Background Information on Consumer Credit Law
Hon J Anderton
Background Information on Consumer Credit Law Reform Announcements
On Wednesday 8 August 2001 the Minister of Consumer Affairs announced proposed changes to consumer credit laws. The reforms will see the Credit Contracts Act 1981 and the Hire Purchase Act 1971 replaced by a single Consumer Credit Bill. Drafting of the Bill will begin immediately with the aim of introducing it to Parliament in the first half of next year.
The important features of the new reform are: improved redress for consumers a public enforcement agency better information for consumers to help them make better credit decisions a fairer deal in relation to interest charges, fees, and early repayment.
The reforms will eliminate some unfair practices by credit providers, discourage others, and improve compliance with the law.
Summary of Reforms
More 'clout' against oppressive activities and breaches of the law through a public enforcement agency. The Government will be seeking funding to give the Commerce Commission authority and resources to investigate the activities of lenders and take action if necessary.
This would reduce the power imbalance between lenders and consumers. It would also provide an incentive for lenders to comply with the law, because the chances of action being taken against them would be greater.
A public enforcement agency will be more effective in enforcing the law and obtaining redress in situations where consumers might be incapable of acting or choose not to act at all. This is because: an agency would have the authority and resources to investigate the activities of lenders and be better placed to detect breaches or assess lenders' actions an agency would develop expertise in dealing with the complexities of credit law an agency could act in cases where many individual borrowers have each suffered a small loss (which amounts to a large aggregate loss), but are unlikely to take action themselves an agency would target those lenders whose actions warrant most concern.
Better information for consumers so that they are better informed about their credit deal. The aim is to achieve contracts that are clearer, with information that is more useful to consumers. The Act will state what information should be provided to borrowers in a credit contract, and a performance standard will specify how it should be presented. For example, lenders will be required to disclose whether there are any penalties for early repayment and will not get away with burying this information in the fine print. Model forms will be written into the Bill to assist lenders. These reforms will not eliminate all the difficulties faced by consumers in credit deals, but it will help make them better informed and more confident in their dealings.
Lenders will no longer have to calculate and disclose the finance rate. The finance rate is often not an accurate measure of the cost of credit, as some costs are excluded from the calculation. This means consumers have not always been comparing apples with apples when finance rate disclosure has been compulsory in the past.
Lenders must keep consumers fully informed throughout the existence of the contract of any unilateral changes made by the lenders and will be greater informed during the course of their loan.
Increased fairness for consumers There will be limitations on how lenders can charge interest, and limitations on certain types of fees. For example, lenders cannot charge interest in advance. Interest should be earned before it is charged.
The reforms will provide clear rules for the early repayment of loans. Any early settlement charges must be transparent and must bear some relationship to the loss incurred by the lender as a result of the early repayment. A formula will be included which may be used by lenders.
Reduce oppressive activities by lenders and encourage greater compliance. The existence of a public enforcement agency should act as an incentive for lenders to comply with the law on the basis that breaches are more likely to be detected and acted against.
There will also be increased penalties and wider powers given to the Courts. The reforms include a new, simplified formula for automatic penalties. Lenders who breach the disclosure requirements will have to pay the borrower the lesser of 5 percent of the maximum outstanding balance of the loan or $3000.
The Courts will have the power to award compensatory damages for any loss to the borrower in addition to the automatic penalty. They can also award exemplary damages to a borrower, and will be able to award injunctions to restrain actions that are or would amount to a breach of the law.
Reduction in compliance costs for business borrowers and lenders to business. Business borrowers and those who lend to businesses will also benefit from changes to the law. The new Bill will apply to consumer borrowing only, and not business borrowing. This will reduce the red tape and compliance costs associated with businesses being covered by a law that does not necessarily meet their needs.
Protections that are appropriate for consumers are not necessarily right for businesses. The previous legislation limited consumer protection because it took account of business circumstances - this also increased compliance costs.
Business borrowers will still receive protection through the Fair Trading Act 1986, the Personal Property Securities Act 1999 and self-regulatory schemes, notably the Banking Ombudsman scheme. They will continue to be protected from oppressive conduct.
The Ministry of Economic Development will be looking at the need for small business specific legislation.