The Commerce Commission says the Court of Appeal's dismissal of an appeal in a long running credit fees case makes it clear a lender's credit fees should only cover costs closely related to a particular loan transaction.
The Court of Appeal has dismissed Motor Trade Finance Limited (MTF) and Sportzone Motorcycles Limited’s appeal in a case brought by the Commerce Commission.
The Commerce Commission says the Court’s ruling upholds earlier High Court judgments backing the Commission’s approach to assessing whether credit fees charged by lenders are reasonable as required by the Credit Contracts and Consumer Finance Act (CCCFA).
The Commission alleged that MTF and Sportzone charged unreasonable establishment and other credit fees on 39 finance contracts entered into between 2005 and 2008.
In September 2013 the High Court found the fees were unreasonable in breach of the CCCFA. In October 2014, it released a further judgment clarifying the practices lenders should adopt when charging fees. MTF and Sportzone appealed both decisions to the Court of Appeal.
Commerce Commission Commissioner Anna Rawlings says the Court of Appeal has now provided a clear statement on the approach lenders should take to the fees they charge.
“The Court’s ruling provides easy to understand guidance for lenders, making it clear that credit fees should only cover costs that are closely related to the particular loan transaction. The Court of Appeal agreed with the Commission that the purpose of the CCCFA is to protect borrowers, especially vulnerable borrowers, by ensuring transparency in the costs of borrowing. Fees should not be used to recover general business costs or to generate profits, that is what interest is for,” Rawlings says.
“The Commission will be publishing further credit guidance to reflect the judgments of the High Court and Court of Appeal, and to ensure that lenders are clear about what the law requires. These judgments and important upcoming changes to the CCCFA, which include new Lender Responsibility Principles, will help to shape our programme of work aimed at ensuring that lending practices comply with the law," says Rawlings.
The Court has told MTF and Sportzone to pay the Commission’s costs.
The companies have 20 days to seek permission to appeal the ruling to the Supreme Court. MTF says it's considering whether to appeal.
MTF 'disappointed', considering appeal
MTF notes in a statement the Court of Appeal has upheld both the High Court’s 'Liability Judgment', that some fees charged under the loan contracts were unreasonable in terms of the CCCFA, and the 'Quantification Judgment', which detailed specific costs that could be recovered by way of the relevant fee.
It said the High Court had rejected the Commerce Commission's claim that Sportzone and MTF failed to make proper disclosure of components of credit fees and that the labels used for establishment and account maintenance fees were misleading and deceptive in breach of the Fair Trading Act. Those aspects of the decision were not challenged by the Commerce Commission at the Court of Appeal. MTF says it has always fully disclosed the fees it charges and the level of those fees.
MTF says it's disappointed with the decision that the amount of some fees charged were considered unreasonable.
"A key purpose of the CCCFA is to assist consumers to distinguish between competing credit arrangements. MTF’s view is this judgment will not assist borrowers to identify any unreasonable fees charged by competing lenders. If two lenders charge exactly the same fee amount to establish a loan on the same terms, one of those fees may be unreasonable and the other not. The Court’s view is that the determination is to be made almost solely by a complex cost accounting analysis that depends on the structure of each lender," MTF says.
"It is highly unlikely that any borrower would be able to make such an assessment prior to taking out a loan. A borrower would not know whether a fee is unreasonable by simply looking at the dollar amount or any benchmark against commercial practice. The fees charged by MTF and Sportzone are similar to those charged by many finance companies and banks in the New Zealand market."
"While not in a position to finally quantify any potential implications at this stage, MTF is well advanced in this process and hopes to work with the Commission to ensure the current fee model is compliant," MTF says.
"This case is significant and has implications for the consumer lending industry generally, as the principles will be incorporated in the Responsible Lending Code, which will take effect from 6 June 2015. The Code sets out the processes, practices and procedures that a lender should follow to ensure that fees are not unreasonable and will apply to all consumer credit contracts written after 6 June 2015."
Here's the judgment, and here's MTF's statement.
Here's some background from the Commerce Commission, and see more on the Commerce Commission's website here.
Sportzone was a Christchurch-based company that sold, serviced and repaired motorcycles. It offered financial services, through MTF, to customers that purchased motorcycles. Sportzone has since gone into liquidation. MTF is a co-operative company that provides financial services to the customers of its associated dealers. Sportzone was a shareholder in MTF.
The Commission began investigating MTF and Sportzone in 2006 after receiving a complaint about their lending practices. Both companies were subsequently charged with charging unreasonable establishment fees, account maintenance fees, and arrears fees on 39 specific loan transactions to borrowers of motor vehicle finance, in breach of section 41 of the CCCFA.