In South Africa, the National Credit Act 34 of 2005 (NCA) regulates consumer finance and is primarily aimed at protecting consumers and making credit 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 to the goods and services that are the subjects 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 the rights to:
- protection against discriminatory marketing;
- restrict unwanted direct marketing;
- disclosure and information;
- fair and responsible marketing;
- fair and honest dealing;
- fair, just and reasonable terms and conditions; and
- fair value, good quality and safety.
The Financial Sector Regulation Act 9 of 2017 (FSRA) established a 'twin peaks' model of financial sector regulation for South Africa by means of two regulators, namely a Prudential Authority, operating within the administration of the South African Reserve Bank (SARB), and a new Financial Sector Conduct Authority (FSCA). The Prudential Authority supervises the safety and soundness of banks, insurance companies and other financial institutions, while the FSCA supervises how financial services firms conduct their business and treat customers.
The objectives of the FSCA include enhancing and supporting the efficiency and integrity of the financial system and protecting financial customers. As a market conduct regulator, the FSCA has particular focus on the most vulnerable customers, namely retail clients or consumers. The outcomes-focused market conduct regulatory and supervisory approach of the FSCA seeks to protect consumers by ensuring that financial institutions demonstrate that they consistently treat their customers fairly in their provision of financial products and services.2
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.3 An agreement is a credit agreement if it is a credit facility, credit transaction, credit guarantee or a combination of these.4 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 person5 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 agreement6 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 credit agreements is also prescribed.7
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.8 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 even though 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. In addition, the NCA also provides for debt-reorganisation in cases of over-indebtedness.
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 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.9
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 the complaint or initiate one in its own name.12 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 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, and 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 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.13
The SARB issued a position paper on virtual currencies in December 2014,14 which highlighted several risks associated with the virtual currencies landscape, particularly digital currencies, and provided a cautionary note to users. The SARB remains of the view that currently virtual currencies (VCs) pose no significant risks to financial stability, price stability or the national payment system (NPS).15
ii Recent developments
The National Payment System Department of the SARB published a policy paper on the 'Review of the National Payment System Act 78 of 1998' in 2018 (the NPS Policy Paper).16 The NPS Policy Paper contains several recommendations, including:
- The NPS Act should enable the ability to consider and adopt, where appropriate, international standards and principles to the extent that it is appropriate to South Africa and does not stifle innovation.
- The primary objects should be stated as promoting the financial stability, safety, efficiency (including interoperability), transparency and integrity of the NPS; the safety and soundness of payment institutions and activities; and confidence in the NPS.
- The secondary objects should be stated as the prevention of financial crime, promotion of financial inclusion and support of the FSCA in its consumer protection objective.
- The SARB should be responsible for licensing all entities that provide payment services and operate payment systems, after consultation with the FSCA.
- It is recognised that in future the SARB may wish to allow or require settlement of other emerging currencies, such as central bank digital currencies and VCs, or designate other settlement systems, and the NPS Act should be enabling in this regard, with specific requirements being provided for in subordinate legislation.
- The provision of retail payment services and activities (e.g., remittance services, e-money, mobile money) where money is not due to a third party should be allowed, whether the entities providing such services are banks or non-banks. Such entities should be exempted from the definition of the business of a bank in the Banks Act 94 of 1990 and be subject to a risk-based and proportionate regulatory, supervisory and oversight framework. This could also be effected through an amendment to the Banks Act and necessary provisions in the NPS Act, while at the same time maintaining financial stability.
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.17 Principles of financial inclusion include access, affordability, appropriateness, usage, quality, consumer financial education, innovation and diversification, and simplicity.18
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 2030.19
Overdrafts are regulated as credit facilities under the NCA (see Section III above).
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',20 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 SARB 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.
The SARB has also published a discussion paper on 'Designing a deposit insurance scheme for South Africa'.21 This discussion paper motivates the need for an explicit, privately funded deposit insurance scheme for South Africa.
Further, a draft Conduct of Financial Institutions Bill (CoFI) was published in December 2018. The object of CoFI is to establish a consolidated, comprehensive and consistent regulatory framework for the conduct of financial institutions that will:22
- protect financial customers;
- promote the fair treatment and protection of financial customers by financial institutions;
- support fair, transparent and efficient financial markets;
- promote innovation and the development of and investment in innovative technologies, processes and practices;
- promote trust and confidence in the financial sector;
- promote sustainable competition in the provision of financial products and financial services;
- promote financial inclusion;
- promote transformation of the financial sector; and
- assist the SARB in maintaining financial stability.
