Breaches of the Code

Contributed by Ian Macdonald and current to 1 September 2005

CIVIL PENALTIES

If the credit provider does not comply with the Code it may be required to pay a civil penalty. A civil penalty may have to be paid by the credit provider where there is a breach of any key requirement of the Code.

In relation to credit contracts that are not continuing credit contracts, the credit provider may be liable to pay a civil penalty if the credit contract fails to disclose or wrongly discloses any one of the requirements of the following provisions set out in section 15:

• the amount of credit;
• the annual percentage rate or rates;
• the method of calculation of interest charges;
• the total amount of interest charges payable (if the contract would normally be paid out in 7 years);
• information about credit fees and charges;
• information about changes to interest rates and the amount or frequency of credit fees and charges and any new fees or charges that may be imposed;
• information about default rates of interest;
• the name of any insurer and the amount payable to the insurer.

In addition, a key requirement will be breached where:

• fees or charges prohibited by the Code are imposed by a credit contract (s.21(a));
• the amount of a fee or charge imposed by the contract exceeds the amount that can be charged consistently with the Code (s.21(b));
• an interest charge under the contract exceeds the amount that may be charged consistently with the Code.

Each of these provisions may impose several requirements on a credit provider, and breach of any one requirement can trigger a civil penalty. The specific provisions should be looked at carefully.

In relation to continuing credit contracts, a failure to disclose information in the following areas can trigger a civil penalty:

• the maximum amount of credit (credit limit);
• the annual percentage rate;
• the method of calculation of interest charges;
• information about credit fees and charges;
• information about changes to interest rates, fees and charges.

In addition, liability for a civil penalty will be triggered by breaches of the following Code requirements:

• to correctly state in a statement of account the amount of interest charges debited during a statement period and when the interest was debited: (s.32(E)(a));
• to correctly state in a statement of account the annual percentage rate or rates, and details of any changes since the last statement period (s.32(E)(b));
• the opening balance shown in each successive periodic statement of account must not exceed the closing balance shown in the last statement of account.

How is a civil penalty imposed on a credit provider?

Any party to a credit contract (including a guarantor) may apply to a Court or the SAT for an order requiring the credit provider to pay a civil penalty. Under the Code a debtor or guarantor may only make an application in relation to their own contract. The credit provider or Department of Consumer and Employment Protection (DoCEP) can make an application relating to a number of credit contracts (s.110).

A debtor or guarantor may not make an application for an order if the credit provider or DoCEP is already making, or has already made, such an application. It is not clear whether a debtor or guarantor is entitled to appear in an application made by the credit provider or DoCEP; however it is likely that debtors and guarantors will be permitted to appear.

What factors are taken into account?

The Code sets out a number of factors that a Court or the SAT may take into account in deciding whether to make an order requiring the credit provider to pay a civil penalty. These factors include: the conduct of the credit provider and debtor; whether the contravention was deliberate or otherwise; the credit provider’s systems or procedures to prevent or identify contraventions; and action taken to remedy the contravention or compensate the debtor. The Court or the SAT must also consider the financial standing of the credit provider.

How much is the civil penalty?

The maximum amount of the civil penalty is set by the Code (s.103). In general terms, the maximum amount of the civil penalty is an amount not exceeding all of the interest charges payable under the contract from the date it was made.

In the case of a contravention of a key requirement relating to a statement of account of a continuing credit contract, the maximum amount cannot exceed all interest charges payable for the period to which the statement0020of account relates.

In the case of a contravention of a key requirement relating to “prohibited monetary obligations” (fees, charges or interest that the credit provider is not entitled to charge) the maximum amount cannot exceed all interest charges accruing under the contract from the date the contravention occurred.

However, the Court or SAT may impose a greater civil penalty if satisfied that the debtor has suffered a loss. In that case, the amount of the civil penalty is not to be less than the amount of the loss.

Where the application is made by a credit provider or DoCEP, the maximum civil penalty that may be imposed for a contravention of a key requirement is an amount calculated so that the total civil penalty for all contraventions in Australia of the requirement does not exceed $500,000, regardless of the number of contracts affected by the contravention (s.105(1)).

For the purpose of determining the penalty, the Court or SAT is to determine the appropriate amount of penalty for disclosed contraventions of the key requirements in each State or Territory of Australia and to determine the amount payable in each jurisdiction proportionately according to the number of contracts in that jurisdiction affected by the disclosed contraventions.

The Code in Western Australia provides that an order relating to the amount payable in another jurisdiction has limited effect in Western Australia (s.108(2) of the Code, modified by section 13 of the Consumer Credit (Western Australia) Amendment Act 2003 (WA)).

To whom is the civil penalty paid?

Where an application is made by a debtor or a guarantor, the penalty is paid to that party.

If the application is made by a credit provider or DoCEP, then the amount of civil penalty must be paid into a fund established for civil penalty monies.

COMPENSATION FOR BREACH OF A “KEY REQUIREMENT”

The debtor or guarantor may apply to the Court for compensation where the credit provider has breached a “key requirement” of the Code.

The court cannot make such an order if the debtor or guarantor has previously obtained or been refused a civil penalty relating to the same contravention.

However, applications for compensation (under s.107) may be made by a debtor even if the application has already been made by a credit provider or DoCEP.

GENERAL RIGHT TO COMPENSATION WHEN THE CODE IS CONTRAVENED

If the credit provider contravenes a requirement of or made under the Code, (other than one for which a civil effect is specifically provided) a Court or the SAT may order the credit provider to make restitution or pay compensation to any person affected. A consumer would have to show that they suffered a loss as a result of the breach to obtain compensation.