Commerce Commission bully?
This article first appeared in the NBR in April 2009
High Court appeal on tough on the defendant
The Commerce Commission lost an appeal in the High Court this week. It was an appeal on a criminal prosecution on which the defendant finance company was as certain to get off as you can ever be in a court of law, even if it lost the point of law. So in the circumstances, it was very hard on the defendant for the public watchdog to appeal. It's as if they were trying to send a message to the finance industry - "defy us and we'll make it painful and expensive."
However, the finance company didn't lose. The result reinforces the outcome of the District Court case which showed that the Commission was very wrong in its view of the law.
In recent times consumer borrowers who pay off their fixed-rate mortgages early have been disappointed (outraged in some cases) to find that they are charged "break fees" or "full prepayment" fees. The rules on these fees were set in the Credit Contracts and Consumer Finance Act 2003 (CCCFA). The CCCFA says in section 54 that a lender is entitled to recover "a reasonable estimate of its loss", but that gives no-one any useful guidance, so the Ministry of Consumer Affairs put in the Regulations to the Act a "safe harbour" formula. Lenders who used this formula would know that they were acting within the law. The safe harbour formula assumes that:
" a lender will immediately re-lend the money,
" there will be no loss at all if interest rates have risen; and
" if interest rates have dropped since the loan was made, the difference between the two rates will be the cause of the only loss that the lender can recover. So banks which lent money at a fixed rate of say 10% and are now lending at, say, 7%, a charging a break fee which, broadly speaking, allows them to recover the 3% difference.
Now clearly, the lender may in fact not re-lend the money for some time. Why should the law assume that the next borrower gets the money that was just repaid, rather than some of the many millions more which are were sitting waiting to be loaned? The Ministry wanted to make it harder to sting borrowers when they repaid early, but anyone could see that the safe harbour formula wasn't really "a reasonable estimate of loss."
Of course lenders didn't have to stick to the safe harbour formula, but the Commerce Commission, which enforces the CCCFA, frowns on other options. The threat of action by the Commission persuaded Allied Nationwide Finance Ltd "to refund approximately $173,000 to more than 1200 customers who had been charged an unreasonably high prepayment fee when they repaid their loan early between April 2005 and August 2007… The affected customers were charged a prepayment fee that equated to 31 days' interest on the outstanding balances of their loan at the time of full repayment." The quote comes from a press release by the Commission.
However, Avanti Finance stuck to its guns on its "unsafe harbour" method. The Commission therefore charged Avanti in the District Court with 50 criminal offences relating to 50 credit contracts which were repaid early.
The key issue was whether the lender had to assume the money was re-lent immediately. The judge said no.
Avanti was exonerated. Not to put too fine a point on it, the Commerce Commission was made to look foolish, and the obvious flaws in the "safe harbour" formula were revealed for all to see.
The Commission appealed, seeking, Paula Rebstock claimed, "clarity on principles of law."
Here's the thing: this is a criminal prosecution and therefore not something to be taken lightly. But it was simply no longer possible for a court to say that Avanti was guilty beyond reasonable doubt because a District Court judge thought Avanti was in the right, so there was clearly reasonable doubt. The appeal seemed very tough on Avanti, given that the Commission couldn't hope for a conviction.
Anyway, they now have clarity on the key issue. "As the [District Court] Judge found, if there is excess lending capacity, then a reasonable estimate [of loss] does not require the assumption that funds will immediately be re-lent, and here Avanti did have such excess lending capacity," said Asher J in the High Court. So there! It will be interesting to see what costs are awarded against the Commerce Commission.
And of course, lenders will now be abandoning the safe harbour in droves. Expect finance company break fees on new loans to go up.
Peter Hattaway - www.hattaways.com - is a director of Hattaways, specialists in credit management training and consulting. This article is not legal advice.