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Last Updated: 18 April 2020
CONSUMER CREDIT LAW REVIEW
PART 5:
REDRESS AND ENFORCEMENT
October 2000
CONSUMER CREDIT LAW REVIEW
PART 5:
REDRESS AND ENFORCEMENT
October 2000
ISBN 0-478-24206-9
33 Bowen Street, PO Box 1473
Wellington, New Zealand
Phone: 64 (4) 474-2750
Fax: 64 (4) 473-9400
Email: mcainfo@mca.govt.nz
CONTENTS
EXECUTIVE SUMMARY
This
is the fifth public consultation document to be released by the Ministry of
Consumer Affairs as part of the Consumer Credit Law
Review. The previous four
documents have discussed ways in which consumer credit law can be improved and
simplified.
The focus of this discussion paper is on the redress and
enforcement provisions of the Credit Contracts Act 1981. It examines whether
the
Act provides strong enough incentives for borrowers and lenders to comply with
the law. Without effective redress and enforcement,
the Act cannot provide
adequate protection to those taking part in credit deals. As well, inadequate
compliance will mean that much
of the benefit from the reforms proposed in the
previous discussion papers in this Review will be lost.
The Credit Contracts Act
The
Credit Contracts Act places two main responsibilities on lenders. First, lenders
must disclose certain information about a credit
contract – most
importantly, the total cost of credit and the annual finance rate – to
borrowers. Secondly, lenders must
not take advantage of the imbalance in
bargaining power that characterises most consumer-credit relationships by acting
in an oppressive
manner towards borrowers.
This discussion paper
concentrates exclusively on the first responsibility – the duty of lenders
to disclose specified information
about the loan to the borrowers. Oppressive
conduct by lenders and unfair contracts is not being dealt with as part of the
Consumer
Credit Law Review (and no changes are proposed to the current
provisions in this area).
The Credit Contracts Act is self-enforcing.
That is, borrowers must take action themselves if lenders breach its provisions.
This
threat of individual action is intended to create incentives for lenders to
comply with the Act.
Borrowers can take action in a number of ways.
When a lender has breached the disclosure provisions of the Act, a
borrower can act to reduce their debt under the contract by a specified
amount
(the civil penalties regime). These civil penalties are automatic, and can be
negotiated directly with the lender. The borrower
does not need to apply to the
Disputes Tribunals or the Court to enforce their rights, unless the lender
objects to the remedy.
If a lender’s behaviour is particularly
“problematic” – such as repeatedly breaching the Act’s
disclosure
requirements, or being convicted of a crime involving dishonesty
– a borrower or any other interested party can apply to the
Court to have
that person banned temporarily or permanently from providing credit. This is
known as “negative licensing”.
When a lender has acted
oppressively, a borrower can apply to the Court to have the credit contract
re-opened and for the Court to
make orders (such as setting aside the contract
and the payment of damages to the borrower).
A lender can also be liable
for criminal fines for breaching the credit advertising provisions of the Credit
Contracts Act.
Criticisms of the Credit Contracts Act
This
paper concludes that the Credit Contracts Act currently does not create
strong enough incentives for some lenders to comply with its provisions. The
main area of concern is with “marginal”
lenders outside the
mainstream – marginal lenders are characterised by limited competition,
low incentives to invest in reputation,
and operations that are relatively small
scale.
The following features of the Act’s redress and enforcement
provisions support the Ministry’s conclusion that reform is
needed.
First, it is not straightforward for borrowers to enforce their
rights at the Disputes Tribunal or Court. The Court process is inaccessible
to
many borrowers because of the cost and time involved in bringing an action. The
Court can also be an intimidating environment,
particularly if the other party
to the dispute is a large company. The Disputes Tribunal provides borrowers with
greater access to
justice, but problems remain. Referees are not required to
have legal training, nor are they bound to follow the Credit Contracts
Act,
which can lead to inconsistent and inaccurate decision-making. This not only
adversely affects borrowers, but also can weaken
the incentives for lenders to
comply with the Act.
Secondly, the Act’s provisions for redress
and enforcement do not fit well with self-enforcement. There are two key
problems
here:
Thirdly, the usual
imbalance of knowledge and power between consumer and trader is heightened in
consumer-credit law. Research suggests
that consumers often do not know their
rights, and that 45 percent of New Zealand adults are “functionally
illiterate”.
These difficulties are compounded – because of the
inherent complexity of the Credit Contracts Act and most credit contracts
– when consumers are involved in credit deals.
The upshot is that very few borrowers use the Act to bring actions to the
Disputes Tribunal or the Court. The infrequency of applications
does not mean
that serious breaches of the Act do not occur. Anecdotal evidence and regular
complaints gathered by the Ministry and
consumer organisations indicate that the
Act is regularly breached and that there is a high level of consumer
dissatisfaction with
this area of law.
From the analysis it has done, the
Ministry considers that reform of the Act’s redress and enforcement
provisions is needed.
This is to ensure that borrowers receive adequate redress
for breaches of the Act and that all lenders face sufficient incentives
to comply with it.
The Ministry has identified a number of alternatives
for reform. Although redress and enforcement are closely intertwined, the
options
are discussed separately for each area. This has been done to make the
analysis and shape of any proposals clearer.
Improvements in redress
The Ministry has looked at areas that could be reformed in order to improve borrowers’ access to redress, and consequently increase the incentives on lenders to comply with the Act.
Improvements to the Disputes Tribunal decision-making procedure – some options for improving the operation of the Tribunals include:
Changes to the
penalty regime for breaches of disclosure – two options are put
forward to assist borrowers in taking action when the Act is breached:
If other
reforms to the Act are made – particularly by strengthening enforcement
– it may be appropriate for lenders to
minimise or, in some circumstances,
avoid their liability altogether. A number of options are considered here:
Other options for improving redress – three other
possible reforms are discussed:
Improvements to enforcement
Even
if borrower’s rights to redress are improved in various ways, the
Act’s current self-enforcing approach is unlikely
to provide powerful
enough incentives for lenders to comply with the Act. The Ministry puts forward
three main options to improve
enforcement:
An enforcement agency
– the various powers and functions of an agency are discussed; the role of
the Commerce Commission under the Fair Trading Act
is a useful model for how a
credit enforcement agency could operate.
Occupational regulation
– two alternatives for licensing or registering lenders are also
considered.
A dedicated fund for private and voluntary sector
enforcement – such a fund could be accessed by community agencies,
which could take action against lenders who consistently breach the
law.
Ministry’s preferred options
The
Ministry believes that the reform with the greatest overall benefit to borrowers
and lenders is to establish an enforcement agency. This specialist agency
will provide borrowers with advice as well as responding to complaints. It will
also be able to monitor the
entire industry, greatly increasing lenders’
incentives to comply with the Credit Contracts Act.
The Ministry
considers that there are two realistic alternative agencies that could fulfil
this role: the Ministry of Consumer Affairs
and the Commerce Commission.
Other reforms the Ministry considers appropriate are:
CALL FOR SUBMISSIONS
The
Ministry encourages written submissions from interested parties on the content
of this document. The purpose of the submissions
will be to inform the Ministry
as it proceeds with the Review of consumer credit law. Ultimately, the
submissions will inform the
government on any decisions it chooses to take with
respect to the reform of consumer credit law.
Questions for submitters
The
Ministry of Consumer Affairs would like to receive comment on all aspects of
this document. Specific questions are also asked
in Chapters 3,4 and 5
Final date for submissions and contact details
Final
date for receipt of submissions is 1 February 2001.
Comments and submissions
should be addressed to:
Consumer Credit Law Review Team
Policy
Unit
Ministry of Consumer Affairs
P O Box
1473
WELLINGTON
Contact details:
Rob Bowie 64 4 474-2927 rob.bowie@mca.govt.nz
Bob Hillier 64
4 474-2944 bob.hillier@mca.govt.nz
Nick
McBride 64 4 474-2818 nick.mcbride@mca.govt.nz
Fax: 64 4
473-9400
OFFICIAL INFORMATION ACT 1982
In
providing your submission, please advise us if you have any objections to the
release of your submission. If this is the case,
please advise us of the parts
of your submission that you would wish withheld, and the grounds for
withholding. In preparing and
releasing any summary, and in considering any
formal Official Information Act requests that might be received, the Ministry
will
carefully review any representations that you make in this regard.
PRIVACY ACT 1993
Any
personal information that you supply to the Ministry in the course of making a
submission will be used by the Ministry in conjunction
with consideration of
matters covered by this discussion paper only.
When preparing any
summary of submissions for public circulation, it is the Ministry’s normal
practice to set out the names
of parties making submissions. Your name will be
included in any summary unless you inform the Ministry that you do not wish your
name to be included. In order to indicate your wishes, or to view personal
information held about you in respect of the matters covered
by this discussion
paper, or to request correction of that information, please contact the Ministry
of Consumer Affairs, ph (04)
474 2750.
INTRODUCTION
A key goal of the
Consumer Credit Law Review is to promote compliance with the law by lenders and
borrowers when they take part in
a credit deal. One of the ways of doing this is
through an adequate system of redress and enforcement.
This discussion
paper focuses on the system of redress and enforcement contained in the Credit
Contracts Act 1981 – and on how
this system may be improved to benefit
both borrowers and lenders. Two main areas will be looked at: the redress and
enforcement
provisions for disclosing information about the loan by the lender
(Part II of the Act); and the banning of “problematic”
lenders
through “negative licensing” (Part IV of the Act).
The
re-opening provisions of the Act (Part I) are not discussed in this paper. The
Ministry of Consumer Affairs has decided to defer
further work on investigating
the remedies for oppressive conduct by lenders – possibly within a wider
context of consumer
protection law enforcement – rather than cover them
within the present Consumer Credit Law Review.
There are several reasons
for this decision. The Review’s consultation and analysis so far has
highlighted application, disclosure,
and redress and enforcement as areas where
more serious problems have been identified than with oppressive conduct by
lenders. The
Ministry is also aware of the difficulties that policymakers and
law-reform agencies have had in developing legislation to deal with
“unfair contracts”.[1]
This suggests that more in-depth analysis is required than is possible in the
timeframe of the present Review.
Structure of the discussion paper
This discussion paper
consists of five chapters. Chapter 1 describes the Credit Contracts Act’s
current redress and enforcement
regime. Chapter 2 critically analyses this
regime and identifies a number of shortcomings.
Chapters 3 and 4 look at options for reform and the approaches taken in other
countries with similar systems of consumer credit law.
In Chapter 5, the
Ministry puts forward its preferred options for reform.
1. A SUMMARY OF THE STATUS QUO
The
Credit Contracts Act recognises that the relationship between borrower and
lender is often unequal. Lenders have greater knowledge
and experience in credit
contracts and frequently much more economic power or “deeper
pockets” than their clients. This
imbalance of knowledge and power often
skews the credit market in favour of lenders. Borrowers, for instance, may not
always receive
(or understand) the information they need to make an informed
choice about a credit deal. Thus, they may be subject to exploitation.
