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Part A: Context

Monitoring and Evaluation of the Credit Contracts and Consumer Finance Act 2003

Reviewing legislation is part of the Ministry's routine work to ensure that consumer legislation is working well. These reviews take two forms

• A review of the operation and implementation of the legislation
  These reviews are usually undertaken after about two to three years of actual operation of the legislation. Their aim is to ensure that the legislation is functioning as intended. It provides an opportunity to clarify legislative intent or rectify legislative design issues which have only become apparent after implementation and which may be hampering the effectiveness of the legislation.
• A full review of the legislation including the underlying philosophy of the Act
  These reviews are usually undertaken after at least five years actual operation of the legislation.

The CCCFA came into force from 1 April 2005. A review of the operation and implementation of the CCCFA will be completed by 31 March 2008. Following this, a report will be forwarded to the Minister of Consumer Affairs. The Report will recommend possible areas where the legislation may need to be amended to improve its effectiveness.

The research contained in Part C of this report forms part of the process of monitoring and evaluation that will inform the CCCFA Operation and Implementation Review. The Ministry of Consumer Affairs' consumer issues management process is the primary source of evidence for monitoring the practices of credit providers and the experiences of consumers in credit markets.

The consumer issues management process includes gathering information from organisations such as the Financial Services Federation, New Zealand Federation of Family Budgeting Services, National Association of Citizen's Advice Bureaux and community law centres. Where the need for further information is identified, discrete research exercises such as that into Pacific consumer behaviour and experiences in credit markets, are undertaken.

Information from the Commerce Commission on matters relating to enforcement is also part of the CCCFA monitoring framework.

The monitoring framework is based on the policy objectives of the CCCFA, and aims to:

• identify the specific issues associated with each purpose, and how these issues have been addressed in the CCCFA
• understand how the CCCFA influences the behaviour of credit providers and consumers, and
• identify any issues relating to enforcement of the CCCFA which affect the achievement of the stated purpose.

The monitoring framework is designed to be flexible. This allows for emerging issues in credit markets to be prioritised and followed up with more in-depth information, such as market research and legal casework analysis.

Objectives of Consumer Credit Law

The CCCFA is the principal legislation that governs credit provision. All lenders are bound by this Act. The policy objectives underpinning the CCCFA are to:

• promote efficient credit markets that are conducive to voluntary transactions
• require effective information disclosure, so that
  • consumers can distinguish between different credit products and, as far as possible, make rational choices between those products and cash purchases
  • consumers are adequately protected from deception
• allow for innovation in the design of credit products
• provide adequate incentives for compliance with the law by all parties to a credit transaction
• discourage oppressive conduct by lenders.

Through the information gathered during monitoring, the Ministry will be able to assess whether the policy objectives of the CCCFA are being met. If it is found that consumers are suffering loss because the objectives of the Act are not being met, the Ministry will work towards implementing or recommending appropriate interventions.

An intervention could be a policy recommendation or it could be an informational programme. The aim of any intervention would be to change the behaviour of traders or consumers. For example, if the problem occurs because consumers do not understand their rights under the CCCFA, then a targeted informational campaign may be recommended. Alternatively, if the problem is due to the CCCFA provisions being unclear or vague, an amendment to the Act may be recommended.

Gathering Information About Credit Markets

Through its evidence gathering, the Ministry has identified the fringe lending market as one in which consumers are more likely to suffer detriment in the form of harsh and oppressive credit contracts, high interest rates, fees and penalty charges, and a resulting high level of indebtedness. From its consumer enquiries database, the Ministry also identified that within the fringe lending market, low income, non-English speaking consumers are more vulnerable, and that Pacific Island consumers are over-represented among those who suffer detriment as a result of fringe lending practices.

