The exploitation of poor debtors is routine
- Ivo Vegter
- 25 Jan 2016 11:17 (South Africa)
Last week, my brother, Onne Vegter, made news headlines with a Facebook post calling out the furniture chain Lewis for shamelessly ripping off an elderly, uneducated customer. According to the post, it charged a grand total of R17,955 over three years for a washing machine priced at R5,999. The customer claims not to have understood the contract, which is entirely plausible, given his Grade 5 education. According to the Rapport newspaper, a similar product can be bought online for as little as R2,600. All this would appear to violate the National Credit Act, which is designed to protect consumers from exploitative behaviour by credit providers.
In the two days following the disclosure, the Lewis Group share price fell by 8.6% to R4.19. Although it has recovered a little since, it is still 55% off its peak of R10.16 last year. The collapse started last year, because this is not the first time that the Lewis Group has been caught red-handed exploiting the poor, or allegedly breaking the law.
Rob Rose recounted an eerily similar story in a cover story for the Financial Mail in July 2015, involving a R4,699 bed that Lewis managed to inflate to R16,156 over 36 months. The story quotes Summit Financial Partners, which advises consumers on debt-related matters, on how easy it is to manipulate the results of an affordability assessment that the National Credit Act requires of consumer credit providers.
Following a “mystery shopping” investigation by Summit, widespread abuses were reported at many stores. The National Credit Regulator vowed to take action, and the company’s share price took a nosedive as investors bailed out of what they saw as an unsustainable business practice.
In October 2015, the group undertook to refund R67.1 million to self-employed and pensioned customers who had wrongly been charged for loss of employment cover.
Lewis Group CEO John Enslin denied any wrongdoing in the case of the R18,000 washing machine, and claimed everything was legal and above board. However, his assurances are undermined by what appears to be a blatant lie regarding the two insurance clauses on the contract.
In no uncertain terms, he claims that an amount of R3,785.76, described as “protection insurance for clients, payable monthly”, included all insurance, while another R2,052, described as “monthly payment for client protection insurance”, covered a “service fee” payable to Lewis. Even if R3,785.76 were a reasonable insurance cost to cover a R5,999 product for three years, which it isn’t, this does not explain the wording of the contract. When a line item says “insurance”, it sure sounds like insurance to me. So either the Lewis contract is dishonest, or Enslin is lying, or both.
Although Enslin claims no fault, he did agree to cancel the contract, refund the customer, and take back the washing machine. That may be because he’d hate to have to explain such blatant exploitation of the poor to the National Credit Tribunal.
Unfortunately, the occasional cases that turn up in the media are only the tip of the iceberg. Despite last year’s public shaming, it is obvious that the Lewis Group has no intention of reforming its exploitative credit practices.
Perhaps that is not surprising. Since the National Credit Act has put credit out of reach of many potential customers on affordability grounds, retailers desperate to sustain profits have taken to squeezing more out of each one. Using sleight-of-hand involving product prices, administration fees, contract activation fees, so-called insurance policies, club fees and delivery fees, they inflate revenues to make up for the loss.
The Lewis Group, which includes the Lewis, Beares, Ellerines and Best Home and Electric outlets, is far from alone. Competing retailer JD Group, which owns brands including Bradlows, Joshua Doore, Morkels, Price 'n Pride, Russells, Incredible Connection, HiFi Corp, Pennypinchers and Timbercity, has been taken to task for “unlawful conduct” in selling insurance policies. Shoprite has been charged with the same offence, and Edcon, which includes Edgars, Jet, Boardmans, and CNA, has also been referred to the National Consumer Tribunal for charging unlawful fees in its credit contracts.
That a store can triple the sales price of an item by adding insurance policies must surprise those who think the in duplum rule limits credit providers. This rule says that a credit provider may never claim more than twice the original capital amount. That is, the cost of credit should never exceed the purchase price of an item.
Indeed, according to the Lewis contract in question, the “credit cost multiple” is 1.99. Yep, right below where it says “total credit cost” is R17,955 on an item priced at R5,999.99, it says the multiple is 1.99, as opposed to 2.99, which it actually is.
