International Comparison Discussion Paper

May 2006

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Part 3 - Legislative Differences Proposed for Adoption

This part of the discussion paper identifies prohibitions, investigation and enforcement tools and penalties that are found in the consumer protection legislation in the other jurisdictions but are not currently available in the Fair Trading Act. It is considered that these amendments would strengthen the Fair Trading Act in terms of achieving the desired outcomes for consumers and businesses.

The tools that have been analysed are -

• Unfair terms in consumer contracts prohibition;
• Product safety warning notice and powers of investigation;
• Cease and desist orders;
• Substantiation notices;
• Court enforceable undertakings;
• Compulsory interview;
• Banning orders.

Some of the proposals, (for example, the those relating to compulsory interviews, the ability to make cease and desist orders and obtain court enforceable undertakings) could assist the Commerce Commission in its enforcement role by enabling it to act more quickly when it believes that a contravention has occurred. Enabling the Commerce Commission to act in this way could reduce the amount of consumer detriment that can result from contraventions of the Fair Trading Act. Some of the tools can be used together to improve the enforcement outcomes for both compliant businesses and consumers. Including these redress and enforcement provisions in the Fair Trading Act should provide better protection for consumers and thereby allow them to transact with more confidence.

The following analysis tests thinking in the area of the enforcement of consumer protection law and MCA is interested to hear your views on the proposals.

Unfair Terms in Consumer Contracts Prohibition

Issue

An unfair term in a contract is one that causes a party (usually the consumer) to be at a disadvantage while the term is not reasonably necessary for the protection of the interests of the other party (usually a business). Typically, an unfair term is a pre-written standard term. A standard term is a term created by the business in advance of a contractual agreement and is not negotiated separately with each consumer. A negotiated term is agreed upon by both the business and each individual consumer. Unfair terms have been defined in other jurisdictions as contrary to the requirement of good faith that cause a significant imbalance in the parties' rights and obligations under the contract to the detriment of consumers. A term that states that a trader may change or alter other terms in a contract without consulting the consumer is an example of an unfair term.

Under Part 1 of the Fair Trading Act (FTA), misleading and deceptive conduct, false representations and unfair practices are prohibited. Unfair terms in contracts are not specifically prohibited. They are covered under general contract law[19] and common law.[20] However, it is uncommon for consumers to take court action under these for unfair terms.

In many instances, consumers do not realise that a term is unfair, or that the term can be negotiated, especially if it is pre-written into the contract. The consequence of a consumer agreeing to a contract with such terms is that they may find themselves bearing most of the cost and/or risk of the transaction. For example, Consumer Affairs Victoria (Australia) notes an example of an unfair term in car rental agreements, where the consumer is required to acknowledge the car is in good condition, clean and roadworthy. While the consumer can see the car is clean, they cannot know the mechanical condition or safety (roadworthiness) of the vehicle.[21]

Consumers may also find they do not have fair and reasonable access to a variety of goods and services in the marketplace. Unfair terms may bind the consumer into a contract where they cannot use other businesses. For example, a contract may bind the consumer to the terms and conditions of the supplier's insurance scheme that the consumer has not looked into and is therefore denied the choice of using another insurer.

The Ministry of Consumer Affairs and the Commerce Commission have received complaints from consumers where the terms in contracts may not be misleading or deceptive but they do appear to be unfair. Even when consumers recognise that the terms are unfair they sometimes feel they have little option but to sign as there is little or no difference in the contracts used by all providers in that sector.

International Comparisons

In several of the other jurisdictions analysed for comparison with New Zealand, consumer protection legislation specifically prohibits unfair terms. When the enforcement agencies believe that a contract term is unfair they can take enforcement action even when consumers have signed a contract.

In the United Kingdom, the Unfair Terms in Consumer Contracts Regulations 1999 state that a consumer is not bound by any standard term in a contract that is unfair.[22]

The Unfair Terms in Consumer Contracts Regulations 1999[23] provide, in a schedule to the Regulations, an indicative but non-exhaustive list of unfair terms. If the Office of Fair Trading (OFT)[24] suspects that a term is unfair, then it can investigate and may take court action. The court may issue an injunction to stop a trader using the unfair term.

