Credit Contracts and Consumer Finance Bill

I raise a point of order, Mr Chairperson. We cannot hear you, Mr Chairperson. Either there is something wrong with your microphone or there is too much noise.

The CHAIRPERSON (Hon Clem Simich): Could those who are leaving the Chamber do so quietly, and leave now. I ask members to bear with us for a moment.

I want to look at clause 114, “Transitional provision”, which states: “(1) This Act applies to every credit contract, consumer lease, and guarantee that is made after the commencement of this subsection.” The point I make is that the contracts formed prior to the bill coming into force continue to be governed by the law in force at the time the contracts were formed. However, revolving credit contracts that were formed prior to the bill coming into force must comply with the bill after the transition period.

💬 Simon Power: What is a revolving credit contract?

That is one that goes round. That is why it is called revolving. I draw the attention of the Committee to quite a significant move, a change that was made in the original drafting of the bill—that is the original clause 114, which was struck out. National believes that this is a very important point, because we should not be treating revolving credit contracts differently from any other contract. So the new provision is the one that we think is significant. That was a change that we supported—a change that says that all contracts need to be treated the same, and, in this case, revolving credits.

When we are looking at the transition periods we need to go back to the commencement date of these. The timing of the changes, the commencement dates, is significant. Clause 2 states that the buy-back provisions “come into force on the day after the date on which this Act receives the Royal assent.” Clause 2 then goes on to state, in subclause (2)(a): “for the purpose of applying those provisions to buy-back transactions, on the day after the date on which this Act receives the Royal assent;”. That is saying that there will be quite a considerable time frame that will allow creditors sufficient time to be able to change the way they operate, change their requirements and procedures, and update the computer system software, whatever it will be. That provision is a good one, and we support it. The buy-back provisions, though, come into force on the date on which the bill receives the royal assent. So those provisions are certainly ones that we supported. We are quite happy with those.

I draw the Committee’s attention to clause 111, “Regulations”. What we see so much in legislation that is being promoted by this Government is that there is always, by way of Order in Council, provision for regulations that will put up charges on business. The National Party is concerned about the high compliance costs and the regulatory creep that come in under so much legislation. Clause 111 states: “The Governor-General may, by Order in Council, make regulations for all or any of the following purposes:”. This is the compliance cost regime that we see creeping in, and, in this case here, it is of major concern to the way that we see this bill. Although we are supporting the bill, we flag quite clearly the fact that anything that increases the cost of doing business, and the cost incurred by people involved in whatever lease or credit facilities they have, is something we are really concerned about. It is interesting that today we had a question in the House about the lower tax regimes that will come in, and the Government’s discussion document, which was released yesterday, about how we can simplify tax for small businesses.

I make the point here that with the release yesterday of the simplification of taxes for small businesses, we will see that if they are paying GST on a 2-monthly basis, then any provisional tax will be linked to that. Of course, businesses that are on a 1-monthly GST return period will be paying that monthly. If it will improve and simplify the tax regimes, that is all very well. But I tell members—I am putting out a warning here—that in a situation like that, which relates to this bill here, the huge costs associated in terms of being able to fund revolving credit facilities may be necessary. Revolving credit is a facility that one has to be able to move up and down within the scale of one’s operations, without having to come back to the lender each time and want variations and extensions, overdrafts, term loans, or whatever it will be.

I am just flagging here that although the Government yesterday moved to look at tax simplification for small businesses, it has not taken care of all those other huge compliance costs that business have to deal with. Dr Don Brash asked a question today about the KPMG survey of 760 businesses in New Zealand, which showed that 98 percent of them said that compliance costs had gone up. The Minister, Mr Cunliffe, did not have an answer for that, but he is in the chair now, so he may like to answer that in a moment. I am talking about clause 111 “Regulations”, which relates to compliance costs and the way this will work. The answer he gave to Dr Brash in question time this afternoon was completely unsatisfactory. The Minister was relating to a survey—not the KPMG survey, because the KPMG survey on compliance costs was very, very clear in what it said. The Minister was referring to the Massey University survey—which did come up with something different because it was instituted by the Government. So what else will it get but the results it was looking for? The point I make is that anything that increases compliance costs is to be avoided. Clause 111, “Regulations” allows the executive, by Order in Council, to say: “Hey, we will increase fees. We will do whatever we like, without the scrutiny of the House.”—without it coming back for members of this House to adequately debate and to see whether the charges and the fees that will be put on are sustainable and are for the benefit of all users. Those were the two points in Part 6 that I wanted to concentrate on.

