IN THE HIGH COURT OF SOUTH AFRICA 
GAUTENG     DIVISION,     PRETORIA
Reportable: NO
Of interest to other judges: No
Case No: 16746/2016
Date: 21/11/16
In the matter between:
MICRO   FINANCE SOUTH   AFRICA                                                                                                                                         Applicant
and
THE   MINISTER   OF   TRADE AND   INDUSTRY                                                                             First Respondent
THE   NATIONAL CREDIT REGULATOR                                                                                       Second   Respondent
JUDGMENT
J W LOUW,   J
[1] The applicant is a registered non-profit company which represents approximately 500 individuals or corporate entities who are   providers   of short term credit and who are colloquially referred   to   as 'micro   lenders'. They operate approximately 1190 branches throughout the country. The applicant alleges that it represents about 30% of   the   micro   lending   industry in the country. In terms of regulation 39(2)(a) of the regulations published in terms of the National Credit Act 34 of 2005 (the NCA) on   31   May 2006 (the previous regulations), a short term credit transaction is a transaction in respect of a loan   not   exceeding   RS 000.00   which   is repayable   within a period not   exceeding   six months.
[2] Section 171(1) of the NCA empowers the   Minister   of   Trade   and Industry (the   first   respondent)   to   make   regulations   expressly   authorised or contemplated elsewhere in the Act in accordance with   ss   (2).   Sub  section (2) provides that before   making   such   regulations,   the   Minister   must publish the regulations for public comment and may   consult   the   second respondent,   the National   Credit   Regulator (the   regulator).
[3] Section 101 of Part C of Chapter 5 of the NCA permits, subject to limitations, the charging of interest, an initiation fee and a service fee in a credit   agreement.     In   terms   of s 105(1),   the Minister- after consulting   the   regulator,   may prescribe   a method   for calculating-
(a)                 a maximum   rate of interest;   and
(b)             the maximum fees contemplated in Part C applicable to each subsector of the   consumer   credit   market, as determined   by the Minister.
Short term credit   is one such   subsector.
[4] Regulation 42 of Part C of Chapter 5 of the previous regulations prescribed the maximum interest rate, maximum   initiation   fee   and   maximum service fee for short term credit transactions. In terms   of   regulation 45(1), the regulator   must   perform   a   review   of   interest   rates   and cost factors at intervals of no more than 3 years   and   advise   the   Minister of any changes   that   may   be required.   It   is common   cause   that this was not done. The regulator's failure to comply   with regulation   45(1)   led to litigation in terms whereof the regulator and   the   Minister   were   ordered to comply with their obligations within a stipulated period of time. They   failed to comply   with that court order   and a further   court order, both   of which   led to   contempt applications.
[5] The Minister thereafter, on 26 June 2015, published new   draft regulations for public comment. On   6   November   2015,   the   regulations were promulgated by the Minister to take effect   on   6 May   2016.   On   1 March   2016, the applicant   launched   the present application   against the Minister and the regulator. It was contended by Mr Carstensen   who appeared on behalf of the regulator that the   applicant   should   be   non    suited because it unreasonably delayed the bringing of the application. I disagree. The draft regulations were published on 25 June 2015, but the   final regulations were only published on   6   November   2015.   The application, which is substantial, was brought within less than 120 days thereafter. Part A of the notice of motion   was   an   urgent   application   in which the applicant sought to stay the implementation of the regulations pending the review of the regulations which was sought in part B of the   notice of motion. The urgent application was heard by Meyer J on 3 May 2016 and was dismissed. In part B of the notice of motion, which is the application now before court, the applicant originally sought an order reviewing and setting aside all of the regulations. It   has since decided   to   limit the relief sought to an order reviewing   and   setting   aside   the regulations insofar as they relate to   short term   credit.   The review   record was only filed by the respondents on   8   June   2016,   whereafter   the applicant filed a supplementary founding affidavit. The respondents filed supplementary   answering   affidavits to which the   applicant filed a     reply.
[6] Section 105(2)   of the NCA provides as   follows:
(2) When prescribing a matter contemplated in subsection (1), the Minister must consider, among   other things-
(a)                     the   need to   make credit available to persons contemplated   in section 13
(a)[1];
(b)                     conditions prevailing in the credit market, including the cost of credit and the optimal functioning of the consumer credit market; and
(c)                   the   social impact on low income consumers.
[7] Regulation     45(2)       of     the     previous       regulations       provided       that     the regulator must, when making a recommendation to the Minister, consider
(a)             ruling interest rates and fees;
(b)                 cost of providing   such credit;
(c)             the choice available to consumers in the particular category of credit agreements,   between different   products   and different   credit providers;   and
(d)               the impact upon access to finance for persons referred to in section   13(a)
of the Act.
