Consumer Credit Bill

While National is supporting the Consumer Credit Bill going to the select committee, we have reservations with regard to some areas of the bill, in particular increased compliance costs. It is interesting to note that National instigated a review of the credit contracts law in 1999, and since then there has been some concern expressed about the necessity of a new bill as opposed to amending existing legislation. The need for greater disclosure and enforcement provisions has been recognised by many, not least by the creditors themselves. This bill provides for greater disclosure and puts in place enforcement provisions that, incidentally, include reference in clause 86 to the Privy Council, which has not yet fallen to the intractable onslaught of Margaret Wilson. However, give it time, as she appears determined to establish her Supreme Court and do away with the Privy Council.In the interim it is gratifying to see that it is still with us, and it is in clause 86.

A consumer credit contract is defined in clause 9—that is, when a debtor enters into a credit contract primarily for personal, domestic, or household purposes. I was interested to note that the words “domestic” and “household” have practically the same meaning in the Concise Oxford Dictionary, so I was left wondering why it was felt necessary to use both words in the context of this bill. Regardless of that, given that the consumer credit contract is personal or domestic, the business credit contracts are now excluded from the provisions of this bill. While this is welcomed by some businesses, it will be interesting to see whether small businesses feel there is some measure of protection necessary for them.

Clause 11, however, provides a presumption whereby if a party to any proceeding for a credit contract claims it is a consumer credit contract, then that remains the case until the contrary is established, or unless a declaration has been made to the contrary, as for clause 12.

Clause 13 outlines those contracts that do not fall within the consumer contracts provision, and subclause (2) deals with disclosure requirements. As stated earlier, greater disclosure has been wanted for some time. Disclosure will not, however, protect consumers who have language or literacy barriers and are unable to understand fully the contract being entered into. This includes those persons who may be drawn into a consumer credit contract as a guarantor, as well as the immediate debtor.

The finance rate disclosure has now been excluded from the disclosure provisions, and it is interesting to note that one of the submitters to the review stated that the finance rate was of benefit to borrowers. I note that the finance rate has now been excluded from the disclosure provisions. Many agencies such as citizen advice bureaus and community law centres, along with reputable businesses, have identified language and literacy as a real problem for some people entering into consumer credit contracts. It was identified that more information needed to be available to broaden the education of people likely to enter into consumer credit contracts whether as debtors or guarantors. However, the funding would need to be put aside for that education process to take place, because that material could be provided to citizen advice bureaus and the like but they could not afford to produce it themselves. Although greater disclosure is welcomed to address some consumer issues, personal responsibility cannot be regulated for, and any language or literacy barriers will need to be dealt with in a different context.

With disclosure come compliance costs, and, as we all know, compliance costs are a significant issue for many businesses, and particularly under the current Government. In this bill there is an increased compliance cost. That increased cost comes from not just the additional disclosure provisions but also from the additional staff training necessary to meet the requirements of the bill. Any such training is usually ongoing, particularly where there is a relatively high staff turnover rate.

Compliance costs will also come about from the programmes that lenders undertake for monitoring their compliance with the law. Dealing with complaints by consumers, or the third party enforcement agency as a result of the legislation, does incur a compliance cost. Given the emphasis on disclosure and enforcement within the bill, claims by consumers may increase as a result, and thereby compliance costs. Any claims that consumers bring to creditors and lenders will need to be addressed by the creditor or lending agency involved, and thereby ensure a compliance cost with that. Because they will have to do some significant work around that.

It has been asserted in the preface to the bill that compliance costs will be no greater, and may be less. I find that an extraordinary assumption. “No less”, but if one looks at the preface, which identifies the compliance costs report, it clearly shows that the emphasis is on increased costs—particularly given the growing indebtedness, which some consumers seem oblivious to. To suggest that compliance costs may reduce, when a creditor or lessor essentially has to do the following—have a compliance programme whereby employees and agents have to follow procedures and where they do have to implement automated procedures, and ensure there are methods in place for systematically identifying deficiencies in the effectiveness of the programme, and promptly remedy any deficiency discovered, defies belief. How could anyone possibly suggest there is any hint of a reduction in compliance costs, after what I have just said? Certainly, once one has been made aware of the provisions of the bill, one has to be aware of the provisions of the increased compliance costs.

A matter that was raised by the Accident Compensation Corporation, which I have not found referenced in the bill anywhere, has been the absence of any reference to the Privacy Act and how that Act might impact on those who extend credit and collect overdue credit, and how that in turn will also impact on compliance costs in adhering to privacy principles. I have no doubt that, in going through the select committee process, these matters of concern will be raised. National has a very strong view about the compliance cost issue, because of the pressure that this puts on to business. While we do support this bill going to the select committee we do have those reservations and they are significantly around the increased compliance cost—the effect it may have on the exclusion of small businesses, the exclusion of the finance rate, the absence of any reference to the Privacy Act, the fact there is a regulation that is trying to redress concerns around consumers, and how consumers actually enter into credit contracts, and their awareness or otherwise of that consumer contract.

It is to be hoped that disclosure provisions and enforcement provisions within this bill will address those concerns, because one cannot regulate for personal responsibility or for people needing to take personal responsibility for their own innumeracy and literacy skills and their language capabilities when they enter into these sorts of credit contracts. So National is happy to support the bill going to the select committee.