The Act attempts to redress this power imbalance by placing various
obligations on lenders. Borrowers[2]
are entitled to redress when a lender breaks these obligations:
The redress available to a borrower as a result of
these breaches can take various forms. The borrower’s debt may be reduced
as the penalty for non-disclosure by the lender. Or the entire credit contract
may be set aside, if the contract was entered into
as a result of oppression on
the lender’s part.
The Act is self-enforcing, so borrowers must
take action themselves to enforce their rights. They can either negotiate
directly with
the lender or take an action to the Disputes Tribunal or Court.
This policy of self-enforcement reflects the underlying assumption
of much of
New Zealand’s consumer legislation: that consumers are usually in the best
position to decide whether their rights
have been infringed and the costs and
benefits of seeking redress for that infringement. Therefore, no government
department or agency
enforces the Credit Contracts Act. The Act relies upon the
threat of individual action by borrowers to provide the incentives for
compliance by lenders.
1.1 Consequences of non-compliance with disclosure requirements
The
disclosure requirements of Part II of the Act apply only to controlled
credit contracts. These are contracts where the lender supplies finance in the
course of its trade or business, or where a professional
has either brought
together the borrower and lender or prepared the contract, and where the amount
lent will be less than $250,000.
Providers of credit under controlled credit
contracts must disclose certain information – most importantly, the total
cost
of credit and the annual finance
rate[3] – to borrowers at the
times specified by the Act. These times will vary depending on whether the
disclosure is initial, continuing,
modification, or on request.
There are
two main consequences for lenders if they do not disclose this information or
disclose it incorrectly:
1.1.1 Credit contracts are unenforceable until the required disclosure is made
A
controlled credit contract cannot be enforced by the lender, until the lender
has made the disclosure required by the Act. This
applies to all types of
disclosure. Similarly, until the required disclosure has been made, only the
borrower can enforce any right
to recover property to which the controlled
contract relates, or enforce any security under the contract.
1.1.2 There are penalties for failure to make disclosure
The
Act sets penalties for failure on the lender’s part to disclose
information as required. This means that the amount the
borrower
owes under a controlled credit contract is reduced by a “specified
amount” for each case of non-disclosure.
Unless it is agreed
otherwise, these penalties take effect at the end of the contract. The borrower
continues to make repayments until
they have paid back the debt left after
subtracting the penalty.
These penalties are automatic –
they apply as soon as a lender has breached the Act, and can be enforced by the
borrower without having to apply to the Disputes
Tribunal or Court. But under
section 31 of the Act, lenders may avoid penalties for failing to disclose
correctly if this failure
results from inadvertence or events outside their
control. This ability to avoid penalties under section 31 is referred to as the
“inadvertent disclosure defence” throughout this discussion paper.
While not technically a defence, the section acts
like one since it enables a
lender to avoid paying penalties altogether.
To use this
“defence”, the lender must make disclosure as soon as is reasonably
practicable after discovering the failure
and offer to compensate the borrower
for any harm caused by the failure to disclose. If the finance rate has been
stated as less
than the correct finance rate, the lender must also reduce the
finance rate to the stated rate.
The lender does not have to go to Court
to use this defence – all it must do is show the borrower that it has
fulfilled these
requirements. But if the borrower is unsatisfied, the lender may
have to apply to the Tribunal or Court to use the defence. Even
if the lender
has not met the requirements of section 31, it still can apply to Court for
relief at the Court’s discretion
under section 32 of the Act.
1.2 Prohibition of financiers (“negative licensing”)
The
Credit Contracts Act contains no registration requirements for financiers
– that is, anyone who provides credit, either
as their main business or in
the course of their business.[4] The
Contracts and Commercial Law Reform Committee, whose proposals formed the basis
of the current Credit Contracts Act, considered
it too onerous on the thousands
of honest lenders to require them to obtain
licences.[5] Instead, the Committee
recommended a system of “negative licensing” whereby dishonest or
unscrupulous lenders could be
banned.
Under section 39 of the Act,
anyone can apply to the District Court for an order prohibiting or restricting a
particular financier
from entering into controlled credit contracts or from
acting as a director, manager, employee or agent of a financier. Orders can
be
made against:
1.3 Restrictions on advertising
Section 34 of the Act, which generally prohibited misleading credit advertisements, was repealed at 1 March 1999. Lenders who place credit advertisements that are misleading or deceptive, or likely to mislead or deceive, could still be liable under the Fair Trading Act 1986. The Ministry’s view, which is supported by the submission documents received so far in this Review, is that the Fair Trading Act regulates this area effectively. There are still restrictions on advertising in the Credit Contracts Act: these relate to the information that must still be disclosed in any advertisement.
1.4 Enforcement of the regime
Since
the Act is self-enforcing, it is up to the borrower to work out whether the
lender has breached the Act, to inform the lender
of the breach, and to enforce
the appropriate penalty (this is discussed further in Chapter 2). If a lender
disputes liability, the
borrower may need to take a complaint to the Disputes
Tribunal or the District Court.
1.4.1 Disputes Tribunal
Disputes
Tribunals (formerly called Small Claims Tribunals) were established to increase
the public’s access to justice. They
allow for the relatively speedy,
inexpensive and informal resolution of small disputes. In most cases any
resolution is
final.[6]
Disputes Tribunals
are attached to every District Court in New Zealand. The Disputes Tribunal
process differs from that of a Court
in several ways:
The Disputes
Tribunal used to be able to hear only claims about the re-opening of oppressive
credit contracts (Part I), but in March
1999 the Tribunal’s jurisdiction
was extended to breaches of the Credit Contract Act’s disclosure
requirements (Part
II).
The Tribunal can hear claims about credit for up
to $7,500, or $12,000 if the parties
agree.[8]
1.4.2 District Court
Borrowers
can also bring an action to the District Court under Parts I and II of the Act,
as long as the credit contract is not for
more than
$200,000.[9] The parties may agree to
waive this limit if the contract is for more than $200,000. If they do not
agree, actions must be taken to
the High Court.
Borrowers and lenders can
also bring actions to the District Court under the Act’s remaining
credit-advertising and negative-licensing
provisions.
2 CRITICISMS OF THE STATUS QUO
2.1 Scale of non-compliance with the Act
It
is only rarely that borrowers take action under the redress provisions of the
Credit Contracts Act. In the 10 years to May 1999,
the Briefcase database
records that there were only 140 reported Court cases on the Act; and only 56
percent – around 79 cases – were
brought by consumers. Borrowers who
were in default on their loans brought most of these cases. This indicates that
the Act is being
used not so much to protect borrowers from unscrupulous
lenders, but rather as a last-ditch effort by some borrowers to avoid repaying
a
loan.[10]
The Disputes
Tribunal does not keep formal records of the nature of the disputes it hears,
but anecdotal evidence suggests that disputes
relating to the Act are relatively
infrequent. However, this does not mean that serious breaches of consumer credit
law do not occur.[11]
Over
the (nearly) twenty years that the Act has been in force, the Ministry has
received hundreds of complaints about credit matters.
It has also been involved
in investigating and settling with several lenders who have breached the Act,
some of which have been well
known national
businesses.[12] The Ministry is also
aware that many consumer and community groups consider credit to be the most
widespread and severe of all problems
faced by consumers.
The
Ministry’s concerns about compliance with the Act by lenders are largely
focused on “marginal lenders”. This
segment of the market was
described in the initial consultation document, Setting the Scene.
Marginal lenders can be distinguished from mainstream lenders by:
Some
cash-loan companies meet these criteria, but perhaps the area with the greatest
number of consumer complaints is hire purchase
finance provided through motor
vehicle dealers. The exact scale of these problems is difficult to measure, but
there is plenty of
anecdotal evidence in the form of a regular stream of
consumer complaints to indicate that a significant problem
exists.
Deliberate or reckless non-compliance is not a feature of the
mainstream segment of the market, so enforcement is much less of an
issue. For
instance, the members of the Bankers’ Association have a self-regulatory
code, as well as an Ombudsman who is able
to monitor compliance with both the
code and the law. Other mainstream lenders have an incentive to develop a good
reputation and
maintain high standards of commercial practice: the high volume
of lending by the largest lenders makes non-compliance extremely
risky. A small
breach may mean compensating thousands of consumers – the cost will be
significant, even if lenders consider
the likelihood of consumers discovering
the breach is low.
In the “marginal lender” segment of the
credit market there is generally less incentive for lenders to comply with the
Act. As well, individual borrowers are not generally receiving appropriate
redress when the Act is breached. Therefore, the Act offers
little real
protection for borrowers from unscrupulous behaviour by lenders.
There
appear to be three broad categories of reasons why borrowers are not enforcing
their rights under the Act:
2.2 Problems with the Tribunal/Court system
2.2.1 Disputes Tribunal
That
few consumers take consumer credit law cases to a Disputes Tribunal still
appears to be the case, even though the Tribunals were
allowed to hear disputes
about disclosure in credit contracts and the monetary jurisdiction was increased
from March 1999. The Ministry
has identified the following features of the
Disputes Tribunal system that make it somewhat unsatisfactory as a compliance
mechanism
for enforcing the Act. Some of them might also contribute to the low
number of complaints heard by the Tribunals.
Monetary jurisdiction not high enough for many credit disputes
The
Disputes Tribunal can hear only claims for up to $7,500 (or $12,000 with the
agreement of the parties). But credit disputes involving
the purchase of a house
or, more likely, a car may be for much greater amounts than this. Lenders also
have a vested interest in
not agreeing to the higher monetary limit, so many
disputes will fall outside the Disputes Tribunal’s jurisdiction.
Referees lack specialist knowledge
Disputes under the Act can be
complex. They may involve difficult financial calculations to establish whether
the law has been breached,
and further calculations to determine the appropriate
remedy. Referees need in-depth knowledge of the Act’s requirements, but
do
not receive any specialist training in them. In 1997, when it was recommended
that the Disputes Tribunal’s jurisdiction
be extended to disputes about
disclosure, referees were asked about general training requirements. Of the
referees surveyed, 91 percent
said that further training was needed. The Credit
Contracts Act was identified as the legal area in which training was most
needed. [13]
Since then a
principal referee has been appointed, whose functions include giving the other
referees legal advice as appropriate to
improve the consistency of
decision-making. However, while undoubtedly of benefit to those bringing credit
claims to the Tribunal,
this appointment may be insufficient to ensure informed
and consistent
decisions.[14]
Recurring problems and lack of precedent
Many consumer credit disputes are substantially the same. In the
Disputes Tribunal system, however, there is no recognition of precedent
–
every case is approached afresh. Moreover, Disputes Tribunal referees are not
strictly bound by the law when resolving disputes.
