Cape Town - A mystery shopping experience by Summit Financial Wellbeing, a company which fights for consumer rights and lobbies for change in the financial services industry, has seemingly uncovered major breaches of the National Credit Act (NCA) by Lewis Group [JSE:LEW].
The alleged breaches relate to interest charges when customers buy on credit.
According to Summit CEO Clark Gardner, the discovery was made after conducting a number of undercover "mystery shopping" visits to Lewis Stores.
The first charge Summit questioned was a so-called delivery fee, which was also called a handling fee. According to Gardner, the mystery shoppers found this charge to be compulsory even if they offered to transport the purchased item themselves.
This fee seemed not to be compulsory if one paid in cash.
"It would therefore seem from recordings our mystery shoppers made of transactions that the fee is merely disguised as a delivery fee in order to circumvent the NCA's (National Credit Act's) limitations on fees," Gardner told Fin24.
"It is our expert opinion that in no way can delivery fees be made compulsory and certainly should not be charged where no delivery took place. We believe hundreds of millions of rands should be refunded to consumers for this breach to the NCA."
Summit also questioned an extended warranty charged when an item was bought on credit, even though the item would have its own product warranty.
According to Gardner, the mystery shoppers found this fee to be compulsory as the system did not allow for its elimination.
"How is this possible? Why are cash buyers not required to take out the extended warranty?" asked Gardner.
"Lewis also seems to account for this fee in their financials by amortising the revenue of 24 months – but that is surely only when the warranty starts applying above the product warranty?"
Another area of concern for Gardner is the process of determining if a customer qualifies for credit at the store.
"One of our mystery shoppers was merely asked for her ID and payslip and nothing else. This is contrary to the new regulations requiring three months' payslips," said Gardner. This shopper also recorded how the person entering his application manipulated the data given so that he could qualify for credit - for instance putting only R10 as living expenses.
The shopper claims the store consultant put him down as single in the system even when he told her he was married.
Soundbite from mystery shopper:
"When asked about this, she told me that if I was married my wife would have to come in and bring documents and that was a huge hassle," according to the mystery shopper.
But his biggest concern is the credit life insurance charges.
"Credit life fees have long been a concern of ours and (are) being used as a means to circumvent the NCA price limitations. It is clear that these fees are charged regardless of the consumer's situation and treated as the money-making scheme it is instead of actually trying to minimise consumers' risks.
"The fact that 1% of clients actually claim is indicative of the actual risk and motive of these products," Gardner said.
As an aside, he furnished Fin24 with the shoppers' notes:
Credit life and product insurance charges of R6 201 were added based on the relevant premium rates. Notwithstanding the fact that I stated that I was self-employed and the consultant entered that into the system, I was still charged for Loss of Employment cover. The policy clearly states that a person who is self-employed cannot claim under this policy, so why was I charged?
Stop and think about this for a minute. The probability of a person dying in any given year is about 1%. In addition, the probability of being disabled or retrenched is probably another 1%. The average cost of insuring a TV through a traditional insurer is about 2%. Thus the combined probability of a claim over 30 months is approx. 10%, and yet the premiums equal nearly 100% of the average loan balance outstanding during the contract!
This is why the claims rates are below 20% of premiums and in fact the ST2014 returns state that the claim rate by number of claims was 1% of the total policies in force.
Gardner pointed out that the NCA clearly stipulates what charges can be added under a credit agreement - limited to interest, initiation fees, service fees (all subject to caps) and credit insurance premiums.
"In terms of section 102, the credit provider may include the cost of any delivery charges, extended warranties and certain other items, offered to the client, to the principal debt of the loan. However, section 102(2) states that a credit provider may not make the provision of these services compulsory and if it provides the service itself, it must charge a fair market price for the service," said Gardner.
"In addition the lack of proper affordability assessments is in direct breach of the NCA. Three months' payslips, bank statements and expense scrutiny should take place to ensure it provides only affordable credit. This is not only good for business, but critical to a healthy and sustainable credit industry."
He said Summit would like to see these practices stopped immediately "and if not, the directors must become personally liable".
In its response to the allegations, Lewis told Fin24 that all its fees or charges are within the NCA. It said there are, however, variable elements in any contract, including the term of the contract and additional services selected by the customer.
Regarding the compulsory delivery/handling fee on items bought on credit, Lewis said it is compulsory for all new, first-time Lewis credit customers.
"This is to provide additional proof of home address as the documentary proof is not always conclusive, the delivery location is not always the home address and delivery takes place via the store delivery vehicle," said Lewis.
The group explained that the fee is not compulsory for repeat customers or cash customers, although they can elect to pay for the delivery if they choose.
The group did not indicate how often it happens that new customers pay the compulsory delivery/handling fee without making use of it.
On the extended warranty fee and Summit's allegation that it is in breach of the NCA, Lewis said the extended warranty is not compulsory and customers can choose to buy it when making their purchase.
"The extended warranty is offered by Lewis Stores and only comes into effect after the supplier’s warranty has expired. For example, if the product has a warranty of 12 months, the extended warranty will then only commence in month 13 and is applicable for a further two years," the group explained.
Also in this case Lewis did not indicate how often customers claim under this extended warranty.
"This is not compulsory and customers can choose to pay for the extended warranty. Where customers make a claim under this extended warranty, the product is either repaired or replaced and no payments are made to customers," the group said.
"Repairs are outsourced to external service providers. Claim levels vary from time to time and we cannot comment on the number of claims."
Lewis added that customers who pay in cash can opt for delivery and pay the fee, and also have the option of taking out the extended warranty.
As for the allegation of reckless lending practices, the Lewis Group responded that it is against company policy to manipulate data to increase credit limits.
"The store manager interviews all customers before a credit agreement is completed, and in terms of the NCA explains all the elements of the contract and the total cost of credit," said Lewis.
"As part of this process the customer's physical pay slip is checked against the information captured on the system. Expenses are checked for reasonableness and in cases where the internal expense table used to assess reasonability of expenses is higher than the expenses offered by the customer, the system overrides same."
Lewis said customers have the right to delay the signing of a contract for five days to consider details and costs.
"All costs are disclosed in great detail. All Lewis Group’s business practices are conducted in accordance with the NCA," the group emphasised.