An Update from the Commerce Commission · 5/28/2012 · 1362703.1 An Update from the Commerce...
Transcript of An Update from the Commerce Commission · 5/28/2012 · 1362703.1 An Update from the Commerce...
1362703.1
An Update from the Commerce Commission
Keynote Speech by Dr Mark Berry, Commerce Commission Chair, to the 12th
Annual Competition Law and Regulatory Review conference, Wellington,
28 May 2012 at 9.40am
Good morning everyone and thank you for inviting me to give a keynote address to this
conference. Thank you Jean‐Pierre de Raad for your introduction.
At the Commerce Commission the outcomes we want for New Zealanders guide our work.
Those outcomes are: that markets are more competitive and consumers are better
informed, and that regulation is better targeted and more effective.
Like every government agency, we’re working in a challenging economic environment as
Government keeps a steady focus on bringing New Zealand’s budget back into surplus.
But in recent years we have put considerable effort into rethinking the way we work, with
changes to our internal structure, a lean management team and a focus on using our
resources wisely to achieve maximum efficiency for the effort we put in.
In a year which sees us deal with a wave of litigation in the regulatory sector, possibly take
on new responsibilities under the Dairy Industry Restructuring Amendment Bill 2012, and
maintain our busy programme under the competition and consumer legislation we enforce,
these improvements have paid off.
We are well positioned to meet the challenges of a busy work programme and new
responsibilities and workload, and to contribute to a more competitive and productive
economy.
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What I’ll cover
In this address I’ll cover the essentials of our current and upcoming work programme across
our Competition and Regulatory branches, including legal areas that create issues for us,
highlight significant cases and preview important legislative developments. At the end of my
address I’ll be happy to take questions from you.
Competition
We place high priority on seeking redress for consumers through our interventions. Over the
last two years, through our work under the Fair Trading and Credit Contracts and Consumer
Finance Acts, we have achieved over $50 million in compensation for consumers.
We respond to breaches of the law by identifying where we can most effectively achieve the
greatest benefit for affected consumers and businesses. While we will sometimes have good
reason for taking cases to court, it is often through negotiated settlements with the
businesses involved that we can achieve more immediate redress, and avoid the time and
costs of litigation.
As we address the need for cost effective enforcement tools targeted to appropriate
sectors, we’ve been very active with our advocacy and education programme. Because Kate
Morrison, the Commission’s General Manager Competition, will speak to you in detail
tomorrow about the case for advocacy as an effective enforcement tool, and the
innovations we have developed, I won’t cover that material here.
Instead I’ll talk about the significant cases we have completed or have underway and
important developments in the pipeline.
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Cartels
A suite of cartel cases have continued to dominate our Competition programme over the
past 18 months. A record number of cartel settlements have produced a string of recent
judgments. These judgments provide valuable judicial guidance on the principles and
processes that apply when calculating financial penalties under the Commerce Act and, in
particular, they reinforce deterrence as the primary objective.
We currently have nine active cartel investigations with another four having been resolved
over the past year without litigation. The large‐scale Freight Forwarding and Air Cargo cases
feature heavily in the Commission’s Competition programme for 2012.
Freight Forwarding
Following a leniency application in 2007, the Commission began an investigation into
allegations of “hard core cartel conduct”1 in the international freight forwarding industry.
We filed proceedings in August 2010.
The Commission reached settlements with four of the parties to the cartel, with the High
Court endorsing jointly recommended penalties against each company. The penalties were:
• In December 2010, the High Court at Auckland ordered
o EGL Inc. to pay a penalty of $1.15 million2
o Geologistics International (Bermuda) Limited to pay a penalty of $2.5 million.3
• In June 2011, the High Court further ordered
o BAX Global Inc/ Schenker AG to pay a combined penalty of $2.5 million4
o Panalpina World Transport to pay a penalty of $2.7 million.5
1 Commerce Commission v EGL Inc., High Court, Auckland CIV‐2010‐404‐5474, 16 December 2010 at [16]. 2 Ibid. 3 Commerce Commission v Geologistics International Bermuda Ltd., High Court, Auckland CIV‐2010‐404‐5490, 22 December 2010. 4 Commerce Commission v Deutsche Bahn AG, High Court, Auckland CIV‐2010‐404‐5479, 13 June 2011. 5 Ibid.
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Litigation continues against the remaining cartelist, Kuehne + Nagel International Ag. While
the Commission successfully applied to the High Court to set aside Kuehne +Nagel’s
challenge to jurisdiction, Kuehne +Nagel has appealed the jurisdiction judgment to the Court
of Appeal. The appeal was heard on 3 April 2012 with the underlying proceedings stayed
pending the appeal outcome. We are currently waiting for the Court of Appeal’s decision.
Air Cargo
The Air Cargo investigation began with a leniency application in 2005 involving allegations of
anti‐competitive conduct by international airlines in the air cargo industry.
