Overview of the National Credit Act (2024)

Overview of the National Credit Act
by Ingrid Goodspeed
Governor SAIFM

The National Credit Act (Act) was promulgated on 15 March 2006. The Act aims to transform the South African credit industry by introducing a consistent regulatory and enforcement framework to “promote a fair and non-discriminatory marketplace for access to consumer credit”. The impact of the Act on the banking industry and other credit providers such as retailers and microlenders is extensive and significant. All credit providers will have to comply fully with the Act from 1 June 2007.

This article attempts to summarise the important provisions and consequences of the Act as they relate to credit providers.

1. Roleplayers

The diagram below shows the roleplayers that fall within the ambit of the Act. It also outlines the primary functions of the National Credit Regulator, established as regulator under the Act, and the National Consumer Tribunal.

Credit providers, credit bureaux and debt counsellors must engage in lending and/or associated activities according to the provisions of and governance embodied in the Act.

All credit providers must register with the National Credit Regulator, except persons who provide incidental credit agreements (see item 2 below) or have fewer than 100 credit agreements or a total outstanding loan book equal to or less than R500 000.

All credit bureaux and debt counsellors must register with the National Credit Regulator.
Note: While the Act does contain debt collection provisions, debt collectors are regulated in terms of the Debt Collectors Act 114 of 1998.

2. Credit agreements

Types of credit agreements
The Act classifies an agreement as a credit agreement if it is a credit facility, credit transaction, credit guarantee; or a combination of these. This is shown in the figure below.

A credit facility is a cheque account overdraft, a credit card or retail store card limit or a line of credit.
A credit transaction is some form of payment deferral that attracts fees, charges or interest with respect to the deferred payment. It includes:

A credit guarantee is an agreement such as a suretyship where one person (guarantor) agrees to pay what another person owes in terms of a credit agreement should the debtor default.

The Act applies to all credit agreements within South Africa that involve:

What is not a credit agreement?

The Act also defines what is not a credit agreement namely:

Unlawful credit agreements

The Act defines an unlawful and thus unenforceable credit agreement as a credit agreement:

If a Court declares a credit agreement to be unlawful, all its provisions are unenforceable and the consumer is not required to return any goods or money received from the credit provider under the agreement and the court may either order the credit provider to return all money received from the consumer under the agreement or order such funds be forfeited to the State.

Unlawful provisions in credit agreements

The Act specifies that a number of provisions, when found in a credit agreement will be unlawful. A provision is unlawful if it attempts, among others, to defeat the policy and purposes of the Act, deceive the consumer, subject the consumer to fraudulent conduct, take away the consumer’s rights in terms of the Act or if it results from an improper negative option offer.

An unlawful provision of an agreement is void from the date of the agreement, and the court is authorised to disregard such a provision and to nullify the entire agreement if the agreement does not make sense without the unlawful provision.

Pre-agreement quotation

The credit provider must provide a prospective consumer with a quotation on the cost of credit (interest rate and fees). The quotation should be valid and binding for 5 days. The quotation must also include the main features of the proposed agreement. The quotation enables the consumer to consider the cost of the credit and the obligations of the credit agreement before making a decision on whether or not to enter into the agreement.

Costs relating to credit agreements

The credit provider is only permitted to charge:

If applicable in respect of the goods that are the subject of an instalment agreement, a mortgage agreement, a secured loan or a lease, the credit provider may include the following in the principle debt: initiation fee; cost of extended warranty; delivery, installation and initial fuelling charges; connection fees, levies or charges; taxes, licences and registration fees; and premiums of credit insurance.

The Act stipulates that the Minister of Trade and Industry may cap the maximum interest rate and fees charged.

Credit insurance

A credit provider may add appropriate credit insurance to a credit agreement. However, the consumer must be advised up front of the premiums and these premiums are to be payable periodically i.e., the credit provider may not capitalise credit insurance upfront.

Credit providers may not coerce consumers to take out their particular insurance policy. Indeed consumers must be advised that they may provide policies of their own.

3. Consumer rights

The Act stipulates a number of fundamental rights of consumers in the credit marketplace. These include:

• protection against discrimination in credit application and granting,

• the right to be given reasons for credit being refused or discontinued,

• the right to information relating to the agreement, in an official language, and in plain and understandable language;

• the right to the protection of confidential information; and

• the right to choose whether to receive certain documents electronically or in paper copy.

4. Credit marketing and advertising

The Act contains a number of provisions to control or remedy abuses in the marketing of credit. For example:

• negative option marketing is prohibited;

• marketing of credit at the consumer’s home or workplace is restrained. However it is allowed if the consumer invites the credit provider to visit for that purpose; and

• a credit provider who is required to be registered, but fails to do so, must not advertise the availability of credit or of goods and services to be purchased on credit.

Advertisem*nts that advertise the availability of credit, goods or services to be purchased on credit must not advertise unlawful credit or be misleading, fraudulent or deceptive. When advertising the granting of credit, interest rate and credit costs must be contained in the advertisem*nt.

