Hundreds of businesses across South Africa offer short-term loans to their employees. Such loans are often used to assist in the event of family disasters, or to help with the costs of education.
What most firms don't realise is that extending credit to employees could require them to register with the National Credit Regulator (NCR) as stipulated in the National Credit Act. According to Helyn Patten, senior associate at Webber Wentzel Bowens, such circumstance would arise if a company extended credit to more than 100 of their employees, or if the total of the principle debt extended to employees exceeded R500, 000.
In either event, the company concerned would have to register as a credit provider with the NCR. Business owners who grant loans to employees and fail to register as credit providers could be conducting the business of a lender in contravention of the law.
"The National Credit Act applies to every credit agreement between parties dealing at arms length and made within, or having effect within South Africa, subject to a number of exclusions," said Patten. While many would argue that an agreement between an employee and employer is not an arm's length transaction, the NCR currently feels that employee loans fall within the scope of the Act. Patten expects that the boundaries will only become clear once they are challenged in a court of law.
Getting tough on lenders
The National Credit Act was promulgated to ensure that all credit transactions and providers of consumer credit are regulated. Banks, furniture companies, retailers, micro-lenders and pawn brokers all fall under the regulatory constraints of the Act. Products that are regulated include mortgages, credit cards, overdrafts and micro-loans. Stokvels, family loans and shareholder loans are not classified as credit agreements in terms of the Act.
The cumbersome piece of legislation was implemented in three stages. The first phase of the Act was implemented in June 2006, the second from 1 September 2006 and phase 3 will come into effect from 1 June 2007. The final section of legislation which becomes active on this date includes chapters dealing with consumer credit policy (with sub-sections on consumer rights, confidentiality, credit marketing practices and reckless credit), consumer credit agreements and collection, repayment, surrender and debt enforcement.
As regulators take a tougher stance on credit extension, some concerns have been raised about the possibility of borrowers being forced to take desperate action to get their hands on much needed cash. If borrowers are unable to obtain loans through conventional channels, the fear is they will be forced to make use of loan sharks, effectively moving out of the regulatory protection offered by the bill.
A couple more regulatory bodies to contend with
The National Credit Act led to the establishment of two regulatory bodies to monitor the credit industry and enforce the Act.
The first is the National Credit Regulator which is tasked with the enforcement of the Act. It will also be responsible for education, policy development, registering industry participants and investigating complaints.
The National Consumer Tribunal exists independently of the NCR and will hear all cases relating to non-compliance of the Act. The Tribunal will have the power to issue fines for the contravention of the Act. The Tribunal also affords consumers and credit providers an opportunity to appeal against rulings made by the NCR.
New legislation is pointless without some mechanism to ensure compliance. While the two new regulatory bodies will hopefully ensure that the Act is enforced, it remains to be seen how much of an impact the additional regulatory requirements will have on the credit industry as a whole.
Editor's thoughts:
The National Credit Act was promulgated to protect consumers from irresponsible lending practices. Do you think that loans from an employer to an employee need to be regulated by the Act? Send your comments to gareth@fanews.co.za.
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