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[2016] ZAGPPHC 1153
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Micro Finance South Africa v Minister of Trade and Industry and Another q (16746/2016) [2016] ZAGPPHC 1153 (22 November 2016)
IN
THE HIGH COURT OF SOUTH AFRICA
GAUTENG
DIVISION, PRETORIA
Reportable:
NO
Of
interest to other judges: No
Case
No: 16746/2016
Date:
21/11/16
In the
matter between:
MICRO
FINANCE
SOUTH
AFRICA
Applicant
and
THE
MINISTER OF TRADE
AND
INDUSTRY
First Respondent
THE
NATIONAL
CREDIT
REGULATOR
Second Respondent
JUDGMENT
J
W LOUW,
J
[1]
The applicant is a
registered non-profit company which represents approximately 500
individuals or corporate entities who are
providers of
short term credit and who are colloquially referred to as
'micro lenders'. They operate approximately
1190 branches
throughout the country. The applicant alleges that it represents
about 30% of the micro lending
industry in
the country. In terms of regulation 39(2)(a) of the regulations
published in terms of the National Credit Act 34 of
2005 (the NCA)
on 31 May 2006 (the previous regulations), a short term
credit transaction is a transaction in respect
of a loan not
exceeding RS 000.00 which is repayable within
a period not exceeding
six months.
[2]
Section 171(1) of the NCA
empowers the Minister of Trade and Industry
(the first respondent)
to make
regulations expressly authorised or contemplated
elsewhere in the Act in accordance with
ss (2).
Sub section (2) provides that before making such
regulations, the Minister
must publish the
regulations for public comment and may consult the
second respondent, the National
Credit Regulator
(the regulator).
[3]
Section 101 of Part C of
Chapter 5 of the NCA permits, subject to limitations, the charging of
interest, an initiation fee and a
service fee in a credit
agreement. In terms of s 105(1), the
Minister-
after consulting the regulator,
may prescribe a method for calculating-
(a)
a maximum
rate of interest;
and
(b)
the maximum fees
contemplated in Part C applicable to each subsector
of the consumer
credit market, as determined by the Minister.
Short
term credit is one such subsector.
[4]
Regulation 42 of Part C of Chapter 5 of the previous regulations
prescribed the maximum interest rate, maximum initiation
fee and maximum service fee for short term credit
transactions. In terms of regulation 45(1), the
regulator
must perform a review of
interest rates and cost factors at intervals of no more
than
3 years and advise the Minister of any
changes that may be required.
It
is common cause that this was not done. The
regulator's failure to comply with regulation 45(1)
led
to litigation in terms whereof the regulator and the
Minister were ordered to comply with their obligations
within a stipulated period of time. They failed to comply
with that court order and a further court order,
both
of which led to contempt applications.
[5]
The Minister thereafter,
on 26 June 2015, published new draft regulations for public
comment. On 6 November
2015, the
regulations were promulgated by the Minister to take effect on
6 May 2016. On
1 March 2016, the applicant
launched the present application against
the
Minister and
the regulator.
It
was
contended by Mr Carstensen who appeared on behalf of the
regulator that the applicant should be
non
suited because it unreasonably delayed the bringing of the
application. I disagree. The draft regulations were published
on 25
June 2015, but the final regulations were only published on
6 November 2015. The application,
which is
substantial, was brought within less than 120 days thereafter. Part A
of the notice of motion was an
urgent
application in which the applicant sought to stay the
implementation of the regulations pending the review of
the
regulations which was sought in part B of the notice of motion.
The urgent application was heard by Meyer J on 3 May
2016 and was
dismissed. In part B of the notice of motion, which is the
application now before court, the applicant originally
sought an
order reviewing and setting aside all of the regulations. It
has since decided to limit the relief
sought to an order
reviewing and setting aside the regulations
insofar as they relate to short term
credit. The
review record was only filed by the respondents on 8
June 2016, whereafter
the applicant filed a
supplementary founding affidavit. The respondents filed
supplementary answering affidavits to
which the
applicant filed a reply.
[6]
Section 105(2) of
the NCA provides as follows:
(2) When
prescribing a matter contemplated in subsection (1), the Minister
must consider, among other things-
(a)
the need to
make credit available to persons contemplated in section
13
(a)
[1]
;
(b)
conditions
prevailing in the credit market, including the cost of credit and the
optimal functioning of the consumer credit market;
and
(c)
the
social impact on low income
consumers.
[7]
Regulation
45(2) of the previous
regulations
provided that
the regulator must, when making a recommendation to the Minister,
consider
(a)
ruling interest rates
and fees;
(b)
cost of providing
such
credit;
(c)
the choice available
to consumers in the particular category of credit agreements,
between different products
and different credit
providers;
and
(d)
the impact upon
access to finance for persons referred to in section
13(a)
of
the Act.
