costs or losses of the creditor, and following some of the wording used in Australia (including in relation to prepayment fees).

from

the

2.5 Default Interest 2.5.1 Pre-existing Policy 115 There is a general proposition in the CCCFA that lenders cannot increase the interest rate payable on a loan if there is a breach of contract (section 40(1)).

3

[2013] NZHC 2531 (27 September 2013)

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116 There is an exception for payment defaults (section 40(2)). Penalty interest rates can

be (and are) charged if there is a default in payment, for so long as the default continues. 117 Default fees are covered under the unreasonable fees provisions (which generally

limit the amount of default fees to the loss incurred by the lender as a result of the default, and subject to reasonable standards of commercial practice), but default interest is a separate matter. 118 There is a case law principle that lenders (and other parties to contracts) cannot

charge penalties on defaults beyond the amount of their loss. This case law principle is preserved in relation to default interest by section 40(3). 2.5.2 Problems 119 The anecdotal cases where borrowers end up owing debts that are much larger than the initial amount of the loan often involve compounding default interest charged at rates much higher than the initial annual interest rate. 120 Interest at the default rate is often calculated on the full amount of the loan, rather

than the amount of the payment default. This is permitted under section 40(2). The effect of default interest being charged on the whole amount of the loan is to ratchetup the effect of the debt spiral faced by borrowers in default. 2.5.3 Evidence 121 The Australian National Credit Code provides that default interest may only be charged in respect of the amount in default (section 30). This means default interest cannot be charged in Australia on the full amount of the loan because part of the loan is overdue. 122 The proposal in the Exposure Draft Bill to adopt the Australian approach in New

Zealand was controversial. Some lenders argued that default interest reflects risk, and it is commercially rational to charge default interest on the whole loan because the risk on the whole loan increases if there is a default. It was also argued by some lenders that default interest is an appropriate disincentive to discourage borrowers from defaulting, although this argument goes to the heart of the “Fair Play on Fees” case, where the argument is that such default rates (and default fees) are unenforceable penalties. 123 Lenders also said non-default interest rates would increase if default interest is

restricted because lenders would have to recover default costs from non-defaulting borrowers. If this is the case, it would indicate a lack of competition in the credit market. 124 The counter-argument is that compounding default interest on the whole amount of

the loan is a significant element of the debt spirals which are seen in the community, and which the Bill is attempting to help minimise. 125 A number of lenders of short-term low-value loans do not charge default interest at

all, and instead rely on default fees (which are subject to the unreasonable fees limitation in the CCCFA).

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2.5.4 Solutions in the Bill 126 The Bill adopts the Australian approach and amends section 40(2) of the CCCFA to say default interest may only be charged in respect of the amount of a payment default.

2.6 Credit-related Insurance 2.6.1 Pre-existing policy 127 When the creditor requires the borrower to obtain insurance from a particular insurer the insurance premiums payable are included in “credit fees”. This means they are covered by the initial disclosure requirement as part of the key information in schedule 1 of the CCCFA. 128 The constraints on unreasonable fees under the CCCFA do not generally apply to

insurance premiums. Credit fees payable to third parties are not covered by the unreasonable fees provisions, and creditors are permitted to be paid a reasonable commission on credit-related insurance (section 45). 129 Consumers have a right to a rebate of their “consumer credit insurance” premiums on

prepayment of a consumer credit contract. Consumer credit insurance relates to the borrower‟s capacity to repay the loan, rather than insurance over physical assets that are secured property. The prepayment rebate applies if the creditor “arranges” the consumer credit insurance. “Arranging” includes being provided by the creditor or a related company, or the creditor or related company acting as the agent for the insurer or receiving a commission, as well as the creditor requiring the borrower to obtain insurance from a particular insurer. 130 There are also rules relating to credit-related insurance, extended warranties and

repayment waivers under sections 69 and 70. Credit-related insurance includes consumer credit insurance and insurance over secured property. Section 69 says a creditor may not impose any unreasonable requirement in relation to these products, and section 70 includes disclosure rules requiring copies of the terms and conditions to be provided within 15 working days of the insurance being arranged. 131 The guidance in the CCCFA as to what an unreasonable requirement would be refers