While such an approach has
many advantages, in the context of credit disputes it has several
disadvantages:
Limited rights of appeal
The feature
of the Disputes Tribunal system of perhaps most concern to legal observers is
that legally untrained referees can make
binding decisions that are wrong in law
and cannot be appealed. Referees are required to determine disputes according to
the substantial
merits and justice of the case, but this does not guarantee that
the law will be followed. This is more likely to be a problem if
the referee is
not familiar with the law relevant to the dispute or the law is difficult to
understand and apply, as is the case
with the Credit Contracts
Act.[16]
Not only is this
unfair to those parties who do not obtain their legal rights as a result of a
Tribunal decision, it also contributes
to inconsistency between decisions as
there is no further opportunity to “get the law right”.
Limited use by Maori and Pacific Island people
There is evidence
that Maori and Pacific Island people are less aware of the Disputes Tribunals
and more reluctant to use them than
the rest of the
population.[17] This is a concern
because Maori and Pacific Island people are more highly represented in the lower
socio-economic groups –
and therefore more likely to borrow from marginal
lenders. Reluctance to use the Tribunals suggests they are less likely to
enforce
their rights if the lender does not comply with the law.
2.2.2 District Court
The fact that court cases relating to the Credit Contracts Act are rare can be attributed to a number of factors. Going to Court is too expensive for those on low and middle incomes, particularly if the amount at stake is relatively small. Legal aid is unlikely to be granted for a case under the Act. Taking an action can also be drawn out and time-consuming. As well, the complexity of the Act and the likelihood that the defendant is a large institution may make the Court process too daunting for most borrowers.[18]
2.3 Problems with the Act’s system of redress and enforcement
2.3.1 Self-enforcement of penalties
The
automatic penalties available to consumers for lack of disclosure allow them to
reduce their debt by the appropriate “specified
amount.” In theory,
the lender cannot enforce the contract until the required disclosure is made.
But to enforce these rights,
the borrower must:
This is a long list that can involve difficult financial
calculations and legal interpretation – let alone the transaction costs
for the borrower in terms of time and effort. Few consumers could undertake this
without legal advice and, as noted, even lawyers
have had difficulties with
these provisions.
The Ministry does not believe that there is sufficient
expertise within community advice agencies to help consumers. While lenders
should assist borrowers in this exercise, there is little incentive under the
Act for them to do so.
2.3.2 Negative licensing
Banning
lenders from providing credit is also part of the self-enforcing regime.
Borrowers can do this by bringing an action to the
District Court under section
39 of the Act. To be successful, the borrower must satisfy the Court on two
distinct points. First,
that one of the events described in section 39(1)(a)(i)
to (iv) occurred – for example, that the lender has been convicted
of a
crime involving dishonesty, or has failed to comply with the disclosure
provisions more than once. Secondly, the borrower must
convince the Court that
the lender is not a fit and proper person to offer controlled credit contracts.
Borrowers are not usually in a position to know if a lender is breaking
the law, or what can be done about it. There are also the
substantial barriers
to taking an action to the District Court set out above in section 2.2.2. The
borrower makes no financial gain
by taking an action under this section –
the only incentive for them to do so is to protect other potential clients of
the
lender (or perhaps retribution against the lender). Therefore, it is not
surprising that nobody has ever taken action against a lender
under section
39.
The fact that rival lenders have not taken an action under this
section – as they and anybody else are entitled to do –
can probably
be explained by the size and diversity of the credit market. Lenders are not
likely to be sufficiently familiar with
the activities of every other lender
– and a large credit institution may not be concerned by the activities of
a cash loan
company, because they operate in different sectors of the market.
Traders’ ability to use the Fair Trading Act for complaints
about
competitors’ advertising and sales practices may also contribute to the
non-enforcement of section 39.
It appears that the
“self-enforcing” objective of the Act is fundamentally unrealistic.
This does not mean, however, that
the principle of self-enforcement is
unrealistic – the Ministry considers that it works well with the Consumer
Guarantees Act
1993.
2.4 General issues
In
many respects the specific problems discussed so far are examples of more
general issues that characterise most consumer law disputes.
These issues are
now looked at in the context of the Credit Contracts Act’s provisions for
redress and enforcement.
2.4.1 Unequal position of borrower versus lender
The lender will usually know more than the borrower about the contract, the Credit Contracts Act, and the legal system generally. Lenders are often large institutions, with far greater resources and “clout” than an individual borrower. Consumer credit policy has traditionally recognised that there is a major imbalance of knowledge and power between lender and borrower. Some of the criticisms in this chapter suggest that the redress and enforcement provisions of the Credit Contracts Act do not always rectify this imbalance between borrower and lender.
2.4.2 Consumers’ ignorance of their rights
The
Ministry and other consumer organisations such as the Community Law Centres, the
Consumers’ Institute and the Citizen’s
Advice Bureaux aim to raise
awareness of the Act through pamphlets, free advice, school programmes, radio
sessions, videos and other
educational tools. Television programmes such as
Fair Go and Target also help to inform consumers of their rights.
Despite these efforts, most consumers are unable to name the main Acts
that protect them, much less describe their rights under the
main provisions of
these Acts.[22] Some consumers have
difficulty reading, or cannot read English, and so are unable to make use of the
information contained in legislation
or
pamphlets.[23] As observed in
previous discussion papers in this Review, about 45 percent of New Zealand
adults are “functionally illiterate”
and will not fully understand
what they are signing.[24] This lack
of knowledge by consumers makes it unlikely that a borrower will seek redress
when they think that something is amiss,
or that they will realise something is
amiss in the first place.
2.4.3 The disincentive of high transaction costs
Transaction costs refer to the costs involved in completing a transaction, including time and effort. Pre-transaction costs are a type of transaction cost and costs include searching out information about a product or service, and the cost of negotiating. Transaction costs can also occur after a transaction has taken place, such as the time and effort it takes to pursue a complaint and obtain redress. In many cases, the transaction costs outweigh the value of the complaint. This may often be the case for the Credit Contracts Act, where redress is far from straightforward – and costly.
3. IMPROVEMENTS IN REDRESS
Since
the Credit Contracts Act is self-enforcing, redress and enforcement are
inter-related. Improved avenues for redress are likely
to increase overall
enforcement of the Act, while improved enforcement reduces the need for redress
by consumers generally. But to
make the shape of the Ministry’s proposals
clearer, these two aspects of the overall regime have been dealt with in
separate
chapters. The intertwined nature of redress and enforcement, however,
means that from time to time both concepts are discussed together
within their
separate chapters.
This chapter puts forward a range of options for
reforming the Credit Contracts Act’s provisions for redress.
Briefly, these are:
3.1 Improvements to Disputes Tribunal decision-making procedures
The
Ministry believes that there are some aspects of the Disputes Tribunals process
that could be improved for the benefit of both
borrowers and lenders.
Four
options for reform are discussed below:
3.1.1 Improvements to training
As
discussed in Chapter 2, referees themselves desire more specialised training in
the consumer credit area. This training would particularly
focus on the
technical requirements of the disclosure provisions, as well as on the more
general principles of the Credit Contracts
Act. Both borrowers and creditors
should benefit from more informed decisions from referees as a result of this
training. The decisions
are also more likely to be consistent with the Credit
Contracts Act and therefore provide stronger incentives for lenders to comply
with it.
But given the relative rarity of consumer credit claims,
referees are unlikely to develop real expertise in this area. General training
for all referees may not improve the status quo in any substantial way.
An alternative is to appoint specialist credit referees. These referees would
come from the general “pool” of referees,
but would receive
specialist training in credit disputes. All claims involving consumer credit
would be heard by these referees.
The advantage of this alternative is
that these referees will be able to develop specialist knowledge and experience
in the consumer
credit area. Borrowers in turn should benefit from improved
decisions about credit disputes, but still retain the advantages of the
Disputes
Tribunal process. Only minor legislative amendment would be needed to create
these specialist credit referees.
This option does have some
disadvantages. Specialist referees may not be available in all Tribunals, and
would therefore have to travel
between Tribunals to hear credit disputes or
conduct hearings by tele- or video-conference. This may result in lengthier
periods
between complaint and resolution and some administrative cost. However,
the Ministry considers these to be relatively minor disadvantages.
3.1.2 Establish a specialist credit tribunal
A
second option is to establish a specialist credit tribunal. This tribunal could
either be a separate tribunal (like the Motor Vehicle
Disputes Tribunal that
hears claims under the Motor Vehicle Dealers Act), or run in tandem with the
Disputes Tribunal. These specialist
tribunals could be based with each Disputes
Tribunal, or “roam” the country.
The creation of a
specialist tribunal would have these advantages:
Several of the
Australian States have some form of specialist tribunal that deal specifically
with consumer credit disputes, although
their operations are rather different
from our Disputes Tribunals.[25]
A specialist tribunal would increase access to justice for consumers
involved in credit disputes and overcome many disadvantages of
the current
system. However, setting up specialist tribunals would require quite substantial
amendment to the Disputes Tribunal Act,
or new specific legislation, as well as
amendment to the Credit Contracts Act. The implementation and maintenance of
specialist tribunals
would also require significant government funding. It may
be hard to prioritise funding a credit tribunal above other parts of the
existing courts system.
3.1.3 Other options
Two other options are
briefly mentioned here. One is that parties to credit disputes could be given a
special right of appeal against
the decision of a Disputes Tribunal if the
amount in dispute exceeded a particular level, say $3000. The Ministry considers
that
the disadvantages of this proposal outweigh the advantages, as the appeal
process would be far more accessible to lenders. The prospect
of appeal to the
District Court, and the associated cost, would deter many consumers from taking
a dispute in the first place.
Another option is to increase the
jurisdiction of the Disputes Tribunal for credit disputes only. There is,
however, no reason why
such a measure should be limited to credit and it would
raise issues of inconsistency with other types of dispute. It would have
the
clear advantage of improving accessibility to the Courts system.
Which of
the following options do you support? Why?
Which of these options do you not support? Why?
3.2 Changes to penalty regime for breaches of disclosure
It
was suggested in section 2.3.1 that one reason why borrowers do not enforce
their rights under the disclosure provisions is because
the provisions are too
difficult for most consumers to understand and apply. Part 3 of this Review,
Transparency in Consumer Credit: Interest, Fees and Disclosure, put forward
some options for simplifying the disclosure requirements of the Act. Simplifying
the disclosure requirements will make
it easier for borrowers and their advisers
to work out whether the lender has breached them, making it more likely that the
borrower
will lodge a complaint about the breach. But the borrower still has to
work out how much the penalty should be, which is a fairly
complex calculation.
