In South Africa, the National Credit Act 34 of 2005 (NCA) regulates consumer finance and is primarily aimed at protecting consumers and making credit and banking services more accessible. In this chapter, we focus mainly on the NCA.
In addition to the NCA, the Consumer Protection Act 68 of 2007 (CPA) is also aimed at protecting consumers. The CPA does not apply to credit agreements but applies to the goods and services that are the subject of credit agreements. The exemptions under the CPA include any transaction with consumers who are juristic persons whose asset value or annual turnover, at the time of the transaction, equals or exceeds 2 million rand. The CPA will therefore apply to all transactions with individuals, and to all transactions with juristic persons whose asset value or annual turnover, at the time of the transaction, is below 2 million rand.
The CPA provides for certain fundamental consumer rights, including:
- a the right to protection against discriminatory marketing;
- b the right to restrict unwanted direct marketing;
- c the right to choose;
- d the right to disclosure and information;
- e the right to fair and responsible marketing;
- f the right to fair and honest dealing;
- g the right to fair, just and reasonable terms and conditions; and
- h the right to fair value, good quality and safety.
II LEGISLATIVE AND REGULATORY FRAMEWORK
The NCA in general applies to all credit agreements between parties dealing at arm’s length and made or having an effect in South Africa.2 An agreement is a credit agreement if it is a credit facility, credit transaction, credit guarantee or a combination of these.3 Such agreements generally have two main elements: credit is granted (e.g., a loan is provided) and a fee, charge or interest is imposed in respect of the deferred payment.
The NCA will always apply to a credit agreement entered into with an individual or sole proprietor. Among others, the NCA will not apply to a credit agreement in which the consumer is a juristic person4 whose asset value or annual turnover, together with that of all its related juristic persons, equals or exceeds 1 million rand, nor to a large credit agreement5 concluded with a juristic person whose asset value or annual turnover is less than 1 million rand.
Credit providers must provide consumers with pre-agreement statements and quotations in the prescribed form. The content of the credit agreements is also prescribed.6
The cornerstone of the NCA is the prevention of reckless credit granting and debt relief measures to deal with the problem of over-indebted customers.7 The NCA requires peremptory pre-assessment of consumers and imposes severe sanctions in certain instances of reckless credit granting.
In terms of Section 80(1)(b)(ii), a credit agreement is reckless if the credit provider, having conducted an assessment, entered into an agreement with the consumer although the preponderance of information available to the credit provider indicated that entering into that credit agreement would make the consumer over-indebted. The regulations under the NCA contain provisions prescribing the criteria to conduct an affordability assessment, the assessment of existing financial means and prospects and the calculation of financial obligations.
A consumer may apply to a debt counsellor to be declared over-indebted. The debt review process, as set out in Section 86 of the NCA read together with applicable regulations, is quite detailed and comprises various phases.
A credit provider is not allowed to charge an amount or impose a monetary liability on a consumer in respect of credit fees or charges prohibited by the NCA, or an amount of a fee or charge or an interest charge under a credit agreement exceeding the amount that may be charged under the NCA.
In terms of Section 101 of the NCA, a credit agreement can only require from the consumer payment of the principal debt, an initiation fee, a service fee, interest, cost of credit insurance, default administration charges and collection costs. All of these fees and charges are either prescribed or limited in their application. The credit provider may further charge default administration charges and collection costs, as defined.
A credit provider may also, in terms of Section 106 of the NCA, require a consumer to maintain, during the term of their credit agreement, credit life insurance not exceeding, at any time during the life of the credit agreement, the total of the consumer’s outstanding obligations to the credit provider in terms of their agreement. There are detailed requirements for such insurance.
Note that the cost of credit must be disclosed in detail in the pre-agreement statement and quotation. If the credit provider charges a prohibited fee, this will be an offence under the NCA.8
The NCA prescribes a two-stage approach to a credit provider’s debt enforcement by distinguishing between procedures that must be complied with before debt enforcement and further procedures that are dealt with as debt procedures in a court. The required procedures before debt enforcement are contained in Section 129, and the debt procedures in a court are found in Section 130.
The NCR was established as the regulator under the NCA and is responsible for (among others) the regulation of the credit industry, the registration of industry participants, investigation of complaints and ensuring the enforcement of the NCA.
The NCT is an independent body distinct from the NCR. It may adjudicate any application that may be made to it in terms of, and make any order provided for in, the NCA in respect of such an application. In addition, it may also adjudicate on allegations of prohibited conduct and impose remedies provided for in the NCA.
