Retailers
looking to create artificially low credit sale prices will be warned off after
a Commerce Commission probe: lowering the list sale price and then recouping
general business overheads as specific fees in the credit contract is in breach
of the Credit Contract and Consumer Finance Act.
The Commerce
Commission challenged use of allegedly inflated fees with legal action taken
against Sportzone Motorcycles, a Christchurch motorcycle dealer now in liqudation,
motor industry financier Motor Trade Finances Ltd and MTF Securities Ltd which
securitises Motor Trade’s loan book and onsells these as debt securities.
The Commission alleged
they were all in breach of credit law by inflating fees charged when buyers
purchased on credit. Credit law does not
limit interest rates charged but it does require clear disclosure in credit
contracts of a number of specific items: establishment fees as the cost of
setting up the credit contract; maintenance fees for ongoing supervision of the
account; prepossession fees for notices on default; and repossession charges.
Credit law limits
these specific fees to the dealer’s actual and reasonable costs.
Credit customers
buying through Sportzone were charged establishment fees of $390 (Sportzone itself charged $200 and financier
Motor Trade charged a further $190); monthly account maintenance fees were
eight dollars (Sportzone at five dollars and Motor Trade a further three
dollars); with itemised one-off payments for default notices and repossessions
(since early 2007, $80 has been charged for both default notices and repossessions).
The Commission said actual
and reasonable costs do not extend to general business overheads such as rent,
insurance, phone and power, rates, staff training and operation of IT systems.
The High Court ruled
that general business overheads are not to be included. There has to be a close and relevant
connection between the cost claimed and the specific fee being charged. Justice Toogood said an analysis of employee
time spent setting up and reviewing credit contracts could justify an
apportionment of employee remuneration to establishment fees and maintenance
fees for individual credit contracts.
For retailers, general
overheads not recoverable by these fees are to be recovered in list
prices. For financiers, overheads are
recovered through interest charged on the loan.
The High Court made no
ruling as to what would be actual and reasonable costs in this case. It was left for discussions between the
finance industry and the Commerce Commission.
Failing agreement, they could return to court.
Commerce
Commission v. Sportzone Motorcycles – High Court (27.09.13)
13.030