Judge finds breaches of Credit Contracts and Consumer Finance Act's responsible lending provisions
The High Court recently ordered TSB Bank Limited to pay the Crown a $2.47m penalty after it admitted to contravening ss. 9C(1) and 41 of the Credit Contracts and Consumer Finance Act 2003.
The Act’s primary purpose was to protect consumer interests in credit contracts by ensuring that creditors acted as responsible lenders. Section 9C(1) of the Act obligated lenders to exercise the care, diligence, and skill expected of a responsible lender when dealing with borrowers.
On the other hand, s. 41 of the Act prohibited credit contracts from including unreasonable credit or default fees. The Act allowed for pecuniary penalties of $600,000 maximum for each breach of ss. 9C(1) or 41.
TSB Bank, headquartered in Taranaki, was the seventh largest among New Zealand banks by total assets. The bank reported a net profit of $34m in the last financial year. Wholly owned by the charitable trust Toi Foundation, the bank paid annual dividends to benefit the Taranaki community.
The bank’s breaches involved overcharging over 42,000 credit contract customers by about $3.6m over the period from 6 June 2015 to 2 November 2021.
The breaches stemmed from the bank’s standard form consumer credit contracts, which incorporated fees lacking any reference to s. 41 of the Act. Instead, the bank determined the fees based on commercial considerations such as competitor fees, customer satisfaction, and income generation potential.
In 2021, the bank ran a review of its fees to check compliance with the Act. The review revealed that 14 of its 35 fees did not comply with the legislation. The bank stopped charging these fees that same year. The bank also refunded the overcharges amounting to approximately $6m, including interest.
The Commerce Commission, which was the plaintiff in this case, proposed a pecuniary penalty of $2.47m. From a starting point of $3.8m, the Commission applied a 35% discount for the bank’s constructive response to the breaches. The bank accepted this proposed amount.
Counsel advised that this would be the first determination of pecuniary penalties under the Act, the judge noted.
In Commerce Commission v TSB Bank Limited, [2024] NZHC 2400, the New Zealand High Court issued a decision finding three breaches of s. 9C(1) and 12 breaches of s. 41 of the Act on the part of TSB Bank, given the bank’s admissions. The court ordered the bank to pay the proposed $2.47m penalty to the Crown.
While the bank’s conduct was not overtly intentional, it could be deemed reckless, the court said. The court pointed out that the bank previously settled with the Commission in 2017 for similar issues, which should have prompted a review of all its credit and default fees.
The court applied a two-step approach to sentencing for regulatory offences. The first step was determining a starting point for the penalty based on the gravity of the offence and the culpability of the offender. The court found the bank moderately culpable of high-gravity conduct. This resulted in an initial penalty range of $4.3m to $4.7m.
The second step involved adjusting the penalty based on the bank’s individual circumstances. The court saw no aggravating factors but noted that it could consider the bank’s delay in involving the Commission such a factor.
Ultimately, the court allowed a 40% discount, considering the bank’s confession of the contraventions to the Commission, its cooperation in the investigation, and the steps that it had taken to rectify the issue.
The court thus set the final penalty range at $2.34m to $2.52m. The court concluded that the agreed $2.47m penalty fell comfortably within this range.
