Finance
companies cannot load general business overheads into specific fees charged
borrowers in consumer credit contracts the Court of Appeal ruled in a Commerce
Commission case against Motor Trade Finances Ltd. Artifically inflated fees enable dealers to
advertise an otherwise misleadingly lower interest rate.
The motor trade failed in attempts to gut
consumer protection provisions out of the Credit Contracts and Consumer Finance
Act. The Act is designed to give
consumers a clear description of the cost of credit which is able to be
directly compared with alternative credit terms on offer.
The Commerce Commission took aim at the motor
trade with action against Sportzone Motorcycles (a Christchurch motorcycle
dealer, now in liquidation) and Motor Trade Finances Ltd (a co-op owned
exclusively by motor vehicle dealers).
The Commission alleged they failed to correctly calculate specific fees
charged in hire purchase contracts for: the cost of setting up individual
credit contracts; maintenance fees for ongoing supervision of each account;
prepossession fees for notices on default and reposssession charges.
Motor Trade Finances complained the
“fine-grained costs-based approach” demanded by the Commission is unworkable in
practice, produces results that are of little or no practical use to borrowers;
discourages innovation and efficiency and is unfair to creditors. The Commission said that Motor Trade Finances
was failing to comply with the Act and that Motor Trade was arguing for an
approach that would require only a vague link between costs incurred and the
fee charged with the only control being a test of whether the specific fees
charged were unreasonable as compared with other lenders. On this approach, any specific fee a finance
company might charge, benchmarked against charges imposed by other finance
companies, could be reasonable. This,
said the Commission, would amount to self-regulation of fees by the finance
industry.
The Court of Appeal said the Act clearly
restricts the costs that can be recovered as specific fees. The emphasis is on actual, specific
costs. Fees imposed must relate to a
specific credit transaction, not recover general business expenses.
There was evidence that Motor Finances Ltd
altered its fee structure from 2005, developing a cost allocation model which
aggressively recovered more of its operating costs through specific fees. Boosting fee income was viewed as a profit
opportunity. Buried in specific fees
charged individual borrowers were staff training costs, travel costs,
directors’ fees together with accounting, legal and audit fees. Also included were costs of running the
treasury section and a figure for cost of capital. These were all dissallowed as general
overhead expenses which should not be taken into account when calculating
specific fees charged individual borrowers.
For a finance company, the primary source of
cost recovery is through net interest: the margin between interest on funds
lent and the cost of acquiring those funds.
The Court of Appeal said guidelines set out in
an earlier High Court ruling provided an illustration of what general business
overheads could properly be spread across specific establishment fees charged for
setting up a new customer account: ten per cent of staff salaries and
performance fees; ten per cent of bank activity fees and ten per cent of
banking costs for direct credit and debit facilities.
Sportzone
v. Commerce Commission – Court of Appeal (30.03.15)
15.027