to protecting the legitimate interests of the creditor and the risks undertaken by the parties. The same “arranges” test applies to the disclosure requirement as applies to the prepayment rebate in section 53 (i.e. the insurance is provided by the creditor or a related company, the creditor or related company is acting as an agent or receiving a commission, or the insurance is required to be obtained from a particular insurer). 2.6.2 Problems 132 Credit-related insurance can add significantly to the cost of borrowing, and creditors and/or insurers sometimes sell insurance policies that borrowers do not need and do not understand. The premiums are usually added to the amount of the loan, so interest is charged on the premium. The reasonable fee constraint does not apply to third party insurance premiums. 133 Creditors have a conflict of interest when they are paid commission for selling credit-

related insurance, or they (or a related company) provide the credit-related insurance themselves. The commission is required to be “reasonable”, but there is no guidance on what a reasonable commission is. MBIE-MAKO-5343289

134 Credit-related insurance premiums are required to be disclosed as a credit fee if the

creditor requires the borrower to obtain the insurance from a particular insurer. If the insurance is optional the premium is not included in the disclosed credit fees. An “option” may be notional in practice. Borrowers often do not understand the disclosure documents they receive, and disclosure documents may be received after the contract is entered into. 135 The disclosure of the actual terms of the credit-related insurance contract may take

place up to 15 working days after the insurance is arranged (section 70). 2.6.3 Evidence 136 ASIC published a report Consumer credit insurance: A review of sales practices by authorised deposit-taking institutions in October 2011 (ASIC Report 256). ASIC examined 15 institutions selling consumer credit insurance. The type of insurance being reviewed is that technically defined as consumer credit insurance in the CCCFA (i.e. insuring the borrower for death, disability, injury, unemployment). 137 ASIC examined the categories of credit for which insurance was sold ((53% credit

cards, 36% personal loans, 11% home loans). The 15 institutions surveyed sold 660,000 insurance policies in the 2009 calendar year. ASIC looked at data like the percentage of loans where credit insurance was sold, how many policies are cancelled, rates of claims and pay-outs compared to premium income, and sales processes. 138 ASIC identified the following problems with consumer credit insurance (CCI), and the

sales practices of creditors: o

Consumers may not be aware that they are purchasing CCI, or that CCI is optional.

o

Consumers may not have consented to the purchase of CCI.

o

Consumers may not be aware that they may be ineligible to claim on all components of the CCI they have purchased (e.g. unemployed person paying for redundancy insurance, forestry worker buying life insurance protection for a loan when forestry workers were excluded from coverage).

o

Use of pressure and harassment by sales staff.

o

Consumers may not understand how much they pay for CCI (e.g. creditors do not disclose that interest is charged on the amount of the premium that is capitalised and added to the loan. Premiums may be calculated on loan limits, rather than the actual amount of the loan, and this is not explained to consumers).

o

Consumers may not understand how long the CCI they have purchased lasts for (e.g. CCI policies may have a 3 or 5 year term, and the loan might have a 25 year term. Conversely the CCI may extend beyond the life of the credit product it was sold in conjunction with).

139 ASIC made 10 recommendations to improve practice in these areas, and many of

them will be relevant to what could be included in the Responsible Lending Code (see pages 10 – 11 of the report).

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2.6.4 Solutions in the Bill 140 The Bill applies responsible lending to the providers of credit-related insurance. The relevant lender responsibilities include making reasonable inquiries to be satisfied that the insurance provided will meet the requirements and objectives of the borrower, and assisting the borrower to be aware of the full implications of entering into a credit-related insurance policy. 141 The responsible lending code can be expected to deal with the issues identified in

the ASIC report. 142 Improving the timeliness of initial disclosure and the disclosure of the terms of

consumer credit insurance policies will improve consumer protection. Initial disclosure of insurance premiums that are credit fees will be required before the consumer credit contract is entered into. A copy of the terms of a consumer credit insurance policy will also be required to be provided to the borrower before the policy is arranged. 143 The standing disclosure of standard terms and costs of borrowing provided in the Bill

applies to credit related insurance policies (and extended warranties and repayment waivers). 144 The provision regarding commissions on credit-related insurance is amended to

provide that commission may not be charged if the creditor requires the borrower to obtain insurance from a particular insurer. 145 A rebate on any extended warranty is required on the prepayment of a consumer

credit contract.

