Discussion Paper Summary

22 August 2000

Consumer Credit Law Review, Part 4: Overindebtedness, Insurance and E-Credit

This document is the fourth public consultation document in the Consumer Credit Law Review. It deals with three important topics: each raises issues on which the Ministry seeks comment.

Overindebtedness

This occurs when consumers borrow more than they can afford to pay off. It is typically caused by one of the following:

• a consumer has received credit which they were always unlikely to be able to repay
• a consumer is not able to meet repayments because of changing circumstances – for example job loss, separation, or illness
• a consumer agrees to act as a guarantor without understanding what this means and later finds that they are responsible for repaying the debt.

The Ministry of Consumer Affairs believes consumer credit legislation has only a limited role in preventing overindebtedness. Extending and improving the information consumers are given when they sign up for credit should help improve understanding of their obligations should generally discourage consumers from taking out credit if they know they are unlikely to be able to meet the repayments.

Further options include:

• allowing contracts to be varied in cases of hardship
• allowing transactions to be reopened in cases where lenders do not appropriately ascertain the ability of consumers to repay
• requiring lenders to do a budgeting exercise with borrowers before extending credit
• greater support for voluntary agencies that assist people with debt problems
• more emphasis on in the school curriculum on how to deal with credit and debt.

Credit -related insurance

Credit related insurance ensures that a borrower can continue repayment of a loan and, if the loan is secured, that adequate security is maintained. We believe common problems in credit-related insurance include:

• consumers paying excessive premiums for insurance
• lack of competition and choice for consumers required to purchase "consumer credit insurance"
• policies not fully disclosed
• inappropriate insurance cover
• duplicate insurance cover.

The Ministry suggests key areas for reform. These are:

• establishing whether the lender has a right to require insurance

There is nothing in legislation to prevent a lender from requiring any kind of insurance. However, some insurance is unnecessary or of limited benefit and it is often overpriced.

• establishing who has the right to nominate the insurer

Allowing lenders to require insurance and also to nominate an insurer limits competition. This allows lenders and suppliers to charge higher premiums than they would be able to if they were in a competitive situation. It can also oblige consumers to duplicate their insurance cover for goods, if they already have contents insurance.

• requiring the lender to disclose the terms of the insurance

The Ministry proposes that credit-related insurance policies should be clearly disclosed to the borrower within 15 working days of acceptance by the insurer. Information that could be usefully disclosed to consumers includes:

• the name and address of the insurer
• the term for which insurance is provided
• the type of insurance
• the amount of the insurance premium
• the risks which the insurance covers
• the exclusions under the insurance policy
• any statutory rights in relation to the policy (such as a right of cancellation).

• a "cooling-off" period for credit-related insurance

This would allow consumers to evaluate the terms of the contract in an unpressured setting.

• requiring insurance to be appropriate.

We believe legislation should prevent a lender or supplier from making unreasonable requirements about the terms on which insurance is to be taken out and that consumers should not be obliged to take insurance out against unlikely risks.

Credit contracts via the Internet

Current legislation does not accommodate electronic credit transactions - ie, does not allow credit arrangements to be completed online.

But the proposed Electronic Transactions Bill would allow electronic communications to be used in place of written/manual communications. Any requirement to keep original copies of a document would be fulfilled if the document could be stored on a computer – eg as a web page or on a hard drive – in its original form. Electronic signatures would suffice for written signatures. E-mail or electronic delivery would have the same status as a physical mailing.

We believe consumer credit regulation should not prevent electronic transactions. As more and more business moves to the online environment, it will become unhelpful if credit transactions are excluded. The challenge, however, is to maintain the policy objectives of:

• evidence - this requires ensuring that there is a durable record of information, and that a signature exists which can be used as admissible and reliable evidence. - this requires ensuring that there is a durable record of information, and that a signature exists which can be used as admissible and reliable evidence.
• caution - this requires some checks to make sure that the consumer has given adequate thought and reflection before action - this requires some checks to make sure that the consumer has given adequate thought and reflection before action
• protection - this requires some evidence that the signature-maker has read and understood the document - this requires some evidence that the signature-maker has read and understood the document
• record-keeping - this requires the creation of a durable record of the contract and its terms. - this requires the creation of a durable record of the contract and its terms.

We have identified seven issues in e-credit transactions that need further debate and clarification:

• the reliability of electronic communications

As electronic communications are not always reliable, there may be a case for requiring that the borrower receives paper-based disclosure as well as electronic disclosure in particular situations, such as with repossession notices.

• date of commencement of the contract

The law is currently unclear about when an electronic contract has been formed. The time at which a contract was made is important because most of the statutory requirements for contracts run from (or for) a certain time period.

The Electronic Transactions Bill is likely to take steps towards clarifying the commencement date of a contract, by creating a default rule for the times of dispatch and receipt. We proposes that the default rules as to time of dispatch and receipt proposed in the Electronic Transactions Act should not be departed from.

• verification of the sender (of communications)

We propose that the default rules as to the verification of the sender proposed in the Electronic Transactions Act should not be departed from.

• confirmation of the consent to purchase credit

In Australia, consideration has been given to whether the instantaneous nature of the Internet means that a consumer might purchase credit inadvertently, or with less consideration than they intended. The OECD’s guidelines on consumer protection also propose a multi-step confirmation process. In this process, a consumer confirms their interest in contracting and their agreement to all the terms and conditions. A multi-step process is likely to increase the chance that a consumer’s agreement is informed and unambiguously expressed.

• form and presentation of information
• storage and reproduction of documents

Consumer credit legislation places various requirements on lenders to "give" information to a consumer – usually the contract document, or a disclosure document. This ensures that the consumer has a copy that can be stored and retrieved as a record of the transaction, and of its terms and conditions. The main issue here is that the documents must be in a form that the consumer can keep and retrieve.

• cross-border consumer credit.

We consider that there are legal and practical barriers which make the development of true cross border credit unlikely in the foreseeable future.

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