The Fair Trading Act 1999[25] in Victoria, Australia also legislates against unfair terms. The provisions found in the Act are based on the United Kingdom Regulations (outlined above). Under Victoria's legislation, consumers can take civil action[26] against a supplier to have an unfair term declared void. Consumer Affairs Victoria (CAV) can also apply for an injunction to stop a trader using an unfair term. Penalties for the use of unfair contract terms are A$1,000 for individuals and A$2,000 for corporations. CAV also works with targeted industry groups to develop fair standard terms in their consumer contracts. To date CAV has worked with the mobile phone, hire car and fitness centre industries. The priority areas for the 2005/2006 year are pay television, internet service providers, home removalists and building contracts.

Comparing the regimes, the Unfair Terms in Consumer Contracts Regulations in the United Kingdom apply to standard contract terms, while in the Victorian Fair Trading Act the unfair term provisions may apply to both standard and negotiated terms. The term "unfair" is defined in a general way in both pieces of legislation and a non-exhaustive list of what may constitute an unfair term is provided. In both the United Kingdom and in the state of Victoria only a court[27] can decide whether a term is unfair. If court action is successful, the injunction usually covers only the unfair term. It is less usual for the entire contract to be declared void.

The OFT has a duty to consider every complaint that it receives about an unfair contract term. CAV is not constrained in this way and has taken a proactive approach in dealing with the issue of unfair terms in contracts. Rather than solely relying on consumers recognising unfair terms in contracts and taking a dispute to the Victorian Civil and Administrative Tribunal or making a complaint, CAV has identified specific industry groups that use standard contract terms and has worked with them to develop contracts that in the opinion of the CAV do not breach their Fair Trading Act. While such an approach can have the effect of changing a number of contracts that are commonly entered into by consumers, it can also be resource intensive.

Although other Australian states do not currently have specific legislation prohibiting unfair terms, they have made a commitment to promote amendments to their consumer legislation that may prohibit unfair terms.

Discussion

Specifically prohibiting unfair terms in consumer contracts in the FTA, even if they are not misleading or deceptive, would enable the Commerce Commission to take enforcement action against businesses using unfair terms in their consumer contracts. As well, if unfair terms were prohibited, individual consumers would be able to take a dispute about an unfair term in a contract to the Disputes Tribunal (or even to court) on their own behalf.

Currently unfair terms are not defined in the FTA. It is suggested that any amendment prohibiting such terms should follow the approach taken in the United Kingdom and Australia in providing an indicative non-exhaustive list to aid decisions by the court. As noted, in the United Kingdom the OFT is required to investigate every unfair term complaint. It is not proposed that a similar approach be taken in New Zealand. Rather, it would be up to the Commerce Commission to decide how to enforce any breach.

A prohibition of unfair terms would provide an opportunity for the Commission to work with industry groups (in an educative way) to develop fair standard terms. This approach can resolve issues in a pro-active and co-operative manner and may prevent court action being taken.

Prohibiting unfair terms would thus expand on the current suite of prohibitions including misleading or deceptive conduct, false representations and unfair practices, and this should allow consumers to enter into contracts with greater confidence.

Proposal

MCA considers that there is merit in proposing that the Fair Trading Act be amended so that it contains provisions where unfair contract terms are specifically prohibited.

Product Safety Warning Notice and Powers of Investigation

Issue

The present Fair Trading Act (FTA) investigative powers (search and seizure) for product safety enforcement are limited to investigating and enforcing compliance with existing product specific measures (safety standards, bans and compulsory recalls). When a safety problem is recognised during the investigative stage, there are no powers to remove the product from sale, exposing consumers to potential harm.

There are also no formal powers by which the Minister or relevant officials can warn the public of the possible harm that may be caused by the products under investigation.

Accordingly, product safety redress and enforcement in the initial investigation stages relies mainly on the goodwill of businesses to stop selling products identified as unsafe. If this fails, action can be undertaken by the Minister of Consumer Affairs. This takes the form of Unsafe Goods Notices, where products classified as unsafe are required to be removed from the market, or compulsory recalls, where the Minister requires the trader to recall the product. Unsafe products may then be the subject of a Product Safety Standard, which outline construction, composition, testing and warnings that apply in respect of a particular product, for example the distance between vertical bars in a cot to prevent a baby's head from getting wedged.

Investigations and the development of Unsafe Goods Notices and compulsory recall orders are actioned by officers of the Ministry of Consumer Affairs (MCA) who have no powers of search and seizure. The Commerce Commission officers can enter premises and seize product but only after an Unsafe Goods Notice or compulsory recall order has been issued, or where a product subject to a product safety standard is believed to be in breach of a standard.