V REVOLVING CREDIT
Revolving credit is regulated as a credit facility under the NCA.23
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.24 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).25
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.26
A consumer may require the credit provider to reduce the credit limit under the facility and stipulate a maximum credit limit that he or she 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.27
Credit cards are not only issued by banks. If the card is a multi-function card that 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 movable 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 movable until the agreement is fully complied with, or does not have a provision authorising repossession of the movable goods 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.28
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:
- 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;
- the cost of an extended warranty agreement;
- delivery, installation and initial fuelling charges;
- connection fees, levies or charges;
- taxes, licence or registration fees; or
- subject to Section 106, the premiums of any credit insurance payable in respect of that credit agreement.29
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 loans. 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.30 Once POPI has come into full force (which may occur in 2019), 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),31 it must comply with all of the conditions for lawful processing.32 There are eight conditions for lawful processing. The conditions relate to accountability,33 processing limitations,34 purpose specification,35 further processing limitation,36 information quality,37 openness,38 security safeguards 39 and data subject participation.40
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 currently not listed specifically as accountable institutions, but banks are. Amendments may be affected to FICA to include credit providers as accountable institutions.
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 that anyone has in such proceeds, and includes any activity that 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.41 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 offences associated or connected with terrorist activities. The offences listed in Section 4(1) focus on the committing of terrorist acts or acts that benefit a terrorist or terrorist organisation.
VIII UNFAIR PRACTICES
The NCT reported the following two notable judgments in its Annual Report 2017/201842 that are illustrative of the manner in which unfair practices are deal with:
In NCR v. Gauteng Motors CC,43 the respondent was allegedly involved in extending credit while not registered as a credit provider and entering into reckless credit agreements with consumers. An investigation by the NCR was prompted by a complaint related to the repossession of a consumer's vehicle by the respondent, allegedly without following the required enforcement procedures. The NCT found that the respondent had engaged in prohibited conduct by engaging in reckless credit, charging extra charges without disclosing their nature and failing to adhere to lawful debt enforcement procedures. The respondent was ordered to pay an administrative fine of 800,000 rand within 30 days of the date of the judgment.
In NCR v. Murphy and Sons Cash Loans CC,44 the allegation by the NCR was that the respondent had inadequately assessed the ability of consumers to receive and repay the credit extended to them; had entered into reckless credit agreements with consumers; had failed to keep proper documentation for conducting affordability assessments; had charged interest on the principal debt in excess of the prescribed amount; and had failed to provide consumers with pre-agreement statements and quotations in contravention of the NCA. The NCT declared the conduct of the respondent to be prohibited and cancelled its registration as a credit provider. The NCT further ordered a refund to all affected consumers who were charged excess amounts in the form of fees or amounts that exceeded the prescribed maximum allowed by the NCA within 30 days of the date of judgment. The respondent was further ordered to pay an administrative fine of 250,000 rand.
IX RECENT CASES
The two most notable recent cases, both of which are under appeal, concern the charging of club fees by retailers who either offer credit facilities or enter into instalment agreements with consumers: Edcon Holdings Limited v. the National Consumer Tribunal and the National Credit Regulator (Edcon case)45 and National Credit Regulator v. Lewis Stores (Pty) Ltd(Lewis case).46
These cases both dealt with the question whether a credit agreement may require the payment of money or other consideration, other than the fees and charges listed in Section 101 of the NCA. The credit providers (Edcon and Lewis Stores) charged a club fee for club membership. The NCR contended that the fees were prohibited since the NCA does not allow a credit agreement to contain any fee or charge other than that permitted by the NCA.