Two options for simplifying the penalty provisions and strengthening
them in favour of borrowers are discussed:
The interests of consumers in having accurate and
timely information about credit contracts must be balanced against the cost to
lenders
of complying with the disclosure requirements. Lenders also find the Act
difficult to understand, and therefore difficult to comply
with. It seems unjust
not to recognise the efforts of lenders who genuinely attempt to comply with the
Act compared with those who
blatantly disregard it.
If the penalties are
effectively increased for non-compliance, or the disclosure provisions are
strengthened in favour of borrowers
in some other way, then it may be
appropriate to improve lenders’ ability to minimise or avoid liability if
a mistake has been
made. One option here is the introduction of a maximum
penalty.
Several changes to lenders’ defences to liability for
penalties under the Act are also discussed:
The final option is a new approach to the penalty
regime, which has been adopted in Australia. It differs significantly from the
New
Zealand regime in its abolition of automatic penalties.
3.2.1 Simplifying the calculation of penalties
When a lender breaches a disclosure provision in the Act, the borrower’s debt is reduced by a “specified amount”. In the case of a breach of the initial disclosure requirement, for example, the “specified amount” is the smaller of:
or
This provision is much
more complicated[26] than the
Canadian equivalent, where the borrower is entitled to the lesser of $500 or 5
percent of the outstanding
balance.[27] The United
States’ Truth In Lending Act also provides a fairly simple penalty: twice
the amount of any “finance charge”
(a figure roughly equivalent to
the total cost of credit), provided that this amount is more than $100 and less
than $1000.[28]
One way of
making the disclosure provisions more “user-friendly” would be to
choose a figure or a simple function of that
figure as a penalty. One choice is
the total cost of credit – it would have been disclosed to the borrower if
the contract
is for fixed credit and can be found in the disclosure documents
rather than having to be calculated. But if it has not been disclosed
correctly
(or not disclosed at all), then the consumer will have to calculate the correct
figure.
For revolving credit, calculating the total cost of credit is
even more complex. It is calculated on the basis of the credit limit
(if there
is no limit the lender must estimate the amount that is likely to be drawn down)
for the minimum period the credit is provided
for, or (where there is no
minimum) for 12 months.
The Ministry has also raised in its
Transparency document the option of no longer requiring lenders to
calculate the total cost of credit.
For these reasons, the Ministry
prefers a similar provision to that in Canada, where the automatic penalty is a
specified proportion
of the outstanding balance of the loan, with
“outstanding balance” referring to the maximum outstanding balance
under
a fixed credit contract and the credit limit under a revolving credit
contract.
A simplified penalty scheme means that lenders will have a
clearer indication of their potential liability, and it will be easier
for
borrowers (and Tribunal referees when there are disputes) to determine the
correct penalty in each case. This will increase the
incentives for lenders to
comply with the disclosure provisions of the Act, while encouraging borrowers to
bring a complaint to the
Disputes Tribunal or Court.
Which method of
calculating automatic penalties do you think is best:
3.2.2 Minimum penalties
Under
the Truth in Lending Act in the United States, lenders’ liability for
breaching the disclosure requirements is a minimum
of $100. This minimum penalty
acts as an incentive for the borrower to bring an action. It could be adopted
here to encourage complaints
to the Disputes Tribunal, provided that the minimum
amount is an appropriate margin above the cost of bringing a complaint
(including
the filing charge).
The idea of a minimum penalty was
originally introduced in the United States as a low-cost method of ensuring
overall compliance because
it would encourage class
actions.[29] This provision,
however, was perceived as exceedingly harsh on lenders, “raising the
spectre of enormous damage suits for minor
violations of the
statute”,[30] and has now been
amended so that minimum recovery does not apply to class actions. But in New
Zealand class actions are still developing
and contingency-fee arrangements are
rare. So minimum penalties pose far less of a threat to lenders in New Zealand
than they do
to their counterparts in the United States. This will be the case
for the foreseeable future, even if class actions were expressly
allowed under
the Credit Contracts Act. (The pros and cons of doing this are discussed in
section 3.4.) The threat of class action
will operate as an effective incentive
for lenders to avoid breaching the Act.
A minimum penalty is probably
required to ensure compliance by lenders of small loans. For example, 5 percent
of the outstanding balance
on a $500 loan only comes to $25. This may not be
enough to deter some lenders from breaching the law, and hardly makes it
worthwhile
for the borrower to seek redress. Therefore, a minimum penalty of a
relatively modest amount (say $100) is appropriate; it can be
modified, if
necessary, to take account of class-action recoveries.
Do you agree that there should be a minimum penalty? Why?If so, at what level
should it be set? Why?
3.2.3 Maximum penalties
As
mentioned above, Canada has fixed a maximum penalty of $500 for breaching its
disclosure requirements, and the United States has
both a minimum and a maximum
penalty of $100 and $1,000 respectively. In both these jurisdictions, however,
the lender may also be
liable to the borrower for damages, and may face
relatively large criminal penalties and even imprisonment. The penalties for
incorrect
disclosure are just one of a number of different measures designed to
compensate the borrower and ensure compliance with the law
by lenders.
In New Zealand, the current penalty provisions in the Credit Contracts
Act are rarely enforced; to further limit their deterrent effect,
by capping the
amount for which a lender can be liable, could undermine the Act even further.
The Ministry believes, however, that
a maximum penalty may be appropriate in
certain circumstances. In Chapter 4 of this discussion paper the Ministry
proposes the establishment
of an enforcement agency. If an agency is set up,
lenders will face an increased exposure to liability under the Act. On these
grounds,
the Ministry considers it appropriate that there be a maximum penalty
of $3000 for a breach of the disclosure provisions.
Do you agree that
there should be a maximum penalty?
If so, at what level should it be set?
Why?
3.2.4 Changes to lenders’ defences against penalties
Three
main options are considered here. The first is the adoption of the Canadian
“excusable error” defence. The second
is the adoption of the
“reasonable mistake” provision of the New Zealand Fair Trading Act.
Lastly, the use of “model
form” contracts in the United States is
discussed. Each of these options has several variations.
(a) “Excusable error” and the role of compliance programmes
The Fair Trading Act[31] of Alberta, Canada, provides that a breach of the Act by a lender is an “excusable error” if:
If the
lender can show that the breach is an “excusable error”, the lender
does not have to pay the penalty.
The Ministry particularly wants to
encourage lenders to establish credit- compliance programmes. These programmes
have two advantages:
lenders have incentives to minimise the risk of breaches (a
benefit to borrowers); and lenders’ potential liability would
correspondingly
be reduced (a benefit to lenders). One way to encourage these
programmes is to introduce the defence of “excusable error”
into the
Credit Contracts Act. The defence would have to be adapted in several ways to
take account of New Zealand’s different
legal and institutional framework.
There are three ways the Canadian defence of “excusable error” could
be incorporated
into the Act.
(i) Replacement of the inadvertent non-disclosure defence with that of
“excusable error”
The excusable error defence could replace
section 31 of the Act. But there are aspects of the current “inadvertent
non-disclosure”
defence that the Ministry believes should be retained,
particularly the requirements that correct disclosure is made as soon as is
reasonably practicable and that the lender offers to compensate the borrower for
any harm suffered as a result of the error. Lenders
in New Zealand are also
familiar with the requirements of the “inadvertent non-disclosure”
defence. In the interests
of certainty, it would be better to build on the
existing defence if possible.
(ii) Amalgamation of the inadvertent non-disclosure and the excusable
error provisions
This approach would combine the new concept of the
compliance procedure with all the elements of section 31 as it currently stands,
thus retaining lenders’ familiarity with these elements. Making a
compliance programme a mandatory part of the defence may
be too onerous on
lenders. A more flexible approach, based on the concept of “reasonable
mistake” in the Fair Trading
Act, is discussed after the next
paragraph.
(iii) Replacement of “compensation” with
“minimising effect”
Another possible amendment to section 31
would be to replace the lender’s obligation to compensate the borrower
with the lesser
Canadian requirement that the lender promptly takes steps to
minimise its effect on any affected borrower. If the Credit Contracts
Act is
reformed in other ways that favour the borrower, this lesser requirement may be
appropriate. Currently, however, the penalty
provisions of the Act are the only
means by which borrowers can receive compensation for any loss suffered from
incorrect disclosure.
Until the law changes, the Ministry considers that it is
more desirable to retain the requirement of compensation.
(b) “Reasonable mistake” under the Fair Trading
Act
Compliance programmes are not specifically mentioned in the Fair
Trading Act, but the Courts and the Commerce Commission have placed
considerable
importance on the existence of effective programmes designed to prevent or
minimise breaches of the Fair Trading Act.
As well as playing a preventive role,
evidence that “reasonable precautions” have been taken (by
implementing a compliance
programme) is considered favourably by the Commission
in its decisions to take action under the Fair Trading Act. The Court will
take
a similar view in deciding verdict or
sentence.[33]
It makes sense
to deal with compliance programmes for the Credit Contracts Act in a similar way
to the Fair Trading Act. There are
three main reasons for this:
There are two
ways that the Credit Contracts Act could be changed to give compliance
programmes the same importance as they have under
the Fair Trading Act:
(i) Incorporation of defence of
reasonable mistake into section 31
Under the Fair Trading Act, it is a
defence against prosecution if the defendant proves that the breach was because
of a reasonable
mistake. The Courts have held that to prove a “reasonable
mistake” a trader must show that there was an intention to
act correctly;
and that this means there should have been some system of checking, such as an
compliance programme, to detect
errors.[34] The compliance programme
must be effective, not just nominally in
place.[35]
To incorporate a
similar approach into the disclosure provisions of the Credit Contracts Act,
section 31(a) could read “the
failure was owing to a reasonable mistake
or to events outside the control of the lender”. Such a change in
wording, coupled with an appropriate introduction in Parliament,
would indicate
to lenders, borrowers, any enforcement agency, and the Courts that the amended
section 31 should be approached in
the same way as the equivalent provision in
the Fair Trading Act.
Under this change, the lack of a compliance
programme would not be fatal to a lender’s defence under section 31 if the
events
were outside their control. When events are within the
lender’s control, it is appropriate that the Court or the enforcement
agency consider whether the lender had an effective
compliance programme. Thus,
the defence of “reasonable mistake” provides a flexible and
relatively familiar way of introducing
compliance programmes into the Credit
Contracts Act.
(ii) Reduction of penalty if lender has a compliance
programme
Under the Fair Trading Act “reasonable mistake” is only a defence to criminal prosecution, although the Court will take account of any compliance programme when considering the appropriate level of civil liability.
The Courts could take a similar approach to a breach of the Credit Contracts Act’s disclosure provisions – even though the Act’s penalties for not disclosing would be civil not criminal. Under section 32, a Court may reduce or waive the penalty on the application of a lender. The Court can consider any matter it thinks fit when deciding whether to reduce the penalty, and so technically may already be able to take account of compliance programmes. But direct reference in the Act to a compliance programme, as part of the relevant criteria the Court must take into account, would clearly signal its importance.
