Credit Contracts and Consumer Finance Bill

Even before the result of this recent voting, I was going to express concern about the schedules, but following the defeat of the Supplementary Order Paper put forward by my colleague the Hon Tony Ryall, I feel even more concerned. The point of Mr Ryall’s Supplementary Order Paper dealing with clause 111 was that, as currently defined, it appears that the intent of this bill may well be significantly circumvented because of the omission of a potentially very large part of the charge against a borrower. Mr Ryall pointed out during the second reading debate that a fee charged by a mortgage broker is, on the face of it, not caught by the definition of the cost of a loan or credit. When we look through schedule 1, that indeed appears to be the case. I feel that is a significant omission, and, as drafted, the bill may very well not achieve the purpose that I think both the Government and we in the National Party would like to see it achieve. That must be a matter for serious regret.

That said, I am bound to say that in our judgment the best way of protecting consumers against rapacious moneylenders is a competitive banking and finance sector. It is not more than 25 years back that most consumers were unable to borrow from mainstream lenders—banks and so on—at all. They were therefore vulnerable to being charged very high prices indeed for consumer credit. Even those who could get less-expensive credit from trustee savings banks were obliged to get down on bended knee and cultivate good relationships with their bank managers, in a way that these days is not required, at all. We now have a very competitive banking and finance market, and for most of the population that provides all the protection required. But I acknowledge that this bill is designed not merely to protect the 80 percent of the public who do not need protection in a competitive banking and finance market, but also the 20 percent who find it more difficult to borrow from mainstream banks and finance houses. I accept that we therefore need something of this kind.

Having acknowledged that a competitive banking and finance model is the most effective way of protecting most of the public, let me also suggest that another highly desirable thing to protect the public from rapacious moneylenders would be a higher understanding of the way finance works. It is a matter of regret that so many people come out of our school system with only the most rudimentary understanding of how credit works, how interest works, how compound interest works, and therefore of the dangers and consequences of borrowing at high interest rates.

I suspect that the most effective way of protecting that 20 percent of the public who cannot get access to mainstream banks and finance houses would be to give them some understanding of the risks they run in borrowing from third-tier financial institutions at very high rates. We have seen tragic cases where people have lost homes, cars, and furniture by not understanding the risks they run. Frankly, I would like to see people—at least at high school, and possibly even at primary school—given some education about the benefits of understanding how interest works and the risks of not understanding that. My colleague Sandra Goudie pointed out that one of the most effective ways of helping people in borrowing situations would be to make it clear what the total cost of a loan is.

While I do not condone some of the quite distorted discussions of some financial institutions in adding principal to interest—

I want to focus very briefly on schedule 1, and in particular on paragraph (s) headed: “Debtor’s right to cancel”. This paragraph is a very important part of the bill. It allows the debtor to pull out of a contract within 3 working days, and shows what the process should be for that cancellation. However, if I go back to clause 24, I see that that clause refers to the cancellation of a contract. Clause 24(1), “Right to cancel consumer credit contract”, states: “(1) A debtor under a consumer credit contract may cancel the contract by giving written notice of the cancellation to the creditor under the contract within 3 working days of the day that disclosure is made …”. It goes on to explain how that will be implemented.

I have concern with this clause, and the Minister may be able to help me. Although I understand the basis of the clause, I find no opportunity in it—when a contract has been terminated and the creditor has agreed to the termination—for compensation for loss of value. I refer to two significant submissions in particular. We had one submission from the New Zealand Retailers Association, which said: “Consumers who purchase goods on credit should not be entitled to return those goods upon taking possession, even if they are entitled to cancel the credit contract because the goods depreciate upon delivery—25 percent depreciation is common.” That is a factor. For people who are in business or involved in any commercial activity, once something is purchased then its value depreciates very, very quickly.

I see that Paul Adams wants to take a call later on. I am sure that he would be able to relate that situation to driving a vehicle out of the showroom door. As soon as someone drives a $10,000 car, a $30,000 car, or whatever it is, out of the door, with his or her name on the ownership papers, he or she will not get what was paid for that vehicle, even if the contract is cancelled within 3 days. I am sure that Paul Adams will take a call and might be able to explain that, because he has some expertise in that area.

💬 Brent Catchpole: After a student party!

Yes. I am concerned that no depreciation factor is included here, and that is a major cost on businesses. It is a loss of opportunity for that money, which could be used elsewhere.

