Consumers caught in hidden debt trap as ombud flags unfair practices

Thousands of consumers may have been unknowingly pushed deeper into debt after making what they believed were full monthly payments on their credit accounts – unaware that certain fees were not being factored into the minimum payment amount.

According to the inaugural report of the National Financial Ombud Scheme (NFO), one of the most concerning issues was the exclusion of value-added service (VAS) charges – such as airtime or insurance add-ons – in calculating minimum monthly payments.

Howard Gabriels (pictured), Lead Ombud: Credit Division, said this oversight had a significant impact on consumers.

“A serious concern emerged regarding the application of payments on credit accounts where VAS charges were not considered in determining the minimum monthly payments,” he said. “This led to growing balances despite customers paying what they believed to be the full amount due. Following our intervention, the affected credit provider agreed to write off inappropriate balances and amend its internal policy to ensure VAS charges are included in future minimum payment calculations.”

Another case with wide-reaching implications involved a consumer who was listed with the South African Fraud Prevention Service (SAFPS) after defaulting on a rental agreement.

“Our investigation found no evidence of intent to defraud, only financial distress,” said Gabriels.

“We successfully engaged the credit provider and SAFPS, resulting in the removal of the listing and a commitment from the credit provider to cease similar practices. This outcome reinforces the importance of fairness and context in fraud classifications.”

These cases were two of the systemic matters raised in the report, which reflects the Credit Division’s work since officially beginning operations on 1 March 2024.

The NFO was formed through the merger of the Credit Ombud, the Ombudsman for Banking Services, and the short- and long-term insurance ombuds under a single recognised scheme.

Gabriels said all staff from the former Credit Ombud were absorbed into the NFO to ensure continuity in handling credit-related complaints, including the finalisation of all outstanding cases.

Between 1 March and 31 December 2024, the Credit Division registered 2 509 cases, comprising 1 410 formal complaints and 1 099 premature complaints. In the same period, 2 040 cases were closed, with just under half (49%) resulting in positive outcomes for complainants and financial redress of about R2.4 million. Formal complaints were finalised in an average of 79 days.

Among the most complained-about institutions was Retail Credit Solutions (RCS), which accounted for 243 cases – 17% of the total. Edcon Limited, DMC Debt Management, and OPCO 365 each represented about 9% of the caseload.

The report also highlighted several individual cases illustrating the Credit Division’s role in protecting consumers, particularly vulnerable ones.

When proof fails, fairness prevails

Mahlangu* approached the Credit Division to dispute an unauthorised transaction of R5 000 on his clothing retail account, which he believed was fraudulent. He requested a refund, but the investigation found he had not formally reported the transaction as fraud.

However, a call recording highlighted his confusion about the reporting process. The investigation also found that Mahlangu did not have access to email or a smartphone, which limited his ability to participate fully in resolving the matter.

His payment history showed consistent and responsible behaviour, with regular contributions often exceeding the minimum required. Taking into account his vulnerability and good faith, the ombud recommended that the credit provider refund the disputed amount as a gesture of goodwill.

The provider agreed, refunding the R5 000 plus R1 290 in interest.

No paper trail, no payback

Ngobeni* believed he had settled his credit account but was surprised to find it still active and accumulating charges. When questioned, the furniture finance credit provider could only produce internal system notes indicating the account remained open.

The Credit Division requested formal account statements to substantiate the provider’s claim. None was provided. In the absence of credible documentation, the Division recommended that the account be considered settled.

The credit provider accepted the recommendation, closed the account, and wrote off the outstanding balance of R26 982.72.

Old debt, new justice

Daniels* approached the Credit Division about an old debt that had been sold to a third-party collector. He hadn’t made any payments or acknowledged the debt in more than three years and believed it should fall away under prescription.

Under the National Credit Act, a debt prescribes if three years pass from the date of default without any of the following interrupting the prescription period: a payment, an acknowledgement of the debt, or enforcement action such as a summons or judgment.

The Credit Division confirmed that no payments, acknowledgements, or legal actions had occurred since the initial default. It therefore recommended the debt be written off as prescribed.

The credit provider agreed, wrote off R63 500, and updated Daniels’s credit profile.

Ghost payments, real debt write-offs

Du Toit* entered a cellphone contract that was later handed off to one collection agency and then sold to another. She maintained she had made payments to the initial agency, yet none appeared on her statements.

The Credit Division requested payment records from the telecom provider, both collection agencies, and pre-sale documentation – but no party could supply accurate statements or balances.

In the absence of any documentary proof, the Division recommended closing the account and writing off the full outstanding balance of R24 449.53, a recommendation the participant accepted.

Signed or sidelined: no agreement, no VAS, no debt

Ramalivhana* complained that his building materials credit account had been loaded with excessive interest charges and unwanted VAS. He never received a signed agreement and denied consenting to the VAS products.

When asked, the credit provider could not produce a complete, signed contract or an accurate account reconciliation. With no supporting documentation or proof of consent, the Division recommended closing the account.

The provider accepted this recommendation, wrote off the full outstanding balance of R11 708.50, and marked the account as paid up.

*Not real names.