Last Friday, the Commerce Commission (the
Commission) published its updated
Credit Fees Guidelines, following MBIE’s update of the Responsible Lending Code’s fees section last month.
The updated Credit Fees Guidelines (the
Guidelines), which were published on Friday 30 June 2017, include some helpful clarifications since the draft Guidelines were published in September 2016. In the main, these updates should give lenders some practical comfort about the approach they are taking to assessing costs which underlie credit and default fees following the Supreme Court’s landmark
Sportzone ruling last year.1 (See a previous update of that decision
We have summarised below
the key changes between the draft September Guidelines and the final
Guidelines. A link to a more detailed summary of
the full Guidelines can be found at the bottom of this page.
Summary of key updates compared to the draft Guidelines
The Guidelines emphasise the Supreme Court’s ruling that fees must only be used to recover a lender’s costs which are closely connected to the relevant lending transaction. Fees cannot recover non-transaction-specific costs, nor include any element of profit.
In this context, the Guidelines provide welcome clarity on a lender’s ability to average costs and estimate costs in advance for the purposes of setting recoverable fees. They also underscore the need for lenders to keep their fee levels under regular review and to keep data and records to support their fee calculations.
Averaging of costs
The Commission confirms that, in its view, it is reasonable for a lender to average its costs for appropriate classes of contract when setting
any cost-based fees (i.e. not only establishment fees) – although it notes that this matter has not yet been considered by the courts. This guidance will be welcomed by large-scale lenders for whom it is impractical to attribute costs on a borrower-specific basis. For this purpose, the Commission says that an appropriate class of contract is a group of contracts “so similar in nature that they are likely to attract the same type and level of costs”.
Estimating costs in advance
A lender can estimate its costs when setting fees in advance of incurring the cost. Helpfully, the Commission confirms that “exact precision” in estimation is not required. However, lenders must follow a sound methodology and make “reasonable efforts to ensure that the estimated fee is as accurate as possible”.
The Commission notes that “[w]here a lender sets its fees in advance by apportioning costs using a documented, consistent, robust and reasoned approach referencing generally accepted principles of activity-based cost accounting, its approach is likely to be reasonable”.
Any estimation should involve a prediction of the costs that will be incurred in connection with that specific loan or class of loans (for example, the cost of the time likely to be spent on that fee generating activity). Systems should be implemented to assess the accuracy of forecasts and assumptions underlying fee-setting calculations and these should be regularly reviewed.
The Guidelines emphasise the importance of estimating future costs by taking account of historic costs incurred for the same or similar credit products (where available) and applying that experience on a forward-looking basis.
The Commission acknowledges that for new lenders with no historical cost data, a greater degree of estimation will be required. Any such estimates will need to be supported by careful assumptions and tested regularly as actual cost data is generated.
Lenders should also document their approach used to estimate fees, and keep evidence of the methodology used and any assumptions relied on.
Regular fee reviews
Lenders should regularly review fees – “ideally” annually, but at least any time they are on notice that their forecast costs “differ materially” from their actual costs. This will ensure they are only recovering transaction-specific costs and losses, and that their fee levels are not unreasonable. Depending on the circumstances, a review may simply involve a high level assessment as opposed to a full cost accounting exercise.
Third party fees
The Guidelines only relate to third party fees where the relevant consumer credit contract was entered into after 5 June 2015. The Commission observes that third party collection and enforcement costs are generally default fees and therefore must be reasonable.
Third party fees should “preferably” be disclosed separately from fees charged for the lender’s own costs.
The final Guidelines are emphatic that percentage-based fees have a high risk of being unreasonable. This is because it is “improbable” that a fee set by this method will accurately recover allowable costs.
For a more detailed summary
of the full Guidelines, please click here.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.