Any person who complains of a contravention of the NCA may submit a complaint to the NCR, which may investigate a complaint or may initiate a complaint in its own name.11 The NCR may refer the matter to a consumer court, the NCT or the National Prosecuting Authority (if an offence in terms of the NCA is committed).
In terms of Section 55 of the NCA, the NCR may issue a compliance notice to a person who it, on reasonable grounds, believes has failed to comply with a provision of, or is engaging in an activity in a manner inconsistent with, the NCA. If a person fails to comply with the compliance notice, or if a person objects to the notice, the matter will be referred to the NCT.
Section 57 of the NCA provides that, if a registered credit provider repeatedly contravenes the NCA, the NCR may request the NCT to cancel the credit provider’s registration. If a credit provider is also a regulated financial institution, the NCR may impose conditions on the registration of that person; refer the matter to the regulatory authority that licensed the financial institution, with the request that the authority review that licence; or at the request, or with the consent, of the regulatory authority that licensed the financial institution, request the NCT to cancel the registration.
A person affected by a decision of the NCR to impose conditions on the registration of a credit provider may apply to the NCT to review the decision. A decision of the NCT is subject to appeal or review by the High Court.
In addition to suspending or cancelling a credit provider’s registration, in terms of Section 150 of the NCA, the NCT may make the following orders (among others) in relation to prohibited or required conduct in terms of the NCA: declaring conduct to be prohibited, interdicting any prohibited conduct, imposing an administrative fine or requiring payment to the consumer of any excess amount charged, together with interest at the rate set out in the agreement.
The amount of an administrative fine may not exceed the greater of 10 per cent of the credit provider’s annual turnover during the preceding financial year or 1 million rand. The annual turnover of a credit provider is the total income of that credit provider during the immediate preceding year under all credit agreements to which the NCA applies, less the amount of that income that represents the repayment of principal debt under those credit agreements. Any decision, judgment or order of the NCT may be served, executed and enforced as if it were an order of the High Court.
The National Payment Systems Act 78 of 1998 (NPS Act) provides for the management, administration, operation, regulation and supervision of the payment, clearing and settlement systems in South Africa. The South African Reserve Bank (SARB) is the overseer of the national payment system.
Apart from the Bills of Exchange Act 34 of 1964, payment methods are not specifically regulated by legislation. Payment methods include electronic transfers, cards, cheques, debit orders and ATMs or mobile devices. The NCA specifically allows debit order payments and regulates their content.12
The use of point of sale devices and ATMs have, according to the 2015/2016 Annual Oversight Report published by the National Payment System Division (NPSD) of the SARB (the Report) increased to add to the availability of the infrastructure to the broader population in South Africa.
ii Recent developments
The Report further confirms that the NPSD has initiated a review of the NPS Act in 2016. The aim is, among others, to align the NPS Act with international standards and best practices. In addition, the payment industry has:
- a engaged in the design of an authenticated collection system for debit orders. Authentication options will include electronic (non-card) and card-based options; and
- b concluded the development and design of card specifications for an open, interoperable national biometric authentication standard which will accommodate biometrics for card-present transactions in South Africa.
The SARB continues to monitor and research the developments regarding virtual currencies, block chain and distributed ledger technologies.
IV DEPOSIT ACCOUNTS AND OVERDRAFTS
A large proportion of the South African population lacks access to financial services, mostly because they do not have a bank account and live in remote or rural areas. The Banking Association of South Africa refers to ‘financial inclusion’ and explains that it is a central aim of the banking sector, whereby the sector seeks to improve the range, quality and availability of financial services and products focusing on the unserved, underserved and financially excluded. Principles of financial inclusion include access, affordability, appropriateness, usage, quality, consumer financial education, innovation and diversification, and simplicity.
The Banking Association reports that the banking industry has set a target of improving financial inclusion in South Africa by raising the current levels of banked individuals from 67 per cent to 70 per cent by 2015 and reaching a target for financial inclusion of 90 per cent by 2030.13
Overdrafts are regulated as credit facilities under the NCA (see Section III, supra).
ii Recent developments
South Africa does not have explicit deposit insurance or deposit guarantee schemes. However, in a position paper issued by National Treasury in 2015, titled ‘Strengthening South Africa’s Resolution Framework for Financial Institutions’,14 it was proposed that a proper resolution strategy should include the protection of depositors in a manner consistent with deposit insurance arrangements. In addition, it was proposed that the South African Reserve Bank should have the power to invoke the deposit insurance scheme. This paper will form the basis of discussions in the industry towards the drafting of a special resolution bill.
