New Zealand: Consumer Law Reform: the Commerce Commission calls for greater powers, prohibitions and penalties - is that fair?

Last Updated: 30 May 2012

By Andrew Peterson and Sarah Keene

Last week the Commerce Select Committee (the "Select Committee") met to hear submissions on the Consumer Law Reform Bill (the "Bill"). Of particular note was the Commerce Commission's (the "Commission's") submission in which it called for:

  • compulsory interview powers when investigating potential breaches of the Fair Trading Act 1986 ("FTA"), similar to its compulsory interview powers under the Commerce Act 1986 (the "Commerce Act") and the Credit Contracts and Consumer Finance Act 2003 (the "CCCFA");
  • a substantial increase in the current maximum FTA penalties, namely from $200,000 per offence for a company and $60,000 per offence for an individual to $1.1 million per offence for a company and $220,000 per offence for an individual (to match the equivalent penalties in Australia); and
  • the introduction of specific provisions in the FTA requiring 'all inclusive pricing', as well as prohibitions on unfair contract terms and unsubstantiated claims.

This Alert explores the Commission's proposals, and the potential implications for businesses.

Compulsory FTA interview powers

The Commission submitted to the Select Committee that the Bill should introduce powers for the Commission, when investigating potential FTA breaches, that would enable it to compulsorily require traders to attend interviews and to compel those interviewees to answer questions (repeating the calls it had made in submissions to the Ministry of Consumer Affairs (the "Ministry") in earlier consultation rounds on the proposed consumer law reform).

This would make the Commission's FTA investigatory powers equivalent to the powers it has for investigating breaches of the Commerce Act and CCCFA,1 and equivalent to the powers of the Australian Competition and Consumer Commission (the "ACCC") when investigating breaches of the Australian equivalent of the FTA.2

The Commission considers such FTA investigatory powers are necessary because its experience is that it is becoming increasingly common for traders, not just small "fly-by-night" businesses but also large corporates, to refuse to attend Commission interviews or to impose investigation-stifling conditions on such interviews - for example, that a person will only attend an interview if he/she receives a list of questions in advance of the meeting, or that he/she will only answer certain questions. The Commission also stated that it was common for parties being investigated, or their legal advisors, to insist on significant delays to interviews - sometimes for months.

The Commission's view is that its inability to demand interviews is resulting in more protracted and expensive investigations, with the Commission being forced to attempt to obtain information through written requests,3 and that this hinders its ability to uncover breaches in a timely fashion with the result that traders can disappear in the meantime to "avoid responsibility altogether."4

The Ministry had previously excluded compulsory FTA interview powers from the Bill due to concerns about the compatibility of such powers with the right not to be compelled to be a witness, the privilege against self-incrimination, the disproportionateness to the strict liability offences of the FTA (which do not require any element of intention, moral wrongdoing or harm), the potential that the powers could be used for intimidation and the need for interviewees to be afforded the same privileges as witnesses in a court.5

The Ministry's arguments against the introduction of compulsory FTA interview powers seem inconsistent with the fact that a number of other regulators, namely the Financial Markets Authority, the Inland Revenue Department and the Serious Fraud Office, have compulsory interview powers, including for strict liability offences, and particularly so given the Commission itself has compulsory interview powers under the Commerce Act and the CCCFA (which includes strict liability criminal offences).

Matching the Commission's FTA interview powers with its powers under the Commerce Act and CCCFA to provide a unified investigatory regime is a logical step provided that:

  • any new FTA powers also include matching built-in protections against evidence gathered in such interviews being used as evidence against the interviewee;6 and
  • the Commission is mindful of the Supreme Court's ruling, in the context of the Commerce Act, that the Commission cannot use any compulsory information gathering powers to go "fishing" for information7, rather before any such power is used the Commission must have a reasonable belief that there may be undiscovered facts that could give rise to a contravention.

Increased FTA penalties

The Commission's submission also called for the penalties available under the FTA to be increased to match the penalties available in Australia under the Australian equivalent of the FTA. This would result in the potential penalties for a breach of the FTA for companies increasing from $200,000 per offence to $1.1 million per offence, and the potential penalties for individuals increasing from $60,000 per offence to $220,000 per offence.

An increase of this magnitude for potential breaches of the FTA is not warranted:

  • as noted above, FTA breaches are strict liability offences, which do not require any element of intention, moral wrongdoing or harm to any person. Given this, it is possible for a company to be fined, despite efforts to ensure compliance, in circumstances such as where there has been a mistaken comment of a call centre staff member on a telephone with a consumer or for a technical error of a staff member in implementing a customer's pricing (even where those errors do not result in any harm or loss to consumers). It is important that FTA penalties are not increased to a level where they are no longer proportional to the degree of culpability and harm;
  • the Commission typically lays multiple charges under the FTA to achieve penalties significantly in excess of the maximum of $200,000 per offence. For example, the maximum penalty that the Commission has achieved under the FTA is $900,000. In that case, the Commission alleged 20 different breaches of the FTA in respect of essentially the same course of offending to achieve a result significantly in excess of the statutory per offence maxima;8
  • the Commission's submission asserted that increased penalties would increase deterrence, however, it did not produce any evidence to support that statement. In our experience, the vast majority of businesses already consider that potential FTA penalties, and reputational risks, are significant - particularly in the light of the Commission's ability to bring multiple charges and seek reparation orders and corrective advertising. Accordingly, for the most part, businesses endeavour to ensure that they are compliant with the FTA. Potential FTA issues by those businesses are typically inadvertent and not an attempt for unlawful gain based on a calculated assessment of the level of potential FTA fines. Furthermore, while there will always be a small number of traders that deliberately engage in unscrupulous conduct, the Commission has not provided any evidence showing that increased penalties would deter such conduct. For example, the Commission did not produce any evidence of a decrease in offending when the FTA penalties were doubled in 2003, from $100,000 per offence for companies and $30,000 per offence for individuals to the current levels. Indeed, the evidence of the Ministry is that "[m]onetary penalties... do not appear to act as a deterrent when used against recidivist offenders".9

