Part 4 - Legislative Differences That Could Be Considered for Adoption | International Comparison Discussion Paper | Review of the Redress and Enforcement Provisions of Consumer Protection Law

Key differences between the consumer protection legislation in New Zealand compared with that found in Australia, Canada, the United Kingdom and the United States of America that could be considered for adoption are now discussed. The Ministry of Consumer Affairs considers that these provisions are not a priority at this stage, as there would need to be a regulatory impact analysis, including a cost-benefit analysis, before the proposal could be progressed. The Ministry of Consumer Affairs, however, welcomes your views on these legislative differences and would like to receive any information that you may have on the advantages and disadvantages associated with adopting these provisions into our legislation.

Broadening the Consumer Definition to Include Small Businesses

New Zealand's Consumer Guarantees Act 1993 (CGA) provides for rights and remedies with respect to transactions involving the provision of goods and services to a consumer. A consumer is defined as a person who acquires goods or services of a kind ordinarily acquired for personal, domestic, or household use or consumption and those goods and services are not to be on-sold, used in the course of a process of production or manufacture, or used repairing or treating in trade other goods or fixtures on land.

In the Australian Trade Practices Act 1974 (TPA), a wider definition of consumer is used. The TPA defines a consumer as a person who has acquired particular goods where the price of the goods does not exceed A$40,000 (regardless of the nature of their use) or, if the price exceeds A$40,000, the goods were of a kind ordinarily acquired for personal, domestic or household use or consumption. The goods can also be a commercial road vehicle. However, the person must not have acquired the goods, or hold himself or herself out as acquiring the goods, for the purpose of re-supply or for the purpose of using them up or transforming them, in trade or commerce, in the course of a process of production or manufacture or of repairing or treating other goods or fixtures on land.[34]

The difference between the definitions of consumer in the CGA and TPA is that, under the TPA, businesses, and particularly small businesses, are considered to be consumers for the purposes of that Act. The Australian definition was amended in 1977 to include businesses as a result of the Swanson Committee report. This report concluded that the definition of consumer should be sufficiently broad to provide protection for a range of business transactions, particularly purchases by small businesses. It was felt that the objective of the consumer protection provisions of the TPA was to address inequalities in technical expertise required to negotiate a fair bargain, and that these inequalities are not necessarily limited to "traditional" consumers or transactions involving "consumer" goods. The monetary limit of $40,000 was suggested as a way of ensuring that most purchases by small businesses are captured under the legislation and those by big business are not.

In 1990, the New Zealand government agreed that transactions involving consumer goods and services should not be identified by way of monetary limits but rather that the test would be whether the goods are of a type ordinarily supplied for private use or consumption, excluding consumers acting in the course of a business or holding themselves out as doing so. The government considered that the ordinary use test more clearly focussed on consumers as opposed to a monetary limit test, and that it was important that the legislation did not cover commercial transactions. Consumer law is based on the need to protect the weaker party, and it was considered that in many commercial transactions there is no weaker party.

Despite the differences in definition, both the Australian and New Zealand courts agree that although most people may use a good for a commercial purpose, if it can be ordinarily used as a domestic product, then the purchaser can be a consumer and the remedies available under the CGA apply. For example, a person who purchases a utility vehicle usually used for farming can be considered a consumer as people now purchase such vehicles for domestic use (Nesbit v Porter [2000]).[35]

In the United Kingdom and Europe, a consumer is defined as "a natural person who is acting for purposes outside his trade, business or profession". This definition is not considered to be adequate for the CGA provisions as it does not define the type of goods or their use.

A consumer is not defined in the Competition Act in Canada but in provincial consumer protection legislation definitions of a consumer or a buyer are provided. These are not as specific as the definitions in the New Zealand CGA or Australian TPA, and would not adequately meet the purpose of the CGA.

The Ministry of Consumer Affairs is not aware of any information that suggests that New Zealand consumers have been disadvantaged because of the different consumer definition used in the CGA in comparison to the TPA. The main impact would appear to be where businesses are considered consumers and can claim redress as consumers.

