Introduction

The Fair Trading Act 1986 (FTA) and the Consumer Guarantees Act 1993 (CGA) establish a regulatory framework which protects consumers from unfair business practices and protects businesses who comply with the legislation from unfair competition. For example, the legislation does this by prohibiting misleading and deceptive conduct and false representations. By prohibiting such practices, businesses can compete fairly against each other on price and on the basis of any extra services that they may choose to provide to consumers.

The FTA and the CGA sit alongside other legislation such as the Commerce Act 1986 and the Securities Act 1978, which aim to promote competitive and fair markets, the efficient allocation of resources and, overall, improved consumer well-being and a well-functioning marketplace.

If businesses are not deterred from breaching the consumer protection legislation, this can impact on consumer confidence. When consumers are not confident they may delay making transactions or may choose not to purchase if they perceive that the risks are too high. Consumers can incur extra costs by spending considerable amounts of time gathering information, by paying more for a good or service in an attempt to avoid a bad deal and by continuing to purchase from the same supplier in an attempt to avoid the potential risks associated with switching suppliers even though another supplier may offer a better deal. When consumers lose confidence in this way they may incur additional costs and competition and market efficiency will be adversely affected by consumers transacting less and suffering from inertia.

The overarching desired outcome for consumer protection policy in New Zealand is an environment where consumers can transact with confidence. Transacting with confidence in this context means that consumers' reasonable expectations of transactions will be met. For this to happen, businesses need to comply with the legislation. In those instances where a transaction goes wrong then consumers have to have ready access to appropriate redress.[1]

For consumer protection legislation to be effective, it needs to protect both consumers and honest businesses from failures to meet quality guarantees, unsafe products and misleading or deceptive conduct. Enforcement tools and penalty provisions that encourage compliance and act as a deterrent are required. According to the pyramid theory of responsive regulation,[2] compliance is best secured by the use of persuasion and negotiation techniques. To be effective, however, these techniques have to be supported by a range of escalating sanctions which can be applied or used depending upon the level of cooperation by the business and the seriousness of the contravention.[3]When a range of sanctions is available, lower level enforcement measures are more effective. The threat of more severe forms of punishment encourages businesses to comply.

Effective consumer protection legislation also depends on consumers and businesses having knowledge of their rights and obligations under the legislation and their ability to apply this knowledge when they are transacting and to their businesses.

The Ministry of Consumer Affairs (MCA) is reviewing the effectiveness of the redress and enforcement provisions in the FTA and the CGA conducted as part of the government's ongoing monitoring of its legislation in order to assess how effective it is in practice in achieving desired outcomes.

As part of this review, MCA has undertaken a survey of consumers and is currently surveying businesses in order to gain an understanding of their experience, awareness and understanding of consumer rights in the marketplace.[4]

The consumer survey, which involved a nationwide random sample of 1,000 people aged 18 years and over, found that consumers are, on balance, generally confident with the cross section of businesses they deal with. Consumers do not on the whole expect to experience frequent or wide-ranging risk. In other words, consumers perceive the New Zealand marketplace as a relatively benign trading environment.

This is not to say that problems do not arise. From the consumer's point of view, whether correctly or incorrectly interpreted, adverse effects are quite common. However, they rarely have an economic impact and many are readily resolved by the consumer approaching the trader.

Consumer law relies to a significant extent on consumers taking action for themselves. The consumer survey shows that this seems to be working well and, accordingly, the underlying principles of our consumer protection legislation are sound. An important part of the consumer law regime is also the enforcement tools that are available to the enforcement agencies (in most cases the Commerce Commission). To identify whether all the best available redress and enforcement tools are available in our consumer legislation, MCA has undertaken an international comparison. This is akin to a benchmarking comparison.

This discussion paper compares the redress and enforcement provisions of the FTA and the CGA with those found in consumer protection legislation in Australia, Canada, the USA and the United Kingdom, that:

• forbid the production and selling of unsafe products;
• prohibit behaviour that is misleading or deceptive; and
• set out redress, enforcement and penalty provisions.

Where differences in the prohibitions and redress and enforcement provisions between the New Zealand legislation and the overseas legislation have been identified these have been examined in more depth and the advantages and disadvantages of adopting such provisions are discussed, always keeping in mind whether new or additional provisions in the FTA or the CGA would improve the effectiveness of the legislation and assist the Commerce Commission to act more effectively and efficiently when a business appears to be breaching the legislation. By being able to act quickly, the potential harm to consumers and other businesses can be reduced.

Structure of This Document

This discussion paper is divided into five main parts. The first part provides background on New Zealand's consumer protection legislation. There is discussion of the purpose of the legislation and the prohibitions. The redress and enforcement provisions in the FTA and the CGA are then summarised. Also summarised is how the legislation enables consumers to get redress and the enforcement action that can be taken and by whom under the FTA and the CGA.

Part two of the discussion paper provides a summary comparison of the prohibition, redress and enforcement provisions found in the FTA and the CGA with the consumer protection legislation found in the selected overseas jurisdictions.

There are provisions in the consumer protection legislation in the other jurisdictions that may allow consumers to transact with more confidence, protect the honest business, and assist the Commerce Commission in its enforcement role. Part three discusses the advantages and disadvantages of adopting these provisions and proposes that the FTA be amended to include them.

The comparison of consumer protection legislation in the other jurisdictions also identified provisions that, following analysis, are not proposed to be adopted into New Zealand's consumer protection law. These provisions are discussed in part four.

MCA is calling for submissions on this document. The submission process is outlined in part five.

[1] An intervention logic that identifies the intermediate outcomes that would need to be achieved and the assumptions that are being made for the desired policy outcome to occur has been developed and is outlined in Review of the Enforcement of Consumer Protection Law: An Initial Think Piece, July 2005.

[2] The pyramid theory of responsive regulation is sometimes referred to as the enforcement pyramid.

[3] A more detailed explanation of the enforcement pyramid is provided in Review of the Enforcement of Consumer Protection Law: An Initial Think Piece, July 2005.

[4] The consumer survey, National Consumer Survey of Awareness and Experience of Consumer Legislation, was conducted during June-July 2005 by National Research Bureau.