Commr for Consumer & Business Affrs v Ioof S.A. Credit Union Ltd No. Dcadd-02-456

Commissioner for Consumer and Business Affairs v IOOF South Australia Credit Union Limited
[2003] SADC 38
Judge Sulan
Administrative and Disciplinary Division
The Application

IOOF South Australia Credit Union Limited (“the applicant”) made an application under section 101(1) of the Consumer Credit (South Australia) Code (“the Code”) seeking a declaration as to whether or not it had contravened key requirements of the Code in connection with its credit contracts. If the applicant was found to have breached the Code’s requirements, the Court was also asked to decide whether a civil penalty should be imposed.
The Commissioner for Consumer and Business Affairs (“the Commissioner”) is the “Government Consumer Agency” in South Australia pursuant to section 9 the Consumer Credit (South Australia) Act 1995[1] and thus was given notice of the application in accordance with section 110(3) of the Code. Exercising his right under section 111 the Commissioner applied to be joined as a party to the proceedings. The application was granted and therefore the Commissioner was given standing to represent “the public interest and the interests of debtors”[2].
The Provisions Relevant to the Application
[1] See also the definition in Schedule 1 of the Code and the Consumer Credit Regulations.
[2] Section 111 of the Code.
The Consumer Credit Code set out in the Appendix to the Consumer Credit (Queensland) Act 1994 applies as a law of South Australia by virtue of section 5 of the Consumer Credit (South Australia) Act 1995 (“the Act”) and is referred to as the Consumer Credit (South Australia) Code.
Key Requirements
Part 6 of the Code is headed “Civil Penalties for Defaults of Credit Providers” and it deals with the consequences of breaching a “key requirement” as defined in section 100. This section refers to the requirements regarding the contents of a credit contract as set out in the relevant components of sections 15, 21, 32 and 33 of the Code.
The key requirements to which the applicant drew the Court’s attention were those in sub-sections 15(B)(a)(i), 15(B)(a)(ii), 15(B)(b), 15(E) and 15(G)(a). These sub-sections state that the contract document must contain the following information:
(B)(a)(i) - the amount of credit to be provided, if that amount is ascertainable;
(B)(a)(ii) - if the amount of credit is ascertainable, the persons, bodies or agents (including the credit provider) to whom it is to be paid and the amounts payable to each of them, if both the person, body or agent and the amount are ascertainable;
(B)(b) - if the amount to be provided is not ascertainable, the maximum amount of credit agreed to be provided, or the credit limit under the contract, if any;
(E) - the total amount of interest charges payable under the contract, if ascertainable (but only if the contract would, on the assumptions under sections 158 and 160 be paid out within 7 years of the date on which credit is first provided under the contract); and
(G)(a) - a statement of the credit fees and charges that are, or may become, payable under the contract, and when each such fee or charge is payable, if ascertainable.
Application for Order Relating to Key Requirements
Under section 101(1) of the Code any one of the following parties may apply for an order under Part 6, namely an order declaring that a key requirement has been breached and an order imposing a civil penalty for that breach:
(a)a debtor[3];
(b)     a guarantor[4];
(c)     a credit provider; or
(d)     a Government Consumer Agency.
[3] This is subject to section 101(2) which states that a debtor “may not make an application for an order under this Division in respect of a contravention under a contract if the contravention under that contract is or has been subject to an application for an order made by the credit provider or a Government Consumer Agency anywhere in Australia under this Code or a corresponding law of another jurisdiction”.
[4] This is also subject to section 101(2).
Pursuant to section 102(1), “the Court must, on an application being made, by order declare whether or not the credit provider has contravened a key requirement in connection with the credit contract or contracts concerned”.
Jurisdiction to hear an application under Part 6 of the Code is held by the Administrative and Disciplinary Division of the District Court of South Australia, pursuant to section 8 of the Act.
