---

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

---