In the Edcon case, Louw J found that the word 'require', in the context of Section 101 of the NCA, can only mean to demand from a consumer who applies for credit, or to impose an obligation on that consumer to pay for something that is not permitted in terms of the Section. If the credit agreement does not place an obligation on a consumer to pay a fee, if the customer has a choice whether or not to subscribe to a product or service, then the credit agreement itself does not require payment of such fees. The court held that the club fee charged is clearly not a cost of credit since the notion of a cost of credit is the cost of lending money or extending a credit facility.47 In addition, the court found that the fee for the product (the club membership) entitled the customer to various benefits. It can therefore not be a cost of credit, or in consequence of or pursuant to the conclusion of a credit agreement. The court was of the view that the fact that membership of the club can be cancelled by the customer at any time, negates that contention.48 Accordingly, the court found that the tribunal had erred in finding that Edcon had engaged in conduct that was prohibited by the NCA.
The facts in the Lewis Stores case are somewhat different to those in the Edcon case. In this case, club membership is agreed to in a separate agreement and not on the credit application form. In addition, the credit agreement is an instalment agreement as opposed to the credit facility in the Edcon case. The court agreed that the NCA does not seek to regulate the goods and services that a credit provider offers to its customers, but only seeks to regulate the fees and charges that can be charged when a customer elects to pay for goods in accordance with a credit agreement (which includes a credit facility). It deals with credit and the cost of credit. Therefore, the NCA does not prevent a credit provider from offering services that are not part of the cost of credit.49 Accordingly, the NCR's appeal was dismissed with costs.
CoFI (see Section IV) is regarded as the next phase of the legislative reforms to strengthen the regulation of how the financial services industry treats its customers. The provisions of this bill are in accordance with the FSRA (see Section I). The FSRA sets out the mandates of the two regulators, namely the SARB and FSCA, while CoFI aims to streamline the framework for the regulation of the conduct of the financial institutions, and to give legislative effect to the market conduct policy approach, including implementing the 'treating customers fairly' principles.
1 Ina Meiring is an executive at ENSafrica.
2 2018 Annual Report of the FSCA p.11.
3 Section 49(1) of the NCA.
4 See the definitions in Section 8 of the NCA.
5 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.
6 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.
7 See Sections 92 and 93 of the NCA.
8 See Section 3 on the purposes of the NCA.
9 Section 100(3) of the NCA.
10 See Sections 12 to 25 of the NCA.
11 See Sections 26 to 34 of the NCA.
12 See Sections 26 to 34 of the NCA.
13 Section 124 of the NCA.
14 No. 2/2014.
15 Annual Regulatory and Oversight Report, National Payment System Department 2016/17.
16 See http://www.treasury.gov.za/comm_media/press/2018/2018121001%20NPS%20Act%20Review%20Policy%20Paper%20Release%201.pdf and https://www.resbank.co.za/RegulationAndSupervision/NationalPaymentSystem%28NPS%29/Legal/Documents/Documents%20for%20Comment/NPS%20Act%20Review%20Policy%20Paper%20-%20final%20version%20-%2013%20September%202018.pdf.
21 May 2017.
22 See clause 3 of CoFI.
23 See Section 8(3) of the NCA.
24 Section 74(2) of the NCA.
25 Section 74(6) of the NCA. See Section 119 for the circumstances under which the credit limit under a credit facility may be increased.
26 Section 94 of the NCA.
27 Section 118 of the NCA.
28 A mortgage is defined in Section 1 of the NCA as a mortgage bond registered by the registrar of deeds over immovable property that serves as continuing covering security for a mortgage agreement.
29 Section 102 of the NCA.
30 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. The 'Regulations Relating to the Protection of Personal Information, 2017' were published on 14 December 2018, but are not effective yet.
31 Data subject means in terms of Section 1 of POPI, the person to whom the personal information relates and includes individuals and juristic persons.
32 Sections 4 and 5 of POPI.
33 The responsible party must ensure that all of the conditions for processing are met.
34 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.
35 The information must be collected for a specific, explicitly defined and lawful purpose.
36 Further processing must be compatible with the purpose of collection.
37 Information must be complete, accurate and updated where necessary.
38 The data subject must be aware that personal information is collected.
39 The integrity and confidentiality of personal information must be ensured.
40 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.
41 See Guidance Note 4 on Suspicious Transaction Reporting issued in terms of Section 4(c) of FICA.
42 See www.thenct.org.za.
43 NCT-78954-2017-140 (1).
44 NCT-82548-2017-57 (1).
45 Case No: A237/2017.
46 Case No: A333/2017.
47 Edcon case, para 7.
49 Lewis case, paras. 15 and 16.