Consumer Credit Law Reform - Jim Anderton Speech
Hon Jim Anderton Speech Notes
Consumer Credit Law Reform
Thursday, 14 February 2002
3rd Annual Summit on Credit and Consumer Law Reform
"Directions for the Consumer Credit Law Reform in New Zealand"
Crowne Plaza Hotel, Auckland
This Labour Alliance Coalition Government has been actively improving the rights of consumers.
In just over two years we have announced a range of measures including:
- a crackdown on pyramid sales schemes;
- a total overhaul of motor vehicle dealer law;
- the Consumer Protection Bill;
- stronger protections for consumers shopping on the internet;
- and changing the time in which claims under the Fair Trading Act can be lodged from three years after purchase to three years after faults are found.
This has given me some personal satisfaction. For many years as a backbencher and in opposition I met people who had problems with credit rip-offs.
Some of the stories were heartbreaking. I met people who had started with difficulties relating to cash flow, had borrowed some money from a small loan company and then months later had lost everything without paying off the principal loan.
It is clear that there are people who will take advantage of others if they can and we need to have laws and protections in place to protect all New Zealanders.
In opposition you do what you can. You raise issues and try and get agencies and companies to deal with problems you may raise with them. You even threaten to slap someone over the wrist with a wet press release.
In Government I have actually been able to make changes and start to close the loopholes that allow credit rip offs to occur.
Our goal for consumer affairs has been stronger protections and better information for consumers. Although we haven’t (and won’t) solved every conceivable problem I think we have gone a long way toward achieving this goal.
We are working on improving consumer safety step by step.
The first step was to make it harder and harder for rip off companies to operate.
My Wigram electorate in Christchurch, has the dubious honour of having the highest concentration of small cash-loan finance companies in that city, as well as a large number of car dealers who provide finance.
Cash-loan companies always set up close to their market. Their market is low-income, high-risk consumers and Wigram encompasses many of the lower-income/working class neighbourhoods of Christchurch. In many respects it is a classic example of what is called a “sub-prime” market.
The Consumer Credit Bill is an important means of dealing with some dubious activity in the area of consumer credit.
I would like to give some examples of the unacceptable lending practices that have prompted my action.
Last year I exposed the disgraceful practices of three lenders: Funaki Enterprises, Financial Options and Jackson Investments. Their activities included:
- Failing to provide written contracts.
- Taking EFT POS cards and PIN numbers as pledges for loans.
- Inflating the purchase price of goods sold on hire purchase when writing the contract.
- Requiring beneficiaries (including unemployed people) to purchase income protection insurance as a condition of receiving credit.
- Publishing the photos of defaulting debtors in the local newspaper.
- Charging a $1000 establishment fee on a $4000 advance (plus 20% interest - of course).
These lenders have operated in the belief that they can get away with this behaviour. And they have. Their borrowers seldom take action themselves. There was no public agency with the responsibility of enforcing the rights that consumers have to be protected from such actions by lenders.
It is completely unrealistic to expect consumers - in many cases desperate for finance - to wade through complex (and sometimes non-existent) small print contractual documentation. They would also have to access and interpret several highly complex commercial law statutes before utilising the confusing and arcane remedies they have against lenders.
I don’t want anyone to have the impression that the case for reform is built on the actions of three extreme examples of bad lenders.
I consider that breaches of consumer credit legislation are widespread and possibly systemic in the lower end of the lending market.
The biggest concern I have is the way that charges are not properly defined for consumers. This occurs in many forms. For example:
- It is common to bill a borrower for “brokerage” services when no genuine brokerage service took place.
- Similarly, it is standard practice, even on the simplest of instalment loans, for a borrower to be billed for “legal expenses” in the region of $500-700. This in addition to a booking fee - when, the lender has not always incurred direct legal costs for the services of a lawyer.
- Inflating the amount of a fee paid to a third party and passing it on to the borrower. For example, the $11 cost to register a motor vehicle security interest is sometimes passed on as $90.
In fact, this last practice was standard right across the mainstream motor vehicle finance market until last year the Ministry and the Commerce Commission pointed out that it breached both the Credit Contracts Act and potentially the Fair Trading Act.
All of these examples lead to incorrect figures and an inaccurate finance rate.
Clearly, lenders have felt little pressure from consumers or the self-enforcing remedies of the Credit Contracts Act to cease these unlawful and misleading practices.
Nor could anyone convince me that the borrowers concerned are autonomous and fully-informed consumers. They are not even adequately informed.
Some practices by lenders while unfair, are condoned by the current law. A good example is that it is virtually standard practice for consumer finance and hire purchase lenders to use the methods in the Hire Purchase Act to calculate the balance payable upon early settlement by the consumer.
Usually, these methods produce outcomes that are unfair and inefficient. A lender is able to recover far more from the consumer than both the cost of setting up the loan or the loss suffered as a result of the early settlement.
As a result of this unsatisfactory situation the Government has decided to introduce the Consumer Credit Bill. The consumer credit market needs some effective regulation and that regulation needs to be better than what is currently in place under the Hire Purchase Act and the Credit Contracts Act.
In particular, there needs to be real enforcement of consumers” rights against lenders who breach the law or deceive borrowers.
As I have stressed before, responsible lenders have nothing to fear and will in fact benefit once the appalling level at which the “credit cowboys’ operate is lifted.
There are other benefits of the legislation as well.
Lending for business purposes will only be covered by the reopening provisions. The provisions of the Credit Contracts Act, which allow courts to reopen oppressive, contracts will be maintained. This will reduce compliance costs for the finance industry and business borrowers.
Finance rate calculations will no longer be required.
Interest will be charged on a consistent basis. However, the rules have been made as flexible as possible.
For consumers the benefits will be a more transparent and equitable regime for credit transactions.
- Disclosure will be enhanced.
- Interest charging will be transparent.
- The rules on early settlement will be fair.
As Acting Minister of Consumer Affairs, I look forward to ensuring this long overdue reform is introduced to the house this year.
I wish your conference well.