As I said earlier, National will be supporting this bill, but I have flagged those concerns. With regard to the transitional provisions in clause 114, we are quite comfortable with what they mean. Certainly the treatment of revolving credit facilities in the same manner as others is to be applauded, and that original clause has been struck out. However, I do flag the concerns we have about clause 111, “Regulations”, and the costs that can be applied. I know that other speakers will pick up on the concern about anything that adds costs to the way people operate. I know that the bill is not specifically about business; it is about individuals. But if people on fixed incomes have to change the way they operate because of these provisions and extra charges, then that must be looked at closely and needs to be avoided. Those were the points that I wanted to raise on Part 6.

This bill does bring out some strange things. Every now and then I am reminded of why I am not in the National Party. Mr Lindsay Tisch explained—in rather mild terms—a few of the stupidities in this bill, and said that the National Party was against them. Then he told the Committee that National would support this bill, when not only this part but the entire scope of this bill is already covered by a very adequate settled piece of law, the 1981 Credit Contracts Act; legislation about which there has been almost no complaint, in an area of industry that has expanded vastly—and we get this drivel and the National Party decides it will support it. I suppose it is one of the benefits of MMP that I can be in this Parliament and not have to associate myself with that through some sort of party discipline. I cannot imagine how the National Party has reached that position.

I look at just one of the items that Mr Lindsay Tisch mentioned—the regulations. Clause 111 now has a new provision that allows the Governor-General to prescribe all the assumptions that may be made to simplify disclosure. It is not very often that the law becomes dramatically worse from the time it is introduced to the time it is reported back by a select committee. At least the bill as introduced set out the assumptions in the schedule to the statute. At least the criminal penalties that would apply for breaches related to something that someone could look up and know that Parliament had addressed its mind to what the consequences would be of non-compliance, and how easy it would be, and that Parliament was therefore creating a law that it understood. But I look at schedule 3 and find it has been removed by the select committee. In reading it, I can see why. The select committee went through and decided it was probably a little bit inaccurate. In all the months that the committee had the bill, it was too hard to think what they would really do, so the Minister has persuaded the select committee to take the schedule out and leave it to be decided later. So, firstly, we have something that is bad in principle; secondly, it is impossible to debate that set of assumptions now, because we do not know what the Minister will prescribe. It is all up to his or her discretion; and, thirdly, we have it in a form in which the assumptions could be entirely at variance with what Parliament believes they will be.

That will now be an implication in looking at the legislative history of this bill. If anyone challenges the assumptions that the Minister decides are the assumptions of Parliament—because that is the effect of what is happening—on the grounds that the Minister is ultra vires, and the court looks at what has been knocked out, it will have to decide that there was something defective about those assumptions, but it does not know what. It will have to decide that the areas covered were an embarrassment, or that there was some serious reason that Parliament would not legislate for them. It will then try to imply from there some further assumptions of its own as to what Parliament might have anticipated or contemplated when it decided that it did not know what it meant. The bill now states that the Minister might know what Parliament meant and they will leave him to decide later. That is bad constitutionally, bad in principle, and bad outright.

Another little gem in this bill is the conflict of laws provision. The bill as introduced was relatively straightforward. It said: “This Act applies to contracts governed by the law of New Zealand.” Now it says it applies to contracts governed by the law of New Zealand, even if there is a choice of law provision that says they are not. The normal provision for the courts to apply is that the parties, if they are competent adults, can choose for themselves whether they will have their contract governed by another law. There are provisions that say that where a choice is entirely unnatural the court can overrule it. Now we have Parliament saying that competent adults cannot put in a choice of law provision. This might well affect, for example, closer economic relations. An Australian bank might not want to incur the cost of having to become familiar with New Zealand’s silly variant of Queensland’s credit contracts legislation, and might want to do lending in New Zealand, by the Internet, under Queensland law, but this little advance by this brilliant Government—that so understands relations with Australia—has decided that that is no longer possible.

I was impressed with some of the points that my learned colleague Mr Franks made. I think it is a great pity that he was not able to present those points at the Commerce Committee, because it seems to me that some of them do have force. There can be few people in this Committee who have more experience of commercial law than Mr Stephen Franks has. But at this stage I am assuming that the Government is not able, or is not likely, to change this bill, so I will confine my comments to Part 6. I want to emphasise the comments that my colleague Lindsay Tisch made a few moments ago. I will speak about both the transitional provisions in clause 114 and our concern about the compliance costs.

Clause 114, as amended by Supplementary Order Paper 141 in the name of the Hon Judith Tizard, comes into force on 1 April 2005. It seems to us that that is a useful advance, but a number of submissions on this bill suggested that even that transitional period would be too short to reduce the compliance costs that are inevitably involved in this new legislation. I think it is unlikely that this bill will go through the Committee stage and its third reading today, which means that it will not be passed until well into October. That means we will not even have 18 months between the bill becoming law and coming into effect on 1 April 2005. We will have fewer than 18 months for the financial institutions affected by this bill to get their systems, documentation, and so on into order. That is a very minimal period—

💬 Stephen Franks: They want to have headlines during the election year.

