In Sportzone Motorcycles Limited (in liquidation) and Motor Trade Finances Ltd v Commerce Commission [2016] NZSC 53, the New Zealand Supreme Court (SC) considered the “reasonableness” of credit fees and default fees charged under credit contracts, in relation to the Credit Contracts and Consumer Finance Act 2003 (CCCFA).
The case is the last chapter in proceedings brought against Sportzone by the Commerce Commission, involving ss 41, 42 and 44 of the CCCFA. The claim was that the credit and default fees were unreasonable under s 41, because the establishment fees included costs not incurred in sufficient connection to the particular transaction (s 42), and the other credit fees and default fees were not sufficiently related to the activities for which the fees were charged (s 44).
The key question was whether a credit fee compensates the credit provider for costs it has actually incurred – are the costs and fees sufficiently connected? The SC upheld the Court of Appeal’s general approach and decision. The fees in question here were designed partly to recover costs not related to the particular transaction; rather, they were costs relating to the provider’s general business. Accordingly, they were unreasonable.
The SC stated that fees subject to reasonableness requirements are an exception to the general CCCFA position that charges will be imposed as interest. Efficiency and pricing flexibility may be factors in CCCFA inquiries, but are secondary to purposes actually enshrined in s 3, such as the “primary purpose” of consumer protection.
The SC accepted that reasonableness was a difficult standard for creditors to apply to specific transactions. However, it upheld this standard, and ruled that the CCCFA sections in question required a transaction-specific approach. The SC held that the reasonableness standard connotes an objective assessment and was intended to constrain creditors in relation to charging fees.
In discussing s 42, the SC held that the legislative intent was to capture “controlling only those costs closely related to that part of the financial service.” In relation to s 42(b) on average reasonable costs, the SC held that averaging gave no indication of the proper costs measure.
In the s 44 context (credit and default fees), the focus is also on actual specific costs and the specific quantum of reasonably estimated loss, for individual debtors.
Non-cost factors might be considerations in the reasonableness inquiry, but were secondary to costs. For example, similarity to competitors was no guarantee of reasonableness as their costs might be different, and their approach could not be assumed to be reasonable.
The SC gave some useful direction for creditors. To calculate reasonable fees, they should identify steps taken in connection to the different aspects of the provision of credit, and charge based on the costs of taking those steps. Where averaging is permitted, a representative sample of transactions should be used to calculate average cost per transaction.
The Supreme Court was unequivocal on what this means for credit providers: their many costs not referable to particular credit transactions must be recovered in the interest rate. Thus, fees should not be used to recover wider business costs or to generate profit.