There is a concern that the FTA powers are not sufficient in that they do not allow for the very quick removal of product from sale when potential safety problems are recognised during the investigative stage, exposing consumers to potential harm.

International Comparisons

Product safety is managed in various ways in the consumer protection legislation in the other jurisdictions analysed for comparison. In Canada, Health Canada takes the lead in controlling and enforcing product safety of all types. In the United States, the Consumer Product Safety Commission has prime responsibility for the 15,000 consumer products within its jurisdiction. Both of these organisations develop voluntary standards, issue and enforce mandatory standards, ban products when no standards would adequately protect consumers, undertake recalls, research potential product hazards and educate consumers.

In the United Kingdom, the General Product Safety Regulations 2005 have introduced an obligation on businesses to only place safe product on the market. The Regulations also require businesses to provide consumers with relevant information to assist them in assessing the risks of using the product, and manufacturers must adopt measures so that they are informed of risks and can take action if necessary. Some offences are criminal and some are civil.

The New Zealand FTA product safety provisions are similar to those found in the Australian Trade Practices Act (TPA). There are, however, two main differences in that the TPA provides for:

• Warning notices; and
• Powers of investigation.

The TPA at section 65B includes provisions for issuing warning notices to the public, where the Minister may publish in the Gazette a notice outlining when a good is under investigation in order to determine whether it will or may cause injury and/or the possible risks involved in the use of the specified good. These provisions were included in the TPA very soon after New Zealand's FTA was passed into law.

As well, the Australian Competition and Consumer Commission (ACCC) can seize products that are under investigation. The ACCC is responsible for implementation of the TPA, including product safety. The Australian states have included the product safety provisions of the TPA into their own consumer protection legislation but also have the ability to differ in their enforcement regimes. For example, a temporary ban can be imposed for between 28 days and 18 months depending on the state. In Tasmania, the ban can be indefinite.

Australia is currently reviewing its product safety regime. A report by the Australian Productivity Commission was released on 7 February 2006. Several options have been proposed, including a general product safety provision like that in the United Kingdom. The Australian review will have an impact on product safety in this country as many New Zealand manufacturers trade in Australia under the Closer Economic Relations (CER) agreement and the Trans Tasman Mutual Recognition Arrangement (TTMRA) which provides that goods legally sold in one country may be legally sold in the other. It is not clear at this stage whether Australia will amend its product safety requirements.

Discussion

Search and seizure powers of a similar nature to those in the TPA in Australia could help to achieve a more effective product safety system in New Zealand. The ability to remove potentially unsafe product from the market more quickly could help to reduce consumer exposure to products that could cause harm.

If a product is subsequently found to be safe, the product can be returned to the trader and be returned to the market. Likewise if a product can be made safe by applying conditions relating to, for example, its composition by way of a product safety standard, the product could be returned to the market by way of the existing Product Safety Standards mechanism.

It is also proposed that the Minister of Consumer Affairs have the power to delegate to either MCA or Commerce Commission officers (as appropriate) the power to seize product pending the outcome of an investigation. In the United Kingdom, Canada and the United States such powers are held at the investigating officer level.

Although under the TPA the ACCC has the ability to issue a warning about a product, it appears that most businesses voluntarily comply with the ACCC on product safety issues. The ability to warn the public may be encouraging the traders to comply.

Being able to warn the public that a product is under investigation when a trader refuses to comply voluntarily reduces the chance that harm may occur to consumers. Consumers are then given the opportunity to stop using, or to modify the way they use the product.

Adding search and seizure and warning notice powers to the FTA also continues the similar nature of New Zealand and Australia product safety legislation.

Proposal

MCA considers that there is merit in providing in the Fair Trading Act:

• the power for the Minister of Consumer Affairs to authorise persons (exercised under warrant) to seize potentially unsafe products during investigations into that product's safety; and
• the power for the Minister to issue warnings to the public regarding potentially unsafe products that are the subject of an investigation.

If a decision is made to progress with this proposal, the Ministry of Consumer Affairs will have to give further consideration to the practical implications of implementing of such a provision including an appropriate threshold for the seizure of potentially unsafe products.

Cease and Desist Orders

Issue

Cease and desist orders are formal administrative injunctions that require traders/businesses to cease conduct that allegedly breaches the Act.

