South Africa: The National Credit Bill

Current indications are that the National Credit Bill, B18 of 2005 ("Bill") will be enacted during October this year, although the legislation may only come into force at a later date as determined by the State President by proclamation in the Government Gazette. Credit providers will be required to be registered within forty business days after the date of commencement of the Act, or relevant part. Once in force, the Bill will repeal the Usury Act No. 23 of 1968 (including the Usury Act Exemption Notice which applies to micro-lenders), the Credit Agreements Act No. 75 of 1980 and the Integration of Usury Laws Act No. 57 of 1996. The Bill regulates previously unregulated entities, such as credit bureaus and will extend the regulatory net to all providers of credit within the South African market. Credit agreements entered into before the enactment of the Bill will be affected by the new legislation to the extent provided for in Schedule 3 ("transitional provisions").

The Bill applies to every credit agreement between parties dealing at arm’s length and made, or having an effect, within the Republic. Certain exceptions apply, such as credit agreements concluded by a juristic person as the consumer, where such entity’s asset value or annual turnover at the relevant time equals or exceeds a prescribed threshold (expected to be between R500 000 and R1 000 000). The Bill does not apply to credit agreements to which the state or an organ of state is the consumer nor to transactions between a stokvel and its members nor leases of immovable property. Parties are not regarded as dealing at arm’s length in circumstances where, for example, the transaction is a shareholders’ loan concluded between a company and its controlling shareholder or is a transaction between parties in a family relationship.

Credit agreements are defined as falling under three general categories, being credit facilities, credit transactions and credit guarantees and within the credit transaction category there are several sub-species of credit agreements, such as mortgages, leases of movable property (as defined) and secured loans. Essential to the definition of a credit agreement is some deferral of repayment or a prepayment and the imposition of a fee, interest or charge in respect of the deferred payment or a discount is given with respect to the prepayment.

The Bill refers to small, medium or large credit agreements and different requirements may apply depending upon the category of credit agreement and/or the size thereof. The Bill contains special provisions relating to public interest credit agreements and developmental credit agreements, such as student loans.

The National Credit Regulator ("NCR") is established as the regulatory body with jurisdiction over all credit providers in the Republic and is tasked with registering all credit providers, credit bureaus and debt counsellors; establishing and maintaining a National Credit Registry and reporting to the Minister in respect of prescribed matters, such as competition in the consumer credit market. The Bill also provides for the establishment of provincial regulators. The NCR is governed by a board consisting of, inter alia, Cabinet Ministers. The National Consumer Tribunal is established as the adjudicative body responsible for amongst other things adjudicating consumer complaints.

All credit providers are required to be registered with the NCR or, if applicable, provincial regulator. A failure to register can result in any credit agreement concluded by such credit provider being declared unlawful and unenforceable. Registration is a prerequisite whenever a credit provider extends credit of one hundred or more credit agreements or has a credit book in excess of the prescribed amount (expected to be R500 000). Credit providers are required to meet a number of criteria in order to obtain such registration, one such criteria being their commitment to Black Economic Empowerment.

The National Consumer Tribunal is empowered to cancel a credit provider’s registration in certain circumstances, save in the case of banks and other regulated financial institutions. For the first time in our law, credit bureaus are required to be licensed and are specifically regulated under the Bill.

Credit providers must report all credit transactions to the NCR, who will keep a data base of all outstanding credit agreements within the Republic. In other cases, credit providers are required to report the prescribed details to a credit bureau, who in turn reports the information to the NCR. Whenever a credit agreement is concluded with a consumer, or an existing credit agreement is varied, the prescribed particulars must be reported to the NCR, or if applicable, to the relevant credit bureau. Similarly, if a credit provider transfers its rights under a credit agreement to another person, the prescribed particulars in respect of such transfer must be reported to the NCR.

