Tribunal rules in ‘reckless lending’ case against Direct Axis, FirstRand Bank and Sanlam Personal Loans

The National Consumer Tribunal (NCT) has decided a case in which Summit Financial Partners alleged that Direct Axis SA, acting as the agent of FirstRand Bank and Sanlam Personal Loans, granted credit recklessly to four consumers.

Summit, a financial wellness company whose services include debt counselling, gained a reputation as a consumer champion by taking on high-profile credit providers over reckless lending. In 2016, legal action by Summit, Wendy Appelbaum and the Stellenbosch Law Clinic resulted in the Constitutional Court handing down a landmark judgment regarding emolument attachment (“garnishee”) orders.

It therefore came as something of a shock when in 2021 the NCT fined Summit’s chief executive, Clark Gardner, R500 000 after finding him guilty of contravening the National Credit Act (NCA).

Read: ‘Consumer champion’ Clark Gardner fined for breaching NCA

In the case against Direct Axis, FirstRand and Sanlam, Gardner said in an affidavit that the affordability mechanisms used by Direct Axis were not fair and objective.

According to the NCT’s decision, Gardner’s submissions included:

• Direct Axis did not comply with section 81(2) of the NCA and regulation 23A of the NCA Regulations because it failed to take reasonable steps to assess the consumers’ affordability before granting them credit.
• In conducting affordability assessments, Direct Axis “routinely” accepted living expenses that were lower than the minimums set by the Minimum Expense Norms table (in the regulations). This, Gardner alleged, was a violation of regulations 23A(10) and (11), which state that a credit provider must use the Minimum Expense Norms table, and it may accept that a consumer’s declared minimum expenses are lower than those in the table only in exceptional circumstances.
• Direct Axis’s call centre script was formulated to prompt consumers to provide answers that would favour the granting of credit.
• Direct Axis “routinely” excluded debt obligations that appear on a consumer’s credit bureau report, based only on the consumer’s indication that someone pays the instalment but without obtaining any further reasonable assessment of this claim.
• Direct Axis did not adequately ensure that consumers understood and appreciate the risks, costs and obligations of the credit agreements before concluding them.
• The four consumers had to apply for debt counselling because they were over-indebted.

It seems Summit’s case was particularly concerned with the alleged abuse or violation of the regulation 23A(11) exception. Summit contended it was Direct Axis’s standard practice for consumers to complete the questionnaire referred to in regulation 23A(11), wherein consumers declared minimum expenses that were lower than those set out in the Minimum Expense Norms table.

The matters have been settled

Direct Axis, FirstRand and Sanlam argued that the NCT did not have the jurisdiction to entertain the applicants’ allegations because of res judicata, which is the legal doctrine that prevents continued litigation of the same case, on the same issues, between the same parties.

The NCT found it was common cause that the four consumers and FirstRand Bank and Sanlam Personal Loans had resolved the issues relating to their (original) credit agreements through settlement agreements, a court order, and an order by the NCT.

The respondents argued that a compromise or settlement is a contract that has as its object the prevention, avoidance or termination of the litigation. It has the effect of res judicata, irrespective of whether it is embodied in an order of court, and it is an absolute defence to any action based on the original claim.

The NCT upheld the respondents’ plea of res judicata.

When reckless lending should be raised

The tribunal said the current matter required it to adjudicate the same issues that were resolved through settlement agreements, the Magistrate’s Court, and the NCT. In all these matters, Summit alleged that all the consumers had to apply for debt counselling because of the respondent’s reckless lending practices.

The NCT said “the right moment” for a debt counsellor to determine whether credit was granted recklessly is when accepting an application for debt review and the subsequent determination “in the prescribed manner and within the prescribed time whether a consumer appears to be over-indebted, and if the consumer seeks a declaration of reckless credit, whether any of the consumer’s credit agreements appear to be reckless” (quoting from section 86(6) of the NCA).

In its view, reckless lending should be raised when a debt counsellor applies for a debt to be re-arranged, if the debt counsellor reasonably concludes that the consumer is overindebted, as alleged in Summit’s application.

The NCT commented it was unclear why the reckless lending challenge was not placed before the court in respect of consumer “KP”. (Her credit agreement with FirstRand was re-arranged by an agreement between the parties.)

Although this was done in respect of consumer “NN”, she and FirstRand settled the matter out of court, with the newly agreed outstanding balance forming part of a debt re-arrangement order.

Gardner did seek a reckless lending order in respect of consumer “DH”, but the Magistrate’s Court dismissed the application. The NCT said the appropriate remedy would have been to file an appeal in the High Court, but this was not done.

It was not apparent why Gardner did not ask the Magistrate’s Court to declare that one or more of the credit agreements of consumer “TT” were reckless if he, as her debt counsellor, had concluded that those agreements appeared to be reckless, the tribunal said.

The NCT dismissed the application, but it did not award costs.

Click here to download the judgment.