As many finance company readers will know, I have conducted an ongoing argument with the Commerce Commission on the issue of full prepayment fees under the Credit Contracts and Consumer Finance Act.

Essentially I have advised my clients that they could charge prepayment fees exactly in the manner which Professor Bowman recommended and the court upheld – all future interest reduced by the cost of funds, discounted to net present value. Avanti elected to use a simpler formula which in fact charged less that the Act otherwise entitled them to charge.

However, understandably, many clients have followed the Commerce Commission line for fear of the costs of conducting a criminal defence. My frustration at this has been increased by the Commission’s flat refusal to discuss its reasoning or any view contrary to its own. That refusal is all the more strange when one considers the Commission’s educative role under the Act.

It now turns out that the Commission’s refusal to enter into discussion turned out to be based on there being no legal justification for its views. It had nothing to say. At the District Court hearing, the Commission’s lawyer was not able to cite a single precedent for its point of view on full prepayment. The defence, on the other hand, was able to rely on principles supported by a number of British and Australian authorities – the same principles I relied on when first crafting my advice three years ago.

The Commerce Commission now has a period during which it has the right to appeal. The Commission has previously said it would appeal if it lost. However, it is hard to see their lawyers encouraging this path. The safe harbour formula has been shown to be a flawed and unrealistic way of calculating losses.

Assuming the Commission doesn’t appeal, I assume that many finance companies will be increasing the fees they charge for prepayment loss. They must ensure they amend the operative terms in their credit contracts and disclosure statements.

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