On 27 August 2024, the High Court (Jagose J) released its judgment on Commerce Commission v TSB Bank Limited [2024] NZHC 2400. In that case, the Commerce Commission (the Commission) for the first time sought an award of pecuniary penalty under the Credit Contracts and Consumer Finance Act 2003 (CCCFA) for breaches of responsible lender obligations under s 9C(1) and s 41 against TSB Bank (TSB). The High Court, in accordance with the Commission's recommendation (which TSB accepted), awarded a pecuniary penalty of $2.47m against TSB.
This case should be of high interest to those currently remediating issues or negotiating regulatory settlements under the CCCFA.
TSB's breaches
Between June 2015 and November 2021 TSB discovered, and subsequently admitted to the Commission, system failures resulting in approximately 42,000 customers being overcharged by about $3.6m in credit and default fees.
In 2021, TSB conducted an internal review of its compliance with the CCCFA in respect of its fees charged. The review found that 14 of its 35 fees charged to consumers between June 2015 and November 2021 were non-compliant. TSB further noted that the fees were set without reference to s 41 of the CCCFA which requires that "[a] consumer credit contract must not provide for a credit fee or a default fee that is unreasonable".
TSB ceased charging those fees during 2021, introducing new fees understood to be in compliance with the CCCFA. It also self-reported the CCCFA breaches and outcome of the review to the Commission in March 2022, followed by commencing a refund of the overcharges (including interest as relevant) to the affected consumers, totaling some $6m.
The Commission recommended that a pecuniary penalty of $2.47m be imposed against TSB, discounted by 35 percent to recognise TSB's self-reporting and proactivity following the discovery of breaches.
High Court's decision
Justice Jagose declared that TSB breached the responsible lender obligations in s 9C(1) of the CCCFA, as well as s 41 as set out above. His Honour also ordered a pecuniary penalty of $2.47m. This is the first determination of pecuniary penalties under the CCCFA.
Overall, it was held that TSB's breaches of the CCCFA were reckless – but not TSB itself, reflecting that TSB's breaches were unintentional, notwithstanding the fact that the fees in breach of the CCCFA were carefully established.
In determining the quantum of the penalty imposed against TSB, Jagose J first noted that where penalty is agreed by the parties before the Court, a negotiated resolution being of public benefit, the Court's role is to be satisfied that the penalty falls within a proper range.
However, Jagose J disagreed with the parties' proposed methodology of calculating the penalty which drew on cases decided under the Financial Markets Conduct Act 2013.
His Honour instead opted for the usual two-step process used for sentencing, ie deciding a starting point for the breach, then adjusting up or down taking into account individual circumstances in order to determine the applicable pecuniary penalty. We discuss the approach taken by Jagose J in respect of these steps below.
- The starting point: S 107A(3) provides that the pecuniary penalty must not, in respect of each act or omission exceed $600,000, leaving 5 percent margins at either end for outlying conduct, and splitting the remainder by progressive 30 percent bands to accommodate contraventions of low, moderate and high seriousness.
Jagose J considered "the Bank's long-term charging of unreasonable credit and default fees to be of high gravity, for which [TSB] is moderately culpable". This split the offending into the below categories:
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S 41: the higher end of the moderate band, in the range of 55-60 percent of the $600,000 maximum
- S 9C(1): a 50-70 percent range of the available maximum, because as TSB is required to be a responsible lender, it bears higher culpability for its slightly less grave conduct.
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Adjustment for individual circumstances: Jagose J accepted that there were no aggravating factors to TSB's breaches of the Act, and considered the allowable adjustments to be:
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TSB's admission of the Commission's alleged contravention: this factor alone justified a substantial discount, analogous to the 25 percent allowed on an early guilty pleas
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TSB's comprehensive making of amends: this factor justified a 10 percent discount
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TSB's significant cooperation in the Commission's investigation: this factor justified a further five percent discount
totaling a 40 percent discount (an uplift from 35 percent as sought by the parties), thus reducing the range to $2.34m - $2.52m, accommodating the parties' proposed $2.47m pecuniary penalty. The Court specifically noted that TSB's "earlier confession to the Commission and comprehensive making of amends", being refunds and establishment of appropriate internal processes demonstrated accountability, rehabilitation and remorse.
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The decision is a good reminder to CCCFA lenders that inadvertent breaches of the CCCFA can have expensive consequences – both from a pecuniary penalty perspective as well as remediation. Justice Jagose's comments regarding TSB's conduct are also in line with the Commission's enforcement guidelines (our recent article can be found here) in which self-reporting of potential or actual breaches, as well as proactive rectification of any "harm" caused to consumers are encouraged.
We expect that as more cases for pecuniary penalties are advanced before the Court by the Commission or the Financial Markets Authority (as the case may be), the framework for determining appropriate penalties will be refined.
We can assist entities undergoing internal review, contemplating self-reporting, or liaising with the Commission. Our experts' contact details are provided below.
This article was co-authored by Delia Fu (solicitor), Thomas Carr (solicitor), Emma Geard (senior associate) and Cora Morrison (senior associate).