PAUL ADAMS (United Future): United Future is pleased to support this bill going to the select committee. It has often been said that if the incoming is not greater than the outgoing, the shortfall will be the downfall. How true that is for many people. In New Zealand now, consumer borrowing is just part of life. I have worked for many years in an industry that has been involved in this. The most confusing aspect for people who borrow has been the finance rate. I am very pleased to see that removed from this legislation, because in principle it made sense but in reality it was very confusing for people to understand. There were institutions such as banks that did not have to declare the finance rate, so it was very confusing for people who were borrowing money. The disclosures will be very beneficial because often when people come under financial pressure—I believe that one of the most difficult pressures families can come under is when their backs are to the wall and the creditors are knocking on their doors, and they realise that the only way they can release themselves from the pressure is to borrow some money—they will often go to desperate means and they will look at the amount they are paying per week or per month, without fully understanding the cost of that money.

Let me give an example. A person may be able to borrow money from a finance company over a 3-year period. The monthly repayments for that, in round figures, might be $300 per month. But they may then go to a bank and borrow the same amount of money, but they will extend their home loan to do that. The repayments on a monthly basis would possibly be one-third of the amount from the finance company, yet the cost of that borrowing may be $3,000—these figures are not accurate, I am just giving an example in round figures—but in reality if they borrowed that money over their home for a 20-year or 25-year period, they might be paying $30,000 or $35,000 in the interest repayments. Of course that money has to be repaid at some point. So the freeing up and the disclosures on all of the finance contracts need to be commended. I think it is very, very good. I have discovered that money is very easy to borrow, but it is incredibly difficult to repay. I do not know whether other members agree with me on that, but it just seems to be a fact of life.

The bill also aims to provide greater transparency and protection for creditors, in targeting the marginal lenders that unfortunately are in our midsts. I think it is very good that there will be provisions for couples, such as those just mentioned, who have language difficulties or other difficulties and do not fully understand the contract that they have entered into. If it is explained to them and if any unethical processes have been followed, they will have the ability to have that contract rescinded. That is very good.

I think it is great that all the information will be provided to the borrowers at the beginning of the contract, and it will be clearly laid out. On the other side of that coin is that we need to accept that New Zealanders should learn to pick up responsibility for contracts that they are entering into, provided all the information is there. This bill does endeavour to make sure that when they are looking at this contract compared with that contract, they have all the relevant information available to them. Unfortunately, this does not happen under our present legislation, which, as we have heard, is over 30 years old. I think this will be very good.

There are concerns about the compliance costs, both to the creditor and to the Government. Providers of domestic credit will face higher short-term costs because of alterations to software and such things. As they work together and bring in a standardisation of it, hopefully the compliance costs will not be so great. The mainstream finance organisations will be able to handle that very easily, but of course the smaller finance companies may have more difficulties.

It is interesting to note that credit card debt alone is now a major form of borrowing for New Zealanders. In the figures I have here the debt is at $3.6 billion in November, before Christmas. More significantly, $7 of every $10 run up on cards is incurring interest because the debt is rolled over month by month. To me that is a scary figure. People are looking solely at what they can afford to pay weekly, monthly, or whatever the case may be, and they are failing to see the true costs of that debt. Hopefully, this legislation will bring greater transparency in these transactions.

Consumers are now much more comfortable with debt. But if they are to be comfortable with debt—and I hope they become uncomfortable with debt, for the betterment of our nation—they must have the complete information and know what they are involved with.

In terms of the costs to the Government, enforcement is estimated to cost the Government an additional $0.6 million per annum. Presumably there will be an education campaign, and creditors and debtors will need to be funded. I believe that the select committee should look into this and I believe that the select committee process will be excellent. No doubt many issues will come up before the select committee. United Future supports this going to the select committee.

Speaking on behalf of New Zealand First, I say that I was not too excited by this legislation, until I heard the speech from Mr Adams from United Future. He suggested that the present credit contracts legislation does not seem to affect banks. That is absolutely wrong. Anyone who has been a lawyer, as I have, and dealt with hundreds if not thousands of credit contracts with loans from banks, knows that every loan offer to a client has the finance rate on it. For that member to say that the finance rate is not applicable to banks destroys the credibility of Mr Adams’ comments on this legislation.

I am interested in the fact that this legislation has removed the finance rate. When I look back to 1981, when I was in this House and we introduced the finance rate there was a reason for it. I am disappointed that the Labour Party has forgotten the reason for that finance rate. The late Arthur Faulkner, who was here in those days as the Labour member for Mount Roskill, rejoiced in this legislation. As a former creditor manager for the Farmers Trading Co. Ltd and a former RAF pilot in World War II, Arthur Faulkner had a great social responsibility. I am disappointed that this Labour Party has lost that concept of social responsibility in its removal of the finance rate.

