Consumer credit law deals with both the obligations and responsibilities of creditors when providing credit to consumers, and the rights of debtors. The primary legislation governing the consumer creditor/debtor relationship is the Credit Contracts and Consumer Finance Act 2003.
The introduction of principles of responsible lending into the legislation and the Responsible Lending Code that has been developed to provide guidance for compliance with these principles, has increased the level of governance required by creditors.
Creditors must ensure they meet the initial and ongoing disclosure obligations required by the legislation as updated by amendments introduced in June 2015.
This includes ensuring initial documentation and processes provide the necessary information, that standard terms are available as required by the Act and that there are robust procedures to meet on-going disclosure obligations for the duration of the relationship.
New lender responsibility principles were introduced into the legislation in June 2015. Among other obligations lenders are required to make reasonable inquiries to ensure that borrowers are able to meet their obligations without suffering substantial hardship, and assist them to reach informed decisions about any credit contracts they enter.
The Responsible Lending Code elaborates and offers guidance to lenders on the principles. While not mandatory, compliance with the Code can be used by lenders to show they comply with the legislation.
Fees & Interest
The law prescribes how and when interest can be applied and imposes reasonableness obligations in respect of fees.
The 2016 decision of the Supreme Court in Commerce Commission vs. Sportzone Motorcycles Limited (in liquidation) and Motor Trade Finance Limited affirmed the Commerce Commission’s position that the legislation requires a transaction specific approach to the setting of fees. The finding means that fees cannot be a source of profit and must be based on costs that can be referenced to a particular credit transaction. Costs that cannot be allocated to a particular transaction need to be recovered through interest charges.
While many creditors have been operating on this basis for a number of years, the judgment highlights the need to regularly review fees and their cost justification. The Commission has recently released its final Consumer Credit Fees Guidelines incorporating the Supreme Court findings, the 2015 amendments and the lender responsibility principles and code.
Other Relevant Legislation
Creditors need to consider the potential application of other legislation relevant to consumer credit, including the Financial Advisers Act 2008, the Financial Service Providers (Registration and Dispute Resolution) Act 2008, Consumer Guarantees Act 1993 and the Fair Trading Act 1986.