High Court sets aside Validation of Gross Income methods

On 16 March 2018, the High Court in Cape Town provided its favourable ruling on the matter brought by the retailers, Truworths Limited, Foschini Group Limited and Mr Price Group Limited (the “Applicants”) against the Minister of Trade and Industry and the National Credit Regulator (the “Respondents”) in which the Applicants requested the court to set aside regulation 23A(4) of the National Credit Act, 34 of 2005 (“NCA”) which deals with the steps required to be taken by credit providers, to validate the gross income of prospective consumers during its affordability assessment as part of a credit application.

Regulation 23A(4) provides that “A credit provider must take practicable steps to validate gross income, in relation to:-

(a) consumers that receive a salary from an employer:
(i) latest three(3) payslips; or
(ii) latest bank statements showing latest three(3) salary deposits;
(b) consumers that do not receive a salary as contemplated in (a) above by requiring:
(i) latest three(3) documented proof of income; or
(ii) latest three(3) months bank statements;
(c) consumers that are self-employed, informally employed or employed in a way through which they do not receive a payslip or proof of income as contemplated in (a) or (b) above by requiring:
(i) latest three (3) months bank statements; or
(ii) latest financial statements.”

The crux of the judgement can be summarised as follows:

  1. Regulation 23A(4) is set aside. Practically this means that credit providers do not have to obtain the consumer’s payslips, bank statements or financial statements to validate the consumer’s gross income;
  2. However, this did not discard the credit provider’s responsibility to take practicable steps to determine (including validate) a prospective consumer’s income to calculate the consumer’s discretionary income as part of its affordability assessment. Credit providers may now, however, determine its own practicable steps in this regard.

Credit providers are urged to consider retaining their current processes and methods to validate a consumer’s gross income, including obtaining a prospective consumer’s payslips and/or bank statements. They may, however, also employ other methods to validate a prospective consumer’s income. For example, where a consumer does not have a payslip, bank account (bank statements) or financial statements, he or she can possibly provide the credit provider with a letter or affidavit from his or her employer, stating their gross income.

It is expected that the Respondents may appeal against this ruling. If they are granted leave to appeal, it will mean that the setting aside of regulation 23A(4) will be suspended until the outcome of the appeal. Therefore, credit providers should consider this before making drastic changes to their current processes and methods to validate the gross income of a prospective consumer.

Please click here to download a copy of the ruling.

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