In an eagerly anticipated judgment the Court of Appeal has laid down the test
for determining when fees charged to borrowers are unreasonable. The judgment in
Commerce Commission v Sportzone1 is a win
for the Commerce Commission and for those who argue that the relevant statute,
the Credit Contracts and Consumer Finance Act 2003 (the CCCFA),
should be interpreted as strictly as possible in order to achieve its objective
of consumer protection. The Court of Appeal held that in charging fees to
borrowers under consumer credit contracts (where the borrower is a natural
person and the loan is for personal, domestic or household purposes), lenders
can only seek to recover costs which are closely connected to the activity for
which the fee is charged. In practice this means that cost recovery via fees
will largely be limited to variable costs (costs that change in proportion to a
volume of activity) and direct costs (costs that are easily identified as
relating to a cost object within an organisation). By contrast, many fixed and
indirect costs (e.g. general business overheads) which are not closely related
to a particular loan transaction cannot be recovered through fees.
here for the full judgment.
High Court decision
The case concerned the fees charged by a vehicle finance company, Motor Trade
Finance (MTF). MTF was the unlucky lender selected by the
Commerce Commission to run a test case as to what constitutes an “unreasonable”
fee prohibited by the CCCFA. In answering this question, the High Court focussed
on the provisions in the CCCFA which state that in order to be reasonable, the
lenders’ costs which form part of the fees must be costs incurred “in connection
with” the particular lending activity.2 The High
Court interpreted the words “in connection with” to require that the costs
recoverable through fees must be sufficiently close and relevant to the
particular activity for which the fee is charged, i.e., the establishment,
administration, maintenance or default of the particular loan. This has been
referred to as the “close relevance test”.
In a second judgment (the Quantification Judgment), the High
Court then applied the close relevance test to the particular fees charged by
MTF.3 In doing so, the High Court examined
line-by-line the various costs incurred by MTF and identified a specific
percentage of the cost that could be recovered through fees. The categories of
recoverable costs included a percentage of the following costs (provided the
costs were closely connected to the particular activity for which the fee was
staff salaries (including temporary staff) and payments under staff
premises costs (which included costs of storage, office rental, rates, energy
costs, insurance, security and cleaning, maintenance, and depreciation of
fixtures and fittings);
charges imposed by the Land Transport Safety Authority for vehicle checks;
IT hardware and software depreciation.
Court of Appeal
MTF appealed to the Court of Appeal. The Court of Appeal upheld the close
relevance test and applied a three stage analysis to assessing the
reasonableness of establishment fees (i.e., the fee a lender charges for setting
up a line of credit). The analysis is:
First, any costs charged to borrowers must be closely relevant to the
following four activities: application for credit, processing and considering
that application, documenting the application and advancing the credit (the
four establishment activities).
Second, the lender must consider whether the amount of the fee is “equal to
or less than” its reasonable costs in connection with those four establishment
Third, the Court held that any additional considerations for including costs
in fees ought to be “compelling” and consistent with the statutory purpose (the
restriction of fees).
For credit and default fees, the question is whether the fee reasonably
compensates the lender for any cost incurred in providing the fee-related
service or any loss incurred in relation to the debtor’s actions. Reasonable
standards of commercial practice may also be considered.
The Court of Appeal also affirmed the Quantification Judgment.
Presumably many lenders had hoped that the Court of Appeal would take a
broader approach to cost recovery via fees, i.e., that costs are recoverable via
fees as long as those costs have a beneficial relationship with the lending
activity. However, the outcome of the Sportzone case and the way the
close relevance test has been applied, means that in assessing whether fees are
unreasonable, courts will be required to undertake a detailed line-by-line
assessment of a lender’s costs. It remains to be seen whether this will result
in a better outcome for consumers, particularly given that there are no
restrictions around lenders incorporating any costs which cannot be allocated to
fees into the lender’s interest rate.
Putting aside whether or not individual lenders change their approach to
fees, lenders would be well-advised to (where possible) at least assess their
fee levels in light of the decision in Sportzone. That is, to identify
the costs associated with their business of providing credit, assess which of
these costs may be said to be closely connected to the activities for which fees
are charged (e.g., loan establishment, account maintenance and customer
default), compare their fee levels in light of that analysis, and to take advice
if they are at all uncertain as to how those fees levels compare.
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.