Do all credit providers need to register?

Do all credit providers need to register?

It has been widely reported that all credit providers should now register with the National Credit Regulator (the “NCR”) as a result of the new threshold for registration as a credit provider of R0 (nil) which was published on 11 May 2016. But is it really required that every business that lends money, regardless of the amount, must now, strictly speaking, register as a credit provider with the NCR?

Section 40 of the National Credit Act 34 of 2005 (“NCA”) requires a person to register as a credit provider if the total principal debt owed to that credit provider under all outstanding credit agreements, other than incidental credit agreements, exceeds the threshold determined by the Minister of Trade and Industry. Prior to the recent amendments of the NCA a person had to register as credit provider if it was the credit provider of at least 100 credit agreements or the principal debt owed to him or her in terms of all current credit agreements exceeded R 500 000. After the amendment of the NCA by the National Credit Amendment Act 19 of 2014, a person was only required to register as a credit provider if the total principal debt owed to him or her in terms of all current credit agreements exceeded R 500 000 (meaning that the number of 100 credit agreements or not became irrelevant and even if the number of 100 was exceeded but the total principal debt owed in terms of the total agreements was less than R 500 000, then no registration was required). On 11 May 2016, however, a new threshold of R 0 (nil) was published and from 11 November 2016, 6 months after the publication of the new R 0 (nil) threshold, all credit providers (irrespective of the number of credit agreements) should register as credit providers with the NCR. Failure to register as a credit provider could result, amongst others, in the credit agreement between the credit provider and its debtor being declared void as an unlawful agreement.

This does, however, not mean that every single person or business that lends money must register as a credit provider. The following should be considered to determine whether to register or not:

  • Is the credit agreement an incidental credit agreement? Section 40(1)(a) of the NCA does not require the registration of a credit provider if the transaction relates to an incidental credit agreement.
  • Is the person a credit provider as defined in the NCA?
  • Is the transaction a credit agreement as defined in the NCA?
  • Will the credit agreement be concluded within, or will it have an effect within the Republic?
  • Are the parties to the credit agreement dealing “at arm’s length“?
  • Do any of the exceptions provided in section 4 apply? For example: the NCA does not apply to a credit agreement where the consumer is a juristic person whose asset value or annual turnover, together with the combined asset value or annual turnover of all related juristic persons, at the time the agreement is made, equals or exceeds the threshold value determined by the Minister (currently R 1 million).

To determine whether you are required to be registered before the due date of 11 November 2016, do not hesitate to contact us.

Another wave of change for the credit industry

November has been a month of a change, once again, for the credit industry. As soon as the dust seems to have settled with the new affordability assessment regulations which are now in effect, credit providers must again prepare themselves for further changes to their business models.

The first wave came on 6 November 2015 when the Department of Trade and Industry published the Review of limitations on fees and interest rates regulations in Government Gazette 39379, which will come into effect 6 months after the date of publication (6 May 2015). The following regulations of the Regulations in terms of the National Credit Act of 2005 will be amended:

  • Regulation 42(1) – maximum prescribed interest rates
  • Regulation 42(2) – maximum prescribed initiation fees
  • Regulation 43 – introduction of regulation 43(3) elaborating on when an initiation fee may be charged
  • Regulation 44(1) – maximum prescribed service fees
  • Regulation 44(3) – introduction of regulation 44(3) elaborating on when a service fee may be charged and what a service fee should cover

For each type of credit agreement, from mortgage to incidental credit, the maximum prescribed interest rates have decreased. Credit providers that offer consumers credit facilities may (from 6 May 2016 onwards) only charge a maximum prescribed interest rate of RR + 14% per year instead of [(RR x 2.2) + 10%] per year. For unsecured credit transactions the maximum will be RR + 21% per year, replacing the [(RR x 2.2) + 20%] per year maximum interest rate. And the list goes on.

The average maximum initiation fee that may be charged has however increase. Interestingly, the amendments introduce an additional provision requiring initiation fees to only be charged when a new credit agreement is established with a consumer and not on a transactional basis. The maximum service fee will also increase from R50 per month to R60 per month and will specifically cover the cost of administering a credit agreement, which the amendments refer to as “the operational cost of the credit provider”.