In August 2011,6 the Commission succeeded in the first phase of a split trial against the
defending airlines. In May 2011, the High Court was asked to decide whether there was a
“market in New Zealand” for the inbound air cargo services that the Commission alleges
were the subject of price‐fixing by the defending airlines. The High Court at Auckland
determined that inbound air cargo services were supplied in a market in New Zealand, and
that the Court had jurisdiction to hear the Commission’s case in full.
Appeals to this decision have been stayed pending the second liability stage of the
proceedings, which will determine whether the defending airlines entered into
arrangements to agree on fuel and security surcharges, which were components of freight
rates. That hearing is set to start in February 2013 and scheduled to last up to five months.
To date the Commission has reached settlements containing substantial penalties with three
of the 11 airlines in the Air Cargo litigation:
• On 5 April 2011, the High Court endorsed the penalties jointly recommended against
British Airways and Cargolux. British Airways was ordered to pay a penalty of $1.6
million7, and Cargolux received a $6 million penalty.8
6 Commerce Commission v Air New Zealand Ltd (2011) 9 NZBLC 103,318 (HC). 7 Commerce Commission v British Airways PLC High Court, Auckland CIV‐2008‐404‐8347, 5 April 2011.
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• Settlement with Qantas followed in May 2011, with the company ordered to pay the
jointly recommended penalty of $6.5 million. 9
Criminalisation of cartels
As you will no doubt be aware, a Bill proposing the criminalisation of cartel conduct was
introduced to Parliament in October 2011.
The question of introducing criminal sanctions arose out of the Single Economic Market
agenda, and the desire for businesses to face the same consequences for the same conduct
on both sides of the Tasman.
However, if the Bill becomes law in its current form we will see not only the introduction of
criminal sanctions, but also an overhaul of s 30 of the Commerce Act.
The Bill proposes a parallel civil and criminal offence in a new s 30.
Drawing on the OECD definition of hard core cartel behaviour, and in line with the
Australian offence, the new s 30 prohibits agreements between competitors that fix prices,
restrict output, allocate markets and/or rig bids.
Put briefly, a person who enters into or gives effect to such an agreement will commit the
civil offence. A person who enters into or gives effect to such an agreement, and who has
the intention to fix prices, restrict output and so forth will commit the criminal offence.
The Commission recognises that it will be important for parties to understand the
circumstances in which the Commission is likely to take a civil prosecution, and those in
8 Commerce Commission v Cargolux Airlines International S.A High Court, Auckland CIV‐2008‐404‐8355, 5 April
2011. 9 Commerce Commission v Qantas Airways Ltd PLC, High Court, Auckland CIV‐2008‐404‐8366, 11 May 2011.
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which we are likely to seek a criminal prosecution. Guidelines on this issue will be published
before the criminal offence comes into force.
The legislation introduces some other new concepts.
The joint venture exemption is replaced by a collaborative activity exemption. This is said by
the Ministry of Economic Development (MED) to be a wide exemption covering both
ancillary restraints and joint ventures. It is a novel exemption, not found in Australia or any
other jurisdiction.
In order to provide certainty for business, the Bill proposes a clearance regime for
collaborative activities that do not substantially lessen competition. Depending on
applications for clearance received, this regime may allow the Commission to build up a
body of precedent as to how it enforces the exemption.
In any event, the Commission intends to publish guidelines on the collaborative activity
exemption before it becomes law.
Although not dealt with in the Bill itself, we understand that the Crown Solicitor and not the
Commission will be responsible for any criminal prosecution. Accordingly it is important for
the Commission to work closely with the Crown Law Office in preparation for the changes.
For example, the cartel leniency programme is a crucial tool for the Commission in detecting
cartels. To ensure the continued effectiveness of the leniency programme we have worked
with the Crown Law Office to develop draft guidelines for criminal immunity in cartel cases.
We will continue to draw on their extensive experience with criminal matters, for example
in the development of prosecution guidelines.
MED have run an extensive consultation process on the Bill that many of you may have
contributed to. Throughout the process it has been the Commission’s role to advise MED on
the operational implications of the proposals. Our goal has been to ensure that any law
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change is not overly burdensome on businesses, but at the same time allows us to properly
detect, investigate and prosecute cartel conduct.
Although it is before Parliament, it is currently unknown when the Bill will become law.
Once the Bill has received its first reading it will go to a Select Committee, where interested
parties can make a submission. The Commission intends at this stage to make a further
submission on some operational implications of the proposals.
Section 36 of the Commerce Act
Monopolisation is perhaps the single most complicated area of antitrust law. Every
competition jurisdiction in the world of which I am aware has struggled to develop clear
rules to distinguish illegitimate anti‐competitive activity from legitimate, aggressive
competition.
The same has proven to be the case for our jurisdiction. Of particular concern is the
reconfirmation by the Supreme Court of the counterfactual test, perhaps now known as the
“comparative exercise”, as the sole test for taking advantage of market power. This test,
which asks what would have happened in a hypothetically competitive market, is not
considered a relevant enquiry in any other jurisdiction, except Australia, and even there it is
not the sole test.
