Credit Regulator Fails to Overturn Ruling on OTR Fees in Vehicle Financing Agreements
The National Credit Regulator (NCR) has failed to overturn a decision asserting that the financial services divisions of BMW, Volkswagen, and Mercedes-Benz did not breach the National Credit Act (NCA) by charging consumers for on-the-road (OTR) fees within their vehicle financing contracts.
The NCR appealed in the Supreme Court of Appeal (SCA) after a majority ruling from the High Court in Pretoria stated that BMW Financial Services, Volkswagen Financial Services, and Mercedes-Benz Financial Services did not levy OTR fees on consumers.
This decision clarified that the three credit providers merely financed the vehicle purchases, where the total cost incorporated OTR fees previously consented to by consumers and car dealers.
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Judge Tati Makgoka, along with Judges Ashton Schippers, Daisy Molefe, David Unterhalter, and Acting SCA Judge Mokgere Masipa, dismissed the NCR’s appeal in the SCA on Friday.
However, the SCA’s ruling emphasized that state bodies involved in public interest litigation typically should not be penalized with costs, thus voiding the cost orders previously applied by the full court against the NCR, establishing that each party would bear its own expenses.
This controversy arose from the practice of credit providers adding OTR fees to vehicle financing agreements, with the NCR claiming these fees contravened sections 100, 101, and 102 of the NCA.
OTR fees are part of the total purchase price when consumers buy vehicles from dealers.
OTR fees
These OTR fees encompass various service charges from vehicle dealers, covering costs for services like pre-delivery inspections, roadworthy certificates, vehicle licensing, license plates, delivery, fuel, and Financial Sector Conduct Authority (FSCA) fees.
The NCR launched an investigation into OTR fee charges within the motor retail sector in 2017.
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This led the NCR to issue compliance notices to BMW, Volkswagen, and Mercedes-Benz, alleging that by including OTR fees in the financed amount, they had unlawfully imposed charges not permitted under sections 100 to 102 of the Act.
In response, BMW, Volkswagen, and Mercedes-Benz petitioned the National Consumer Tribunal (NCT) for reviews to nullify the NCR’s compliance notices.
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Tribunal case
These petitions were submitted at different intervals to the NCT and were evaluated by separate tribunal panels.
BMW and Mercedes-Benz successfully persuaded the NCT to dismiss the NCR’s compliance notices, maintaining that the OTR fees were assessed by dealers, not by the credit providers.
The NCT determined that vehicle dealers are permitted to charge OTR fees, deeming this practice lawful.
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Conversely, the NCT panel reviewing Volkswagen’s petition rejected its request, asserting that it had charged OTR fees contrary to the NCA.
The NCT concluded that OTR fees are considered credit fees or charges prohibited by section 100(1)(a) of the NCA, and therefore cannot be included in the primary debt.
Appeal
The NCR argued in the SCA that sections 101 and 102 define limited lists of charges that credit providers can legally impose, concluding that since OTR fees were not included, they were indeed unlawful.
BMW, Volkswagen, and Mercedes-Benz contended that they did not set OTR fees; these fees are determined by dealers through agreements with consumers based on contractual freedom before applying for vehicle financing.
Judge Makgoka emphasized that the credit providers’ claim—that they merely financed the credit agreement without obligations to scrutinize the agreement between the dealer and the consumer—was untenable.
He noted that, unlike dealers who are not regulated by the NCA, credit providers are obligated to comply with it and ensure that the amounts financed align with the Act’s stipulations.
“Thus, a credit provider cannot simply ignore the terms of the agreement it is requested to finance.
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“Among other things, a provision in a credit agreement is unlawful if its overall purpose or effect is to undermine the Act or to mislead the consumer,” he remarked.
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Nevertheless, Judge Makgoka stated that costs for accessories and services provided by the dealer at the consumer’s request do not fall under disallowed fees or charges per the NCA.
He concluded that if credit providers have not charged additional costs or fees similar to those mentioned in section 102(1), they have not breached section 102.
Judge Makgoka highlighted the existing ambiguity regarding OTR fees, which has resulted in a lack of transparency. He asserted that credit providers should not neglect the objectives of the NCA, particularly those regarding transparency.
He pointed out that credit providers earn interest income from financing deferred amounts over the duration of credit agreements—typically spanning 60 to 72 months—and that even a minor OTR fee can, when deferred with interest over this period, produce substantial profits for a credit provider.
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Judge Makgoka referred to an example from the High Court’s minority judgement concerning a car wash, which typically costs R100.
“Financed as part of the deferred amount at 8% over 72 months, the consumer would pay R676 throughout the credit agreement. This total would increase significantly at the current interest rate of 10.50%, amounting to R703.60 over 72 months.
“There is no evidence presented to us that consumers were made aware of this circumstance,” he noted.
Judge Makgoka reaffirmed that the NCA’s objective includes establishing a fair and transparent credit market.
The Act aims to protect consumers by encouraging responsible borrowing, minimizing over-indebtedness, and enhancing the fulfillment of financial obligations. It also strives to improve equity in the credit market by balancing the rights and responsibilities of credit providers and consumers.
He stated that credit providers are duty-bound to uphold these objectives, resulting in the following outcomes from this ruling:
- OTR fees included in the purchase price must be distinctly itemized, with the credit provider detailing the nature and cost of each specific charge.
- Consumers should be consulted on whether they wish to pay OTR fees in cash or prefer them to be financed as part of the deferred amount.
- To enable informed decision-making, consumers must be informed of the difference between the cash price of OTR fees and the total cost—considering interest and any additional charges—if included in the principal debt financed under the installment agreement.
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