Civil Penalty may be Imposed for a Contravention of a Key Requirement
Section 102(2) provides that “the Court may make an order … requiring the credit provider to pay an amount as a civil penalty, if it is of the opinion that the credit provider has contravened a key requirement”.
In considering the imposition of a civil penalty section 102(4) states that the Court must have regard to the following:
(a)the conduct of the credit provider and debtor before and after the credit contract was entered into;
(b) whether the contravention was deliberate or otherwise;
(c)the loss or other detriment (if any) suffered by the debtor as a result of the contravention;
(d)when the credit provider first became aware, or ought reasonably to have become aware, of the contravention;
(e)any systems or procedures of the credit provider to prevent or identify contraventions;
(f)whether the contravention could have been prevented by the credit provider;
(g)any action taken by the credit provider to remedy the contravention or compensate the debtor or to prevent further contraventions;
(h)the time taken to make the application and the nature of the application; and
(i)any other matter the Court considers relevant.
Pursuant to section 105 of the Code, on an application being made by a credit provider, the maximum civil penalty that may be imposed by the Court for a contravention of a key requirement is an amount calculated so that the total civil penalty for all contraventions of the requirement in Australia does not exceed $500,000.
Any penalty that is imposed by the Court must be paid to the “Consumer Credit Fund”, in accordance with section 106 of the Code. In South Australia, this fund is administered by the Commissioner.
Sub-section 102(5) states that since some of the key requirements contain more than one single requirement (referred to as ‘portmanteau’ provisions) and because a breach of a particular requirement may result in consequential breaches of other key requirements, the Court is required to regard such breaches as breaches of a single requirement. This prevents the maximum penalty from being multiplied if a contravention “occurs merely because of another contravention”[5].
Case Law
[5] Section 102(5) of the Code.
There are few reported cases concerning applications under section 101 of the Code. The principal cases are Macquarie Credit Union v The Director General, Department of Fair Trading[6] and Suncorp Metway Limited v Director General, Department of Equity and Fair Trading (Queensland)[7]. The only similar case brought in the South Australian jurisdiction is that of the unreported decision of Judge Lee in Re. Polish Community Credit Union Limited[8].
[6] (1998) ASC 155-014
[7] (1999) ASC 155-027
[8] [2000] SADC 7 (28 January 2000) (Judge Lee)
Where the contravention has been neither deliberate nor oppressive of borrowers under the loan contracts, the cases have held that the Courts should impose either no penalty or a merely nominal penalty. In either case, the applicant is normally left to bear its own costs and to pay the costs of the intervening consumer credit regulator.
Whilst in Macquarie and Suncorp Metway no penalty was imposed, in Polish Community Credit Union the Court imposed a penalty of $5.00 per contract and ordered the applicant Credit Union to pay all relevant costs. In contrast in Queensland v Ward[9] there was extreme conduct and a deliberate disregard for the legal requirements of the Code, and thus a significant penalty was imposed.
The Factual Background
[9] [2002] QSC 171 (14 June 2002) (Judge Ambrose)
The evidence was presented by way of a comprehensive Statement of Agreed Facts.
Formed in October 1997, the applicant is a public company limited by shares and is a Credit Union registered under Part 4 of the Financial Institutions (South Australia) Code.
The applicant first became aware of possible contraventions in or about May 2001. The applicant and CPS Credit Union (“CPS”) had been negotiating the transfer of the credit provider business of the applicant to CPS. As a result of due diligence inquires made by CPS in connection with the negotiations, the applicant’s own internal inquiries and the applicant’s discussions with its solicitors, Johnson Winter & Slattery, the applicant understood that it had, or may have, breached key requirements of the Code. A full audit was undertaken by Norman Waterhouse Solicitors in August 2001. Through its solicitors, the applicant formally reported to representatives of the Commissioner on 21 December 2001 that there had been possible contraventions.
The applicant made an application to the District Court on 29 August 2002 seeking a declaration as to whether it had contravened key requirements of the Code in connection with its credit contracts.
