A bruising club fee defeat for the NCR

A High Court judgment that paves the way for furniture retailer Lewis to continue charging consumers club fees and extended warranties could hobble the National Credit Regulator’s (NCR) efforts against retailers breaching credit regulations.

On Monday, the Gauteng High Court dismissed an appeal by the NCR to a Consumer Tribunal ruling in June 2017, which cleared Lewis of breaching credit regulations for offering its customers’ club fees and extended warranties.

At the time, two of the three Tribunal members ruled that club fees and extended warranties were reflected by Lewis in a separate statement of account and not included in the credit agreement.

However, the credit regulator disagreed with the Tribunal’s views, saying unsuspecting consumers are charged extra fees, which pushes up the cost of buying goods on credit.

The nub of the High Court judgment is that the National Credit Act does not prevent credit providers from offering their customers a club membership and extended warranties, provided that they are not part of the cost of credit. The court was of the view that Lewis’s club fees do not form part of the cost of credit and the retailer may include the cost of an extended warranty as part of its fees.

The NCR didn’t respond to Moneyweb’s request for comment on whether it plans to appeal the judgment.

Double blow

The judgment is another blow for the NCR as it follows a Western Cape judgment in March 2018 that scrapped a major aspect of its affordability assessment regulations, which required consumers to present additional documents when applying for credit. Three retailers, The Foschini Group (TFG, the owner of Foschini, Markham, Total Sports and other brands), Mr Price and Truworths, hauled the Department of Trade and Industry and the NCR to court and won.

The latest court ruling is not only relief for Lewis but for other retailers that are duking it out with the NCR over their club fees. The NCR began its cost of credit investigation in 2015, with a specific focus on the cost of club fees and credit life insurance charged by retailers.

Caroline Young, a legal advisor for the NCR, recently said the National Credit Act allows for certain fees that can be charged to consumers – such as initiation fees and interest on store accounts. “We found in our investigation that there were other fees included in the credit agreements and these are prohibited charges.”

Over the past two years, the NCR has referred fashion retailers Edcon, TFG and Mr Price to the Consumer Tribunal for breaching credit regulations in the club fees they charge. If found guilty, the retailers could face a fine of up to 10% of their annual sales or be forced to refund consumers’ fees dating back to 2007.

All retailers are opposing their referral to the Tribunal.

Arguably, some of the retailers in the NCR’s firing line will likely use the Lewis High Court judgment to defend their practice of charging club fees.

Anthony Thunström, CFO at TFG, recently told Moneyweb that its referral to the tribunal is incorrect, as the National Credit Act does not limit which products retailers may sell to customers on their credit store accounts. “This was also recently confirmed by the tribunal in the Lewis case,” he said.

Big business

Club fees have become big business for retailers at a time when consumer spending remains in the doldrums.

Although Lewis does not disclose revenue generated from club fees and extended warranties, it generated R710.1 million in the year to March 31 2017, in “ancillary services revenue”.

TFG also does not report the money it earns from club fees but it generated about R690 million from publishing income (relating to its magazines offered to consumers) and insurance income for the year to March 31 2017. Mr Price pocketed R22 million in the year to April 1 2017, from club fees.

Edcon received a ‘klap’ from the tribunal in 2017 when it ruled that its club fees were illegal and contravened the act; it was instructed to refund consumers club fees from 2007, having generated R545 million from club fees in the year to March 25 2017. Edcon’s former CEO, Bernie Brookes, said the retailer would fight the tribunal’s ruling as high as the Constitutional Court.

“We see the club card as a product. It’s a product that we sell, like any other product we sell in the store. The customer has a choice to buy the product and is then charged to their credit account so they can pay every month. We see this as not being illegal,” he previously said.

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