Commerce Commission v Harmoney Ltd

• Jurisdiction: New Zealand
• Judge: Courtney J
• Judgment Date: 18 May 2018
• Neutral Citation: [2018] NZHC 1107
• Docket Number: CIV-2016-404-002125
• Court: High Court
• Date: 18 May 2018

Between

Commerce Commission

Plaintiff/Respondent

and

Harmoney Limited

Defendant/Applicant

[2018] NZHC 1107

CIV-2016-404-002125

IN THE HIGH COURT OF NEW ZEALAND

AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA

TĀMAKI MAKAURAU ROHE

Banking and Lending: Claim that the defendant was breaching the Credit Contracts and Consumer Finance Act 2003 (“CCCFA”) by charging unreasonable credit fees — defendant operated a web-based platform that matched borrowers with investors (peer-to-peer lending) — defendant charged borrowers a fee called a “Platform Fee” — Whether a credit contract under s7 CCCFA (meaning of credit contract) can be comprised of more than one document — whether the Platform Fee was a “credit fee” as defined by s5 CCCFA (interpretation — fees payable by the debtor under a credit contract)

Appearances:

S J Mills QC, A D Luck and J D Cairney for Plaintiff/Respondent

A R Galbraith QC, A M Callinan and S A Comber for Defendant/Applicant

JUDGMENT OF Courtney J

Table of Contents

	Para No.
Introduction	[1]
The case stated	[4]
Statutory context	[8]
Question 1: Is the “credit contract” as defined in s 7 of the CCCFA, comprised of a number of the Documents operating together or just the loan contract?	[12]
A contract may be comprised of more than one document	[16]
Which document or documents constitute the credit contract	[27]
Question 2: On the basis of the Documents and the factual summary, which entity or entities are the “creditor(s)” for the purposes of the CCCFA, as defined in s 5 of the CCCFA?
The issue	[36]
Relevant principles	[41]
The terms of the Investor Agreement and Loan Contract	[53]
The Administration Deed	[62]
Question 3: On the basis of the Documents and the factual summary, is the Harmoney Platform Fee a “credit fee” as defined by s 5 of the CCCFA?	[76]
First limb: a fee payable “under a credit contract	[81]
Second limb: a fee payable by the debtor to the creditor “in connection with a credit contract”	[84]
Third limb: a fee payable by the debtor for the benefit of the creditor in connection with a credit contract	[90]
Result	[94]

Introduction

1 Harmoney Ltd (Harmoney) operates a web-based platform that matches people wanting to borrow money with investors who want to lend money, commonly known as peer-to-peer lending. 1 The loan contracts arranged through the platform are credit contracts for the purposes of the Credit Contracts and Consumer Finance Act 2003 (CCCFA). Under the loan contracts Harmoney's sister company, Harmoney Investor Trustee Ltd (HITL) is the named creditor as a bare trustee for the investors.

2 Harmoney charges borrowers a fee, known as the Platform Fee, to arrange the loans. The Commerce Commission contends that this fee is a credit fee under the CCCFA 2 and therefore subject to the requirement that it not be unreasonable. 3 Harmoney maintains that the Platform Fee is akin to a brokerage fee and is not captured by the CCCFA.

3 This proceeding is a case stated brought by the Commission to establish whether the Platform Fee is a credit fee.

The case stated

4 The case stated poses three questions by reference to a specimen loan arranged through the Harmoney website as it operated until December 2015. 4

5 The loan was documented in five key documents:

• (a) The “Administration Deed” records the relationship between Harmoney and HITL. The parties are Harmoney and HITL. Slightly different versions were in use before and after October 2015.

• (b) The “Investor Agreement” sets out the terms on which the investor may access and use the Harmoney website. The parties are the investor, Harmoney and HITL.

• (c) The “Borrower Agreement” sets out the terms on which the borrower may access and use the Harmoney website. The parties are the borrower, Harmoney and HITL. It is a term of the Borrower Agreement that the borrower pays the Platform Fee. 5

• (d) The “Loan Disclosure” provides disclosure of the information about the loan before the loan contract comes into existence, as required by the CCCFA. 6 There were slightly different versions in use prior to and after November 2015.

• (e) The “Loan Contract”, which comes into existence automatically after the Loan Disclosure is sent to the borrower. The parties are the borrower and HITL (with HITL said to be acting through Harmoney as its agent).