(c) Model-forms
The United States’ Truth in Lending Act
requires the Federal Reserve Board to promulgate model-forms of contract.
Lenders’
proper use of these forms is regarded as compliance with the
disclosure provisions of the Act, except if mistakes are made in the
specific
numerical disclosures (such as the interest
rate).[36]
Model-forms could
be developed to provide guidance about the information that needs to be
disclosed. The model-forms could be included
in a schedule to the Act, or could
be promulgated by the Ministry of Consumer Affairs or an enforcement agency. As
with the “excusable
error” defence, if lenders adopt these model
forms and follow them they are not liable for any penalties under the Act.
Model-form contracts pose a number of problems in practice. They would
require constant monitoring and alteration to be kept up to
date, and they may
be difficult to apply to the numerous forms of credit available and the current
trend for “tailor-made financing”.
Even if there were model-form
“clauses” that could be included in a lender’s own contract,
such clauses simply
might not fit all contracts because of the nature of the
credit product to which they relate. Moreover, the appropriateness of a
particular clause may well depend on the context in which it is
used.
Another alternative is not to make the use of model-forms a
defence, but rather a factor that an enforcement agency or a Court can
take into
account. But, because of the difficulties highlighted above, this is unlikely to
create a strong enough incentive for lenders
to use them.
For these
reasons, the Ministry considers that model-forms are an option only for
regulating presentational standards as discussed in Part 3 of this
Review, Transparency in Consumer Credit: Interest, Fees and
Disclosure.
Which option to you think is the most appropriate on
which to base a defence for lenders?
What advantages and disadvantages do you see with these options?
3.2.5 The Australian approach to penalties
The
civil penalties regime under Australia’s various repealed Credit Acts was
similar to New Zealand’s current regime.
The credit charges under the
credit contract were automatically irrecoverable if the lender failed to comply
with the disclosure
obligations. Also, like the Credit Contracts Act, lenders
could apply to the courts for a reduction or a waiver of the penalty.
In
1996 the Credit Acts were replaced with the Consumer Credit Code. The Code does
not retain the concept of automatic penalties,
and instead requires borrowers to
apply to the Court for relief.
Briefly, the main features of the civil
penalties regime under the Code are as follows:
This approach appears to have
definite advantages when viewed in light of the problems New Zealand is
currently experiencing. It would
also increase the harmonisation of New Zealand
and Australian law, which is an objective of the New Zealand and Australian
governments.
The regime also encourages lenders to “confess” to a
breach of the disclosure requirements, whereas in New Zealand there
is little
incentive for lenders to do so. The penalty awarded also takes into account the
seriousness of the breach, whereas in New
Zealand the same penalty applies
whether the breaches are substantial or trivial, deliberate or otherwise. And to
obtain any relief
from the automatic penalty, a lender must meet the
requirements of section 31 or 32 of the Credit Contracts Act.
The pivotal aspect of the Australian regime is the existence of an
enforcement agency with the ability to take action to a Tribunal
or Court. Such
an agency facilitates the “race” to the Tribunal or Court. In New
Zealand borrowers consistently under-enforce
breaches of the Credit Contracts
Act, despite the current automatic penalty provisions. This suggests that
forcing the borrower to make a complaint to a Tribunal or take an action to
Court, without
also appointing an enforcement agency, will worsen the current
under-enforcement of the Act. In turn, the current level of under-enforcement
means that a lender can safely assume there is little risk of a borrower making
a complaint, and so undermines the “race”
by not making an
application itself.
Therefore, adopting the Australian civil penalty
regime would require the establishment of an enforcement agency with similar
powers
to those in Australia. (Establishing an enforcement agency is further
discussed in the next chapter.)
Any penalties ordered against lenders on
the application of the consumer agency or lender are to be paid into a
“consumer credit
fund”; if a borrower wants compensation for the
breach they must make an independent application to the Tribunal or Court.
Therefore New Zealand, if it wanted to provide individuals with redress, would
also have to adopt a similar system of separate application
for compensation.
Automatic penalties were abandoned in Australia because they were seen
as giving borrowers the upper hand in the credit deal. The
Consumer Credit Code
was an attempt to redress the balance in favour of lenders. This clearly differs
from the New Zealand experience.
Although the Australian regime has
merit, adopting it is not the Ministry’s preferred option. This is because
of the differing
New Zealand experience with the civil penalties provisions, and
the different institutional arrangements for enforcement.
3.3 Disclosure requirements as a Consumer Information Standard
This
option was initially raised in Part 3 of the Review, Transparency in Consumer
Credit: Interest, Fees and Disclosure, for the formatting and presentation
of disclosure.[38]
It would
be possible to “transplant” the Credit Contracts Act’s
disclosure provisions into a Consumer Information
Standard under the Fair
Trading Act. The Standard would require the disclosure of certain cost-of-credit
information to consumers,
and would be enforced by the Commerce Commission like
the other Consumer Information Standards.
The mechanism for creating
standards under the Fair Trading Act is wide enough to cover all the disclosure
requirements in the Credit
Contracts Act. This would be by far the biggest and
most complicated Standard so far, and the first to deal with services rather
than goods.
Advantages of a Credit Consumer Information Standard
The main
advantage of moving the Credit Contracts Act’s disclosure provisions to a
Standard would be that the Commerce Commission
would enforce it. As a piece of
subordinate legislation under the Fair Trading Act, it would be easier and
quicker to amend, making
it potentially more responsive to developments within
the credit market. The transfer from the Credit Contracts Act to a Standard
could also address other issues with the current disclosure provisions, such as
complexity and timing, that were identified in Transparency in Consumer
Credit: Interest, Fees and Disclosure.
Disadvantages of a Credit Consumer Information Standard
There are,
however, significant disadvantages in adopting a Consumer Information Standard
to regulate disclosure. It would be a further
fragmentation of consumer credit
law, which is undesirable as that law is already dispersed over several
statutes. The adoption of
a Standard would mean that a consumer seeking redress
for both failure to disclose and relief from an oppressive contract would
have to take action under separate pieces of legislation.
Adopting a
Standard would also cause inconsistency in enforcement. The Commerce Commission
could take action for breaches of disclosure,
but provisions that would seem
more appropriate for an enforcement agency, such as the negative licensing
provision, would remain
enforceable only by individuals.
Enforcement is
clearly an issue in all aspects of the Credit Contracts Act, not just the
disclosure provisions. If an agency –
such as the Commerce Commission
– were appointed to enforce the entire Act, the principal benefit of using
a Standard would
be achieved without its drawbacks. It could simply be written
into legislation that the agency undertake this overall enforcement
role and it
would not specifically require a Standard. For this reason, the Ministry
considers the argument in favour of a Standard
to be misconceived.
Do you think that cost-of-credit disclosure information should remain a part of consumer credit legislation or be transferred to the Fair Trading Act as a Consumer Information Standard?
3.4 Class actions
A
class action allows a single plaintiff to bring an action on behalf of all
persons with a common interest in a piece of litigation.
Class actions are
particularly well suited to consumer law disputes, because they enable people to
“pool” the costs and
time associated with legal action. An American
judge of a senior United States Court, Chief Justice Bird, aptly described the
benefits
of class actions in State v Levi Strauss & Co when he
observed that:
without such actions defendants may be permitted to retain ill-gotten gains simply by their conduct harming large numbers of people in small amounts instead of small numbers of people in large amounts.[39]
New Zealand lenders make wide use of standard-form credit contracts, and
so class actions would be a particularly useful form of redress
for breaches of
the disclosure provisions. This is because a breach of the disclosure provisions
in a standard-form contract will
be of exactly the same nature across all of
these contracts. It will affect many people, who then have a common interest in
seeking
redress. Setting a minimum penalty for breach of the disclosure
requirements, as discussed above in section 3.2.2, could also facilitate
class
actions.
Class actions, however, are of not much practical benefit to
consumers where the breach of the disclosure requirements arises from
an
isolated instance of inadequate disclosure in an otherwise complying
standard-form. In this case, the failure to disclose will
not affect a large
number of contracts and borrowers.
Class actions are common in the United
States, and to a lesser degree in Canada and Australia. Class actions in New
Zealand are permitted
by Rule 78 of the High Court Rules, making them
technically available under the Credit Contracts Act. To encourage borrowers to
bring
class actions, the Act could be amended to specifically provide for this
type of redress.
Class actions, however, have been little-used in New
Zealand, for a number of reasons. Firstly, our courts historically have
interpreted
Rule 78 very narrowly, making it difficult for individuals to meet
the criteria for bringing a class action. A second reason is that
contingency
fees[40] are rarely used in this
country because of concerns that they are technically illegal. Contingency fees
encourage class actions,
because they avoid the need for the individuals taking
the action to organise financing between them. They also remain controversial.
Many critics fear that they will encourage lawyers to act unethically in their
zeal to win the case and their fee, and will lead
to a much more litigious
society.[41]
Despite these
concerns, it seems likely that doubts about the status of contingency fees will
be resolved eventually and class actions
will become more common in New Zealand.
At present, however, class actions in New Zealand are still very much in their
infancy, and
so cannot be relied upon to ensure effective redress and compliance
with the Credit Contracts Act.
What case, if any, is there for class actions under credit
legislation?
3.5 Damages
3.5.1 Compensatory damages
The
Credit Contracts Act’s civil penalty regime is designed primarily to
promote compliance, rather than compensate the borrower
for any losses as a
result of a breach. This is also the case with consumer credit law in Australia,
Canada and the United States,
although these jurisdictions also give the Court
the power to award damages to the borrower for their loss.
In New Zealand, apart from seeking damages for oppressive contracts under
Part II of the Act, a borrower has no means under the Credit
Contracts Act of
recovering their losses when the penalty is not adequate compensation. A
borrower’s only option is to try
to bring a claim for damages under
another statute or by using the common law. This will probably involve taking
legal advice and
bringing an action to the District
Court.[42]
The Credit Contracts
Act’s present focus is on overall compliance through self-enforcement, and
so the Act must provide sufficient
incentive for borrowers to enforce their
rights. One way of doing this would be to allow borrowers to seek damages from
the Tribunal
or Court when they feel they have suffered loss over and above the
amount of the penalty awarded. The Tribunal or Court would have
the discretion
to award damages as it saw fit.
The advantage of this proposal is that
it may make bringing a claim to the Tribunal or Court more worthwhile for the
borrower. As
a consequence, the prospect of more proactive borrowers and higher
costs may deter lenders from breaching the Act’s provisions.
In
most cases, however, the penalty already available under the Act is enough to
compensate borrowers for any loss they may have suffered.
