After a wave of investigating and prosecuting mobile traders, the Commerce Commission appears to have redirected its attention to lenders as creditors who offer high-cost, short-term loans (third-tier lenders).
Since March 2016, five lenders of short-term personal loans have been ordered, or have agreed, to pay over $3 million for breaches of the Credit Contracts and Consumer Finance Act 2003 (CCCFA) or the Fair Trading Act 1986 (FTA).
The most recent of these is Acute Finance Ltd. On 23 June 2017, Acute was fined $22,000 for charging an unreasonable waiver fee – a mandatory fee for which Acute would meet the borrower’s obligations if they died, became disabled or were made redundant.
This article discusses the Commerce Commission’s investigations and prosecutions of mobile traders and third-tier lenders, and the key provisions of the CCCFA and FTA that impose obligations on to these lenders. It then suggests that, in future, the Commission is likely to take a more rigorous approach to prosecutions, which may include the prosecution of more directors of lending companies.
Mobile traders
Mobile traders are described by the Commission as traders that:
“…[sell] high priced consumer goods on credit, using a variety of sales techniques and often to those who have low incomes and poor credit histories. Mobile traders are often referred to as ‘truck shops’ these are businesses that do not have fixed retail premises in the traditional sense. Some operate mobile shops usually from trucks, whilst others employ sales staff who sell goods door to door, using catalogues and brochures.
“They sell predominately or exclusively on credit, lay-by or other deferred terms and often to those, as I have said, with low incomes and poor credit histories. The price of goods is often significantly higher than would be charged for comparable goods by mainstream retail traders.”
— Commerce Commission v Betterlife Corp Ltd [2016] NZDC 10579 at [7]-[8].
In 2014, the Commerce Commission began a year-long investigation into the conduct of mobile traders to monitor, educate on and improve compliance with consumer protection legislation. The resulting report entitled Mobile Trader 2014/2015 Project found that 31 out of 32 mobile traders were in breach of the CCCFA and FTA by:
- Failing to include required information in their contracts,
- Failing to deliver goods purchased or delivering them much later than represented,
- Preventing customers from exercising their statutory and contractual rights to cancel agreements,
- Using terms in contracts to ensure continued payment such as obtaining multiple signed direct debit forms, requiring customers to continue to make payment after the item is fully paid to build an account credit and requiring a home visit that the customer pays for before a refund is granted,
- Failing to promptly pay refunds,
- Using advertising that does not specify the total cost to the customer or the details of the product to be purchased.
In response to these findings, the Commission initially provided compliance advice to mobile traders, which set out business practices that the Commission considers to be unlawful. The Commission then commenced prosecutions of those mobile traders who continued to be non-compliant, in a further attempt to change industry behaviour (R v Smart Shop Ltd [2016] NZDC 19377 at [14]).
The Commission has successfully prosecuted 12 mobile traders since January 2016. In the majority of cases, the mobile trader was fined for breaches of the CCCFA and FTA. The Commission notes that the five mobile traders sentenced in 2016 were fined a total of $510,000.
To date, mobile traders sentenced in 2017 have been fined a total of almost $200,000. Some mobile traders have also refunded fees that were charged when they were not entitled to do so (for example, Commerce Commission v Ace Marketing Ltd [2016] NZDC 19165).
The director of one mobile trader, Flexi Buy Ltd, was sentenced to two years’ imprisonment as a party to Flexi Buy’s misrepresentations to customers. The company made false representations that it would deliver goods after partial or full payment for goods, and omitted to inform customers of a material particular (namely that it did not intend to supply them with the goods they had purchased). Of Flexi Buy’s over 300 customers, only nine received their goods. Judge Cunningham found that the director aided Flexi Buy to make such misrepresentations (R v Mehta [2016] NZDC 233773).
Third-tier lenders
In February 2016, the Commission announced the commencement of a project similar to that carried out in relation to mobile traders, but which focuses on third-tier lenders.
The Commission’s interest in the conduct of third-tier lenders naturally follows from enforcement action taken against mobile traders. Third-tier lenders have the same target audience as mobile traders, namely those who have low incomes or poor credit history who therefore cannot access mainstream credit facilities.
The Commission began reviewing third-tier lenders’ websites for compliance with their obligations under the CCCFA and FTA. Whereas the Commission found 31 out of 32 mobile traders to be non-compliant with these obligations, by February 2016, compliance notices had been issued to only 15 of the 100 third-tier lender websites that had been reviewed. The findings of the Commission’s investigation suggest that non-compliance with statutory provisions is not as widespread as mobile traders, particularly given the number of third-tier lenders in the market.
The nature of third-tier lenders’ non-compliance also seems to be more limited than mobile traders. This flows from third-tier lenders’ narrower role. Mobile traders are involved in both financing and providing the goods purchased, whereas third-tier lenders are only involved in the former. For this reason, the Commission’s interest in third-tier lenders focuses on the failure to disclose information and charging fees that are unreasonable.
Directors of both mobile traders and third-tier lenders are nevertheless exposed to the risk of being prosecuted personally. The director of Twenty Fifty Club Ltd was convicted under the Crimes Act 1961 as a party to the lenders’ offending, which involved failing to provide key information to debtors, charging unreasonable fees, and misrepresentation (Commerce Commission v Twenty Fifty Club Ltd and Marsich [2016] NZDC 7242).
