National Credit Regulator v Ncedumzantsi Business Solutions CC (NCT/223374/2022/57(1)) [2024] ZANCT 34 (10 September 2024)

IN THE NATIONAL CONSUMER

TRIBUNAL

HELD IN CENTURION

Case number: NCT/223374/2022/57(1)

In the matter between:

NATIONAL

CREDIT REGULATOR

APPLICANT and

NCEDUMZANTSI

BUSINESS SOLUTIONS CC

RESPONDENT

Coram:

Ms Z Ntuli - Presiding Tribunal Member

Dr MC Peenze - Tribunal Member

Adv S Mbhele - Tribunal Member

Date of Hearing - 4 September 2024

Date of Judgment - 10 September 2024

JUDGMENT

AND REASONS

PARTIES

1. The applicant in this matter is the National Credit Regulator (the applicant or the NCR), a juristic person established by section 12 of the National Credit Act, 34 of 2005 (the NCA). Ms Renate Garlipp, the senior legal advisor in the applicant’s Investigations and Enforcement department, represented the applicant at the hearing.

2. The respondent is Ncendumzantsi Business Solutions CC (the respondent), duly incorporated under the close corporation laws of South Africa, with registration number 2011/062415/23. The respondent is a registered credit provider with the NCR under registration number NCRCP5402. The respondent was not represented at the hearing.

TERMINOLOGY

3. A reference to a section in this judgment refers to a section in the NCA. A reference to a regulation refers to the National Credit Act Regulations, 2006[1] (the regulations). A reference to a form refers to a form as prescribed in the regulations. A reference to a rule refers to the Rules of the National Consumer Tribunal[2] (the rules).

PROCEEDINGS ON A DEFAULT

BASIS

4. The applicant submitted that the notice and application were served to the respondent on 30 March 2022 via registered mail to the

respondent’s registered address, as reflected in the CIPC[3] records. The application was filed with the Tribunal on 31 March 2022, and the matter was set down for 6 June 2022. However, the applicant realised that the mail was still in transit. The mail was eventually collected on 20 September 2022, but the notice was not received due to changes within the respondent.

5. The applicant served the documents again by registered mail on 15 January 2024. The mail was collected by N. Ndamase, a respondent member, on 5 March 2024. On 29 July 2024, the applicant filed the track-and-trace report with the Tribunal, and a notice of set down was issued to the parties on 29 April 2024. The panel is satisfied that the respondent was properly served in accordance with the rules.

6. According to rule 13(2), the respondent must serve an answering affidavit on the applicant within 15 business days of receiving the application. The respondent failed to do so, and the applicant did not apply for a default order under rule 25(2). Therefore, the registrar correctly set the matter down for a hearing on a default basis, as the pleadings were considered closed.

7. Rule 13(5) states that any factual allegation in the application or referral not explicitly denied or admitted in the answering affidavit is considered admitted. Since the respondent did not submit an answering affidavit, they are deemed to have admitted the allegations presented in the applicant's application.

BACKGROUND

8. This application arises from a complaint lodged by the applicant under section 136(2). The Office of the Consumer Protector within the Eastern Cape Provincial Government informed the applicant that it suspected the

respondent of overcharging credit costs and failing to conduct proper affordability assessments before extending credit to consumers. This led to a reasonable suspicion that the respondent was extending credit in contravention of the NCA and/or its regulations.

9. On 5 March 2020, the applicant's Chief Executive Officer authorised an investigation under section 139(1)(c), read in conjunction with section 136(2), into the respondent's credit granting practices. Muhanganei Mbedzi (Mbedzi) and Douglas Musandiwa (Musandiwa), both applicant employees, were appointed under section 25 to conduct the investigation. The scope of their investigation involved examining ten consumer files to assess the respondent’s business practices and determine the following:

9.1 Whether the respondent engaged in reckless credit granting;

9.2 Whether the respondent entered into credit agreements without first taking reasonable steps to assess affordability, as required by law;

9.3 Whether the respondent complied with Regulation 23A when conducting affordability assessments; and

9.4 Whether the credit costs charged by the respondent complied with the maximum allowable amounts as prescribed.

10. On 10 March 2020, the inspectors conducted an on-site investigation at the respondent’s business premises at Shop No. 7, Chithibuna Building, Butterworth, Eastern Cape. N Ndamase, who identified herself as the owner of the respondent, explained that the business provides short-term loans to government employees and SASSA grant recipients, up to a maximum of R5,000.00, with a repayment term of up to 6 months at a flat interest rate of 40%, including initiation and service fees. The respondent uses the Pro-Loan software program to obtain consumers’ credit bureau records but does not retain those records.