2.7 Unforeseen hardship 2.7.1 Pre-existing Policy 146 The CCCFA includes the right for borrowers to apply to the creditor to change their loan by extending the term, or reducing or postponing payments due, if the borrower faces circumstances of unforeseen hardship. 147 Unforeseen hardship includes illness, injury, loss of employment, end of a

relationship, or other reasonable cause that makes it unreasonable for the borrower to make the payments due without the terms being changed. 148 The borrower cannot apply for a change if the loan is already in default. 149 If the borrower does not agree with a lender‟s decision on a hardship application, the

borrower can apply to the Court (including the Disputes Tribunal) to make the changes requested. 2.7.2 Problems 150 The exclusion of borrowers already in default undermines the usefulness of the potential relief. Borrowers are likely to already be in default before they seek help – either directly from the lender, or through an intermediary such as a budget adviser. 151 There are no processes or criteria in the CCCFA that lenders are required to follow in

deciding whether to accept a hardship application for a change from a borrower. This means the timeframes for responding to applications are unregulated, leaving open an opportunity for irresponsible lender behaviour. MBIE-MAKO-5343289

152 The changes that can be made only relate to the timing of the payments due; the

amount of the debt, including interest and fees, is unaffected by a hardship change. 2.7.3 Evidence 153 The Exposure Draft of the Bill included changes to the unforeseen hardship provisions. Budget advisers told us that the exclusion of borrowers already in default renders the borrower‟s right to apply for a change ineffective. 154 Some responsible lenders will process hardship applications where the loan is

already in default, but this is discretionary. 155 It is practically impossible to challenge a lender‟s decision on a hardship application,

especially if they have considered the application on a discretionary basis. 156 Some lenders have submitted that they never receive hardship applications. 157 There is no exclusion of loans in default in the equivalent Australian legislation. The

reforms on hardship applications in Australia were very controversial with lenders when they were passed in 2009, and the provisions in the Bill are similar to those passed in Australia. 158 It was clear from submissions on the Exposure Draft that a one-size-fits-all time

period for hardship applications would not be not suitable for applications for hardship changes for all loans in default. The Bill also needs to be clear about the lender‟s right to continue to charge interests and fees while an application is considered. 159 Lenders are concerned about fraudulent applications, or repeat applications from

borrowers dishonestly gaming the system. 2.7.4 Solutions in the Bill 160 Hardship applications must be in writing, with supporting reasons. 161 The timing for eligibility to make applications in respect of loans which are in default

is the sooner of, o

2 weeks after a repossession warning notice or default notice has been served

o

4 or more payments have been missed

o

2 months

162 Borrowers cannot make repeat applications on the same grounds in less than 4

months. 163 The Bill includes time limits for lenders to acknowledge receipt of applications,

require further information, and make decisions to accept or decline applications. 164 Decisions on hardship applications must be made in light of the lender responsibility

principles, and lenders must provide written reasons for declining any application. 165 Lenders cannot charge any fee of default interest charge in relation to hardship

applications that would not otherwise have been payable, and cannot commence or continue any enforcement action while an application is being considered.

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166 The existence of the hardship remedy is to be added to initial disclosure, and to

repossession warning notices and notices of sale in relation to the repossession of consumer goods.

2.8 Repossession 2.8.1 Pre-existing Policy 167 Credit repossession is currently regulated under the Credit (Repossession) Act 1997 (CRA). Regulating credit repossession is justified because it involves creditors and their agents entered somebody‟s house to take their property. Borrowers also lose value in goods that are repossessed and sold, invariably at a discounted price. 168 A balance is required between protecting the interests of consumers, and ensuring

creditors have sufficient incentives and protections to provide credit to consumers who could not borrow on an unsecured basis. 169 The consumer protections in the CRA primarily involve disclosure, which is consistent

with the CCCFA. In addition to the disclosure requirements in the CCCFA (initial, variation, continuing and request disclosure), creditors are required to serve prepossession and post-possession notices, and statements of account when they repossess and sell consumer goods. 170 Secured creditors‟ rights to enter premises and repossess consumer goods are

