None should think the Supreme Court’s dismissal last week, of credit providers’ appeals against findings their fees were unreasonable, is a ringing endorsement of the Credit Contracts and Consumer Finance Act 2003’s (CCCFA) regulation of credit and default fees charged by financiers to consumers under consumer credit contracts.
In Sportzone Motorcycles Ltd (in liquidation) & Motor Trade Finances Ltd v Commerce Commission [2016] NZSC 53 , the Supreme Court affirmed the CCCFA’s “transaction-specific focus” for determination of costs recoverable in specified fees. A permissible “reasonable” fee is one focusing on the variable cost of providing the particular service to the particular creditor, with some averaging over time, and including relevant and closely connected fixed costs. The Supreme Court cautiously allowed, but did not decide, an avoidable cost measure (which may be characterised as long term variable cost) may also suffice.
Attribution of costs is notoriously difficult, and their precise categorisation is, as the Supreme Court said, one on which “reasonable minds may differ”. The “reasonableness” standard is imprecise and difficult to apply to particular situations. Fees have to be set in circumstances the creditor may not have precise information on its costs and will not know how many transactions it will enter into during the period the fee level is applied. Allowance has to be made for circumstances diverging from creditors’ predictions. The discussion echoes past telecommunications and other network interconnection disputes, and reminds that one of the prime reasons for subsequent network utility regulation was determination of relevant costs is an art, not a science. The Supreme Court acknowledged calculation of CCCFA-compliant fees is difficult for creditors and hard for the Disputes Tribunal and courts to apply.
What, then, is the consequent uncertainty doing in the CCCFA, which has as its primary purpose consumer protection, predominantly by disclosure of information to consumers to allow for easy comparison of competitive financing options? The CCCFA’s drafting is, as the Chief Justice said at the appeals’ hearing, “terrible”; its exposure of creditors to criminal sanctions for breach of indeterminate obligations offends a fundamental plank of the rule of law: “that a citizen, before committing himself to any course of action, should be able to know in advance what are the legal consequences that will flow from it” (Black-Clawson International Ltd v Papierwerke AG [1975] AC 591 (HL), 638 per Lord Diplock). That is why the Supreme Court said such exposure was “a valid criticism of the provisions relating to fees in the [CCCFA]”.
Yet the CCCFA itself provides a possible answer to these significant concerns, in connection with “reasonable” fees chargeable on early repayment of consumer credit. Regulations made under the CCCFA offer a calculation of creditors’ recoverable losses, which calculation the CCCFA deems “reasonable”. Criminal liability for breach of “open-textured” obligations can only constitutionally be justified where a similar safe harbour is provided. In reviewing consumer lending codes and guidelines in wake of the judgment, MBIE and the Commerce Commission should pay close regard to the Supreme Court’s criticisms.
[This article was first published in The Capital Letter (39/18, 17 May 2016)]
[See also earlier commentary on this blog]
Pheroze Jagose 