It’s a sobering reality. Many of us buy just about everything on credit, from appliances and furniture to groceries and cosmetics, and we’re defaulting on repayments. And retailers, in an effort to mitigate the bruising losses they suffered due to the introduction of more stringent credit criteria, are sweetening the deal with vouchers, club cards, insurances and other “add-ons” to lure business.
Those costs, which might pale in comparison to the actual credit provided to clients, are a lifeline for businesses and a nifty little “passive income”, because few consumers utilise their memberships.
The costs were also considered “add-ons” to agreements, which raised flags at the National Credit Regulator (NCR), tasked with the credit industry’s regulation.
The National Credit Act (NCA), which came into effect in June 2007, gave credit providers discretionary powers to determine consumers’ ability to afford credit. That all changed in 2015 when amendments to the act were introduced and credit providers were given guidelines on how to determine affordability by requesting documentary proof and to factor discretionary income into their affordability assessments to avoid reckless lending.
Retailers not only found the new regulations onerous, but they lost out on a significant chunk of business, costing Truworths reportedly up to R250 million shortly after it complied with the new affordability regulations and causing a 30% decline in Foshini’s new store accounts.
So, joined by Mr Price, the three retailers took the National Credit Regulator and its political boss the dti to court. In March the Western Cape High Court judgment agreed with the plaintiffs and set aside a major aspect of the NCA’s affordability assessment regulations: the obligation for consumers to provide documentary proof.
Regulation 23A(12)(a) of the act, which was set aside, states that when conducting an affordability assessment, credit providers must calculate consumers’ discretionary income (gross income less statutory deductions such as income tax, UIF contributions, maintenance payments, necessary expenses and all other committed payment obligations).
In other words: credit providers had to take practicable steps in vetting if consumers had the financial means and prospects to repay debt before credit was extended, which meant three months’ bank statements, payslips, latest financial statements and additional checks at the credit bureaux had to be conducted.
The ruling was hailed by some as a victory for a significant section of the population that is unbanked, which now had access to credit.
The regulator, which wanted to appeal the ruling, has now responded by publishing new guidelines for ascertaining consumers’ gross and discretionary incomes, which it hopes will close the gaps left by the court’s scrapping of the requirement for documentary proof of affordability.
NCR company secretary, Jacob Mashapa, said it believed the court erred because it shouldn’t have allowed formally employed people to also not produce documentary proof of affordability.
“Credit providers are still required to ascertain consumers’ gross incomes and discretionary incomes when conducting affordability assessments on credit applications.
"Parts of the regulations requiring credit providers to calculate consumers’ discretionary and gross incomes and, for determining consumers’ minimum living expenses remain in force. These cannot be done by credit providers for formally employed consumers without asking for payslips or bank statements.
“For people who are formally employed you can only see their gross income on their pay slips. These two parts of the guidelines are still in force - the judgment rendered these regulations impractical to apply.”
Mashapa said since the DTI is not appealing, the regulator is providing guidelines to the industry because it’s the NCR’s duty to ensure credit providers conduct affordability assessments accurately.
“You only have to look at the number of consumers with impaired credit records, which has declined substantially. It was around 48% three years ago, now it’s 38%. That’s a significant drop and is largely due to stricter affordability assessment requirements.”
Whether or not that is true, the NCR is pushing ahead with new guidelines (open for public comment until May 31) to close the loopholes.
And it’s taking another matter on appeal: its High Court loss to Lewis on April 30.
The regulator had accused the retailer of breaching credit regulations relating to its club fees and extended warranties.
The NCR believes these are prohibited under the NCA, so it referred four of the country’s biggest credit providers, Edcon, TFG, Mr Price and Lewis, to the Tribunal for breaching credit regulations in their club fees.
The NCR held that the additional fees pushed up the cost of buying goods on credit and that they were illegal.
The court felt differently though: Judge Nicolene Janse van Nieuwenhuizen of the North Gauteng High Court was scathing of the way in which the regulator had conducted itself, accusing it of over-reach, wasting taxpayer money and saying the NCR never had a case against Lewis in the first place.
She found Lewis’s “club fees” and extended warranties were not illegal, dismissed the matter, and slapped a costs order against the NCR to discourage any such future “crusades”.
Edcon was itself dealt a “klap” when the tribunal outlawed the charging of club fees on store accounts and ordered the group to refund all club fees it had charged since 2007. The Edcon and Lewis issues differ though because the former’s club fees are reflected in the credit agreements while Lewis’s are on the statements of account. Edcon is taking the matter on appeal so club members will have to wait a while before they see any refunds.
Mashapa says as the regulator, they need to set standards in the industry.
“We don’t believe we’re over-reaching. For example, in the guidelines we leave to credit providers to apply their own models to assess the incomes of consumers in the informal sector but they should submit such models to us.
“The club fees were included in the statement of account and not a separate agreement. We are appealing the judgment because it sets a precedent. It’s an issue of such significance that it should be finally determined by the Supreme Court of Appeal to provide final clarity to the market and the NCR. We have always held the view that you cannot include a fee not permitted in a credit agreement in a separate document.”