New Zealanders pride themselves on fairness, and the Fair Trading Act 1986 is a pillar of our consumer protection framework – protecting consumers from misleading or deceptive conduct in trade, unsubstantiated representations, and unfair contract terms.
The Courts have confirmed that the FTA is underpinned by the “public interest” and exists primarily “to protect the public”. Despite this, the penalties for non-compliance with the FTA have not kept up. Currently, the commercial benefit of breaching the FTA could potentially outweigh the costs of doing so.
The Government has looked to address that issue with some of the proposed reforms announced last week; but has the Government got it right?
The beefed-up regime
Despite the penalties regime under the FTA being updated in 2022, the maximum penalty amounts weren’t increased, leaving New Zealand out of step with its peers and trading partners. The penalty caps have long been criticised (including by the Commerce Commission itself) as amounting to nothing more than a “cost of doing business”, and not an effective deterrent. This appears to have led prosecutors to 'penalty farm' (a practice of laying multiple charges for effectively the same conduct) when prosecuting breaches of the FTA.
Recently, Ministers Nicola Willis and Scott Simpson announced a “crackdown” on FTA breaches, by increasing the penalties to act as a greater financial disincentive and deterrent. The maximum fine under the FTA will increase from $600,000 (for corporates) to at least $5 million. This is certainly a step in the right direction. However, given the rise of 'penalty farming' over the last several years as a method of countering the low maximum penalties, it is unclear if it will be the dramatic “crackdown” the Government suggests it is.
The newly announced changes to the FTA would increase the maximum fine under “most provisions” of the Act to the highest of:
• $1 million for individuals or $5 million for body corporates; or
• Three times the value of the commercial gain made or loss avoided; or
• The value of the consideration for the transaction(s) that constituted the contravention.
These materially increased penalties are still significantly less than those overseas. For example, penalties under the Australian Consumer Law, are the greater of:
• $50,000,000;
• Three times the value (if it can be determined) “reasonably attributable” to the benefit obtained; or
• If the Court cannot determine the value “reasonably attributable” to the benefit, then 30% of the corporation's adjusted turnover during the period of the breach.
Other maximum penalties are also set to increase:
• Breaching management bans will increase from $60,000 to $200,000.
• Breaching consumer information requirements, consumer transaction rules, and impeding enforcement will increase from $10,000 to $60,000 for individuals and from $30,000 to $200,000 for body corporates.
The reforms will introduce a new civil penalties regime for most breaches of the FTA, allowing the Commerce Commission to take action on the “balance of probabilities”, rather than meeting the higher criminal standard of “beyond reasonable doubt”. Serious or deliberate offences, such as demanding payment without intending to supply, serious product safety breaches, or obstructing the Commission in its enforcement role, will remain criminal.
Absence makes the FTA grow weaker?
What is perhaps equally noteworthy about the Government’s announcement is what has not been included in the revamped regime.
Interestingly, the Government has chosen, “at this time”, not to proceed with proposals to prevent directors taking out insurance or indemnifying themselves from penalties under the FTA. This comes after consultation with “business and other groups”. While the Commerce Commission has shown an increasing willingness to prosecute and fine individual directors for FTA breaches, the Government has rebalanced the scales somewhat by continuing to permit statutory liability insurance for those breaches.
The Government has also chosen to leave certain areas of the FTA untouched.
Infringement fees (the process whereby the Commerce Commission can issue an infringement notice and a fine up to $2,000 for a minor infringement, such as breaching consumer information standards, instead of initiating a prosecution) are slated to see no changes at all.
Similarly, the unfair contract terms regime, which protects consumers against unfair terms in a variety of contracts, will not be reformed. Under the FTA, an “unfair” term is a term that:
• Would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
• Is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
• Would cause detriment (whether financial or otherwise) to a party if it were applied, enforced, or relied on.
The regime is aimed at unfair terms in standard form consumer contracts (for example, in a mobile phone plan, whose nature makes it difficult for a consumer to negotiate) as well as standard form trade contracts. The regime has gradually been extended to small trade contracts (certain B2B contracts worth under $250,000 per year) and to grocery supply contracts between suppliers and regulated grocery retailers – both of which are known as “specified trade contracts”.
An expansion to the unfair contract terms regime would likely be “too much, too soon” for the business sector, but the Government’s announcement leaves room for future changes in this space.
What happens next?
The proposed changes follow an almost 23% rise in the number of fair trading complaints made to the Commerce Commission over the past five years.
The Government intends to introduce legislation amending the FTA to Parliament in early 2026. The proposed reforms are not expected to become law until later in 2026, and any changes to the penalty regime will not apply to any cases currently before the Courts.
We will watch the progress of these proposed reforms with interest. If you need advice on compliance with the FTA, get in touch with one of our team.