If we look further, we see that clause 27(1)(e), which relates to the effect of the cancellation under the schedule, states: “unless the contract otherwise provides, the debtor is liable to pay to the creditor—(i) any reasonable expenses necessarily incurred by the creditor in connection with the contract and the cancellation of the contract; and (ii) if property is returned to a creditor that has been damaged while in the possession of a debtor, the cost of repairing the damage.”

Another submission, put in by the New Zealand Law Society, states that clause 27(e) should be amended to enable a creditor to require payment of compensation for depreciation, if the goods had been used while in the possession of the debtor. That is a real concern, and maybe the Minister could explain to the Committee the issue of goods and depreciation—why once people have taken goods they have paid for, the goods are not worth the same value if returned. That is a concern, and I bring it to the attention of the Committee.

I would like to follow up on Lindsay Tisch’s comments about the right of the debtor to cancel, under schedule 1, which refer back to clause 24. He is quite right in his example of a car leaving the car yard, because it certainly does lose its value. I tried to point out to him while he was speaking—and I hope he did not mind my interruption—a reference to a student party and a stereo. I tend to think that a stereo after a student party would lose a lot of its value if returned within the 3-day limit of the normal interpretation of clause 24.

I move on to paragraph (s) in schedule 1: “Time limits for cancellation”. In general, the time limit is 3 working days. However, if the documentation and agreement are made by electronic means or email, then that period can be extended to 5 working days after the electronic communication is sent. I have a problem with the terminology of “after the electronic communication is sent.”, because there is no guarantee that the electronic communication will be received and read at the other end, unless a provision is inserted to ensure that that happens. That provision can be activated with modern email systems, but if it is not activated then there is no guarantee that electronic mail and emails have been received. That is a key factor. If somebody is not aware that an email is there, then how can he or she possibly respond to it within the 5 working days set out in this schedule? This is quite a concern, because one has the right to cancel a transaction within a certain time, but that right is extended, by the use of an electronic method, without any confirmation of whether the electronic communication has been received.

The schedule goes on to say that there can be an agreement, within the contract or process, to receive information by electronic mail. That information could concern the request for a price, or some details about a particular product or contract. The provision does not necessarily set out that the agreement has to advise the debtor of the final contract, which, I think, is something that was overlooked in the final analysis.

I go on to the statement in paragraph (s): “Delete if the credit contract does not involve a credit sale.” I have some concerns about the interest provision of this paragraph. The interest period is from the day the property or services are received until the day either the cash price is paid for the property or services or the property is returned to the creditor. But if someone makes a credit contract and then pays that cash price within 3 days, where does that situation lie? That person has the right to cancel that contract within 3 days, but if he or she then decides to pay cash within 3 days, will interest be charged for that 3-day period? I would like the Minister to take a call on that and give me an answer.

I move on to schedule 3, which sets out the procedures for buy-back transactions. It is good that there is a fairly comprehensive description of what information there should be on a contract, but there is one thing missing—

I will take a call on the schedules. I just want to pick up on one point Don Brash mentioned, and that was educating people regarding their credit debt. I think it is a very good point. There is no way, unfortunately, that we can legislate in Parliament for people’s success, as much as we would love to. We must have laws; nobody would doubt that. But we need to understand that we cannot legislate for people’s success, and we need also to be responsible for educating them and letting them know exactly what they are getting into when they take on debt.

I have learnt in life, as probably many members have also learnt, that money is a wonderful servant but it is a terrible master. Yet we all have to learn in life by experience. But sadly, with debt, that can be a very painful lesson to learn. Sometimes it does concern me. The other day I was in a queue and there were some young people in front of me—and I love young people, so hear me correctly on this—and one said to the other: “Look, I’ll give you the cash, and you just put this cost on your credit card.” Well the answer amused me, because the person turned round and said: “I’m sorry, I think my card is full.” Well, I thought that “full” was an interesting way of saying: “I have reached my maximum credit allowance.”