The finance rate prevents front-end loading in contracts. A contract for $1,000 can have an interest rate of 10 percent, so 1 years’ interest might appear to be $100, but of course it is not. If that bill is paid over 12 months on a reducing basis, it is not 10 percent interest, it is closer to 17 percent. In addition, there are extra payments of a $100 booking fee or $100 for insurance. The original legislation was really set to deal with car dealers—and I understand that Mr Adams was a car dealer, so he ought to know. If on a contract of $1,000 the interest is shown as 10 percent, and $100 is charged for interest, add to that a $100 booking fee and $100 for insurance, and the borrower is forced to pay $300 on the $1,000—the interest rate is not 10 percent. The finance rate takes into account the $100 interest, the $100 insurance, and the $100 booking fee. The borrower needs to know what the actual payout is that he or she needs to make. The actual interest rate or finance rate—or the true interest rate—takes it up to about 30 percent.

For that reason it is important to retain a finance rate, especially for people living in south Auckland or west Auckland, or especially for solo parent beneficiaries who may not understand these things. When we talk about interest-free periods, members of the public might think that it is only 10 percent. They might believe that because those people have big businesses they must know what they are doing, and so they just go along with it.

I can see the Consumers Institute of New Zealand and Mr Russell getting involved in a submission on this legislation very promptly, so that somewhere in the contract it is made clear to the person borrowing the money from some car dealer, that he or she is not paying an interest rate of 10 or 12.5 percent. The lender wants to know what it will cost him or her. That is what the finance rate did in the Credit Contracts Act, which I was a very proud to be a supporter of when I was in the Government when we introduced it in 1981. That is one of the evils remedied by the Credit Contracts Act. This credit contract legislation, introduced by Labour, will leave it wide open for unscrupulous people to rip off the poor in our society.

The Minister gaily read the speech that the department gave her to read, but Miss Judith Tizard has no idea of what the bill involves.

💬 Darren Hughes: The Hon Judith Tizard.

I am terribly sorry; she is the Hon Judith Tizard. I am sure that if the Hon Bob Tizard had still been in the House, he would have ranted and raved and ripped into the Government member who introduced this bill. I can almost see the Hon Bob Tizard getting stuck into the Government on this type of legislation, which does not protect the person in the street. In so far as the person in the street is concerned, I am sure that every car dealer in New Zealand will be delighted with this legislation, because it does not protect car buyers.

The second area is the question of prepayment. If members read clause 46 on prepayment, they will see that people have to be very, very careful with this, because it allows a lender to add in charges on repaying a loan if it is repaid earlier. Let us say that someone has borrowed $1,000 and at about the 11th month of the repayments that person decides to repay it early. If the loan were allowed to go through for the full 12 months, there would be no prepayment charges. But if it is repaid in the 11th month, then there are prepayment charges. Nowadays banks will charge people $150 to $200 to repay a loan just ordinarily. They would then add that on to an early repayment charge This bill has not been thought through, and the Minister obviously does not understand it. She has merely read what the department has provided. This is very dangerous legislation.

The existing legislation, under the Hire Purchase Act, looks at the rule of 78. It is a rough rule, but it has worked for more than 30 years. I am sure that Mr Adams is familiar with the rule of 78, as are most of us who have been involved in this area. The rule of 78 sets out the procedure and it seems to be fair. It has lasted 31 years, and I have never known anyone really to complain about the rule of 78. It gives everybody a fair go. But now this bill seems to be setting up a system whereby if one repays early, one has to work out what it is costing the lender.

We know what happens today when someone repays a mortgage earlier. Say a person has taken out a mortgage for 3 years at a fixed rate of 7.5 percent and repays it in a 2-year period. The bank would charge that person $2,000 or $3,000 because of early repayment. This bill is saying that that early repayment charge would now apply to a car loan if it were repaid early. Surely the Government is not saying that because a finance company lent the money at 7.5 percent, and the interest rate has then gone down and the finance company would lose money because it has to lend it out at a lower rate, the borrower for the car has to pay the difference because that is the principle of contractual damages loss that the banks apply today. This bill has not been well thought-through.

Let us look at the loose requirements, such as creditors’ loss arising from full repayment. It has not been thought through. The rule of 78 has been rough and ready, but, on the whole, a fair approach. What we are going to say to someone who has bought a car—and it does not matter whether it is a $4,000 car or a $40,000 car—is that his or her ability to repay is based on one’s income. It hurts one equally, whether one is earning $15,000 a year or $50,000 a year. So if people go to the finance company and say they have had their holiday pay, their bonus, or whatever, and they want to repay their loan earlier, they get stung for charges and for any loss there might be on the reduction in interest.

All I can say is that New Zealand First will support this bill going to a select committee. As I understand it, this bill is meant to be only for improving disclosure, but it has gone into so many other areas now that it will create problems. I strongly suggest that Mr David Russell of the Consumers Institute, and all those others who have an interest in this area, have a close look at it, because it seems to be very much in favour of the banks and the lending institutions. Even the definition of “oppressive” in clause 92 is in favour of the banks and the lending institutions, and does not take into account the requirements of the working person and the ordinary family person as much as it should do. I will be interested to see how the bill comes back from the select committee.

I am pleased to have the opportunity to speak in favour of this bill. I have glanced through some headlines from the past year, and they say things such as: “Interest free deals with strings confuse customers”; “Credit law rip offs”; and “Loan sharks find easy prey”. I am sure all of us are aware of the number of stories that appear all the time in the news media about unscrupulous people ripping off consumers.