During the period between the initial meeting with representatives of the Commissioner on 21 December 2001 and the making of the application, two actuarial reviews were undertaken, and certain further investigations were undertaken to ascertain the nature and extent of the possible breaches. Representatives of the Commissioner were kept informed of the progress, including being sent a confidential Briefing Paper on 4 July 2002 and meeting with the applicant on 6 August 2002.
Notwithstanding the language of the application, presented in accordance with section 102(1), the applicant did not submit, nor sought to argue, that it had not breached certain key requirements of the Code. Therefore the balance of the submissions were directed to the question of penalty in the event that the Court declared that the applicant had breached one or more key requirements.
Since its formation, the applicant had written 383 contracts. Of those, 119 were home loan contracts secured by real property mortgages. It was accepted that the Code did not apply to at least 16 of these contracts, for example because they were wholly or predominantly for investment purposes. The remaining 264 contracts were personal loan contracts (both secured and unsecured) and the Code applied to all of these. As at 26 August 2002, there were approximately 157 current credit contracts that were subject to the Code. The other 216 contracts had been completely performed, with the members concerned having repaid all monies owed and all relevant securities having been discharged.
The review undertaken by the solicitors of CPS examined 238 of the 367 relevant contracts. The applicant submitted that, in the circumstances, that sample should be regarded as representative both in relation to the entire portfolio of loans written by the applicant and representative of the home loan and personal loan portfolios separately.
Since first becoming aware of the possible breaches in May 2001, according to the agreed facts, only two home loans and seven personal loans were written, and it was accepted by the Commissioner that the applicant had ensured that the key requirements were addressed in the loan documentation applicable to those contracts.
The Nature of Possible Key Requirement Breaches
Sections 100(1)(a) and 15(B)(a)(i), (a)(ii) and (b)
With respect to the requirement that the contract document contain the amount of credit (if ascertainable) or otherwise the maximum amount of credit agreed to be provided/credit limit (if any), in four cases the amount of credit was understated in the credit document. In the case of two personal loans, the amount of credit was ascertainable but an incorrect amount was stated. In the first loan the error was in the sum of $4.95 and this understatement occurred simply because of human error. In the second loan the error was in the sum of $8.85 and arose because when two loans were amalgamated and treated as a new advance, the amount of capitalised interest on the current advance was overlooked. Again this was due to human error.
In the case of two home loans, since they were building/progress payment loans, the amount of credit to be provided was not ascertainable. The policy of the applicant in such cases was to set a maximum amount of credit. With one home loan it appeared that the amount of credit was understated by $127 given that the payee details added up to an amount which exceeded the amount of credit by that sum. An amount of $100 in excess of the disclosed amount of credit was subsequently advanced. With the other home loan the amount of credit was understated by $86.61 in comparison with the payee details and the amount actually provided.
In all instances the amount of credit actually advanced was said to have reflected the debtor’s intention, requirements and instructions.
Regarding the requirement to state if the amount of credit is ascertainable, the persons, bodies or agents (including the credit provider) to whom it is to be paid and the amounts payable to each of them, if both the person, body or agent and the amount are ascertainable, the applicant found it difficult to be certain in all instances whether the required disclosures were made at the time of contract preparation.
In the case of eleven reviewed personal loans and fourteen reviewed home loans, the payee details were either not disclosed, stated “not applicable” or appeared to be incomplete. Therefore, it was said that the amounts were not actually drawn and disbursed in accordance with debtors’ instructions.
Although the contraventions could have been prevented if greater care had been taken by the applicant’s staff and by additional training, the breaches of sections 15(B)(a)(i), (ii) and (b) related to a small number of the credit contracts and the Commissioner did not oppose a finding that they were due to human error in the preparation of the individual contracts. The Commissioner submitted that these breaches were at the lowest end of the scale of contraventions. I agree.
