So-called “on-the-road” (OTR) fees charged by motor-vehicle dealers and financed by credit providers do not contravene the National Credit Act (NCA) provided they form part of the vehicle’s purchase price and are not fees expressly listed in section 102(1) of the Act. This was the unanimous decision by the Supreme Court of Appeal (SCA) in a judgment handed down on Friday.
The Court concluded that section 102(1) contains a closed list of charges that may be included in a financed principal debt, and that OTR fees fall outside that list when freely negotiated between consumer and dealer and then financed as part of the purchase price.
The judgment consolidated three interrelated appeals involving the National Credit Regulator (NCR) as the appellant, the National Consumer Tribunal (NCT) as the first respondent, and three credit providers – Volkswagen Financial Services (SA) (Pty) Ltd, BMW Financial Services (SA) (Pty) Ltd, and Mercedes-Benz Financial Services (SA) (Pty) Ltd – as the second respondents in their respective appeals.
OTR fees are composite charges imposed by motor vehicle dealers at the point of sale, encompassing services such as:
- pre-delivery inspection and roadworthy certification;
- licensing, registration fees, and number-plate acquisition; and
- delivery and initial fuelling.
Although these services are provided and priced by dealers, credit providers include the total OTR fee alongside the vehicle’s cash price when quoting and financing the sale.
The dispute centred on whether OTR fees, when charged in the context of financing motor vehicle purchases on credit, are permitted under the NCA.
The NCR has argued that OTR fees are not among the permissible charges outlined in sections 100, 101, and 102 of the NCA, which allow only for specific items such as initiation fees, delivery costs, extended warranties, a tank of fuel, and licence or registration fees. Including OTR fees in financed amounts, according to the NCR, is a contravention of the Act.
Vehicle financiers countered that they do not “charge” these fees themselves. Instead, dealers add OTR costs to the vehicle’s purchase price during negotiations with the consumer, and the financiers simply provide credit for the total principal debt (including those extras) at the consumer’s request. The NCA, they argue, does not prohibit financing agreed-upon purchase price components, and OTR fees apply equally to cash and financed purchases, meaning the liability stems from the dealer sale, not the granting of credit.
Regulatory action by the NCR
The NCR conducted investigations in 2017 into the practice of charging OTR fees in the motor retail industry.
The NCR issued compliance notices under section 55 of the NCA, alleging contraventions of sections 100(1)(a), 101(1), and 102(1) and (2). The notices claimed that OTR fees were: (a) prohibited credit fees or charges under section 100(1)(a); (b) not permissible under section 101(1); and (c) not includable in the principal debt under section 102(1).
Additionally, in Volkswagen’s case, the NCR alleged that OTR fees were disguised as “service and delivery” charges, violating section 89(2)(c).
The NCR ordered the credit providers to cease charging OTR fees and refund affected consumers.
Decisions by the Tribunal and High Court
The credit providers challenged the compliance notices before the NCT.
BMW and Mercedes-Benz succeeded in having the compliance notices set aside on the basis that OTR fees were charged by dealers rather than credit providers. In any case, the Tribunal concluded that vehicle dealers are not prohibited from charging OTR fees, nor is charging them unlawful in any way.
The NCT concluded that Volkswagen charged the OTR fees in contravention of the Act. It dismissed Volkswagen’s application but amended the terms of the NCR’s compliance notice in certain respects.
The Full Court in Pretoria heard appeals from these decisions and handed down judgment in January 2023.
The majority decision was that the credit providers did not charge consumers the OTR fees separately when these fees and services were included in the credit agreements. These fees were negotiated between the dealers and the consumers. Credit providers only financed the principal debt, which included the purchase price and other extras, such as OTR fees and additional services.
The Full Court upheld Volkswagen’s appeal and dismissed the NCR’s appeals and cross-appeal, awarding costs against the Regulator.
Read: High Court rules on the inclusion of ‘on the road’ fees in credit agreements
Interpretation of sections 100, 101, and 102
The SCA’s analysis focused on interpreting sections 100, 101, and 102 of the NCA.
