The high costs charged in relation to credit agreements is an ever-present concern. It is important for both consumers and credit providers to be mindful of the various fees charged in respect of credit agreements, as such fees could be strictly prohibited under the National Credit Act No 34 of 2005 (“NCA”). This article will take a closer look at the recent decision of the High Court in the case of Edcon Holdings Ltd v National Consumer Tribunal and Another (“Edcon Holdings Case”) which turned on whether a particular cost in respect of credit was prohibited.

In the Edcon Holdings Case, Edcon Holdings (“Appellant”) appealed against an order made by the National Consumer Tribunal (“Tribunal”) in respect of a complaint initiated by the National Credit Regulator (“Regulator”). The Appellant is the retailer that offers revolving credit to its customers, which is accessed by making use of a “personal store card” in order to purchase ancillary products such as clothing, airtime, accessories and other services in relation thereto. A subscription to a club membership (“Club”) is listed as one of the products that are sold to customers.

The complaint related to the fact that the Appellant was charging its customers a Club fee on their credit agreements and that such a fee is not listed under section 101 of the NCA and as a result thereof not permitted under the NCA.

Section 101 of the NCA reads as follow:

 “(1)        A credit agreement must not require payment by the consumer of any money or other consideration, except –

  1. the principal debt, being the amount deferred in terms of the agreement, plus the value of any item contemplated in section 102;
  2. an initiation fee;
  3. a service fee;
  4. interest;
  5. cost of any credit insurance provided in accordance with section 106;
  6. default administration charges; and
  7. collection cost.”

What is a Club fee?

The Appellant provided extensive evidence of the nature of the disputed Club fee and the originating cause being the Club membership that customers may elect to subscribe for when entering into the credit agreement and the manner in which it is paid for.

The Club is presented as a virtual basket of “value-added” services and benefits which the customer receives in return for the payment of the Club fee. The Appellant is able to supply the customers with goods, services and rewards by entering into separate agreements with third party suppliers. The Club membership together with the fee payable by the members will in return dictate the level of benefits that the customers are eventually entitled to.

The Appellant argued that the Tribunal erred in finding that the Club fee is a form of prohibited cost of credit, as contemplated in section 101 of the NCA due to the fact that the Club membership was an optional item which a customer may elect to accept or not. By ticking the relevant tick box on the pre-agreement statement of the original credit facility, the customer exercised this election. The Club membership can also be purchased by using the store card and customers may cancel it at any time. The Club fee is furthermore payable on a monthly basis and is not reduced by each monthly payment. Another feature of the Club membership is that when a customer’s account is in arrears for a period of 90 (ninety) days, not only is the charging of the fees suspended, but also the membership as a whole.

Is the Club fee a prohibited cost?

The Regulator argued that the Appellant engaged in repeated prohibited conduct and that the Appellant should furthermore be ordered to reimburse all customers charged with Club fees and an interdict should be issued to prevent the Appellant from charging any Club fees in the future. The Tribunal stated in its judgment that the main argument was whether the Club fee constituted a “cost of credit” as referred to in section 101 of the NCA.

The Tribunal referred specifically to the wording of section 101 of the NCA which permits only certain fees and charges to form part of a credit agreement. The intention of the legislature is to ensure that consumers are not misled into “thinking” and/or “assuming” that certain fees and costs automatically form part of their credit agreements. The Tribunal further stated that any fee or charge not listed under section 101 of the NCA would not be permitted and regardless of the fact that a consumer is presented with the “option” to accept or refuse the fee by means of a tick box option and/or otherwise – section 101 of the NCA specifically excludes the Club fee from being charged.

The Appellant brought the appeal against the entire decision of the Tribunal and it was subsequently submitted by the Appellant that a distinction should be drawn between the meaning of “contain” and “require” when interpreting the wording of section 101 of the NCA. The Appellant argued that the credit agreements entered into between the Appellant and the consumers do not “require” and/or demand from the consumer to pay the Club fee and therefore the Club fee is clearly not a cost of credit which is extended to the consumer in terms of the credit agreement.

The Court supported the submissions made by the Appellant and held that the notion of a cost of credit is the cost of lending money and/or extending a credit facility. The Tribunal’s finding that the fee was for a product that entitled the consumers to various benefits further supported the view that the Club fee was not a cost of credit and the Court ruled that the Tribunal’s finding should be set aside. The appeal was upheld with cost and the initial complaint of the Regulator was dismissed by the Court.

Where consumers have the option to choose to pay a certain fee, and such fee not being in consequence or pursuant to the conclusion of a credit agreement, the fee charged will not be regarded as a cost of credit. Credit providers should take note of the judgement and section 101 of the NCA to ensure that they do not charge fees which are prohibited, and consumers should also be aware thereof in order to ensure that they are not exploited by unscrupulous credit providers.

03 October 2018