Deadline approaches for input on consumer credit fees

Katie Carson, Senior Associate | Thursday 9 April 2009

The deadline of 1 May is approaching for submissions on the Commerce Commission's guidelines for consumer credit fees.

Deadline for submissions is 1 May 2009 Focus on establishment fees as well as general credit and default fees – prepayment fees not dealt with Commission sets out seven key principles for interpreting CCCFA's fee provisions Reasonableness requirement and consumer protection purpose given wide general ambit Commission sets out detailed tables of recoverable cost categories

Introduction

The Commerce Commission has released draft guidelines on the requirements for consumer credit fees under the Credit Contracts and Consumer Finance Act 2003 (the CCCFA).

Only the courts are able to make binding decisions about compliance with the CCCFA, and so these guidelines are simply an indication of factors that may trigger an investigation by the Commission. However, it is expected that most creditors will wish to comply with the Commission's guidelines as far as possible.

While the draft guidelines provide some useful insights into the Commission's general thinking, in some places they are contradictory and confusing, and to that extent are likely only to add to the lack of clarity for creditors concerned to fit within the regulatory safe harbour. It should also be noted that the guidelines have a particular focus on establishment fees and general credit or default fees. They do not deal specifically with prepayment fees, third party fees or interest charges.

The Commission has invited submissions by interested parties on the draft guidelines before they are finalised. The deadline for submissions is 1 May 2009. The full text of the draft guidelines is available on the Commerce Commission's website at: www.comcom.govt.nz

Seven key principles

The draft guidelines contain an introductory section outlining seven key principles which inform the Commerce Commission's views on fees. Those principles are:

1. The CCCFA has a consumer protection focus.

2. The CCCFA allows creditors to recover their costs of lending. However, the Commission goes on to qualify this by referring in the guidelines to "reasonably incurred" and "prudently incurred" costs.

3. The CCCFA requires that fees must be cost-reflective. Credit and default fees are intended to be compensatory in nature and a causal link is necessary between the relevant cost and the service or function for which the fee is charged.

4. Fees may recover creditors' direct and indirect costs. Indirect costs (e.g. office premises, IT expenses, etc) as well as direct costs may be apportioned to particular services or functions for which fees are charged.

5. Each cost component should be recovered no more than once through fees.

6. Estimation of fees is allowable.

7. Any profit should be earned from interest not from fees.

Discussion sections – reasonableness requirements

The Commerce Commission's discussion on fees, which follows the introductory section, is divided up into a general discussion on credit and default fees, a more specific discussion on s42 of the CCCFA (which relates to establishment fees), and then a more specific discussion on s44 of the CCCFA (which relates to other credit and default fees).

Unfortunately, the discussions on reasonableness across the three sections are somewhat confusing. For example, it is not clear how the general discussion on credit and default fees interfaces with the specific requirements of s42 and s44. In some places, the Commission anticipates giving the reasonableness requirements and consumer protection policy of the CCCFA a wide general application to restrict "excessive" fee recovery.

However, the Commission also sets out detailed tables of the types of costs that, in its view, can be properly included in establishment fees and other credit or default fees (or that may be included on a case-by-case basis). The suggestion is that, as long as only costs of those types are included, then the relevant fee will be objectively reasonable.

Discussion sections - enforcement approach

The guidelines are completed with a discussion of the Commerce Commission's approach to enforcing the requirements of the CCCFA, which is a useful point of reference as to when investigation action by the Commission may be expected and what steps can be taken to avoid or mitigate that situation.

Speak now or forever hold your peace?

We recommend that creditors consider making submissions in relation to the draft guidelines in particular if:

• the creditor wishes to recover costs of a type that the Commission specifies in the guidelines are not able to be recovered through fees (or are only able to be recovered on a case-by-case basis);

• the creditor has found in practice that it is not able to recover its costs of lending through fees when complying with the CCCFA;

• the creditor's costs are higher than average (resulting in higher than average fees being required in order to recover those costs);

• the creditor has experienced any problems with applying a cost-allocation accounting methodology to its business for the purpose of setting fees, including ensuring that there is no duplication in cost recovery and that any estimates of average costs even out over time;

• the creditor is concerned that the approach recommended by the Commission is otherwise difficult (or costly) to implement from a practical perspective; or

• the creditor has any other questions or comments on the draft guidelines.

We would be happy to help draft submissions on your behalf. Please contact:

Murray King
Partner