The approach to single‐firm conduct in Australia has been quite flexible. The recent
amendments to s 46 of the Competition and Consumer Act only codified a judicial trend,
which was already well underway, to view unilateral conduct by dominant firms from a
variety of angles depending on what approach was best suited to elucidating the issue,
without relying solely on the counterfactual test.
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The Commission saw the 0867 proceedings as an appropriate factual matrix in which to
urge, on appeal to the Supreme Court, the departure from Privy Council precedent and the
adoption of a more flexible approach, such as that taken in Australia.
Interestingly, the Supreme Court did not share the Commission’s understanding that the
approaches set out in the Australian authorities differed materially from the counterfactual
test required by the Privy Council. Rather it appeared to interpret the Australian
jurisprudence as being consistent with the Privy Council precedent applicable in New
Zealand.
In particular, the Court seemed not to recognise any significant difference between the
counterfactual test and either of the “materially facilitated” or “Deane J” tests. While
apparently acknowledging the different formulations of these enquiries, the Court
emphasised what it viewed to be the essential feature common to all of them, namely the
employment of a “comparative exercise”.
The Supreme Court laid down what it considered to be the nub of the analysis in any given
case, holding that “it must be shown, on the balance of probabilities, that the firm in
question would not have acted as it did in a workably competitive market”. Although the
Court does not use the moniker, this is effectively a verbatim restatement of the
counterfactual test laid down by the Privy Council, and most commentators have
interpreted the decision to have upheld the prevailing approach as previously mandated by
the Privy Council.
Despite the clarity of language in the Court’s restatement of the counterfactual test, it must
be acknowledged that references elsewhere in the judgment to the concept of “facilitation”
could raise questions about whether the Court intended to broaden the mandated
approach.
The Court’s apparent decision not to refer explicitly to the “counterfactual test” in its
judgment, but rather to speak of a “comparative exercise”, may give oxygen to such
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speculation. As one commentator10 has put it, “Did the Supreme Court intend to confirm the
counterfactual test by a different name? Or did it intend to introduce some greater
flexibility?” The answer is not clear.
For now, the consequence of the Supreme Court’s judgment for the Commission, firms and
their advisers is a significant measure of uncertainty. The decision has not delivered the
alignment with Australian jurisprudence that the Commission had sought in terms of being
able to employ alternative tests for determining whether a firm has taken advantage of its
substantial market power.
As a result of the very clear availability of alternative tests in Australia, which have now
been codified in s 46(6A) of the Competition and Consumer Act, it would seem that any
policy preference in New Zealand for clear alignment with Australia will require legislative
intervention.
Mergers and Acquisitions
In the mergers and acquisitions area we have seen an upswing in the numbers of companies
applying for clearances or authorisations.
In the 2009 / 10 year we had seven applications for clearance. The following year saw 10
applications for clearance, two for business acquisition authorisations and one for a
restrictive trade practice authorisation. Between the end of last year and May 2012 we’ve
had nine applications for clearances and two for restrictive trade practices authorisations.
Since the global financial outlook is still uncertain we’re unsure whether this upward trend
will continue. In the meantime we’ve used our staff resources in a productive and efficient
way with mergers and acquisitions personnel moving between other areas of the
Competition Branch depending on where demand is greatest.
10 O Meech “’Taking Advantage’ of Market Power” [2010] NZLJ 389 at 391.
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The Christchurch earthquakes were factors in two applications for clearance. The first was
the IAG (NZ) Holdings Limited application to acquire certain business assets of AMI
Insurance Limited, excluding AMI’s Canterbury earthquake liabilities. You will probably
remember that as a result of the Canterbury earthquakes, AMI incurred significant insured
losses which required it to enter into a capital support arrangement with the New Zealand
Government in order to continue operating. Subsequently, AMI determined that the best
course of action was to seek an external investor.
The second was Southern Community Laboratories Limited’s application to acquire 100% of
the shares in Medlab South Limited from Sonic Healthcare (New Zealand) Limited. The
application followed the loss of the Canterbury DHB contract and the destruction of Medlab
South’s Christchurch laboratory as a result of the February 2011 earthquake.
Seagate Technology Plc’s application for a clearance to acquire certain assets of the hard
disk drive business of Samsung Electronics Co. Limited, illustrated the trend we are
increasingly seeing of global mergers. As the acquisition and competition effects of the
proposed merger would play out in other jurisdictions, the Commission had to delay its
decision until the American and European authorities had completed their competition
assessment.
As a consequence of this type of work the Commission has strengthened its ties with its
fellow agencies and in particular, the Australian Competition & Consumer Commission
(ACCC).
Godfrey Hirst
Of particular interest during the year was Godfrey Hirst’s appeal in the High Court against
the Commission’s decision to authorise Cavalier’s acquisition of the wool scouring assets of
its sole New Zealand competitor, NZ Wool Services. The Commission was satisfied that the
acquisition would result in such a benefit to the public that it should be permitted.
