Discussion Paper Summary

June 1999

Consumer Credit Law Review, Part 1:  Setting the Scene

Review purpose
Key issues to be addressed

Introduction

The market for consumer credit in New Zealand is large and amorphous. In fact, it is more helpful to think of the overall ‘market’ as being composed of a series of market segments, each having its own distinguishing characteristics.

Since the publication of the 1988 document, Consumers and Credit, the Ministry of Consumer Affairs has played a key role in introducing various innovations to credit legislation, in order to make the credit market for consumers work in a more effective way. Nonetheless, the approach has been piecemeal: in contrast with other industries there has been no major overhaul of credit legislation since the Credit Contracts Act 1981.

That the regulatory framework for consumer credit has become outmoded is now widely acknowledged. For this reason, in March 1999 the Minister of Consumer Affairs instructed officials to undertake a review of consumer credit policy and legislation. The justification for the review is based on impediments to efficiency and the quality of regulation issues, as well as consumer detriment. The task lying ahead is to deal with these issues in a thorough and timely manner.

This document is the first in a series to be released for public consultation. In setting the scene for the review, it summarises the current regulatory framework for consumer credit, leading into a discussion of appropriate goals for a framework. Following this is an attempt to unravel the market and provide an overview of its shape and the determinants of its structure as well as, where possible, estimates of the size of the key market segments.

The justification for regulatory intervention is dealt with in some detail in the paper. Through employing a dual economic analysis, it is argued that there are several likely elements of market failure, as well as equity concerns, in the market for consumer credit. Nonetheless, it is concluded that this offers only a prima facie case for intervention: the net gains from any proposed intervention need to be clear.

Consumer credit can contribute to the welfare of consumers and the prosperity of business, but only if certain conditions are met. For this reason, consultation will be at the core of the review process. We encourage you to make your views available to us and we look forward to your response.

Review purpose

General focus

There have been no major changes to consumer credit law since 1981, when the Credit Contracts Act came into force. Since that time, however, there has been significant technological and economic change, which has impacted heavily on the consumer credit market.

Consumer credit law has been a target of widespread criticism since 1981. This criticism is based on various considerations, including:

• complexity of the law, particularly the Credit Contracts Act
• fragmentation of the law across a number of statutes, resulting in unnecessary duplication as well as inconsistencies
• difficulties in enforcing the law
• unfairness to consumers under some provisions, such as the "rule of 78" method for calculating early repayment rebates; the use of nominal, rather than effective, interest rate calculations; and the exclusion of certain charges from the finance rate
• unnecessary compliance costs for lenders and business borrowers in some circumstances (e.g., under controlled credit contracts).

Purpose of the review

The purpose of the review is to identify an appropriate regulatory regime for consumer credit. In particular, it will focus on:

• the relevance of existing law to consumer credit transactions
• the scope for simplifying the law
• ways to strengthen compliance and enforcement
• identifying specific legislative provisions that cause detriment.

Key issues to be addressed

The following issues will be explored in greater detail as the review progresses. They will form the subject of specific consultation documents.

Application of consumer credit law

• How can consumer credit law be appropriately targeted, so that those, and only those, who need consumer protection are covered?
• Do small businesses need consumer protection when borrowing?
• Should there be a money limit on credit legislation, or should its application be defined by the purpose for which the credit is used?

Achieving transparency in consumer credit

• What information should be disclosed by lenders under a credit contract (including hire purchase and other related contracts) and how should it be presented?
• For which credit products should finance rates be maintained?
• Can the law provide incentives for lenders to provide clearer, plain English contracts?
• What method of calculating interest rates is fairest for consumers?

Redress and enforcement

• Are the redress provisions under current law adequate and, if not, how can they be improved?
• What incentives do lenders need to properly comply with credit law?
• Is the test for oppression under the Credit Contracts Act working adequately for consumers? If not, how might it be enhanced?

Other issues

• What rules should credit law provide in relation to rebates for early repayment of a credit contract?
• How should insurance under a credit contract be regulated?
• Is it a function of credit law to consider consumer over-indebtedness?
• How can the law (particularly the Hire Purchase Act) be made consistent with the new personal property securities legislation?
• What issues are raised by the development of electronic commerce?

Discussion Paper - full text

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