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Commerce Commission says credit card late payment fees are unreasonable

Friday 21st May 2010

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The Commerce Commission has issued compliance advice letters to a number of banks and credit card providers (issuers) following an investigation into the reasonableness of credit card exception fees.

The Commission has been investigating the late payment fees and over-limit fees charged on credit card transactions by American Express International (NZ), ANZ National Bank, ASB Bank, Bank of New Zealand, Kiwibank, TSB Bank, The Warehouse Financial Services and Westpac.

The investigation into late payment fees has now concluded, while the investigation into over-limit fees continues.

Up until 2009, issuers charged late payment fees ranging from $20 to $25. As a result of its investigation, the Commission has concluded that it is unlikely that late payment fees in the range of $20 to $25 can be justified as reasonable.

Credit card issuers charging this level of fee were generally generating profit in addition to recovering the actual costs of late payment by card holders.

In the Commission's view this practice does not comply with the Credit Contracts and Consumer Finance Act.

Issuers have also used the late payment fees to recover bad debt.

The Commission does not believe that card holders who ultimately make right their late payment 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.

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.

But during the Commission's investigation, in mid-2009, a number of the credit card issuers voluntarily dropped their late payment fees to less than $15 due to market changes in New Zealand and similar changes in fee structure in Australia.

The Commission considers that a late payment fee of $15 or less is likely to be justifiable on a cost recovery basis.

Commerce Commission Auckland Fair Trading Manager Graham Gill says the Commission considers it appropriate to issue compliance advice to all the investigated parties, recognising that the voluntary reduction in late payment fees by some credit card issuers in 2009 enhanced competition in the market.

"However, we are also drawing a line in the sand.

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

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

He says generally the Commission urges consumers to shop around.

"Look at all fees being charged by all lenders, including exception fees or other default fees, and if the fees are too high, vote with your feet and go to another provider," said Gill.

 



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