If an advertisem*nt includes a statement of comparative credit costs it should show the costs of credit and interest rates for each alternative compared. The advertisem*nt must also state cautions and warnings concerning the use of the comparative statements.

5. Reckless credit

Credit providers must not enter into reckless credit agreements.

A credit agreement is regarded as reckless if at the time it was made, the credit provider did not do an assessment. Such assessment requires the credit provider to consider the prospective consumer’s understanding of the risk and costs of the proposed credit and the rights and obligations under a credit agreement; debt repayment history; and financial means, prospects and obligations. In addition the credit provider must assess whether the commercial undertakings the consumer has in mind by applying for credit, will be successful.

A credit agreement will also be reckless if the credit provider did the assessment, and nonetheless entered into the agreement despite the fact that the consumer did not understand the risks, costs or obligations of the agreement or despite the fact that the consumer could not afford the specific agreement i.e., the agreement caused the consumer to be over-indebted.

If a Court finds that an agreement was reckless it may suspend the agreement. A suspended agreement remains in force, but cannot be enforced until the consumer is able to afford it. However if the Court is satisfied that the consumer failed to fully and truthfully answer any question for information, the Court will not declare credit to be reckless.

6. Over-indebtedness

A consumer is over-indebted if, having regard to the consumer’s financial means e.g., income, prospects and obligations, the consumer cannot reasonably satisfy all obligations under all credit agreements in a timely manner.

A consumer may apply to a debt counsellor to be declared over-indebted. The debt counsellor will perform a review of the debt and make a recommendation to the Court. The Court in turn may re-organise the consumer’s debt by extending the term of any agreement, postponing payments, re-calculating unlawful fees or interest, or ordering adjustments to improperly charged items.

Once a consumer applies to a debt counsellor, or a Court refers a case to a debt counsellor, and until the process is complete or is terminated by notice:

• the consumer is prohibited from entering into any new credit agreement, except to consolidate existing obligations;
• all credit providers whose agreements are being reviewed may not enforce those agreements; and
• if a credit provider has notice of the review and enters into a new credit agreement during that time, that new agreement may be declared reckless.

If the debt review process does not conclude within 60 days, and the consumer is in default, a credit provider may serve notice to end the process, so that the credit provider may approach the Court to enforce the agreement. The court will have discretion to order the debt review to continue in appropriate circ*mstances.

7. Business impact of the Act

The Act has inevitably changed the way in which credit providers extend credit. In the process there have been compliance costs as credit providers have:

• ensured their existing and new standard agreements comply with the Act
• put pre-agreement processes in place – affordability assessments and quotations;
• checked and updated their systems to ensure that only permitted interest and fees are calculated and charged and to keep necessary records to compile statistical returns and compliance reports
• aligned their marketing and selling practices with the requirements of the Act; and
• trained staff to understand and comply with the requirements of the Act.

At the same time the income of credit providers has and will be affected by the limitations on interest and fees and credit-insurance provisions

While it is too soon to assess the impact of the Act on the volume and quality of credit extended, there is evidence that volumes have been affected(2) although growth in credit extension to the private sector remains high.

• June 2007 saw a year-on-year decrease of 13.5% in the sales of retailers in household furniture, appliances and equipment. This is attributed mainly to the introduction of the Act on 1 June 2007;

• Seasonally adjusted motor trade sales for the 2nd quarter of 2007 decreased by 2.6% compared with the 1st quarter of 2007. This is ascribed to the introduction of the Act and the difficulty in the registering of new and used vehicles, as a result of the faulty eNaTIS system.

• growth in credit extended to the household sector toned down from 22.8% year-on-year in May 2007 to 21.5% in June 2007.

Possible side effects of the Act that may still surface are:

• credit providers leave the industry as compliance proves too onerous. This may negatively impact competition, credit supply and cost of credit;

• compliance costs may act as a barrier to the entry of new credit providers to the market; and

• development of new and innovative credit products is hindered, particularly in the areas such as housing and small, micro and medium enterprise lending.

(1)Arm’s length transactions are agreements in terms of which the parties are independent of each other and are dealing from equal bargaining positions with neither party being subject to the other's control or dominant influence. Both parties necessarily strive to obtain the utmost possible advantage (e.g., profit) out of the transaction.

(2) Volume changes should be assessed against the medicinal interest rate tightening handed out since late 2006 and indications that transactions may have been brought forward to precede the implementation of the Act in expectation of tightening in lending criteria:

References websites

1. South African Reserve Bank www.reservebank.co.za
2. Statistics South Africa www.statssa.gov.za
3. National Credit Regulator www.ncr.org.za
4. Deloitte & Touche www.regulatoryhub.deloitte.co.za

Author’s details:
Name: Ingrid Goodspeed
Phone number: 011 2959751
E-mail address: [email protected]