The SCA considered whether credit providers could permissibly levy OTR fees on consumers acquiring motor vehicles on credit, and specifically whether the credit providers complied with sections 100, 101, and 102 of the NCA in doing so. Ultimately, the SCA clarified the conditions under which OTR fees may be lawfully included in motor vehicle finance agreements, emphasising transparency and consumer consent.

Unfortunately, while the judgment no doubt intended to provide clarity and certainty, it may have inadvertently introduced more uncertainty into this vexed area of consumer credit law.

Background

As noted in the judgment, the process for purchasing a motor vehicle generally begins with the consumer selecting a motor vehicle and thereafter submitting an offer to purchase (OTP) to a motor vehicle dealer. The OTP provides for the costs agreed to by the consumer, which include the selling price and the OTR fees. OTR fees are described in the judgment as:

“[C]omposite fees for various services provided by motor vehicle dealers. They include, among other things, costs for services such as conducting a pre-delivery inspection, obtaining roadworthy certificates, licensing the vehicle, acquiring licence plates, delivery, fuel, and fees charged by the Financial Sector Conduct Authority. This list is by no means exhaustive.”

The case before the SCA originated following the National Credit Regulator’s (Regulator) determination, after conducting investigations into the practice of charging OTR fees in credit instalment agreements, that this practice contravened sections 100(1)(a), 101(1), 102(1) and (2) of the NCA. When the Regulator issued compliance notices (under section 55 of the NCA) to the credit providers, they objected and litigation ensued, culminating in this judgment. To comprehend how charging OTR fees could contravene these sections, it is necessary to examine each section individually.

Section 100

Section 100(1) prohibits credit providers from charging an amount or imposing a monetary liability on a consumer in respect of: (i) a credit fee or charge prohibited by the NCA; (ii) fees or charges exceeding amounts that may be charged as per the NCA; (iii) interest exceeding the amount that may be charged as per the NCA; or (iv) any fee, charge, commission or other amount payable by the credit provider to any third party except as contemplated in the NCA. Moreover, section 100(2) provides that any charges imposed by a credit provider for any goods or services must not be higher than the price charged for the same or substantially similar goods or services in the ordinary course of business for cash transactions.

Section 101

Section 101(1) regulates what consideration can be recovered from a consumer under a credit agreement, specifically “the principal debt, being the amount deferred in terms of the credit agreement, plus the value of any item contemplated in section 102” and, in addition, other prescribed credit charges and costs (such as an initiation fee, a service fee, interest, the cost of credit insurance, default administration charges and collection costs).

Section 102

Section 102(1) then provides that if a credit agreement is an instalment agreement (as was the situation in this case), a mortgage agreement, a secured loan or a lease (for instance finance leases for movables), the credit provider may include in the principal debt deferred under the credit agreement any of the items listed in 102(1) to the extent that they are applicable in respect of any goods that are the subject of the credit agreement.

These items comprise: (i) an initiation fee if the consumer has been offered and declined the option of paying that fee separately; (ii) the cost of an extended warranty agreement; (iii) delivery, installation and initial fuelling charges; (iv) connection fees, levies or charges; (v) taxes, licence or registration fees; or (vi) the premiums of any credit insurance payable in respect of that credit agreement.

The Regulator’s argument

The Regulator contended that sections 100(1)(a), 101(1) and 102(1), when read cumulatively, establish a “closed list” of permissible fees and charges. Consequently, in the Regulator’s view, credit providers who finance motor vehicles on an instalment payment basis (which would include leases) are limited to charging the principal debt plus the value of items expressly contemplated in section 102, rendering those OTR fees not explicitly listed in section 102, an unlawful charge.

The credit providers, on the other hand, argued that they did not set the OTR fees. These are determined by the dealers in agreement with the consumer (based on freedom of contract) before the request to finance the vehicle. Like all other extras, the consumer may request the dealer to include the OTR fees as part of the principal debt. These all contribute to the total amount which the consumer requests them to finance. The agreement between the dealer and the consumer is then ‘carried over’ to determine the amount (the principal debt) which the consumer seeks to have the credit provider finance. Furthermore, it was the credit providers’ submission that section 102 has limited relevance in this context. Section 102 permits credit providers, if they choose to offer any services listed in section 102, to include these in the principal debt provided that they comply with section 102(2).