The Bill deals extensively with the rights of consumers. All persons are entitled to apply for credit and credit providers cannot discriminate against a consumer when deciding whether or not to extend credit to the consumer. Banks can continue to make use of score card models when evaluating whether or not to extend credit to a consumer; provided that there is no discrimination against the consumer on the basis of, inter alia, marital status, gender or race. If a credit provider refuses to extend credit to a consumer, the consumer is entitled to be provided with a reason for such refusal. In addition, a consumer is entitled to be advised by a credit provider before any adverse information regarding that person is reported by the credit provider to a credit bureau and credit bureaus are required to give consumers access to reports and other credit information held by them. Consumers are entitled to challenge the accuracy of information held by a credit bureau and a credit bureau is required to investigate any such challenge. A duty is placed upon a credit bureau to take reasonable steps to verify the accuracy of any credit information which is reported to it and a credit bureau which knowingly or negligently provides a credit report which contains inaccurate information is guilty of an offence.

Consumers are entitled to receive credit documentation in at least two official languages and such documents must be provided free of charge. Credit providers are prohibited from penalising a consumer or taking action against the consumer to accelerate, enforce, suspend or terminate a credit agreement as a consequence of the consumer exercising its rights under the legislation.

The Bill outlaws negative option marketing. This means that a credit provider cannot enter into a credit agreement with a consumer on the basis that the agreement will automatically come into existence unless the consumer expressly declines the offer. The same applies to any alterations or amendments to a credit agreement which requires the express consent of the consumer.

When concluding a credit agreement, the consumer must be given the option to decline pre-approved credit limit increases and elect for their personal data to be excluded from any customer lists which the credit provider may sell or distribute to other parties. A credit provider must maintain a register of all options elected by a consumer in this regard.

A credit provider can only visit a consumer at home or at their work place for purposes of entering into a credit agreement with such consumer or inducing the consumer to enter into a credit agreement with the credit provider, if certain requirements are met. An unsolicited visit to a consumer’s home is prohibited as are such visits to a consumer’s work place unless the employer or, if applicable, a representative trade union or employee representative, have consented thereto. In such cases, the employer or trade union/employee representative, cannot receive any consideration or other monetary benefit in respect of such consent or as a consequence of the conclusion of the credit agreement.

A credit provider that is required to be registered in terms of the legislation but fails to do so, is prohibited from advertising credit. Any advertisement by a credit provider may not be misleading, fraudulent or deceptive and must contain the prescribed information, including applicable interest rates and cost of credit. Comparative advertising is permitted, subject to certain requirements. Any solicitation for credit by a credit provider from a consumer must be accompanied by the disclosure in writing of prescribed particulars.

The Bill contains a number of provisions relating to the steps which are required to be taken by a credit provider before a credit agreement is concluded. These include pre-agreement disclosure of prescribed information as well as steps to be taken by a credit provider in deciding whether or not credit should be granted to a consumer.

The Bill proposes the application of the "financial means, prospects and obligations" test. Credit providers will be obligated to apply this test when assessing a potential consumer for credit. The credit provider will have to request the consumer to provide information relevant to such consumer’s income, any right to receive income, such consumer’s financial means, prospects in respect of future income and such consumer’s obligations relevant to other credit agreements. If the consumer has a commercial purpose for applying for credit, the consumer will have to produce the reasonably estimated future revenue flow from such business purpose.

Generally, the "financial means test" would require a consumer to provide proof of income, expenses, budgets for household and general expenses, a list of assets and liabilities including a listing of all existing credit agreements. Information relevant to financial obligations and details of debt repayment history will become relevant. The veracity of this information will have to be proved to the satisfaction of the staff assigned to the credit provider’s credit department prior to the provision of credit to such consumer. Delays in obtaining verification of this information, including obtaining credit bureau reports, might delay the ability of the consumer to obtain credit.

The test of over-indebtedness is dealt with in the Bill and is based on the premise that the consumer, when providing information to the credit provider, fully and truthfully answers any requests for information made by the credit provider when the application for the credit agreement is made.

A consumer would be over-indebted if the preponderance of available information at the time the determination is made indicates that the particular consumer is or will be unable to satisfy in a timely manner all the obligations under all credit agreements to which the consumer is a party. The credit provider must take into account -

• the financial means, prospects and obligations of such consumer; and
• the probable propensity of the consumer to satisfy in a timely manner all of such consumer's obligations under all credit agreements to which the consumer is a party, and taking into account the consumer's history of debt repayment.

In terms of the Bill, a credit agreement would be deemed to be reckless if, at the time the agreement was made, an inadequate assessment of the consumer's obligations occurred. Alternatively, a credit agreement would be deemed to be reckless if the credit provider, having conducted an assessment of the consumer's ability to meet its credit obligations concludes that such consumer would not be in a position to meet such credit obligations, but notwithstanding proceeds to enter into a credit agreement with such consumer.