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While the High Court dismissed the appeal it found that the margin between the benefits
was closer than the Commission determined. However, the likely detriments were still
outweighed by the public benefits and consequently the acquisition was authorised.
The judgment determined that the Commission does not need to identify a single figure for
a particular detriment or benefit; it can choose a range, however, if it does adopt a
particular value for a detriment or benefit, we should set out our reasons why we have
chosen that figure as likely.
It was argued on appeal that different analytical standards were required in the merger‐to‐
monopoly situation. The Court held that the word “monopoly” adds nothing to the
Commission’s factual assessment and there are no special standards for analysing merger‐
to‐monopoly. Any concern that the sole remaining competitor will have a high level of
discretionary market power, leading to potential detriments in the market, should be
accounted for in the factual/counterfactual comparison and the related quantitative
analysis.
We are not required to overlay some kind of social policy judgement enabling us to decline
an authorisation even if the merger‐specific efficiencies accepted by us outweigh the
efficiencies lost or, conversely, to grant an authorisation where losses exceed gains.
The Court confirmed the importance of using quantitative analysis, acknowledging that it
underpins and facilitates the balancing exercise the statutory test requires and noted that
such an assessment avoids the speculation and intuition that might come into play without
the discipline and rigour of a facts‐based quantitative assessment.
The quantitative analysis is not the only reference point in the balancing exercise – there
may be non‐quantifiable benefits that are still to be given weight.
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Multiple counterfactuals
Multiple counterfactuals are somewhat problematic for New Zealand competition law
because New Zealand’s jurisprudence has departed from the rest of the world.
The substantial lessening of competition test under s 47 involves an inquiry into
comparative levels of market power in the factual compared with the counterfactual.
The High Court in Woolworths v Commerce Commission formulated the principle that there
could be multiple counterfactuals that are real and substantial possibilities and if so, it is
necessary to assess the factual against each. This is a novel approach which does not apply
elsewhere.
The High Court also advanced the further principle in Woolworths that where there is more
than one real and substantial counterfactual, the Commission and the Court should not
choose the one that either thinks has the greatest probability of occurring. Rather, the
competition assessment should be made against each of the counterfactuals.
This framework is problematic and runs the risk of false negatives. There is the danger that
in the absence of an assessment of the probability that an unfavourable counterfactual
would occur, a merger may be declined clearance by the Commission in a scenario where
the choice of a more probable and more favourable (in competition terms) counterfactual
would have allowed us to give clearance.
Igloo case
As we recently announced, we have closed our investigation into the joint venture
agreement between TVNZ and Sky television to provide low‐cost pay TV services.
On the basis of the evidence available we considered that provisions of the Agreement
between the parties were unlikely to substantially lessen competition and therefore were
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unlikely to breach s 27 of the Commerce Act. In particular, the relevant restraints on TVNZ’s
behaviour were relatively narrow.
TVNZ’s acquisition of 49% of Sky’s Joint Venture Company was unlikely to substantially
lessen competition. With or without the acquisition TVNZ would retain a similar ability and
likely incentive to enter pay TV or offer content to pay TV operators.
Given the number of complaints we have received, we investigated the scope for the
acquisition to lessen competition, assuming that there is a material difference between the
factual and the counterfactual. In other words:
• with the joint venture, TVNZ will not launch a low‐cost pay TV operation competing
with Igloo
• without the joint venture, TVNZ alone or with others will launch a low‐cost pay TV
operation.
Even if this was the case, we are of the view that any lessening of competition would not be
substantial. This is because it is unlikely that TVNZ entering into pay TV would significantly
increase competition in the market given the number of other likely new and potential
entrants identified in our investigation.
However, our market inquiries, and overseas competition inquiries, identified potential
material barriers to entry into pay TV. In particular, we have received concerns that access
to content and Sky’s contracts with internet service providers may be hindering
competition.
Accordingly, we have started a separate investigation into concerns under Part 2 of the
Commerce Act, in particular that:
• Sky’s agreements for content acquisition might substantially lessen competition
contrary to s 27 of the Commerce Act, by denying actual or potential rivals access to
a critical mass of quality content.
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• Sky’s agreements with internet service providers such as Telecom, Telstra Clear,
Vodafone and CallPlus might substantially lessen competition contrary to s 27 of the
Commerce Act, by limiting internet service providers’ ability and/or incentive to offer
competing pay TV products.
The Credit Sails investigation
A significant issue for the Commission has been the ongoing investigation under the Fair
Trading Act into the promotion and sales in New Zealand of an investment product called
Credit Sails.
Credit Sails was promoted and sold to the New Zealand public in 2006 with the prospect of
capital protection and 8.5% interest income over the six and a half year life time of the
notes. The investment raised $91.5 million from the public, mostly retail investors.