In respect of concerns about the fact that the finance rate is not in the disclosure, I point out that this bill provides not just for initial disclosure, but also for continuing disclosure throughout the term of the contract, and that the date, amount, and a description of each fee or charge debited to the debtor’s account during the statement period must be made right through the term of the contract. I think that those people who take the trouble to read the bill and consider the clauses very carefully will realise that there is a lot of protection here for the consumers of New Zealand that will make life much better for them. I commend the bill to the House.

I rise on behalf of the ACT party to oppose this bill, which we see as another knee-jerk ossification of an Act that there is no need to rewrite. There were some problems with the old Act, where this bill purports to improve the situation. But, as part of this Government’s cringing sycophancy to Australian regulations—

💬 Hon Judith Tizard: Ha, ha!

The Minister might laugh, but as she goes through the bill she will see that it has been drafted and modelled exactly on the old Act, and that there is very little in the bill that is new, at all. The Government has allowed the former Acting Minister of Consumer Affairs to issue strident press releases about what this bill will do, but in reality the bill just pays lip service to consumers. Once more under this Government, small business will be the loser under this bill.

The bill is supposed to address a power imbalance, and that is ideologically very telling. If we look at what this Government means by a power imbalance, we see it usually means that nanny State does not have enough power to push people around. The bill aims to provide the so-called vulnerable with more clout. Well, who are the vulnerable here? Who are we talking about? The bill actually excludes those who borrow for business purposes. So, under this bill business borrowers will be left to fend for themselves. If we look at the power imbalance, can we see who has the power here? I would say that it is the consumers. The finance companies are practically begging customers to come to them; they are throwing money and incentives at people. It is a highly competitive market, and this bill will just make it more regulated—and I will talk more about the heavy cost of that regulation further on in my speech.

New Zealand is heavily indebted. Recent figures that came out over the Christmas period show that the country is far too indebted, but the way to fix that is not to make credit harder to get and tighter; it is to reduce taxes overall, especially for those people whom this Government would call vulnerable. If those people were allowed to keep more of their own money they would immediately be protected, because they would not need to go into debt to purchase the household goods and personal items that this bill covers.

Some 80 percent of New Zealand businesses are said to employ fewer than five people. I do not believe that the concerns and needs of those businesses are any different from those of the average consumer. Small businesses are operated by mums and dads around the country—self-employed people. Why are those people, as consumers, vulnerable when they borrow to buy a personal computer for their children or for themselves to use at home—probably they have to use a computer at home in order to comply with all the regulations and tax laws that this Government continues to insist on passing—but not as vulnerable when they are borrowing to buy a similar computer for their office? Nothing in this legislation indicates those people will be protected in their business activities.

What of the small-business person’s spouse, who probably does need protection? The courts have recognised in the past that those spouses need protection because they are often pushed into the position of having to incur a personal liability for a business debt. Often those people are completely innocent of the workings of that business, but, because of the high taxes and high compliance costs, they are being forced more and more to incur a personal liability. They are not offered any protection by this bill, at all. I am not concerned about large businesses with regard to this bill. They have the ability to employ lawyers who can ferret out unfair terms, and they can wield commercial leverage. It is the small business, in reality, that is in no stronger position than the average consumer.

I will read out parts of the Hon Lianne Dalziel’s press release about this bill in September last year. She said that lenders of last resort, or loan sharks, regularly breach the law, yet few people take credit cases to court or to the disputes tribunal because the law is seen as too complex, the process too costly, or because they feel intimidated. Lianne Dalziel has supplied no evidence for the claim that lenders of last resort or loan sharks regularly breach the law. We hear about a few such cases, as the member highlighted earlier in this debate. The fact that the cases are reported in the newspapers indicates to me that they are very few and far between. The last part of the member’s press release stated: “It will not apply to commercial credit, and it will reduce red tape and compliance costs compared with the status quo.” That is absolutely not true. This legislation will increase red tape and compliance costs.

By making it tougher on lenders, this Government believes it is helping consumers. But in fact, tightening the regulations will, as I said, increase compliance costs. In a survey by Business New Zealand those costs are already estimated to have gone up, on average, by more than $30,000 a year since this Government came into power. That is at least enough to pay one person who could have been employed. That is shrinking our economic growth. If the Government makes it harder to lend money and harder to collect a loan, then in such a competitive market the costs of that will inevitably be reflected in the cost to anyone who manages to get credit. If credit is too tough, then the sensible, cautious, prudent people who are hurt will just give up and go away. The need for credit will not change. This bill will do absolutely nothing to change the need for people to borrow money; there will always be a need for people to borrow money.

This Government, assisted by United Future, which seems to want to protect people from themselves, is in effect telling some people that they are too stupid to borrow money, that they are getting caught up with three terms when that should be two terms, and that they cannot be responsible for their actions. So the Government is to make it too tough for those people to get credit by legitimate means, and is to excuse them when they do not read the fine print. How can the Government say on the one hand that the legislation will reduce compliance costs, and on the other hand that there will be ongoing disclosure regulations? That just does not stack up.