11. Following the on-site investigation and assessing the evidence in the sampled files, Mbedzi compiled an investigation report with his findings. This report, along with the sampled files marked as Annexures “D1” to “D10”, is attached to the application as Annexure "FA5”. The applicant’s cause of action is outlined in its founding affidavit, read with the investigation report.

ALLEGED CONTRAVENTIONS OF THE NCA AND THE TRIBUNAL’S FINDINGS

12. According to the applicant, the respondent is still in business, as shown in the CIPC report dated 26 August 2024, and registered as a credit provider with the applicant in terms of the NCA. The respondent has admitted to all the alleged contraventions based on rule 13(5), as it failed to contest the applicant's allegations and findings.

13. The applicant demonstrated that the respondent failed to operate its business in a manner consistent with the purposes and requirements of the NCA. The respondent’s conduct amounts to gross and systematic contraventions, which occurred repeatedly. Based on the investigation report, the following contraventions are evident:

Failure to conduct affordability assessments

14. Section 81(2) prohibits a credit provider from entering into a credit agreement with the consumer without, amongst others, first taking reasonable steps to assess the consumer’s general understanding and appreciation of the risks and costs of the proposed credit and rights and obligations of the consumer under a credit agreement; the debt repayment history of the consumer under credit agreements; and the existing financial means, prospects, and obligations of the consumer. According to section 78(3)(a), financial means, prospects, and obligations include income or any right to receive income, regardless of the source, frequency,

or regularity.

15. Section 81(1) states that when applying for a credit agreement, and while the credit provider is considering that application, the prospective consumer must fully and truthfully answer any requests for information made by the credit provider as part of the assessment required by this section.

16. It is evident from Annexures “D1” to “D10” that the respondent failed to evaluate the consumers' debt repayment history, financial means, prospects, and obligations. No credit bureau checks were conducted on the relevant consumers. This constitutes a contravention of section 81(2)(a)(ii), read with section 81(3), and regulation 23A(3), (12)(b), and (13).

17. Annexures “D1” to “D8” show no evidence that the respondent obtained documents to verify the consumers' income or that calculating the consumers' financial means, prospects, or obligations was done. While bank statements were provided in Annexures "D9" and "D10", no such calculations were performed. This contravenes section 81(2), read with section 81(3), and regulation 23A(8). Furthermore, the respondent did not apply the minimum expense norms table in any of the sampled files, violating regulation 23A(9).

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18. The panel is cognisant of Truworths Limited and Others v Minister of Trade and Industry and Others[4] case in which regulation 23A(4) was set aside, with the remainder of regulation 23A applicable to all credit agreements. All credit providers are obligated to adhere to regulation 23A. The panel finds that the respondent repeatedly contravened sections 81(2)(a)(ii) and (iii) read with regulation 23A.

Reckless credit agreements

19. Section 81(3) prohibits a credit provider from entering into a reckless credit agreement with a prospective consumer. According to section 80(1)(a), a credit agreement is reckless if, at the time that it was made, the credit provider failed to conduct an assessment as required by section 81(2), irrespective of what the outcome of such an assessment might have concluded at the time.

20. As demonstrated above, the respondent failed to conduct affordability assessments required by section 81(2) in respect of Annexures “D1” to “D10”. The panel finds that the respondent repeatedly contravened section 81(3) read with section 80(1)(a). Accordingly, the credit agreements in Annexures “D1” to “D10” are reckless.

Failure to keep proper records of documentation to support the steps taken when conducting affordability assessments

21. In all credit agreements assessed, the respondent failed to keep records of the relevant documentation relating to steps taken to assess the affordability of the consumer as required. The panel finds that the respondent has repeatedly contravened section 170, read with regulation 55(1)(b)(vi). The respondent also contravened section 52(5)(e) by failing to keep prescribed records.