contractual rights. The CRA does not authorise secured creditors to repossess goods. The CRA does however require a security agreement to be in default (or the consumer goods to be at risk) before consumer goods can be repossessed, and any right to enter premises to repossess consumer goods must be exercised in a manner that is reasonable. The CRA also limits the times when premises may be entered for repossession, and it regulates the process for disposing of consumer goods that have been repossessed. 171 The CRA provides self-help civil remedies for consumers; there is no regulator

responsible for the CRA, there are no offences for people carrying out repossessions, and repossession agents are not required to be registered. 2.8.2 Problems 172 The Law Commission carried out a review of the CRA as part of the general consumer credit review by Consumer Affairs. The Law Commission found that the self-enforcement of the CRA by consumers does not work. People whose goods are repossessed are not in a good position to assert their legal rights, and illegal repossessions often happen with impunity. The Law Commission also found the legal rights under the CRA are deficient because they are expressed vaguely or loosely. 173 The Law Commission concluded that the balance between consumer and creditor

rights in the CRA is tipped too far on the side of creditors. 174 Repossession agents are often intimidating. The processes in the CRA can increase

intimidation by repossession agents (e.g. having continuing repossession notices hanging over the heads of borrowers). The key requirement for repossession agents to be “reasonable” when they enter premises is not a sufficiently clear test for repossession agents to be held to account.

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175 The rules setting out which consumer goods may be repossessed allow “all present

and after acquired property” clauses to be enforced, which leaves borrowers particularly vulnerable. It is anecdotally common for repossession agents to repossess property owned by flatmates or other family members. Creditors also use “blackmail securities” where the sentimental or social value of security goods are out of proportion to their economic value. 2.8.3 Evidence 176 The Law Commission undertook a thorough consultation process, including receiving 39 written submissions and holding public meetings on its draft report. It also considered legal models from other jurisdictions. 177 There is strong anecdotal evidence of credit repossession abuses in the community.

Poor people who stand to lose the few assets they own are especially vulnerable, and the current law is of limited practical assistance to them. 178 Lenders that say they are responsible lenders may still be required to repossess

consumer goods as a last resort, and they have said that having workable repossession powers is important to them. Some creditors claim that they can be the victims of unscrupulous borrowers, and those creditors look to the law to protect their interests. 2.8.4 Solutions in the Bill 179 The Bill: o

Incorporates the CRA into the CCCFA, and adds credit repossession to the consumer credit areas the Commerce Commission is responsible for regulating and enforcing.

o

Applies the responsible lending principles to credit repossession.

o

Requires credit repossession agents to be licensed under the existing Private Security Personnel and Private Investigators Act 2010.

o

Restricts the types of consumer goods that can be offered as security, and requires secured goods to be more specifically identified in consumer credit contracts.

o

Clarifies the information required to be provided to consumers in repossession warning notices, including a checklist of the steps required to be undertaken in consumer credit repossessions, and information about hardship applications and dispute resolution.

o

Adds new rights for consumers such as a stay on repossession while hardship applications or disputes are dealt with, and creates a right for consumers to voluntarily surrender secured goods if a repossession warning notice is issued.

o

Makes breaches by creditors and repossession agents offences under the CCCFA.

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2.9 Oppression 2.9.1 Pre-existing Policy 180 The CCCFA includes the remedy for the courts to “reopen” credit contracts where the transaction is “oppressive”, or the creditor has exercised a right or power under a credit contract in an oppressive manner. The courts have the power to make a wide range of orders adjusting payments and transfers of property between the parties if a credit contract is reopened. 181 This remedy is the only provision in the CCCFA that applies to all credit contracts,

rather than only applying to consumer credit contracts. 182 The CCCFA says oppressive means, “oppressive, harsh, unjustly burdensome,

unconscionable, or in breach of reasonable standards of commercial practice” (section 118). This test is intended to balance the need to provide an effective mechanism to protect consumers in the face of oppressive conduct, while not being so wide as to create significant uncertainty for lenders about the possibility of a contract being re-opened. 183 The CCCFA also includes a list of “guidelines” the courts must have regard to in