Sections 100(1)(d) and 15(E)
In cases where contracts exist which would, on the basis of certain assumptions, be paid out within 7 years of the date on which credit is first provided, the contract document must contain the total amount of interest charges payable, if ascertainable. The “within 7 years” requirement meant that this key disclosure related to 79 personal loan contracts written by the applicant since formation. Specifically they related to “honeymoon rate” loans where a fixed rate existed for an initial period and at the expiry of that period the loan rolled to a variable rate (unless alternate negotiations led to the fixing of a new fixed rate for a new fixed term).
For loans of this nature, the appropriate method of calculating the total interest charges payable for disclosure purposes under the Code is to calculate the projected interest charges at the fixed rate for the fixed rate period, and to calculate projected interest charges for the variable rate period using the then current variable rate (as the future variable rate cannot be predicted). The sum of these two amounts represents the projected total amount of interest charges payable.
The applicant used a software product produced by an external supplier, and the applicant’s management (“management”) believed that this software was Code compliant. As part of the supply contract the supplier indicated that the software was compliant, and management was aware that the software was designed for use by credit unions generally and was actually used by other credit unions. They believed that if the software did have any Code compliance problems, then the supplier would have known of such problems and would have advised the applicant accordingly. Since they did not receive any such advice, management believed that this supported their assumption that the software produced results in accordance with Code requirements.
With respect to the “honeymoon rate” loans, it was noted that the software had the capacity to handle the two rates relevant to disclosure in relation to these loans. Again management was aware that other credit unions offered honeymoon rate products and presumed that those credit unions produced the same documents using the software that was used by the applicant. They were unaware of any changes that these other credit unions may have made to their systems to deal with this issue, and believed that, in the absence of any information from the software supplier, the software was Code compliant in this area.
For these reasons, no checks were made to ensure that the calculations performed by the software, and included in the documents, reflected the Code’s requirements. However, this assumption proved to be incorrect in respect of the documentation concerning “honeymoon rate” loans. The software calculated the projected total interest charges as if the initial fixed rate applied for the term of the loan (ie, the calculation did not use the current variable rate for the later period.). Consequently, where the current variable rate on the day the contract was prepared was higher than the initial fixed rate (which would generally have been the case), the total amount of interest charges predicted as being payable under the contract for the term of the loan was understated. Despite this, the applicant submitted that all customers were actually charged interest at the discount rate and then the standard rate, as appropriate.
This breach related to a larger number of the contracts (approximately 30%). The Commissioner submitted that it was of a more serious nature, compared to the previously mentioned breaches, since one of the principal purposes of the Code is provide consumer protection. Such protection includes the debtor being fully informed about the nature and amount of the debt that he or she is undertaking at the time they enter the contract.
The Commissioner further stated that it was incumbent upon the applicant to satisfy itself that the information system operated correctly, at the very least at the time of its initial installation[10]. It was suggested that the contraventions could have been prevented by the applicant had it taken more appropriate care in preparing for the introduction of the “honeymoon rate” loan product and had it sought a further independent compliance check on the externally provided information technology systems, rather than relying on the warranties of the supplier and, what the applicant believed to be industry standard documentation.
Sections 100(e) and 15(G)(a)
[10] See Macquarie at 148,502.
Finally, the contract document must contain a statement of the credit fees and charges that are, or may become, payable under the contract, and when each such fee or charge is payable, if ascertainable. Reference was made to various pro forma contract documents.
In the Personal Loan Contract, certain fees were listed under the section headed “Credit Fees and Charges Retained by Us”. The contract does not clearly state when the fee is payable, although it was said that it was clear that these fees were payable on or before funding. The equivalent section in the Home Loan Contract was entitled “Credit Fees and Charges Retained by Us Payable On or Before Funding”. The additional words indicated when the fee was payable. This disparity is reflected in the incidence of potential breaches being in 154 of the 157 reviewed personal loan contracts whilst only in 13 of the 81 reviewed home loan contracts.
Mention was also made to the Default Fee appearing in the extract of fee descriptions. In the case of this fee it was arguably unclear whether the $20 fee applied as opposed to the $10 fee.
