Discussion Paper Summary

October 2000

Consumer Credit Law Review, Part 5: Redress and Enforcement

Improvements in redress
Improvements to enforcement

This is the fifth public consultation document to be released by the Ministry of Consumer Affairs as part of the Consumer Credit Law Review. The focus of this discussion paper is on the redress and enforcement provisions of the Credit Contracts Act 1981. It examines whether the Act provides strong enough incentives for borrowers and lenders to comply with the law. Without effective redress and enforcement, the Act cannot provide adequate protection to those taking part in credit deals. As well, inadequate compliance will mean that much of the benefit from the reforms proposed in the previous discussion papers in this Review will be lost.
 The Credit Contracts Act currently does not create strong enough incentives for some lenders to comply with its provisions. The main area of concern is with "marginal" lenders outside the mainstream – marginal lenders are characterised by limited competition, low incentives to invest in reputation, and operations that are relatively small scale.

The following features of the Act’s redress and enforcement provisions support the Ministry’s conclusion that reform is needed.

First, it is not straightforward for borrowers to enforce their rights at the Disputes Tribunal or Court. The Court process is inaccessible to many borrowers because of the cost and time involved in bringing an action. The Court can also be an intimidating environment, particularly if the other party to the dispute is a large company. The Disputes Tribunal provides borrowers with greater access to justice, but problems remain. Referees are not required to have legal training, nor are they bound to follow the Credit Contracts Act, which can lead to inconsistent and inaccurate decision-making. This not only adversely affects borrowers, but also can weaken the incentives for lenders to comply with the Act.

Secondly, the Act’s provisions for redress and enforcement do not fit well with self-enforcement. There are two key problems here:

• the penalty regime is complex and places a heavy burden on borrowers to enforce their rights
• borrowers do not have the information or incentive to bring actions against lenders under the Act’s negative licensing provisions.

Thirdly, the usual imbalance of knowledge and power between consumer and trader is heightened in consumer-credit law. Research suggests that consumers often do not know their rights, and that 45 percent of New Zealand adults are "functionally illiterate". These difficulties are compounded – because of the inherent complexity of the Credit Contracts Act and most credit contracts – when consumers are involved in credit deals.

The upshot is that very few borrowers use the Act to bring actions to the Disputes Tribunal or the Court. The infrequency of applications does not mean that serious breaches of the Act do not occur. Anecdotal evidence and regular complaints gathered by the Ministry and consumer organisations indicate that the Act is regularly breached and that there is a high level of consumer dissatisfaction with this area of law.

Improvements in redress

The Ministry has looked at areas that could be reformed in order to improve borrowers’ access to redress, and consequently increase the incentives on lenders to comply with the Act:

Improvements to the Disputes Tribunal decision-making procedure – some options for improving the operation of the Tribunals include:

• improvements to the training of Tribunal referees on the requirements of the Credit Contracts Act
• the establishment of a specialist credit tribunal
• an increase in the Tribunal’s monetary jurisdiction.

Changes to the penalty regime for breaches of disclosure – two options are put forward to assist borrowers in taking action when the Act is breached:

• simplifying the calculation of any penalty, so that it is either twice the total cost of credit or a proportion of the outstanding balance of the loan
• setting a minimum penalty for each breach of the Act by a lender.

If other reforms to the Act are made – particularly by strengthening enforcement – it may be appropriate for lenders to minimise or, in some circumstances, avoid their liability altogether. A number of options are considered here:

• setting maximum penalties
• incorporating into the Act a requirement for lenders to have compliance programmes – either by adopting a defence used in Canadian consumer credit law legislation, or by drawing on the "reasonable mistake" defence from New Zealand’s Fair Trading Act
• allowing lenders to use "model form" contracts as a means of minimising their liability – this alternative is based on United States’ consumer credit law
• adopting a new approach to the entire civil penalties regime, based on the Australian Consumer Credit Code, which abolishes the concept of automatic penalties.

Improvements to enforcement

The Ministry puts forward three main options to improve enforcement:

• An enforcement agency – the various powers and functions of an agency are discussed; the role of the Commerce Commission under the Fair Trading Act is a useful model for how a credit enforcement agency could operate.
• Occupational regulation – two alternatives for licensing or registering lenders are also considered.
• A dedicated fund for private and voluntary sector enforcement – such a fund could be accessed by community agencies, which could take action against lenders who consistently breach the law.

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