Commission steps up enforcement of Credit Contracts and Consumer Finance Act

Two recent actions under the Credit Contracts and Consumer Finance Act 2003 (CCCFA, or the Act) demonstrate that the Commerce Commission has made enforcing the Act a priority in 2007.

In only the second prosecution of a lender under the Act, the partners of car finance business, Dolbak Finance, were fined $100,000 and required to pay $46,600 in statutory damages to customers after each pleaded guilty to 22 charges. Among their breaches, the partners had not told customers what fees and charges applied, how interest was calculated, or how to pay the loan off early. The Commission reported that Dolbak was twice warned about not providing full and accurate information required by the Act, but chose to ignore the reminders.

Another car finance company, Club Finance, settled with the Commission out of court and agreed to refund $788,000 to over 1,500 of its customers after breaching the CCCFA by requiring borrowers to take out insurance that was "not reasonably necessary for the protection of their legitimate interests".

Club Finance had required the borrowers to insure their car loans against the risk of redundancy, even though they were unemployed. Even if the borrowers eventually found employment and were subsequently made redundant, the contract contained a clause that meant the borrowers were ineligible to claim the insurance.

These enforcement actions signal that the Commission has stepped up its activity in the consumer finance sector and is looking to make examples of any lenders who fail to comply with CCCFA requirements.

In addition, the Commission is currently conducting an industry survey of credit industry fees and charges. Based on its publications about the Act, the Commission appears to have a different view on how consumer credit fees should be calculated to some industry participants. These issues have not yet been tested in court.

In view of the Commission's current activity in this area, now would be a good time for lenders who provide consumer credit finance to review their fees and CCCFA compliance procedures.

What is the CCCFA?

The CCCFA is the successor legislation to the Credit Contracts Act 1981 and the Hire Purchase Act 1971, and provides the legislative framework for credit contracts, consumer leases, and buy-back transactions of land.

The CCCFA is intended to protect borrowers by imposing strict disclosure requirements on lenders. In addition, the Act restricts the fees that lenders may charge and the manner in which they are calculated, with the aim of enhancing transparency and borrowers' ability to compare products.

Does the CCCFA apply to you and what does it require?

The CCCFA will apply to you if you enter into one of the kinds of transactions that the Act covers. Most commonly, these transactions will involve providing credit to a private individual under a consumer credit contract.

Lenders have obligations under the Act relating to:

• disclosure;

• interest;

• fees and charges;

• cancellation;

• payments and prepayments; and

• variation of the contract.

Among its provisions, the Act regulates:

• how interest may be calculated and charged; and

• the type and amount of fees and charges payable under a consumer credit contract.

In particular, the Act requires that lenders' fees, charges and insurance are reasonable and are clearly explained to the borrower.

What liability do you have under the CCCFA?

If you are in breach of the CCCFA, then you are not only a target for investigation, but face the risk of criminal conviction, with fines of up to $30,000 for each offence. In addition, the Commission is able to seek remedies on behalf of borrowers as a group.

You may be ordered to pay statutory damages, compensation, or refund money obtained in breach of the Act.

Non-compliance has other potentially serious implications. For example, if you do not disclose the required information, the debtor may cancel the contract and you will not be able to enforce it until disclosure is made.

Finally, you may also face the prospect of being banned from operating within the finance industry.

What are the Commission's powers?

The Act gives the Commission the role of promoting compliance with the CCCFA.

The Commission has the power to prosecute creditors, lessors, and buy-back operators for non-compliance with the Act; the power to bring civil proceedings on behalf of customers, and a range of investigatory powers.

Getting advice

Bell Gully is able to provide comprehensive advice on all aspects of the CCCFA including compliance, regulatory investigations, and proceedings.

This article was written by senior associate Jenny Cooper and solicitor Nick Christiansen and was first published on Friday 8 June 2007.

Enquiries and information

For more information on any of the cases, articles and features in Commercial Quarterly, please email Diane Graham or call her on 64 9 916 8849.