Breaches of the Fair Trading Act (FTA) can cause considerable detriment to consumers. Currently, the FTA does not have cease and desist provisions, so when the Commerce Commission believes that there is a breach of the Act it cannot force a trader to cease the conduct until it has taken court proceedings. This means that while breaches are being investigated and during the court process, businesses may continue to engage in conduct which may cause considerable harm to consumers. If the Commission had the power to issue a cease and desist order, it could very quickly prevent a trader continuing with the alleged misconduct.

Under the Commerce Act 1986, the Commerce Commission can make a cease and desist order where there is a prima facie case that a person has engaged in a restrictive trade practice (section 80 (1)) or has contravened the business acquisition provisions (section 83(1)) and it is necessary for the Commission to act urgently. A cease and desist order prevents a person from engaging in conduct as identified in the order.

The Commerce Act's cease and desist order process involves an investigation of the breach by the Commission, then a referral to a Cease and Desist Commissioner who decides whether or not the conduct contravenes the Act. The person who is the subject of the order is consulted and can consent to the terms of the proposed order or can decide to have the matter determined by the Commissioner following a hearing.

A cease and desist order can be made if the Cease and Desist Commissioner is satisfied that a case has been made and it is necessary to act urgently to prevent consumers from suffering serious loss or damage and/or harm in the interests of the public. Failure to comply with an order would result in an application for a penalty to the High Court.

A cease and desist order is deemed to be a Commerce Commission decision and is subject to appeal in accordance with sections 91-97 of the Commerce Act.

International Comparisons

In the United States and Canada,[28] cease and desist orders are available in their consumer protection legislation. These are administrative rather than judicial orders. Court action is not required before they are issued. Their advantage is that the level of proof required is not as high as that needed for an injunction.

In the United States, the Federal Trade Commission can issue cease and desist orders if there is reason to believe that the Federal Trade Commission Act has been breached. The process is complex, with the trader allowed several opportunities to appeal. The final order is binding 60 days after its issue.

Canada has a form of cease and desist order, where the Competition Commissioner can make an application for an interim order lasting up to 10 days. The trader is given 48 hours notice prior to the issuing of the order. The period the order covers can be extended to allow for the Commissioner to undertake an investigation. An interim order can only be granted under serious circumstances, and it is understood that the Competition Tribunal has never used this power. The Competition Commissioner can also apply for interim and permanent injunctions, which appear to be the preferred enforcement tool.

The Australian Trade Practices Act (TPA) does not provide for cease and desist orders for either competition or consumer law. In a review of the TPA by the Australian Treasury in 2003, competition cease and desist orders internationally were discussed and analysed. The Australian Treasury concluded that there was little evidence that cease and desist orders were faster, cheaper or more effective than injunctions with respect to breaches of competition law and saw little need for an additional process. There appears, however, to have been no analysis with regard to consumer protection law breaches.

Discussion

Amending the FTA so that the Commerce Commission can make cease and desist orders would mean that behaviour that contravenes the legislation could be stopped more quickly than presently occurs following court proceedings.

This is important because the costs and delays associated with FTA litigation have increased significantly during the last three years. In that time, according to the Commerce Commission, the costs of litigation have trebled and the number of FTA cases in the court system has doubled.

The Commerce Commission has not used the cease and desist provisions under the Commerce Act since they came into force on 1 April 2002. They are, however, considered by the Commission to be a useful enforcement option, which may be better suited to consumer protection issues than to competition issues. This is because it is often easier to demonstrate a breach and also to demonstrate that consumers are suffering serious loss or damage as a result.

Injunctions can be used to stop businesses from behaving in a manner that contravenes the legislation. Under the FTA, injunctions may be granted by the court for contraventions of parts I, II, III and IV of the Act. The test that is used for the granting of an injunction, however, is very different from that which would apply at a cease and desist hearing. A cease and desist commissioner is required to make decisions on the basis of whether there is a prima facie breach of the Act and the detriment to consumers.

Injunctions are granted on the basis of the balance of convenience test. Under this test an assessment is made as to what would happen if an injunction was made and the interests of the trader (including commercial loss) are balanced against those of consumers. The balance of convenience test will typically tip in favour of businesses unless it is proven that consumers have suffered a significant detriment, for example, lost their life savings. Therefore injunctions are not necessarily the best option for consumer protection.

In comparison with the court process, cease and desist orders are low cost, can be introduced quickly, and prevent continuing cost to the economy, consumers and compliant businesses.

Proposal

MCA considers that there is merit in proposing that the Fair Trading Act be amended so that the Commerce Commission can make cease and desist orders.