Forsyth Barr Ltd acted as the lead manager, while Credit Agricole Corporate and Investment
Bank, formerly Calyon, acted as arranger. Calyon also assumed a number of other roles. The
investment notes were issued by Credit Sails Ltd, a Cayman Islands company set up for this
purpose.
Credit Sails involved a complex series of related transactions, including the purchase of a
series of notes issued by Momentum CDO (Europe) Ltd, a credit default swap between
Momentum and Calyon in relation to a reference portfolio containing 120 entities, and a
total return swap between Calyon and Credit Sails Ltd.
Between September 2008 and March 2009 a series of six credit defaults occurred in the
Momentum Reference Portfolio. In other words, six of the 120 entities in the portfolio
(including Lehman Bros and three Icelandic banks) collapsed.
These six defaults were sufficient to reduce the value of the Credit Sails notes to zero, apart
from a small balance resulting from the unwinding of the credit strategy.
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On 12 May 2009 Credit Sails Ltd announced that, at maturity (December 2012), Credit Sails
would be redeemed at zero plus the investors’ pro rata share of the residual monies, which
at the date of the announcement amounted to $11.66 plus interest for every $1,000
invested.
The Commission’s investigation is focused on whether the promotion of Credit Sails involved
misleading conduct in breach of the Fair Trading Act. If the Act has been breached, then the
Commission hopes to obtain compensation for investors who were misled. The Commission
has been liaising with the Financial Markets Authority, and has spoken with a number of
investors, brokers and local and overseas financial experts.
The investigation has now advanced to the stage that the Commission is communicating its
views with Forsyth Barr and Calyon. Progress is being made on this front, and we expect to
be in a position to provide a further public update in July or August 2012.
Fair Trading
We continue to have a busy enforcement programme under the Fair Trading Act which
ranges between compliance advice, warnings and prosecutions depending on the severity of
the case.
One particular innovation has been the cost effective approach of the low level inquiry unit.
Tomorrow Kate Morrison will highlight more of the thinking behind this unit and other
enforcement choices, so I’ll cover the significant enforcement actions of our programme
over the past 14 months and the coming year.
Sometimes the Commission issues and publicises industry‐wide compliance advice in order
to try to influence behaviour change and to alert consumers to particular issues. One
initiative which received widespread coverage last year was a caution to 280 sunbed
operators and distributors about the risks of making false or misleading claims concerning
the health benefits and risks of sunbed use.
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This year we also issued a well publicised warning to Progressive Enterprises Ltd about beer
sale promotions that we considered to be in breach of the Act.
Progressive claimed that customers could save “at least 20%” or “at least 25%” off all beer
at its Countdown, Foodtown and Woolworths supermarkets. The Commission considered
that consumers could reasonably have expected the discounts to be in relation to the usual
price, or the price at which the beer was offered for sale immediately prior to the
promotion. However, we found that, in a number of cases, the discount was calculated off
Progressive’s “standard shelf price”, which in many cases had not been offered for a lengthy
period of time.
We achieved considerable penalties in our prosecutions of major breaches of the Fair
Trading Act.
In August 2011, Vodafone was fined over $400,000 after pleading guilty to breaching the Act
in relation to its Vodafone Live mobile phone internet site. In September 2011, Vodafone
was fined $81,900 after being found guilty of breaching the Act in relation to its $1 a day
mobile phone internet data charges.
We have long been concerned about the advertising of cheap calling rates on prepaid phone
cards. These rates are often prominently displayed in retailers’ windows and on call rate
comparison cards. However, in some instances there are various fees and surcharges that
are disclosed only in fine print, and some purchasers – particularly migrants and
international students – are liable to be misled. After previous attempts to educate phone
card companies went largely ignored, the Commission has recently taken two prosecutions.
These resulted in penalties of $100,000 for Tel Pacific NZ Ltd and $140,000 for Compass
Communications Ltd.
In February 2012, Chrisco Hampers Ltd was fined $175,000 after pleading guilty to breaching
the Fair Trading Act by misleading customers about their cancellation rights under the Layby
Sales Act.
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The Commission expects to bring a number of new Fair Trading Act cases to court over the
coming year.
In addition, we continue to be involved in litigation that began in previous years, including
the series of cases against Vodafone. The issues in those cases, which are to be heard in July
and September, include the provision of a $10 registration credit for prepay mobile phone
customers, the advertising of mobile broadband, and claims by Vodafone in 2008/09 to
have the largest mobile network.
The Commission also expects to settle a large number of cases, and continues to encourage
voluntary compliance in order to reduce the need for litigation.
Credit Contracts and Consumer Finance Act
Lower Tier Lenders Project
Under the Credit Contracts and Consumer Finance Act an important focus has been the
activities of lenders who target vulnerable consumers. Working with a range of agencies has
helped make the intervention more effective.
We started a project in 2011 to ensure lower tier lenders were compliant with the CCCFA.
The project was started in South Auckland, and focussed on identifying “backyard” lenders
operating out of garages that provide finance to vulnerable consumers.