The inevitable result of a 5-fold increase in the statutory penalty maxima available under the FTA is that Courts will interpret the change as a direction that penalties are to increase by that amount.10 This will result in significantly increased compliance risks for businesses - the result being even further oversight, consideration and checks and balances before any new, including legitimate, entrepreneurial drives are initiated. The Select Committee, as with any proposed new regulation or increased compliance risk, should consider whether that is the best result for New Zealand's productivity and its competiveness with other nations.

New prohibitions

The Commission's submission called for the introduction of a specific 'all inclusive pricing' provision, also to match an equivalent provision in Australia. Such a provision would require traders who advertise the price of a good or service by breaking down the price into discrete components also to specify the total price at least as prominently as the most prominently displayed component of the price. For example, this would specifically require airlines who advertise fares comprising a range of separate components also to advertise a single price fare.

It is not clear that this new prohibition is necessary. The Commission has already had success prosecuting, for example, Air New Zealand under the existing FTA prohibitions where its headline prices were misleading due to a failure to disclose additional charges with sufficient adequacy.11 Leaving such alleged to be conduct to be considered under the existing prohibitions on false and misleading conduct would seem to be a more principled approach to regulation, in line with the Government's commitment to introduce new regulation only when it is required,12 as the existing prohibitions only capture advertisements that actually mislead consumers - without an arbitrary external control on the display of prices in advertisements. The proposed new prohibition would seem to result in increased compliance costs without a proportional benefit to New Zealand consumers.

The Commission's submissions also repeated its calls for the introduction of specific prohibitions on "unfair contract terms" and "unconscionable conduct". As set out in our 20 March 2012 Alert, Cabinet's decision to exclude such prohibitions from the Bill represented a principled regulatory approach in line with the Government's to only introduce reasonable and robust regulation.13

Conclusion

The introduction of any of the Commission's suggestions would represent significant, and potentially adverse, changes to the effect of the Bill. If the Select Committee is minded to recommend the inclusion of those proposals, it should undertake a further process that allows public submissions on the proposed drafting so that the Commission's proposals are subject to robust public scrutiny, which the Select Committee process is intended to provide.

If you are uncertain as to whether or how the Bill, including the Commission's proposals, may affect your business, please contact one of the contributors below.

Footnotes

1 For example, see s 98(c) of the Commerce Act 1986.
2 The Australian Consumer Law, contained in Schedule 2 to the Competition and Consumer Act 2010.
3 Under the Fair Trading Act 1986 s 47G.
4 Commerce Commission Submission to the Commerce Committee on the Consumer Law Reform Bill, at [14].
5 The Ministry of Consumer Affairs. Consumer Law Reform Additional Paper. Enforcement of the Fair Trading Act (February 2011). At paragraphs 74 to 79.
6 For example, s 106(5) of the Commerce Act provides that any statement made by a person in answer to a question put by the Commission "shall not in criminal proceedings or in proceedings for pecuniary penalties of this Act, be admissible against that person."
7 AstraZeneca Ltd v Commerce Commission [2009] NZSC 92.
8 Commerce Commission v Carter Holt Harvey DC AK CRI:2005-004-018578 (12 October 2006).
9 The Ministry of Consumer Affairs. Review of the Redress and Enforcement Provisions of Consumer Protection Law: International Comparison Discussion Paper. (May 2006). Available at: http://www.consumeraffairs.govt.nz/legislation-policy/policy-reports-and-papers/disscussion-papers/international-comparison-discussion-paper/multipagedocument_all_pages
10 By way of example, Vodafone's recent penalty for not specifying with sufficient clarity the bounds of its "Vodafone Live!" service was $402,375. Increasing that penalty by a factor of 5.5 would result in a very significant penalty, even for a large corporate, of $2.2 million. (Commerce Commission v Vodafone New Zealand Limited Auckland District Court, CRN 09004505626, 12 August 2011. See our 13 December 2011 Competition Alert for further details: http://www.russellmcveagh.com/_docs/CompetitionUpdate13December2011_434.html)
11 Commerce v Air New Zealand Ltd DC AK CRN 4004500558, 583, 584, 603 & ORS 24 November 2005.
12 The Treasury. (2010). Government Statement on Regulation: Better Regulation, Less Regulation. Retrieved from http://www.treasury.govt.nz/economy/regulation/statement
13 See our 20 March 2012 Alert for further details: http://www.russellmcveagh.com/_docs/CompetitionUpdate20March2012_455.html

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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