The Commerce Commission has entered into a settlement with New Zealand Guardian Trust Company resulting from an investigation into break fees. The settlement will see 77 affected consumers sharing refunds of $165,000.  

This means that in the last two years, Commerce Commission investigations into break fees charged by banks and other lenders have resulted in approximately $1.4 million returned to consumers in settlements and ex-gratia payments.

The latest settlement relates to alleged misleading representations made between September 2007 and June 2009 about mortgage break fees for loans issued by Propertyfinance Securities Limited. The New Zealand Guardian Trust took over management of the loans when Propertyfinance Securities was placed in receivership in August 2007.

In the settlement New Zealand Guardian Trust acknowledged it was likely to have breached the Fair Trading Act and the Credit Contracts and Consumer Finance Act (CCCF Act) by making alleged misleading representations that it was entitled to charge break fees calculated using a formula that was different to the one set out in customers' contracts.

 

The Commission's investigation identified that Propertyfinance Securities' customers had contracts that stated that the break fee would be calculated using a formula set out in the Credit Contracts and Consumer Finance Regulation (the 'safe harbour' formula). However, in practice, affected customers were charged a different break fee which was greater than it would have been, had the safe harbour formula been used. By using a formula that was different to the one set out in the customers' contracts, New Zealand Guardian Trust acknowledged that it was likely to have breached the CCCF Act. New Zealand Guardian Trust also acknowledged that using the different formula was liable to mislead borrowers about the cost of break fees and therefore breach the Fair Trading Act.


"Banks and lending institutions need to ensure when quoting or charging break fees that they accord with the terms of the contract," said Graham Gill, Commerce Commission's Enforcement Manager, Auckland. "While New Zealand Guardian Trust only charged customers the break fee that it was charged by its bankers, a creditor has to charge break fees using the method disclosed in customers' contracts. Break fee formulae are complicated and the average customer is unlikely to be able to check the calculation to confirm that it is correct. Customers are reliant on creditors getting it right because otherwise there can be huge financial impacts."

New Zealand Guardian Trust cooperated fully with the Commission's investigation and changed its method of calculating break fees as soon as it was advised of the problem.

Background

New Zealand Guardian Trust Company Limited is a trust company which is a wholly-owned subsidiary of the Suncorp Group. Suncorp Group is involved in banking, insurance, investment and wealth management in New Zealand and Australia.  It manages the trusts which hold the loans originated by Propertyfinance Securities Limited.

 

Propertyfinance Securities Limited is a Christchurch-based company which originated loans as a 'second tier' non-bank mortgage lender.   Propertyfinance Securities is owned by Propertyfinance Group Limited (in liquidation).

 

PropertyFinance Group Limited is the holding company of Propertyfinance Securities Limited. Its directors are Barney Sundstrum, Darryl Queen and Peter JM Taylor. PropertyFinance Group was a publicly listed company but was delisted from the NZSX on 21 July 2010. Peter JM Taylor was a Commissioner on the Commerce Commission from February 2001 until February 2010.

PropertyFinance Group Limited was on the Commerce Commission's Member's Conflicts of Interest Register for Mr Taylor and Mr Taylor was not involved in any aspect of the Commission's decision to investigate Propertyfinance Securities or the subsequent settlement with New Zealand Guardian Trust Company.

A break fee, or prepayment fee, is a fee charged by a creditor to recover its loss when a customer repays their loan early. Under the CCCF Act creditors are entitled to recover their loss when a customer makes an early prepayment or breaks the term of a fixed interest loan, as long as the creditors use what the CCCF Act describes as an appropriate procedure to calculate a reasonable estimate of loss.

Section 54 of the Credit Contracts and Consumer Finance Act 2003 states:

(1) A creditor must calculate a reasonable estimate of its loss arising from a full prepayment using -

(a)       a procedure prescribed for the purposes of this section by regulations; or

(b)     an appropriate procedure set out in the consumer credit contract for calculating that loss.

(2) If a creditor uses a procedure prescribed for the purposes of this section by regulations, the amount calculated is to be treated in any court and in any proceedings under this Act as a reasonable estimate of the creditor's loss.

The safe harbour formula. The procedure set out in the CCCF Regulations is colloquially known as the safe harbour formula.   It is based on the movement in retail rates.   If a creditor follows the safe harbour formula, then the creditor will be assumed to have assessed a reasonable estimate of loss in accordance with section 54(2) above.

Previous break fees investigations
In the last two years, Commerce Commission investigations into break fees charged by banks and other lenders has resulted in approximately $1.4 million returned to consumers in settlements and ex-gratia payments.

In July 2010, PSIS Limited approached the Commission and advised that it had discovered an error with its break fee calculator. PSIS uses the safe harbour formula, but its calculator was incorrectly calculating one of the inputs. The Commerce Commission investigated the matter and resolved the issue by way of a warning letter, as PSIS had proactively agreed to refund about 755 customers a total of $207,000 to compensate them for overcharged break fees.  

In May 2010 the Commerce Commission reached a settlement Foundation Custodians Limited. Foundation Custodians admitted breaching the Credit Contracts and Consumer Finance Act (CCCF Act) and the Fair Trading Act in relation to fees charged on early loan repayments. . The company provided refunds totalling $200,000 to affected customers.

In May 2010 the Commerce Commission also concluded an investigation into five financial institutions. In relation to ANZ, Westpac and GE the investigation was closed with no enforcement action. Kiwibank and HSBC were each issued with a warning on the basis that the formulae they were using until mid-2009 had technical deficiencies which meant that they were likely to have breached section 54 of the CCCF Act. During the investigation both banks changed their formula. In addition, Kiwibank made ex-gratia payments to its customers totalling approximately $689,000 while HSBC made ex-gratia payments to its customers totalling approximately $113,000.

In May 2009 the Commerce Commission settled with Medical Mortgages Limited. Medical Mortgages admitted breaching the Fair Trading Act by making misleading representations that it was entitled to charge break fees calculated using a different formula than the one set out in customers' contracts. Medical Mortgages Limited refunded around 100 affected customers a total of approximately $80,000.


In April 2009 an investigation into ASB, SBS Bank, BNZ and National Bank was closed with no enforcement action taken as the Commission concluded that these banks were likely to be charging reasonable fees. These banks charged fees based on the change in retail interest rates, which is consistent with the safe harbour formula.

Disclosure under the CCCF Act. The CCCF Act requires creditors to provide particular disclosure to all debtors entering into consumer credit contracts.   Information required to be disclosed includes the method of calculating the fee charged by a creditor to compensate it when a consumer credit contract is repaid early.

The Fair Trading Act. Section 13(g) of the Fair Trading Act states:

No person shall, in trade, in connection with the supply or possible supply of goods or services or with the promotion by any means of the supply or use of goods or services,….make a false or misleading representation with respect to the price of any goods or services.

Only the courts can decide if the CCCF and Fair Trading Acts have been breached and set appropriate penalties.