The following article is authored by a finance and banking industry insider in New Zealand.
As members of New Zealand’s highly profitable retail banks yet again report billion-dollar profits being paid to Australian parent companies this year, they could perhaps be forgiven for failing to notice the ground shifting beneath them.
It’s no longer the public’s increasing intolerance for the big four’s supercharged profits that threatens to be their Archilles’ heel, but a quiet watershed in the enforcement of consumer protection laws.
Many New Zealanders will not realise that when one of the big four banks breaches the law, as they seem to do with surprising regularity, they don’t face the legal consequences in the same way you or I might if we break the law.
Rather, they treat it as an opportunity to enter into secret negotiations with the relevant regulator to agree a reduced punishment, often against the best interests of their own customers.
Cloak of Confidentiality
It goes like this. In the banking world, when a breach of the law is discovered, standard operating procedure is to make a confidential disclosure to the appropriate regulator and then use that cloak of confidentiality to best advantage by quietly negotiating down the potential penalty to something considerably less than is provided for under the law.
The first the public hears about either the legal breach or the deal struck is after the fact, when a settlement is announced.
Given the relevant banks’ own customers are not told the details of the breach, they don’t recognise that their bank has just neatly circumvented their consumer rights and avoided most of the penalty stipulated in the very consumer laws intended to protect them.
Bank ‘Spin’
The banks even try to spin their legal obligation to self-report breaches as evidence of good corporate citizenship, in an attempt to deflect from the reality that they have yet again failed the most basic of obligations – to operate within the law.
The result is that money that rightfully belongs to hard working Kiwis is unlawfully retained by the banks, plumping up their profits and ultimately benefiting the banks’ Australian owners. It’s a substantial transfer of wealth from Kiwi bank customers to the owners of the Aussie banks.
To date, no customer or entity has had the means or tenacity to challenge the power and legal war chests of the New Zealand banks on these important consumer protection issues.
But recent developments in the law are tipping the scales in favour of the New Zealand public’s ability to fight back.
A current example is the banking class action involving two of the big four banks – ANZ and ASB.
In both cases the banks made confidential admissions to the Commerce Commission that they had breached the Credit Contracts and Consumer Finance Act (CCCFA) disclosure requirements affecting over 100,000 New Zealand banking customers.
The banks then secretly negotiated settlements with the Commerce Commission which saw the affected customers receive a small fraction of the redress they were entitled to under the CCCFA.
Essentially, the banks took it upon themselves to determine what they considered was “fair” – not what the law says they are liable for – but a much lesser amount.
However, ANZ and ASB customers can actually be very grateful to the regulator, as it left the door open for civil action, making it clear that nothing in either banks’ settlement precluded a customer exercising their consumer rights and bringing their own action.
The banks could be forgiven for considering this a remote possibility. For a start, the banks carefully avoided giving their customers proper information about the nature of the breaches or their rights under the CCCFA.
Letters customers have received offer limited detail, and actively reassure them they don’t need to take any action. Secondly, the grievance is a collective one.
The issues at stake relate to repeated under investment in systems and compliance. No individual customer can afford to take on the financial or psychological burden of challenging the banks and their armies of expensive lawyers.
Banking Class Actions
But here’s where the ground has begun to shift. The banking class action has landed at a crossroad between the past and the future.
The days when the banks could make their own rules without challenge by their customers have passed. There is an important new legal landscape of consumer accountability developing, coupled with an increased expectation that the big four Australian owned banks need to actively earn their social licence to operate in New Zealand.
The Courts have been an important ingredient in implementing this shift with their steadfast support of class actions as a mechanism to bring cases.
It really started with the Southern Response case where the Supreme Court supported an opt-out class, a landmark ruling that removed an important barrier to accessing justice. An opt-out order means that if an action is successful the defendant is liable for all impacted customers, not just those who registered to join the action.
“The granting of the first CFO in New Zealand has been big legal news internationally, but we are really just catching up with the rest of the world in consumer protection law.”
In the banking class action, the Court of Appeal recently upheld a similar opt-out order, paving the way for nearly 100,000 ANZ and ASB customers to be automatically included in the claim.
This will potentially see thousands of New Zealanders refunded all interest and fees they paid on loans, as required by the CCCFA.
The Game Changer
Another way the ground is shifting is the Court of Appeal’s recent support for a common funding order (CFO) in the banking class action case. This is the first time a New Zealand court has approved a CFO. It is not well understood but in the realm of consumer protection it is a game changer, and here’s why.
For obvious reasons, class actions typically require someone to pay the legal bills for an action to get off the ground. It’s equally typical for large corporate defendants to engage ‘deny, delay, defend’ strategies that run up eye watering legal bills and are designed to drag cases out over many years in the hope of burning off those trying to hold them to account.
Litigation funding is crucial to enabling plaintiffs to match defendants’ financial resources. The funders underwrite the risk and costs of the action in return for an agreed fee.
The Court of Appeal’s granting of a CFO in the banking class action formalises this financial arrangement.
It recognises that for funders to have the confidence to move forward with a case, and to reduce the cost of funding, both the plaintiffs and the funders need to know where they stand. It facilitates the wheels of justice. Importantly, it paves the way for more consumer protection class actions as litigation funders will be more likely to step up if they believe the courts will grant them financial certainty up front.
This should not be interpreted as a green light for poor cases to be brought, with no real prospect of success. However, good litigation that is brought to hold powerful parties to account for unconscionable behaviour and/or harm occasioned to others is important and meaningful work.
In the case of consumer protection laws, it performs a crucial role in keeping major corporates honest, on behalf of all New Zealanders.
The granting of the first CFO in New Zealand has been big legal news internationally, but we are really just catching up with the rest of the world in consumer protection law. It actually moves us ahead of Australia where these issues have been dealt with in an unhelpfully haphazard way.
New Zealand unfortunately has had a poor record in consumer protection. Damages provisions are typically low, which fails to recognise that an important purpose of consumer protection is to disincentivise others from engaging in bad behaviour in the future.
An easy analogy is if I get pulled over in my car and issued a speeding ticket even though I haven’t hurt anyone.
The purpose of the ticket is to make me and others think twice about speeding in future, therefore reducing overall harm. We all slow down when we see the flashing lights, even if we’re not the ones being ticketed. This concept is even more important when disciplining dominant oligopolies where there are fewer opportunities to correct behaviour or address breaches of the law.
It’s a principle that executives and board directors of New Zealand’s banks would do well to think deeply about as they pass over billions of dollars of Kiwis’ hard-earned dollars to their Australian owners.
The ground is shifting in favour of consumer protection rights, and they’re in danger of being left embarrassingly stranded on the wrong side of history.