It may be that damages
are most appropriate when the disclosure breach amounts to oppression, which
means the borrower can apply
for compensation under Part II of the Act. As was
noted in the Introduction, the Ministry has no immediate plans to change the
Act’s
current requirements relating to oppression.
On balance, the
Ministry considers that there will be no significant benefits from instituting
damages awards for disclosure breaches,
and so it does not recommend this course
of action.
3.5.2 Exemplary damages
Exemplary
damages are damages designed to punish the defendant, rather than compensate the
claimant. Their purpose is also to deter
others from behaving in a similar
way.[43] New Zealand courts can
award exemplary damages in certain common law and statutory
circumstances.[44] The Tenancy
Tribunal also has the power to award exemplary damages under the Residential
Tenancies Act 1986.[45] And the Fair
Trading Act of Alberta gives its Courts similar powers to award exemplary
damages against contravening
lenders.[46]
The Credit
Contracts Act could be amended to grant similar powers to our Courts where
lenders’ behaviour is particularly outrageous.
This might not be
necessary, however, as “problematic” lenders can already be removed
from the market permanently though
the Act’s “negative
licensing” provisions – and if an enforcement agency was appointed
this provision could
act as an effective “punitive” measure.
An enforcement agency could also be granted the right to apply for
pecuniary penalties for breaches of the Act, something that the
Commerce
Commission can do under the Commerce Act. These penalties can perform the
function of exemplary damages. (Providing an enforcement
agency with these
powers is discussed more fully in the next chapter.)
Should consumer
credit legislation allow for a borrower to claim compensatory damages? Exemplary
damages?
3.6 Other redress options
This section briefly
overviews other redress options. Whether and how these options proceed depends
on the content of any amendments
to credit legislation resulting from this
Review. Therefore, they are only raised in passing here.
3.6.1 Charges improperly imposed by lenders
If a lender imposes a
charge on a borrower that is either restricted by legislation or not authorised
by the contract, the borrower
should be able to recover that charge. This type
of redress would cover, for instance, fees charged by lenders that are not
authorised
by the credit contract, or fees for services that are not actually
provided as part of the contract.
3.6.2 Criminal penalties
Criminal penalties could
be provided for breaches of the Act, as is the case in Canada and the United
States. This type of penalty
would reinforce the existing civil penalties for
redress.
Under the Credit Contracts Act, the remaining credit
advertising restrictions still attract criminal fines and this approach could
be
extended to areas such as the disclosure requirements, breaching a negative
licensing order, and insurance charges.
When criminal fines are enforced,
they can act as a significant incentive for lenders to comply with the Act. It
is the Ministry’s
experience that, except for the Fair Trading Act where
the Commerce Commission is funded to bring criminal prosecutions, criminal
fines
under consumer legislation are rarely enforced. However, fines should still be
considered for those breaches of the Credit
Contracts Act where some sanction
should apply and the automatic penalties are inappropriate or insufficient.
4. IMPROVEMENTS IN ENFORCEMENT
A
number of proposals for simplifying and improving the Credit Contracts Act have
been suggested in this discussion paper and in other
parts of the Review, but it
remains unlikely that the level of action taken directly by borrowers under the
Act will be enough to
ensure compliance by all lenders. This is because the
usual imbalance of knowledge and power between trader and consumer is heightened
in the credit area because of its inherent complexity.
Equally, borrowers
may realise that their rights have been infringed. But the amount at stake will
frequently be too small to warrant
making a complaint even to the Disputes
Tribunal (particularly given recent increases in filing fees). This problem is
widespread
in consumer law, and is well illustrated by the criticism the
Ministry made of a major retailer in 1994. The retailer had incorrectly
calculated penalty interest on more than 42,000 hire purchase contracts, and had
overcharged borrowers a total of $750,000. While
this is a substantial total
amount, it amounts to only $17.85 per borrower – an amount too small for
some people to even consider
making a complaint to the retailer
itself.
This chapter, therefore, looks at the possibilities for improving
enforcement of the Credit Contracts Act. The central focus is on
the option of
creating an agency to enforce the entire Act, and the various powers and
responsibilities such an agency could possess.
An agency’s ability to
enforce the “negative licensing” provision of the Act is
specifically discussed. The corresponding
extension to the Court’s powers
under the Credit Contracts Act is also examined. Occupational regulation and
registration of
lenders are the two other enforcement options covered in this
chapter.
Many of these options are interdependent – for example,
the changes to the enforcement of negative licensing depend on the establishment
of an enforcement agency. And if some reforms are adopted, others will not be
necessary or appropriate. A wide range of options has
been proposed to gauge
industry and consumer reaction.
4.1 Establishment of an enforcement agency
4.1.1 Call for an agency
The
suggestion that an enforcement agency should oversee and enforce compliance with
the Credit Contracts Act is far from new.
In 1977 the Contracts and
Commercial Law Review Committee recommended that the government department
administering the Act should
also enforce
it.[47] Although this recommendation
was not adopted, the call for
an enforcement agency has been made repeatedly over the 20 years that the Act
has been in force, most recently by the Consumers’
Institute in its 1998
Report.[48]
Credit contract
legislation is enforced by specialist agencies in other jurisdictions, including
the United States, Australia, Canada
and the United Kingdom. The Commerce
Commission is already responsible in this country for enforcing the Fair Trading
Act, although
that Act also provides for self-enforcement.
4.1.2 Effectiveness of an agency
An agency might be more effective in enforcing and obtaining redress in situations where aggrieved consumers might not be successful or choose not to act at all. This is because:
An enforcement agency would also be vigilant about
lenders whose behaviour is of particular concern. This is a much easier and more
flexible option than attempting to change the law to target these
lenders.
Major breaches of credit law have often emerged only when an
agency becomes involved.[49] The
Ministry was involved in the retailer case referred to above, and has
investigated and reached agreements with other offending
lenders. The Commerce
Commission has also taken action under the Fair Trading Act in areas that
overlap with credit law.[50] To
maximise the benefits of “third party” involvement in consumer
credit disputes, the Ministry’s view is that
one body must be responsible
for enforcing the Credit Contracts Act.
4.1.3 Functions of an agency
The functions of the Commerce Commission under the Fair Trading Act are a useful guide to the possible functions of a credit law enforcement agency. These functions can be broken down into three broad categories.
Educate and raise awareness
An agency could educate consumers and lenders of their rights and obligations
under the Act, which should decrease the likelihood
of a breach and increase the
likelihood that borrowers will act when there is a breach. The agency’s
activities could include
publishing information pamphlets and compliance guides,
giving industry seminars, and releasing regular publications and media
statements.
Section 2.4.2 of this paper noted the difficulties in informing
consumers about their rights and legal protections. These problems
are
compounded in the area of consumer credit, because most borrowers have little
incentive to gain this information until they think
something has gone wrong. As
well, knowing their rights does not necessarily help borrowers work out whether
those rights have been
infringed in a particular situation. For example, knowing
that a lender has to disclose “the total cost of credit” does
not
help a borrower work out what that figure is for a particular
contract.[51] So while it is
important to disseminate information about the Act’s requirements
generally, it is perhaps more useful to improve
borrowers’ ability to
access this information when they need it. This will involve support for
community agencies that provide
advice to consumers caught up in disputes with
lenders.
Undertake investigations
An agency could receive and investigate
complaints from consumers about breaches or potential breaches of the Act by
lenders. Under
the Fair Trading Act, for example, the Commerce Commission has
the power to obtain information from a lender or enter its premises
if there are
grounds to suspect a breach of the Fair Trading Act. This allows an enforcement
agency to detect and deal with repeat
offenders, in a way that the current
individual self-enforcement regime cannot. By receiving borrower complaints, the
agency will
also be in a better position to identify deep-seated problems with
the Act and recommend legislative change if necessary.
Take enforcement action
An agency could act in a number of ways to
ensure the Act is enforced. It could:
4.1.4 Agency enforcement
The
Ministry considers that an enforcement agency should enforce the Act
proactively as well as reactively. The agency should not be limited to
acting on consumer complaints as they come up, but instead should be able
to
actively monitor industry actions and developments, and to act on its own
initiative.
As this agency would be actively searching out and
investigating potential breaches of the Credit Contracts Act, it would need to
be given similar investigative powers to those of the Commerce Commission under
the Fair Trading Act. To link this proactive ability
to the losses that may be
suffered by borrowers, there would need to be a provision in the Credit
Contracts Act similar to section
43 of the Fair Trading Act. Section 43 allows
any person to apply to the Court to make orders for the benefit of any other
person
that has suffered or may suffer from the actions of a defendant.
This type of provision would help the enforcement agency act on behalf
of a “class” of borrowers (who are affected by
a standard-form
contract that breaches the Act), which would provide much of the benefit to
borrowers that class actions offer. The
agency could also respond to a type of
contract or practice that may be a one-off or much more limited breach. The
agency would be
able to recover civil penalties, damages, and any other redress
available to individual borrowers, as well as apply to the Court
for the
remedies discussed below in section 4.1.5. These measures should provide the
incentives for compliance that the current self-enforcement
regime lacks.
4.1.5 Expansion of Court orders if an agency is set up
The
types of Court orders that are suitable following successful proactive action by
an enforcement agency are different from what
is suitable after a successful
reactive action. Proactive action is focused on stopping a certain behaviour
before it causes more
harm, while reactive action provides redress for the harm
and punishes whoever caused the harm. Ideally, the best protection for
borrowers
is stopping the activity as soon as it is discovered, rather than waiting for it
to cause harm before acting.
With the exception of section 39, which acts
as the ultimate preventive order by removing the lender from the market, there
is no
power under the Credit Contracts Act to stop a lender acting in a certain
way. Even where the Court finds that a contract is oppressive
and sets aside or
alters that contract, this does not affect other borrowers who may be suffering
under another contract with the
same lender on the same terms.
For an
enforcement agency to play a proactive role under the Act, the Courts need to be
given the power to make a broader range of
orders. Again, the Fair Trading Act
is a useful guide. The power of the Court to make orders for the benefit of
people not party
to the proceeding – as is the case with the Fair Trading
Act – has already been discussed in section 4.1.4 above.
Another
useful power – derived from the Fair Trading Act – is the power to
order injunctions to restrain behaviour that
breaches or is likely to breach the
Credit Contracts Act. This would allow an agency to act pre-emptively and stop a
certain type
of conduct before too much harm is caused. For example, an
injunction would force a lender to stop using a credit contract that is
misleading or fails to properly disclose various costs. In many cases, a
credible threat by the agency that it will seek such a remedy
will be enough to
persuade the lender to alter its conduct.
4.1.6 Section 39 - negative licensing
An
aspect of the Credit Contracts Act that would particularly benefit from the
establishment of an enforcement agency is section 39.
