In the recent appeal decision in National Credit Regulator vs Capitec Bank Limited and Another (the Capitec case), the High Court of South Africa ruled on the power of the National Credit Regulator (NCR) to initiate a complaint in its own name and to refer such a complaint to the National Consumer Tribunal (Tribunal).

The appeal stemmed from a complaint that the NCR had referred to the Tribunal, relating to the activities of Capitec Bank Limited (Capitec) as a registered credit provider under the National Credit Act, 2005 (NCA).

Section 136 of the NCA provides for the submission of a complaint to the NCR concerning an alleged contravention of the NCA or alleged reckless credit. It further provides, in section 136(2), that the NCR may initiate such a complaint in its own name.

The facts in the Tribunal

At the beginning of 2011, the NCR appointed Gobodo Forensic and Investigative Accounting (Pty) Ltd (Gobodo) to investigate the unsecured and micro-lending practices of Capitec. Gobodo sampled 60 Capitec credit agreements (including credit agreements in default) and produced a forensic report which it then submitted to the NCR. The report concluded that Capitec had engaged in various activities in contravention of the NCA, including in relation to inadequate pre-agreement disclosure, excessive interest and initiation fee charges and inadequate affordability assessments.

The NCR referred the matter to the Tribunal and requested the Tribunal to, among other things, interdict Capitec from continuing to engage in the alleged prohibited conduct, impose an administrative fine on Capitec and order Capitec to pay the costs of the referral.

Capitec argued that the NCR had “unlawfully mandated Gobodo to embark on a fishing expedition by a wide-ranging investigation of its affairs” and that the referral to the Tribunal was unlawful and invalid.

The Tribunal’s interpretation of section 136(2) of the NCA

The Tribunal restricted its judgment in the matter to the circumstances under which the NCR had initiated the investigation and whether the referral to the Tribunal was lawful. After accepting that, on a plain reading of section 136(2), the NCR is entitled to initiate an investigation without a complaint having been received by it, the Tribunal referred to the approach taken by the Supreme Court of Appeal in Woodlands Dairy and Another v Competition Commission 2010 (6) SA 108 (SCA) (Woodlands), which dealt with the Competition Commission’s power to initiate complaints under the Competition Act, 1998 (in rationalising its reference to Woodlands, the Tribunal noted that the Competition Commission and the NCR exercise similar powers in terms of their enabling statutes, which clothe each institution, respectively, with far-reaching powers to initiate complaints, to appoint investigators and to issue summons).

The SCA accepted in Woodlands that, while the commissioner has exclusive jurisdiction to initiate a complaint in terms of the Competition Act, he would at the very least have been in “possession of information concerning an alleged practice which, objectively speaking, could give rise to a reasonable suspicion of the existence of a prohibited practice. Without such information there could not be a rational exercise of the power.” (emphasis added)

Having had regard to the content of the Gobodo report, the Tribunal was satisfied that the NCR had not submitted any specific complaints to Gobodo regarding Capitec, nor had the NCR initiated the investigation on the basis of any specific complaint or information received. Having found that the NCR investigation was purely general in nature with a view to determining whether Capitec complied with the NCA, the Tribunal held that the NCR had lacked a reasonable basis for initiating the complaint and investigation and, as such, the referral to the Tribunal was invalid. The NCR was not empowered, according to the Tribunal, to initiate a complaint and lodge an investigation “purely as a fishing expedition” into Capitec’s practices.

The appeal

In its determination of the NCR’s appeal against the Tribunal’s ruling, the High Court noted that the NCA does not define the concept of “initiation” of a complaint and, as did the Tribunal, took guidance on the concept from the Woodlands case and from Competition Commission v Yara (SA) (Pty) Ltd and Others 2013 (6) SA 404 (SCA) (Yara), both of which dealt with the interpretation of similar provisions under the Competition Act. The court noted the pronouncement made in Yara to the effect that there can be no investigation in terms of the Competition Act without a complaint submitted by a complainant or initiated by the commission against an alleged prohibited practice, and that a complaint can be initiated by the commission only on the basis of a reasonable suspicion.

It is firmly established then, according to the court, that in respect of the initiation of a complaint by the Competition Commission under the Competition Act, a reasonable suspicion is a jurisdictional requirement for the validity of an ensuing investigation and referral. The court took the view that the same principles apply in respect of the NCR’s initiation of a complaint under the NCA: the NCR’s powers may not be abused for the purposes of a general ‘fishing expedition’.

The NCR had presented, as the basis for and reason behind the Capitec investigation, the wording used in its mandate to Gobodo, namely that “[c]oncerns have been raised relating to the provision of unsecured credit and short term loans by Capitec Bank”. The court, however, held that:

“it is immediately and without more ado, abundantly clear that the statement does not, even by the wildest stretch of imagination, comply with the requirement of a reasonable suspicion or, any suspicion for that matter. Nor were any facts set out, either in the mandate read as a whole or in the NCR’s affidavits, from which a reasonable suspicion can be inferred. On the contrary, the facts alluded to by the NCR show beyond all doubt that it intended nothing other than a fishing expedition.”

The court did not consider it necessary under the circumstances of the case to attempt to define precisely what a ‘reasonable suspicion’ may amount to. In our view, this is a factual question which would need to be assessed on a case-by-case basis.

Under the circumstances, the investigation instituted by the NCR and the referral to the Tribunal were both held to be invalid.

Implications

The Capitec case may present as something of a victory for credit providers, debt counsellors and other registrants with the NCR, given the clear pronouncements made by the Tribunal and the court. Given that the judgment has undoubtedly limited the NCR’s powers – or at least its perceived powers – the NCR will very likely, in our view, seek amendments to the NCA with a view to extending its statutory powers going forward and allowing the regulator to be more intrusive in its policing of the industry.

Written by Naticia Chetty, senior associate, and Kirsten Kern, partner in Bowman Gilfillan Africa Group's Banking & Finance Practice