1 The following is a submission with respect to the review of section 99(1A) of the Credit Contracts and Consumer Finance Act.

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1 Alan Liddell Credit Lawyer P O Box 62 Seventh Avenue Mail Centre Tauranga Teleph Section 9 (2)(a) 28 November 2016 Section 99(1A) CCCF Review, Competition and Consumer Policy, Ministry of Business, Innovation and Employment, PO Box 1473, Wellington. 1 The following is a submission with respect to the review of section 99(1A) of the Credit Contracts and Consumer Finance Act. 2 Glossary Comcom Commerce Commission. Consumer lenders lenders under consumer credit contracts. DRP - Dispute Resolution Provider DT - Disputes Tribunal RLR Responsible lending rules. 3 It is saddening that the Ministry took so long to act against the unfairness of section 99(1A) and that it took a letter from the Bankers Association before it even (publically anyway) acknowledged the appalling consequences of its penal attitude to consumer lenders. 4 Those who are most affected are high risk consumer lenders, those first demonised by the MBIE speaker at Auckland on 7 th of May 2012 and by the then Minister on various occasions as loan sharks. 5 I do not comment on your notes in full as I simply do not have the time, but I raise a number of issues. 6 Firstly, in your paragraph 24, you refer to banks suffering from over-cautious lending practices as a result of the need to obsessively comply with the disclosure requirements. That equally applies to consumer lenders in general but the caution is added to by the requirement to adhere to the RLR. Section 99(1A) and the RLR

2 appear to me to have caused a general increase in the ordinary interest rates charged by high risk consumer lenders. I have done no statistical survey but four consumer lenders have advised me that they are increasing annual rates as a result of the increased risks created by your 2014 amendments to the CCCFA including your prohibition of charging default interest for the increased risk to the principal sum caused by the default. 7 Further, the additional requirements for disclosure have meant that fewer loans are being made. Two separate small consumer lenders have told me that they are making fewer loans. As establishment fees are calculated by taking all of the costs (as permitted under the Comcom v Motor Trade Finance and Sportzone decisions) of establishing consumer loans over a period and dividing them by the number of consumer loans being made in that same period, the effect of your changes is that you have caused the cost of establishing loans to increase. You could probably get confirmation of this from Comcom by asking them to compare the average establishment fees of most recently entered agreements they have looked at with those of 18 months ago. Comcom could probably confirm what I believe about the increase in annual interest rates too. 8 With respect to paragraph 25, you might expect Comcom to wish to retain the status quo. a. Its job is very easy now and if you introduce degrees of culpability, you are going to cause Comcom to have to exercise discretions when it comes to prosecuting or not. It has a discretion now but the issue of guilt or innocence is already decided. If you vary the degree of guilt, it will make Comcom s job much more difficult. b. Comcom as an organisation gets a lot of good PR from being able to advertise on its website that it has managed to penalise lenders who have failed to disclose, causing it to repay many thousands of dollars and driving at least one consumer lender out of business. I see that Cash in a flash appears now to be a referral website rather than a lender and the Comcom website publicises that company having had to pay back over $122,000 to borrowers. c. However, I suggest that Comcom will not have provided any evidence that a lesser penalty would not have had the same effect and before speaking positively to you (whatever that means) about the effect of section 99(1A) on improving compliance, I would have thought it would also have considered what effect a lesser penalty would have provided. d. Comcom should also have noted to you that the offenders suffering from the effects of the new rules are doing so out of ignorance, not a desire to rip off their customers those who are trying to rip off customers break the rules in other respects as well. Twenty Fifth Club and Gavin Marsich would have

