The Western Cape High Court has recently scrapped a subsection of the National Credit Regulations that required lenders to demand payslips, bank statements or financial statements as part of their affordability assessments for consumers who apply for credit.
The case was brought against the department of trade and industry and the National Credit Regulator (NCR) by three retailers — Truworths, the Foschini Group and the Mr Price Group. They claimed the regulation had negatively affected their businesses.
The judgment will apply to all lending, from store credit to microloans.
The decision has drawn both criticism and support. Lenders appear generally pleased with the court outcome and even the consumer watchdog Summit Financial Partners has described the judgment as fair.
But the regulator says an important tool in the fight against reckless lending and borrowing has been removed.
The judgment, handed down by Acting Judge Keith Engers on March 16 this year, set aside the need for subsection 23 A(4) of the regulations, which have been in effect since September 2015 and required credit providers to obtain proof of income as part of an affordability assessment.
For those permanently employed, the regulation required credit providers to obtain three recent payslips or bank statements as proof of income. For those who do not receive a salary, three recent documented proofs of income or bank statements had to be obtained. For those who are self-employed, informally employed or employed in a way that they cannot provide proof of income, the credit provider had to obtain three recent bank or financial statements.
“In my view, the attack is well-founded,” said Engers in his judgment. “If, for example, a flower seller in Adderley Street 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 were earning a reasonable amount each month.”
The NCR’s company secretary, Lesiba Mashapa, said the regulator was not happy with the entire subsection being set aside. “The judgment removes the income verification requirements entirely from the regulations, even for consumers who can produce payslips and bank statements.”
He said the NCR was taking legal advice with a view to appealing the judgment.
The department of trade and industry said it was still studying the finding so would not comment on it.
Stephen Logan, the founder of nonprofit FairCredit, criticised it and described it as overreach. He said the court had failed to appreciate that striking out the subsection went far beyond the unbanked. The regulation was in fact designed to ensure, in order to obtain credit, the unbanked became banked.
“There is simply too much money to be made in extending credit recklessly. Many credit providers would gladly rely on spurious proof of income as credit providers know that consumers who lack the means to pay will still pay in due course, even if only after having to suffer the consequences of defaulting on their credit obligations,” said Logan, adding this was clearly not something the court had understood, or considered.
But Clark Gardner, the chief executive of Summit Financial Partners, said the judgment was fair and demonstrated an understanding of the industry.
The setting aside of the subsection “is merely an indication of how out of touch the minister [of trade and industry] is to the industry, the consumers’ needs and what is required to prevent harm to society”, he said, adding that regulations requiring three months, payslips or bank statements was an administrative burden.
The effect of setting this aside was minimal because the Act still required a credit provider to conduct a reasonable assessment and, as the judgment stated, “removing the specific provisions for validating gross income does not do away with the need to ascertain gross income”, he said.
The judgment emphasised the need for affordability assessments to be based on accurate information and that credit providers must take reasonable steps to ensure the information is accurate, Gardener said.
He added that problems stemmed from the National Credit Act and other regulations “not being enforced, with little precedents set as a result of a regulator not taking on these big lenders who breach reckless lending rules”.
Mark Seymour of Thuthukani Financial Services and a board member of Micro Finance South Africa said the association supported the scrapping of the regulation. The government was trying to protect consumers, “which is noble and honourable to do, but in that process there are sectors of the economy where the unintended consequences are that previously disadvantaged people are excluded from accessing credit”, he said.
People who could not get credit from the formal credit market were turning to the underground market for loans. “Government has been trying to bring the cost of credit down and credit providers tend then to deal with more affluent clients and not riskier clients,” Seymour said. “In the informal market, those people charge exorbitant rates and have an appetite for higher risk.”
The effort required to produce the required proof of income could also have forced people into the informal market, he said. “To jump these legislative hurdles for a R1 000 loan versus a mortgage is different in terms of whether the return on effort is worth it. When you send these consumers away [because of inadequate documentation], you often don’t see them again,” Seymour said.
He did not believe that setting the subsection aside would open the way for reckless lending. “No credit provider wants to grant someone credit who is not going to pay them back. It’s an irrational thing to do.”
Pakie Mphahlele, the managing director of the Mafori Group, which provides financial services, welcomed the outcome of the legal action. “All over the world there is what they call grey income — you can see cashflow, the kids are in private schools, and instalments on the car are met … at the same time, small business and self-employed people with cash could not access credit.”
He said the rules to verify income could be bureaucratic and didn’t always make sense, which stifled development, especially for enterprising business people who require finance.
Other ways of verifying income required some creativity but, “if government must decide what that is for everyone, it won’t be creative”, Mphahlele said. Seymour said the credit industry and regulator were in fact in agreement. “We have to grant responsible credit … but it’s how to do it where we differ from each other.”
While the NCR considers an appeal, it has asked credit providers to continue to apply the income verification standards set by the regulations to protect themselves and consumers from reckless lending and borrowing.
It has reminded credit providers the Act still requires them to take reasonable steps to assess consumers’ financial means before granting them credit.
The Foschini Group’s response is that it is a responsible credit provider and will continue to conduct fair and objective assessments.