The poor will still borrow money for things they cannot afford. That is their right. People have a right to make mistakes, and they have a right to be wrong. The Government does not have a right to push people around and to tell them what they can and cannot do if they are not hurting anyone else. The onus should be on lenders to make sure that they have adequate security when they lend money, and obviously if they do not do that the responsibility is then on them when they lose the money. The people who will be shut out from legitimate credit markets by this bill will end up going to the informal markets. I predict that we will see a growth in the lender of last resort industry—in the so-called loan shark industry. If the people who borrow from loan sharks renege on a loan, then repayment will not be enforced by the multiple hoops that this legislation will put lenders through. Instead, repayment will be enforced by sending the gangs or the heavies around to seize the borrower’s car or to biff a rock through a window. We will see more people in desperate situations going to even crueller loan sharks, if that is the term we want to use, in order to borrow from Peter to pay back Paul.

The Minister has put forward a bill that will make no difference at all to the middle class, except to push up costs. The rich, in general, are lenders, not borrowers. They can afford to pay lawyers to make sure that they do not make mistakes. This bill will put up the price of legitimate credit, put it out of the reach of the poor, expand the business of the loan sharks, and add to the compliance costs of, and burdens on, small business.

I am always frustrated—I was going to say fascinated—after hearing an ACT speaker. I wonder where the world is that they talk about. I wonder where those people are, whom they talk about. I do not come across such people very often—and I am an electorate MP, unlike the previous speaker, so I do see people. But people do not tell me stories like those that that member has just portrayed.

The aim of this bill is to repeal the Credit Contracts Act and the Hire Purchase Act, and to replace them with a new legislative framework governing credit contracts and consumer leases. At this very moment I am working on cases for two women. The women are totally unrelated, but a similar incident is causing them great concern in their lives. Both of them are widows in their eighties, and both are feeling extremely vulnerable. Their concern has been brought about by a plumbing situation. Those women have not got rash with their cash in the late years of their lives, but have found themselves in an extremely unfortunate and expensive situation through absolutely no fault of their own. So I say we do need to have protections in place for consumers. This is a good bill, in that it provides that protection.

The previous speaker said that people have a right to make mistakes. However, I wonder why we bother legislating for so many things if we think that people have the right to make mistakes. We seem to spend a disproportionate amount of our time in this House in trying to assist people not to make mistakes, or in mopping up after mistakes have been made, so I wonder what the member meant by that statement.

One of the issues that does concern me, and I am pleased to see this bill being progressed through the House for this very reason, is the proliferation of quick money places throughout New Zealand. We now frequently see advertisements in our metropolitan, and certainly the provincial newspapers, as well, that state that if people wanting money go and ask for it they will get it, to paraphrase the advertisements. That issue concerns me a great deal. It is, as Mr Adams said, far easier to borrow money than it is to pay it back. I believe we need to be cognisant of, and concerned about, people who do find themselves in difficulties through the misguided borrowing of money.

I am pleased to support this bill. Let us get it progressed through the House as quickly as possible, so that there is more protection for consumers.

The Green Party welcomes the introduction of this bill to the House. A review of the law covering consumers and credit is well overdue, given that there has been no real change in the legislation for over 20 years, and that there have been huge changes in our society and our economy during that time. Debt has become a critical issue for ordinary working people and beneficiaries during that period. The levels of indebtedness continue to rise to new heights, and most groups working with low-income people acknowledge that crippling debt is, in many cases, an overwhelming factor in people’s inability to make ends meet on a day-to-day or week-to-week basis.

Of course, the laws around credit are not in themselves the underlying source of the problem. The rise in, and entrenchment of, structural unemployment in the 1980s and 1990s, the pressing down of the comparative value of benefit levels from 1990 to 1991 onwards, and low minimum wages have meant that hundreds of thousands of people have been forced into debt as they struggle to provide the bare minima of life for themselves and their families. The fact that people have had to resort to borrowing on an unprecedented scale in recent years has meant that things like extremely high interest rates and deceptively easy access to credit have led people into ever-worsening cycles of poverty and despair, in ways that impact on all sorts of aspects of some families’ lives. The recently released Child Poverty Action Group report on the effects of housing transience on school attendance in south Auckland is just one example that highlights the way in which the spiral of debt compounds other problems, as families move house constantly in an effort to escape debt.

For anyone who takes a wander through the streets in places like parts of Manukau City or Otahuhu, it is easy to see that alongside the proliferation of pokie parlours and Cash Converters stores there is also an ever-burgeoning number of businesses offering in a variety of languages to lend passers-by cash, right now. Moneylending at what I will call the bottom end of the market appears to be a booming part of the economy in those places, just like the pokies, and I am sure that they are not without links. At the same time, I would be the first to agree that lots of the borrowing is not for gambling but for things that most of us see as the necessities of life, such as paying the rent or mortgage, buying a car to get to work in, or simply putting food on the table this week. The fatal contradiction for people borrowing at the bottom end of the market is that all too often the interest rates and other charges are much higher than those paid by better-off people who borrow from mainstream lenders, for the very reason that this is fringe lending.

