Credit Contracts and Consumer Finance Bill

We in the National Party always like to be positive. In this part, we can be positive, and that is always such a joy for us.

Just like the previous speaker from the ACT party, Mr Franks, I have spent 20-odd years as a lawyer. The Credit Contracts Act was brought into Parliament in 1981 and stood the test of time for 20-odd years. I remember when that Act came into play. Before that, we had the Moneylenders Act, which was much more cumbersome, much more difficult, and very easy to offend against—supposedly without any great harm to the person at the receiving end of it. It was great to have the Credit Contracts Act, and it is with some sadness that I see that it will be done away with by this legislation.

Part 3 deals with some of the issues relating to that. In particular, I would like to speak about the buy-back transactions in respect of land. I take that matter very seriously, and I see that the Minister does, too. One of the odd idiosyncrasies of life is that whenever Parliament feels it is taking a step towards stopping some great unfairness, methods are brought into play to work around that unfairness and create another one. Unfortunately, that has happened in the south Auckland area, where my electorate is. A significant number of people there prey on the less fortunate—I see the Minister agreeing, and I thank her for that—by coming along with an offer that is just too good to be true. Quite often, people have trouble paying their mortgage, paying debts, or, as often happens, particularly with Pasifika families, there is a funeral overseas and suddenly they need money and someone comes along with this great offer, and the offer really is just too good to be true. It is: “I will take away the mortgage for you. I will take away these problems, and now you can go back to renting. When you feel better about it all, and you’re in a better state of mind, and the husband, wife, or somebody, is back working again, then you can buy back the house.”

There are all sorts of problems with that; the Credit Contracts Act does not really deal with them, and that is why this part of the bill is one we feel we can support. It applies the credit contract provisions to those buy-back agreements. They almost always involve a situation whereby the person who is selling or entering into the buy-back agreement—the person who originally owned the home—is in a state of distress. Very often those people will never ever be able to buy back that home. Unfortunately, the person who helps them to enter into that just-too-good-to-be-true offer knows that, and that is one of the problems. I am really pleased that the Minister is supporting me on that issue with her nods.

Another issue we could look at here is consumer leases, and I am just a little bit concerned about that. As I have said before, whenever there is a law to protect people, people will work out a way to get around it, and it has happened here. That will apply to consumer leases of 1 year or more, or where there is an option to purchase the goods.

One thing we believe in, and it is in this bill, is that there must be good disclosure of the facts. Unfortunately, sometimes those facts are not particularly well disclosed, and the Credit Contracts Act did a very good job, particularly with the finance rate it brought in. Those of us who were lawyers, many people in the finance industry, and, I am sure, in the car resale business and many others, understood what that finance rate was all about. It was all about putting the true cost of interest into transactions, so that people no longer ended up thinking that they were paying 10 percent interest, when with application costs and everything else put on, they were often paying a true rate of interest in the late 20s or 30 percent area. That is what had been happening, but at least under the Credit Contracts Act that issue was addressed. This part will bring those provisions into consumer leases, and that is a very good thing.

I would like to follow up on the words from my esteemed colleague Judith Collins, and say that it is good to see that the finance rate has been included. A lot of submitters were incredibly concerned that it had been omitted, and I remember a deliberation in the House in which Paul Adams from United Future applauded the fact that it had not been included. It is quite interesting to see that the finance rate is now there, and I applaud the Minister for recognising that it is an important aspect of the bill.

One of the other things I would like to talk about is that the disclosure requirements for lease arrangements are, to a degree, the same as those in schedule 2 for consumer credit contracts. Again, the disclosure requirements are important. One submitter said that one of the starkest ways to bring home to consumers the meaning of a credit contract, or credit lease, or whatever, would be to have nothing on the first page of the contract other than the total sum payable—in large black letters. Members heard my esteemed colleague Judith Collins explain the difficulties that people can get themselves into. Any reasonable person—and we certainly have some concern about the definition of that, because there is not one—can get himself or herself into difficulty. If the total sum payable is printed in large black letters on a blank page, then that gives people a very clear message about what they are getting themselves into. A number of people out there do not have the knowledge or, indeed, the literacy or numeracy skills, to fully appreciate what sort of transaction they are entering into. It is a major concern.