Lower tier lenders were identified from a number of sources including information being
provided by consumer advocates, for example, community law centres, budget advisory
services, and local Citizen Advice Bureaux. Commission staff, in conjunction with Financial
Markets Authority staff, visited a number of these creditors.
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Creditors have been made aware of their obligations under the CCCFA such as providing
proper disclosure and not charging interest in advance, and the requirement for registration
under the Financial Service Providers Act.
We are conducting follow up checks on the identified creditors, and rolling the project out
to other parts of New Zealand. Commission staff continue to liaise with FMA staff when
instances of non‐compliance with financial service providers legislation are identified.
Prosecutions
We took two successful prosecutions in the consumer finance area.
eFeMCee Finance Limited (FMC)
FMC Finance pleaded guilty to charges under the CCCFA and FTA in May 2011, and was
sentenced in October. FMC was a small finance company based in Auckland. It had
approximately 50 debtors but as is common with many small creditors, there was a history
of repeat lending to existing debtors and many debtors had multiple loans.
FMC and its director, Albert Loots admitted charging unreasonable fees on loan payment
protection plans, unreasonably requiring debtors to buy insurances, failing to provide
debtors with required information about their loans and failing to correctly rebate insurance
premiums when loans were repaid early and misleading consumers in relation to the nature
of the payment protection plans being sold by FMC.
The payment protection plan was in effect a bond designed by Mr Loots to ensure that
borrowers met their repayments – which was both misleading and contrary to industry
practice. Mr Loots had sole discretion in determining whether or not to offset this bond
against the outstanding balance of the loan at the end of the contract. According to Mr
Loots, the insurance was to cover the loan repayments if a debtor died or fell sick, but there
was no policy document setting out the cover provided and payment was also at his
discretion.
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Mr Loots changed some of the company’s practices in 2008. As the Commission only
received a complaint about FMC’s loans in late 2010, it was hamstrung by time limitation
issues, and could only deal with the contracts taken out between April and June 2008.
However, as a result of the Commission’s case, FMC reduced the loan balances of about 16
loan contracts belonging to debtors, and refunded $39,600 to six borrowers who paid
unreasonable fees for insurance and payment protection policies, as well as the compound
interest that was applied to those fees.
Banning Order against Trevor Ludlow
Under the CCCFA it is possible for us to apply to the Court to ban a person from acting as a
creditor. In December 2011 we obtained our first banning order when Trevor Allan Ludlow
was banned indefinitely from working in the consumer finance industry.
Mr Ludlow and his company Takarunga Management Limited trading as Mortgage Rescue
were prosecuted by the Commission under both the CCCFA and the Fair Trading Act in
relation to its conduct and fees it charged homeowners desperate to stave off mortgagee
sales. Mr Ludlow is a convicted fraudster who the Judge said did not “display the integrity
and fair dealing that is appropriate in this type of dealing.”
Gym Contracts
Over recent years we have received complaints about gym memberships and in particular
that consumers were unaware of the total financial commitment they were signing up for,
and the cost of cancelling contracts.
In 2011 we decided to look further into these contracts. We contacted a number of gyms
across the country and asked them about their practices, particularly in relation to
disclosure of the total cost of membership and the information gym members were given
about cancelling their contracts and costs of this.
After considering the terms of the contracts, particularly the fees charged, we formed the
opinion that many of the contracts were likely to be consumer credit contracts. We
provided information to the gyms covering why we thought they were likely to be subject to
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the CCCFA, the obligations the CCCFA imposed on creditors and also worked with a key
industry body, Fitness NZ, to disseminate information about the CCCFA to the wider
fitness/gym industry.
Many gyms outsource the fee collection process and we liaised with this business to ensure
that the gym contracts contained the information required by the CCCFA. We also obtained
widespread media coverage of the issue which helped publicise the issue to the industry
and consumers.
Consumer credit law review
We have continued to work with the Ministry of Consumer Affairs on the consumer credit
law review, in particular raising issues around the enforceability and clarity of particular
provisions of the Act.
Our key focus within this work has been on providing comment on how the current
consumer protection laws are working and providing the expected level of consumer
protection, and ensuring lenders obligations are clear, particularly when the consequences
of breaching those obligations are criminal sanctions and/or potential banning orders.
We expect to make a formal submission on the review and also on the current review of
the Credit Repossession Act.
Regulatory work programme
In the electricity, gas and specified airport services part of our regulatory work programme,
good progress towards regulation has been tempered by a considerable amount of
litigation.
Input methodologies
Input methodologies for electricity lines services, gas pipeline services and specified airports
services in Auckland, Wellington and Christchurch were set in December 2010. While parts
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of these input methodologies are subject to merits appeals in the High Court, they remain in
place until any appeal is successful.