Substantiation Notices

Issue

Under the Fair Trading Act (FTA) misleading or deceptive representations are prohibited.

There are, however, no statutory powers in the Fair Trading Act to allow the Commerce Commission to require, by way of issuing notices, substantiation of claims or representations from businesses, which means that the onus of proof usually falls on the Commission to demonstrate that a claim cannot be substantiated.

This can be particularly difficult for the Commission where the claims relate to comparative pricing issues or technical or scientific declarations. In such instances the Commission usually has to go to considerable expense and often has to employ significant resources in order to prove that such a claim cannot be substantiated. Gathering good evidence to prove a claim cannot be substantiated can also be time consuming, leaving consumers exposed to potentially misleading or deceptive representations for some time.

Complaints relating to claims made in advertisements can be dealt with by the Advertising Standards Authority (ASA) which can request evidence to support a claim made. This process only covers advertising claims. It does not cover labelling or packaging claims, unless they can be seen in an advertisement.

International Comparisons

In several states in Australia, the consumer protection legislation provides for substantiation notices. These notices require a business to substantiate the expressed or implied claims made in advertisements or on labels or packages, and in the case of New South Wales, also extends to requiring real estate agents to substantiate selling price estimates.

If a substantiation notice is served on a business it is required to provide evidence, demonstrating that a claim can be substantiated, to the Director-General of Fair Trading (or other equivalent person) within the time specified by the notice. It is an offence not to comply with the notice or to knowingly provide information that is false or misleading. It is also an offence for a business to be unable to substantiate a claim made in the marketplace.

Based on the business's response, the regulator assesses what action should be taken. If the business cannot substantiate the claims, it is often required to give an undertaking that it will cease making such claims. A consumer cannot seek damages because a business fails to substantiate their claims. Instead, the consumer can claim damages leading from any misleading and deceptive conduct.

The United States Federal Trade Commission (FTC) has an advertising substantiation policy which states that by making claims, an advertiser is indicating it has supporting evidence for those claims. A trader's failure to support its claims constitutes an unfair and deceptive act or practice in violation of section 5 of the Federal Trade Commission Act. The FTC can also use its cease and desist orders to require a trader to:

• stop running the deceptive advertisement or engaging in the deceptive practice,
• substantiate claims in future advertisement; and
• report to FTC staff about the substantiation it has for claims in new advertisements.

Violations of cease and desist orders can result in civil penalties of up to US$11,000 per violation.

In the United Kingdom the Control of Misleading Advertisements Regulations 1988 implements a European Community Directive on misleading advertising. The Regulations aim to protect the interests of consumers and businesses from misleading advertising - or advertisements that make prohibited comparisons. Most complaints about misleading non-broadcast advertisements are handled by the United Kingdom Advertising Standards Authority (United Kingdom ASA) and the Trading Standards Service. If an advertisement is found to break the British Codes of Advertising and Sales Promotion, the United Kingdom ASA will ask the company to withdraw or change the advertisement. Advertisers are required to prove that any claims they make are capable of objective substantiation. The codes, devised by the Committee of Advertising Practice, cover most forms of non-broadcast advertising.

Canada has a comprehensive regulatory regime that deals with unsubstantiated claims. The Competition Act requires advertisers to substantiate all of their material[29] claims. Guarantees, efficacy, lifespan and other statements must be based on adequate and proper tests. While these tests are flexible to accommodate the vast variety of claims, guidelines and industry codes help to remove uncertainty about the appropriate tests and how to apply them. If claims are not based on adequate and proper tests, they then become "reviewable conduct". This means the conduct can be investigated by the Competition Bureau. It is a criminal offence if the misrepresentation is shown to be made knowingly or recklessly and the following sanctions can be imposed:

• a cease and desist order for up to 10 years;
• a requirement that the advertiser publish a notice of the misleading claim and the court's order;
• CAD$50,000 (first order) or CAD$100,000 (subsequent orders) for an individual, and CAD$100,000 (first order) or CAD$200,000 (subsequent orders) for a corporation.

If the Competition Bureau takes a case to court, the directors and officers of the advertiser can face up to five years imprisonment and a court imposed fine.