No research has ever been provided to show why this bill is necessary, and why it has been necessary to legislate to the degree attempted in order to protect people from themselves. Nothing has been provided in the way of research to show that a new bill or Act is justified, and that issue has been raised by a number of submitters this evening. It is a material omission that the bill is not based on sound research, but on someone’s concern that consumers were not being protected enough, and who wanted to strengthen the protection provisions through this newly named Credit Contracts and Consumer Finance Bill.

I would like to raise the issue of compliance costs yet again, because it is a significant part of what is happening with regard to this bill. I did not cover all the business compliance cost statements that were identified in the preamble to one of the original bills, but, as Stephen Franks has already said, those costs will be passed down to consumers. Dealing with claims by consumers will be a cost, but at the moment there is no way of knowing to what degree that will impact on businesses. The “oppressive” provisions will place a cost on both consumers and lenders, but no one has any way of calculating it. It is one of the risks imposed by the bill, and it could be incredibly substantial.

There will be a cost to lenders in monitoring the compliance of their programmes with the law, and due to stronger enforcement, that could again be substantial—a fact that has been noted by a number of submitters. There is real concern about increased costs because of unknown factors in relation to what is “oppressive”, and what that will mean in terms of litigation. There are significant opportunities for people who are not satisfied with the contracts they have entered into to bring about litigation by saying that they were misled. It could be as simple as them saying that they are reasonable people and that they were misled when they entered into the contract. We will get into that issue further as we debate the other clauses of the bill.

Hire purchase providers have also identified increased short-term costs, but I put it to the Committee that those costs will be ongoing.

I will take just a short call on this part because sense seems to have prevailed with Part 3. I would like to ask the Minister in the chair, the Hon Judith Tizard, whether she could clarify what I think is the confusing issue of the “occupier” in buy-back transactions of land. There is a definition of “occupier” in clause 6B of an earlier part, which I will refer back to even though we have already debated it. It sets out that the occupier is the person who agrees to transfer an estate in land to another person, in exchange for borrowing money from that person. That is fine, so far. The land handed over is security for the money loaned, and is the principal place of residence for the occupier at the time the occupier enters into the transaction. That is all fine.

But clause 58B sets out the disclosure provisions of buy-back transactions. The onus is very much on transferees to disclose, and to make sure that occupiers understand the transactions they are getting into and all details of those transactions. In fact, the onus is on the transferee to ensure that the occupier has independent legal advice, and so on—which is fine—but then clause 58B(2) states that every transferee must ensure that a copy of the terms is given or sent to every occupier under the transaction. I find that confusing, because up until that point we had been dealing with “an occupier” but suddenly we get to “every occupier”—presumably under the one transaction, therefore, one piece of land is being dealt with.

That raises the question of how the transferee is to know—or is he or she presumed to know—whether there is one occupier or more of the land in the transaction. Is the transferee liable because he or she did not know, or did not try to find out? That also raises the question of what happens when the hardship provisions are enacted by the occupier, or whoever the occupiers are. Can one occupier try out the hardship provisions, or can every occupier use the hardship provisions as an excuse for not paying back the debt, or whatever is owed, under the terms of the contract? I consulted the expert Judith Collins, who is a lawyer—because I am not—and she was confused, too. As I said, this is just a short call and perhaps the Minister in the chair could take a call and explain whether it should be one occupier or several occupiers.

Thank you for choosing me, Madam Chair. I appreciate it. It is a first that seniority is being—

💬 Lindsay Tisch: She didn’t see me standing.

I am sure that you did not overlook my colleague Mr Tisch, Madam Chair. I want to take a relatively short call on this part as well, because I also find myself agreeing with the Government on this part. I will not go so far as to say that I am giving out bouquets, but I think it is sensible. However, for the sake of the Hansard record, I want to deal with the issue of buy-back transactions and to make it very clear what I am talking about.

A buy-back scheme is a transaction whereby the title to a home is transferred to a company or an individual and the original owner enters into an agreement to stay in the property, usually by paying rent. The person who transfers the title also has the right to buy back the property at a later date if he or she can. That part is not included in the definition, but it is, of course, the issue. I believe that the provision in the bill is dead right. It is really an issue of trust, because the people who parade such schemes generally fit into the category of “loan shark”. They prey on people who, generally, are ignorant of finance. To those people finance is simply another world, and they rely on others for their advice. To abuse that trust describes the worst kind of individual I can think of. That is simply preying on the weak, who should be protected in law. Therefore, I commend the Minister for the clause.