[8]
The applicant contends
that the above mandatory requirements were not complied with by the
Minister and the regulator, and that
the Minister's
decision to publish the new regulations is accordingly
reviewable in terms of sections 6(2)(e)(iii)
and/or
6(2)(e)(vi) and/or 6(2)(h) of PAJA. In terms of s
6(2)(e)(iii), an administrative decision is reviewable
if irrelevant
considerations were taken into account or relevant considerations
were not taken into account. In terms
of s 6(2)(e)(vi),
it
is
reviewable if it was taken
arbitrarily or capriciously. In terms
of
s 6(2)(h), it is reviewable if the exercise of the
power or the performance of the function authorised by
the
empowering provision is so unreasonable that no
reasonable person could have so exercised the
power or performed the function.
[9]
The maximum
interest rate prescribed in terms of
regulation 42 was 5%
per month for
short term credit transactions, the
maximum initiation
fee was R150 per credit agreement
plus 10% of the amount of the
agreement in excess of
R1 000, but never to exceed
R1 000, and the maximum monthly service
fee was
R50. In terms of the
new regulations, the maximum prescribed interest rate is
5%
per month on the first loan
and 3% per month on subsequent loans within a calendar
year. The maximum initiation fee is R165 per
credit agreement plus 10% of
the amount
in excess of R1 000, but never to exceed R1 050.
The maximum monthly service
fee is
R60.
[10]
In the founding affidavit
in the urgent application it is stated that prior to the
promulgation of the new regulations,
a period of no less than nine
years had passed without them being renewed. This, the applicant
states, gave rise to an untenable
situation. As a result of inflation
and certain other additional expenses (such as payment streams), the
members of
the applicant found
it increasingly difficult to
conduct
business. When the new regulations were finally
promulgated the entire industry was of the hope that the new
regulations would remedy
the situation and provide a new
lease of life in the micro finance industry. However, upon closer
scrutiny it became apparent
that in issuing the new regulations the
respondents had failed to take into account the effect that the
new fees and interest
rates would have on the providers
of micro loans; failed to conduct proper market research
in order to determine if the new fees and interest
rates would be beneficial to the market as a whole;
and
failed to consider the views of the members of the applicant or any
of the micro financiers in the industry. The net effect
of the new
regulations, the applicant states, is effectively to bring
the entire micro loan industry
to its knees and
make it impossible to conduct business, let alone a profitable
business.
[11]
The applicant further
states that the new regulations do not only
affect its members personally, but
that there
will be an enormous knock on effect on the South African public
as a whole. Some 5 to
6 million people make
use of micro financiers for funding.
It
is a niche
market which is not served by the traditional banks. By
taking a substantial
portion of the members of the
applicant out of the market, those
members of the public that
require credit will not be able to
obtain credit from legitimate sources and an enormous increase
of unregistered credit
providers is a real
possibility.
[12]
Having regard to the
above and to the opinions of three experts
which the applicant has presented, the applicant
contends that the
respondents have failed to promote equity in the
credit market as required
by s 3(d) of the NCA by
balancing the respective rights and responsibilities of credit
providers and consumers. The
applicant states
that no account has been taken of the rights, interests
and obligations of
its members and that, ironically, the
individuals who will be most affected are the members of
the general public who
will be forced to obtain finance from
unregulated and unregistered sources, thereby increasing the
prospects of them
being
exploited.
[13]
The applicant points out
in its supplementary founding affidavit that there is nothing
contained in the record which was
furnished by
the Minister which indicates that any member of the applicant or any
of their customers was approached
in the assessment which was done
and that it was obvious that the entire short term credit
industry was, to
all intents and purposes, ignored.
More particularly, the applicant states, the respondents did not take
into account the
typical short term
credit provider or the individuals which they
serve.
[14]
Although these
allegations are denied by the Minister in his supplementary
answering affidavit, he has
not
provided any evidence to
the contrary. The
regulator states in his supplementary answering affidavit that in
making the recommendation to the Minister, the
balance between the
rights of the consumer and the credit providers was considered. He
does, however, not give any information
of how this was done.
[15]
The regulator denies that
the interests of the short term credit
industry were ignored, and relies
in this regard on a report by
PricewaterhouseCoopers (PWC) who the regulator commissioned in
February 2015 to carry out an assessment
of the impact of changing
the current maximum interest rates, initiation fees
and service fees.
There are, however, a number of
difficulties arising from the PWC report.
