The High Court has refused Harmoney's request to strike out the Commerce Commission's case stated against it. The decision leaves three key issues before the Court for determination including whether Harmoney is a creditor for the purpose of the Credit Contracts and Consumer Finance Act 2003 (the CCCFA) and whether the fees it charges are credit fees.1
Background to the proceeding
The Commerce Commission commenced a proceeding against peer-to-peer lender Harmoney Limited (Harmoney) last year, seeking guidance from the Court on how the CCCFA applied to consumer loans entered into with Harmoney.
Peer-to-peer lending differs from more traditional lending arrangements in that the entity arranging the lending (Harmoney) is not the person who ultimately provides the funds for the loan. Rather, Harmoney provides a platform to match those who have funds to lend (the investor) with those who need to borrow (the borrower) and to facilitate the transaction.
Essentially the process is as follows:
- Prospective borrowers apply online with Harmoney for a loan and enter into a "Borrower Agreement" with Harmoney and a subsidiary of Harmoney, known as the Trustee. Harmoney screens the prospective borrowers for creditworthiness and assigns an interest rate, a maximum loan amount and the repayment period.
- Prospective lenders register online with Harmoney and enter into an "Investor Agreement" with Harmoney and the Trustee. They deposit funds into a trust account with Harmoney and then review the various loan applications and decide into which loan applications to invest.
- Once the loan application is funded, the investor funds are transferred to an account in the name of, and are held on trust by, the Trustee.
- Harmoney provides Disclosure to the borrower and the Loan Contract is entered into between the borrower, Harmoney and the Trustee. It is a term of the Loan Contract that the borrower pays Harmoney a "Platform Fee", deducted from the funds to be advanced. The Platform Fee was initially calculated as a percentage of the loan amount. Following discussions with the Commission in 2015, Harmoney changed its Platform Fee to a fixed fee.
- The Trustee then pays the Platform Fee to Harmoney and transfers the remaining funds to the borrower.
- The borrower makes repayments to the Trustee. The Trustee pays Harmoney investor fees and then pays the balance of the repayments to the investor.
At the heart of the proceeding are two issues:
- whether Harmoney was a creditor for the purpose of the CCCFA, and
- whether the Platform Fee was a credit fee pursuant to the CCCFA.
Harmoney argues that it is not a creditor and the Platform Fee is revenue it earns for running its loans marketplace, not a credit fee.
The strike out application
The proceeding was commenced as a "case stated" – that is, a shortcut route to obtain a court determination on questions of law.2
The Commission sought guidance on five questions:
- Was the "credit contract" as defined in section 7 of the CCCFA comprised of the Borrower Agreement, the Loan Contract and the Disclosure operating together, or just the Loan Contract?
- Was there a transaction that was in substance or effect a "credit contract" for the purpose of the CCCFA?
- Which entities are the "creditor(s)" for the purpose of the CCCFA: both Harmoney and the Trustee or the Trustee alone?
- Was the Platform Fee a credit fee pursuant to the CCCFA?
- Was the Platform Fee an establishment fee pursuant to the CCCFA?
Harmoney applied to strike out the case stated on the basis that it relied on the Court determining facts which were in dispute. It argued that the five questions needed to be interpreted against a full understanding of the character of the peer-to-peer lending regime, which could not be gained through the case stated process.
The Court agreed with Harmoney in respect of questions 2. and 5. above and struck out those questions as not being appropriate for the short-cut case stated route. However, it considered that questions 1., 3. and 4. could be determined on a case stated application.3
Significance of the decision
How the CCCFA applies to peer-to-peer lending scenarios is currently unclear. As the Court acknowledged, the ultimate outcome of the Commission's case stated application will establish the threshold for the application of the CCCFA to such arrangements.
However, given the Court's decision, it seems likely that the outcome of the case stated application will still leave issues to be resolved in any event. For example, if the Commission is successful in establishing that Harmoney is a creditor and the Platform Fee is a credit fee, it will likely then enquire into whether the Platform Fee is reasonable, in accordance with the CCCFA. But if the Commission is not successful on Question 1. above, it may still bring enforcement proceedings to test Question 2. – namely whether the transaction with Harmoney is, in substance or effect, a credit contract.
Accordingly, clarity for peer-to-peer lenders may still be some time away.
If you have any questions regarding 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.