peer to peer lending

Peer-to-Peer Lending and the CCCFA –Clarification on the Horizon or Not?

In early 2017, Act leader David Seymour sought to introduce a legislative amendment to the definition of a “credit fee” under the Credit Contracts and Consumer Finance Act 2003 (CCCFA) to clarify the CCCFA’s application to the peer-to-peer lending industry.  That attempt was blocked.  The High Court has now released its decision in Commerce Commission v Harmoney Limited [2017] NZHC 1167 which will allow the Commerce Commission (Commission) to have that issue clarified by the Court with respect to Harmoney’s structure.  However, that decision may be some time away, and may not provide the industry as a whole with much needed clarity.

Uncertainty within the Peer-to-Peer Industry

There is inherent uncertainty around the regulation of peer-to-peer lending platforms in New Zealand.  The Commission has taken the view that Harmoney is a “creditor” and that fees charged by Harmoney may be “credit fees” for the purposes of the CCCFA.  This would have the consequence of requiring fees charged by Harmoney to be reasonable – meaning they have to be generally cost-based and cannot incorporate any element of profit.  In 2016 the Commission put forward a “case stated” seeking the High Court’s opinion on five questions relating to the composition of a credit contract within Harmoney’s structure, and whether Harmoney’s platform fee amounted to a “credit fee” or an “establishment fee”.  There is a distinct lack of agreement in the industry whether the CCCFA applies to peer-to-peer platforms, and legislative clarification has been sought as noted.  This test case indicates the Commission’s own uncertainty regarding the application of the CCCFA in this area.

A New Tool for the Commission?

This case represents the first use of the “case stated” procedure by the Commission under the CCCFA (and only the second time the Commission has used this procedure).  The case stated procedure is familiar in a tribunal context as a mechanism to provide a straightforward  procedure to ensure correct legal interpretation is followed.  It is less familiar in the present instance where a regulatory body is using the procedure to obtain clarification of the law in an uncertain area.

How the Commission uses this decision to guide its future investigation and enforcement activities will be of interest.  It may be that this use of the case stated procedure represents the rare example of difficult legal questions arising in response to the emergence of new industries.  However, other peer-to-peer providers may be alert to similar actions being pursued depending on the outcome of this case.  The Commission may also seek to use this as a more efficient and cost-effective tool in order to achieve its enforcement objectives under the CCCFA (and potentially also under the Commerce Act or Fair Trading Act).

Outcome and Next Steps

The Court struck out two of the questions posed by the Commission, but agreed that the three remaining questions were suitable for the Court to give its opinion.  This paves the way for a hearing and decision to be given on what a credit contract is within Harmoney’s structure, which entity within the Harmoney structure is a creditor, and whether Harmoney’s platform fee is a “credit fee”.

Whether an appeal will be lodged by either party is unknown.  If the present result stands, we await the hearing and judgment of the Court on the specific questions posed by the Commission.  The outcome of that hearing will no doubt have ramifications for any Commission investigation into Harmoney’s structure.  It is important to bear in mind that this case stated relates only to Harmoney’s structure.  The Commission’s questions for the Court’s opinion are focused on Harmoney’s structure and documents.  The Court has been careful to amend the questions to clarify that its findings will reflect the documents and information before it.  As such, it remains to be seen whether any clarification will be achieved for the industry as a whole.

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