Commerce Commission 'draws line in sand' on credit card late payment fees

By Gareth Vaughan

The Commerce Commission says it's drawing a line in the sand for credit card providers saying they shouldn't be charging customers late payment fees of more than NZ$15.

The warning comes as the commission issues compliance advice letters to a number of banks and credit card providers after an investigation into the "reasonableness" of credit card exception fees, including late payment and over-limit fees. The commission said it had sent compliance advice letters to a number of banks and credit card providers following the probe  into the reasonableness of credit card exception fees.

The commission has been investigating such fees charged on credit card transactions by American Express International (NZ) Inc., ANZ New Zealand, ASB, Bank of New Zealand, Kiwibank, TSB Bank, The Warehouse Financial Services and Westpac. The consumer watchdog said its investigation into late payment fees had concluded, but it's investigation into over-limit fees continued.

Up until 2009, issuers charged late payment fees ranging from NZ$20 to NZ$25. The commission says it has now concluded it's "unlikely" late payment fees in that range can be justified as reasonable. During its investigation, in the middle of last year, several credit card issuers voluntarily dropped their late payment fees to less than NZ$15.

The commission's Auckland fair trading manager Graham Gill said the consumer watchdog was now drawing a line in the sand at this level.

"We have advised the parties that any late payment fees at or below NZ$15 should not trigger future investigation or enforcement action. Credit card issuers charging in excess of NZ$15 may be liable to further action by the commission,” said Gill.

“We expect any credit card issuers charging in excess of NZ$15 to review these fees.”

Late payment fees in the NZ$20 to NZ$25 range were generally generating profit for the card providers in addition to recovering the actual costs of late payment by card holders, Gill added.

This doesn't comply with the Credit Contracts and Consumer Finance Act. Furthermore, issuers had used the late payment fees to recover bad debt and the commission doesn't believe customers' who ultimately make right late payments, should be held liable for the costs and losses incurred through defaulting customers who never make good their debt.

"In addition, various costs appear to have been included in the fee which, in the commission’s opinion, are too removed from the act of late payment to be properly recoverable in this way. Some credit card issuers suggested to the commission that it was 'reasonable commercial practice' to charge a fee that recovered more than the costs associated with late payments, as it would have a deterrent effect," said Gill.

"However, the Commission has neither seen, nor been provided with, any supporting evidence that charging a high level late payment fee deters credit card holders from defaulting."

He also urged credit card users to shop around, suggesting they look at all fees being charged by all lenders, including exception fees or other default fees.

"If the fees are too high, vote with your feet and go to another provider,” said Gill.

Commerce Commission background

Credit Contracts and Consumer Finance Act

The investigation into the “unreasonableness” of the credit card exception fees relates to sections 41 and 44 of the CCCF Act. Section 41 – Unreasonable credit fee or default fee (1) A consumer credit contract must not provide for a credit fee or a default fee that is unreasonable.

Section 44 – Other credit fees and default fees (1) In determining whether a credit fee or a default fee is unreasonable, the Court must have regard to,- (a) in relation to the matter giving rise to the fee, whether the fee reasonably  compensates the creditor for the following: (i) any cost incurred by the creditor (including the cost of providing a service to the debtor if the fee relates to the provision of a service); (ii) a reasonable estimate of any loss incurred by the creditor as a result of the debtor’s acts or omissions; and (b) reasonable standards of commercial practice.

Penalties under the CCCF Act A creditor who is found to be in breach of the CCCF Act: may be liable for statutory damages; may be liable on criminal conviction to a fine of up to $30,000; and may be banned by the Court from providing consumer credit or being involved in a company providing consumer credit.