Pawnbrokers will face more regulatory oversight after a court ruling found they fall under the law regulating New Zealand lenders.
Believing pawnbroker pledges should be considered loans under the Credit Contracts and Consumer Finance Act (meaning brokers were covered by responsible lending rules) the Commerce Commission filed a case in the High Court in 2022 to see if its interpretation of the law was correct.
The regulator’s view contrasted with that of the National Pawnbrokers Association of New Zealand, which believed the profession shouldn’t fall under the act.
Pawnbrokers operate by taking an item, be it a stereo, skill saw or Rolex, as security for a loan.
To get the item back the borrower has to repay the cash with a fee/interest on top. If the loan taker doesn’t repay the broker, the broker can sell the item to make their money back.
The association said pawn contracts weren’t credit contracts because the borrower didn’t have to pay the loan back. It also argued that the broker had no right of recourse if sale of the goods didn’t make up the loan amount.
The High Court’s ruling was posted to the commission’s case register this month, with Judge Mary Peters not upholding every question it put forward but finding the pawnbroking contracts were considered credit contracts under schedule 6(a) of the Act in that they defer payment of a debt.
In New Zealand, pawnbrokers are regulated under the Secondhand Dealers and Pawnbrokers Act 2004, which requires pawnbrokers to be licensed and includes provisions for how they are to conduct business.
The 2004 law, which falls under the Ministry of Justice, replaced the Pawnbrokers Act 1908, which has its roots in the Pawnbrokers Act 1868.
The 1908 act regulated the interest a pawnbroker could charge on a loan, but restrictions on this were abandoned in the 2004 act.
Pawnbrokers are considered one of the oldest professions and English law relating to pawnbrokers can be traced back to 1604, when the Parliament of James I enacted the Act Against Brokers in response to rising numbers “abusinge the true and honeste ancient name and trade of broker[s]”.
The Commerce Commission’s acting general manager of credit Sarah Bartlett said the ruling meant most pawnbrokers would now need to comply with the Credit Contracts and Consumer Finance Act (CCCFA).
“At the moment, the commission’s priority is for pawnbrokers to comply with the CCCF Act’s obligation to certify and provide disclosure.”
A luxury pawnbroker who spoke to Newsroom on the condition they weren’t named said they expected the Commerce Commission would eventually extend its reach into the space, but all it was asking for right now was a register for fit and proper person certification under the Act.
“That’s all got to be done by the fifth of September, and after that who knows. But knowing the Commerce Commission they’ll come out of the woods and say you need to do this and you need to do that.
“What they’re effectively saying is what a person can and cannot do with their own item. If the guy comes in and says, I want to pull my stereo for a couple of weeks because I’ve got, you know, I’ve got a car repair bill that’s just come out the window, then why can’t he do it?”
Repeating sentiments aired by the sector when the Commerce Commission launched the action in 2022, the pawnbroker said it would make the industry unviable.
“If they come in with responsible lending and other compliance you need to do, there’s going to be a lot of pawnbrokers closing up because they won’t be able to run their business because the cost of compliance is just horrendous.”
As a luxury broker that works on an appointment basis with pricier items, they said greater regulation wouldn’t impact them as seriously as everyday pawn shops that deal with small loans, often less than $100.
They said that whether you like it or not, pawnbrokers performed a service that could get people out of tight spots without needing to resort to high-cost lenders (though high-cost lenders have been heavily restricted).
Jake Lilley, a policy advisor from financial mentoring agency FinCap, said while there might well be a time and place for pawnshop loans, mentors had been reporting significant concerns around a lack of affordability and suitability assessments.
He said these included taking priceless cultural items, such as tapa cloths, with unrealistic repayment conditions.
“It leads to substantial hardship, which is what the credit law is there to prevent – people going without meals in order to pay a loan, and that being foreseeable from the very start,” Lilley said.
“What we’d like to see is more upfront checks of what’s being taken, what the borrower’s intentions are, and whether or not the items are essential on going to that borrower; and what’s essential to each person is very different. These things actually need to be considered.
“There may be a place where a pawn-brokering loan is totally appropriate and worthwhile and in the interest of consumer, but it’s important to point out there are often other alternatives.”
These include reaching out to the Minister of Social Development, bank overdrafts, financial mentors or negotiating with utility providers.
If brought further under the Credit Contracts and Consumer Finance Act, there would be potential for financial dispute resolution schemes, interest rate caps and other aspects that groups like FinCap would like to see.