The first is that
the report itself states that the results for short
term credit transactions are based on insufficient responses and can
therefore
not be relied upon. The applicant further
points out that PWC was not instructed to do an
analysis
of the interest rate as recommended
by the regulator and ultimately promulgated. It
was only instructed to assess
scenarios for interest rates of 5%, 7%
and
10%. The regulator admits this, but says that the
impact of the proposed interest rate changes
had
already been researched prior to the appointment of PWC. In
support of this statement, the regulator attaches a
letter which was
addressed to Capitec Bank on 14 August 2014 which it says is an
example of numerous letters which were
dispatched
inter alia
to Bayport
Financial Services (which
it
says is a
significant player in the short term credit industry) and other
banking institutions such as ABSA.
It
is further stated that engagements with
approximately 19 credit providers were undertaken.
The
regulator goes on to say that the applicant and its members
are a small part of the credit industry as a whole, and is not a key
player in the short term credit industry. The letter to
Capitec Bank states the following:
"1.
In terms of
Regulation 45 of the National Credit Regulations,
2006,
the National Credit
Regulator (NCR) must perform a review of interest rates and cost
factors at intervals of not more than three
(3) years and advise the
Minister of Trade and Industry of any changes that may be required.
When making the recommendation to
the Minister, the NCR must consider
the ruling interest rates and fees, the cost of providing credit, the
choice available to consumers
in the particular category of credit
agreements between different products and different credit providers
and the impact upon access
to finance for persons referred to in
section 13(a)
of the
National Credit
Act.
2.
The
NCR has
commenced with work for this review
with
conceptual scenarios which will ultimately inform the
rationale for the regulations
to be issued by
the dti. The NCR envisages that these regulations will be implemented
after extensive consultations with industry
stakeholders and testing
by selected credit providers to determine their impact on the credit
market.
3.
The NCR
hereby invites Capitec Bank to participate in the testing of the
different scenarios in relation to this work.
Further
details will be provided to Capitec Bank once the response to
the invitation has been received."
[16]
The regulator does not
say whether Capitec or any of the other banking
institutions responded to the invitation.
It
does not
give any further information about the research which it
says it conducted. The deponent to the
applicant's supplementary
founding affidavit states that only one short term
credit provider provided PWC with
any evidence, namely
First Rand Bank. This is not denied by the
regulator.
[17]
In regard to the
PWC report, the regulator states that
the report must be seen as an impact
assessment report
and not as an original piece of research to enable it to
discharge its statutory duties.
The regulator
states that the report was considered by it and that
its contents were
found to be at odds with the
envisaged course of action to be recommended
to the Minister,
a significant portion
of which was,
inter
alia,
based on consumer
interests. As is pointed out by
the applicant,
there is, however, no evidence or
documentation which could justify why the regulator departed from the
PWC recommendations. PWC
observed in their report that actual costs
over a period have increased on an annual basis and that these
increases had not been
met by corresponding raises in the maximum
fees chargeable. The direct result of this was a gradually widening
gap between actual
costs on loans disbursed and maximum fees
chargeable. In view of the fact that the fees had not
been reviewed
for such a long period of time, PWC
recommended a two-fold solution for the situation. First, that there
should be a rebase
of the maximum fees chargeable and, second,
to prevent the rebased fees from falling behind actual cost
increases, that an
annual CPI adjustment be applied.
[18] Mr
Michau, who appeared for the applicant,
inter
alia
referred to the
following passages in the judgment of the
Constitutional Court in
Minister
of Health and Another v New Clicks South Africa (Pty) Ltd and
Others :
[2]
[391]
The Pricing Committee
seems
to have calculated
the
dispensing
fee without any
evidence of the breakdown of the income and expenditure of the
dispensaries, information they considered to
be important for the
proper determination of the dispensing fee. They assumed
that dispensing subsidises
the operations of the front
shops of community pharmacies. They have not, however, provided any
evidence to support this assertion,
which is denied by the
Pharmacies. As Dr Stillman points out, it is unlikely that front
shops would be operated if they were indeed
loss-making ventures.
The Pricing Committee does not say what weight was attached to
this assumption in the calculation
of the dispensing
fee.
………………………
..
[393]
The Minister and the Pricing Committee do not deal with the impact of
the dispensing fee on rural pharmacies. Professor McIntyre
says that
the Pricing Committee considered the predicament of rural pharmacies
which are 'economically disadvantaged, primarily
because of a
comparatively low turnover and also unfavourable payment
conditions from wholesalers'. They concluded,
however, that
this is the result of 'distortions in
the health sector'
and that 'an appropriate
dispensing fee should be as neutral as possible in respect of such
distortions'. No mention is made
of what those
distortions (if any) are, other than
low turnover and adverse payment conditions.
