Credit Regulator Unable to Overturn OTR Fees Ruling in Vehicle Finance Contracts

The National Credit Regulator (NCR) has been unsuccessful in overturning a ruling that concluded the financial services branches of BMW, Volkswagen, and Mercedes-Benz did not violate the National Credit Act (NCA) by charging consumers for on-the-road (OTR) fees in their vehicle financing agreements.

The NCR initiated an appeal in the Supreme Court of Appeal (SCA) following a majority ruling from the High Court in Pretoria, which stated that BMW Financial Services, Volkswagen Financial Services, and Mercedes-Benz Financial Services did not impose OTR fees on consumers.

The ruling indicated that the three credit providers simply financed the purchase of vehicles on credit, where the purchase price included OTR fees agreed upon by consumers and motor vehicle dealers.

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Judge Tati Makgoka, alongside Judges Ashton Schippers, Daisy Molefe, David Unterhalter, and Acting SCA Judge Mokgere Masipa, rejected the NCR’s appeal in the SCA on Friday.

Nonetheless, the SCA ruling reiterated that state organs pursuing public interest litigation typically should not be ordered to bear costs, thereby nullifying the cost orders imposed by the full court against the NCR, replacing them with a decree that each party would cover its own costs.

The issue stemmed from the practice of credit providers incorporating OTR fees in vehicle financing agreements, with the NCR asserting that these fees violated sections 100, 101, and 102 of the NCA.

OTR fees are included in the purchase price when consumers acquire vehicles through dealers.

OTR fees

These OTR fees consist of various service charges from vehicle dealers, covering costs for services such as pre-delivery inspections, obtaining roadworthy certificates, vehicle licensing, acquiring license plates, delivery, fuel, and fees from the Financial Sector Conduct Authority (FSCA).

The NCR began investigating the practice of charging OTR fees in the motor retail sector in 2017.

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This led the NCR to issue compliance notices against BMW, Volkswagen, and Mercedes-Benz, claiming that by integrating OTR fees into the financed amount, they had unlawfully imposed charges not allowed under sections 100 to 102 of the Act.

In response, BMW, Volkswagen, and Mercedes-Benz applied to the National Consumer Tribunal (NCT) for reviews to set aside the NCR’s compliance notices.

Tribunal case

These applications were submitted at different times to the NCT and were examined by separate tribunal panels.

BMW and Mercedes-Benz successfully convinced the NCT to dismiss the NCR’s compliance notices, asserting that the OTR fees were charged by dealers, not by the credit providers.

The NCT determined that vehicle dealers are not prohibited from levying OTR fees and that their charging is lawful.

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In contrast, the NCT panel reviewing Volkswagen’s application denied its request, stating it had charged the OTR fees in violation of the NCA.

The NCT ruled that OTR fees are credit fees or charges banned by section 100(1)(a) of the NCA, and thus cannot be included in the primary debt.

Appeal

Upon appeal, the majority of the full court of the High Court in Pretoria supported BMW, Volkswagen, and Mercedes-Benz, concluding that they did not distinctly charge consumers OTR fees when these fees were incorporated into credit agreements, with these fees negotiated between dealers and consumers.

The NCR contended in the SCA that sections 101 and 102 provide limited lists of charges that credit providers may legally impose, and since OTR fees were not included, they were therefore unlawful.

BMW, Volkswagen, and Mercedes-Benz asserted that they did not determine OTR fees; those fees are set by the dealers through agreements with consumers based on contractual freedom, prior to seeking vehicle finance.

Judge Makgoka emphasized that the argument from the credit providers—that they solely financed the credit agreement without responsibility to examine the agreement between the dealer and the consumer—was unsustainable.

He remarked that, unlike dealers who are not governed by the NCA, credit providers must adhere to it and must ensure that the amounts they finance as part of the deferred amount in credit agreements align with the Act’s provisions.

“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 noted.

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However, Judge Makgoka stated that costs for accessories and services provided by the dealer at the consumer’s request do not constitute a fee or charge prohibited by the NCA.

He concluded that, as long as credit providers have not imposed additional costs or fees on consumers akin to those referenced in section 102(1), they have not violated section 102.

Judge Makgoka highlighted the evident ambiguity concerning OTR fees, which has led to a lack of transparency. He asserted that credit providers should not disregard the NCA’s objectives, particularly transparency.

He noted that credit providers accrue interest income from financing deferred amounts over the duration of credit agreements—generally lasting from 60 to 72 months—and that even a seemingly minor amount of OTR fees, when deferred with interest over this timeframe, could yield considerable profits for a credit provider.

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Judge Makgoka referenced an illustration from the High Court minority judgment involving a car wash, typically costing R100.

“Financed as part of the deferred amount at 8% over 72 months, the consumer would pay R676 over the credit agreement. This total would be even higher at the current interest rate of 10.50%, amounting to R703.60 over 72 months.

“There is no indication in the documentation before us that consumers’ attention has been drawn to this fact,” he remarked.

Judge Makgoka affirmed that the NCA’s purpose includes establishing a fair and transparent credit market.

The Act aims to safeguard consumers by fostering responsible borrowing, curtailing over-indebtedness, and promoting the fulfillment of financial obligations. It also strives to enhance equity in the credit market by balancing the rights and duties of credit providers and consumers.

He stated that credit providers are obligated to uphold these purposes, leading to the following consequences from this ruling:

• OTR fees added to the purchase price must be clearly itemized, with the credit provider specifying the nature and cost of each individual charge.
• Consumers must be surveyed on whether they choose to pay OTR fees in cash or wish to have them financed as part of the deferred amount.
• To facilitate an informed decision, consumers must be made aware of the disparity between the cash price of OTR fees and the total cost—factoring in interest and any other charges—if they are included in the principal debt financed under the installment agreement.

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