The Commission has been progressively rolling out the regulatory instruments that apply
the input methodologies. Airports information disclosure and an individual price‐quality
path for Transpower are already in place. Information disclosure for gas and electricity
distribution is expected to be in place around the middle of this year, with Transpower's
information disclosure requirements being developed in the second half of the year.
It was also expected that the Commission would have decided by now whether to reset the
default price‐quality path for electricity distribution to take account of the input
methodologies, and that a default price‐quality path for gas pipelines would be in place by
the middle of the year. However, these have both been delayed to due to a judicial review
challenge by Vector.
Vector successfully challenged the Commission’s decision not to set a Starting Price
Adjustment Input Methodology in December 2010, and not to specify certain other Input
Methodologies which apply to the Default Price Quality Path (the SPA JR).
The High Court ordered that the Commission had to set these further Input Methodologies,
which we expect to do by September 2012.
The Commission has appealed the part of the High Court judgment relating to the Starting
Price Adjustment Input Methodology to the Court of Appeal, and is awaiting that judgment.
In our view Parliament never intended that there should be a Starting Price Adjustment
Input Methodology.
Merits Appeals
Interested parties are able to appeal against any aspect of an Input Methodology on the
basis that a materially better option was available to the Commission.
Twelve parties filed merits appeals against aspects of the December 2010 Input
Methodologies determinations. Three have since withdrawn their appeals.
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The merits appeals against the cost of capital and asset valuation Input Methodologies will
be heard in the High Court in September and October 2012. The merits appeals against the
other Input Methodologies will be heard in December.
Effect of litigation
The Starting Price Adjustment Judicial Review has caused substantial delay to our regulatory
work programme. The Commission’s decision regarding resetting the Default Price Quality
Path for electricity distribution has been delayed by a year.
Our ability to implement an initial Default Price Quality Path for gas pipelines that reflects
the Input Methodologies, has also been delayed by between nine and fifteen months.
While we are appealing the High Court’s decision that a Starting Price Adjustment Input
Methodology is required, we have substantially progressed work on that Input
Methodology, along with the other aspects of the Court’s judgment, to ensure that our
regulatory work programme is not further delayed regardless of the Court of Appeal result.
A further round of process judicial reviews late last year has also had a substantial impact.
The main challenge in these process judicial reviews related to whether the Commission had
been legitimately able to run its 2009/10 Input Methodology consultation and
determination process that overlapped between the sectors of airports, gas and electricity
and the functions of transmission and distribution. Parties particularly challenged the way in
which the Commission’s cross‐sector process was communicated to them. The Commission
also faced a number of other process challenges at the same hearing.
In relation to the cross‐sector process, the High Court found in December 2011 that the
Commission ‘did what it was required to do and what it had said it would do’.
While we accept the right of parties to bring judicial review challenges, in our view the
cross‐sector process challenge was, when viewed against the full context of our two year
Input Methodology consultation process, without real merit.
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Further it is not clear to us what real benefit the parties were seeking from this process
challenge – even if we had been required to re‐do our process, the major arguments
relating to the most contentious aspects of the Input Methodologies had already been put
to and considered by the Commission prior to its 2010 decisions.
The cross‐sector process challenge has caused material detriment to all involved. Because it
challenged the fundamentals of the Commission’s process, this judicial review essentially
required that the merits appeals be put on hold for nine months. But for that challenge, we
would have expected all, or at least the vast majority of, merits appeals of the 2010
determinations to have been heard by now.
We acknowledge that one party to the process judicial review was successful on a specific
relatively narrow, cost of capital point, which we are re‐consulting on at present. To give
this some context, however, our costs in defending the process judicial review at a six day
hearing were substantial. In particular, there were significant trial preparation costs. We
estimate that between them the parties would have spent millions of dollars on legal fees in
this exercise.
Dairy
A key development in dairy regulation has been the prospect of new roles for the
Commission.
As some of you will be aware, the Parliament’s Primary Production Select Committee is
currently considering the Dairy Industry Restructuring Amendment Bill 2012. The Bill
proposes a number of new roles for us, with the key one being monitoring Fonterra’s
methodology for setting the farm gate milk price and its application of that methodology
against purpose principles specified in the Bill.11
11 Other proposed roles include: enforcing the Trading Among Farmers (TAF) behavioural obligations,
and enforcing the fair value share requirement should TAF not proceed.
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The proposed price monitoring regime is envisaged to play an important role in ensuring
Fonterra’s milk price is set consistent with the wider efficiency objectives of Dairy Industry
Restructuring Act (DIRA). We are ready to play whatever role Parliament considers
appropriate in implementing that regime.
So that we can implement the proposed regime effectively, we have been working with
MAF officials and most recently the Primary Production Select Committee to provide them
with our views on practical implementation issues of the regime. Our focus has been
squarely on ensuring clarity of policy intent and identification of risks that may lead to
unintended outcomes and higher than expected direct and indirect costs of implementing
the monitoring regime.
This process is ongoing. The Select Committee is expected to report back to Parliament in
early June.