Amending the CGA to cover business to business transactions would alter the purpose of the Act, which is to provide protection for consumers and does not cover business-to-business purchases. There is a need to explore the relationship between small and large business transactions but not by broadening the CGA definition of consumer. It is more appropriate that this issue is considered in the review of industry-led regulation presently being progressed by the Ministry of Consumer Affairs[36] or possibly in a future review of the Sale of Goods Act 1908.

Industry Codes of Conduct

In New Zealand, industry codes of conduct are usually developed by industry associations to regulate the behaviour of their members. They are a form of self-regulation. Typically, standards of conduct identify how a particular industry can comply with the legislation or provide for a level of compliance beyond that required by the legislation. Compliance with a code is usually voluntary.

By joining an industry association which uses a code, a trader agrees to conduct their business according to that code. The code is created by the association in consultation with its membership and other organisations, as necessary. Breaching a code can result in sanctions and penalties, which may include revocation of membership. As membership usually confers some form of benefit to the trader, (for example, prestige) the threat of membership revocation may deter a trader from operating outside the code.

In Australia and in the United Kingdom, codes are specifically provided for in the consumer protection legislation. The process that is used is different, however, and while in Australia the code provisions can cover competition or consumer issues, the consumer codes approval scheme provided for by the Enterprise Act 2002 in the United Kingdom is specifically designed for the benefit of consumers.

The Australian Trade Practices Act (TPA) provides for industry codes to be prescribed in regulation. Codes must be declared to be either mandatory or voluntary. Compliance with a prescribed voluntary code applies only to those businesses that subscribe to the code. Prescribed mandatory codes are mandatory on all businesses covered by the code.

In the TPA, there are specified remedies and penalties if an industry code is contravened. The Australian Competition and Consumer Commission can enforce mandatory codes by administrative methods, such as undertakings or through the courts. The courts can grant injunctions, award damages and make various orders (including non-punitive). Currently, the franchising code is the only mandatory code that is prescribed under the TPA. There are no prescribed voluntary codes.

In the United Kingdom, the Enterprise Act provides the Office of Fair Trading (OFT) with increased powers to assist in the development of effective self-regulation by the approval and promotion of consumer codes of practice that meet the OFT's core criteria. The Consumer Codes Approval Scheme (CCAS) consists of two stages. Stage 1 requires the code sponsor to make a promise that their code meets OFT's published criteria for codes. At stage two, the code sponsor has to demonstrate, with evidence, that their code is working in practice and that it delivers on that initial promise. OFT endorsement and promotion of the code begins once the burden of proof has been met by the code sponsor.

The OFT publicises the fact that a code has completed stage one and following the completion of stage two and the granting of an approval, the code is promoted[37] by the OFT as part of the CCAS. Monitoring of the effectiveness of the code continues post approval and is conducted by both the code sponsor and the OFT.

The main aim of the CCAS is to safeguard consumer interests and to provide benefits to consumers through OFT approved codes that go beyond the requirements in the law. The OFT admits that the criteria are challenging and that meeting them requires considerable commitment from the code sponsors and their members in order to successfully complete the process and obtain approval. The OFT also acknowledges that not all code sponsors who apply will be able to achieve approval for their codes.

In New Zealand, neither the Commerce Commission nor the Ministry of Consumer Affairs have any formal role in endorsing industry codes.[38] The Ministry of Consumer Affairs, however, has guidelines for industry on self-regulation and has been involved in advising different organisations on self-regulation schemes related to consumer complaints and redress.

The Ministry of Consumer Affairs is currently conducting a review on industry-led regulation. It is appropriate that any proposals relating to codes of conduct be made as part of this review. For further information on the industry-led regulation review (including codes) please refer to the Review of Industry-Led Regulation discussion paper.