Mr Franks makes a very important point. Some of the submissions suggested that the transitional periods should be at least 2 years. I think we have compromised with a period of 18 months, but there will be less than that between the time that this bill becomes law and the time that the law comes into effect on 1 April 2005, and we regret that.

Mr Tisch made the point that we have been increasingly concerned on the Opposition side of the House about the compliance costs that this Government lumbers on the business sector, and it seems to me that this is just one further example of that problem. As Mr Tisch pointed out earlier, KPMG and Business New Zealand released a very comprehensive survey of 760 businesses on 25 August, which indicated that three of the 760 businesses surveyed felt that compliance costs had reduced over the last 12 months. Eleven of the 760 businesses felt that compliance costs had not changed very much over the last 12 months, and 746 of the businesses—98.2 percent of the total—felt that compliance costs had gone up. That survey indicated that tax compliance costs and issues relating to the Occupational Safety and Health Service, the Resource Management Act, and the Employment Relations Act were all significant issues for a great many businesses. This bill does not talk about that territory. It is just one more example of the compliance costs that are lumbered on the business sector at every turn.

Large businesses can often cope with those compliance costs, because they can employ specialist human resources people, and specialist lawyers and accountants. But compliance costs are a very major impediment to growth for smaller businesses. They are a major impediment to taking on more staff, and a major reason that our growth in per capita income is still insufficient to get us back to the top of the OECD, or even halfway up the OECD ladder, within a reasonable period of time. Indeed, at the moment all those compliance costs—of which this bill is a good illustration—are likely to mean that we will never get back into the top part of the OECD—not in 20 years, not in 30 years, and, sadly, not even in 50 years.

I move, That the question be now put.

Part 6 of this bill covers the transitional provisions, which is one area that I would like to touch on at this point. Although there are transitional clauses here to allow other Acts to apply until this legislation comes into effect, I am concerned about clause 114(3), which states: “However, subpart 3 of Part 3 does not apply to a buy-back transaction made before the commencement of this subsection.”

I would hate to think that that particular form of transaction will be excluded until that clause comes into being. I request the Minister in the chair, David Cunliffe, to stand up and take a call, to make it quite clear to this Committee and to everybody else that buy-back transactions that occurred prior to this bill coming into force will be captured, and that there will be remedies for those people who have been trapped in such schemes by unscrupulous transactions. The Minister should take note of what I am saying, and then get up and confirm to this Committee that transactions under buy-back schemes will not be excluded from this legislation. An awful lot of desperate people are already trapped in existing buy-back schemes, and they are hopeful that they will have a means of remedying that, so I hope that clause 114 will not exclude those people from that remedy.

I move on to clause 115, “Election for Act to apply”. That clause allows creditors the choice to elect for this legislation to apply to contracts that existed prior to this law coming into force. It does not allow anywhere for debtors to have that choice. I am disappointed that debtors are excluded from that option, because on a number of very important issues that are addressed in this legislation a debtor would have recourse to a better deal under it, rather than just the creditor having that option. I would like the Minister in the chair to comment on that.

I move to clause 116, “Continuing application of Credit Contracts Act 1981 and Hire Purchase Act 1971”. I am pleased to see that provision there. I just hope that it does not preclude people from remedies under this legislation if the creditor has elected to continue under the old Acts. I would like the Minister to take a call and confirm to the Committee that continuation under those old Acts does not preclude actions under this legislation in circumstances where the creditor has elected to work under the old Acts and that is to the detriment of the debtor. I suggest that in such cases those three clauses disadvantage the debtor to the extent that we really need some comment from the Minister—in particular, to do with buy-back schemes. If buy-back schemes are being excluded because of those three clauses, I really do need to have some comment from the Minister.

If buy-back schemes are not being excluded and debtors are able to continue under this legislation and get a remedy, I will be happy with that. But I ask the Minister to please confirm to the Committee that there will be a remedy under this legislation in respect of buy-back schemes already in existence before this bill comes into effect. I ask the Minister to stand and take that call.

I move, That the question be now put.

In speaking to Part 6, I laud the excellent contributions from my colleagues Lindsay Tisch and Don Brash. I also acknowledge Stephen Franks, because I valued his contribution and I see that he has an amendment on which I am sure he wishes to address the Committee during the debate on this part. I would appreciate hearing from him, and I hope that he will get a further call.

In speaking to this part I recall that no reason was given for the introduction of this bill, so one can only presume that the reasoning was that there was a growing concern about people entering into credit contracts, and that there was an increasing problem with regard to people finding themselves in difficulties with their creditors. Hence, one presumes, we have this bill to deal with the issue of those people who enter into credit contracts and get themselves into difficulties. It has been said that while this bill is predominantly about disclosure, for the benefit of people who have a limited understanding of these particular contracts, the starkest way to bring home to consumers the meaning of a credit contract would be to have nothing on the first page of the contract other than the total sum payable in large, black letters. I cannot emphasise that to members enough. Many people think they have a degree of understanding when they enter into credit contracts, but often they do not, particularly when they have limited literacy and numeracy skills.