Unlawful / prohibited and excessive charging

22. The applicant demonstrated that the respondent charged unlawful and undisclosed fees not permitted under section 101 without providing any indication of how these fees were calculated, in contravention of section 100(1)(a), read with section 101(1). In all cases, the total cost of credit exceeded the maximum allowed, with excessive initiation, service fees, and interest charged. The panel finds the respondent in repeated contravention of sections 100(1)(b) and (c) and 101(1)(b)(i), (c)(iii), and (d)(ii), read with regulations 42(1) and (2), 43, and 44.

Failure to submit reports in the prescribed manner to the applicant

23. The applicant submitted that while preparing this application to the Tribunal, they detected that the respondent failed to submit statutory reports, comprising the annual financial and operational return, to the applicant in the manner prescribed per Form 40. The panel finds that the respondent repeatedly contravened regulation 66 and section 52(5)(c), read with general condition 3 of its conditions of registration as a credit provider.

RELIEF SOUGHT

24. The contraventions outlined above are serious and systemic, raising concerns about the extent of such practices within the respondent's operations, considering that only ten files were sampled. All sampled files were found to be grossly non-compliant. The panel agrees that declaring these contraventions as prohibited conduct is warranted.

25. The CPA explicitly prohibits reckless lending to promote responsible borrowing, prevent over-indebtedness, and ensure consumers meet their financial obligations while discouraging credit providers from reckless lending. The credit agreements in Annexures "D1" to "D10" are deemed reckless. Consequently, the panel believes allowing the respondent to collect on these agreements would be unfair.

26. The order for an audit is justified since only a few of the respondent's credit agreements were investigated. Given the gross contraventions found in the ten sampled files, it is in the interest of justice and consumer protection to appoint an independent auditor, at the respondent’s cost, to determine whether reckless credit was extended within the past three years. Based on the auditor’s report, the applicant can decide the next steps in protecting consumer rights. It is important to note that the panel does not grant orders for a person(s) not a party to this application.

27. The applicant believes the respondent's conduct has damaged the reputation of the consumer credit industry and disregarded consumer rights. They request the cancellation of the respondent's registration, arguing that the systemic nature of the contraventions indicates that an interdict would not be adequate to prevent future breaches. The panel finds cancellation appropriate due to the severity of the contraventions and the respondent's apparent indifference.

28. The applicant also seeks an administrative fine against the respondent. Under section 151, the Tribunal has the authority to impose such fines for prohibited conduct, with a maximum set at 10% of the respondent's annual turnover or R1,000,000, whichever is higher. The panel notes that the NCA does not prohibit it from ordering cancelling registration and imposing a fine in a case. The issue is whether an administrative fine is appropriate or justified in this case.

29. Administrative fines primarily serve as a punitive and deterrent function, aiming to prevent the perpetrator and others from engaging in similar unlawful behaviour. This purpose was explored in Southern Pipeline Contractors and Another v Competition Commission,[5] where the court underscored that fines should not be used solely for deterrence but must also be imposed with consideration to fairness

for the offending party, adding that it should not be aimed at destroying a business. In this case, the respondent forfeited the chance to argue in mitigation of the penalty by not contesting the application. However, this does not relieve the panel from carefully evaluating whether the relief sought is appropriate and fair.

30. In NCR v Midwicket,[6] the Tribunal pronounced that the primary purpose of an administrative fine is to serve as a means of deterring an offender from engaging in the prohibited conduct again. Where the offender’s registration is cancelled and is thus no longer permitted to conduct business as a credit provider, one of the main reasons for imposing a fine falls away. The imposition of the fine then becomes purely punitive, which would generally only be warranted in the most extreme of circumstances.

31. The panel has already determined that the respondent’s contraventions are severe enough to warrant cancellation of their registration. In assessing whether the extreme circumstances necessary to justify an additional fine exist, the panel considered the narrow scope of the applicant's investigation, the absence of previous violations by the respondent, and the respondent's co-operation with the investigation. Furthermore, there was no quantified loss or damage caused nor the profit gained because of the respondent’s conduct.

