Supreme Court dismisses MTF, Sportzone appeal in long-running credit law case
The Supreme Court has upheld the approach of the High Court and Court of Appeal in relation to assessing whether credit fees charged by lenders under consumer credit contracts are reasonable under the Credit Contracts and Consumer Finance Act 2003 (CCCFA), affirming the ‘transaction-specific’ approach to assessing the reasonableness of fees under that Act.
The Court affirmed that only costs that are sufficiently close and relevant to a particular transaction (and not all of the creditor’s operating costs and general overheads) are recoverable as fees. When setting fees, a creditor is required to identify what steps were undertaken in relation to particular aspects of the provision of credit, and calculate the costs of taking those steps. While averaging may be permitted (to calculate the average cost per transaction, which may be used in setting a reasonable fee), a ‘representative sample of transactions’ should be used.
The Supreme Court did express some concern at the imprecise nature of the reasonableness standard in the CCCFA, which can be difficult to apply in particular situations, particularly as the imposition of an unreasonable fee potentially exposes a creditor to criminal charges.
The end of Sportzone means the Commerce Commission will now begin the (long-awaited) review of the Fees section of the Responsible Lending Code, issued in March 2015.
A copy of the full decision (and a media release published by the Supreme Court) can be found here. A copy of the Commerce Commission’s media statement can be found here.
The Commerce Commission has also recently reminded lenders that a failure to disclose key information to borrowers in consumer credit contracts may result in the repayment of all fees and interest on each loan for the period until disclosure is corrected. A link to the Commerce Commission media release, and supporting information, can be found here.
Conduct and culture top of FMA’s agenda
Speaking at a Trans-Tasman Business Circle Lunch in May, FMA chief Rob Everett gave the FMA a ‘five year report card’. Amongst the successes he noted were the enforcement outcomes of the finance company cases, the FMA's work on corporate governance and the work done on exemptions and designations under the FMA Act. The speech, available here makes important reading for anyone in the regulated sector.
Key thematic points emphasised by Mr Everett were:
- Conduct: The FMA expects that firms:
- are demonstrably delivering the outcomes their customers want;
- have designed processes, systems and governance with that goal in mind – not solely for profit;
- can clearly articulate, and support with examples, how their conduct reflects the appropriate alignment of customer, business and, where relevant, shareholder interests; and
- are disclosing to investors and the public what they are doing to meet their regulatory obligations and the principles of good conduct, and how they are doing it.
- Mr Everett noted that if firms cannot show the FMA those things and convince the FMA they have customers’ interests at the centre of what they do, the FMA will regard them as a higher conduct risk and will pay more attention to that firm.
- Culture: The FMA does not and should not prescribe culture. Senior leaders of industries and firms decide culture and must be accountable for what happens inside their organisation and the outcomes for their customers.
- Enforcement: Whilst emphasising the benefits of the flexible range of enforcement tools available to the FMA, Mr Everett was careful to note that it is critical that the FMA has a ‘credible will and ability’ to pursue court proceedings.
Perhaps the most significant signals from the speech were the following indications of future areas of focus:
- The FMA will be making enthusiastic use of its fair dealing powers under the FMC Act. The FMA noted in particular that whilst banks and insurers are not licensed by the FMA, their sales practices are covered by those fair dealing provisions and there is an issue of how far the FMA’s conduct remit under that Act can be stretched to cover what goes on at banks and insurers.
- The FMA is interested to understand how banks have responded to the global issues and those across the Tasman in benchmarks such as BKBM and other areas. Mr Everett indicated the FMA has been asking banks whether they have considered their current and past practices and whether there is anything they have to disclose to the FMA as a result.
- Mr Everett gave an indication that the FMA may be considering whether submissions to benchmarks and FX trading more generally should be brought into the securities framework so that they would be caught by (for instance) market manipulation rules.
FMA wins appeal on Vivier’s deregistration
On 13 May 2016, the Court of Appeal allowed an appeal by the Financial Markets Authority and ordered that Vivier and Company Limited be deregistered. The case considered the evidential threshold required for deregistration of a Financial Service Provider (FSP).
The Court of Appeal held that the FMA did not need specific evidence that Vivier’s registration was misleading. The FMA was entitled to rely on its expert knowledge of financial markets in New Zealand and overseas when assessing whether Vivier’s registration was misleading or damaging. This judgment may make it easier for the FMA to pursue similar deregistrations in future.
The Court of Appeal noted that where an FSP is neither providing financial services in or from New Zealand, nor generating any associated financial activity in New Zealand, continued registration is likely to have one of the effects stated in s 18A of the Financial Service Providers (Registration and Dispute Resolution) Act 2008. In such a case it may therefore be necessary or desirable that deregistration occurs.
For the full decision in Vivier see here.
FMA not yet able to claim receivership costs from alleged ponzi scheme
The High Court has rejected (for now) an application from the FMA seeking payment of receivers’ fees to be met from the assets of a string of companies alleged to be engaging in a ponzi scheme. The claim related to the appointment of receivers to PTT Ltd, as well as six associated entities on a limited basis, including to the personal assets of Steven and Lisa Robertson.
