On 30 June 2017 the Commerce Commission released its final guidelines on consumer credit fees. This follows the release of the draft guidelines in September 2016.
The guidelines provide detailed information about the Commerce Commission's views, its approach to considering the reasonableness of credit fees, and how the fees provisions of the Credit Contracts and Consumer Finance Act 2003 should be interpreted. However, as pointed out in the guidelines, it is ultimately up to the Court to interpret the fees provisions of the Act, and each case will need to be considered on its own facts.
The guidelines rely on, and quote from, the Supreme Court judgement in the Sportzone case, which was delivered last year.
The final guidelines are not significantly different in substance from the draft guidelines released last year. The key points to note are:
- The final guidelines put more emphasis on the test in Sportzone that costs must be "closely connected to the transaction" in order to be taken into account in setting fees.
- The final guidelines have added some further information not contained in the draft guidelines, in particular:
- a paragraph referencing the Commission's enforcement guidelines and highlighting that compensation to customers is an important consideration in its enforcement decisions.
So if, following a review, the lender becomes aware that it has been charging a higher fee than it was entitled to charge, the Commission considers the lender should reduce its fee and refund those borrowers who have been overcharged. Although there is no requirement to refund, the borrower is entitled to seek a refund through the Courts or to complain to the Commission, which can act on the borrower’s behalf.
- a paragraph saying that fees should be charged at or around the time they are incurred to avoid extra interest costs.
- guidance on when the Commission considers costs may be unreasonably high and therefore would consider that the fee is unreasonable even where the costs are actually incurred and sufficiently closely connected to the transaction. This may be a concern to some lenders in relation to establishment and prepayment fees as the legislation does not require the court to have regard to reasonable standards of commercial practice when assessing those fees.
Costs may be unreasonably high where:
- they are significantly above the commercial norm;
- the lender adopts a business practice or structure that unnecessarily raises the costs it seeks to recover through fees; or
- the lender fails to adopt cost saving practices, technologies and structures where it is reasonable to do so.
- further information about pre-selected services and the Commerce Commission's view that pre-selected services are not optional.
if the service has been pre-selected or pre-ticked in the contract, in our view it is not optional, as the borrower has taken no positive step to opt into the provision of the service. The lender also risks breaching the Fair Trading Act by misleading the borrower that they are purchasing one service when in fact they are purchasing a bundle of services
- in relation to prepayment fees, clarification that, where part of a loan is fixed and part of the loan is not, the prepayment fee can only relate to portion of the loan that was fixed.
- a paragraph that the lender must mitigate its loss on prepayment, and the lender has an obligation to act reasonably to minimise the loss they suffer.
- a section headed "Third party collection and enforcement costs are generally default fees" that records the Commission's view that most fees charged by the lender to recover third party collection or enforcement costs must be reasonable whether or not the third party is associated with the lender.
- a section on broker fees under the third party fees section, in which the Commission notes that this is perhaps the most common third party fee and clarifies that, although fees charged by a broker that is not associated with the lender are not directly subject to the reasonableness requirements of the Act, the fees are still subject to various regulatory requirements (including the Fair Trading Act and the oppression provisions of the CCCFA).
- a comment in relation to the disclosure of third party fees that it is preferable for lenders to disclose these separately from fees charged for the lender's own costs.
- The final guidelines also take a harder line on percentage-based fees than the draft guidelines. In the final guidelines, the Commission says that percentage-based fees 'run a high risk of being unreasonable'.
Overall, the guidelines are a useful tool for any business that is setting consumer fees, because they provide clear guidance on the Commission's view of the requirements under the Credit Contracts and Consumer Finance Act 2003 and a valuable indication of the Commission's approach to enforcement. However, some aspects of the guidelines are still likely to cause friction within the industry, and the exercise of cost-accounting for consumer credit fees will remain a complicated one for most lenders.
If you would like to discuss our insights in more detail, please contact us.