Super-Complaints

The Enterprise Act 2002 in the United Kingdom allows designated[39] consumer groups to submit super-complaints to the Office of Fair Trading (OFT) on issues that affect many consumers. To ensure that these super-complaints contain the required information, the process that must be followed by the designated agencies before a complaint can be made is demanding.

When the OFT receives a super-complaint, it has a duty to investigate the complaint within 90 days and must publish a response stating what action, if any, it intends to take. Such action can include no further action, a finding that the complaint was unfounded, dismissal of the complaint as frivolous or vexatious, a referral of the complaint to a more relevant regulator or enforcement action by OFT's consumer regulation division.

The super-complaints provision is a fast-track system designed to ensure that complaints about market failure are considered within a specified period of time.

Although the super-complaints system is regarded as a success in the United Kingdom, it is not proposed that the Fair Trading Act (FTA) be amended to provide for such a system in this country. This is because the benefits that have accrued in the United Kingdom since the introduction of the super-complaints system would be unlikely to occur in New Zealand. In the United Kingdom complaints received about consumer protection issues are directed to Trading Standards Authorities (TSA). There are 202 of these. It can, therefore, be difficult for the TSAs to recognise when a number of consumers throughout the country have been affected by a particular trader or where a market failure may be occurring. In New Zealand, in contrast, the Commerce Commission has a centralised complaints processing system which handles all the complaints received by the Commission.

In addition, implementation of a provision similar to the super-complaints system in New Zealand would require significant adaptation to the New Zealand situation. Many of the designated consumer groups in the United Kingdom have government funding or are funded by levies, thereby providing them with the resources to undertake research and policy development. No consumer group in New Zealand is funded in such a way. This is likely to impair their ability to be make super-complaints

Adopting a super-complaint system would also have implications for the Commerce Commission. The Commerce Commission is an independent Crown entity. It is funded by the government but the government cannot direct the Commerce Commission to investigate particular complaints. Instead the Commerce Commission identifies the market areas that it will investigate as a matter of a priority. Requiring the Commerce Commission to investigate particular complaints brought to its attention by consumer groups within a specified timeframe may affect the Commission's ability to focus on the areas that it has identified as priorities based on its own monitoring of the market and the complaints that it receives.

Before a super-complaint system could be proposed, there would need to be significant information that indicates that the current system would be greatly improved by the introduction of such a provision in the FTA. Currently, there are informal arrangements between consumer groups and the Commission to discuss where consumer groups see priorities and how the Commission's priorities compare. Some of the recent Fair Trading Act court cases taken by the Commerce Commission have originated from information supplied to the Commerce Commission by consumer organisations.

Formal Cautions

The Office of Fair Trading and the Trading Standards Authorities in the United Kingdom can, in accordance with the Enforcement Concordat[40] issue formal cautions. Formal cautions are used as an alternative to prosecution and are the same as police formal cautions. Cautions are recorded on the Central Register of Convictions and are used to deal with less serious offenders in an attempt to reduce re-offending. If an individual re-offends within three years of receiving a caution, this can be taken into account if he or she is prosecuted.

Before a caution can be given, there must be sufficient evidence to suggest that a conviction is a realistic prospect. The suspected offender must admit to the offence (in writing) and give informed consent to the caution.

Formal cautions are not used in New Zealand although the police do have the power to use diversion. Under the diversion power, offenders are charged (that is, police lay an information), but then are diverted from the court processes by agreeing to conditions (a form of undertaking).

As the New Zealand Police do not have the power to issue formal cautions and the New Zealand penalty system differs from the United Kingdom, this matter will not be investigated further and it is proposed that formal cautions not be provided for under the Fair Trading Act.

Unconscionable Conduct Prohibition

Unconscionable conduct is generally defined to be when one party subjects another party to undue pressure to enter into a transaction, i.e. if a business takes advantage of a consumer's physical or mental infirmity, ignorance, illiteracy, age or inability to understand the nature or language of the transaction. It can also apply to the business's knowledge about the consumer's ability to pay for the product or service.

