Yesterday the Government announced amendments to the fees section of the Responsible Lending Code, which take effect from 6 July 2017. The changes provide increased guidance on how the Government expects lenders to set the fees they charge to consumers for borrowing which is used or intended to be used wholly or predominantly for personal, domestic or household purposes.
The changes follow on from the release of the Supreme Court decision in Commerce Commission v Sportzone1 which considered how the Courts assess whether a fee is reasonable under the Credit Contracts and Consumer Finance Act 2003 (see a previous update of that decision here).
The changes generally reflect the Supreme Court's approach in Sportzone by emphasising that in order for a lender to recover its costs through a fee, those costs must be closely connected to the activity for which the fee is charged. In practical terms, this means that a detailed line-by-line assessment of tasks and the associated costs will likely be required to determine the appropriate fee level.
There are three amendments to the Code, as follows:
The Code currently provides that when setting an establishment fee, the lender should assess the reasonable costs they are likely to incur in connection with the application for credit, processing and considering that application, documenting the contract and advancing the credit.
The amendments clarify that this assessment should involve the lender first identifying the tasks undertaken in order to establish the credit contract or class of credit contract and calculating the costs of undertaking each of those tasks.
Close relevance of costs
The amendments introduce new guidance that costs recovered should:
- relate to the specific credit contract or class of credit contract, and
- be sufficiently close and relevant to the steps in the lending process to which the fee relates that they can reasonably be said to be incurred in relation to those steps.
The Code currently permits lenders to average costs across a class of credit contracts when calculating the amount of those costs which are recoverable in fees. The amendments clarify that:
- those costs must be relevant to the class of credit contracts, and
- when the averaging involves past experience, a representative sample of transactions should be used.
The Code also acknowledges (as it did in the previous version) that it is not practical for there to be an exact (i.e., to the dollars and cents) matching of costs incurred to the level of fee charged.
Now that the Code has been amended, lenders are well advised to consider whether their current fee-setting processes reflect those set out in the Code.
If you have any questions regarding the amendments or any of the issues raised in our article, please contact one of our specialists, or your usual Bell Gully adviser.
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.