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[2016] ZAGPPHC 1155
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Micro Finance South Africa v Minister of Trade and Industry and Another (16746/2016) [2016] ZAGPPHC 1155 (22 November 2016)
IN
THE HIGH COURT OF SOUTH AFRICA
GAUTENG
DIVISION, PRETORIA
(1)
REPORTABLE: NO.
(2)
OF INTEREST TO OTHER JUDGES: NO.
Case
No: 16746/2016
Date:
22/ 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 R8 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 in
s 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 drives
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. T V 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.
[2]
2006
(2) SA 311
(CC). Footnotes have been omitted.
[3]
My
emphasis in all of the quoted passages.