However, the Bill does provide an escape clause for a credit provider in that, should the prospective consumer not fully and truthfully answer requests for information made by the creditor provider in terms of the relevant assessment, such failure would provide a complete defence to the credit provider in respect of an allegation of the provision of reckless credit.

In terms of the Bill, in any court proceedings in which a credit agreement is being considered, the court may declare the credit agreement to be reckless. In the event of such a finding, the court may make an order -

• setting aside all or part of the consumer's obligations under that agreement, as the court determines just and reasonable in the circumstances; or
• suspending the force and effect of that credit agreement in accordance with the provisions of the Bill.

The effect of the suspension of the credit agreement is that -

• the consumer is not required to make any payment required under the agreement;
• no interest, fee or other charge under the agreement may be charged to the consumer; and
• the credit provider's rights under the agreement are unenforceable.

Once the suspension of the credit agreement is lifted, all respective rights and obligations of the credit provider and the consumer are revived and are fully enforceable except to the extent that a court may order otherwise. No amount may be charged to the consumer by the credit provider with respect to any interest, fee or other charge that were unable to be charged during the period of the suspension.

If a consumer believes that he has been a recipient of reckless credit, he may apply to a debt counsellor for debt review. Once in receipt of the application, a debt counsellor will notify all creditor providers listed in the application and every registered credit bureau. When making application, the consumer must comply with any reasonable request by the debt counsellor to facilitate the evaluation of the consumer’s state of indebtedness and the prospects for responsible debt rearrangement. Once a debt counsellor has accepted an application in terms of the relevant section, he must determine, in the prescribed manner and within the prescribed time, whether the consumer appears to be over-indebted and whether the consumer’s credit agreements appear to be reckless.

If the debt counsellor reasonably concludes that the consumer is not over-indebted, the debt counsellor must reject the application. If the consumer is not over-indebted but is nevertheless experiencing difficulty in satisfying all of the consumer’s obligations under credit agreements in a timely manner, the debt counsellor may recommend that the consumer and the respective credit providers voluntarily consider and agree on a plan of debt rearrangement.

If the debt counsellor believes the consumer is over-indebted, the debt counsellor may issue a proposal recommending that the Magistrate’s Court either declare the consumer’s credit agreements to be reckless or that the consumer’s obligations be rearranged. Rearrangement can include the extending of the period of the agreement and the reduction of the amount of each payment due in terms of the credit agreement. Postponement of dates for payment and the extension of the period of the agreement may also be ordered by the Magistrate’s Court. If a debt counsellor rejects an application made by a consumer, the consumer may, with leave of the Magistrate’s Court, apply directly to the Magistrate’s Court for the relevant relief.

Prior to concluding a credit agreement with a consumer, the credit provider must make written pre-agreement disclosure to the consumer in the prescribed form however, this is not required in respect of certain types of credit agreements, for example, an outstanding account. In addition, the credit provider must present the consumer with a written quotation setting out the cost of credit under the agreement, which quotation remains binding on the credit provider for a period.

Where a credit provider makes a credit facility available to a consumer and the consumer accesses that facility by way of a P.I.N number, card or similar device, the agreement must record the arrangements in respect of lost or stolen cards or P.I.N. numbers. If the card or P.I.N number is reported lost or stolen, the credit provider cannot charge the consumer in respect of any purchases or transactions on that facility after the fact unless the credit provider has proof that the consumer effected such transaction, for example, it has the signed sales slip or the credit provider can prove the consumer used or authorised the use of the facility.

A credit provider must send legal notices to the address of the consumer provided for in the credit agreement or as the consumer may have indicated in writing or by e-mail at a later stage (if the agreement provides for an e-mail address for the credit provider).

Where a consumer has possession of goods under a credit agreement in respect of which that consumer is not the legal owner or in respect of which the credit provider has a right to take possession of those goods, the consumer is obliged to disclose to the credit provider in the prescribed form any changes to the consumer’s residential or business address, the address of the premises where the goods are kept and the name and address of any person in whose possession the goods are. A consumer who knowingly provides false or deceptive information under these provisions, commits an offence.