[8] The applicant contends that the above mandatory requirements were not complied with by the Minister and the regulator, and that   the   Minister's decision to publish the new regulations is   accordingly reviewable in terms of sections 6(2)(e)(iii) and/or   6(2)(e)(vi)   and/or   6(2)(h) of PAJA. In terms of s 6(2)(e)(iii), an administrative decision is reviewable if irrelevant considerations were taken into account or relevant considerations were not taken into account.   In   terms of s 6(2)(e)(vi), it   is reviewable if   it   was   taken   arbitrarily   or   capriciously.   In   terms   of   s 6(2)(h), it is reviewable if the exercise of the   power or the performance   of   the function authorised by the empowering provision   is   so unreasonable   that no reasonable person could have   so   exercised   the   power   or performed   the function.
[9] The   maximum   interest   rate   prescribed   in   terms   of   regulation   42   was 5%   per   month   for   short   term   credit   transactions,   the   maximum   initiation   fee was R150 per credit agreement   plus   10%   of   the   amount   of   the agreement in excess of R1 000, but never   to   exceed   R1   000,   and   the   maximum monthly service   fee   was   R50.   In   terms   of   the   new   regulations, the maximum prescribed interest rate   is   5%   per   month   on   the   first   loan   and 3% per month on subsequent loans   within   a   calendar   year.   The   maximum initiation fee is   R165   per   credit   agreement   plus   10%   of   the amount in excess of R1 000, but never to   exceed   R1   050.   The   maximum monthly   service   fee   is R60.
[10] In the founding affidavit in the urgent application it   is stated that   prior to the promulgation of the new regulations, a period of no less than nine years had passed without them being renewed. This, the applicant states, gave rise to an untenable situation. As a result of inflation and certain other additional expenses (such as payment streams), the members     of   the   applicant     found     it     increasingly     difficult     to conduct business. When the new regulations were finally promulgated the entire industry was of the hope that the new regulations would remedy   the   situation and provide a new lease of life in the micro finance industry. However, upon closer scrutiny it became apparent that in issuing the new regulations the respondents had failed to take into account   the effect that the new fees and interest rates would have on   the   providers   of   micro loans; failed to conduct proper market   research   in order   to   determine   if the new fees and interest rates would be beneficial to the market   as a   whole; and failed to consider the views of the members of the applicant or any of the micro financiers in the industry. The net effect of the new regulations, the applicant states, is effectively to   bring   the   entire   micro   loan industry to its knees and make it impossible to conduct business, let alone a profitable business.
[11] The applicant further states that the new regulations   do   not   only   affect its members personally,   but   that   there   will be an enormous   knock on effect on the South African public as a whole. Some   5   to   6 million   people make use of micro financiers for   funding.   It   is   a   niche   market which is not served by the traditional banks.   By   taking   a   substantial   portion of the members of the applicant   out   of   the   market,   those   members of the public that require credit will not be able to   obtain   credit from legitimate sources and an enormous increase of unregistered credit providers   is a real possibility. 
[12] Having regard to the above and to the opinions   of   three   experts   which the applicant has presented, the applicant contends that the respondents have failed to promote equity   in   the   credit   market   as   required by s 3(d) of the NCA by balancing the respective rights and responsibilities of credit providers and   consumers.   The applicant   states   that no account has been taken of the rights,   interests   and   obligations   of its members and that, ironically, the individuals who   will   be most affected are the members of the general public who will be forced to obtain finance from unregulated and unregistered sources, thereby increasing   the   prospects of them being   exploited.
[13] The applicant points out in its supplementary founding affidavit that there is nothing contained in the record which   was   furnished   by   the Minister which indicates that any member of the applicant or any of their customers was approached in the assessment which was done and that it was obvious that the entire short term credit   industry   was,   to   all intents and purposes, ignored. More particularly, the applicant states, the respondents did not take into account   the   typical   short   term   credit provider   or the individuals   which   they serve.
[14] Although these allegations are denied by the Minister in his supplementary   answering   affidavit,   he   has   not   provided   any   evidence to the contrary. The regulator states in his supplementary answering affidavit that in making the recommendation to the Minister, the balance between the rights of the consumer and the credit providers was considered. He does, however, not give any information of how this was done.
