Commerce Commission attempts to establish how the Consumer Finance Act 2003 applies to peer-to-peer lender's 'platform fee'; Harmoney 'disappointed' with action

The Commerce Commission has filed civil proceedings in the Auckland High Court asking the Court questions about how the Credit Contract and Consumer Finance Act 2003 (CCCFA) applies to consumer loans entered into with peer-to-peer lender Harmoney Limited.

Harmoney says it’s “disappointed’ with the commission’s action.

The loss-making Harmoney is already facing a six-figure fine in a separate Fair Trading case brought earlier by the commission, and to which it has pleaded guilty.

Since its incorporation in May 2014, Harmoney has charged borrowers a ‘platform fee’ that is added to all loans funded through its platform. Before December 2015 Harmoney set the fee at a percentage of the amount borrowed. The Commission’s view is that the platform fee is a credit fee under the Act, and that Harmoney is a creditor. Harmoney says it is not a creditor, and that the fee is the revenue it earns for running its loans marketplace.

From when it commenced business until December 2015 Harmoney charged a platform fee based on the percentage of loan amount. That was changed, but the commission says it understands that the lending transaction remains fundamentally the same. The commission says that while its case relates primarily to the original platform fee regime, the Court’s answers will apply to any fee structures that are similarly constituted.

If the Court finds that the platform fee is a credit fee, the CCCFA requires the fee to be reasonable and only cover the lender’s transaction-specific costs, as recently confirmed in the Supreme Court’s MTF/Sportzone ruling.

There are now four P2P companies in operation, with different business models. Both Squirrel Money and Lending Crowd launched with flat fees, assuming they were party to the CCCFA. But LendMe has argued its fees are not credit fees under the CCCFA.

The commission said that Harmoney had indicated that it has been developing a proposal for a revised transaction structure, but this has not been finalised. However, the commission said it anticipated that this new structure may also give rise to questions regarding applicability and effect of the CCCFA. “If that is the case, and the details are finalised in the near future, the commission may seek the Court’s leave to add further questions in relation to that proposed structure,” the commission said.

The Commission is asking the Court a number of legal questions and it expects that the answers will provide more clarity about how consumer credit laws apply to loans offered by Harmoney and other peer-to-peer lenders.

The Commission has made its application under section 100A of the Commerce Act which enables it to seek the opinion of the High Court on issues of law. This is the first time that the Commission has made an application under section 100A in a consumer credit case.

Harmoney’s Joint chief executive and founder Neil Roberts said that prior to launching the Harmoney peer to peer marketplace the company documented the business model in detail following extensive legal advice and working with all stakeholders during the licensing process prior to being granted its peer to peer licence by the Financial Markets Authority.

“As the first peer to peer provider to seek and obtain a licence, we consulted with the Commerce Commission and MBIE providing them with full details of our business model including detailed information about fees.”

The Commerce Commission disputes this comment, saying it was not given all the information about Harmoney’s set up and fees modelling prior to launch.

Roberts said that from the time the Commerce Commission decided to consider further the application of CCCFA as it may apply to P2P lending providers, “which was sometime after our licence had been provided and the marketplace was in operation, Harmoney has been cooperative with the Commission”.

“Thousands of New Zealanders borrow and lend every day on the Harmoney platform and we have gone about building, launching and operating the platform in exactly the manner anticipated by the new legislation that made p2p platforms possible in New Zealand. Harmoney has built a highly transparent and interactive marketplace since it became the first operator in this new area of financial services in New Zealand.”

For the year to 31 March 2016, Harmoney recorded a loss of $14.2 million before tax on revenues of $8.6 million. Roberts says, “We have invested heavily in the platform to open up a new asset class for retail investors and a frictionless experience for borrowers, a genuine alternative that creates competition in the financial markets. Like many tech start-ups we are not yet turning a profit, and continue to invest as an innovator in the P2P lending market.”

Harmoney chairman David Flacks says – “The peer to peer industry is new to New Zealand and is growing fast both in New Zealand and globally. It offers benefits both to borrowers and lenders over traditional lending options. Harmoney was the first licensed peer to peer platform in New Zealand and is the largest. It is disappointing that the Commerce Commission is seeking to clarify the legal position, as it affects the entire peer to peer industry, by bringing this case stated action using Harmoney’s operating model as the basis for the judicial review.”

“I am committed to ensuring that Harmoney complies fully with all laws and regulations. It is highly problematic however when interpretation of each law by government departments results in a lack of clarity as to how the regulatory framework applies overall to p2p platforms. For this reason we have also met with the Commerce and Consumer Affairs Minister Paul Goldsmith to request that this issue be clarified by an appropriate legislative change”.

LendMe chief executive Marcus Morrison said his company was “having quite a bit of dialogue with Comm Comm (and their lawyer) late last year” but have not had any since.

“We made our stance and process very clear to them at that time. We believe that the our platform fees are not deemed credit fees under the CCCFA in that the borrowers’ ability to drawdown their loan is in no way contingent upon their payment of the platform fee (paid to LendMe) and that the fee is not in any way passed on to the lender.

“In any case, virtually all of our borrowers have either been commercial entities or trusts and so are not subject to the requirements of the CCCFA,” Morrison said.