In order to gather more detailed information about the fringe lending market, the Ministry commissioned desk research[1] in 2006 to look at the regional distribution of fringe lending businesses. The research revealed that fringe lenders appear to be concentrated in lower income communities, particularly in South Auckland. Of the 71 fringe lenders located in Auckland, 23% have a branch in or around Manukau City, 14% have an office in Otahuhu, 14% in the North Shore and 8% in West Auckland. Fringe lenders may be defined as sharing some of the following characteristics:[2]

• small, often owner-operated, specialising in personal cash loans
• higher interest rates than mainstream lenders
• large administration fees out of proportion to the size of the loan (may include establishment, security inspection, documentation and loan shortfall insurance policy fees)
• loans may be secured against personal property (e.g. cars, houses, household appliances)
• item for security often worth considerably more than the loan (e.g. car, house)
• loan amounts are often small and repayment short term (sometimes even next pay day)
• provide immediate availability of cash
• may offer pawnbroker services
• may deal with defaulters through strategies such as "naming and shaming" (e.g. in community newspapers)
• holding ATM cards, garnishing benefit payments, etc., targeted at specific communities (particularly ethnic communities, beneficiaries, low income neighbourhoods and those with poor credit ratings)
• possibly less flexible terms and conditions, few credit checks and little paperwork to fill out; and
• may provide limited documentation or overly simplified contracts (which is often promoted in their advertisements).

The Ministry of Consumer Affairs operates a dedicated free phone for Pacific consumers. Anecdotal data from this source suggests that in some cases Pacific consumers are getting into financial difficulties through what would appear to be oppressive and otherwise unlawful conduct by fringe credit providers.[3]

It was in this context that the Ministry commissioned the research on Pacific consumers' behaviour and experience in fringe lending credit markets. The research was based in South Auckland where there is a large Pacific population and where fringe lenders are particularly prevalent.

Pacific Consumers in Credit Markets Research

Background

It would appear that providing credit to Pacific consumers is a distinct submarket within the overall credit market. There is evidence that Pacific consumers are targeted by fringe lenders through advertising and other marketing practices. One marketing technique is to play on the socio-cultural obligations, faalavelave, of Pacific consumers and their need to have access to finance on short notice to meet these obligations.

Research Objectives

Within the context of monitoring the CCCFA, the Ministry's research objectives were to explore the behaviours and experiences of Pacific consumers in relation to obtaining consumer credit in the New Zealand fringe lending market.

Specifically, trader practices as experienced by consumers that were identified for investigation were:

• current disclosure practices
• availability and accessibility of lending institutions in the area
• typical brokerage and fee schemes - in the context of the legislative requirement of "reasonable"
• oppressive contracts and credit provider conduct
• influence of finance marketing – advertising to, and targeting of, Pacific consumers; and
• lending practices in relation to motor vehicles.

The study of consumer behaviour/knowledge was also an important research objective. In particular, the research canvassed:

• frequency of "shopping around" in credit markets
• what type of demand necessitates the need to borrow, e.g. church and family obligations
• knowledge and recall of recourse and redress methods/attempts
• consumer understanding of responsibilities and obligations
• saving money vs. the cost of credit
• level of consumer concern in relation to defaulting and credit ratings; and
• consumer debt and the consequences of bad credit deals.

Research Methodology

The research was qualitative[4]in nature and involved

• Twelve semi-structured face-to-face interviews with key informants from nine agencies providing assistance to Pacific consumers in South Auckland.
• Ten focus group interviews, each lasting two to three hours involving Pacific consumers. Both men and women were interviewed and these included a range of ages, household income levels, and educational qualifications.
• Fifty individual face-to-face interviews, each between one and a half and two hours, with Pacific consumers were conducted (although some were interviewed with their partners).

Caveat On Usage of the Data

The qualitative nature of the research means that it provides a snapshot of the South Auckland fringe credit market as experienced by those Pacific consumers and community organisations interviewed. Further research would be needed to establish whether the experiences of Pacific consumers extend themselves to other geographical locations and other communities within New Zealand.

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