V REVOLVING CREDIT
Revolving credit is regulated as a credit facility under the NCA.15
A credit provider is not allowed to make an offer to increase the credit limit under a credit facility, or induce a person to accept such an increase, on the basis that the limit will automatically be increased unless the consumer declines the offer.16 When entering into a credit agreement, the credit provider must afford the consumer an opportunity to decline the option of pre-approved annual credit limit increases as set out in Section 119(4).17
Consumers must be provided with contact telephone numbers where they can report the loss or theft of a PIN or a card, and the consumer may not be held liable by the credit provider after the time that the consumer has reported the loss or theft of the card or PIN, unless the consumer’s signature appears on the voucher, sales slip, or similar record evidencing that particular use of the credit facility; or the credit provider has other evidence sufficient to establish that the consumer authorised or was responsible for that particular use of the credit facility.18
A consumer may require the credit provider to reduce the credit limit under the facility and to stipulate a maximum credit limit that the consumer is prepared to accept. A credit provider may also reduce the credit limit under that credit facility to take effect on delivery of a written notice.19
ii Recent developments
Credit cards are not only issued by banks. If the card is a multi-function card which could also allow the cardholder to withdraw cash from the credit facility, the issuer will only be able to issue such a card in partnership with a bank, so as to avoid conducting the business of a bank as provided for under the Banks Act 94 of 1990.
Vi INSTALMENT CREDIT
Instalment credit in respect of moveable goods, such as the financing of vehicles, is regulated as instalment agreements under the NCA. If the instalment agreement does not reserve ownership of the moveable until the agreement is fully complied with, or does not have a provision authorising repossession of the moveable in the event of a breach of the agreement, it will not be regarded as an instalment agreement for purposes of the NCA. It may then be regarded as a credit transaction as provided for in Section 8(4)(f) of the NCA (i.e., payment is deferred and a charge, fee or interest is payable).
A mortgage agreement is also regulated under the NCA as a credit agreement.20
If a credit agreement is an instalment agreement or a mortgage agreement, the credit provider may include in the principal debt deferred any of the following items to the extent that they are applicable in respect of goods that are the subject of the agreement:
- a an initiation fee as contemplated in Section 101(1)(b), if the consumer has been offered and declined the option of paying that fee separately;
- b the cost of an extended warranty agreement;
- c delivery, installation and initial fuelling charges;
- d connection fees, levies or charges;
- e taxes, licence or registration fees; or
- f subject to Section 106, the premiums of any credit insurance payable in respect of that credit agreement.21
Certain types of credit agreements are excluded from the application of Sections 81 to 84 of the NCA insofar as those provisions relate to reckless credit. The excluded agreements include a school loan or a student loan and emergency loan. Although these loans must be reported to the National Credit Register, no such register has as yet been created. In the case of an emergency loan, the credit provider must obtain and retain proof of the existence of the emergency, as defined in Section 1 of the NCA.
VII OTHER AREAS
The Protection of Personal Information Act 4 of 2013 (POPI) has recently been promulgated, but is not yet fully effective.22 Once POPI has come into full force (which may occur in 2017), it will govern the processing of personal information as defined. These obligations are placed on the responsible party, which is defined as a private or public body or any other person that, alone or in conjunction with others, determines the purposes of and means for processing personal information.
Therefore, to the extent that a responsible party company processes personal information of consumers (data subjects),23 it must comply with all of the conditions for lawful processing.24 There are eight conditions for lawful processing. The conditions relate to accountability,25 processing limitations,26 purpose specification,27 further processing limitation,28 information quality,29 openness,30 security safeguards31 and data subject participation.32
The Financial Intelligence Centre Act 38 of 2001 (FICA) compels only accountable institutions listed in Schedule 1, to identify and verify the identity of a new client before any transaction may be concluded or any business relationship is established. Credit providers are not listed specifically as accountable institutions, but banks are.
FICA and the Prevention of Organised Crime Act 121 of 1998 (POCA) provides the primary legal foundation for combating money laundering in South Africa. Money laundering is described in Section 1(1) of FICA as an activity that has or is likely to have the effect of concealing or disguising the nature, source, location, disposition or movement of the proceeds of unlawful activities or any interest which anyone has in such proceeds, and includes any activity which constitutes an offence in terms of Section 64 of FICA or Sections 4, 5 or 6 of POCA (offences relating to the proceeds of unlawful activities).