Discussion

As indicated above, substantiation notices are an accepted consumer policy enforcement tool in all of the international comparison jurisdictions. They also place the onus of proof of claims on the trader, not the enforcement agency. Currently, the Commerce Commission is required to prove that claims cannot be substantiated. Such investigations can be very resource intensive. A recent comparative pricing investigation, for example, has involved around 80 covert store visits by Commission investigators. It is likely that such labour intensive investigations generally could be avoided if the Commission was able to require businesses to substantiate their claims (refer also to the example highlighted above).

The costs to the Commission of proving that a product's claim is unsubstantiated can be very high. In a recent case, for example, the cost to the Commission was $177,897 for expert and legal expenses. This figure covers external costs only and does not include the Commission's internal legal and investigative expenses.

If the FTA was amended to enable the issuing of substantiation notices, any person who received a substantiation notice would be required to support the claims that they make about their products or services. The Commission would then be able to assess the validity of the information supporting the claim and base any action on the basis of that response. Where there is inadequate information, or no information is supplied, the Commerce Commission would be likely to take a case against the business on the basis that they are allegedly making false and misleading representations.

For a substantiation notice provision to be effective, a trader would not be able to refuse to provide evidence, be able to ignore a notice or to knowingly provide information that is false or misleading without committing an offence.

It is not expected that the ASA's substantiation process would be affected by amending the FTA so that the Commerce Commission could issue substantiation notices. The Commission only initiates an investigation if the issue meets its enforcement criteria. The advertising complaints process is well established and it is expected that most advertising complaints would still be directed to the ASA.[30]

The ability of the Commerce Commission to issue substantiation notices should also encourage consumers to have greater confidence in the claims that are made about products or services.

Proposal

MCA considers that there is merit in amending the Fair Trading Act so that the Commerce Commission may require a trader to substantiate any claim that they make about a product or service.

Court Enforceable Undertakings

Issue

Court enforceable undertakings are agreements between the enforcement agency and a business which are provided for in the consumer protection legislation. The enforcement agency can take the trader to court if the agreement is breached. Undertakings are voluntary. If a trader does not agree to an undertaking, the matter may proceed to court. The Fair Trading Act does not currently provide for court enforceable undertakings.

Currently, the Commerce Commission sometimes uses agreements known as settlements, when a business voluntarily admits that it has breached the Fair Trading Act and gives an undertaking to amend its behaviour. Settlements provide a business with the opportunity to rectify a contravention of the legislation without being prosecuted.

If a business does not comply with the agreed terms of the settlement, the Commerce Commission can initiate court proceedings for the original offences. A problem is that such action is subject to the limitation period set out in section 40(3) of the Fair Trading Act (3 years) or in the Limitation Act 1950 for civil proceedings.

Injunctions can be sought and granted against businesses for conduct that contravenes the legislation. They cannot, however, be used when a business breaches an agreement with the Commerce Commission to cease such conduct.

International Comparisons

Other jurisdictions, such as Australia, have court enforceable undertakings. Section 87B of the Australian Trade Practices Act allows the ACCC to take civil legal action against any business which has breached a term(s) of an undertaking. If the court is satisfied that a term of the undertaking has been breached, it can make civil orders including directing the business:

• To comply with the term of the undertaking, or
• To pay the amount of any financial benefit obtained as a result of the breach of undertaking, or
• To pay compensation.

Court enforceable undertakings are used by the ACCC on a regular basis.

At the state level, Queensland, the Australian Capital Territory, New South Wales, Western Australia, Victoria and the Northern Territory all allow their consumer affairs agencies to apply to a court for orders to direct a person to comply with an undertaking.

Discussion

Settlements are a cost-effective way of achieving good consumer outcomes and supporting a level playing field for business. The Commerce Commission's inability to hold businesses accountable for their part of a settlement weakens this tool. Court enforceable undertakings would seem to be a way of addressing this weakness.

As with settlements, court enforceable undertakings provide businesses with an opportunity to rectify their behaviour without being prosecuted. Undertakings are flexible in that they can be customised to different situations and can impose particular conditions upon a business. Any breach of an undertaking is an offence and can be prosecuted in court.

Court enforceable undertakings are available in other New Zealand legislation. The Securities Commission, for example, has the power to accept undertakings that are enforceable in a court and this is proving to be an effective enforcement tool. An enforceable undertaking is accepted by the Securities Commission when it considers that this approach will provide the most suitable outcome. Accepting an undertaking does not prevent the Securities Commission from exercising any of its other enforcement powers if necessary.

The new anti-spam legislation, the Unsolicited Electronic Messages Bill, has also adopted court enforceable undertakings as an enforcement tool.