6 The Commission and Harmoney agree on the following summary of the key elements of a transaction effected through the Harmoney website:

• (a) Prior to any Lending Transaction, a prospective borrower was first required to register with Harmoney. 7 Harmoney would then receive, consider and approve applications for registration in accordance with its eligibility criteria. Harmoney performed various tasks including receiving and assessing loan applications and undertaking credit checks.

• (b) If the borrower wanted to take out a loan, he or she was required to complete a loan application. 8 The loan application process was designed to assess a borrower's credit grade, which in turn was used to determine the applicable interest rate and the maximum Loan Amount. The borrower then selected an agreed Loan Amount (between the maximum and a minimum of at least $1,000) and chose whether to repay the loan over a 36 or 60 month term (provided that the borrower could afford to make repayments over a 36 month term).

• (c) Once a loan entered the online marketplace, investors decided whether or not to fund the Loan through placing an order. 9 Investors made orders in $25 increments – referred to as “notes” – for each investment until the loan was fully funded. 10

• (d) Investors paid the amount they wanted to invest into an ‘investor account’. Harmoney held the investor account in trust for investors whose funds had been deposited into that account. 11

• (e) Once there were sufficient orders to fully fund the loan listing (or to offer funding of a lesser amount which the borrower nonetheless agreed to accept), Harmoney transferred the investor funds from the investor account to an ‘advance account’, a separate bank account held by the Trustee on trust for investors. 12

• (f) Harmoney would then transfer the loan principal to the borrower's nominated account. 13 The borrower did not sign a Loan Contract, as the contract was stated to come into existence immediately after Harmoney provided a Loan Disclosure. 14 From that point, the Trustee held the loan on trust for the benefit of investors. 15

• (g) Settlement of a loan would occur within one business day after Harmoney provided the Loan Disclosure. 16 At Settlement, Harmoney would deduct from the Loan Amount an amount equal to the Platform Fee (outlined below) and transfer it to Harmoney's own account. Harmoney would pay the balance of the Loan Amount to the borrower's nominated account. 17 The Documents state that these fund transfers were to be made by Harmoney “at the direction of the Trustee, as authorised by the Borrower”. 18

• (h) The Platform Fee is defined in the Borrower Agreement as “the fee payable by the borrower to Harmoney for arranging any Loan which settles, as set out on the Website under the “Interest Rates and Fees Section.” 19 The Borrower Agreement defined the ‘Loan’ as “the total amount lent or to be lent by the Trustee” to the borrower.

• (i) Following settlement, the borrower had an obligation to make all of the loan repayments specified in the Loan Disclosure 20 to a ‘Collections Account’ held in the name of the Trustee as trustee for investors. 21 Interest accrued on the whole of the Loan Amount, which included the Platform Fee.

• (j) Harmoney administered the loan accounts, including by receiving payments and undertaking recovery action. The Documents state Harmoney did this as agent for the Trustee. Harmoney charged a fixed service fee to investors for these services. 22 As at December 2015, this fee was set at 1.25 per cent of the principal and interest payments collected on funds advanced by that investor.

7 The case stated poses the following questions, which are to be determined on the basis of the agreed summary of facts and key documents:

• (a) Question 1: Is the “credit contract” as defined in s 7 of the CCCFA, comprised of a number of the Documents operating together or just the Loan Contract?

• (b) Question 2: On the basis of the Documents and the factual summary, which entity or entities are the “creditor(s)” for the purposes of the CCCFA, as defined in s 5 of the CCCFA?

• (c) Question 3: On the basis of the Documents and the factual summary, is the Harmoney Platform Fee a “credit fee” as defined in s 5 of the CCCFA?

Statutory context

8 The CCCFA was enacted to protect consumers, including borrowers under credit contracts. The primary purpose of the CCCFA includes protecting “the interests of consumers in connection with credit contracts”. 23 It is also a purpose of the Act to provide “rules about interest charges, credit fees, default fees, and payments in relation to consumer credit contracts”. 24 However, the CCCFA pre-dates peer-to-peer lending and does not specifically provide for credit contracts entered into using the kind of service that Harmoney provides.

9 Peer-to-peer lending was included in the review of securities law that led to the Financial Markets Conduct Act 2013 (FMCA). In its 2010 review the Ministry of

Economic Development described the nature of peer-to-peer lending, which clearly had potential benefits for consumers: 25

Person-to-person lending services (also referred to as peer-to-peer lending or “social lending”) allow investors to lend money to individual borrowers, with the service acting as a “matchmaker”. Whereas...