In March 2018 the Western Cape High Court delivered a judgment on the validity and effectiveness of the financial assessment mechanisms prescribed by the National Credit Act 34 of 2005 (“the NCA”). This financial assessment is obligatory to all considerations of affordability prior to the extension of credit to a consumer by the relevant credit provider.

The judgment dealt with a challenge to the specific wording of sub-regulations 23A (4), (5) and (7) of the NCA as brought by Truworths Limited, the Foschini Group Limited and Mr Price Group Limited (“the Applicants”). The cited Respondents included the Minister of Trade and Industry (“the Minister”), the National Credit Regulator and the South African Human Rights Commission as friends of the court.

The Applicants wanted the above provisions set aside on the basis that they unfairly discriminated against the less privileged members of South African society, specifically those who, despite their active participation in the South African economic market, were not in possession of a bank account with a reputable banking institution. The Applicants’ also alleged that the provisions of the sub-regulations as determined by the Minister were unreasonable, that he failed to take into account relevant considerations and were procedurally unfair.

Before dealing with the merits of the challenge, it is necessary to consider the wording of the sub-regulations sought to be set aside. Due to the particular reasoning of the court and its ultimate decision in finding it unnecessary to deal with the validity of sub-regulations 23A (5) and (7), it is  only necessary to set out the provisions of sub-regulation 23A (4)(c)(ii) which are as follows:

“(4)        A credit provider must take practicable steps to validate gross income, in relation to –

  • 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:
  • Latest three (3) months bank statements; or
  • Latest financial statements.” (own emphasis added)

The thrust of the challenge related to the view that the above provisions, and specifically sub-regulation 23A (4)(c) which applies almost exclusively to the less privileged members of society, prescribe an “inappropriate” form of validation and one which is nigh on impossible for these individuals to comply with. The reasoning was that it prohibits those who are self-or informally employed, and not in possession of a bank account, from entering the credit market as it would not only be impossible, but also somewhat absurd, for such an individual to produce either three months bank statements or financial statements. The anomalous consequences of the everyday operation of sub-regulation 23A (4) was simply put by the Judge, Engers AJ, as follows:

“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 are earning a reasonable amount each month.”

The Minister’s primary argument in rebuttal of the Applicants’ position was that the setting aside of these sub-regulations would effectively render one of the primary purposes of the NCA, the prevention of reckless credit, redundant. He further argued that these “unbanked” were specifically borne in mind when he drafted the regulations. The court held that these arguments did not carry much weight given the rigidity of the wording of the sub-regulations. The court further noted that the final wording of the sub-regulations reflected, verbatim, the wording suggested to the Minister by Capitec Bank during the public participation process. The court recorded the seeming incongruity of a banking institution, whose customers by definition have bank accounts, offering drafting input on a legal amendment which would apply exclusively to those who do not possess bank accounts.

A further argument made by the Respondents was that the alternative requirement of “financial statements” in 23A (4)(c)(ii) did not necessarily entail audited financial statements and that a letter or affidavit from an employer may suffice as such a “financial statement”. The court rejected this argument and held that a more formal definition of the phrase “financial statements” was originally intended especially due to the inclusion of the word “latest” in 23A (4)(c)(ii).  The court further held that “financial statements” by nature are produced from time to time meaning that a letter or affidavit from an employer, being a once-off occurrence, would not comply with the intended meaning of the term. Moreover, the court asked whether those who are self-employed, and ‘unbanked’, must compose their own letter confirming their own employment and gross income, which would be bizarre

The court therefore held that, notwithstanding the admirable aim of the sub-regulations in preventing reckless credit, the consequences of their implementation are starkly in contrast with the remaining purposes of the NCA as they create a clear barrier to those who have historically been unable to access credit from doing so.

Accordingly, the court held that the provisions of sub-regulation 23A (4) discriminated against a large portion of the populace representing the less privileged in a manner that was unfair and decided that these provisions were to be set aside.

The practical effects of the judgment are yet to be fully tested but it is certain that consumers and credit providers both will be monitoring its influence closely.

