CCCFA - compliance issues you should know about

The Commerce Commission has distributed an article on compliance issues under the Credit Contracts and Consumer Finance Act (the CCCFA) to industry groups.

In its article, the Commission summarises enforcement actions taken against creditors who, in the Commission's view, have breached the CCCFA.

The Commission has:

• commenced criminal proceedings against two creditors;
  
  
• entered into a settlement with one creditor;
  
  
• issued formal warnings to 13 creditors; and
  
  
• issued compliance advice letters to six creditors.

The following key compliance issues have been highlighted by the Commission:

Disclosure

• Legible disclosure must be made;
  
  
• failure to properly disclose prevents enforcement;
  
  
• documents must be updated to reflect the different requirements of the CCCFA; and
  
  
• some people don't realise their activities are covered by the CCCFA.

Improving compliance with the disclosure requirements of the CCCFA is a stated priority for the Commission.

Two creditors are being prosecuted by the Commission under both the CCCFA and the Fair Trading Act for disclosure-related breaches. Specifically, one company failed to update its documents to comply with the CCCFA, and another company disclosed using a faxed photocopy, which was effectively illegible.

Unreasonable fees

Credit fees must be reasonable. The Commission expects that creditors will have undertaken a cost analysis process to set their fees and is using this to decide whether it thinks fees are unreasonable.

Establishment fees

It is the Commission's view that establishment fees must be restricted to those costs that are directly attributable to establishing the loan, such as processing the application and documenting the contract.

Provision for bad debts

The Commission has advised a creditor against including provision for the costs associated with bad and doubtful debts in its monthly administration fee. It also notes that no provision for bad or doubtful debts should be included as part of a default fee and that the averaging of the costs associated with bad and doubtful debts over all defaulting debtors is unreasonable and likely to be a breach of the CCCFA.

Third party fees

Third party fees must not exceed what the third party actually charged the creditor. A creditor has been warned about its practice of charging the cost of staff time in carrying out searches of the Personal Property Securities Register.

Commissions on credit-related insurance

In November 2005, the Commission issued guidelines on its position relating to "reasonable commission" allowed to be retained by creditors under section 45 of the CCCFA. It has concluded that commissions for credit-related insurance should be no more than 20% of the gross premium. Click here to link to the Commission's website, where a copy of the guideline is available.

Full prepayment

• Creditors who want to include the time taken to re-lend money in its repayment formulas must be prepared to justify it; and



• charging extra interest on full prepayment can be seen as charging interest in advance, which is a breach of the CCCFA.

The Commission's position is that "any estimate of loss should be calculated on the basis that a creditor will take reasonable steps to mitigate their loss and to re-lend money as soon as possible". Creditors who claim an allowance for the time taken to re-lend the money should be prepared to demonstrate, based on an analysis of its operations, that a delay in re-lending the money is unavoidable and that the extent of the delay has been accurately calculated.

Credit related insurance

The Commission has warned a creditor for requiring an unemployed debtor to obtain credit-related insurance that covered redundancy.

Another creditor was warned for charging a guarantee fee for a "guarantee" that was, in effect, an insurance contract. The Commission has stated that disguising an insurance product to avoid the requirement to provide a proportionate rebate of the insurance premium to debtors who prepay is likely to be a breach of the CCCFA.

Agents and brokers

The Commission has made clear its expectation that creditors who use agents or brokers will take reasonable steps to ensure that those agents or brokers also have adequate compliance programmes.

Click here to link to a full copy of the Commission's article.

Enquiries and information

For more information on any of the cases, articles and features in Financial Services Quarterly, please email Rachel Gowing or call on 64 9 916 8825.