The second wave reached the shore on 13 November 2015 when the Department of Trade and Industry published the Draft Credit Life Insurance Regulations in Government Gazette 39407, this time for public comment to reach the department before 13 December 2015. In summary, the following draft regulations are introduced:

  • a definition for the word “disability” used in relation to credit life insurance products;
  • a maximum cost that a credit provider may charge a consumer in relation to credit life insurance including the cost of any commission fees or expenses in relation to that insurance (which will be calculated on the total of the consumer’s outstanding obligations under the credit agreement);
  • the minimum cover that credit life insurance should settle in the event of the consumer’s death, permanent disability, temporary disability or in the event of the consumer becoming unemployed;
  • where a consumer is not employed on the date that the credit agreement is entered into, no cost relating to the risk of becoming unemployed or being unable to earn an income may be included in the cost of the credit life insurance;
  • a credit provider or insurer that wishes to increase its credit life insurance premiums to the new maximum prescribed cost of credit life insurance after the date on which the regulations come into operation must, at the request of the National Credit Regulator or the Registrar, demonstrate that the cost of credit life insurance was determined having regard to the actual risk and liabilities associated with the credit agreement;
  • a list of exceptions and limitations for which the credit life insurance may provide (events or circumstances which the consumer’s credit life insurance will not cover – but this must be explained to the consumer on the date that the credit agreement is entered into and at regular intervals thereafter);
  • when the credit life insurance may lapse; and
  • that consumers may exercise their right to substitute their credit life insurance policy at any time after the credit agreement is entered into if the premium and benefits under the new policy are the same as or better than those under the current policy.

For detailed advice on whether the proposed amendments will affect your business, please contact Jana at jana@dommisseattorneys.co.za or Lizelle at lizelle@dommisseattorneys.co.za.

 

Forfeiture Provision Of The NCA Declared Unconstitutional

The Cape Town High Court delivered a judgment during April 2012 (Opperman vs Boonzaaier and Others Case No. 24887/2010) in terms whereof section 89(5)(c) of the National Credit Act 34 of 2005 (“NCA”) was declared unconstitutional. The majority of the Constitutional Court has now confirmed the order of invalidity.

Background factual information:
Opperman lent Boonzaaier roughly R 7 million in terms of three written loan agreements. Boonzaaier was unable to repay the debt and during the subsequent application for his sequestration, the question was raised whether section 89(5)(c) was unconstitutional. In terms of
this section a credit provider loses his right to claim back money which has been lent to a consumer if he was not a registered as a credit provider when making the loan. Section 40 of the NCA requires a person who is a credit provider under at least 100 credit arrangements or to whom the total principal debt owed in terms of all outstanding credit agreements exceeds R 500 000.00, to be registered as a credit provider in terms of the Act. If such a credit provider fails to register, the credit agreement would be void. In this case, Opperman was not registered as a credit provider as he was not aware of the requirement of registration.

Constitutional Court Judgment
The majority of the Constitutional Court found that section 89(5)(c) resulted in “arbitrary deprivation of property in breach of section 25(1) of the Constitution”. It was further confirmed that the deprivation was not a reasonable and justifiable limitation of the right to property, because the said section compelled a court to declare an agreement such as the one in this matter to be void and compelled the court to order that the unregistered credit provider’s right to restitution be cancelled or forfeited to the state. No discretion is allowed under section 89(5)(c) and by removing a credit provider’s right to claim restitution, he is being deprived of property. In light of the above, the section was found to be unconstitutional. This judgment will no doubt be viewed as a welcome relief to credit providers who, in good faith, lend large amounts of money without being aware of the requirement that they register as a credit provider under the NCA.

Amendments to the National Credit Act

The National Credit Act (NCA) came into effect on 1 June 2007. One of the objectives of the NCA was to stop credit providers from providing credit to consumers who could not afford the credit. Six years down the line and the unfortunate reality is that a rather large percentage of credit consumers are in fact over-indebted. Fingers often point to credit providers and whether their business practices are in line with the NCA requirements. It is therefore imperative that credit providers revise their processes to ensure that they conduct business in accordance with the spirit and intent of the Act.

Considering the current credit position in our country, it is clear that despite the good intentions of the Act, some of the content needs clarification. On 29 May 2013 the Department of Trade and Industry therefore published the draft Amendment to the Bill, together with the draft Policy Review Framework, with the stated aim being to address problem areas identified in the practical
application of the NCA.

Some of the proposed amendments apply to the following aspects of the Act:

1. Amendments to some definitions like the definition of “lease” and “secured loan”;
2. Registration of debt counsellors;
3. Cancellation of registrations;
4. Changing the conditions of registration;
5. Suspension of reckless credit agreements;
6. Consent of spouse where married in community of property;
7. Registration and accreditation of alternative dispute resolution structures and agents.

Depending on your business model, some of the proposed amendments may have a big impact on your business operations. It is therefore necessary that you review current practices, and also consider the approach that the National Credit Regulator is likely to take in future.