32. In addition to cancellation, the respondent is required to refund affected consumers, with all consumers’ debt obligations set aside. These measures serve to restore fairness and protect vulnerable consumers. The NCA's primary goal, protecting consumers, has already been achieved by removing the respondent from the market and preventing further potential harm.

33. While the NCA does not establish a strict hierarchy of penalties, cancellation of a registrant's registration is the most drastic sanction available under the regime. It effectively shuts down the respondent's business immediately. Cancellation itself effectively serves both the deterrent and punitive purposes of the NCA. Further punitive action would be excessive and disproportionate in this instance.

34. The panel concludes that imposing a fine is not warranted. This stance should not be considered a blanket rule against imposing a fine and cancelling a credit provider's registration under the NCA. It simply means the panel did not find sufficient justification for a fine beyond cancellation.

ORDER

35. In the circumstance, the panel makes the following order: -

35.1 It is declared that the respondent repeatedly contravened the following sections of the NCA:

(a) sections 81(2)(a)(ii) and (iii) read with regulation 23A;

(b) section 81(3) read together with section 80(1)(a);

(c) section 170 read with regulation 55(1)(b}(vi); and section 52(5)(e);

(d) section 100(1)(a) read with section 101(1);

(e) section 100(1)(b) and (c) and section 101(1)(b)(i), (c)(iii), and (d)(ii) read with regulation 42(1) and (2), 43 and 44;

(f) regulation 66 and section 52(5)(c), read with general condition 3 of the respondent's conditions of registration as a credit provider;

35.2 The contraventions listed in paragraph 35.1 above are declared as prohibited conduct in terms of section 150(a);

35.3 It is declared that the credit agreements in the files attached as Annexures “D1” to “D10” to the investigation report are declared reckless in terms of section 80(1)(a); and:

35.3.1 the consumers’ obligations under these credit agreements are set aside; and

35.3.2 the respondent must, at its own costs:

35.3.2.1 refund all the costs of credit charged and recovered from consumers under all such agreements;

35.3.2.2 refrain from taking any enforcement action against such consumers and, to the extent that the respondent may already have taken enforcement action which is pending against any such consumers, the respondent must formally withdraw such action and tender payment of the consumer's legal costs where the action is defended or opposed;

35.3.2.3 take all such steps as may be reasonably necessary to ensure that:

35.3.2.3.1 any adverse credit bureau records that may have arisen because of the consumer having concluded such credit agreements with the respondent are removed;

35.3.2.3.2 any civil judgments taken by the respondent against such consumers in respect of such agreements, are rescinded or, if rescission is not possible, abandoned;

35.4 Within 30 business days of the issuance of this judgment, the respondent shall, at its own cost, appoint an independent auditor to investigate whether there were any transactions like those in Annexures “D1” to “D10” concluded by the respondent within the last three years from the date of the issuing of this judgment. The auditor’s report must include credit agreements concluded without conducting affordability assessments, a list of all consumers charged prohibited fees and/or excessive total cost of credit, and the amount by which each such consumer was overcharged. Within 120 business days, the auditor must submit a report to the applicant regarding such transactions and the amounts that could be reimbursed to consumers for the applicant to assess and possibly refer them to the Tribunal for further relief.

35.5 The respondent, by its conduct, brought the credit industry into disrepute or acted in disregard to consumer rights generally;

35.6 The respondent's registration as a credit provider is cancelled with immediate effect; and

35.7 There is no order as to costs.

[signed]

Ms Z Ntuli

Presiding Tribunal member

Tribunal members Dr MC Peenze and Adv S Mbhele concur.

[1] Published under Government Notice R489 in Government Gazette 28864 of 31 May 2006.

[2] GN 789 of 28 August 2007: Regulations for matters relating to the functions of the Tribunal and Rules for the conduct of matters

before the National Consumer Tribunal, 2007 (Government Gazette No. 30225).

[3] Companies and Intellectual Property Commission.

[4] 2018 (3) SA 558 (WCC).

[5] (105/CAC/Dec10, 106/CAC/Dec10) [2011] ZACAC 6; [2011] 2 CPLR 239 (CAC) (1 August 2011), paragraph

[6] NCT/7962/2013/57(1), paragraph 34.