Moreover, they
do not suggest how these distortions could be overcome,
what the impact of the dispensing
fee will be on the
economically disadvantaged rural pharmacies, and how that will affect
access to medicines in rural areas.
………………………
..
[403]
The Pricing Committee has
provided no models or other evidence to demonstrate how the
dispensing fee was calculated or how the members
of the Pricing
Committee satisfied themselves that it was appropriate. It has not
told us what assumptions it made
about the probable SEPs
in calculating the dispensing
fee, or how it
assessed the dispensing fee when it seems to have had no data dealing
with dispensary revenue and expenses which
it considered to be
essential for that purpose.
It has not addressed in any meaningful
way
the
contention
that
the dispensing
fee
will lead
to
pharmacy
closures
that
will
impair accessibility to
health care, particularly in rural
areas.
The
assertions
made by
Professor McIntyre and Dr Zokufa about additional revenue sources and
the subsidisation of the front shop by the back shop
are, at
best, flimsy. The failure to make provision for
compounding in the dispensing fee is a material
misdirection.
………………………
..
[510]
What lies at the heart of
the challenge
to
the
dispensing
fees is
the
contention that the dispensing
fees as determined
in the
regulations
are
not
viable
for pharmacies and will drive them out of business.
In
effect
the pharmacies contend that, in
determining the dispensing fees,
the
Pricing
Committee did not have due regard to the viability of the dispensing
fees for pharmacies, as they were bound to do. This
contention was
upheld by the SCA, which in effect concluded that the
fees were not viable for pharmacies.
Failure
by a decision-maker to take into account a relevant
consideration in the making of
an
administrative decision is an instance of an abuse of discretion. As
pointed
out earlier, this is a ground of review
which is expressed ins 6(2)(e)(iii) of
PAJA.
[511]
There is obviously an overlap between the ground of review
based on failure to take into consideration
a relevant
factor and one based on the unreasonableness of the decision. A
consideration of the factors that a decision maker
is bound to
take into account is essential to a reasonable decision. If a
decisionmaker fails to take into account a factor that
he or
she is bound to take into consideration, the resulting
decision can hardly be said to be that of a reasonable
decisionmaker.
It seems to me to follow that if, in determining the dispensing
fees, the Pricing Committee
was bound to take
into consideration the
viability
of the fees for pharmacies, but failed to do
so
properly,
the resulting fees can hardly be said to be one that a
reasonable Pricing Committee could
fix.
[512]
As I see it, therefore,
the
central question in this case reduces
to
whether
the Pricing
Committee gave proper consideration to the viability of pharmacies
in
fixing the
dispensing fees. This question raises two
separate,
but
related,
questions. The first is whether the Pricing Committee was bound, in
fixing an appropriate dispensing fee pursuant to
s
22G(2)(b)
,
to
have
regard
to
the viability of
pharmacies,
so
that failure to do
so
amounted
to failure to take into account a consideration relevant to the
determination of an appropriate fee. The second question,
which only
arises if the first question is answered in
the affirmative,
is whether the Pricing Committee gave due regard to the viability of
pharmacies.
………………………
..
[518]
As the SCA held, an appropriate dispensing
fee must be fair and just. Indeed
it can hardly be
argued that a dispensing fee that is unjust or unfair is appropriate.
The dispensing fee must be fair not only to the public, but also
to
pharmacies
. The fee must not be
such that it will render medicines
inaccessible to the general public.
Nor must it be such that it
pharmacies out of business. Its determination requires a
consideration of conflicting interests of
the public, who are
entitled to access to affordable medicines, on the one hand,
and the interests of dispensers
who, in terms of
the Act, are essential to the public for the supply
of medicines and whose economic viability
is implicitly
recognised by the Act and is of 'national
importance', on the other hand.
………………………
..
[526]
Once it is accepted, as it must be, that pharmacists are crucial to
the objectives of the Medicines Act, it must also be accepted
that
there is a need for them to survive. But those who are
involved in the pharmaceutical industry
do
so
for
profit.
An appropriate
dispensing fee must be rationally related to the
cost
of doing business. It must be such that it makes it worthwhile for
pharmacies to remain in business
.
And the economic viability of pharmacies
is
implicitly recognised by
the Medicines Act. As the Australian Federal Court observed in the
context of price fixing
for pharmaceuticals
in that country.
………………………
..
[531]
The Pricing Committee and the Minister must
therefore do more than pay lip service to
the viability
of pharmacies. They must address the need for pharmacies to exist in
a meaningful way when fixing the appropriate
fee, and be able to
demonstrate that they have done
so.
