Credit watchdog cracks down on retailers for club fees

The referral of Mr Price to the National Consumer Tribunal for breaching the credit act may decimate the more than R19 million-a-year income it generates from club fees on store accounts (credit).

If the tribunal imposes sanctions on Mr Price – in the form of an administrative fine or refunding consumers – it would have grave implications for the retailer as it struggles to boost sales in current conditions.

On Thursday, the National Credit Regulator (NCR) referred Mr Price to the tribunal after its investigation revealed that the retailer charged a club fee on store accounts, contravening the National Credit Act (NCA).

Its investigation was completed in December 2015.

The act, which has been in force for the past 10 years, prohibits the charging of any other fees or costs in credit agreements under sections 90, 100, 101 and 102.

Caroline Young, legal advisor for the NCR, said the 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.”

Club fees are typically charged to consumers’ store accounts at a monthly fixed rate for purported benefits including funeral plans, rewards vouchers, magazines and discount offers.

At the tribunal, Mr Price will be asked to conduct an independent audit into its loan book to determine the number of consumers who have been paying club fees, and to refund them if found guilty. The audit will also determine the type of fees Mr Price has been charging its consumers. Mr Price would also be interdicted from charging a club fee on credit agreements.

Although it’s unclear how many Mr Price credit consumers were subjected to paying a club fee, its recent results for the year-end April 1 unveils the extent of the financial losses it might incur if found guilty by the tribunal.

Mr Price said club fees that were charged by its ladies’ wear business Miladys represented 0.1% of its R19.8 billion sales. This means Mr Price bagged R19.8 million worth of income from club fees at a cost of R12.50 per month.

According to its latest annual report, the retailer raked in R20 million from club fees in 2016 from 1.4 million active store accounts.

The company said its initial legal advice concluded that the NCR has no rational basis for the relief sought and that it will launch an application by June 8 to oppose the NCR’s proposed sanctions.

Over the last three years, Mr Price has struggled to revive credit sales (making up 55% of total sales) as household spending remains under pressure due to rising living costs, interest rates and unemployment.

Edcon implicated

In May, the tribunal ruled that the club fees charged by Edcon to its credit customers were illegal and contravened the act. Edcon is the operator of Edgars, CNA, Red Square and Jet.

The regulator said it would approach Edcon to audit its loan book to establish how many consumers must be refunded, and the total amount to be refunded from 2007 to date. Edcon has appealed the ruling.

Edcon collected club fee revenue of R418 million, according to its results for the 39 weeks to December 2016, from 3.4 million active store account holders who are club members.

It charges store account holders R39 to R60 per month in club fees with benefits such as reduced airfares, roadside assistance and others. Edcon CEO Bernie Brookes said club members can save up to R17 000 per member over 12 months.

Brookes said at the retailer’s results presentation last week that it would take the appeal as high as the Constitutional Court. “We received numerous legal advices that the case we have is strong enough to get the original decision turned around,” he said.

“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 into their credit account so they can pay every month. We see this as not being illegal.”

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