If goods are substituted under a credit agreement, the credit agreement applies to the substituted goods rather than the original goods described and the credit provider must deliver an amended credit agreement which correctly reflects the description of the new goods without changing any other provision of the agreement.

A credit provider cannot charge a consumer any fee or charge prohibited by the Act and cannot charge interest in excess of the maximum interest rates determined by the Minister from time to time. Importantly, a credit provider cannot charge a consumer a higher price for goods or services made available on credit than the same or substantially the same goods or services provided in the ordinary course for cash.

A credit provider can only recover prescribed amounts from a consumer, namely -

• the principal debt under the agreement and, in the case of a mortgage, secured loan or lease agreement, certain other permitted charges (for example, licence, taxes and registration fees);
• an initiation fee, which cannot exceed the prescribed amount relative to the amount of the principal debt and cannot be charged unless the application by the consumer results in a credit agreement being concluded;
• service fees, which cannot exceed the prescribed amount relative to the principal debt;
• the interest due and payable under the credit agreement, expressed as an annual rate and not exceeding the applicable maximum rate determined by the Minister;
• the cost of credit insurance, if applicable;
• default administration charges, which again cannot exceed the prescribed amount and
• may only be charged if the consumer is in default as provided for in terms of the Bill; and
• collection costs, which cannot exceed the prescribed amount and may only be imposed to the extent permitted in terms of the Bill.

A credit provider is well within its rights in requiring a consumer to take out credit life insurance or credit insurance to cover the outstanding balance under the credit agreement, however, the credit provider cannot force a consumer to take out credit insurance which is unreasonable or which provides cover in excess of that required to insure the outstanding balance under the credit agreement. The credit provider is required to give the consumer the option of taking out its own insurance policy and, if the credit provider proposes an insurance policy to the consumer, it must make full disclosure of the cost of insurance and any commissions, fees or rebates which may be received by the credit provider in respect of such policy. Where such insurer is within the same group of companies as the credit provider, the credit provider may not charge the consumer a premium in excess of a competitive price.

A credit provider cannot unilaterally change the interest rate under a credit agreement, other than under a credit facility or in accordance with a change to a variable interest rate fixed to changes in a reference rate. The credit provider is required to notify the consumer in the prescribed manner of such changes.

A consumer can at any time elect to reduce its credit limit under a credit facility. The credit provider is obliged to comply with this request and cannot charge the consumer a fee for reducing the credit limit.

A credit provider can unilaterally increase the credit limit under a credit facility only if the consumer has specifically requested in writing the option of an automatic credit limit increase and then only -

• once a year;
• by an amount not exceeding the lesser of the average monthly payments by the consumer under the facility or monthly purchases/advancements under the facility,
• during the preceding twelve month period.

Temporary increases in the credit limit under a credit facility are permitted in certain circumstances.

A credit provider cannot unilaterally change the period for repayment of the principal debt under the credit agreement, except to give the consumer more time to make payment under the agreement. Any other alterations to a credit agreement after it has been concluded with the consumer are void unless the consumer’s liabilities are reduced under the credit agreement or the consumer has consented thereto as evidenced by the signature of the consumer in respect of such change.

Notwithstanding anything that may be provided for in a credit agreement, the consumer can at any time elect to settle or terminate the agreement by paying up the outstanding balance owing under the agreement (as calculated in accordance with the provisions set out in the Bill) or, if applicable, tendering the return of the goods under the agreement. In case of large agreements, the credit provider can charge an early settlement charge, subject to the maximum amount provided for in terms of the Bill. In the case of an instalment sale transaction or a lease of movable goods, a consumer is granted a "cooling off" period and can rescind the contract within five days after concluding the agreement.

A credit provider cannot terminate a credit agreement otherwise than in accordance with the provisions of the Bill. In the case of a credit facility, the credit provider can suspend the credit facility if the consumer is in default or close the facility upon ten days written notice to the consumer; provided that the credit provider cannot terminate a credit facility solely on the grounds that the consumer has declined a credit provider’s offer to increase the credit limit under the facility.