This is the negative
licensing provision that allows the Court to make an order preventing certain
people from acting as lenders.
Section 39 is theoretically a useful
power. It allows the general free-market operation of the credit industry, while
reserving the
right to “prune off” inappropriate lenders. This right
has never been used – in the 19 years the Act has been in
force, there has
never been any action taken under section 39. This is not surprising.
Most borrowers would not know this provision existed, would not personally
benefit from bringing an action, are unlikely to know which lenders are
operating outside the law, and would find it extremely difficult
to gather the
evidence needed to show that the lender is not a fit person to provide
credit.
The same constraints do not apply to an enforcement agency. With
its specialist knowledge, greater resources and knowledge of the
overall
industry, an agency is far better equipped to detect and take action against
problematic lenders. Australia has long had
agencies that enforce negative
licensing systems: the Northern Territory, New South Wales, Queensland, and
South Australia all use
a negative licensing scheme enforced through an agency.
The threat of an agency enforcing the negative licensing scheme would provide
strong incentives for lenders to comply with the Credit Contracts Act,
particularly those with bad track records.
It is envisaged that the
enforcement agency would apply to the Court for disciplinary action to be taken
against a lender. An alternative
option would be for the agency itself to have
the power to make orders under section 39. This is the case in several states in
Australia.
The Ministry believes that this would create a confusing overlap of
roles for the agency, and consequently does not recommend it.
Given the gravity
of removing someone from a particular trade, it is appropriate that only a Court
makes such an order.
If an enforcement agency is not set up, then the
negative licensing provision of section 39 could still be included under a
broader
injunctive power – such as those discussed in section 4.1.5 above.
This negative-licensing injunctive power by the Court could
operate in the
absence of an enforcement
agency.[52]
4.1.7 The cost of establishing an enforcement agency
The
main drawback to establishing an enforcement agency is the cost of establishing
and operating it. It might be possible to set
up the enforcement agency on a
full or partial self-funding basis. One option for a “user-pays”
scheme is to give the
agency the power to recover at least some of its costs by
charging lenders for the reasonable costs of any investigation the agency
undertakes into them. This is the position under the Fair Trading Act in
Alberta.
Costs could also be spread across the industry by requiring
registration of all lenders and then charging registration and periodic
renewal
fees. Registration is discussed in more detail below in section
4.2.1.
Ultimately, it is difficult to justify funding the enforcement
agency for consumer credit protection in any different way than consumer
protection generally under the Fair Trading Act – which is entirely
taxpayer-funded.
Establishment costs could be minimised by using an
existing agency, such as the Commerce Commission or the Ministry of Consumer
Affairs.
The Commission has had a number of new functions imposed on it recently
and its workload may increase in the near future with the
proposed amendments to
the Commerce Act and possible regulatory rules for electricity and
telecommunications (as well as various
proposals for new Consumer Information
Standards). The Commission, therefore, would probably need to be given extra
resources to
carry out an enforcement role under the Credit Contracts Act, or
would have to reduce the resource that is dedicated to existing
functions.
Is self-enforcement an adequate means of promoting compliance
with consumer credit legislation?
Do you agree with the proposal for an
enforcement agency? If so:
What range of orders should be available to the Court in credit disputes?
4.2 Increased occupational regulation of the credit market
Section
39 of the Credit Contracts Act currently provides for the negative licensing of
lenders. The Contracts and Commercial Law
Reform Committee’s underlying
rationale for recommending a negative licensing regime for the Act was that a
positive scheme
would be too onerous on the vast majority of honest
lenders.
New Zealand effectively has no licensing scheme as long as section 39 remains unenforced. As has been discussed above in section 4.1.6, establishing an enforcement agency is a credible and effective way of enforcing section 39. But if this agency is not implemented, then increased occupational regulation of lenders may be required to better monitor the industry and increase compliance with the Credit Contracts Act. Two options for occupational regulation are set out below.
4.2.1 Positive licensing and registration
Positive
licensing allows only those lenders who have obtained a licence after meeting
certain prescribed standards to operate in
the credit market. It aims to prevent
abuses by adopting entry criteria relating to the lender’s honesty,
solvency and skill.[53]
A
lower level of occupational regulation than positive licensing is registration
of all lenders. Registration is used throughout Australia.
There are no
restrictions on who may be registered – and registration generally places
no constraints on the way the market
may operate. The agency in charge of the
register need only carry out administrative functions.
Either option is
possible, but neither seems justified given the cost of establishing,
maintaining and enforcing such a system. Commercial
law reform in recent years
has emphasised that a strong justification is needed before imposing licensing
or registration on an industry.[54]
While this case might be made for marginal lenders, it is much less plausible
for the remainder of the credit market.
4.3 Facilitate private and voluntary sector enforcement
A suggestion that has
been made to the Ministry in the past is that rather than set up a new agency,
or extend the functions of an
existing agency, there should be a dedicated fund
for private sector actions against lenders who have breached the law. This is
similar
in concept to “legal aid” but the purpose is but to enforce
the law in the public interest, rather than aid private
litigants.
Agencies such as community law centres could apply to the fund
directly or could arrange for a lawyer to make the application. The
lawyer could
then take the action on behalf of the agency. This proposal is untested but may
be an effective way of increasing applications
under the negative licensing
provisions or against lenders whose regular breaches of the law affect a large
number of consumers.
Solicitors and community groups are often aware of the
practices of local lenders; a fund could enable them to take action.
A
major advantage of this proposal is that it may be less costly than funding an
agency. This is because the required expenses associated
with establishing an
office, such as recruiting staff and marketing, would be reduced. It would also
utilise existing local knowledge.
The disadvantage of this proposal is
that it would require systems for receiving applications, monitoring, quality
control and disbursement
of funds. The funding department would need to set up
criteria for accessing the fund, have systems in place for paying out of the
fund and ensuring that it is used appropriately. The “arms-length”
nature of the scheme may be problematic in that it
would not provide for close
control by the funding department that is ultimately accountable for the
expenditure.
A further disadvantage is that the fund would be limited to
court action. It could not be used for investigations and gathering evidence,
legal advice, and case assessment – all of which may be prerequisites to
successful court action.
Do you have a view on the other options
discussed for improving enforcement?
5. THE MINISTRY’S PREFERRED OPTIONS
The
previous chapters of this discussion paper have identified serious limitations
in New Zealand’s current consumer credit
redress and enforcement regime.
Reforms are necessary to ensure that individuals are able to obtain effective
redress for breaches
of the Credit Contracts Act, and to ensure that lenders
comply with it.
When suggesting reforms, it must be remembered that the
Act regulates a large and diverse market of lenders. Many of these lenders
comply with the Credit Contracts Act as it currently stands. Reform measures
designed to improve compliance must not be too onerous
on these lenders; yet
still provide enough incentive for compliance by those lenders who currently
breach the Act.
The Ministry believes that its proposals for reform to
the redress and enforcement regime of the Act, and to the Disputes
Tribunal’s
procedures for credit disputes, will meet this goal.
5.1 Appoint an enforcement agency
The Ministry proposes
that the most important and beneficial reform that can be made to the Credit
Contracts Act is the establishment
of an enforcement agency. An agency will not
only improve borrowers’ opportunities for redress, but its proactive
enforcement
powers will also create greater incentives for compliance by
lenders.
A choice would have to be made whether to establish a new agency
with specific functions and powers to enforce credit law, or whether
to create
new functions and powers for an existing agency.
The advantage in
establishing a new agency is that it could be dedicated to consumer credit
issues. However, the obvious disadvantage
is that establishment would incur
significant costs.
If it is considered appropriate to utilise an
existing agency, the Ministry considers that there are two options:
5.1.1 The Commerce Commission
The Commission has 14
years of experience in consumer law investigation and enforcement. Over that
time it has demonstrated its effectiveness
in enforcing the Fair Trading Act in
cases involving consumer credit (and one occasion prosecuted a trader under Part
III of the
Credit Contracts
Act).[55] There are also strong
synergies between the Credit Contracts Act and the Fair Trading Act – both
Acts are consumer oriented
and address the quality of information given
consumers. The emphasis on compliance programmes recommended in this document is
also
relevant. Further, the functions and powers given to a new agency would
likely be similar to those currently given to the Commission
under the Fair
Trading Act.
In the United Kingdom, the Office of Fair Trading –
which is similar to the Commerce Commission in that it enforces competition
and
fair trading laws, enforces the Consumer Credit Act 1974. In the United States,
however, the Federal Trade Commission is not
responsible for consumer credit law
– that is the responsibility of the Federal Reserve
Board.[56]
As noted above, a
number of new functions have been proposed for the Commission, most notably
concerning the electricity market. Therefore,
a disadvantage with the
appointment of the Commerce Commission is that a further extension of its
functions and powers would add
to resource pressures.
5.1.2 The Ministry of Consumer Affairs
Since its inception, the
Ministry of Consumer Affairs has developed considerable experience in dealing
with credit disputes –
as noted above this has included major
investigations into breaches of the Credit Contracts Act and the negotiation of
settlements
with consumers.
It currently has an enforcement role under
the Weights and Measures Act 1987, it is not lacking in enforcement experience.
In 1999,
the Ministry’s enforcement functions were increased when it was
aligned with the Energy Safety Service. The Service enforces
the safety
provisions of the Electricity Act 1992 and the Gas Act 1992.
The
enforcement of credit law in Australian and Canadian states is undertaken by the
fair trading departments, which are counterparts
to the Ministry of Consumer
Affairs.
There would be two distinct disadvantages in appointing the
Ministry of Consumer Affairs. One is that it lacks the specific enforcement
experience that is likely to be required to enforce credit laws. For instance,
its experience in taking traders to Court is limited
to occasional prosecutions
under the Weights and Measures, Gas, and Electricity Acts (where the subject
matter is quite different).
The other disadvantage is that the Ministry
has a role in recommending policy for consumer credit law (it administers the
Hire Purchase
and Credit (Repossession) Acts). Public policy in New Zealand in
recent years has
recommended the separation of policy and operational/enforcement
functions,[57] so it would be
unconventional to merge the two in the consumer credit context.
5.1.3 Other considerations
Whichever agency is
appointed, the Ministry believes that this agency should have similar powers and
functions as those of the Commerce
Commission under the Fair Trading Act. The
Ministry also notes that, should the enforcement role be undertaken by an
existing agency,
increased funding would be necessary to enable the agency to
undertake the additional role, without restricting its performance of
existing
functions.
5.2 Changes to Disputes Tribunal process
5.2.1 Appointment of specialist credit referees on Disputes Tribunal.
If
an enforcement agency for the Credit Contracts Act is established, borrowers
will have increased assurance that lenders are complying
with the Act. This,
coupled with the relatively infrequency of consumer credit disputes that are
heard by the Disputes Tribunal,
suggests that the establishment of a specialist
credit tribunal is unwarranted. However, the training of specialist credit
referees
would go some way to ensuring that any credit disputes heard by the
Tribunal would be decided with greater accuracy and consistency.