Section 100 prohibits credit providers from charging consumers for prohibited fees, excessive fees, excessive interest, or third-party fees not contemplated in section 102 or elsewhere in the NCA
Section 101 lists permissible payments under a credit agreement, including the principal debt (deferred amount plus section 102 items), initiation fees, service fees, interest, credit insurance costs, default administration charges, and collection costs.
Section 102(1) specifies fees or charges that may be included in the principal debt for instalment agreements subject to conditions, such as the credit provider acting as the consumer’s agent and not charging above actual costs or fair market value. These fees or charges include initiation fees; extended warranty costs; delivery, installation and fuelling charges; taxes; licence and registration fees; and credit insurance premiums.
In its decision, the SCA said 101(1)(a) of the NCA describes “principal debt” as “the amount deferred in terms of the agreement, plus the value of any item contemplated in section 102”.
The SCA clarified that the “amount deferred” includes the vehicle’s purchase price and other charges reasonably related to the sale, such as optional accessories (for example, sunroofs and alloy wheels) and services (for example, maintenance plans). However, the fees in section 102(1) form a closed list, limiting what credit providers can include in the principal debt.
The SCA rejected the credit providers’ argument that section 102 applies only when they provide listed services, not when financing dealer-consumer agreements.
Permissibility of OTR fees
The SCA held that OTR fees, when agreed upon between consumers and dealers and included in the principal debt, are not prohibited by the NCA if they are not akin to section 102(1) fees.
“The fact is that the cost of the accessories and services supplied by the dealer to the consumer at the latter’s request is not a fee or charge prohibited by the Act. This means that in each case, any extra charge should be examined to determine whether it can be regarded as forming part of the purchase price, regardless of the name given to it in the credit agreement.
“In other words, it is the nature of the charge that is essential, not how it is named in a credit agreement. If it falls within the category of items listed in section 102(1), it is prohibited. That would be the case if, for example, a credit provider imposes a related charge on a consumer under a general line item such as ‘service charge’, ‘on the road fee’ or administration fee’,” Judge Tati Makgoka wrote on behalf of the Court.
If a charge falls within section 102(1) (for example, delivery or licensing fees), it must comply with section 102(2); otherwise, it can be financed as part of the principal debt without breaching the NCA.
The SCA held that section 102 is designed to protect consumers against arbitrary and hidden charges. “The need for such protection is lessened where it is the consumer herself who requests the accessories or service and agrees to pay the cost thereof.” To insist in such a situation that the credit provider breaches section 102 is unrealistic, unbusinesslike, and would stultify the broader operation of the legislation.
Transparency is essential
The SCA underscored the NCA’s purpose of ensuring a fair and transparent credit market.
The Court identified a lack of clarity in how credit providers disclosed OTR fees, noting examples where Volkswagen labelled them as “service and delivery”, BMW listed them as “On road cost – dealer”, and Mercedes-Benz initially failed to itemise them. Judge Makgoka observed: “It is clear from the above examples, that there was a lack of clarity regarding these fees, which, in turn, led to a lack of transparency.”
Over the term of a credit agreement (60 to 72 months), seemingly minor OTR fees could generate significant costs with interest, as illustrated by a hypothetical R100 valet fee ballooning to R703.60 at a 10.5% interest rate over 72 months.
To address concerns about the lack of transparency, the SCA imposed the following requirements:
- OTR fees that are added to the purchase price must be specified, and the credit provider must clearly state the nature and cost of each item.
- Consumers must be asked whether they prefer to pay cash for OTR fees or to have them financed as part of the amount deferred.
- Consumers must be told of the difference between the cash price of the OTR fees and the total cost of the fees, including interest and all other charges, if they are to form part of the principal debt to be financed.
Outcome and cost orders
The SCA dismissed the NCR’s appeals and Volkswagen’s cross-appeal, finding that the credit providers did not breach section 102 by financing OTR fees agreed between dealers and consumers.
Regarding costs, the SCA applied the principle that organs of state pursuing bona fide public interest litigation should not be penalised with costs orders. The Court found no evidence that the NCR acted with malice or irresponsibly, and the differing Tribunal and Full Court judgments justified the appeal to resolve uncertainty. Consequently, the SCA set aside the Full Court’s costs orders against the NCR, ordering each party to bear its own costs.
