Another step in insuring credit access to all
A recent judgment in a matter brought by various retailers against the Department of Trade & Industry and the National Credit Regulator caused quite a stir in the credit industry and was widely reported on. Unfortunately, the reporting wasn’t always so accurate.
The judgment delivered in March 2018 in respect of the review and setting aside of Regulation 23A(4) of the National Credit Act is directly associated with the Affordability Requirements and Over-indebtedness and Reckless CreditSections of the National Credit Act (“the Act”).
What does Regulation 24A(4) say?
This specific regulation placed an obligation on credit providers to validate consumers’ gross income in relation to:
(a) consumers that receive a salary from an employer:
(i) 3 most recent payslips; or
(ii) latest bank statements showing 3 most recent salary deposits;
(b) consumers that do not receive a salary as contemplated in (a) above by requiring:
(i) documented proof of income (3 most recent); or
(ii) most recent bank statements spanning 3 months;
(c) consumers that are self-employed, informally employed or employed in a way through which they do not receive a payslip or proof of income as contemplated in (a) or (b) above by requiring:
(i) most recent bank statements spanning 3 months; or
(ii) most recent financial statements.
Retailers argued that this obligation excluded a certain sector of the market, i.e. those who do not have access to bank statements and/or payslips and/or financial statements but still earn a proper income which should enable them to actively take part in the credit market.
The view of the Court was that Regulation 23A(4) frustrates the aim of the Act to promote the development of a credit market that is accessible to all South Africans, in particular to those who have historically been unable to access credit because they are either unemployed, sporadically employed, self-employed or do not have bank accounts.
It was further the Court’s opinion that Regulation 23A(4) in its current form does indeed have the potential to eliminate any credit being granted to many people, especially those aforementioned instead of merely preventing reckless credit. As such, the Court found that Regulation 23A(4) was neither reasonable nor rationally connected to the purpose for which it was intended.
Regulation 23A(4) was found to be discriminatory against a section of the population that is less privileged and/or previously disadvantaged and was ultimately set aside due to the fact that many self-employed or informally employed would-be consumers are unable to obtain credit due to not being able to produce financial statements or bank statements and that credit providers would need to decline many customers whocouldactually afford credit.
What is the effect of the judgment?
The elimination of Regulation 23A(4) does not affect Regulation 23A(3); (5) and (7) and these Regulations still have full force and effect.The setting aside of Regulation 23A(4) removes only the specific provision and requirements for validating gross income of prospective consumers’ by way of obtaining and retaining the most recent 3 months’ payslips or most recent 3 months’ bank statements or financial statements if self-employed but does notdo away with the requirement to take practicable steps to ascertain (including validate) a prospective consumer’s income as a step towards calculating such consumer’s discretionary income.
The duty imposed on credit providers to assess a Consumer’s affordability and to avoid reckless credit being given is to ensure that the Credit Provider’s assessment is based on accurate information and to ensure that the Consumer does not deliberately provide false information in order to qualify for a loan or other credit.
All credit providers will be well advised to continue with their current processes or methods of establishing a prospective consumer’s financial means and ultimately such consumer’s discretionary income with the proviso that it is now possible to deviate from the previously imposed obligation (Reg 23A(4)) of obtaining validation documents. It is of huge importance for credit providers to understand that the obligation remains to establish and ascertain through validation a prospective consumer’s financial means and the mere taking of a consumer’s word through a consultative process will most probably not constitute a defence against reckless credit. The implementation of a proper procedure/method/system would still need to be in place as far as establishing a consumer’s financial means and prospects are concerned. Hopefully, this judgment will result in all income-earning consumers having access to credit.