The National Credit Regulator (NCR) is seeking legal advice to appeal a recent court judgment that set aside a major aspect of its affordability assessment regulations, which riled clothing retailers Mr Price, The Foschini Group (TFG) and Truworths.
The judgment was a major win for the three retailers, who hauled the NCR and Department of Trade and Industry to court to fight the raft of amendments to the regulations in 2015.
The amendments to Regulation 23 of the National Credit Act require retailers to take additional steps in vetting the existing financial means of consumers, who are either self, formally or informally employed.
These steps include consumers presenting three months’ bank statements and payslips in stores; latest financial statements (if self-employed) and being subjected to additional checks with credit bureaus to prove they are worthy of large amounts of credit.
The NCR deemed the amendments as necessary to ensure that reckless lending is avoided while Mr Price, TFG, and Truworths deemed them cumbersome.
However, the Cape Town High Court on March 16 set aside Regulation 23A(4) – dealing with the presentation of bank statements, pay slips and financial statements – on the basis that the section discriminates against consumers who are informally or self-employed and without bank accounts, thus disqualifying them from applying from credit.
In other words, there is no longer a need for retailers to collect any particular form of documentation when consumers apply for credit.
In his judgment, Judge AJ Engers said Regulation 23A (4) frustrates the development of a credit market that is accessible to all South Africans, in particular, consumers that have historically been unable to access credit under sustainable market conditions. These consumers are typically the poor and less privileged, said Engers.
As he put it in court papers: “If a flower seller in Adderley Street [in Cape Town] does not have a bank account, it is unlikely in the extreme that they would have financial statements. This would then be an insurmountable obstacle to even obtaining credit in a relatively small amount even if they are earning a reasonable amount each month.”
Lesiba Mashaba, the NCR company secretary, said the regulator is not happy with the judgment as it extends to consumers who are formally employed and have the means to produce payslips and bank statements.
“The judgment removes the income verification requirements entirely from the regulations even for consumers who can produce payslips and bank statements,” he told Moneyweb.
The NCR is taking legal advice with a view to appealing the judgment, said Mashaba.
In the meantime, retailers would have to rely on their own affordability checks which include income verification standards, checks with credit bureaus for historical defaults and determining consumers’ discretionary income after deducting personal expenses.
The judgment also reminded Mr Price, TFG and Truworths to be responsible in their opening of credit taps to consumers by rigorously testing their financial means.
David Pfaff, the CFO of Truworths, welcomed the judgment. “This judgment is actually in favour of the consumer as it now allows creditworthy applicants to access credit who were unable to because of the documentation requirement,” he said.
Truworths, Mr Price, and TFG took a hit to their credit sales and new store account (credit) acceptance rates as they had to comply with the NCR’s affordability assessment regulations. TFG recorded a decline of 5.4% in its active accounts for the year to March 2017 while Truworths’ active store account base declined by 4.4% for the year to July 2017.
Pfaff believes there will be an increase in the number of new account openings now that the Engers has provided clarity on the credit extension rules. “But it is still too early to say how many more [account openings].”
TFG’s director of financial services Jane Fisher said the retailer has always applied rigorous credit scoring processes to assess the customer’s credit worthiness. She said the retailer will continue to conduct fair and objective assessments in line with international best practice.
Independent analyst Chris Gilmour said the passing of this judgment is a good thing, as it puts the onus back on the retailers to determine if the customer qualifies for credit.
“At the end of the day, retailers are not stupid – they are not going hand over credit recklessly, particularly at this point in the economic cycle, they going to want to get their money back and it’s up to them to decide whether this person is a good credit risk or not,” Gilmour added.
Gilmour said while the aim of the National Credit Act is to help consumers at the lower end of the social spectrum, the NCR’s requirement for all forms of documentation is “probably a bit onerous.”