(“the NCA”). This financial assessment is obligatory to all considerations of affordability prior to the extension of credit to a consumer by the relevant credit provider.

The judgment dealt with a challenge to the specific wording of sub-regulations 23A (4), (5) and (7) of the NCA as brought by Truworths Limited, the Foschini Group Limited and Mr Price Group Limited (“the Applicants”). The cited Respondents included the Minister of Trade and Industry (“the Minister”), the National Credit Regulator and the South African Human Rights Commission as friends of the court.

The Applicants wanted the above provisions set aside on the basis that they unfairly discriminated against the less privileged members of South African society, specifically those who, despite their active participation in the South African economic market, were not in possession of a bank account with a reputable banking institution. The Applicants’ also alleged that the provisions of the sub-regulations as determined by the Minister were unreasonable, that he failed to take into account relevant considerations and were procedurally unfair.

Before dealing with the merits of the challenge, it is necessary to consider the wording of the sub-regulations sought to be set aside. Due to the particular reasoning of the court and its ultimate decision in finding it unnecessary to deal with the validity of sub-regulations 23A (5) and (7), it is  only necessary to set out the provisions of sub-regulation 23A (4)(c)(ii) which are as follows:

“(4)        A credit provider must take practicable steps to validate gross income, in relation to –

  • 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:
  • Latest three (3) months bank statements; or
  • Latest financial statements.” (own emphasis added)

The thrust of the challenge related to the view that the above provisions, and specifically sub-regulation 23A (4)(c) which applies almost exclusively to the less privileged members of society, prescribe an “inappropriate” form of validation and one which is nigh on impossible for these individuals to comply with. The reasoning was that it prohibits those who are self-or informally employed, and not in possession of a bank account, from entering the credit market as it would not only be impossible, but also somewhat absurd, for such an individual to produce either three months bank statements or financial statements. The anomalous consequences of the everyday operation of sub-regulation 23A (4) was simply put by the Judge, Engers AJ, as follows:

“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 are earning a reasonable amount each month.”

The Minister’s primary argument in rebuttal of the Applicants’ position was that the setting aside of these sub-regulations would effectively render one of the primary purposes of the NCA, the prevention of reckless credit, redundant. He further argued that these “unbanked” were specifically borne in mind when he drafted the regulations. The court held that these arguments did not carry much weight given the rigidity of the wording of the sub-regulations. The court further noted that the final wording of the sub-regulations reflected, verbatim, the wording suggested to the Minister by Capitec Bank during the public participation process. The court recorded the seeming incongruity of a banking institution, whose customers by definition have bank accounts, offering drafting input on a legal amendment which would apply exclusively to those who do not possess bank accounts.

A further argument made by the Respondents was that the alternative requirement of “financial statements” in 23A (4)(c)(ii) did not necessarily entail audited financial statements and that a letter or affidavit from an employer may suffice as such a “financial statement”. The court rejected this argument and held that a more formal definition of the phrase “financial statements” was originally intended especially due to the inclusion of the word “latest” in 23A (4)(c)(ii).  The court further held that “financial statements” by nature are produced from time to time meaning that a letter or affidavit from an employer, being a once-off occurrence, would not comply with the intended meaning of the term. Moreover, the court asked whether those who are self-employed, and ‘unbanked’, must compose their own letter confirming their own employment and gross income, which would be bizarre

The court therefore held that, notwithstanding the admirable aim of the sub-regulations in preventing reckless credit, the consequences of their implementation are starkly in contrast with the remaining purposes of the NCA as they create a clear barrier to those who have historically been unable to access credit from doing so.

Accordingly, the court held that the provisions of sub-regulation 23A (4) discriminated against a large portion of the populace representing the less privileged in a manner that was unfair and decided that these provisions were to be set aside.

The practical effects of the judgment are yet to be fully tested but it is certain that consumers and credit providers both will be monitoring its influence closely.

This article should not be used or relied upon as professional advice and is for information and marketing purposes. Please consult with one of our attorneys should you need legal assistance relating to this area of law.