Therefore, the NCA only protects the consumer when credit providers attempt to use their position to supply services, and thus the NCA does not govern the relationship between dealers and consumers, which may be covered by other legislation, such as the Consumer Protection Act 68 of 2008.

Prior to reaching the SCA, the matter was initially heard in the National Consumer Tribunal (Tribunal) where each of the credit providers separately sought orders to review and set aside the compliance notices issued against them; each review being considered by different panels of the Tribunal. Interestingly, the three panels came to two contradictory rulings. In one matter, the Tribunal found that OTR fees constituted fees prohibited under the NCA, whereas in the remaining two cases the Tribunal found that OTR fees were not prohibited.

High Court ruling

On appeal, a full bench of the High Court ruled that OTR fees, when charged by motor vehicle dealers after having been negotiated with the consumer, did not contravene the NCA. The majority found that the credit providers did not charge consumers the OTR fees separately when these fees and services were included in the credit agreements. These fees, according to the majority, are negotiated between the dealers and consumers. The credit providers only financed the principal debt, which, according to the majority, included the purchase price and other extras, such as OTR fees and additional services. The minority, in reaching a different conclusion, reasoned that the cost of credit includes, among other things, the price and value of items contemplated in section 102. This constitutes the ‘principal debt’. Once the dealer charges the consumer the OTR fees, they should not be imposed on the consumer, as this is prohibited by section 100.

Judgment

After highlighting that the differing conclusions reached in the previous forums were due to certain ambiguities in the NCA, the SCA, in response, distinguished between OTR fees imposed by a credit provider, on the one hand, and OTR fees forming part of the purchase price as agreed between the dealer and the consumer, on the other. The court held that OTR fees are unlawful if imposed as a separate charge by the credit provider unless specifically listed in section 102(1). However, if OTR fees are transparently incorporated into the purchase price and agreed upon by both the dealer and the consumer, they may be financed as part of the credit agreement.

Consequences

On the surface, this approach appears to facilitate meaningful consumer participation within the credit market, balancing the rights and responsibilities of both credit providers and consumers. However, what may be of concern is that this approach (albeit unintentionally) risks the dilution of the consumer protection mandate enshrined in the NCA.

The judgment, while well-intentioned, presupposes certain conditions in the South African consumer credit market that may not always be true in all cases. Chief among these assumptions are that: purchase negotiations between the dealers and consumers are always conducted on an equal footing with equal knowledge and bargaining power; and requiring transparency in relation to the disclosure of such charges/costs would be sufficient to avoid or mitigate against predatory credit practices or unscrupulous credit providers who would look to potentially exploit the ambiguity created by (i) what charges can legitimately be included in the principal debt to be deferred and (ii) the lack of guidance on what would constitute sufficient disclosure for the purposes of ensuring transparency.

These concerns arise because the SCA has, in effect, opened the floodgates for the introduction of unspecified charges not initially contemplated in the NCA that could be included in the principal debt and accordingly form part of the deferred amount on which interest and other charges would be levied under a credit agreement. In the context of credit agreements to which the NCA generally applies, it is not controversial that a consumer could agree on any amounts (i.e. the principal debt) which would be subject to credit financing. However, in the case of mortgage agreements, instalment agreements, secured loans and leases (all as defined in the NCA) these charges/items are circumscribed and limited to those specifically listed in section 102(1). That this is a closed list is confirmed by the SCA, however, in its judgment these and other charges/items can be included in the principal debt by agreement. In so doing, however, section 102 will not find application and, in effect, the protections afforded to consumers in terms thereof (see sections 102(2) and 102(3) enabling consumers to challenge the imposition or quantum of these charges/items) will be nullified.

Although the intention of the SCA may be laudable, the potential consequences of its judgment are far less so. Arguably, and perhaps inadvertently, this judgment has potentially eroded some of the consumer protections envisaged in the NCA and in so doing potentially tilted the scales of equity in the credit market in favour of credit providers in this instance.