Credit Contracts and Consumer Finance Act 2003
The CCCFA applies to “consumer credit contracts”: where the debtor is a natural person and the credit is intended to be used for personal, domestic or household purposes (CCCFTA, s 11).
As a result of amendments to the CCCFA that came into force on 6 June 2015, the regulatory framework available to the Commission when investigating third-tier lenders is broader than when it produced the Mobile Trader 2014-/2015 Project report. However, some mobile traders were also ultimately prosecuted under these new provisions. For example, Best Buy Ltd was charged with misleading customers into thinking it had a right to repossess goods when it did not.
Of note, Lender Responsibility Principles were introduced that require lenders to:
- Make reasonable enquiries to determine whether the credit will meet the borrower’s requirements and objectives, and that the borrower can make repayments without suffering substantial hardship;
- Assist the borrower to reach an informed decision as to whether or not to enter into the agreement and to be reasonably aware of the full implications of the agreement, by ensuring that advertising is not misleading, deceptive or confusing, and the terms of the contract are clear; and
- Treat the borrower and their property reasonably and in an ethical manner.
Failure to meet the Lender Responsibility Principles means the court can make an order under section 94. The amendments to the CCCFA also allow the Minister of Commerce and Consumer Affairs to develop a Responsible Lender Code to provide guidance to lenders on how to satisfy the Lender Responsibility Principles.
Other amendments to the CCCFA in 2015 follow the Supreme Court’s decision in Sportzone Motorcycles Ltd (in liquidation) v Commerce Commission [2016] NZSC 53, providing that a lender can only charge fees that reflect the costs and losses associated with the particular activity for which the fee is charged.
Creditors must also be registered under the Financial Service Providers (Registration and Dispute Resolution) Act 2008 and be a member of a dispute resolution scheme, which must be disclosed to consumers. If a creditor wishes to take security for a loan, the items over which the security is taken must be specified in the loan contract and cannot include essential items such as beds, cooking equipment and washing machines (CCCFA, s 83ZN).
The available fines were also increased by 20 times by these amendments, so that an individual can now be fined up to $200,000 and a company can be fined up to $600,000 (CCCFA, s 103; Commerce Commission v Betterlife Corp Ltd at [70]). These are consistent with the penalties available for breaches of sections 9 and 13 of the FTA, which have provided the basis for a significant number of the prosecutions to date.
Most mobile traders and third-tier lenders were prosecuted under section 17 of the CCCFA, which requires initial disclosure of key information to borrowers such as the initial balance, details of any fees to be charged, the number of payments required, and the debtor’s right to cancel the contract within five working days. Failure to provide adequate disclosure prevents a lender from enforcing the contract or recovering any fees for any period that the lender failed to comply with its disclosure obligations (FTA, s 40). If a lender is prosecuted under section 17, a court can require repayment of fees collected during the period of non-compliance as part of sentencing. For example, the Court ordered repayment of fees in Commerce Commission v Ace Marketing Ltd.
A court can also order that fees be refunded or are not required to be paid where lenders have breached sections 39 and 40, which prohibit the charging of unreasonable fees and limit the fees that can be charged (FTA, s 40).
Observations about the Commission’s approach
When non-compliance with the CCCFA or FTA is identified, the Commission has three options. It can give a warning, issue an infringement notice or commence prosecution. Mobile traders and third-tier lenders were initially given a warning: compliance advice and an opportunity to rectify their loan documents and behaviour.
However, the Commission is unlikely to continue to show such leniency. The Commissioner alerted lenders to as much in a media release in May 2016:
“Lenders had 12 months prior to the law changing to get up to speed with the changes and to ensure that their documents and processes complied with the law. Detailed information on the changes has been available to lenders and the Commission ran a number of workshops to help lenders to understand what is required of them. There is no excuse for non-compliance and the Commission will take enforcement action against those that do not comply.”
Furthermore, the Commissioner’s powers to issue infringement notices and require the payment of infringement fees is limited. Infringement notices can only be issued in respect of non-disclosure of required information, and the infringement fee is limited to $2,000. There is no mechanism by which the Commission can impose fines or recover fees that the lender obtained as a result of breaches of the CCCFA without a court order.
The Commission is therefore likely to treat prosecution of lenders who do not comply with their legal obligations as the best way to deter and protect vulnerable consumers. Whether or not the lender has been previously identified as being non-compliant is unlikely to factor heavily into the Commission’s decision to prosecute. For example, the Commission laid charges under the CCCFA against Zee Shop, despite not recognising its non-compliance in the Commission’s 2014/2015 Report. The Commission’s educational efforts and warnings given to other lenders could be regarded as sufficient to treat any further non-compliance as serious enough to warrant prosecution.
It is also possible that there will be an increase in the number of directors of lenders who are prosecuted. In Commerce Commission v Betterlife Corp Ltd, the Commission had interacted with the sole director and shareholder of Betterlife when he was involved with another mobile trader. The Commission’s 2014/2015 Report notes that there are low barriers to entry of the mobile trading industry, meaning participants can enter and exit the market fairly rapidly. The deterrent effect of financial penalties is undermined in these circumstances. If the situation allows it, the Commission may view the prosecution of directors as more effective, particularly given the successful prosecution of the directors of Flexi Buy Ltd and Twenty Fifty Club Ltd.
Hannah Musgrave hannah.musgrave@bellgully.com is a senior solicitor based in Bell Gully’s General Liltigation team in its Auckland office. She specialises in dispute resolution, regulatory prosecutions, civil litigation and insurance.