deciding whether a credit contract is oppressive (including all the circumstances, whether the amount payable is oppressive, time given to remedy a default, requirements for prepayments, conditions on releasing security). 2.9.2 Problems 184 It is very rare for the courts to decide that a credit contract is oppressive, despite predatory lending practises being all too common. Partly this is an access to justice problem. Borrowers who are parties to potentially oppressive credit contracts, or who have been subjected to oppressive conduct by a creditor, are usually in a poor position to enforce their legal rights. 185 There are also problems with how the oppression tests have been applied. Most of

the cases have been in commercial contexts, and the courts have not approached these cases from a consumer protection perspective. The courts have tended to preserve the benefit of “good deals” lenders have been able to make. While these two factors need to be balanced, the decisions have been primarily weighted towards the latter. That is despite the broad wording of the oppressive definition, consumers have only tended to be successful where they are in a vulnerable family situation (e.g. guaranteeing relatives), or have a language barrier. 186 The Commerce Commission could take oppression cases on behalf of consumers,

but it has never done so. The Commission indicates this reflects how difficult it is to meet the oppression test as it is currently applied by the courts. 2.9.3 Evidence 187 The courts have considered contracts that seem to be harsh or unjust, but when they have balanced the contracts against the test of reasonable standards of commercial practice they have generally found the contracts are not sufficiently harsh or unjust to justify reopening and altering their terms. 188 The way the courts have applied the oppression test has changed since the 1980s.

The “reasonable standards of commercial practice” part of the definition of oppressive is now applied as an overarching element of the test, and it has tended to underpin the commerciality of the courts‟ approach. MBIE-MAKO-5343289

2.9.4 Solutions in the Bill 189 The Bill provides a range of new factors for consideration in the guidelines the courts must have regard to in deciding whether a credit contract is oppressive. The new factors include, o

responsible lending compliance

o

relative bargaining power

o

particular characteristics of the debtor

o

whether legal advice was provided

o

unfair pressure or tactics, or unfair influence

o

terms of comparable arrangements, including cost and onerous terms

o

plain language, legible, clearly presented

o

debtor being reasonably able to comply with terms

o

terms reasonably necessary to protect the legitimate interests of the lender

o

enforcement and recovery actions reasonable in the circumstances.

190 We consulted on this general approach in the Exposure Draft of the Bill, and it was

generally supported. One option was to change the “oppression” test to an “unjust” test, which is the language used in the Australian National Consumer Credit Protection Act 2009. The balance of submissions opposed this option because it would introduce new uncertainty in the law. The Bill does not amend the definition of oppressive, or make any distinction between credit contracts and consumer credit contracts. 191 The new elements in the oppression guidelines in the Bill are however all based on

comparable provisions in the “unjust” credit contracts test in the Australian Act.

2.10 Financial Service Providers (Registration and Dispute Resolution) Act amendments 2.10.1 Pre-existing Policy 192 The Financial Service Providers (Registration and Dispute Resolution) Act (FSP Act) includes a relatively light-handed registration requirement for financial service providers (FSPs). FSPs include creditors under consumer credit contracts, and other financial institutions, brokers and advisers. The only requirement for registration of FSPs is that the applicant for registration must not be disqualified, and must become a member of an authorised dispute resolution scheme. 193 The requirement for FSPs to be registered, and to be members of a dispute

resolution scheme, does not apply to the providers of finance leases (effectively hire purchase agreements) to consumers, because those transactions are excluded from the definition of credit contracts in the FSP Act. 194 There are three industry dispute resolution schemes (Banking Ombudsman,

Insurance and Savings Ombudsman, and Financial Service Complaints Limited), and the reserve scheme (Dispute Resolution Services Limited). The reserve scheme is subsidised by the Government (approximately $200,000pa), and it was established as a backstop in case the other private approved dispute resolution schemes did not provide sufficient coverage for FSPs (or consumers). MBIE-MAKO-5343289