FICA requires all suspicious and unusual transactions to be reported. This obligation is, however, more widely cast in that it applies not only to accountable institutions but to any person who carries on business in South Africa. The term ‘business’ has not been defined, and the ordinary meaning of the word will therefore apply, namely that of a commercial activity or undertaking.33 Failure to report under Section 29 constitutes an offence. A person convicted of this offence will be liable to imprisonment for a period not exceeding 15 years, or to a fine not exceeding 10 million rand.
A person convicted of a money laundering offence under Sections 4 to 6 of POCA is liable to a maximum fine of 100 million rand or to imprisonment for a period not exceeding 30 years. Also, the proceeds as well as the instrumentalities of the crime may be lost to the state in terms of the confiscations and forfeiture powers under POCA.
Section 4 of the Protection of Constitutional Democracy against Terrorist and Related Activities Act 33 of 2004 also creates various offences associated with the financing of or economic support for ‘specified offences’. Specified offences include the offence of terrorism and an offence associated or connected with terrorist activities. The offences listed in Section 4(1) focus on the commission of terrorist acts or to benefit a terrorist or terrorist organisation.
VIII UNFAIR PRACTICES
Several credit providers have been deregistered in applications brought before the NCT by the NCR. The reasons for their deregistration include granting credit to consumers recklessly without taking reasonable steps to conduct an affordability assessment, failure to provide consumers with a pre-agreement statement and quotation, failure to provide consumers with copies of the credit agreements, charging consumers in excess of the fees and interest rates prescribed under the NCA.34 In addition debt counsellors have been deregistered for committing fraud by not passing on money paid to them to the credit providers to whom the money was due, or by misleading consumers into being placed under debt review against their will.
IX RECENT CASES
i Enforcement actions
Notable recent judgments of the NCT include:
- a the prohibition of conduct where a respondent advertised credit to consumers who had been blacklisted;35
- b the deregistration of a credit provider for breaching the NCA by charging interest rates and collection commission in excess of the rates prescribed by the NCA;36 and
- c the deregistration of a debt counsellor who misled consumers into being placed under debt review against their will.37
ii Disputes before the regulator
The NCR has a complaints department that receives complaints about alleged contraventions of the NCA, resolves such complaints informally and promotes the informal resolution of disputes.
In Absa Ltd v. Moore and Another,38 the facts were that the Moores fell victim to a property scam. Under the impression that they were applying for a secured loan, the Moores sold their house to an ‘investor’, Mr Kambini, to whom Absa granted a home loan secured by a mortgage bond. The property was transferred to Mr Kambini and the Moores’ (five) mortgage bonds cancelled simultaneously with the registration of Mr Kambini’s bond. When Mr Kambini later defaulted on his loan, Absa took judgment against him and attached the property, which was still occupied by the Moores, in execution of his debt.
A High Court found that the agreements signed by the Moores were invalid by reason of simulation and granted the Moores’ application for an interdict prohibiting the proposed sale in execution. The court ordered the restitution of the property to the Moores subject to the reinstatement of their original mortgage bonds. In an appeal by Absa, the Supreme Court of Appeal held the agreements to be invalid for fraud, not simulation, and undid the condition imposed by the High Court, which it found to be unjustified and incompetent.
In an application for leave to appeal to the Constitutional Court, Absa sought only the reimposition of this condition (i.e., the reinstatement of the Moores’ original mortgage bonds). The Constitutional Court held that while a debt may be paid without the consent of the debtor (the Moores), provided the payer (Kambini) intended to pay and the creditor (Absa) intended to accept payment, the question was whether the ‘fraud unravels all’ principle could aid Absa by undoing the debt discharge and the bond cancellation. The answer was that it could not: the payment was valid despite the fraud, and effective to discharge the Moores’ debt to Absa. The fraud did not unravel the cancellation of the Moores’ bonds: they were accessory to the main debt they owed Absa, which was validly cancelled. The court was of the view that this outcome was fair: Absa, which enjoyed the institutional resources and power to protect itself against the fraudulent scheme, but didn’t do so, had to suffer the loss its loan to Mr Kambini caused to it. In addition, Absa has a claim against Kambini, and it was accordingly not impoverished. Leave to appeal was accordingly refused.
In Edwards v. FirstRand Bank Ltd t/a Wesbank,39 Wesbank as the credit provider had issued summons against the consumer appellant (Mr Edwards) after he fell into arrears with his instalments under an instalment sale agreement between them, cancelling the credit agreement and claiming return of the vehicle that was its subject matter. Having obtained summary judgment against Mr Edwards, Wesbank then repossessed the vehicle, and after notices in terms of Sections 127(2) and 125 of the NCA were dispatched to Mr Edwards by ordinary post using the address he had furnished in the credit agreement, sold the vehicle at an auction. Mr Edwards alleged that he did not receive the notice.
