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Who the national credit act really helped

06 March 2008 Gareth Stokes

Plenty has been written about the damaging practices in the micro-lending industry. One of the main intentions of the National Credit Act was to stamp out lending practices which resulted in the poorest of the poor paying up to 360% per annum on micro-loans. A recent article in the Financial Mail provides some interesting insight into the world of micro-finance.

The article focuses on African Bank’s recent acquisition of Ellerines. It is an interesting transaction that makes sense because of the huge reliance local furniture retailers place on short-term finance to generate their operating profits. Financial services contribute 70% to Ellerines’ annual profit; and probably make up a similar slice of JD Group the country’s other furniture retail giant... And this makes the 1 200 furniture retail stores in the Ellerines stable little more than glorified banks...

FAIS Ombud had good reason to lambaste retailers

Lending practices at the furniture retailers has not escaped regulatory attention. On 29 January 2008 the FAIS Ombud issued a determination which sent a stern warning to the sector. The 89 page ruling highlights that abuses still occur in South Africa’s highly regulated financial services arena; helped by the blurring of lines between furniture retail and credit provision.

The case summarises an all too familiar horror story that plays out when the poor and uneducated purchase furniture on credit. The complainant, Ntiya Thulisiwe Gumede, purchased a small television set and stove from Barnetts (part of JD Group) in Port Sheptson. Gumede purchased items with a cash price of R2 779.88 and a TV Licence for R225.00. By the time she left the store the price of her purchase had more than doubled, and she owed Barnetts a total of R6 468.89.

People who buy goods on credit expect to pay interest on the outstanding amount. What they are not prepared for is the charges for credit life and other insurance that are ‘sold’ during the financing process. When FAnews Online first reported on this case we noted that the store would have completed the transaction legally if the sales person had paid more attention to detail. The ‘numbers’ in the deal that caused the ruckus are perfectly legal. It was the financial advice component (and the FAIS Act) that allowed the Ombud to determine in favour of the claimant.

Financial services ‘add-ons’ still causing trouble

And it seems the practice of lashing credit life and other insurance to credit sales at furniture retailers is as strong as ever. The Financial Mail ‘purchased’ a lounge suite from an Ellerines store in Roodepoort to see if Pillai still has cause for concern. The price tag on the item was R11 649 (which could be paid with a R1 164 deposit and 24 monthly payments or R800.97). So buying the item over two years ends up costing R20 387! Incidentally the interest rate on this purchase (stripping out the deposit and repaying R10 485 over two years) amounts to 60%. And that’s the maximum a consumer can be charged for unsecured credit!

“But the actual repayments were only a small fraction of Ellerines’ plans,” states the magazine. Additional charges included an initiation fee of R460, a deliver fee of R385 and a massive R3 026.19 in credit life insurance. In addition ‘optional’ insurance of R138.33 per month was offered to cover the goods for the life of the loan. The end result is that insurance and other financial service product ‘add-ons’ inflate the contract by R4 774.06 (or 40% of the value of the purchase). And these charges exceed the interest charge of R4 558 too.

Clearly the Act did not go far enough in regulating the fees that can be charged on loans in addition to interest. Once these fees are included, the total cost of finance rockets. For example, a consumer borrowing R8 000 over six months ends up paying an effective interest rate of 96% per annum if the maximum fees are applied. If this doesn’t clarify African Bank’s decision to snap up Ellerines, then nothing will.

Editor’s thoughts:
The National Credit Act seems to create the false illusion that entry level borrowers are protected from exploitation. The truth is the Act’s maximum allowable interest rates combined with high fees allow credit lenders to make just as much money as before – with legal backing. Should the National Credit Act be tweaked to offer poor consumers better protection? Send your comment to [email protected] or add them below.

