How banks tried to shut down multi-million dollar legal threat, but failed

Thursday, 18 November 2021

In June 2015​, the National government led by Sir John Key created the law that would be used this year​ to launch a class action lawsuit against ANZ by home loan borrowers.

Key, ANZ’s current chairman, was at the helm when section 99(1A)​ of the Consumer Credit Contracts and Finance Act (CCCFA) came into force as part of a drive to get lower tier lenders to treat vulnerable borrowers decently.

The clause required lenders to refund all costs of borrowing, meaning fees and interest charged, during a period in which they were in breach of loan disclosure laws designed to ensure borrowers were fully informed about their loans.

But in May ​2016, ANZ realised it had made errors in loan variation letters sent to thousands of customers between May 2015 and May 2016​ potentially leaving it on the hook to pay a large sum to those borrowers.

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That month, the banks launched an intensive lobbying operation to get the law changed, and to make the changes retrospective.

ASB, which made disclosure errors too, faces the same class action threat as ANZ, with both banks defending the action from mortgage borrowers seeking to have their cost of borrowing paid back, a windfall that could help them repay their mortgages earlier.

Westpac also revealed in early November that it was “reviewing its processes” under the CCCFA, which “could result in customer remediation, regulatory action and litigation”.

The lobbying operation was carried out by the New Zealand Bankers’ Association.

On May 17​, 2016, the association wrote to the Ministry of Business, Innovation and Employment (MBIE) to protest that section 99(1A) was unfair because it meant the banks “must refund costs of borrowing in all situations, even if they’ve corrected non-disclosure or there is no material harm to the borrower”.

The letter from the association’s chief executive at the time, Karen Scott-Howman​, was unearthed by Auckland lawyer Scott Russell, who is taking the case with a litigation loan from funder LPF, which backed the class action by kiwifruit growers against the Ministry for Primary Industries.

Russell said ANZ lobbied Parliament to change the law after it realised in 2016 the bank had breached is disclosure obligations.

“They didn’t tell the Commerce Commission until June 2017​ that they had made the error, over a year after they had lobbied Parliament to change the law. They didn’t tell their own customers they had made the error until a year after that.”

The Scott-Howman​ letter linked the association’s concerns not to ANZ’s mistake, but to a case in which payday lender Cashinaflash.co.nz refunded interest and fees to borrowers who were paying annualised interest rates of up to 584 per cent​ for short-term loans.

ANZ said it would not comment because the matter was before the courts.

Scott-Howman argued instances of accidental non-disclosure or wrong disclosure were unavoidable, and that section 99(1A) could have serious and harsh implications for a lender.

She called for “refinements” to the law to ensure lenders were not required to refund the cost of borrowing when they had corrected their own mistakes, and there had been no “material harm” borrowers.

In June the same year, the association met with MBIE officials and urged changes to be made, and for them to be backdated.

In November 2016, MBIE issued a discussion paper revealing the June meeting. The paper proposed the law change the banks wanted, and acknowledged the banks’ role in prompting the review.

However, it noted section 99(1A) was a strong incentive for lenders to comply with the law, and that the Commerce Commission had spoken positively about it to MBIE officials.

It appears at this point neither the commission or the government knew ANZ had made a historic disclosure problem.

The commission’s settlement with ANZ confirmed Russell’s claim that it was not until June 2017​ that the commission was told of the problem by the bank.

Aucklander Anthony Simons​​ has a home loan with ANZ, and is one of the representative plaintiffs in Russell’s class action case.

He believes he was effectively denied the chance to have his say on the law changes the Banking Association’s lobbying eventually brought about.

Simons said when the law change was being debated, he had no idea it was happening.

Even if he had, he would have had no idea he was a borrower who could lose out financially, if the law was changed, and made retrospective.

That was because even when ANZ admitted in May 2018 that it had made an error to customers, he said it did not explain the possibility that it had a legal duty to pay back all the interest paid during the period in which the bank had failed in its obligations to them.

“People like myself wouldn’t have had any idea what was happening,” Simons said.

Simons said he would have got involved, had he been alerted to the proposed law change, and the importance of it to him personally.

“The lengths they have gone to, it just feels like cheating,” Simons said.

When in mid-2018 ANZ said it would make payments of about $10 million to customers, Russell said borrowers who got in contact with their banks to try and understand what had happened, were told little.

“A lot of them got in touch with their bank managers, who couldn’t tell them what they were being paid for,” Russell said.

He said it looked like the bank was trying to tell borrowers as little as possible.

In March last year, ANZ committed to paying a further $29.4m to borrowers over the errors in a settlement with the Commerce Commission.

The Bankers’ Association’s submission to MBIE on the 2016 discussion paper showed the true scale of the threat to banks with historic disclosure mistakes.

It used an “example” in which a bank had an unforeseen fault in the template it used to generation loan variation letters for 30,000 ​home loan borrowers, with the interest amount being shown as 0.559​ per cent rather than 5.59​ per cent.

Under the current law, the bank would “arguably” have to refund $670m​ in fees and interest, assuming an average home loan size of $400,000​, the association said.

When Labour won power in 2017​, commerce minister at the time, Kris Faafoi​ continued the process of changing the law.

A paper he brought to the Cabinet in June 2018​ showed the association had been joined in its lobbying by law firms.

Organisations like the Citizens Advice Bureau, which represented the interests of vulnerable borrowers, opposed the change.

In March last year the law was changed, giving lenders the right to apply to the court for relief from the consequences of breaching disclosure obligations, but not retrospectively.

Roger Beaumont, NZBA's chief executive said Section 99(1A) was introduced at speed in 2015 and the way in which it could be interpreted “could lead to excessive consequences from failing to comply with some customer information disclosure requirements”.

“We did not agree with that interpretation and, therefore, sought to address the risk through further law reform on behalf of our members.”

Russell said the lobbying by the well-funded association showed the political power of banks.

“It's an unfair playing field really. The very well-resourced banks against consumer who place their trust in the banks,” he said.