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Summary Business Law 2 Notes
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Comprehensive set of notes on the full semester of Business Law 2 coming from lectures, exercises, and the textbook.
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Section 1: Consumer CreditTerminology and Concepts
Credit Agreements Typically Display Two Identifying Features:
- Credit is extended:
o Creditor lends money to the debtor, or pays money to a third party at the
debtor’s instruction, or performs a service for the debtor; and
o Creditor and debtor agree that repayment of the resulting debt by the debtor
will occur at a future time.
- There is a cost to the debtor resulting from this agreement, such as: interest, charges,
fees, or a combination of these or in the form of a lesser amount being payable in the
case of early settlement.
Why is the Regulation of Consumer Credit Important?
- There will normally be an imbalance of power between individual/consumer borrowers
and better-resourced lending businesses.
- It is difficult for consumers to protect themselves against exploitation by more powerful
lending businesses, so the State protects consumers by establishing ground rules for
lending. This is also the case in many other countries (USA, UK, EU, Australia).
- South African consumer credit law has been significantly revamped and extended by the
National Credit Act 34 of 2005 (‘NCA’).
- The creation of a separate branch of consumer law to protect weaker contracting
parties (including consumer credit law) is in line with the goals of post-apartheid South
African contract law generally. The democratic marked a shift to a fairer law of contract,
as part of what is described as ‘transformative constitutionalism’.
o Transformative constitutionalism entails changes to the existing law to better
encapsulate the rights and values of the South African Constitution.
- The regulation for access to credit is also important. An inability to borrow credit in a
safe and affordable manner is a form of financial exclusion. The opposite of financial
exclusion is financial inclusion.
o Financial inclusion is defined in section 1 of the Financial Sector Regulation Act 9
of 2017 (‘FSRA’) as: ‘Financial inclusion means that all persons have timely and
fair access to appropriate, fair and affordable financial products and services’.
o Since the FSRA sets the tone for financial services law as a whole, it is safe to say
that financial inclusion is a general regulatory goal of the South African
government.
, - Consumer credit law is part of the web of financial services laws. Hence access to credit
should also be promoted on ‘appropriate, fair and affordable’ terms.
The National Credit Act 34 of 2005
General
- Consumer credit is governed by the NCA in South Africa, which has been fully in force
since 1 June 2007.
- The NCA and its regulations are amended from time to time – we must always use the
latest version of the statute.
- The NCA only applies to consumer credit agreements. Not all credit agreements involve
a consumer as borrower.
o Where the borrower is not a consumer (a commercial credit agreement) the NCA
does not apply – the residual common law rules apply. It is therefore very
important to be able to tell when the NCA applies because the common law
rules are different.
Forms of Debt
- Debt can be positive (when borrowed capital is used to start a business, pay for an
education, or to buy an asset). In this positive sense, debt is something which most of us
will need at some point in our lives and it will enable us to build wealth over time.
- Debt can also be negative, however, like borrowing money for consumption expenses
(e.g. buying food or household necessaries), this is a dangerous process. Even more
dangerous is borrowing money to pay other debts.
o Negative forms of borrowing can cause a person to live beyond their means and
to become trapped in a cycle of debt, which may be difficult to escape.
o Unfortunately, it is easy to get trapped in a cycle of debt: credit cards are readily
available for many with bank accounts; others may borrow from fringe lenders
who lend money until your next pay-cheque – sometimes referred to as ‘payday
lenders’.
Aims of the NCA (Section 3)
- Consumer credit law should protect consumers both from having to borrow on unfair
terms and from having loans offered to them which they cannot afford to repay. Should
a consumer fall into the debt cycle and lose control, there also needs to be a safety net
to help to cure ‘over-indebtedness’.
- There are competing policy goals. Financial inclusion requires that the State create a
market where money can be borrowed on safe and affordable terms. But, for this to
, happen, it is important that the rights of credit providers are also protected, so that
credit providers are incentivised to lend, even to lower income consumers. This requires
that (where appropriate) debts are enforced.
o Getting the balance between consumer and credit provider rights correct is key
to effective consumer credit protection. This is difficult policy territory.
- Section 3 of the NCA gives some general instructions to those working with the statute,
particularly courts, as to how the Act should be interpreted. When uncertain as to a
question of law, the ‘Aims’ of the NCA are there to provide general guidance to those
interpreting its provisions.
- Stated aims of the NCA:
o Promote the development of a credit market which is accessible to all South
Africans, particularly those who historically lacked safe access to credit (promote
financial inclusion through access to credit).
o Promote responsible borrowing to avoid over-indebtedness of consumers.
o Prevent reckless lending by credit providers to consumers who can’t afford the
debt.
Note: this point is possibly in tension with aim (a); it is hard to make
access to credit more widely available while simultaneously ensuring that
loans only go to those who can afford to repay them.
o Balance the rights and duties of consumers and credit providers.
Note: This is also a difficult point. The rights and interests of creditors and
debtors will often be in conflict with each other. One of the ways which
the NCA seeks to achieve this balancing goal is through regulating for fair
procedures. Thus, in order to enforce a debt (for example), a clear
process which must be followed by a credit provider.
o Address imbalances in negotiating power between consumers and credit
providers.
Protect weaker parties; this goal is line with the spirit and values of the
Constitution and is also generally accepted as a regulatory goal in many
other countries.
o Improve access to information by consumers (eg: from credit bureaux).
This point deals with consumers being able to find out why (for example)
a loan was declined or what records of their credit history exist on
national databases.
o Promote better dispute resolution between consumers and credit providers.
There are processes and facilities available for consumers to solve their
disputes themselves (instead of going to court which is expensive). These
, ‘alternative’ forms of dispute resolution are an important innovation of
the NCA.
Who is a ‘Consumer’ Under the NCA?
- Consumers are natural persons who borrow money under a ‘credit agreement’.
- All natural persons will be consumers. This provides a useful rule of thumb in deciding
whether the NCA applies to a loan. If the borrower is a natural person, then the Act
probably applies.
- To be protected by the Act, the credit agreement in question must be one which is
regulated by the NCA.
- ‘Juristic person’ is defined in the NCA to include companies, partnerships, larger trusts,
but NOT to include stokvels.
- Very small juristic persons are treated as consumers under the NCA.
o In order for a juristic person to be protected as a ‘consumer’ by the NCA, the
asset value and annual turnover of juristic person must both be below R1 million
at the time of the loan.
o Capital lent to juristic person must be below R250 000 AND loan must not be
secured by a mortgage.
- The State or an ‘organ of State’ is never a consumer in terms of the NCA.
Who is a ‘Credit Provider’ under the NCA?
- Anyone who lends to a ‘consumer’ in a ‘credit agreement’ is a credit provider for the
purposes of the NCA.
- A credit provider does not need to lend as part of its business, nor to be a registered
credit provider, for the NCA rules to apply to it.
- Credit providers who are not registered will not be able to lawfully enforce a credit
agreement against a consumer.
o Since 2016, a credit provider who has lent more than R0 to a consumer must
register with the National Credit Regulator (where there is a cost to this credit in
the form of interest, fees, or charges).
o If the credit provider is not registered, this makes the credit agreement unlawful
and hence void (these rules only apply when lending to consumers in credit
agreements which are subject to the NCA).
- If the credit provider is the Reserve Bank, the NCA does not apply (the Reserve Bank
does not normally lend to consumers anyway).
What is a ‘Credit Agreement’ under the NCA?
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