I will just to give one horrific example of that. A Consumers Institute investigation of loan sharks last year found a case where a woman in Otara had borrowed $600 from a small lender. She had to pay a brokerage fee of $100, a documentation fee of $498, interest at 28.5 percent, $30 to make a phone call, and $50 to receive a fax. Within 6 months she had paid back the $600, but she still owed $1,398. There are other iniquitous practices, as well. For example, there are places where lenders hang on to borrowers’ automatic teller machine cards and pin numbers, so that they can get into borrowers’ accounts at will, or there is the Tongan moneylender in Otahuhu who runs a name-and-shame page in the Taimi’o Tonga newspaper, with photos of the people who are behind with their repayments and a written description in the press of what the loan was for.

From even just a couple of examples like that, it is easy to see why, in the years since the introduction of the Credit Contracts Act, there has been considerable criticism of that Act. The Act is often seen as too complex and difficult for ordinary people to understand, especially with the need to cross-reference it to other legislation. There are problems in ever getting the law enforced, because there is no Government agency empowered to enforce the Act. There is perceived unfairness to consumers in some areas such as the exclusion of certain charges from the finance rate, and businesses often complain of high compliance costs. The new bill in front of us today is the Government’s attempt to address the issues, and is long overdue. The Green Party welcomes its introduction and will be supporting the bill going to the select committee, where much of the fine detail can be worked out.

However, we do, even at this early stage, have several reservations about whether the bill goes far enough in certain areas. Firstly, and probably most significantly, the Green Party believes there should be a named and fixed limit on interest rate charges. Many low-income people in south Auckland and elsewhere are defaulting on loans that have exceptionally high finance rates. I have been reliably told that rates of 30 to 35 percent are not uncommon, and some are even as high as 42 percent. Those loans are being made by moneylenders who are very well aware that it would be just about impossible for a borrower to meet the repayments. When a debtor defaults, for example, on a car repayment the vehicle is repossessed, and the debtor spends years trying to continue to make payments on a car he or she no longer owns, or he or she skips out on the debt, with all the negative long-term legal and financial consequences that that incurs. Meanwhile, the vehicle is resold to someone else on similar terms, and the whole vicious cycle is repeated.

While clause 92 of the new bill does talk about oppressive contracts, we do not think that that is enough. There should be a mechanism by which maximum finance rates for consumer credit are regulated. We are also concerned that the definition of an oppressive contract is not sufficient to cover all the types of iniquitous practice to which some borrowers are subjected. I hope that will be tightened up carefully during the select committee process.

A second reservation that the Green Party has about this bill is in the area of small business. As my colleague in ACT has just said, small-business people need protection and disclosure when they borrow, just as much as anyone else does, and many of them are in the same low-income, low-capital bracket as the vulnerable borrowers I have talked about already. The Green Party believes that small-business people should have the same rights and safeguards as personal borrowers, and I cannot quite understand why the Labour Government has seen fit to leave that out of this welcome legislation. In its April 2000 discussion document on the review of consumer credit law, the Ministry of Consumer Affairs did, evidently, consider ways and possibilities of allowing small business to fall under the new legislation—for example, through defining limits based on the financial size of a business and the number of its employees. However, sadly, in the time since that review took place, the ministry and the Minister seem to have found small business too difficult to deal with in the context of the bill. That is a great pity and I hope the select committee will, with the help of submitters and officials, find a way to make sure that small business will have access to the benefits of this legislation.

Despite those reservations and others, such as problems around the access to the disputes tribunal, I am pleased that this badly needed update is finally before the House. I look forward to hearing what the wider community will have to say about it during the select committee process.

I am very pleased to support the Consumer Credit Bill’s first reading in Parliament. This is a modernisation of the law in this area that the Minister of Consumers Affairs, the Hon. Judith Tizard, has brought to Parliament, to replace two very old pieces of legislation—the Hire Purchase Act of 1971 and the Credit Contracts Act of 1981, which I think is pretty old, too. I am very pleased that that old credit legislation is being updated by Parliament. This bill will go to the Commerce Committee, of which I am a member, and through the submission process I look forward to picking up on the points that Sue Bradford has raised.

Judging by the statement made by the previous young member, I would say that if the number of years it has been in force is a good reason to change the legislation, the speech by the New Zealand First member Dail Jones now makes a lot more sense to me. I certainly think that the age of a piece of legislation is not a very good reason to change it. The Minister and all the members of the Labour Party still fail to convey to the public what they mean by this legislation replacing the Credit Contracts Act and the Hire Purchase Act with a modern framework. People who are still listening to the debate would ask what that means and what this new legislative framework is, so let us explore that.

The bill that we are examining sets out to achieve the following objectives: to promote an efficient credit market, to provide for effective information disclosure, to allow pricing flexibility, to provide adequate incentives for compliance, and to discourage oppressive conduct.

Sitting suspended from 6 p.m. to 7.30 p.m.

Ni hao, Mr Speaker. What a multicultural Parliament! It is sad that we are going to debate this bill. I challenge the next Labour speaker to stop reading from his or her prepared speech and, once and for all, explain to the public what Labour means by this bill. It is to provide a contemporary framework and replace the Credit Contracts Act and the Hire Purchase Act, but I am still seeking the answer as to what the significant difference is between the Consumer Credit Bill and the Credit Contracts Act.

