The Commerce Commission has issued compliance advice letters to a number of banks and credit card providers (issuers) following an investigation into the reasonableness of credit card exception fees. Late payment and over-limit fees are two of a group of fees commonly known as 'exception fees'.

The Commission has been investigating the late payment fees and over-limit fees charged on credit card transactions by American Express International (NZ) Inc., ANZ National Bank Limited, ASB Bank Limited, Bank of New Zealand Limited, Kiwibank Limited, TSB Bank Limited, The Warehouse Financial Services Limited and Westpac New Zealand Limited. The investigation into late payment fees has now concluded, while the investigation into over-limit fees continues.

Up until 2009, issuers charged late payment fees ranging from $20 to $25. As a result of its investigation, the Commission has concluded that it is unlikely that late payment fees in the range of $20 to $25 can be justified as reasonable.

Credit card issuers charging this level of fee were generally generating profit in addition to recovering the actual costs of late payment by card holders. In the Commission's view this practice does not comply with the Credit Contracts and Consumer Finance Act. Issuers have also used the late payment fees to recover bad debt. The Commission does not believe that card holders who ultimately make right their late payment should be held liable for the costs and losses incurred through   defaulting customers who never make good their debt.

In addition, various costs appear to have been included in the fee which, in the Commission's opinion, are too removed from the act of late payment to be properly recoverable in this way. Some credit card issuers suggested to the Commission that it was "reasonable commercial practice" to charge a fee that recovered more than the costs associated with late payments, as it would have a deterrent effect. However, the Commission has neither seen, nor been provided with, any supporting evidence that charging a high level late payment fee deters credit card holders from defaulting.

But during the Commission's investigation, in mid-2009, a number of the credit card issuers voluntarily dropped their late payment fees to less than $15 due to market changes in New Zealand and similar changes in fee structure in Australia.

The Commission considers that a late payment fee of $15 or less is likely to be justifiable on a cost recovery basis.

"The Commission considers it appropriate to issue compliance advice to all the investigated parties, recognising that the voluntary reduction in late payment fees by some credit card issuers in 2009 enhanced competition in the market," said Commerce Commission Auckland Fair Trading Manager Graham Gill.

"However, we are also drawing a line in the sand. We have advised the parties that any late payment fees at or below $15 should not trigger future investigation or enforcement action. Credit card issuers charging in excess of $15 may be liable to further action by the Commission," said Mr Gill. "We expect any credit card issuers charging in excess of $15 to review these fees."

"Generally we urge consumers to shop around. Look at all fees being charged by all lenders, including exception fees or other default fees, and if the fees are too high, vote with your feet and go to another provider," said Mr Gill.

Background

Credit Contracts and Consumer Finance Act The investigation into the "unreasonableness" of the credit card exception fees relates to sections 41 and 44 of the CCCF Act.

Section 41 - Unreasonable credit fee or default fee

(1) A consumer credit contract must not provide for a credit fee or a default fee that is unreasonable.

Section 44 - Other credit fees and default fees

(1) In determining whether a credit fee or a default fee is unreasonable, the Court must have regard to,-

(a) in relation to the matter giving rise to the fee, whether the fee reasonably  compensates the creditor for the following:

(i) any cost incurred by the creditor (including the cost of providing a service to the debtor if the fee relates to the provision of a service);

(ii) a reasonable estimate of any loss incurred by the creditor as a result of the debtor's acts or omissions; and

(b) reasonable standards of commercial practice.

Penalties under the CCCF Act A creditor who is found to be in breach of the CCCF Act:

  • may be liable for statutory damages;
  • may be liable on criminal conviction to a fine of up to $30,000; and
  • may be banned by the Court from providing consumer credit or being involved in a company providing consumer credit.