Dry run of proposed monitoring regime
Ahead of the Bill being passed into law, the Minister for Primary Industries requested we
conduct a non‐statutory ‘dry run’ review of Fonterra’s 2011/12 methodology for setting the
farm gate milk price and Fonterra’s application of that methodology.
The purpose of the ‘dry run’ review is to help inform investors ahead of Fonterra launching
Trading Among Farmers (TAF). In particular, the ‘dry run’ review is intended to show
investors how the Government‐proposed farm gate milk price monitoring regime might
work in practice.
The ‘dry run’ review is a targeted review of Fonterra’s current methodology for setting the
farm gate milk price and its application. It is aimed at a limited number of key issues,
identified by both industry stakeholders and our own analysis, as potentially contentious
and material to the calculation of the farm gate milk price.
This dry run review is being conducted before the legislation is passed, and based on our
interpretation of the draft legislation as it was introduced to the House.
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It is, in effect, a voluntary review based on a Terms of Reference agreed with Fonterra.
Due to the constrained timeline for completing the ‘dry run’ review, it will not reflect any
amendments to the Bill which may arise during the Primary Production Select Committee’s
consideration of the proposed amendments.
In March 2012, we published the Terms of Reference for the ‘dry run’ review and sought
input from all interested parties in relation to information, evidence and key issues we
should consider as part of the review.
We are currently working on our draft report, which we intend to publish on 31 May 2012.
There will be a short period of consultation.
Following consideration of submissions on our draft report, we intend to publish the final
report on the ‘dry run’ review by 14 August 2012, before Fonterra’s planned launch of TAF
in November 2012.
Telecommunications
Telecommunication regulation is not an area that I am personally involved in. I have been
provided with this information to share with you, but will not be able to answer questions
about telecommunications.
The telecommunications team has been focused on the implementation of the
Telecommunications (TSO, Broadband, and other Matters) Amendment Act 2011. The
changes to the Act build on the 2006 model replacing operational separation with structural
separation, and rely on enforceable undertakings as the primary regulatory instrument for
the fibre network.
The Commission’s role in monitoring and enforcing those undertakings will ensure that the
benefits that the 2006 Amendments have delivered will not be lost as we move to the next
stage in this fast‐evolving industry.
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The copper regime remains basically intact for a transitional period of three years, after
which the regulated Unbundled Copper Local Loop price will move from a de‐averaged
metro/ price to a nationally averaged price, and Unbundled Bitstream Access will move from
“retail minus” to a cost based price. The three year transitional period is designed to provide
a reasonable period for those access seekers who have unbundled Telecom exchanges to
obtain a return on their Unbundled Copper Local Loop investments.12
The fibre undertakings regime builds on the lessons learnt from the operational separation
undertakings. The twin pillars of open access, non‐discrimination in relation to third party
supply, and equivalence in relation to self supply, are carried over into the fibre regime. The
definition of non‐discrimination has been expanded in accord with the interpretation we
applied in relation to the Operational Separation Undertakings
The most significant feature of the 2011 Amendments is the structural separation of
Telecom. Structural separation is the “nuclear option” of telecommunications regulation,
and is what many commentators have concluded should have been done as part of the
privatisation process 21 years ago. At a stroke it removes the economic incentives of a
vertically integrated entity to discriminate in favour of its downstream business, to the
disadvantage of its competitors in those downstream markets.
Another significant project the telecommunications team have also been working on has
been the demand side study which is focused on identifying barriers to uptake of high speed
broadband. Three issues papers have been published and a very successful conference on
the topic was held in February. A final report is due in June 2012.
The year ahead is all about bedding down the new regime this includes:
• Finalising the framework for information disclosure with the local fibre companies,
and completing the Unbundled Bitstream Access cost allocation review
12 “I consider that 3 years is a reasonable period for Access Seekers to obtain a return on UCLL investments and is, therefore, an
appropriate transitional period.” Office of the Minister for Communications and Information Technology, Regulatory issues arising from the Ultra‐Fast Broadband Initiative, 13 December 2010 (regulatory issues Cabinet paper), page 11, paragraph 49c
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• Closing out the last of the Telecommunications Service Obligations reviews now that
we have had direction from the Supreme Court
• Confirming eligibility for the new Telecommunications Development Levy
• Continuing to monitor the telecommunications sector through our monitoring
reports.
Conclusion
As you will gather from this overview of the Commission’s work programme we are working
in a busy and, at times, challenging environment. But as I indicated at the beginning of my
address, the changes to our organisation mean that we are able to steer a steady ship and
use our resources effectively.
Always in our work we have the end goals for New Zealanders in mind – that markets are
more competitive and consumers are better informed, and that regulation is better targeted
and more effective. Whether it’s a choice about what litigation to pursue, or when to
negotiate settlements, or the drive to bring our input methodologies to fruition, we always
operate thinking of our contribution to building a healthy competitive New Zealand
economy.
I am now happy to answer questions on any area, apart from Telecommunications
regulation.