I heard another conversation between two ladies. One said to the other: “Let’s go shopping.” Now, of course, one never has to convince a lady to go shopping. She said: “Why are we going shopping?”. The other lady said: “I have just discovered that my card owes me $5,000.” I thought that was another interesting saying. So I had to ask her: “What do you mean ‘my card owes me $5,000’ ”? She explained to me that she thought she was at the maximum of her credit card balance, but she had just got her account and in actual fact she still had $5,000 to go, and she thought that the card owed her that amount. That sort of comment scares me because I think that people do not fully understand the debt they are getting into. As I said earlier, the current credit card interest rate of 18.75 percent—which I think banks in New Zealand need seriously to look at—is an extremely high interest rate. We have 90-day bill rates at below 6 percent, yet banks are still charging the average New Zealander 18.75 percent interest on a credit card. If a person cut up his or her card when it was at the maximum balance of $3,000, and never spent another cent on it but just continued to pay the minimum balance, which is 2 percent per month, most New Zealanders do not understand that it would take that person 37 years to pay off the card.

So as we bring in this legislation I just want to make that point, because I think it is a very good opportunity to mention that we can legislate. This is great legislation, and United Future is supporting it. But I think we have a responsibility to make sure that, as a Government, we let people know exactly what debt is costing them, and encourage this nation again to begin saving—because, once again, that would be United Future common-sense policy.

United Future common-sense policy is: “We will save when we are told what money costs us.” People will save when it is worth saving. When we have a Government that for 45 years has been telling us it is OK to live beyond our means, and that we will live off the savings of poor people. The Taiwanese have become twice as rich as us by lending us money. We will keep spending money for as long as our Government keeps pretending we will never have to pay it back.

But getting back to this bill, I am a little bit baffled by a completely unexplained change in the schedules. Schedule 3, “Assumptions” has been completely deleted, and there is no reference in the Commerce Committee report as to why. There may be someone here who was on the select committee who can explain it. But given that it was not explained and that schedule 3 was a major part of the bill, in that its intent was to simplify the form of disclosure—with statutory assumptions—I am genuinely baffled about why it has gone.

I am also curious about the form of schedule 1, “Key information concerning consumer credit contract”, and in particular, the right to cancel. Paragraph (s) prescribes a statement to the consumer about his or her cancellation rights that does not seem to fit the head clause—clause 15. The cancellation right in that paragraph states that notice must be given within a certain period and the cash price must be paid within 15 days, but it does not state when the property has to be given back. I wonder whether that is deliberate or an oversight. The head clause states that the property should be given back in 3 days, but the notice, which is the only thing most consumers will ever see, does not tell them when the property has to go back. At the very least, some poor soul will think that some bush lawyer will read it and decide to push his or her luck and, of course, cause cost to the lender. Very, very easily he could assume and argue that the notice would have told him when he had to give back the property. Certainly, it tells consumers when they have to pay the cash price. In fact, as a reasonable person, I might think that I had to pay the cash price and give back the property within 15 days. Of course, people will know that quite a lot of property deteriorates considerably as time passes. If it was a consignment of plants from a garden shop, it may well be that the plants had died before they went back.

💬 Sandra Goudie: A used bed.

I am not sure about that. Another little puzzle here is that this does not seem to apply if possession has been taken of the goods. I am not sure why that is, but using the garden shop example, one could easily pay for a whole garden full of plants and not pick them up—intend to pay for them later. Of course, the garden shop ought to try to keep them alive, but theoretically at least, it is not its problem once a person has bought them. Maybe the person has not taken possession—the carrier has them—and there is an argument, because whose carrier it is has never been prescribed. There are a whole lot of situations where this could be an issue, and it puzzles me that this form of disclosure is set out in full in schedule 1, where it will be hard to change. Then the regulation-making power states that if anything is forgotten, extra disclosure can be added—maybe that can be used. But it does not state that the prescribed form can be changed. I think that is just a bit of clumsy work.

I do not know the quality of the advice from the ministry or from the officials who have advised on this legislation, but anything from the Ministry of Consumer Affairs has to be deeply suspect. It has no intellectual rigour in the way in which it approaches consumer protection. It does not believe in markets. I suspect that this is simple incompetence. The confusion that will result for consumers is that those well-meaning people, who always purport to act in the interests of consumers, are in fact acting against them.

Finally, in looking at the schedules, I find that there is another small puzzle. If the Minister in the chair would take a call, that puzzle might be explained very easily. The prescribed information for the standard form of consumer credit contract is in great detail.

I move, That the question be now put.

