The New Zealand government has announced its intention to reform consumer credit law by introducing a new Consumer Credit Bill. The Bill will replace both the Credit Contracts Act 1981 and the Hire Purchase Act 1971. It aims to reduce the imbalance between lenders and consumers by implementing a stricter disclosure regime, increasing penalties and giving the Commerce Commission the power enforce the law and obtain redress on behalf of consumers. It is hoped that these measures will protect consumers and enable them to make more informed credit decisions.
The Consumer Credit Bill will only apply to credit contracts for personal, domestic or household purposes. At present it is unclear exactly how this will be applied, especially where domestic and business lending are interconnected. Under the Credit Contracts Act monetary thresholds determine when disclosure is necessary. This means that business borrowing is sometimes covered by a disclosure regime designed specifically for consumer borrowing.
Credit contracts formed prior to the Bill coming into force will continue to be governed by the law in force at the time the contract was formed. However, revolving credit contracts entered into prior to the commencement of the Bill will have to comply with the new regime after a transitional period.
The Consumer Credit Bill is intended to improve the existing disclosure regime by requiring clearer contracts and ensuring that information required to be disclosed is more useful to consumers. It requires disclosure of certain terms that are not at present required to be disclosed, such as charges payable upon early repayment. The Bill will also set out a performance standard requiring disclosure to be expressed clearly and in a logical order. Model forms will be written into the Bill which lenders may use to be sure that they have complied with the performance standard. The continuing disclosure requirements will also be extended and lenders will be under an obligation to keep customers informed of any unilateral changes made throughout the existence of the credit contract.
Under the new Bill there will be limitations on the amount and type of fees and interest charges that lenders can charge. Charging interest in advance will be prohibited; interest must be incurred before it is charged. No interest may exceed the amount that would be charged by applying a daily interest rate to the unpaid balance owed by the borrower and early repayment charges and establishment fees must reflect the actual costs incurred by the lender. The Bill will include a formula that lenders can use to calculate fair charges.
One of the criticisms of the existing consumer credit regime is that the onus is on consumers to enforce breaches of the law. In practice consumers often do not have the knowledge or resources to do so. The Consumer Credit Bill gives the Commerce Commission the power to investigate breaches of the law and take action on behalf of consumers if necessary. A public enforcement agency is thought to be a more effective way of enforcing the law because the Commission will be able to develop expertise in the complexities of consumer credit law. Its powers of investigation will also make it better placed to detect breaches.
The Consumer Credit Bill also increases penalties and widens the powers given to the Courts. A lender who breaches the disclosure provisions will have to pay the lesser of 5% of the maximum outstanding balance of the loan or $3,000. The courts also have the power to award additional compensatory and exemplary damages to the borrower if necessary. It is intended that the increased penalties and powers given to the Commerce Commission will act as a deterrent to disreputable lenders.
The Consumer Credit Bill is being drafted at present. It is expected to be introduced to Parliament during the first half of this year.
James Aitken and Hannah McKechnie
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