5.3 Changes to penalty regime for breaches of disclosure provisions
5.3.1 Simplified penalty for breach
The
Ministry proposes that the calculation of the automatic penalties for breaches
of the Act’s disclosure provisions should
be simplified. The penalty
payable in cases of breaches of these provisions should be calculated as a
proportion of the outstanding
balance – possibly 5 percent, with a minimum
penalty set at $100. This simplification should make it easier for borrowers and
Tribunal referees to calculate and enforce penalties, and easier for lenders to
recognise their potential liability for breaches
of these provisions. The result
should be improved compliance by lenders.
Since lenders would be facing much
higher potential liability if an enforcement agency was implemented, the
Ministry considers that
the compliance burden on lenders for disclosure should
be eased in two ways:
Maximum penalty of
$3,000
The Ministry recommends that the maximum penalty for a breach of
the disclosure provisions is $3,000. This reform is unlikely to be
of
significant detriment to borrowers, as most of the penalties would fall below
this amount. It should provide some relief to lenders,
since these penalties
would more likely be enforced if an enforcement agency is established.
Introduction of “reasonable mistake” defence and compliance programmes into sections 31 and 32
The Ministry recommends the adoption of the
“reasonable mistake” defence from the Fair Trading Act into section
31 of
the Act, so that lenders may minimise or avoid liability for penalties by
implementing effective compliance programmes. These programmes
would be of use
to the enforcement agency when it is considering bringing an action against a
lender, as well as to the Court when
it is determining liability under section
31.
The Ministry considers that section 32 should be amended, so that the
Court must take into account the existence and effectiveness
of a lender’s
compliance programme when deciding whether to reduce or waive a penalty.
What is your view of the Ministry’s preferred options?
Do you
have any suggestions as to which agency could fulfil an enforcement function in
credit law?
What are your reasons?
[1] The New Zealand Law Commission decided not to proceed with its work on “Unfair” Contracts (NZLC PP11, 1990); for examples of academic criticism of various unfair contracts legislation and proposals see D McLauchlan, (1991). “Unfair Contracts: The New Zealand Law Commission’s Draft Scheme”. New Zealand Recent Law Review, 311; A Duggan (1991). “Some Reflections on Consumer Protection and the Law Reform Process”, Monash Law Review 17(2), 252; and D Vaver, (1988). “Unconscionability: Panacea Analgesic or Loose Can(n)on”. Canadian Business Law Journal 14, 40.
[2] Guarantors of controlled credit contracts also have rights of redress in relation to the disclosure requirements of the Act. Sections 16A, 24A and 25A respectively: require that disclosure be made to guarantors; provide that such disclosure is a prerequisite to any claim being made against a guarantor; and provide for penalties for failure to disclose to guarantors. Guarantors face similar issues to those arising for borrowers under the Act, particularly in relation to the disclosure provisions. However, it remains unclear whether guarantors are able to avail themselves of the oppression and re-opening provisions of the Act: Gault on Commercial Law Brookers: Wellington, at para CCIntro. 01.
[3] For fixed credit only.
[4] Section 2 Credit Contracts Act 1981.
[5] Credit Contracts: Report of the Contracts and Commercial Law Reform Committee on Credit Contracts February 1977, at pp 45-46 (para 5.10).
[6] See Brookers District Courts Procedure, Brookers: Wellington, at para DT Intro.01.
[7] See Disputes Tribunal Act 1998. See also K Tokeley, (2000). Consumer Law in New Zealand. Wellington: Butterworths, at 382-387.
[8] Disputes Tribunals Act 1988, Sections 10, 13.
[9] The cost of credit is not included in this amount: Gault on Commercial Law, supra n2 at CC45.04.
[10] G Hannis, The Consumers’ Institute’s View of Credit Law: Protecting the Rights of the Consumer, paper to the BIIA New Zealand Credit Law Conference, 24 February 2000. Briefcase is a comprehensive index of case summaries in electronic format. In the past, Briefcase sourced from secondary publications, so only cases that were reported or noted in publications were catalogued. Cases are now summarised directly from actual judgments emanating from a wide variety of Courts, Tribunals and judicial bodies. However, Briefcase is not a complete record of all cases, and therefore the figures quoted in the text are a good but not final representation of the number of cases involving the Act in the ten years to May 1999.
[11] See also the comments in Gault on Commercial Law, supra n, at CCIntro.01 “It is fair to say that non-compliance with the provisions of the Act by [“fringe financiers”] is common.”
[12] For details of some of these investigations, see Hannis, supra n10 at section 3.3
[13] Centre for Research, Evaluation and Social Assessment (“CRESA”) (August 1997). Disputes Tribunal Research Project at 17-19.
[14] Tokeley, supra n7 at 385.
[15] In 1997 almost two thirds (64%) of Tribunal referees surveyed identified the lack of consistency in procedures across the country as a weakness of the Tribunal system, and a third also identified the lack of consistency in decision making as a weakness: Disputes Tribunal Research Project, supra n13 at 27.
[16] Tokeley, supra n7 at 385-6.
[17] Ministry of Consumer Affairs (July 1994). Review of the Operation of Disputes Tribunals from a Consumer Perspective.
[18] Actions under other consumer legislation are similarly infrequent for the reasons described above: CCH New Zealand Business Law Guide. Commerce Clearing House, Auckland at 51, 301.
[19] Butterworths Laws of New Zealand, “Consumer Credit and Hire Purchase”, para 15.
[20] At para 60-150.
[21] This is made more complex, because the legislation does not state whether “total cost of credit that relates to the period from the day the contract is made” (section 25(2)(a)) refers to a calculation based on the fraction of the time period, or an actuarial calculation based on the relationship between the total cost of credit and the outstanding balance for that period.
[22] Tokeley, supra n7 at 379.
[23] Ibid.
[24] The Consumers’ Institute reports that in a 1997 survey some budget advisers claimed that the vast majority of their clients did not understand the nature of their contracts: Consumers Institute, (August, 1998). The Reform of Consumer Credit Law in New Zealand, at section 3.4.
[25] Some examples are the Fair Trading Tribunal of New South Wales, the Commercial Tribunal of Western Australia and the Australian Capital Territory Credit Tribunal. These tribunals, as do the general tribunals which perform equivalent functions to the Disputes Tribunal here, differ from the Disputes Tribunal in that disputes are heard by more than one referee (in Victoria one referee has to be a lawyer), and decisions can be appealed on points of law. Several of the tribunals also allow legal representation in some circumstances, and in most states the hearings are usually open to the public. For further detail see A Duggan and E Lanyon, (1999). Consumer Credit Law Butterworths: Sydney, at 487-493.
[26] Particularly for revolving credit, when the consumer will have to calculate the total cost of credit him or herself as it would not have been disclosed by the lender.
[27] See section 98, Fair Trading Act 1999 Alberta, Canada. “Outstanding balance” refers to the maximum amount of a fixed credit contract and the credit limit for revolving credit.
[28] Truth in Lending Act (15 USCS § 1640). In Canada and the United States the borrower must bring an action against the lender to recover this amount.
[29] See W Whitford, (1973). “The Functions of Disclosure Regulation in Consumer Transactions”. Wisconsin Law Review, 2, at 443.
[30] E Rubin, (1991). “Legislative Methodology: Some Lessons from the Truth-in-Lending Act”. The Georgetown Law Journal, 80, 233 at 237.
[31] The consumer credit provisions in this Act are based on the Cost of Credit Disclosure Act, drafted and recommended for adoption by the Uniform Law Conference in October 1998 (www.law.ualberta.ca/alri/ulc/acts).
[32] Section 98(1) Fair Trading Act 1999, Alberta, Canada.
[33] Gault on Commercial Law, supra n2 at para FT 40.11.
[34] See for example Commerce Commission v Telecom Corp of NZ Ltd (1990) 4 TCLR 1; Commerce Commission v Warkworth Supermarket Ltd 21/11/91, Judge Buckton, DC North Shore CRN1084003797.
[35] Foodtown Supermarkets v Commerce Commission [1991] 1 NZLR 466.
[36] 15 USCS s105(b).
[37] See Duggan and Lanyon, supra n25 at 434.
[38] The option was raised in the Ministry’s 1988 paper and has been recommended to the Ministry from time to time since then.
[39] 224 Cal Rpt 605 at 612 (1986); quoted in Tokeley, supra n7 at 391.
[40] A contingency fee system operates whereby a lawyer does not charge for their services, but takes a percentage of the Court award if the case is successful.
[41] Tokeley, supra n7 at 389.
[42] The Tribunal’s jurisdiction in tort extends only to loss to property, and in DGSW v Disputes Tribunal (1999) 12 PRNZ 642; 9 TCLR 106, the High Court in an obiter dictum interpreted this as meaning that a claim for pure economic loss cannot be brought in the Tribunal. But if, for example, a borrower brought a claim under the Contractual Mistakes Act 1977 or the Contractual Remedies Act 1979 that they had entered into a credit contract as a result of a mistake or misrepresentation, the Tribunal would have jurisdiction up to $12,000.
[43] S Todd, (1988). “Exemplary Damages” Victoria University of Wellington Law Review, 18, 145 at 146.
[44] Accident Insurance Act 1998, section 396; Crown Pastoral Land Act 1998, section 19.
[45] Residential Tenancies Act 1986, section 77.
[46] Section 99 Fair Trading Act 1999, Alberta, Canada.
[47] Report of the Contracts and Commercial Law Committee, supra n5 at 188-190.
[48] Supra n24.
[49] Ibid.
[50] See Chapter 5, n55 for further detail.
[51] As discussed in Transparency, knowing what a finance rate is does not inform a consumer how to interpret and use the rate.
[52] E.g. section 80 Trade Practices Act 1974 (Commonwealth, Australia).
[53] See Duggan and Lanyon, supra n25 at 451.
[54] In 1999, the Ministry of Commerce released the Policy Framework for Occupational Regulation: A guide for government agencies involved in regulating occupations, which discusses when licensing and regulation are appropriate for an industry.
[55] For example, in 1996 the Commission prosecuted a major bank for running misleading credit advertisements. The bank was fined $16,000. The Commission has also successfully prosecuted several organisations under the Fair Trading Act in relation to the advertising of supposedly interest-free credit deals when the cash price of the items is less than the interest-free price.
[56] The Federal Trade Commission is similar in function to the Commerce Commission, while the Federal Reserve Board is more akin to the Reserve Bank of New Zealand.
[57] This document is not the place to discuss the advantages and disadvantages in separating operational from policy functions. On advantage is that it improves the flow of information used in policy development, whereas a disadvantage may be less objectivity.
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