Update on Commerce Commission bank break fees investigation

The Commerce Commission has completed the first part of its investigation into banks’ break fees.

A break fee, or prepayment fee, is a fee charged by a creditor to recover its loss when a customer repays their loan early. The Commission has been investigating break fees charged by banks to ensure that the fees comply with both the Credit Contracts and Consumer Finance (CCCF) and Fair Trading Acts. The Commisson’s investigation concluded that the break fees charged by four banks are likely to be ‘reasonable’ under the CCCF Act. Its investigation into three other banks will continue.

“The subject of break fees is topical at the moment. Due to the significant movement in interest rates in recent times many consumers have been asking their banks about the cost of breaking their fixed mortgages,” said Graham Gill, Commerce Commission’s Fair Trading Manager, Auckland.

Under the CCCF Act banks are entitled to recover their loss when a customer makes an early prepayment or breaks the term of a fixed interest loan, as long as the banks use what the CCCF Act describes as an appropriate procedure to calculate a reasonable estimate of loss.

“The Commission has completed its investigation into the fees charged by the ASB, SBS Bank, BNZ and National Bank. These four banks all charge break fees based on the movement in retail interest rates,” said Mr Gill. “It is the Commission’s opinion that the formulae used by these banks are likely to be appropriate under the Act and the Commission will be taking no further action against these banks in relation to these formulae. However, the Commission’s investigation into the break fees charged by ANZ, Kiwibank and Westpac will continue,” said Mr Gill.

The Commission will be making no further comment on the continuing investigation.

Background

Credit Contracts and Consumer Finance Act 2003. Section 54 states:

(1) A creditor must calculate a reasonable estimate of its loss arising from a full prepayment using –
(a) a procedure prescribed for the purposes of this section by regulations; or
(b) an appropriate procedure set out in the consumer credit contract for calculating that loss.

(2) If a creditor uses a procedure prescribed for the purposes of this section by regulation, the amount calculated is to be treated in any court and in any proceedings under this Act as a reasonable estimate of the creditor’s loss.

Only the Courts can decide if the CCCF and Fair Trading Acts have been breached and set appropriate penalties.

The safe harbour formula. The procedure set out in the CCCF Regulations is colloquially known as the safe harbour formula. It is based on the movement in retail rates. If a bank follows the safe harbour formula, then the bank will be assumed to have assessed a reasonable estimate of loss.

Further information about the CCCF Act, including a sample formula for calculating loss on full prepayment, can be found in the Commission’s publication - Credit Contracts and Consumer Finance Act – A general guide for the credit industry. This publication can be downloaded from the Commission’s website www.comcom.govt.nz under Consumer Credit/Consumer Credit Publications