Further to our recent update relating to the exposure draft of the Bill (Draft Bill) amending the Credit Contracts and Consumer Finance Act 2003 (CCCFA), the Law Commission has now released its report on possible amendments to the Credit (Repossession) Act 1997 (CRA).  

As previously noted, the Ministry of Consumer Affairs (MCA) has indicated that comments on the Law Commission's recommendations would be welcomed as part of any submission on the Draft Bill.  These submissions are now due on 25 May 2012.  Information on how to make a submission is available here.

The Law Commission has made a number of recommendations in its comprehensive report (160 pages, available here), which it considers are "necessary to ensure clarity, efficiency and fairness" (p 3) in this area.  These recommendations include the following:

The right to repossess

  • The CRA should be merged into the CCCFA so that there is a single statute that governs this area – i.e. a "one process-one statute" approach (para 1.25).  In addition, the legislation should include a "checklist" of the requirements that must be fulfilled as a precondition to repossession, in order to address confusion as to where the right to repossess originates.  The checklist would include, for example, a valid security and a contractual right to repossess (see para 3.2).
  • The security agreement should specifically identify the goods that may be repossessed, to "ensure clarity as to which goods are liable to repossession and which are not".  This is intended to address, for example, the repossession of goods belonging to other family members or flatmates (para 3.19).  As such, an "all present and after acquired personal property" description would not permit repossession of goods that are not specifically identified (although it would still suffice to give rise to a security interest), unless (i) the goods are subject to a purchase money security, (ii) the goods are bought in substitution for existing goods subject to repossession, or (iii) there is a written variation to the agreement expressly extending the security to the (specifically identified) after acquired goods (paras 3.22 to 3.32).  As in the Draft Bill, the Commission recommends that power of attorney clauses should not be able to be used to appropriate after acquired consumer goods to the security such that they can be repossessed (para 3.37).
  • Regulations should prescribe that certain consumer goods cannot be repossessed (except under purchase money securities), such as medical equipment, bedding and washing machines.  Moreover, the MCA's proposed Code of Responsible Lending (Code) should deal with the granting of security over and repossession of goods with high sentimental value but little or no economic value, such as children's toys (paras 3.63 and 3.64).  In making these recommendations, the Commission acknowledged the need for a balance between "preventing unacceptable hardship on the one hand, and the individual's freedom to choose to use the assets as a way of securing credit" (para 3.40).  There is, however, an argument that an absolute prohibition in regulation (as opposed to guidance in the Code) is not needed in light of the amended oppressive credit contract provisions and responsible lending principles in the Draft Bill.
  • The Commission considered whether creditors should be required to choose whether to "seize or sue", such as in some Canadian provinces, on the basis that it incentivises responsible lending and, for example, provides a disincentive to creditors repossessing goods that have a low monetary value but high utility value for the consumer.  However, it considered that the Code "might forestall the need" for such a provision (para 3.77).  It also considered that section 35 (which is intended to crystallise the debt at the time of repossession) ought to be retained (as providing for a partial election between seizing and suing), but that it should be redrafted for clarity.  

Informing the consumer

  • "Plain English" forms of the pre-possession and post-possession notices should be prescribed by regulations (paras 4.54 and 4.64).  In addition, the Code should require creditors to "ensure that information is given to consumers in a clear and transparent manner with a view to ensuring the consumer understands the nature of the arrangement into which they are entering" (para 4.41).  The Commission recommends that this "should include, where feasible, information in languages that the consumer readily understands" (R18).  Notices should be able to be given by electronic communications if both parties agree (para 4.74).
  • The legislation should require pre-possession notices to include certain information, such as that "doing nothing is not an option" and encouraging the debtor to contact the creditor (para 4.52).  In addition, pre-possession notices should expire after 28 days (or within 28 days of any complaint being resolved) so that they cannot be used for subsequent defaults on renegotiated payment arrangements months later (para 4.59).  

The process of repossession

  • Section 14 of the CRA (which provides that a creditor or its agent "must not exercise a right to enter premises in a manner that is unreasonable") should be replaced with a more general provision requiring creditors and their agents to act in accordance with the Code when dealing with a debtor in a credit repossession matter.  The Code should require both creditors and repossession agents to "act responsibly" when repossessing goods and should specify the type of conduct which would be considered to be irresponsible (paras 5.28 to 5.31).  Along with the Commission's recommendations in relation to section 108 of the CCCFA below, the effect of this will be that persistently acting irresponsibly may lead to a creditor or repossession agent being prohibited from acting in that capacity.  However, as noted in our previous update, it will be up to two years after the amendments are enacted before the Code will be published.
  • Creditors and repossession agents must produce a number of other documents on entry of the consumer's premises for repossession (in addition to the current documents listed in section 17 of the CRA).  These include a copy of the credit contract and an expanded section 18 notice (which would be required to be provided regardless of whether the consumer is present), including an explanation as to why the goods have been repossessed and where they will be stored (paras 5.39 to 5.45).  

