Recommended Amendments to the Motor Vehicle Sales Act 2003: Discussion Paper

March 2007

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6. Fidelity Fund

The Review of the Operation of the Motor Vehicle Sales Act 2003 considered whether or not to re-establish a motor vehicle trader Fidelity Fund. Since this Review, two of the Motor Vehicle Disputes Tribunal adjudicators also have asked for further consideration to be given to this matter.

Under the earlier Motor Vehicle Dealers Act 1975, consumers and security interest holders had access to the Motor Vehicle Dealers Fidelity Guarantee Fund (the Fund) as a protection against default by the licensed dealer. The Fund could be accessed when a licensed dealer was unable to pay a compensation order due to its insolvency or failed to account for money it held as an agent.

In the course of developing the MVSA, the government explored various options for retaining the Fund or a redress equivalent. These included:

• Compulsory third party warranties;
• Compulsory indemnity insurance;
• Government-run fidelity fund;
• Self regulation: group insurance or voluntary fidelity fund.

Each of these options contained significant drawbacks: these included high administrative costs compared to the benefits conferred, inequities in where the burden of risk was placed (mostly on the finance provider rather than the trader), and difficulties in designing a redress fund that appropriately reflected the differing roles of traders in the broader registration regime - car market operators and auctioneers do not have a financial interest in the vehicle under purchase.

It was decided that the maintenance of a compulsory fidelity fund was inconsistent with the simplified registration regime administered by a government department.

The policy decision was made to disestablish the Fund because:

• The number of claims to the Fund was small, and the number of successful claims was even smaller. In 1999 only 13% of claims were successful, and most of the claimants were finance companies with a security interest in the vehicle;
• The administrative and investigative functions were costly, and were extremely expensive when compared with the number of claims. In 2000, the costs of administering the Fund were twice the value of claims paid out;
• All traders were obliged to pay into the scheme and were therefore subsiding the actions of dishonest traders;
• The Fund was established before the Consumer Guarantees Act 1993. This Act has subsequently provided consumers with better remedies;
• Access to the fund was not direct: claims were first screened by the industry-based Motor Vehicle Dealers Institute;
• The new registration structure did not support the fidelity fund in its existing form; and
• Alternatives to the Fidelity Fund were either too costly or not available (i.e. compulsory indemnity insurance is unavailable to sole traders as it is impossible to insure against one's own dishonesty).

Review Findings

The Review found that the removal of the Motor Vehicle Dealers Fidelity Guarantee Fund may have denied some consumers a full remedy. However for others, the wider application of the MVDT to enable access to redress under the Consumer Guarantees Act has brought better remedies.

The Fund was available only when a licensed trader could not pay out on an order because the trader had become insolvent. In the two years of operation of the MVSA ten companies had their registration cancelled for reasons of insolvency. None of these companies appear on the record of claims received by the MVDT and the removal of the Fund would not therefore have had any impact in these instances.

A further 33 companies had their registration cancelled. Cancellation is commenced if the Registrar is satisfied that the motor vehicle trader has been registered by reason of any false or fraudulent representation or declaration, if the application fee has been subsequently dishonoured, if the trader is disqualified for registration, or if the trader has ceased to carry on the business of motor vehicle trading.

Anecdotal evidence would suggest that there may be some individuals who have attempted to avoid their obligations to pay compensation by voluntarily ceasing trading and starting up trading under another slightly modified name. This practice is commonly referred to as establishing a phoenix company and is not restricted to the motor sales industry. The Ministry's review noted that the Insolvency Law Reform Bill (which was passed in October 2006) contained provisions to minimise abuse of phoenix company arrangements. It should be noted that the National Enforcement Unit can prosecute a trader who has gone out of business and the trader can be fined. Additionally, enforcement processes mean that some traders may be prohibited from registering as a trader in the future. However, this does not guarantee a consumer will recover any money owed.

Insolvency law exists to protect those people whose businesses are legitimately in trouble, and therefore pursuing such businesses for redress is against the spirit of those laws. This is potentially in conflict with consumer protection, but serves to encourage a confident economy. There will always be those traders who seek to subvert the laws to their own advantage. The aim of the legislation should be to discover and punish these traders who bring the profession into disrepute. No other legislation allows pursuit of debts from insolvent business other than those processes currently available. There has been no reason identified to introduce additional regulation on motor vehicle traders over and above the standard insolvency provisions that apply for all other traders.

Some finance companies are experiencing losses due to traders going out of business, particularly if the trader has responsibility for any security interests. Under the Motor Vehicle Dealers Act 1975, finance companies claimed for such losses under the Fidelity Fund. With the Fund removed, finance companies are in a similar situation to consumers. As commercial operations, finance companies should make a risk assessment as to the character of the motor vehicle trader they choose to deal with. The Select Committee, at the time of deliberating on the Motor Vehicle Sales Bill, chose that the risk of the trader's insolvency (in the case of "on-behalf of" sales) should be borne by the financier rather than the consumer who purchased the vehicle. The Committee considered that financiers are better placed to manage and absorb the risk.

The Ministry does not wish to downplay any concerns about the detriment to consumers from such behaviour. It is difficult, however, after three years of operation of the new registration regime, to determine whether the problems of such behaviour are sufficiently widespread to justify reinstating a fidelity fund or its alternative, and the costs of administering such. Consumer groups have not indicated that the lack of a fidelity fund is having a widespread detrimental effect on consumers.

Additional Information

As noted, finance companies, not consumers or purchasers of vehicles, were the majority of claimants in the final few years of the Fund, mainly because there were difficulties accessing information on outstanding debts on vehicles around the Personal Property Securities Register (PPSR) that put transactions at risk. The on-line status of the PPSR has removed such problems as it can be searched for $1.

Adjudicators have noted that some consumers would have been eligible to claim on the Fund had it still been in existence and have called for its re-establishment. However, it appears that about 1% of the cases considered through the MVDT in 2005/2006 would have met the Fund's eligibility criteria. It is also difficult to quantify the amount of potentially eligible claimants where traders have failed to settle a compensation order, as the MVDT does not follow up the collection of their orders. A consumer can register the failure to pay on a compensation order with the Collections Unit at the District Court. This is similar to any debt from a compensation order from the ordinary Disputes Tribunal.

One of the offences that the Fidelity Fund covered included when a trader did not pass on monies from a sale of a vehicle on behalf of a consumer. Under the MVSA, this offence can be prosecuted and can attract a fine not exceeding $20,000 for an individual and $40,000 for a company. This is enforced by the National Enforcement Unit, a Business Unit of the Ministry of Economic Development. Therefore, there would be no need to access a fidelity fund for this type of offence.

Conclusion

The policy reasons for disestablishing the fund are still valid. In addition, a structure within which a fund could efficiently work is not in place, and re-establishment of this is prohibitively expensive.

While there are some examples where consumers may have been eligible for the fidelity fund had it existed, these are rare and there is no evidence that these claimants would have been successful through the fidelity fund system.

Continued monitoring of the impact of the removal of the Motor Vehicle Dealers Fidelity Fund by the Ministry of Consumer Affairs is the recommended way forward in the face of limited information.

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