I would like to take up a few of the comments from the previous speaker. Schedule 1 puts out quite a substantial amount of disclosure. One of the main problems identified with the current regulation of the consumer credit industry is the imbalance of strength between lenders and borrowers. When one considers the information that Stephen Franks has just referred to with regard to schedule 1(s), one has to wonder whether the emphasis is now in favour of the borrower; whether all the difficulty in fully understanding what is happening with regard to goods and the return of goods is now in favour of the lender. There will be substantial costs, as a result of that, to the lenders. We have already talked about exorbitant compliance costs.

One thing the bill does address is the exorbitant interest rates, which have previously gone unchecked. Now there is some control around that and around the high cost of a multiplicity of fees, which were unregulated. One of the problems of the current industry is laws that allow lenders wide latitude and require security for loans, and double-jeopardy clauses, interest insurance, and a call on chattels, often in excess of the loan. However, concerns have been expressed around that, and there may still be some problems in that area, even within the current proposals.

The difficulty in understanding the arcane and sometimes contradictory language of the current law is certainly an issue, and is really, to some degree, one of the major premises of the bill in terms of the disclosure requirements to consumers. Schedule 1 certainly identifies the requirements with regard to disclosure to consumers.

But one has to wonder whether, even with full disclosure of all those things, people really understand what they are getting themselves into. Many people do find themselves in some considerable difficulty. If people have literacy difficulties, how will they understand what they are doing? How will they understand what sorts of contracts they are entering into? A number of cases have been given. In one case study a person borrowed $10,000 from a lender at 26 percent interest, with no fees payable over 3 years, and with a monthly payment of $402.91, and a friend borrowed the same amount, also at 26 percent interest, and also for 1 year, from another lender. He owes another 12 payments; he owes $7,478.60, and the other person owes $7,600. It is a case of “Do you understand all of that? Would you please sign on the dotted line.” If people have a limited understanding—

💬 Simon Power: We have trouble understanding it here.

Exactly; that is my point. If people have limited literacy skills and a limited understanding of the language, under the current disclosure provisions being promoted in the bill, will they be any better off? At the end of the day, how far can we go to protect people from themselves? We heard Paul Adams give an interesting address on indebtedness and on how people make assumptions about their credit cards, which they really do not understand. People get themselves into all sorts of difficulties. Paul Adams referred to it taking 37 years before a person paying the minimum payment pays off a balance of $3,000 on his or her overdraft. That is the type of impression that people are getting, and the sort of indebtedness that people get themselves into. There is a range of areas where this happens.

Another couple on a very modest combined income bought a $7,000 car on hire purchase for a total cost, finance included, of $13,000. They then borrowed $6,000 from a building society to meet general living expenses. In the same year the husband travelled home to Samoa by taking out a personal loan from a loan company that was secured over the household furniture. He fell ill and his wife had to travel to Samoa to be with him. For her travel she borrowed from another loan company, using the same furniture as security, and when they returned home their furniture had been repossessed by the second loan company. There were three different instances of borrowing by this particular family. They entered into each of those transactions, so they must have had a limited understanding of what they were doing, but with the whole lot put together they clearly could not manage their situation. They certainly needed assistance. How far do we go in trying to protect these people from themselves through legislation?

I move, That the question be now put.

Thank you for the opportunity to finish what I was saying on schedule 3. This particular schedule has the information concerning buy-back transactions. I make the point that nowhere in the explanations or information does it set out or highlight the specific clauses that deal with the independent advice that is required when somebody goes into this particular type of transaction. That is the point I wanted to make. Paragraph (j) does not quite provide a description. Therefore, I think the schedule is missing a provision that would cover the independent advice that is required under this Act. Perhaps the Minister could take a call and explain that.

To round off, I would like to touch on what Sandra Goudie and Don Brash talked about, which was the idea of budgeting for education at an early stage, to explain some of these things. This would perhaps go a long way to help people overcome the difficulties they get into when they are in financial trouble. It is usually the people who can least afford it who end up in these contracts that are so bad for them. I think that with a bit of early education, in secondary schools at least, or perhaps a little earlier, people could be helped through the process of learning how to handle a credit contract. Don Brash made a good point about that, and it would be worth looking at further education under the education system.

Thank you for the opportunity to finish my contribution.

The question was put that the following amendment in the name of the Hon Tony Ryall to schedule 1 be agreed to:

to insert the following new heading and paragraph:

Broker’s fees and commission

(na) a description of any fees or commission payable as a result of the contract when that is known by the creditor:.