3 suffered under the new rules had they been in effect at the time the Club entered the contracts in respect of which it was recently convicted but the old rules were ample to penalise them for their behaviour (See Comcom v Twenty Fifty Club and Gavin Marsich [2016] NZDC 7242, Judge Moses. 9 With respect to your paragraph 27, I am not sure if it matters much but it is wrong to say that leaving things as they are maximises the incentive for lenders to comply. You have no idea what would maximise lenders incentives but the incentives would be greater if you introduced a greater penalty than already exists. You should not use superlatives where they are clearly inapplicable. Possibly your writer does not know what maximise means. What to look at first. 10 It seems to me that in some respects you are looking at the options for change from the wrong direction. The first question you should be asking is who is going to decide? You note that options B and C require adjudication by the courts and of course, the combination of them in option D would require the same thing. It is all very well suggesting options for reform but those options should be easy, quick and convenient. In many loans, the actual amounts involved will be a few hundred dollars or even in the low thousands of dollars. In those circumstances, it is completely unfair to both parties to require one of them to apply to a court. In each case, there will be court costs involved and the costs of using solicitors. I do not comment on the horrors of either party being self represented. Furthermore, with respect to disputes over small amounts, the district court system is worse than useless. It is slow, clumsy, bound by procedure and, in a number of registries, like, for example, Manukau, hindered by staff who are unable to use their initiative and who are paralysed when looking at a situation in which they are not told directly what to do. I recently abandoned a procedure when my client had won and been awarded costs (all we had to do was file a memorandum of those costs) and one of the reasons we did so was that we had found the Manukau District Court appalling to deal with. 11 The alternative would be to allow either party to apply to a Disputes Tribunal where the amount was less than the jurisdictional limit indeed any legislative amendment to the CCCFA could increase jurisdictional limit for the Disputes Tribunals to, say, $25,000 or to another figure. I understand that the jurisdictional limit of the Disputes Tribunals is to be increased shortly anyway or it least the issue is under discussion 12 I discount the idea of allowing the use of Dispute Resolution Providers because: a. the DRP s are available only for borrowers and b. the cost of any such disputes fall solely on the lender which means that the current incentive for the borrowers to blackmail lenders for concessions and

4 or make false complaints will be accentuated. One of the reasons that high risk borrowers are high risk is that a large proportion of them either are basically dishonest or are the type of people who, when faced with an easy advantage from dishonesty, will opt for it inflated insurance claims come from such people. c. From one point of view, if the lender has made the mistake, it is not unfair that the lender should pay for resolving it. That is reasonable and you make the point yourselves. However, you should bear in mind that if the lender makes a particular mistake with one borrower the lender will have made that same mistake with a number of borrowers. This has occurred with all of the non-bank consumer lenders against whom I am aware Comcom has already proceeded or is in the process of proceeding. As things stand, the DRP s deal with applications from individual borrowers and even although they might have decided the issue in exactly the same way for 25 borrowers, it is still open for the next 25 borrowers to raise exactly the same issue. And of course, in the individual circumstances, it is possible that one or more of those borrowers could have been genuinely disadvantaged by the omission. 13 The point I make about mass claims, of course, applies no matter who is making the decision - a court, a DRP or a DT. What to look at second. 14 The second thing is that you should decide what you mean by: a. Minor and unimportant instances of non-compliant disclosure (your paragraph 33, for example). If they are to be excluded from the things that penalise a lender or subject to lesser penalties you should be thinking of removing them from compulsory disclosure altogether. Or work out a formula of some sort. b. Disproportionate consequences (Option B) and Materiality (Option C). It is unfair on the parties to force them to argue about this, at all leaving aside what forum is provided for them to do so. Wherever it is, the cost for small loans will be excessive. This comment also applies to minor and unimportant instances of non-compliant disclosure. The options. 15 Your option A would probably be the most practical if it were as set out in your paragraph 29. However, you have shown some dishonesty or negligence in stating in paragraph 29 that the option was that the costs of borrowing forfeited would be limited but then going on in paragraphs 30(a) and 30(b) to provide that the cost of borrowing to the debtor was limited. Limiting the cost of borrowing to the debtor is exactly the

5 opposite of limiting the costs forfeited by the lender unless, in the case of 30(b), the proportion was 50%. 16 What is it you mean? Why don t you people sort out your act? How can the high risk lending industry trust your integrity and competence when you create this sort of inconsistency? 17 My suggestion is that you have a two stage penalty for the period before compliant disclosure takes place. a. For failure to disclose the information in paragraphs b to q and r, s, and sa of Schedule one of the CCCFA, 25% of interest charged and 25% of all fees charged (excluding the establishment fee) during the period of non-compliant disclosure and b. For failure to disclose the information in all other paragraphs of Schedule one, 10% of all interest and 10% of all fees charged (excluding the establishment fee) during the period of non-compliant disclosure. Otherwise, there should be no penalty. It should always be remembered that a debtor, once she receives full disclosure, has the right to cancel and re-borrow. This suggestion gets round the issue of the parties arguing about what is material or unimportant or inconsequential and keeps the issue out of the courts, the DT s and the DRP s. Yours faithfully, Alan Liddell Credit Lawyer A.A. Liddell