The competition regulator is taking ANZ Bank-owned UDC Finance to court for allegedly charging unreasonable default fees.
The Commerce Commission has filed charges against UDC in the High Court relating to its practices in providing consumer loans of $10,000 or more which were secured against assets such as vehicles.
"The commission alleges that UDC's dishonour and late payment fees were unreasonable in that they exceeded UDC's reasonable costs and estimates of losses," it says in a statement.
UDC says it is weighing its "options" and that it has been working with the regulator for some time to explain how it determines the reasonableness of its fees.
The commission has a track record of success on this issue, including a Supreme Court ruling.
UDC charged a dishonour fee if a borrower missed a scheduled payment and charged a late payment fee if the borrower had not made payment seven days after it was due.
"The commission alleges that each fee exceeded UDC's costs and estimated losses associated with a missed payment or with a seven-day default respectively," the regulator says.
"In the case of the late payment fee, UDC calculated its fee by charging recovery costs that it did not actually incur until much later – if at all."
The dishonour fees were imposed between June 6, 2015 and Sept. 4, 2016 while the alleged unreasonable late payment fees were first charged on June 6, 2015 and continue to be charged.
"The commission seeks a declaration that UDC breached the Credit Contracts and Consumer Finance Act 2003 by charging unreasonable fees. It also seeks orders compensating borrowers for amounts paid in excess of a reasonable fee."
The commission won't comment further as the matter is now before the court.
However, its background notes point to the Supreme Court's 2016 ruling in favour of the commission in the Sportzone/MTF case.
That ruling held that credit fees can only cover costs that are "closely related" to the loan transaction and that other costs should be recovered through the interest rates charged.
"It found that the CCCFA indicates a transaction-specific approach to the setting of fees. It is not permissible to take all operating costs – or virtually all – and allocate them to one fee or the other," the commission says.
"The consequence of this is that many costs incurred by a credit provider will not be referable to particular credit transactions and will therefore have to be recovered in the interest rate."
UDC says the nub of the regulator's beef with its fees is whether it is reasonable to average costs across borrowers.
"Following a long and open dialogue, the commission is now looking to the courts for a declaration on the matter," it says.
"UDC believes its fees fairly and reasonably recover the underlying costs it incurs and that the law allows it to charge the fees on the basis that it does."
Nevertheless, it will continue to engage with the commission to see whether they can reach an out-of-court settlement, UDC says.
"UDC takes its compliance with any legislation very seriously and followed a robust process in setting fees, including dishonour and late payment fees, to ensure they are fair and reasonable," it says.
"UDC regularly reviews its fees to ensure compliance with the CCCFA. This review process has seen UDC reduce a number of its fees."
It has been a bad year for ANZ Bank, New Zealand's largest, on the regulatory front.
It has fallen foul of the Financial Markets Authority for not treating the sale of a house in Auckland to former chief executive David Hisco's wife as a related-party transaction in the bank's 2017 financial statements. The St Heliers Bay Road home was sold for $6.9 million when QV's valuation at the time was $10.75 million.
Rather than just complying with the FMA's directive that it issue a corrective statement, ANZ has continued to argue that the transaction didn't need to be disclosed, thereby attracting considerable further public criticism.
In June, prudential regulator the Reserve Bank demanded ANZ provide assurance that it is operating in a prudent manner and ordered it to engage an independent reviewer.
That followed RBNZ's order in May that ANZ had to hold more capital against both housing and farm lending than ANZ's own models indicated was warranted.