Essentially, the objectives of the Consumer Credit Bill are to encourage full disclosure, to make sure that borrowers are well informed, and to ensure that there is a competitive market for efficiency of operation. Let me read the objectives stated in the Credit Contracts Act, which this current bill is supposed to replace. Those objectives are to—“(a) Prevent oppressive contracts and conduct; (b) Ensure that all the terms of a contract are disclosed to debtors before they become irrevocably committed to them; (c) Ensure that the cost of credit is disclosed on a uniform basis in order to prevent deception and encourage competition; and (d) Prevent misleading credit advertisements;” Therefore, I fail to see what significant differences there are between the Credit Contracts Act and the Consumer Credit Bill. This particular bill falls into a “tidy mind” bureaucratic process that always underestimates the cost of enacting a piece of legislation. Every time Parliament introduces new legislation, it introduces uncertainty into the lives of people. So many case laws have to be established for the public, lenders, and borrowers to understand, or second-guess, the meaning of a particular word in the legislation. Therefore, I challenge the next Labour speaker to explain to us whether the benefit of introducing this so-called new bill significantly outweighs the cost of uncertainty.

Let us examine it. Apparently, one of the major differences in this bill is to exclude business transactions. That was capably pointed out by the ACT member—and even agreed to by the Green member, who asked why a person would be treated differently if he or she needed a personal computer to run a business. If the money is borrowed on a personal basis, it is covered by the Consumer Credit Bill, but if that person chooses to say that he or she operates a small business, suddenly the bill does not cover that. That is very strange. What happened to the Labour Government, which always claims to be the champion of small business? Suddenly it is saying that it does not want to protect small business from the compliance-cost burden. The ACT party is seeking an amendment to include small businesses in the bill, and the Green Party will support it. The challenge now lies with United Future, which always campaigns on the grounds that it is for average, hard-working, small-business people.

💬 David Benson-Pope: Get a member of a major party!

National thinks this is a bureaucratic piece of legislation. If David Benson-Pope ever has anything worthy to say, I ask him to take a call.

Dr the Hon Lockwood Smith: Failed schoolteacher!

I do not want to insult schoolteachers—I respect schoolteachers, except that one.

The bill seeks to limit the manner in which interest can be charged, but it continues to show a lack of understanding of borrowers. People who want to borrow money usually really need the money. Therefore, all they are concerned about is whether they can afford the total cost. If borrowers appreciate the full cost of borrowing, it is up to them to decide whether they can afford it. Full disclosure in itself is sufficient. We do not need this heavy-handed legislative measure to do that.

I am still looking for a significant advantage in the Consumer Credit Bill that is not apparent in the Credit Contracts Act that it is supposed to replace. Maybe it is to do with the enforcement regime, or the penalty regime. The Commerce Commission is the enforcement agent for the Consumer Credit Bill, but members should look at the statutory damages—only $3,000, or 5 percent of the credit limit. I hardly think that would deter anybody from flouting the intention of this legislation. The only provision I was looking forward to was one from the Minister of Commerce, the Hon Lianne Dalziel, who promised last year that she would toughen up this legislation to sort out the problem of so-called loan sharks. The only provision I can see that remotely relates to that issue is a requirement to restrict the daily interest that can be charged. But the problem with loan sharks is the lack of enforcement. Most victims of loan sharks are not going to report the crime. This legislation stipulates an enforcement agency to look at whether the interest regime has been infringed. If it has, the police might take action. The only way the loan shark situation can be dealt with effectively is to increase the resources and commitment of enforcement officers. The police, rather than the Commerce Commission, should be the ones to take proactive action, but they are usually more involved in organised crime.

Last year, the honourable Minister promised a lot, but I do not see any more effective mechanisms in this bill for dealing with the very unsatisfactory loan shark situation. She needs to have a conversation with the Minister of Police, but given that Minister’s performance in the leaky-building saga, I doubt that he would see any problems, or react to anything. After reading the bill page by page, I fail to understand what enlightened, contemporary, wonderful framework has been put into place to replace the Credit Contracts Act and the Hire Purchase Act. As the magazine Consumer advocates, we want to ensure that the public has a say in whether there is any point in passing this legislation. National will support this bill to the select committee, but we will examine it and make sure that public submissions are listened to. In particular, we believe that the compliance costs will be horrendous.

I am pleased to rise in support of this legislation and commend to the House its passage to the select committee.

I wish to take a short call to cover the points that came up earlier in the debate and were mentioned by Dail Jones and by my colleague Pansy Wong. The explanatory note in this bill brings to my attention some major concerns as to why we should want to repeal the Credit Contracts Act and the Hire Purchase Act. There are two points I want to bring to the House’s attention, which I am sure will be canvassed in detail in the select committee. The first point is on page 2 of the explanatory note. It states: “The Bill clarifies that the debtor has a right to pay out the contract at any time (full prepayment) while allowing the creditor to recover a charge that does not exceed a reasonable estimate of the loss suffered by the creditor on full prepayment.” What is the incentive for somebody to repay a loan if there is a penalty for doing so?