The court confirmed that although it may be advisable to send the notice in terms of Section 127(2) by registered mail, that was not what the law required. The credit provider must place facts before the court showing that notice, on a balance of probabilities, reached the consumer. The court would then determine whether facts presented constituted adequate proof of delivery. From the evidence it was clear that a notice was sent to the address furnished by Mr Edwards. Since he knew there was no street delivery of mail, he only had himself to blame for not having received it. In the result, the appeal was dismissed.
A second revised draft of the Financial Sector Regulation Bill (FSR Bill) has been published for public comment. The intention is to establish a twin peaks model of financial sector regulation for South Africa. Two regulators will be established, namely a Prudential Authority (PA), operating within the administration of the SARB, and a new Financial Sector Conduct Authority (FSCA), which is intended to replace the Financial Services Board.
The FSR Bill also sets out the functions of the SARB in relation to financial stability and managing systemic risks and systemic events. The intention is that the PA will supervise the safety and soundness of banks, insurance companies and other financial institutions, while the FSCA will supervise how financial services firms conduct their business and treat customers.
The twin peaks system of regulation will (when fully phased in) focus on a more harmonised system of licensing, supervision, enforcement, customer complaints (including ombudsmen), appeal mechanism (tribunal) and consumer advice and education. Full implementation of the twin peaks system of regulation will inevitably require further legislative and operational changes.
1 Ina Meiring is a director at Werksmans Advisory Services (Pty) Ltd.
2 Section 49(1) of the NCA.
3 See the definitions in Section 8 of the NCA.
4 The NCA has limited application if the credit agreement is entered into with a juristic person who falls within the thresholds. See Section 6 of the NCA.
5 A large credit agreement is either a credit transaction in terms of which the principal debt is 250, 000 rand or more, or a mortgage agreement.
6 See Sections 92 and 93 of the NCA.
7 See Section 3 on the purposes of the NCA.
8 Section 100(3) of the NCA.
9 See Sections 12–25 of the NCA.
10 See Sections 26–34 of the NCA.
11 See Sections 26–34 of the NCA.
12 Section 124 of the NCA.
13 See www.banking.org.za/what-we-do/overview.
14 2015 Resolution Framework Policy http://www.treasury.gov.za/publications/.
15 See Section 8(3) of the NCA.
16 Section 74(2) of the NCA.
17 Section 74(6) of the NCA. See Section 119 for the circumstances under which the credit limit under a credit facility may be increased.
18 Section 94 of the NCA.
19 Section 118 of the NCA.
20 A mortgage is defined in Section 1 of the NCA as a mortgage bond registered by the registrar of deeds over immoveable property that serves as continuing covering security for a mortgage agreement.
21 Section 102 of the NCA.
22 Certain sections of POPI became effective in 11 April 2014, and deal mainly with the establishment of the office of the Information Regulator and with the powers of the Minister to issue regulations.
23 Data subject means in terms of Section 1 of POPI, the person to whom the personal information relates and includes individuals and juristic persons.
24 Sections 4 and 5 of POPI.
25 The responsible party must ensure that all of the conditions for processing are met.
26 Processing must be adequate, relevant and not excessive. It is not necessary to collect data directly from the data subject if the data subject provided consent to the collection of the information from another source.
27 The information must be collected for a specific, explicitly defined and lawful purpose.
28 Further processing must be compatible with the purpose of collection.
29 Information must be complete, accurate and updated where necessary.
30 The data subject must be aware that personal information is collected.
31 The integrity and confidentiality of personal information must be ensured.
32 Data subjects have the right to access personal information and to request correction of inaccurate, irrelevant, out of date, excessive or incomplete or misleading information.
33 See Guidance Note 4 on Suspicious Transaction Reporting issued in terms of Section 4(c) of FICA.
34 See the Annual Report 2015/2016 by the NCT.
35 National Credit Regulator v. City Finance NCT/22130/2015/55(6).
36 National Credit Regulator v. Mayibuye Cash Loans CC NCT/22132/2015/57(1).
37 National Credit Regulator v. Celeste Sullivan NCT/22678/2015/57(1).
38 Absa Ltd v. Moore and Another 2017(1) SA 225 (CC).
39 Edwards v. FirstRand Bank Ltd t/a Wesbank 2017 (1) SA 316 (SCA).