First of all, I will carry on with the comments made by my learned colleagues on Part 6, “Miscellaneous provisions”. Clause 111 states: “(1) The Governor-General may, by Order in Council, make regulations for all or any of the following purposes:”. In doing that, he or she can change the information that must be disclosed. We already know from many, many submitters that it could cost some people hundreds of thousands of dollars to change their documentation and processes, as required by the disclosure requirements. If, at any time, the Governor-General issues an Order in Council to institute a difference in the disclosure requirements that results in a change to the documentation, that will activate an additional compliance cost to be met by all those creditors who have to comply with those requirements. That is of concern, and my colleagues have expressed our concern at that.

Clause 111(1)(f) states: “prescribing model disclosure statements that comply with section 29, and the terms and conditions on which the model disclosure statements may be used:”. I put it to members that “may be used” is not correct; I would have thought that they had to be used. Thus we enter into that whole realm of compliance costs. Those compliance costs will actually be ongoing. There was quite a substantial compliance cost in an earlier version of the bill. However, some assumptions associated with that cost were not correct, and were challenged by submitters to the Commerce Committee. It was quite clear that those assumptions were not correct, and that there will be an ongoing cost because of the requirement for creditors to continually monitor their performance, and to have programmes to monitor their compliance with the legislation.

I will move on to subclause (1)(ia), which provides for “prescribing the form of the certificate that must be given under section 58C:”. Clause 58C refers to the buy-back provision. In that situation, the creditor has to ensure that every occupant of a house gets legal advice. I would like the Minister in the chair, the Hon David Cunliffe, to take a call and perhaps explain to us why the bill requires that every occupant of a house, where someone from the house is to be involved in a buy-back scheme, has to have legal advice, and why the creditor has to ensure that. Perhaps he would like to explain that further and clarify that little provision, which relates to prescribing the form of the certificate that must be given under clause 58C.

I, too, would like to raise the concerns that have been mentioned concerning clause 114(3).

I move, That the question be now put.

I would like the opportunity to explain the effect of the amendment I have proposed, which is that clause 109 be amended to, in effect, reinstate in this bill the provision of the Credit Contracts Act that allows the parties’ choice-of-law clause to prevail. I am unaware of any case where that has been exploited or been a problem. The Commerce Committee in its report imagined the possibility that people might use a choice of law clause as a way of avoiding the protection that the committee hoped to improve in this bill.

I guess that is a theoretical possibility, but the effect of the change—which having talked to people involved, I do not think was contemplated by the committee—is to shut down a much more likely possibility. For example, there is the possibility of Australian retailers selling into New Zealand—using a term sale or credit arrangement that would be deemed to be a consumer credit contract under our law and their law—but having to try to comply with New Zealand’s provisions. As I understand it, if the Queensland code is applied, a consumer in New South Wales can contract on the Queensland form and there will be a mutual recognition. I am not certain of that, but that is what I understood to be the effect of the mutual recognition arrangement a few years ago. I suggest that our clause 109 would permit something similar in New Zealand, because the Australian contract will say which state’s law governs—whether it is Queensland or any other state.

Accordingly, I urge that members vote for this amendment. It will permit the trans-Tasman market that is so important not only in terms of the simple freedom of people to contract and take advantage of opportunities, but also to keep competitive pressure on New Zealand. It might be that at some later stage an efficient form of direct consumer credit from banks in Australia will be a constraint on pricing in the New Zealand market for credit alone. But more important in the short term, I believe that reinstating in this bill the law that has caused no problems since 1981 will allow Australian retailers and providers of services on credit to continue to operate in New Zealand without the compliance costs of having to change their contract forms, get legal advice, and work in the unfamiliar code that our code would be for them. The consequence probably would be that if their offers were price-sensitive, they simply would not bother to extend them to New Zealand.

So I urge the adoption of my amendment. It is not a hazardous one, it does not take people into strange territory, and it would simply maintain the position as it currently is under the Credit Contracts Act and extend it to this bill. It is not like the normal last-minute change at the Committee stage, where it is a matter of stepping into the dark; this is a change the Government could easily support. I recognise that it is hard for a Government to move very quickly on something like this clause, but it should be able to decide that by initiating it the select committee was making what was probably a well-meant flight of ambition. As I understand it, the officials had not proposed it, and if it closes down part of the retail market and excludes people from Australia who would otherwise be making credit sales in New Zealand, it is a change that might have much wider implications than anyone anticipated.

The question was put that the following amendment in the name of Stephen Franks to clause 109 be agreed to:

to omit from paragraph (a) all the words after the words “New Zealand”.