Court enforceable undertakings appear to be a flexible and powerful enforcement tool that has worked well for other agencies. The Commerce Commission has indicated that it would use this type of undertaking frequently.

Proposal

MCA considers that there is merit in amending the Fair Trading Act so that the Commerce Commission may use court enforceable undertakings.

Compulsory Interview

Issue

When the Commerce Commission is investigating a possible contravention of the Fair Trading Act (FTA) it can require a person, by notice, to supply information or documents. Persons required to supply information or documents have the same privileges in relation to the supply of the information and documents as witnesses have in any court. It is an offence not to comply with a notice and any person who fails to comply is liable on summary conviction to a fine not exceeding $10,000 in the case of an individual or $30,000 in the case of a body corporate.

While requiring a person to supply information or documents can assist the Commerce Commission in its investigations of possible contraventions of the FTA, some of the value of this provision is lost because currently the Commission cannot require a person to explain the contents of documents or information prior to any court case.

The ability to require a person to answer questions can be a valuable investigative tool. It not only allows the Commerce Commission to obtain information but also enables individuals to answer questions safe in the knowledge that they cannot incriminate themselves.

International Comparisons

Consumer protection legislation in other jurisdictions requires persons to give evidence. Under the Australian Trade Practices Act (and certain state legislation, for example, New South Wales, Northern Territory, Victoria and South Australia), individuals can be required to appear before the Australian Competition and Consumer Commission (or the state enforcement agency).

Discussion

The Commerce Commission estimates that if it had the power to require a person to attend an interview to answer questions under the FTA it would use the power in up to 50% of its complex investigations. At present, if the Commerce Commission cannot get the information it needs by requiring persons to supply documents or information, the only other tool that it has available is a search warrant. In most cases a compulsory interview power is likely to be less intrusive than a search warrant and may be more useful in providing evidence of an offence particularly in instances where there is little written evidence of offending. It is also likely that the availability of this power in the FTA would greatly reduce the time needed by the Commerce Commission to investigate complex cases.

Under the Commerce Act 1986 and the Credit Contracts and Consumer Finance Act 2003 (CCCFA), as well as requiring an individual to supply information or documents, the Commission can also require a person to appear before it to give evidence. Evidence that is obtained as a result of using these powers cannot be used against that person in court proceedings. The compulsory interview provision can also be found in the Securities Act.

It is an offence under the CCCFA and the Commerce Act (section 103) not to appear or to deceive or knowingly mislead the Commission. The same offence provision would seem to be appropriate in the FTA if it is amended so that a person is required to appear before the Commission and give evidence. Without the offence provision, the Commission could not require a person to comply.

Replication in the FTA of the provisions in the Commerce Act and the CCCFA relating to the requirement to give evidence would need to consider appropriate immunity provisions. The immunity provisions in the Commerce Act and CCCFA give a person required to appear before the Commission immunity against the evidence provided being used in court against them or their spouse. It does not prevent the evidence being used against a company. Currently, where a person is required to provide evidence or information to the Commerce Commission under the FTA they have the same privileges as witnesses have in any court.

Proposal

MCA considers that there is merit in amending the Fair Trading Act so that a person can be required to appear before the Commerce Commission and give evidence, with appropriate immunity provisions.

Banning Orders

Issue

Under the Fair Trading Act (FTA), an individual can be fined up to $60,000 for contravening the legislation. Being fined for breaching the FTA, however, does not prevent a person from continuing to supply goods and services. Even when a person has been found to have contravened the FTA on more than one occasion they are still able to trade.

The activities of Michael Knight are a good example of the limitations of the current enforcement provisions and of the potential value of banning orders. In 1994, the Commerce Commission obtained interim injunctions from the High Court relating to alleged breaches of the Fair Trading Act by two companies promoted by Knight. Following that, Knight transferred his business activities to Australia and was there investigated by consumer protection authorities in relation to numerous promotions. Eventually, in New South Wales he was banned for life from trading and in Queensland he was restrained from engaging in trade or commerce relating to the tourism industry.

The ability of an individual to supply goods and services after breaching the FTA on more than one occasion contrasts with the provisions found in other New Zealand business legislation and in the consumer protection legislation in some of the Australian states.

