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High Court Sets Aside Short Term Credit Fee Cap

In a surprising move and blow to the Department of Trade and Industry (DTI) and National Credit Regulator (NCR) the Pretoria High Court has set aside recent Interest Fee Changes which came into effect in May of this year.

‘The Court found that the DTI Minister and NCR could not back up claims that there had been sufficient research and consultation with the short-term credit industry’

The Court found that the DTI Minister and NCR could not back up claims that there had been sufficient research and consultation with the short-term credit industry before the rates were slashed a little while back. The rates were cut despite submissions from many parties of the extreme consequences of such a cut.

The DTI mentioned that they had engaged closely with 19 credit providers (particularly during June 2015) prior to making the changes which saw the caps for short-term credit rates slashed. While in the past there had been years of warnings from Debt Counsellors about a credit bubble and concerns about short-term credit abuses and reckless credit granting, the DTI and NCR, as well as credit provider organisations, had repeatedly denied any systemic risk. This was despite the sudden and marked increase in short-term lending at the time. Then African Bank fell apart and the industry, as well as parliamentarians, realised that there really were some serious issues. Government and those who regulate began to look for ways to reduce the incentive for credit providers to offer so much short-term credit. An obvious simple solution was the slashing of the rates when Micro Finance South Africa (MFSA) forced the NCR to review the rates and changes were going to be made.

The National credit Act requires the NCR to review such costs and fees at least every 3 years. They had not done so for nine years at the time.

Short Term Credit is defined as: credit less than R8000 and is repayable within 6 months.

MFSA and it’s members however soon decried the drastic slashing of their profitability and said that their members and others had not been well consulted or their presentations largely ignored before the changed rate caps were announced. They were not the only ones who felt this way. Several other large credit providers also decided to take the matter to court.

court-4The MFSA matter was heard recently and the judgement handed down during November 2016. Interestingly MFSA made the application in terms of the Promotion of Administrative Justice Act (PAJA). In terms of the Act if an administrative decision is made without taking into account relevant factors or if a decision was taken which was capricious or arbitrary it can or must be reviewed. The Courts found that this was the case with the drastic fee cap reduction which MFSA have said may well bankrupt half of it’s members. It also felt that the Regulator and Minister simply could not back up their claims of having properly engaged with the industry about the matter.

NCR to Appeal Ruling

The NCR have announced that they are not happy with the judgment and will now appeal the ruling. While that is the case the effects of the ruling will be held in stasis.