In recent months the Credit Tribunal has been hot on the heels of major South African retailers with Edcon being the first to feel the heat, however, they have not stopped there and continue to pressure South African retailers regarding their consumer credit practices. The referral of Mr Price to the National Consumer Tribunal for breaching the credit act may decimate the more than R19 million-a-year income it generates from club fees on store accounts (credit).
Sanctions have begun
If the tribunal imposes sanctions on Mr Price – in the form of an administrative fine or refunding consumers – it would have grave implications for the retailer as it struggles to boost sales in current conditions.
On Thursday, the National Credit Regulator (NCR) referred Mr Price to the tribunal after its investigation revealed that the retailer charged a club fee on store accounts, contravening the National Credit Act (NCA).
Its investigation was completed in December 2015.
Contraviening of the credit act
The act, which has been in force for the past 10 years, prohibits the charging of any other fees or costs in credit agreements under sections 90, 100, 101 and 102.
Caroline Young, legal advisor for the NCR, said the act allows for certain fees that can be charged to consumers – such as initiation fees and interest on store accounts. “We found in our investigation that there were other fees included in the credit agreements and these are prohibited charges.”
Club fees are typically charged to consumers’ store accounts at a monthly fixed rate for purported benefits including funeral plans, rewards vouchers, magazines and discount offers.
At the tribunal, Mr Price will be asked to conduct an independent audit into its loan book to determine the number of consumers who have been paying club fees, and to refund them if found guilty. The audit will also determine the type of fees Mr Price has been charging its consumers. Mr Price would also be interdicted from charging a club fee on credit agreements.
Although it’s unclear how many Mr Price credit consumers were subjected to paying a club fee, its recent results for the year-end April 1 unveils the extent of the financial losses it might incur if found guilty by the tribunal.
Mr Price said club fees that were charged by its ladies’ wear business Milady’s represented 0.1% of its R19.8 billion sales. This means Mr Price bagged R19.8 million worth of income from club fees at a cost of R12.50 per month.
According to its latest annual report, the retailer raked in R20 million from club fees in 2016 from 1.4 million active store accounts.
The company said its initial legal advice concluded that the NCR has no rational basis for the relief sought and that it will launch an application by June 8 to oppose the NCR’s proposed sanctions.
Over the last three years, Mr Price has struggled to revive credit sales (making up 55% of total sales) as household spending remains under pressure due to rising living costs, interest rates and unemployment.
Edcon implicated in club fees charge
In May, the tribunal ruled that the club fees charged by Edcon to its credit customers were illegal and contravened the act. Edcon is the operator of Edgars, CNA, Red Square and Jet.
The regulator said it would approach Edcon to audit its loan book to establish how many consumers must be refunded, and the total amount to be refunded from 2007 to date. Edcon has appealed the ruling.
Edcon collected club fee revenue of R418 million, according to its results for the 39 weeks to December 2016, from 3.4 million active store account holders who are club members.
It charges Store account holders R39 to R60 per month in club fees with benefits such as reduced airfares, roadside assistance and others. Edcon CEO Bernie Brookes said club members can save up to R17 000 per member over 12 months.
Club cards being scrutinised
Brookes said at the retailer’s results presentation last week that it would take the appeal as high as the Constitutional Court. “We received numerous legal advices that the case we have is strong enough to get the original decision turned around,” he said.
“We see the club card as a product. It’s a product that we sell, like any other product we sell in the store. The customer has a choice to buy the product and is then charged into their credit account so they can pay every month. We see this as not being illegal.”
Club fees are a big business for TFG, the operator of fashion brands including Foschini, Markham, Exact, Donna and others.
If it is found to be on the wrong side of the National Credit Act in charging account holders club fees on credit agreements, it could wipe out the more than R600 million a year income it generates.
The National Credit Regulator (NCR) has referred TFG to the Tribunal, who is yet to decide whether TFG contravened the credit act and impose a subsequent administrative fine and refund of fees.
The NCR’s department manager for investigations and enforcement Jacqueline Peters, said it has asked the Tribunal to order TFG to conduct an audit of its loan book to determine the number of consumers to be refunded. Peters said the refunds could date back to 2007.
“The NCR has a growing concern regarding the practice of certain retail credit providers of including club fees into their credit agreement,” said Peters.
Club fees are typically charged to consumers’ store accounts at a monthly fixed rate for purported perks including funeral plans, rewards vouchers and discount offers.
In TFG’s case, it offers the subscription of fashion and lifestyle magazines for a monthly rate of R32 with a bundle of benefits including credit life insurance, death insurance, bursaries and competitions.
Although it’s unclear how many TFG’s credit consumers were subjected to paying a club fee, its recent results for the year-end March 31 2017, unveils the extent of the financial losses it might incur if found guilty by the Tribunal.
TFG amassed R400 million in publishing income (relating to its magazines offered) and insurance income of R289 million – equating to more than R600 million. The company doesn’t include a breakdown of revenue from club fees. See club fee revenue generated by other retailers below.
Club fee revenue for SA retailers
| Retailer | Revenue associated with club fees period | Club membership cost |
|---|---|---|
| TFG | R600m* 12 months to March 31 2017 | R32 per month |
| Edcon Holdings | R418m 39 weeks to December 2016 | R39 to R60 per month |
| Mr Price | R19.8m 12 months to April 1 2017 | R12.50 per month |
*TFG doesn’t disclose revenue from club fees. The figure represents its income from publishing and insurance.
Source: TFG, Mr Price, Edcon
Peters said the NCR’s investigation, which was completed in December 2015, revealed that TFG allegedly charges club fees on store accounts (credit agreements), which is prohibited under the credit act.
Club cards being scrutinised
TFG will oppose its referral to the Tribunal, as it doesn’t agree with the view held by the regulator. It said that the credit act does not limit which products retailers may sell to its customers on their store accounts, and a subscription to club products is optional.
The retailer would likely cite the Tribunal’s recent judgement – which gave furniture retailer Lewis Stores the green light to charge club fees and extended warranties – to defend the merits of its club fees.
In the case of Lewis, two of the three Tribunal members ruled that because club membership fees and extended warranties fees were reflected by Lewis separately in the account statement of consumers, instead of it being included in the credit agreement, the retailer didn’t contravene the credit act.
Based on this case, market watchers believe that TFG might avert sanctions.
“Without knowing the details of the TFG case I would say based on the Lewis outcome I’m not too concerned [about the referral to the Tribunal],” said Anthony Rocchi, portfolio manager at Rexsolom Invest.
TFG is the third retailer to be accused by the credit regulator of charging unlawful club fees. Over the past two months, Mr Price was accused of breaching the credit act by charging club fees while the Tribunal ruled that the club fees charged by Edcon were illegal. Both retailers are opposing the NCR’s allegations.
Don’t be part of the debt club
If you’re feeling overwhelmed by your current financial situation, feel free to contact us. To Speak to one our consultants about debt review contact us here.
Source: Moneyweb