A credit provider is required to provide a consumer with a statement of account containing the prescribed information on a periodic basis as stipulated in the Bill. A A consumer is entitled by notice in writing to dispute the accuracy of any information contained in such statement of account and in such circumstances, the credit provider is required to investigate and resolve such dispute. The credit provider cannot take action against the consumer for non-payment whilst such matter remains unresolved. A consumer can request a statement setting out the outstanding settlement amount under the credit agreement and that statement remains binding on the credit provider for a period of five days. This would be required by a consumer whenever they wish to settle the credit agreement and to pay the outstanding balance thereunder.

The Bill provides that a credit agreement might be declared to be unlawful if at the time the agreement was made, the consumer did not have full legal capacity and the credit provider knew or could easily have determined that the consumer did not have the necessary capacity to enter into such credit agreement. In addition, should the consumer be the subject of an administration order referred to in section 74(1) of the Magistrate’s Court Act and the administrator concerned did not consent to the credit agreement, such agreement would be held to be unlawful.

Credit agreements must not contain any unlawful provision, as provided for in the Bill. A provision of a credit agreement would be unlawful if its general purpose or effect is to defeat the purposes or policies of the Bill and purports to deceive the consumer or subject the consumer to fraudulent conduct. Similarly, a provision in a credit agreement in terms of which a consumer waives any prescribed common law rights, would be unlawful.

If a credit agreement is an unlawful credit agreement, a court must order that the credit agreement is void as from the date the agreement was entered into and the credit provider must refund to the consumer any money paid by the consumer in terms of that agreement. All of the purported rights of the credit provider in terms of an unlawful credit agreement to recover any money paid or goods delivered to the consumer would be of no force and effect.

In terms of the Bill, if a consumer is in default under a credit agreement, the credit provider may draw the default to the notice of the consumer in writing and propose to the consumer that the credit agreement be referred to a debt counsellor, alternative dispute resolution agent, consumer court or ombudsman with jurisdiction, with the intent that the parties resolve any dispute under the agreement or develop a plan to bring the payments under the agreement up to date. The credit provider may not commence any legal proceedings to enforce the agreement before first providing such notice to the consumer. This is not applicable to a credit agreement that is already subject to a debt restructuring order or to proceedings in a court that could result in such an order.

A consumer may at any time reinstate a credit agreement in respect of which it is in default by paying to the credit provider all amounts that are overdue together with the credit provider’s permitted default charges and the reasonable costs of enforcing the agreement up to the date of reinstatement. In addition, the consumer may resume possession of any property that has been repossessed by the credit provider pursuant to any attachment order.

The credit provider may approach the court for an order to enforce a credit agreement only if, at that time, the consumer is in default and has been in default under that credit agreement for at least 20 business days and has not responded to a notice from the credit provider as referred to above.

In terms of the Bill, any person may submit a complaint to the NCR in the prescribed manner and form, alleging improper conduct and conduct which would be in violation of the provisions of the Bill. As an alternative to filing a complaint to the NCR, a person may refer any dispute to a consumer court established for that purpose under provincial legislation or to an alternative dispute resolution agent for resolution by conciliation, mediation or arbitration or, if the credit provider is a regulated financial institution, to the relevant ombudsman with jurisdiction. If the NCR issues a notice of non-referral in response to a complaint, the complainant concerned may refer the matter directly to the relevant consumer court or to the National Consumer Tribunal. The National Consumer Tribunal will conduct a hearing into any matter referred to it and in accordance with the requirements of the Bill.

According to recent comments made in the press, South Africa’s consumer debt crisis is costing the country an estimated R500 million a month directly and another R500 million a month in productivity losses, totalling around R12 billion annually. Existing South African insolvency and consumer protection legislation does not assist in the combating of over-indebtedness and overspending by consumers. It is hoped that the introduction of this Act will assist in finding a solution to the debt problems of consumers. The thinking worldwide in respect of the protection of consumers is that "prevention is better than cure".

Consumers have historically been subject to the high cost of credit and often exploitative practices by non-reputable credit providers. The legislation is biased towards consumers but deliberately so, as the Government seeks to redress imbalances in the South African consumer credit market and aims to create a more efficient market in which all South Africans will be able to have access to credit at affordable rates.

Obviously, the provisions of the Bill will impact on each and every company engaged in the provision of credit and this will necessitate all such businesses and companies keeping themselves informed and updated in respect of this legislation and its future impact and development in the South African economy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.