Regarding the Home Loan Contract, particular reference was also made to the Early Repayment Fee disclosed in the Credit Fees and Charges. The amount of this fee and when it was payable was said arguably to be ambiguous because in the “amount” column it stated $100. This was the administration fee. In the General Description, however, it indicated that the actual fee payable was to be the administration fee and/or (for certain fixed rate loans) the break cost fee (further information on whether break costs were payable and the method of calculation was set out in the contract, with the dollar amount being unascertainable at the time of contract preparation).

Despite breaching this key requirement it was submitted that the existence of fees was always disclosed to customers and thus a more significant breach was not involved.
The unclear drafting of these standard documents stemmed from amendments made by management with the stated goal of improving disclosure to customers. Documents entitled “Schedule” and “General Terms” were subjected to the scrutiny of the applicant’s then legal advisers and said to be compliant with the Code. However, with respect to the schedule, the applicant amended the document by expanding certain wording to, in management’s opinion, better explain the scope of some of the fees. This meant that further fees that were or may have been payable were listed on the documentation. In further changes management unwittingly deleted the reference to when the up front fees were payable in some contracts. That is, the words “payable on or before funding” were removed. It was submitted that at all times management believed that the nature and extent of changes made to the schedule previously signed off on by its then legal advisers were of such a nature that they did not warrant further legal signoff, believing that the changes made would better inform customers.
The breaches related to a large number of the contracts (approximately 70%). With respect to the breach concerning the time the fee or charge was payable, the Commissioner accepted that although these breaches were technically breaches of the Code it was unlikely that a debtor would have been in doubt as to the time the fee or charge was payable. Regarding the breach concerning the amount of fees or charges payable if there were early repayment upon the loan (for an unidentified number of the contracts), the Commissioner submitted that it was possible that a debtor may have been confused as to the fees and charges payable given the drafting of the contracts and therefore should be considered as more serious than just a “technical breach” although it was still a breach at the lower end of the scale. All such breaches could have been prevented by more care being taken in the drafting of the loan documents.
Non Key Requirement Breaches
Other possible breaches were agreed by the applicant and the Commissioner to be breaches of non key requirements. These matters did not require determination by the Court and were not subject to the civil penalty application.
Conclusion
I declare that the applicant breached sections 15(B)(a)(i), 15(B)(a)(ii), 15(B)(b), 15(E) and 15(G)(a) of the Consumer Credit (South Australia) Code. However, having regard to all of the circumstances and in particular the criteria set out in section 102(4) of the Code, I am satisfied that no civil penalty should be imposed.
The breaches were not deliberate and were, at the admission of the Commissioner, at the lowest end of the scale of contraventions. Whilst preventable, the breaches related to human error, the failure of staff to independently verify that the software system in use was Code compliant, and inadequate drafting. Upon discovering the breaches the applicant went to considerable lengths to identify, remedy and prevent further breaches, and was prompt and diligent in bringing the application, whilst being fully candid in its dealings with the Commissioner.
Importantly no debtors were prejudiced by the breaches. This is demonstrated by the fact all debtors were given notice of the application (via a thorough process outlined in the affidavits) and no individual applications were brought before the Court claiming loss or other detriment. Consequently compensation was inappropriate, although the applicant did attempt to ensure that debtors were not overcharged with respect to a non key requirement breach.
Since the commencement of its business, the applicant has had a committee in place, which has had as one of its responsibilities the recommendation and monitoring of lending policies and control procedures. It is accepted that Code compliance was monitored. Additionally, since becoming aware of the contraventions the applicant has ensured that the key requirement issues as identified have been addressed in its subsequent loan documentation.
Finally, I accept that the applicant has spent approximately $100,000 in remedying the breaches and I consider that the addition of a nominal penalty would not serve a useful purpose.
I will hear the parties as to costs.

[2003] SADC 38

7 March 2003