Comments

Added by Eve, 21 Jun 2012
Please advice if the life insurance is really compulsary as stated by the stores.I questioned the store manager and they insisted it is compulsary,and then i questioned the high amountschargedmthey could not give a valid answer.I bought goods to the amount of R13000,and an extra 3300 was added for life insurance besides the other fees and interest rates
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Added by NB, 07 Mar 2008
I do feel that the NCA needs some fine-tuning. Many companies are getting away with "admin fees" that amount to high percentages of the "loan" For example Cash Converters. If you want to pawn something or as termed today, get a cash advance - you are offered R600 at 0% interest for one month, but the admin charge is in excess of 30%
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Added by Chris Breytenbach, 07 Mar 2008
Both the article, as well as Allan Holton's comments, are an eye-opener. I wonder what other industries are operating in the same way and also contravening the law. Motor dealers is one example I can think of.
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Added by Alan Holton, 06 Mar 2008
Ellerines is flouting the law and the FSB does not seem to have any concern about this. Let me elaborate. According to the official website of Ellerines (http://www.ellerines.co.za/geographical.html) they had 1016 outlets in South Africa at the end of their 2006 financial year. Every single one of these outlets provides a financial service to customers in that funeral policies and short term insurance are sold as a matter of course every time an item is purchased on credit. The question and implications of the nature of this financial service and whether it amounts to advice or an intermediary service is a topic deserving of its own focus. According to the FSB website, FSP 2814, Ellerine Services (Pty) Ltd has only one Key Individual , Mr. Robert James Furmidge and only three Representatives, these being Charmane Basson, Dave Allen Neumann and Ellerine Furnishers (Pty) Ltd with Arnoldus van den Borne appearing as the Key Individual of this juristic representative. On the face of it, financial services are being rendered at over a thousand locations by a mere three human representatives. How is this possible? Could it be that the requirements of Section 13 of the Financial Advisory and Intermediary Services Act 37 of 2002 are being ignored? Section 13(1)(b) provides that a person may not act as a representative of an authorised financial services provider, unless such person is able to provide confirmation, certified by the provider, to clients that a service contract or other mandatory agreement, to represent the provider, exists and that the provider accepts responsibility for those activities of the representative performed within the scope of, or in the course of implementing, any such contract or agreement. I have called at four Ellerine stores and asked the sales people for sight of their section 13 Certificates and every time I received a blank stare in response. Section 13(3) provides that every authorised financial services provider must maintain a register of representatives, and key individuals of such representatives, which must be regularly updated and be available to the registrar for reference or inspection purposes. The current register as displayed on the FSB website shows only three representatives. Section 13 (6) states that any person who complies with the requirements of this Act for a representative and acts as employee or mandatory for any authorised financial services provider, is, for the purposes of this Act, but subject to the provisions of this Act relating to representatives, regarded as a representative. This being the case, it could be said that every sales person in this group who in any manner sells insurance to a customer is actually a representative of Ellerines. But are they fit and proper? Do they have the minimum educational requirements? And why do they not appear in the FSB register? Section 36 of the Financial Advisory and Intermediary Services Act 37 of 2002 which provides that any person who contravenes or fails to comply with a provision of inter alia, section 13 (1) is guilty of an offence and is on conviction liable to a fine not exceeding R1 000 000 or to imprisonment for a period not exceeding 10 years, or to both such fine and such imprisonment. Clearly Ellerines is aware of the requirement that a register of representatives be established and maintained. If this is the case, how is it physically possible for just three people to provide financial services at 1016 outlets? What can we expect from the Regulator? The FSB has recently sent a letter to all authorised financial service providers. Under the rubric "The FAIS Division of the Financial Services Board started with a series of on-site reviews of selected Financial Services Providers (FSPs) ("theme visits") in terms of its risk base supervision approach"some earth shattering comments were made such as: 29% of all FSPs reviewed did not have plans for business continuation in place . . .. 71% of the FSPs had only one Key Individual and no business continuation . . . 90% of all FSPs reviewed did not have formal management structures and processes . . . Only 38% of the FSPs reviewed actually had risk management plans in place . . . One can imagine the time and resources that went into a survey of this kind. If one tenth of this time and these resources were devoted to visiting the real perpetrators of what the FAIS Ombud called an abuse and exploitation of the poor and vulnerable, we could justifiably expect fireworks. Sadly, I don't think we will see even a squib go off.
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