State will not contest ruling on credit

The Department of Trade and Industry will not be appealing against the recent setting aside by the High Court in Cape Town of a critical affordability regulation linked to the National Credit Act.

Lionel October, the department’s director-general, told Business Day on Thursday that instead of appealing they would “fix the clause” that had prompted the legal challenge.

In mid-March, the court set aside regulation 23A(4), which requires the presentation of bank statements, pay slips and financial statements before credit can be extended to a consumer. The judge ruled that the regulation discriminated against consumers who were informally employed or selfemployed and/or those without bank accounts.

October said the judge’s view on informally employed consumers was accurate, but he was concerned about the effect of the ruling on formally employed consumers.

“It could enable over-lending to consumers who are formally employed,” said October.

He said the department would work on making the regulation more flexible, but stressed that banks and other credit providers had to be aware of the obligation to “verify that borrowers are not overindebted”. The act still requires credit providers to ensure consumers can afford the credit they receive. Unaffordable credit is deemed to be reckless and is a contravention of the act.

In March the National Credit Regulator (NCR) said it was seeking advice on whether or not it would appeal the judgment. This week it did not respond to queries about what, if any, decision had been made.

The action was launched by Mr Price, TFG and Truworths in response to the introduction of the regulation in 2015, which the NCR said was necessary to avoid reckless lending.

Critics said it demonstrated the NCR’s typical heavy-handed approach to a complex problem and that it in effect allowed for reckless lending to be codified.

“If you were able to tick the boxes by providing pay slips you could access reckless amounts of credit,” said one critic, who described the regulation as well-intended but badly thought through.

It had a significant effect on the performance of retailers during financial 2016 and 2017. TFG reported a 5.4% decline in active financial accounts in 2017 and Truworths’ active store account base shed 4.4%.

Alec Abraham of Sasfin Securities said that potentially the biggest beneficiary of the court ruling was Truworths, given its relatively high exposure to credit sales. About 72% of Truworths sales are on credit compared with TFG’s South African 55% credit sales exposure and Mr Price at 20%.

The ruling is expected to underpin the stronger investor sentiment towards the retail sector, evident since late 2017. The Truworths share price, which dipped 2% on Thursday to R102, is now getting back to levels enjoyed in early 2016. TFG has also enjoyed a strong run since late 2017 and recently broke through the R200 level for the first time since 2015.

Although it did not take a hefty knock, Mr Price has also enjoyed a share price surge in the last six months. The benefits of the court ruling accrue to more than the three parties to the legal action. In its recent results Shoprite referred to the adverse effect of the affordability regulation on sales at its furniture division OK.

Furniture group Lewis, which has been going through a torrid time since 2015, has also benefited from an uptick in consumer demand and investor sentiment. At R47.79, the share price is back to levels seen 12 months ago, although it is still at half the level it was trading at in 2015. In its 2016 annual report the chairman said the affordability regulations “have had a profound impact on the group and contributed directly to the muted merchandise sales growth of the past year”.