The FMA applied to appoint receivers after a complaint alleging Mr Robertson was running a ponzi scheme through the entities. Justice Palmer in the High Court said that the Court’s discretion under the FMC Act to order receivers’ fees, costs and indemnities be met from assets received is limited. These should only be ordered where the Court is satisfied (after hearing from all relevant parties) that the receivership is clearly justified, and the effect of doing so will not impact the returns to potentially aggrieved persons. It was on the second limb that the FMA’s application failed after it was stated that impact on potentially aggrieved investors was not yet known.
In reaching his decision, Palmer J invited the FMA to apply for the order again once there is ‘greater clarity about the costs and claims’.
A copy of the judgment can be found here.
FMA directs training and advice firm to amend its marketing material
The FMA has issued a Direction Order to Cambrian Corporation, which offers training and advice services relating to foreign exchange trading, following an alleged breach of the FMC Act. The order directs Cambrian to amend its marketing materials, including its website, after the FMA found that there was no evidence that Cambrian’s strategy resulted in the returns claimed in its promotional material
A copy of the FMA media release can be found here, while a copy of the order can be found here.
FMA annual survey shows that market confidence has fallen
Confidence in New Zealand’s markets fell from 60 per cent in 2015 to 56 per cent this year, according to an annual survey released by the FMA. Following a year of ‘uncertainty and turmoil’, confidence fell most among middle income earners with 59 per cent of respondents earning $50,000-$100,000 per annum saying they were confident in the market, down from 66 per cent last year. However, 75 per cent of those earning between $100,000-$150,000 expressed confidence, up on 71 per cent from last year.
In terms of market regulation, three out of five respondents were confident that NZ’s markets were being effectively regulated. Confidence was found to be higher for those that had investments (63%) and, in particular, those with managed funds (80%) and shares (75%) were most confident about the effective impact of regulators.
A copy of the FMA media release, and a link to the full results, can be found here.
Reserve Bank consults on revised policy proposals for the review of the outsourcing policy for registered banks
Following its 2015 consultation process on outsourcing, the Reserve Bank has now issued a final consultation paper regarding revised outsourcing policies. The Reserve Bank is seeking further submissions before finalising the outsourcing policy by the end of 2016.
The consultation paper provides a high level summary of the submissions received on the 2015 consultation paper and includes the Reserve Bank’s responses to those submissions.
Submitters indicated that the cost implications from the proposals in the 2015 consultation paper could be high, with estimates ranging between NZ$10 million and NZ$400 million. The Reserve Bank has, accordingly, revised a number of the proposals that submitters found the most problematic, and has sought to strike a balance between reducing their impact on registered banks, and not compromising the policy objectives. The revised policy proposals set out in the final consultation paper include:
- Maintaining the existing threshold for the outsourcing policy (NZ$10 billion in liabilities, net of amounts owed to related parties), rather than aligning the outsourcing policy threshold with the threshold for OBR pre-positioning (NZ$1 billion in retail funding).
- Instead of an explicit prohibition on outsourcing certain functions to a parent entities or related parties, the policy would require banks that outsource certain key functions to have robust backup capabilities in place.
- Instead of including a materiality threshold that would apply to the proposed outsourcing definition, a more extensive ‘white list’ of activities and functions that would not be caught by the definition of outsourcing would be developed and reviewed periodically to ensure it remains appropriate.
- The transitional path would be extended to five years, rather than two and a half years as was proposed under the 2015 consultation paper.
The consultation paper sets out further options on a number of aspects of the outsourcing policy that the Reserve Bank would like to receive feedback on before finalising the outsourcing policy. The consultation paper, along with information on making a submission, can be viewed here. Submissions close on 12 August 2016.
Disruption or distraction?
The Reserve Bank has released a paper which considers the increasing operation of non-bank ‘digital disruptors’ in the New Zealand market, such as large technology companies and start-ups. The paper provides a useful review of the extent of ‘digital disruption’ within the New Zealand market and potential risks and challenges for banks arising from this.
The paper concludes that, while the Reserve Bank is maintaining awareness of the emergence of digital disruption in the banking system, there are no current plans to change the regulatory framework. The Reserve Bank will, however, continue to assess whether and how it might respond to the digital disruption with regulatory changes. A copy of the paper can be found here.
UK Responsible Lending Review
The Financial Conduct Authority has released a report summarising its key findings of a thematic review into how the UK’s responsible lending rules have affected firms, consumer outcomes and competition. In terms of consumer outcomes, prior to the thematic review, concerns had been expressed in the UK media that the responsible lending provisions were leading to discrimination against certain borrowers.
The review found no evidence that the rules had prevented firms lending responsibly across particular groups, except in one niche area (life time mortgages that let customers make regular payments but switch to rolling up interests at any point without the risk of repossession).
The report does, however, encourage the mortgage market to continue to develop products to meet the needs of older customers, given that they make up an increasing proportion of the UK population. A copy of the report can be found here.
This publication is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice.