Incidental credit providers are not accountable institutions in terms of the Financial Intelligence Centre Act (FICA), according to the latest draft of Public Compliance Communication (PCC) 23A.
The Financial Intelligence Centre (FIC) yesterday published the updated draft PCC 23A, which provides guidance on the interpretation of credit providers, as defined by Item 11 in Schedule 1 to FICA.
Draft PCC 23A was made available for a first round of consultation from 15 December 2022 to 20 January 2023. The FIC said the updated draft incorporates, where appropriate, the comments it received.
The second round of consultation on draft PCC 23A will now take place, and the deadline to comment is the close of business on Friday, 7 February 2025. Comments must be submitted via the online link only.
Incidental credit providers excluded
An incidental credit provider refers to an entity or person who occasionally provides credit in the ordinary course of their business or occupation, but their primary business does not revolve around offering credit. This type of credit provider is typically not in the business of lending money or providing credit as a main source of income, but they may provide credit as part of their regular business activities.
An example is a medical doctor who sends a statement of account to a client, indicating that additional charges may apply where payment of the amount due is late. If the client makes a late payment and is charged additional fees, this is an incidental credit agreement.
Draft PCC 23A states that, in terms of the National Credit Act (NCA), a credit provider in respect of a credit agreement includes a party that supplies goods or services under an incidental credit agreement. However, section 40 of the NCA does not require a person who enters only incidental credit agreements to register as a credit provider with the National Credit Regulator (NCR).
As a consequence, the FIC is of the view that where an entity enters only incidental credit agreements and is not required to register with the NCR, that entity does not carry on the business of providing credit and is not deemed to be accountable institutions in terms of Item 11.
The draft PCC says the doctor referred to in the above example is not required to register as an accountable institution, because he or she would not be considered to be carrying on the business of a credit provider, and the doctor is not required to register with the NCR.
Some of the other provisions of draft PCC 23A are addressed below.
First category of credit providers – Item 11(a)
A credit provider is defined in item 11 of Schedule 1 of FICA as:
“(a) A person who carries on the business of a credit provider as defined in the National Credit Act, 2005 (Act 34 of 2005).
(b) A person who carries on the business of providing credit in terms of any credit agreement that is excluded from the application of the National Credit Act, 2005 by virtue of section 4(1)(a) or (b) of that Act.”
The first category of credit providers includes those who are required to register as credit providers with the NCR under the NCA. The FIC says this definition is broad and includes various types of credit agreements, such as discount transactions, pawn transactions, credit facilities, mortgage agreements, secured loans, leases, and credit guarantees.
Factoring, cession and sale of loan book
When a registered credit provider transfers its rights (for example, through cession or factoring) to another party, that party must register as a credit provider under FICA. This also applies to scenarios where an institution purchases a loan book, because the new owner assumes the role of the credit provider and must register as such. Even institutions managing a run-off loan book (but not extending new credit) are considered to be credit providers.
Third-party service providers are excluded
Businesses that provide third-party services, such as debt collection, but do not acquire rights and obligations under the credit agreement, are not considered credit providers. This distinction is important because it differentiates between entities that merely facilitate credit agreements and those that are actual credit providers.
“In scenarios where a business merely provides a third-party service to a credit provider (that is, debt collection) and none of the rights and obligations in terms of the credit agreement pass to the third party, then that third party is not considered to carry on the business of a credit provider,” says the draft PCC.
Consultation note
The FIC invites commentators to provide feedback on the registration of special purpose vehicles (SPVs) or ring-fenced companies. It asks whether the registration responsibility should be delegated to the linked company that created the SPV or the ring-fenced company.
Additionally, the FIC seeks input on how such entities should comply with FICA, particularly in terms of registration and reporting.
Second category of credit providers – Item 11(b)
The second category of credit providers under Item 11(b) of Schedule 1 includes all persons who provide credit under any agreement that is excluded from the application of the NCA by virtue of sections 4(1)(a) or (b) of the NCA. Entities involved in incidental credit agreements do not qualify as credit providers under this category.
The second category encompasses a broad range of credit agreements, specifically those between legal persons, irrespective of whether they are excluded from the NCA’s application. Entities that assert they do not fall under this category must provide evidence to support such claims, the FIC says.
In alignment with the NCA, the definition of a “credit agreement” for the second category includes situations where:
- The agreement is at arm’s length (meaning it is conducted in a manner that is independent and unbiased).
- The credit provider’s clients are juristic persons (business entities or legal bodies) irrespective of their monetary value or annual turnover.
- The credit agreements are large and involve juristic persons as clients.
- The credit provider is either registered or operational in South Africa.
- The creditor is the state or an organ of the state.
The FIC says there are specific instances where the definition of a credit agreement, per the second category, do not apply, in alignment with section 8(2) of the NCA. These exclusions include:
- Products that involve an insurance policy or credit extended by an insurer solely to maintain premium payments.
- Agreements that involve the lease of immovable property.
- Transactions between a stokvel and its members in accordance with the rules of the stokvel.
No threshold
Credit providers that do not fall under the first category of Item 11 will fall under the second category. Importantly, there is no maximum monetary threshold applied when determining whether an entity qualifies as a credit provider and an accountable institution under Item 11(b).
Single transaction or business relationship
The draft PCC provides definitions for “business relationship” and “single transaction”.
A “business relationship” is described as an arrangement where a client and an accountable institution engage in transactions on a regular basis. A “single transaction” is defined as any transaction that is not part of a business relationship, and specifically when the value of the transaction is R5 000 or more.
The FIC considers the payout of a loan and the repayment of the loan as multiple transactions.
Given that there is an element of time duration to this engagement, there is an expectation on the part of accountable institutions that the engagement with the client would recur over a period of time.
In light of the above, it is the FIC’s interpretation that credit agreements, because of their nature, are considered business relationships. Therefore, credit providers must adhere to the customer due diligence and targeted financial sanctions obligations outlined in sections 21F, 21G, 21H, and 28A of FICA, along with other relevant provisions.
