A recent judgment handed down by the Western Cape High Court, will ultimately prompt a major shift in the credit facility landscape as it seeks to improve the implementation of the purposes of the National Credit Act 34 of 2005 (“NCA”) and address the plight suffered by previously disadvantaged persons.
Truworths Ltd, the Foschini Group Ltd and the Mr Price Group Ltd brought a case against the Minister of Trade and Industry and the National Credit Regulator (“NCR”), with the South African Human Rights Commission intervening as amicus curiae. The major retailers sought a review of the documentary evidence required for affordability assessments in terms of the NCA, such as the standard three months’ bank statements and salary payslips. They argued that the requirements were unreasonable and discriminated against certain sectors of society, particularly the informally employed and unbanked.
An example of such a section of society would be street vendors who manage successful stands on the street. Given the nature of their business, it is unlikely that they would be in possession of financial statements or proof of income. This would result in them being prevented from securing credit, despite earning an amount sufficient for purposes of tendering repayments.
Affordability Assessment in terms of the NCA
The practice of affordability assessments by credit providers has been an inherent requirement of the NCA. In practice, credit providers were afforded a discretion to determine the manner in which these assessments be conducted. However, pursuant to its promulgation in 2015, regulations to the NCA introduced certain criteria for the purposes of conducting assessments.
Section 81 of the NCA regulates the prevention of reckless lending and places an obligation on credit providers to conduct affordability assessments before entering into a credit agreement with a consumer. This section remains in force. Regulation 23A(4) of the NCA provides that a credit provider must take practicable steps to assess the consumer or joint consumer’s discretionary income, in order to determine whether the consumer has the financial means and prospects to pay the proposed credit instalments. This regulation, which was the main point of dispute, was accordingly altered, the full extent of which will become apparent on publication of the judgment itself.
The Effect of Altering Regulation 23A(4)
By virtue of this ruling, persons who would have qualified for credit but were barred from doing so due to an inability to furnish the prescribed documents would be granted access to credit. In essence, this fulfills one of the key purposes of the NCA being the promotion and advancement of a fair credit market that is accessible to all South Africans, especially those who historically have been unable to access credit under sustainable market conditions.
The court was of the view that by discriminating against a section of the population that represents the less privileged in a manner that is not fair, the regulation conflicts with sections 14(2) and 14(3) of the Promotion of Equality and Prevention of Unfair Discrimination Act and further contravenes section 9(3) of the Constitution.
While the ruling has resulted in the alteration of Regulation 23A(4), it does not remove the obligation of retailers to conduct fair and objective affordability assessments, and persons applying for credit remain liable for providing proof of affordability.
The effect of the ruling is that credit providers must now conduct credit assessments using its own internal mechanisms whilst still complying with the remainder of the regulations, which remain in full force and effect. While there is a risk of consumer dishonesty, the consumer is obligated to provide valid information in terms of the regulations.
Although this ruling is certainly a welcome development in creating a more open and accessible credit market, authorities such as the Credit Ombudsman and NCR have met the ruling with concern, with a possible appeal against the ruling in the offing.
From a legal perspective, Regulation 23A(4) sought to create a situation where credit facilities were provided to consumers on the basis of validated income, thereby averting reckless lending and borrowing. While the position of the informally employed and unbanked has been addressed by the ruling, it may be viewed as double-edged sword in that consumers who are formally employed and can produce payslips and bank statements will not be required to do so.
Credit providers are to be reminded that S81 of the NCA requires reasonable steps to be taken to assess consumers financial position prior to granting credit. Thus, while the ruling altered Regulation 23A(4), credit providers should carefully consider to whom they grant credit facilities and continue to apply income verification standards within their internal policies without infringing on the rights of the disadvantaged.
The above ruling is a further example of our ever-evolving society and evergreen Constitution. However, persons previously prevented from securing credit facilities are urged not to overextend themselves in securing credit. While the preliminary obstacles have been removed, even greater obstacles lay in wait for those failing to honour their obligations in terms of a credit agreement.
LLB | LLM Mercantile Law | Associate – Litigation Department
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