2.10.2 Problems 195 The light-handed „negative licensing‟ system for FSP registration has enabled FSPs to be registered which probably should not be registered; particularly where they are overseas FSPs taking advantage of New Zealand FSP registration as a reputational benefit. 196 The reserve scheme has also been identified as being unnecessary because the

coverage of the other three schemes shows there is no need for the Government sponsored backstop. The reserve scheme has applied to be an approved dispute resolution scheme without relying on its status as the reserve scheme, confirming that the special status of the reserve scheme under the FSP Act is unnecessary. 197 The current definition of credit contracts in the FSP Act excludes finance leases and

hire purchase-type consumer transactions under the FSP Act, despite these being included as consumer credit contracts under the Credit Contracts and Consumer Finance Act. The availability of lender-funded dispute resolution schemes is an important consumer protection provided by the FSP Act, but this protection is not available for a significant category of consumer credit contracts. 198 The level of knowledge by consumers of the approved dispute resolution services

available to them is low, and creditors do not necessarily have an incentive to inform borrowers of these services. 2.10.3 Evidence 199 There have been examples of FSPs registering in New Zealand to facilitate allegedly criminal activities. IB Capital FX (NZ) LLP was deregistered in July 2012 because it did not have a genuine place of business in New Zealand. IB Capital had allegedly been involved in fraud of around US$53 million. 200 Misuse of registration under the FSP Act could cause damage to business, investor

and consumer confidence in New Zealand‟s regulatory environment. It could also damage the domestic and international reputations of legitimate New Zealand FSPs. 201 The dispute resolution schemes will be an important enforcement mechanism for the

new responsible lending principles in the Bill, and the new provisions regarding credit repossession being added to the CCCFA. The responsible lending principles and repossession rules will apply to finance lease and hire purchase-type consumer credit contracts, and the lack of coverage of these transactions under the dispute resolution schemes is a significant gap. 2.10.4 Solutions in the Bill 202 The Bill addresses issues related to overseas-based entities registering as FSPs in New Zealand for reputational reasons by adding to the powers of the Registrar of FSPs and the Financial Markets Authority to evaluate whether FSPs should be declined for registration, or deregistered. The disqualification criteria include convictions for crimes in other countries. 203 The Bill removes the requirement for the Government sponsored reserve scheme

from the FSP Act. 204 The definition of „credit contract‟ is amended, removing the exclusion of consumer

credit contracts under section 16 of the CCCFA (i.e. consumer finance leases) from coverage under the FSP Act. MBIE-MAKO-5343289

205 A new purpose clause for the FSP is added, which is consistent with other more

recent financial markets and consumer protection legislation. 206 The CCCFA amendments in the Bill will improve the profile of the approved dispute

resolution schemes by requiring them to be identified in initial disclosure documents, and requiring notices from creditors in relation to unforeseen hardship applications and repossessions to refer to consumer rights under the dispute resolution schemes. Consumer credit contract enforcement will also be „stayed‟ while an unforeseen hardship application or repossession complaint is being resolved by an approved dispute resolution scheme.

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3. Other Matters the Committee may wish to examine 207 Submissions on the Exposure Draft indicate that the following additional areas of

interest are likely to be raised in submissions to the Committee: 

Cost of Finance/Interest Rate Caps



The effect of “remedial disclosure” on the prohibition on enforcing consumer credit contracts if disclosure has not been made (sections 99 – 102)



Exclusion of securitisation transactions from the new transfer disclosure requirement



Lack of reference in the CCCFA to dispute resolution schemes



Enforcement issues with various repossession-related provisions, e.g. goods excluded from security agreements, disabling devices, residual debt following sale of security



Pawnbrokers, and the appropriateness of their being covered by responsible lending



Targeted rating schemes by local authorities as consumer credit contracts, and the practicality of the disclosure requirements in the CCCFA for transactions such as energy efficiency loans



Additional disclosure requirements for credit cards



Finance leases and consumer leases, and the treatment of transactions that are not credit contracts (including disclosure and responsible lending)



Whether an offence provision should be added prohibiting creditors from charging undisclosed fees



Mechanism for rebate of extended warranties on the cancellation of a consumer credit contract



Increasing fines for offences



Potential problem with the limitation on default interest if the entire loan is being called up, and whether there should be a „non-acceleration‟ clause



The relationship between the FMA and the Registrar of FSPs, and the FMA‟s powers under the Bill

208 These are relatively discrete issues that have not been addressed in this initial

briefing, but they are the sorts of issues that are likely to require specific briefings for the Committee through the submission process.

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