For example, under the Credit Contracts and Consumer Finance Act 2003 (CCCFA), which like the Fair Trading Act is administered by the Ministry of Consumer Affairs and enforced by the Commerce Commission, persons can be ordered not to act as creditors, lessors, transferees, or buy-back promoters (section 108). The orders are made by the District Court and any person (including the Commerce Commission) can apply to the court for an order. Orders may be made for a specified time or without any time limit and may be made on any other terms or conditions that the District Court thinks fit. Orders can be cancelled or varied at any time by the District Court.

Under the Insolvency Act, without the leave of the court, a bankrupt is prohibited from entering into or carrying on any class of business either alone or in partnership with any person, from acting as a director or taking part directly or indirectly in the management of any company or class of company. The Act also prevents a bankrupt from being engaged in the management or control of any business carried on by or on behalf of, or being in the employ of, persons related to the bankrupt (as identified in section 111(1)(b)). Such a prohibition may be for a specified time period or may be without any time limit. The court may at any time cancel or vary any such order.

Under the Companies Act, the registrar may prohibit persons from being a director or promoter of a company or being concerned (either directly or indirectly) with the management of a company for a period of up to five years. The registrar may exercise this power in relation to persons who have been a director or were involved in the management of two or more companies that have been put into liquidation because of inability to pay debts, ceased to carry on business because of inability to pay debts or has entered into a compromise or arrangement with creditors.

Under the Motor Vehicle Sales Act 2003, the District Court may, on application of any person, make an order that bans any person from motor vehicle trading. An order may be made if a person has been convicted of a specified offence but is not banned from participating in the business of motor vehicle trading[31] and the District Court considers that the person is not a fit and proper person to participate in motor vehicle trading. The District Court can also make a banning order if it considers that there is sufficient evidence to indicate that the person is not a fit and proper person to participate in the business of motor vehicle trading.

The inability to ban recidivist offenders has been recognised as a weakness of the Securities Act. The Securities Legislation Bill which is currently before Parliament contains banning provisions.

International Comparisons

Under the fair trading legislation in the Australian states of New South Wales and Victoria individuals can be banned from conducting the business of supplying goods or services.

Under the Fair Trading Act 1987 in New South Wales (NSW), if the Director-General is satisfied that a person has in trade or commerce, engaged in any unlawful conduct[32] on more than one occasion (whether in NSW or in any other place), the Director-General may, by notice in writing require an individual to demonstrate why they should not be prevented from carrying on a business of supplying goods or services. The person on whom the notice is served has the right to make a written submission to the Director General within a specified time period. Should a submission be received, the Director-General is required to consider it and conduct any inquiries or investigations to which the notice relates as the Director-General thinks appropriate.

After issuing the notice and considering any submissions that may be received, the Director-General may apply to the Supreme Court for an order. The Supreme Court may prohibit the person who is the subject of the order from carrying on a business of supplying goods or services. The order can be for an indefinite period or for a time specified in the order.

Under the Fair Trading Act 1999 in Victoria, the Director-General may issue a notice in writing that asks a supplier to demonstrate why it should be allowed to continue the business of supplying goods or services. The Director-General is able to issue such a notice if he or she has reasonable grounds to believe that the supplier has engaged in conduct that has contravened the Act or the regulations and if the Director-General believes that the supplier will continue to engage in conduct and that there is a danger that a person may suffer harm, loss or damage as a result of that conduct unless action is taken urgently. If the supplier does not respond to the notice within the time specified, the supplier must cease carrying on the business of supplying the goods or services to which the notice relates or any business of a like kind. The supplier to whom the notice applies can appeal the decision to the Victorian Civil and Administrative Tribunal.[33]

Discussion

The Commerce Commission has identified a small number of individuals who, even when they have been found by the courts to have contravened the legislation, have continued to supply goods or services in a manner which breaches the legislation. For these recidivist offenders, the available penalties do not appear to act as a deterrent. Having a provision that bans serious offenders from supplying goods or services either for a set period of time or indefinitely would prevent them from being able to continually mislead or deceive consumers. The threat of such a provision should encourage businesses to comply with the legislation, particularly when they have been found by the court to have contravened the legislation. If consumers were aware that recidivist offenders under the FTA could be banned from supplying goods and services this should give them more confidence in the market.

Banning recidivist offenders under the FTA from supplying goods or services would affect the livelihood of these individuals. The impact that these recidivist offenders have on consumers by knowingly contravening the FTA is considered, however, to outweigh this matter.

Proposal

MCA considers that there is merit in amending the Fair Trading Act so that recidivist offenders could be banned from supplying goods or services.

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