The people who enter into those agreements should also be getting advice, by going to people like my colleague Judith Collins—in her former life, of course—to seek independent legal advice. The key is that it has to be independent legal advice, and people need certainty that that is what they are obtaining. But, of course, on this issue the legal profession also has a responsibility. Like seeking finance, going to a lawyer is also a unique and sometimes a frightening experience for those folk. The cost of obtaining legal advice is an issue that I will flag as part of the compliance cost concerns I have about this bill. With that said, I believe that another part of the key information that should be disclosed is whether the advice that people receive is independent and of sufficient quality to walk people through this complex area with some certainty.

Another clause I would like to talk about very briefly is clause 57(2), which deals with insurance. The test of whether something is reasonable has already been raised. But I can say without fear of contradiction that insurance will be paid for in some form, somehow. That will occur either through an insurance policy that the lender insists on, or by including insurance in the price of the finance. Those who understand financing and pricing will understand the concept of pricing for risk. All lenders have a risk profile, and, across that, credit fits into categories ranging from “A”, being a credit that has a low risk and therefore is marginally priced, right through to “F”, which is high risk and therefore carries a very high pricing structure. Somewhere in between, of course, is Utopia, where shareholders’ funds are being protected because the risk profile is medium around the “B” and “C” areas, and, while those areas are less aggressively priced than in the case of the lower categories, the price is enough to be profitable. That, of course, is how the finance companies build shareholder wealth and profitability.

I reiterate that the clause relating to whether something is reasonable will give people false hope, because somewhere in the contract there will be a cost for insurance.

I move, That the question be now put.

Part 3 is the real guts of the bill, where the Government had to act swiftly because of the buy-back schemes. Those schemes came about in fairly recent times, and they hit with a vengeance. I am pleased to observe tonight that a large number of members, both in the Opposition and in the Government, are supporting this part. It is a very important part, intended to protect the unwary from the extraordinary lengths to which some people will go to in order to trap them into a situation that they will have no way of getting out of. That is basically what the buy-back transactions of land are all about. They are set up in such a way that the individual who borrows the money against his or her property has no way of refinancing it and getting the property back.

💬 Hon Lianne Dalziel: They have transferred their property.

The person has transferred his or her property, and basically the conditions are set so that it makes it very, very difficult for the person to get it back.

I would like to touch on the point concerning independent legal advice. We agonised for quite some time in the Commerce Committee over how we could ensure that a person who was trying to borrow money would get independent legal advice. In many cases, a person has turned up with perhaps a parent or a friend who has tried to assist the borrower, and in those cases neither person has had financial or legal knowledge. We have put in a clause requiring that there must be legal advice. Sometimes the person lending the money recommends the legal advice, and that is an area where a person can fall into a trap. If the borrower accepts that advice, then he or she is in dire straits. We agonised over that provision, to try to make sure that that situation did not happen. I certainly hope it does not happen under the circumstances provided for in the bill, because it is a very serious issue.

With that, I say New Zealand First strongly supports this part of the bill. We support the bulk of the bill, but this is a very important part that needs to be acted on quickly because of the circumstances that have developed very recently and very swiftly. Unfortunately, I do not see any remedies in this bill that will solve the existing problems that people may have. Although the Minister has stopped any further transactions like that, I believe that this legislation will not resolve the situation for those who have already lost their homes or are already tied up in an existing agreement under the previous Acts. Unfortunately, I feel that this legislation does not quite capture those people. I would like to get an assurance from the Minister that it does, but I have a feeling that this part is weak and does not quite resolve that problem.

Another issue is the cost of getting legal advice. The cost of approaching a lawyer adds to the cost of the money that a person has to borrow. That is where independent legal advice will sometimes fall down, and the person will try to rely on a relation who has some legal knowledge. But occasionally that will fall down, too.

Deborah Coddington raised an interesting point about the hardship provisions. According to the way that a buy-back scheme is set up, if a hardship provision is invoked under the bulk of this legislation, then there will be some serious difficulties for the people who have lent the money.

I move, That the question be now put.

I have a question for the Minister about clause 48 in particular, which relates to consumer leases. Clause 48(1)(d)(i) and (ii) refers to the lessee having an option to purchase the goods. I want to question the Minister specifically in relation to leasing a car in a situation where, at the end of the lease, the person does not have the opportunity to purchase the vehicle. I have always operated leased vehicles, so I can use that as a specific example.