Unconscionable conduct is not specifically provided for under the Fair Trading Act (FTA).[41] Unconscionable conduct is, however, covered by the Disputes Tribunals Act 1988[42] and common law. Consumers currently have to take court action for themselves if affected by unconscionable conduct. Under the Disputes Tribunals Act section 19 (1) (e) and (f), Disputes Tribunals referees have a wide jurisdiction to deal with unconscionable contracts:

In Australia, unconscionable conduct is covered by both common law and statutory unconscionable conduct provisions in the Trade Practices Act 1974 (TPA) and in some state legislation. The unconscionable conduct provision was introduced into the TPA in 1979 because it was considered that while some conduct may not be misleading or deceptive, it could be unfair or unreasonable. There are two statutory prohibitions against unconscionable conduct at the federal level: one for consumer transactions (relating to goods and services that are ordinarily used for domestic or household use), and one for business transactions to protect small businesses. Only civil remedies are available for breaches of these provisions. Penalties include injunctions, damages and compensatory orders, and the contract or part of the contract can be made void.

Unconscionable conduct is also written into some provincial Canadian legislation and can include terms or conditions which are so harsh or adverse to the consumer as to be inequitable. Remedies include making the transaction non-binding on the consumer.

Whether action is taken by an individual or an enforcement agency under either common or statutory law, the decision as to whether unconscionable conduct has occurred is made by the court.[43] Therefore, seeking redress and enforcement against unconscionable conduct is often expensive. Penalties are usually the same as those that apply when a business breaches any of the unfair practices' provisions.

In the 20 years since the passing of the FTA, the addition of unconscionable conduct provisions has been raised several times. While there are obvious advantages to consumers associated with the addition of specific unconscionable conduct provisions, further work has never progressed. This appears to be because unconscionable conduct can be difficult to prove and also because such amendments to the FTA would have implications beyond that legislation.

Amending the FTA so that unfair terms in consumer contracts were specifically prohibited (as discussed earlier in this paper) should benefit consumers in a timely manner while reducing the number of potential unconscionable cases. Therefore amending the FTA to specifically provide for unconscionable conduct provisions is not being proposed.

[34] Similar conditions apply to services.

[35] Note that the opposite does not apply. A domestic product used for a commercial use is not covered by the CGA.

[36] For further information on the industry-led regulation review (including codes) please refer to the Review of Industry-Led Regulation discussion paper.

[37] Being a member of an approved code does not make a business immune to enforcement action should evidence suggest that it has breached the law.

[38] The Government Policy Statement on Electricity Governance 2004 requires that the Electricity Commission in consultation with the Ministry of Consumer Affairs develop certain electricity industry codes. Compliance with the Government Policy Statement is a requirement under the Electricity Act 1992.

[39] To become a designated super-complaints body, a consumer group must meet certain criteria, such as:

is known to represent the interests of consumers and is suitably independent, impartial and has integrity. evidence of this includes CVs of the directors, financial accounts, etc;
demonstration of considerable experience and competence in representing the interests of consumers;
the ability to put together reasoned super-complaints;
willingness to co-operate with the OFT and other agencies; and
procedures are in place to ensure there is no conflict of interest if the body has commercial interests.

[40] The Enforcement Concordat [link to UK Cabinet Office website] is a document produced by the United Kingdom Cabinet Office that outlines rules of enforcement.

[41] The Credit Contracts and Consumer Finance Act 2003 (CCCFA), which is also enforced by the Commerce Commission, has a part that focuses on the reopening of oppressive credit contracts, consumer leases and buy-back transactions. Under the CCCFA, oppressive is defined as "harsh, unjustly burdensome, unconscionable, or in breach of reasonable standards of commercial practice".

[42] The Disputes Tribunal can hear claims up to $7,500 (or $12,000, if both parties agree).

[43] The Ministry of Consumer Affairs understands that the Australian Competition and Consumer Commission has recently settled with several parties who have admitted that their behaviour was unconscionable.