Offences, remedies, disputes and penalties

  • The Commission recommends that criminal offences should be introduced for breach of sections 15 (entry at prohibited times), 17 (requirement to produce documents on entry) and 18 (requirements of entry if occupier not present) (para 6.18, R40).  It would not be an offence to breach the expanded section 14, "given the difficulties in interpreting the concept of irresponsibility" (para 6.13).  The Commission also recommends that the maximum penalty should be increased from $3,000 to $30,000 for offences under the CRA, consistent with offences under the CCCFA.  This does not apply to the offence of obstructing a creditor or its agent taking possession of goods.
  • Repossession agents should be liable (both criminally and civilly) for illegal acts that they commit during the repossession process (para 6.19, R41).  We note, however, that it is probable that repossession agents will require creditors to indemnify them against civil liability in their terms of appointment.  The Commission further recommended that creditors should be liable for the acts of a repossession agent if they "have been complicit" in the commission of the offence, although debtors will be able to obtain relief from the creditor (through the courts or a dispute resolution scheme) for any breach that its agent commits.  What "complicity" will require is not explained.
  • The Commission recommended that compensation must be available to debtors "who have suffered non-financial loss or damage, humiliation or stress" – and recommended that the Financial Service Providers (Registration and Dispute Resolution) Act 2008 (FSP Act) be amended to require that dispute resolution schemes' rules provide for this.  This is because, while the monetary value of goods taken can sometimes be low, the utility value to the debtor can be high and stress or humiliation is likely to be suffered if goods are illegally repossessed or the debtor experiences unreasonable conduct (para 6.56).  In addition, as in the CCCFA, statutory damages should be available for breach of the recommended pre-possession notice disclosure requirements (para 6.58).
  • The Commission also recommended a number of other amendments to the dispute resolution schemes' rules, including to provide for the consideration of complaints relating to the oppressive exercise of contractual rights and powers in relation to repossession (R49). 
  • The consumer credit repossession legislation should prohibit repossession, enforcing payment of a debt and disposal of repossessed goods from the time a debtor has made a complaint until it has been resolved.  While the Commission recommended that enforcement action may be taken if the debtor fails to make a complaint to a dispute resolution scheme within 14 days of the creditor making a decision on the complaint, the recommendation nevertheless opens the possibility that some debtors may play the system by making vexatious complaints.  The Commission did "not think that the amendment poses a significant problem" in this respect on the basis that "it provides creditors with an incentive to deal with complaints as quickly as possible and the dispute resolution schemes will simply need to deal with complaints that appear to be vexatious in an expeditious manner" (para 6.104).  However, whether this is possible in practice may be debateable.
  • The Commission also recommends that, where a credit contract has been sold and the original contract was with a financial service provider, only financial service providers should be permitted to repossess goods.  As previously advised, the FMA has issued guidance that entities need to register under the FSP Act, even if they are only servicing outstanding loans (and not providing new credit).  That suggests that assignees of credit contracts such as debt collection agencies already need to register in any event (although, as previously noted, we are not convinced that this is the correct interpretation of the Act and it does not accord with our experience of market practice).  To that extent, the Commission's recommendation may not change existing law.  

Regulation and licensing repossession agents

  • A regulator should be charged with enforcing the CRA, rather than relying only on a privately enforced model (para 7.61).  The same regulator should be responsible for both the CRA and CCCFA (para 7.62).  Creditors should be required to report six-monthly to the regulator on the number and location of repossessions they have conducted (para 7.66).
  • Section 108 of the CCCFA (which relates to the courts' power to make orders prohibiting persons from acting as creditors, etc) should be extended to apply if the creditor has been convicted of one or more serious offences under the consumer credit repossession legislation or has persistently failed to comply with the provisions of that legislation.  The Commission also recommended that the equivalent provisions for breaching the CCCFA should be amended to ensure that they do not cover creditors who have committed a single, minor breach (para 7.35).  That seems to us to be a useful clarification.
  • Repossession agents should be licensed by an appropriate body – e.g. under the licensing regime in the Private Security Personnel and Private Investigators Act 2010 (para 7.48).  In the absence of this, the Commission recommends that section 108 of the CCCFA be amended to enable a court to prohibit repossession agents from acting as such agents if they commit a serious breach of the CRA or persistently fail to comply with its provisions.  

Finally, it is worth reiterating the Commission's point that, "[a]lthough repossession may seem harsh, it may be better than no credit in the first place" (para 2.43).  It is therefore vital that the appropriate balance between consumer protection and facilitating access to credit is achieved.