I bring the attention of the House the heading “What you may have to pay if you cancel” in schedule 1. One of the most important things for individuals, and even for businesses, to do is to reduce debt loading. Eighty-five percent of small businesses in New Zealand employ fewer than 5 people. One of the major factors in the work I have done over the last 15 years as a management consultant is refinancing and restructuring. We have looked at debt reduction, how we can grow a business and make things a lot easier. One of the incentives is to reduce and actually clear that debt. Here we have a provision that states that if people are going to do that and cancel their contracts, then they will be penalised for it. What incentive is there for an individual to clean the slate and get rid of his or her short-term debt, if he or she is to be penalised for doing so?

The second major point I want to bring to members’ attention is in the explanatory note. It describes the provisions in clauses 24 to 28, which are about the debtor’s right to cancel a consumer credit contract, as the “cooling-off” provisions. It states: “These ‘cooling-off’ provisions are substantially similar to the equivalent provisions in the 1981 Act. However, while the equivalent provisions in the 1981 Act applied to modification disclosure, these provisions do not apply to variation disclosure.” A lot of the work done over the years in restructuring has been to look at variations that extend the term. One can often get people into a viable business situation by looking at variations. It might be the variation of a mortgage on a property. For example, the term of a mortgage can be extended, its terms and conditions can be exchanged, and different interest-free loans can be considered. If someone other than the mortgagee wants to lend the money, then priority might have to be conceded to allow that person to come in. That is part of what happens in the real world. Variations of the terms and conditions of mortgages and credit contracts are very important, yet this bill will stymie that. When the bill gets to the select committee, those are questions that people will ask. Although we are supporting the bill to the select committee, we have major concerns about the compliance costs that will be associated with it.

The third area I want to bring to members’ attention is the operation of leases. The bill actually talks about consumer leases. I have been a strong advocate of leasing. In fact, over the years I have never owned a car; I have always leased one. In that respect, I have been able to go into a dealer—in my case, a Ford dealer—and drive out with a nice car. I have been able to operate that vehicle for a period of, say, 2 or 3 years, or until 60,000 kilometres have been clocked up. I have been able to enter into two types of leases—a full operating lease, in which the Ford dealer or the Ford credit company, whoever is providing the finance—

💬 Hon Dover Samuels: I hope it’s got a warrant of fitness.

Of course the car has a warrant of fitness! I always drive with a warrant of fitness, as the member would know.

With a full-operating lease, the costs of registration, warrant of fitness, insurance, and repairs and maintenance on a new vehicle would be covered. Or I could opt for a lease whereby I meet those commitments or outgoings, and after a period of a couple of years, maybe change the vehicle. From a taxation point of view, there are major advantages for a business in leasing, because there is no capital outlay. Instead of buying a vehicle for one’s business, and maybe paying $30,000 to $40,000, one can free up that capital by leasing. In the work I have done over a number of years in my previous occupation, I found that leasing was an option. If capital is an area of concern, a limiting factor in the way one operates, then that capital can be freed up. We have looked at that area not only in respect of business but also in respect of individuals. Leasing can be done with computers, fax machines, and cellphones. In fact, the first cellphone I ever operated back in 1993 was one of those big bricks. Do members remember those? To buy one of those at that time cost nearly $1,000.

💬 Darren Hughes: You haven’t still got it?

I do not have it now.

In less than 12 months, the cost of cellphones fell to below $300. Now there are companies that give them away. The point I am making is that by having flexibility in financing an operation, people were able to get a short-term lease on a phone and pay, in this case, $85 per month. They are not committed to it, and after a short period of time they are able to replace it. As technology expands rapidly, there is huge move to lease the sorts of things I have mentioned—Eftpos machines in businesses, for example. Why pay $3,000 when one can be leased for about $65 a month? My point is that leasing is a very important part of an operation, whether for business or for individuals.

The fourth major point I want to bring to the attention of the House follows up on the point about the finance rate made by Dail Jones just before the dinner break. He made a comparison, saying that if he borrowed $1000, but at the same time had to pay the interest rate, the establishment fee, a booking fee, and insurance, then those things could add a major cost to the loan. If I am going to borrow money, or if any person I am dealing with in a restructuring situation is going to borrow money, then we really want to know what the true cost of borrowing is. It is no good just talking about the interest rate. Dail Jones mentioned an interest rate of 10 percent. In fact, the true interest rate—or the true finance cost of borrowing the money—could be in excess of 30 to 40 percent. That is the area that this bill does not address, and it is one of the reasons we are supporting it to the select committee. We have major issues with the compliance costs, and how the measure will work in the long term. We believe that many questions will be asked in the select committee about how it will work.

Pansy Wong asked earlier why we would want to bring in this legislation. What was wrong with the Acts we had that were mentioned earlier—the Credit Contracts Act of 1981 and the Hire Purchase Act of 1971? We are looking at a comparison here. I do not believe that there is a change significant enough to repeal those pieces of legislation and replace them with this legislation. This is being done at the Government’s whim, and hard questions have to be asked about how this bill will work and what the benefit will be to the borrower. At the end of the day, the borrowers are the most important people. They are the customers, and we have to look after them. I am really concerned about the compliance cost and the finance rate. They are not mentioned, and they are issues that I am sure will come to light.

, on behalf of the Minister of Consumer Affairs: I move, That Consumer Credit Bill be referred to the Commerce Committee.