ANGELIQUE ARDÉ: Beware of misinterpretation of the judgment in favour of clothing retailers
If you're in the market for credit, you shouldn't get too excited about a recent high court ruling scrapping part of the regulations under the National Credit Act. Two of the county's biggest unsecured lenders will continue to rely on payslips or bank statements as part of their affordability assessments.
The much-discussed judgment, by Acting Judge Keith Engers, stems from a successful application by some clothing retailers to set aside regulations spelling out how credit providers must validate the income of consumers applying for credit.
In spite of the scrapping of the subregulation, African Bank's chief risk officer, Piet Swanepoel, says the bank will still require payslips as part of its assessment, and Charl Nel, head of communications at Capitec, says Capitec believes that "the latest salary slips and/or bank statements are the most reliable documents to accurately verify a client's income".
It has been incorrectly reported in the media that the judgment means you'll no longer have to provide proof of income when applying for credit. That's not what the judgment means: it means credit providers are no longer compelled to use payslips and bank statements as validation of income. The act gives credit providers the discretion to determine their own affordability assessments, provided the model they use results in a fair and objective assessment of what you can afford. When you apply for credit you will still have to provide some proof of income.
The regulations that were the subject of the court case were introduced in March 2015 after it became apparent to the minister of trade and industry that affordability assessments being used by credit providers were not sufficient to reduce reckless lending.
In terms of the subregulations that have been set aside, credit providers had to validate gross income by way of your three latest salary slips or bank statements showing your salary deposits if you are a salaried employee; and your three latest bank statements or financial statements if you are self-employed, informally employed or employed but don't receive a payslip or proof of income.
In setting aside the provisions for validating gross income, Engers said they imposed on credit providers "a rigid set of requirements" which discriminated against consumers who don't have bank accounts and who are informally or self-employed. He used the example of a flower seller who doesn't have a bank account and is not likely to have financial statements. On the basis of regulation 23(A)(4) of the National Credit Act, such a person would be excluded from accessing credit even though they could in fact afford the credit.
The National Credit Regulator's alarmist statement that the judgment removes the income verification requirements from the regulations is only partly true; the regulations are subordinate to the act, and the act stands: a credit agreement is reckless if, at the time that the agreement was made, the credit provider failed to conduct an affordability assessment.
In the judge's words, scrapping the subregulation does not do away with the credit provider's need to ascertain the consumer's gross income as a step towards calculating discretionary income. Engers also said the applicants had not made a good case for the setting aside of other subregulations, namely, the one stating that if your gross income varies, the credit provider must use an average over the previous three months and another which states that you must provide "authentic documentation" to a credit provider to enable it to assess whether you can afford the credit.
I think it's a shame that the subregulation detailing how you must prove your income was scrapped. But what the judgment reveals about how the regulations came into being is even more shameful; it reflects poorly on Minister of Trade and Industry Rob Davies.
The judgment says "a great number of" organisations, businesses and individuals commented on the draft regulations after these were published by the minister for public comment in August 2014.
The judge says changes were made to the subregulation with Capitec's proposed wording appearing almost word for word in the final regulations.
These revised regulations were not circulated to stakeholders and interested parties for further comment. While the minister is not obliged to republish final regulations for further comment, the judge says where the minister changes the draft regulations in a material respect, doing so is advisable, if not necessary. If this was done, the court case would have been avoided.
The judge says the minister changed "what appeared to be a fairly flexible requirement into a far more rigid and stringent one", and that there are indications that the minister might not have taken account of public input. "The record of decision does not bear out that the consolidated comments of the DTI were placed before the minister for consideration," the judgment says.
The DTI did not respond to requests for comment. But the NCR's company secretary, Lesiba Mashapa, says the regulator is considering appealing the judgment as the regulation was an important tool in the fight against reckless lending and borrowing.