It achieves this feat of magic by simply dumping a bunch of things into the value of the main credit agreement. The maintenance contract for which the customer did not ask was included. The delivery cost of R750 in a town where deliveries can be made for R250 (and which Summit says is not charged on cash purchases), is included. So is the contract initiation fee. Suddenly, it appears as though the total credit cost, at the exorbitant interest rate of 23%, is only double the original amount. Legally, speaking, of course.
Clearly, the National Credit Act does little to protect consumers. To make matters worse, the single biggest investor in the Lewis Group is the government itself, in the form of the Public Investment Corporation, which invests public sector pensions.
Enslin tries to appear generous in cancelling the contract by mentioning the five business day “cooling-off period” granted to consumers by the National Credit Act. This is another example of how the law is flawed, however, in two ways.
On one hand, the returns window is unreasonably short. Recent research suggests that more lenient time limits on returns are associated with a reduction – not an increase – in returns. Favourable returns policies are also correlated with an increase in sales.
On the other hand, this level of consumer protection was heavily criticised by industry at the time the National Credit Act of 2005 (and later, the Consumer Protection Act of 2008) were enacted. They made the not unreasonable claim that it would increase the risk of sales, since returned goods could not always be resold as new, and handling costs would be incurred in either case. This is one of the reasons why retailers have been under pressure to make each transaction more profitable, leading to the perverse effect that the law has made credit less affordable for consumers.
The Consumer Protection Act requires plain language in contracts, and the National Credit Act outlaws any contracts that deceive or defraud the customer, or otherwise defeat the purposes of the act. It also requires creditors to clearly explain the terms of a contract to would-be debtors. By selling such an outrageous contract to a consumer with a limited education, however, taking advantage of the fact that he was just happy to hear he “qualified” to purchase the washing machine, Lewis demonstrates that these clauses have no real meaning.
One might take a fully libertarian position on this matter, as Walter Block did in Defending the Undefendable (obtainable free from the Mises Institute). Its chapter on moneylending is well worth reading, to quash any notion that a credit agreement, even a very expensive one, is necessarily exploitative or morally wrong. Because people differ in their time preference of money, both parties to a credit transaction benefit, by their own subjective measures.
One could also argue that the gardener in this story ought to have done more diligent comparison shopping, ought to have saved to buy the product cash, or ought to have consulted someone more literate to advise him on the contract. Those are fair criticisms, and one hopes he'll learn from his mistakes.
But a large part of the responsibility for this travesty lies with the retailer. Block adds an important caveat in his defence of lenders: “There are, of course, dishonest moneylenders just as there are dishonest people in all walks of life.”
That is what went wrong in this case. The consumer did not simply take a calculated risk, with full understanding of the costs and consequences. He did not understand the contract that he entered into, and was sold a lot of complicated things that he neither needed nor wanted, just to inflate the price. Lewis, like many other consumer credit providers, exploit customer ignorance as a matter of business practice. They aim to deceive, and aim to defeat the purposes and policies of the National Credit Act, both of which are illegal.
About 25 years ago, I had a student job at clothing retailer Edcon, opening new accounts for customers. Edcon was one of the pioneers of consumer credit in South Africa. When they lowered the minimum income requirement from R800 per month to R600, and then to R350, I asked how we could possibly extend credit to someone earning so little. The response was that such amounts were typically earned by domestic servants and gardeners, and because they often have board and lodging provided as part of their jobs, much of this money was “disposable income”. Naturally, Edcon wanted that income to be disposed of into its coffers. I thought it was immoral and exploitative then, and I still do.
Ripping off poor consumers is nothing new, but instead of curbing abuses, the laws and regulations passed by government have made them worse. Financial services have always been heavily regulated, with high barriers to entry. This turns a handful of large corporations into something of a cartel, able to squeeze consumers for everything they’ve got. When someone says, “we are a registered financial services and credit provider”, this is a warning that you’re dealing with a government-protected cartel. Today, main street retailers, telcos and even the banks, operate just like unscrupulous loan sharks, and they have the legitimacy of law to hide behind. Some years ago, I wrote about a similar problem among the telcos that form part of South Africa’s highly regulated, government-protected cartel. That problem persists too, despite the best efforts of the National Credit Regulator.
Presumably, this is not what the government intended. But watch. They’ll try to fix the failure of their regulations not by making it easier to compete against abusive retailers, but by creating more regulations that corporate lawyers and executives can exploit, and that will only raise the cost of credit. DM