This could be done
by explaining
the
manner in which the viability of pharmacies was given effect.
They must
give an explanation of how the appropriate fee was calculated. This
explanation
is
crucial to the
process of determining an appropriate fee. It explains
to the
public
and the pharmaceutical industry the manner in which the fee
was arrived at. It discloses the
reasoning process of the Pricing
Committee. And it enables those who have
an
interest in the fee to assess
whether the Pricing Committee
has
properly discharged its statutory duty. This explanation
should generally be contained in the report of the
Pricing
Committee making a recommendation
to the Minister.
………………………
..
[535]
What is singularly lacking
in
the
record
is an explanation of
how
the
dispensing fees were
arrived at. There is no explanation as to why
the
Pricing
Committee chose the
figures that it chose.
While the Pricing
Committee indicated that the fee covers both the
professional remuneration and
operating
costs, it does not explain what was allocated to each
of these component parts
of the fee. As the
SCA observed, 'except for a general statement that all
factors were taken into
account, there is no
evidence or document that shows what those factors were,
what weight they bore,
whether any calculations were made and,
more particularly, whether any regard was
given to the viability
of the dispensing profession'.
It
was
this lack of explanation for quantum
of the dispensing fees that
led
the
SCA
to conclude that there was no
rational
explanation
for the quantum of
fees
and
that therefore the fees were not appropriate.
[3]
[19]
The requirements which the decision maker
in
New Clicks
was found to have to comply
with, apply
mutatis mutandis
to the regulator
and the Minister in the present matter. Had the
recommendations of PWC
been followed, the
maximum service fee would
have
been R80.54. Without
any explanation, the regulator simply suggested an
amount
of R65.00 to the Minister. The Minister, also
without any explanation, reduced the amount to
R60.00. Furthermore,
the Minister of his own
accord and without being advised by the regulator to do
so and
without any explanation, added a
rider that the fee should be calculated
pro
rata
the number of days if a credit agreement
was concluded during the course of a calendar
month. No reason
or explanation is given for the
reduction of the interest rate from
5%
to
3%
per
month for further loans after the first during a calendar. All that
is referred to is a policy to reduce the over indebtedness
of
consumers. There is, however, no evidence that the
existing initiation fee, service fee and interest rate were the
cause
of such over-indebtedness.
[20]
I have referred above to
the requirements of s 105(2) and regulation 45(2) with which the
Minister and the regulator have to comply.
These include the
need to make credit available to historically disadvantaged persons
and low income persons and communities,
the impact
of access to finance for such persons, and the conditions
prevailing in the credit market, including the cost
of providing
credit. Apart from the regulator stating in general
terms that research was done, no evidence has
been provided of how
these matters were investigated or considered. The
Minister and the regulator have not addressed
in any meaningful way
the applicant's contention that the amended fees
and interest rates will lead
to closures of
the businesses of many of the applicant's members and
will
impair access to credit by those members of the population who
require short term credit provided by the applicant's
members.
[21]
In view of the
aforegoing, I agree with Mr Michau's submission
that the Minister's decision to promulgate
the regulations
insofar as they relate to short term credit is reviewable in
terms of either s 6(2)(e)(iii),
s
6(2)(e)(vi) or s 6(2)(h) of
PAJA.
[22]
I therefore make the
following
order:
[a]
The first respondent's
decision to promulgate the regulations published in
Government Gazette 39379, Vol. 605 of 6 November
2015, is reviewed
and set aside insofar as it relates to short term credit.
[b]
The first and second
respondents are ordered to pay the applicant's costs jointly and
severally, such costs to include the costs
of senior counsel.
Counsel
for applicant: Adv. R Michau SC
Instructed
by: Lewies Attorneys, Pretoria
Counsel
for first respondent: Adv. TV Norman SC; Adv. P Jara
Instructed
by: State Attorney, Pretoria
Counsel
for second respondent: P L Carstensen SC
Instructed
by Edward Nathan Sonnenbergs, Sandton
[1]
In
terms of s 13(a) the National
Credit Regulator is responsible
to-
(a)
promote and support the development, where
the need exists, of a fair, transparent, competitive, sustainable,
responsible, efficient,
effective and accessible credit market and
industry to serve the needs
of-
(i)
historically disadvantaged
persons;
(ii)
low income persons and communities; and
(iii)
remote, isolated or low density
populations and communities, in a manner consistent with the
purposes of the
NCA.
(iv)
[2]
2006
(2) SA 311 (CC). Footnotes have
been omitted.
[3]
My
emphasis in all of the quoted
passages.