I have had an option to be able to buy a vehicle, by putting some money down, and having the lease spread over, maybe, 3 years. At the end of the 3 years there has been a residual value, and at that time I could then buy the vehicle. That has been an option. The other option, which I have always exercised, has been to lease the vehicle just on a monthly payment basis, which includes the lease per month plus GST. Then at the end of the period, after I may have had the vehicle for 2 years and done 60,000 kilometres, or whatever the lease arrangement is, I can then hand back the vehicle and drive out with a brand new car. I have had the option of choosing a vehicle that has a residual value or a vehicle that does not. Many people do that, so maybe the Minister or her advisers can help me. In the situation that I am referring to, does the circumstance arise whereby at the end of the lease period I will not have the option of buying the vehicle at the residual value? Is that covered by the bill?

Clause 48(1)(d) states: “when the lease is entered into, 1 or more of the following applies: (i) the term of the lease is for 1 year or more:”—that is fine; it is very clear—“(ii) the lessee has an option to purchase the goods.” The question is whether the lessee has the option to purchase the goods. That is what I am asking. I know that there are a number of individuals—business people—who fall into that category. I do not know, from reading clause 48(1)(d)(ii), whether those people are covered specifically by that provision.

Leasing is big business. A lot of my work before I came here to Parliament was in restructuring businesses. One of the things we did was to look at leasing as an option. We looked at leasing computers, fax machines, and Eftpos machines, for example. Why would people want to spend $3,000 on buying an Eftpos machine when they could lease one for about $65 a month? As technology has moved so quickly why would anyone want to have a depreciating asset, when that person could lease it and claim the total cost back as a cost against the business, or even lease it for personal use? There is also, though, with some of those lease arrangements, the opportunity to purchase the equipment, which takes us back, once again, to clause 48. I do not know whether that is covered by clause 48.

I am asking the Minister a very simple question. The advisers could say yes or no just to that question; I would be comfortable with that.

💬 Hon Judith Tizard: Businesses aren’t.

OK. But a lot of individuals fall into that category; a lot of individuals lease vehicles. Why would people want to spend $30,000 or $40,000 on buying a car, when they can lease one for $300 or $400? Even if they are not in business, that is still a cheap option. Leasing is an optional way of funding one’s operation, whether it be for personal or business use. We can look at a number of examples of that. Computers and fax machines fall into that category. It covers other equipment, as well, and a lot of the vehicles on the road today are not owned by the people who drive them. Leasing is an absolutely huge business.

So the point I make to the Minister is this: if there is no residual value at the end of the lease period that gives me the opportunity to buy the item, am I actually covered by clause 48? I am quite happy to sit down if the Minister can answer that question for me.

I move, That the question be now put.

I want to carry on speaking about this issue, because I have not had an answer. I will take a break while the Minister confers with her advisers, and then I will sit down. I am asking a very simple question: if there is not a residual value at the end of the lease—[Interruption] Why does Mr Benson-Pope not stand up and take a call himself? If there is not a residual value at the end of the lease, does clause 48(1)(d)(ii) cover the situation where I do not have the option to purchase the goods at any time during the lease or at the expiry of the lease, for the residual value? That is the question.

💬 Hon Judith Tizard: I think that the member needs to read clause 48(1)(d) carefully. The legislation will apply when the lease is for a term of 1 year or more. Other circumstances may or may not apply, but that does apply, because clause 48(1)(d) actually states: “, 1 or more of the following applies:”.

That is right, and “the lessee has an option to purchase the goods.” My question is about what happens if I do not have the option to purchase the goods—and there are a lot of leases where people do not have that option. I ask that question.

💬 Hon Judith Tizard: It does not matter. The issue is whether the lease is for more than a year.

That is part of it. That is in subparagraph (i): “… for a year or more:”. People can have leases for 2 or 3 years. If I lease a car, for example, I go for a 2 or 3 year lease, but I do not have the—

💬 Hon Judith Tizard: Then it is covered.

It’s covered?

💬 Hon Judith Tizard: If it is for 2 or more years it is definitely covered.

So the Minister is saying that I am covered?

💬 Hon Judith Tizard: The member is covered if the term of the lease is for 1 year or more.

But a lease of under 1 year is not covered?

💬 Hon Judith Tizard: No.

It is not covered if it is under 1 year?

💬 Hon Judith Tizard: Not unless other provisions apply.

OK. So if I lease a vehicle for less than a year, I am not covered.

💬 Judith Collins: What about a renewal?

Yes. What about renewals? A lot of leases are actually for less than 1 year. So those people are not covered by this particular clause.

I move, That the question be now put.