Retailers are hailing last week’s Western Cape High Court ruling in favour of Truworths, Foschini and Mr Price in a case that challenged the requirements of the National Credit Act (NCA).
The case was brought against the Minister of Trade and Industry and the National Credit Regulator (NCR), with the South African Human Rights Commission intervening.
The three retailers had called for a review, arguing that the specified requirements for documentary evidence, such as three months’ bank statements and payslips, for affordability assessments were unreasonable and discriminated against certain sections of society, in particular, the unbanked and the informally employed.
Affordability assessments have always been a requirement of the NCA, but credit providers were allowed to determine the manner in which they were conducted. That all changed on March 13, 2015, when new regulations to the Act were promulgated, introducing criteria to be followed when conducting the assessments.
Section 81 of the NCA, which regulates the prevention of reckless lending, places an obligation on a credit provider to conduct affordability assessments before entering into a credit agreement with a consumer. This section remains in force.
An attorney at Norton Rose Fulbright who represented the retailers says the ruling will allow many people who would otherwise have qualified for credit but were barred from accessing it because they did not have the prescribed documentation to be granted loans.
“One of the purposes of the NCA is to promote and advance a fair credit market that is accessible to all South Africans,” the attorney says. “The applicants were of the view that regulation 23A(4), which has now been struck out, was not in line with this purpose.”
Citing the court’s example of a flower seller who did not have a bank account, the attorney says it was unlikely that such a person would have financial statements, which meant she would have been prevented from obtaining a small amount of credit, even if she was earning a reasonable amount each month. This would prejudice her from obtaining much-needed credit to buy school uniforms for her children, despite being able to afford the repayments.
“Same if you were a student: you don’t have an account, then you get a job and you want to buy a suit, but you don’t have three months’ salary slips yet. It would now be open to the credit provider to consider other documentation to verify the credit applicant’s affordability. Perhaps they would consider the letter of engagement.”
The attorney says the court found that regulation 23A(4) frustrates the aim of the NCA to promote the development of a credit market that is accessible to all South Africans, and, in particular, to those who historically have been unable to access credit under sustainable market conditions.
The court was of the opinion that, in discriminating against a section of the population that represents the less privileged – and probably also many previously disadvantaged persons – in a manner that is not fair, the regulation falls foul of sections 14(2) and 14(3) of the Promotion of Equality and Prevention of Unfair Discrimination Act and contravenes section 9(3) of the Constitution.
The ruling, however, does not affect retailers’ obligations to conduct fair and objective affordability assessments, and credit applicants still need to provide “authentic proof”.
The attorney says a credit provider must still conduct an assessment and use its own mechanisms to determine the affordability of the credit applicant, and in doing so it must comply with the remainder of the regulations relating to the conduct of this assessment, which are still in force.
She says there is the risk of consumer dishonesty, but credit providers will still do checks with the credit bureaus. “In terms of the regulations, there’s an obligation on the consumer to give valid information.”
The ruling has been greeted with caution by the Credit Ombud, while the NCR says it’s considering appealing.
Lee Soobrathi, the senior manager in the complaints and case management department at the Credit Ombud, says the decision merely addresses the need to provide three payslips or a three-month bank statement.
“If a consumer can justify their income, and the credit provider can justify their decision, the agreement will not be reckless. This merely addresses a situation where a consumer does not receive a payslip or have a bank account.”
Soobrathi says it remains to be seen how credit providers will assess affordability, although they are likely to revert to their internal affordability policies, in addition to the guidelines.
Lesiba Mashapa, the regulator’s company secretary, says the NCR is considering taking legal advice with a view to appealing the judgment.
“The purpose of regulation 23A(4) was to enable credit providers to lend to consumers on the basis of verified/validated income. It was an important tool in the fight against reckless lending and borrowing.”
Mashapa says the NCR is unhappy with the judgment, because it means that even consumers who are formally employed and can produce payslips and bank statements will not be required to do so.
“(We) appeal to credit providers to continue to apply the income verification standards set by the regulations to protect themselves and consumers from reckless lending and borrowing.
“Credit providers are reminded that section 81(2) of the NCA requires them to take reasonable steps to assess consumers’ financial means before granting them credit. They should request consumers to produce proof of income,” Mashapa says.