The Commerce Commission’s warning to the gym industry that gym membership contracts may be breaching the Credit Contracts and Consumer Finance Act 2003 provides a useful reminder of the wide scope of the Act.
With the Government focused on combating irresponsible lending in the wake of high-interest text-a-loan schemes, providers of credit to consumers should check their disclosure practices, fees and contract terms to ensure they comply with the Act as the consequences of getting it wrong can be severe.
This Brief Counsel summarises when the Act applies, and the key compliance requirements. We also flag areas of possible reform.
What is a consumer credit contract?
Broadly, a consumer credit contract is any contract or arrangement under which credit is or may be provided and:
- the debtor is a natural person
- the contract is primarily for personal, domestic or household purposes
- interest or fees are or may be payable or a security interest is or may be taken, and
- the creditor carries on a business of providing credit (whether or not the business is the creditor’s only or principal business) or makes a practice of providing credit in the course of the creditor’s (other) business.
Loans, mortgages, hire purchase arrangements, credit cards and overdraft contracts are all caught, as are instalment payment arrangements which include any fees or interest (like the typical gym membership contract).
But if the total agreed price of the goods or services is payable within two months no consumer credit contract arises.
Key compliance requirements for consumer credit contracts
Clear, up-front, accurate disclosure
Creditors must provide debtors with certain information about the consumer credit contract within five working days of entry into the contract and again:
- every six months (or every 45 days in the case of a revolving credit contract), or
- whenever a change is made to the contract, or
- on receipt of a request from the debtor.
The initial disclosure statement must include (among other things):
- the total amount owing, any further advances to be made and any credit limit
- how much interest is payable and how it is calculated (including the annual rate and the total interest over the life of the contract)
- details of the fees and charges that are or may become payable, including establishment fees, insurance charges, credit check and other third party charges, default interest and fees and any early repayment fees or charges
- the amount and timing of each payment and, if ascertainable, the total number and total amount of the payments, and
- a statement of the debtor’s right to cancel.
Guarantors must also be provided with a copy of that initial disclosure statement for each consumer credit contract covered by their guarantee as well as details of any changes.
Disclosure must be clear, concise, and made in a manner likely to bring the information to the attention of a reasonable person and unlikely to deceive or mislead. Regulations set out model disclosure statements which are deemed to comply with the Act.
Disclosure can be given by email or over the internet if the information is readily accessible and the debtor consents to electronic delivery.
The consumer’s right to cancel
Consumer credit contracts can be cancelled by the debtor within a three working day “cooling-off” period after initial disclosure is made (or at any time if that disclosure has not been made).
The debtor can only be required to pay interest (at the contract rate) for the period during which credit was actually provided, and any reasonable expenses necessarily incurred by the creditor in connection with the contract and its cancellation. However, even after cancellation, the debtor must pay the full cash price of any goods received on hire purchase or any services already performed.
Fees and charges should relate directly to the creditor’s actual (and reasonable) costs or losses. For instance, prepayment fees will be considered unreasonable (and may be annulled or reduced) if they exceed a reasonable estimate of the creditor’s loss from that prepayment.
In addition, “oppressive” contracts or the oppressive exercise of a right or power can be re-opened by the Court.
The consequences of getting it wrong
Until disclosure is made, neither the contract nor any security or any guarantee can be enforced.
In addition, creditors can be forced to refund payments received under the contract and pay damages and fines (of up to $30,000).
Get it wrong repeatedly and a creditor (and individual directors and officers) can be prohibited from providing (or being involved with providing) consumer credit.
Registration and dispute resolution requirements
Providing credit under an interest bearing credit contract (other than a hire purchase arrangement) is a financial service so the creditor will require to be registered under the Financial Service Providers (Registration and Dispute Resolution) Act 2008.
If a credit contract is provided to “retail clients” (which would include most consumers), then the creditor will also need to become a member of an approved dispute resolution scheme.
The loan shark crackdown – legislation or industry led solution
The Government’s financial summit on 11 August is tasked with looking at ways to protect the most vulnerable from falling prey to loan sharks.
In announcing the summit, Minister of Commerce and Consumer Affairs Simon Power stated:
“The key question that needs to be asked is whether the Credit Contracts and Consumer Finance Act needs to be amended to provide more protection for consumers – including from irresponsible lending – or whether the same outcomes can be obtained from voluntary industry initiatives.”
While Power has refused to rule out interest rate caps (and a Private Members Bill from National MP Peseta Sam Lotu-Iiga includes a rebuttable presumption of oppression for interest rates above 48%), it appears that the Government’s focus is on clear, upfront disclosure of the true cost of credit.
In our view, the CCCFA (together with the Fair Trading Act) already contains adequate disclosure requirements.
The enhanced Fair Trading Act enforcement tools given to the Commerce Commission under the Consumer Law Reform Bill are also relevant and, together with financial literacy initiatives, may help to facilitate the crackdown on unscrupulous lenders that the Government is looking for. For a commentary on the Consumer Law Reform Bill (which was introduced to Parliament on 20 April) see our earlier Brief Counsel.