[15] The regulator denies that the interests   of   the   short   term   credit industry were ignored, and relies in this regard on a report by PricewaterhouseCoopers (PWC) who the regulator commissioned in February 2015 to carry out an assessment of the impact of changing the current maximum interest rates,   initiation   fees   and   service   fees.   There are, however, a number of   difficulties   arising   from   the   PWC report.   The first is that the report itself states that the results for short term credit transactions are based on insufficient responses and can therefore not be relied   upon.   The applicant   further points   out that   PWC   was not instructed to do an analysis of the   interest   rate   as recommended   by   the   regulator and ultimately promulgated.   It   was   only   instructed   to   assess   scenarios   for interest rates of 5%, 7%   and   10%.   The regulator   admits this,   but says that the impact of the proposed interest   rate changes   had   already   been researched prior to the appointment of PWC. In support of this statement, the regulator attaches a letter which was addressed to Capitec Bank on 14 August 2014 which it says is an example of numerous letters which   were   dispatched   inter   alia   to   Bayport   Financial   Services   (which it says is a significant player in the short term credit industry) and   other banking institutions such as ABSA. It is further   stated that engagements   with approximately 19 credit   providers   were   undertaken.   The   regulator goes on to say that the applicant and its members are a small part of the credit industry as a whole, and is not a key player in the short term credit industry.     The letter to Capitec   Bank   states the   following:
"1. In terms of Regulation 45 of the National Credit Regulations, 2006, the National Credit Regulator (NCR) must perform a review of interest rates and cost factors at intervals of not more than three (3) years and advise the Minister of Trade and Industry of any changes that may be required. When making the recommendation to the Minister, the NCR must consider the ruling interest rates and fees, the cost of providing credit, the choice available to consumers in the particular category of credit agreements between different products and different credit providers and the impact upon access to finance for persons referred to in section 13(a) of the National Credit Act.
2. The NCR has commenced with work for this review with   conceptual scenarios which will ultimately   inform   the   rationale   for   the   regulations   to be issued by the dti. The NCR envisages that these regulations will be implemented after extensive consultations with industry stakeholders and testing by selected credit providers to determine their impact on the credit market.
3. The NCR hereby invites Capitec Bank to participate in the testing of the different scenarios in relation   to   this work. Further   details   will be provided to Capitec Bank once the response to the invitation has been       received."
[16] The regulator does not say whether Capitec or any of the   other   banking institutions responded to the invitation. It   does   not   give   any   further information about the research which it says it conducted. The deponent to the applicant's supplementary founding   affidavit   states   that only one short term credit provider provided PWC with any   evidence,   namely   First Rand Bank.     This is not denied by the   regulator.
[17] In regard to the PWC report,   the   regulator   states   that   the   report   must be seen as an impact assessment report and not as an original piece     of research to enable it to discharge its   statutory   duties.   The   regulator states that the report was considered by it   and   that   its   contents   were   found to be at odds with the envisaged course of action   to   be   recommended   to   the   Minister,   a   significant   portion   of   which   was,     inter alia,   based   on   consumer   interests.   As   is   pointed   out   by   the       applicant, there is, however, no evidence or documentation which could justify why the regulator departed from the PWC recommendations. PWC observed in their report that actual costs over a period have increased on an annual basis and that these increases had not been met by corresponding raises in the maximum fees chargeable. The direct result of this was a gradually widening gap between actual costs on loans disbursed and maximum fees chargeable. In view of the fact that the fees   had not   been reviewed   for   such a long period of time, PWC recommended a two-fold solution for the situation. First, that there should be a rebase of the maximum fees   chargeable and, second, to prevent the rebased fees from falling behind actual cost increases, that an annual   CPI adjustment   be   applied.
[18] Mr Michau, who appeared for the applicant, inter alia referred to the following passages in   the   judgment   of the Constitutional Court in Minister   of Health and Another   v New Clicks South Africa (Pty) Ltd and Others : [2]
[391] The Pricing Committee seems to have   calculated the dispensing fee   without any evidence of the breakdown of the income and expenditure of the dispensaries, information they considered to be important for the proper determination of the dispensing fee.   They   assumed   that   dispensing   subsidises the operations of the front shops of community pharmacies. They have not, however, provided any evidence to support this assertion, which is denied by the Pharmacies. As Dr Stillman points out, it is unlikely that front shops would be operated if they were indeed loss-making ventures.   The Pricing Committee   does not say what weight was attached to this assumption in the calculation of the dispensing fee.
………………………..
[393] The Minister and the Pricing Committee do not deal with the impact of the dispensing fee on rural pharmacies. Professor McIntyre says that the Pricing Committee considered the predicament of rural pharmacies which are 'economically disadvantaged, primarily because of a comparatively   low   turnover and also unfavourable payment conditions from wholesalers'. They concluded, however, that   this   is   the result   of   'distortions   in   the   health   sector'   and   that 'an appropriate dispensing fee should be as neutral as possible in respect of such distortions'. No mention is made of what   those   distortions   (if   any)   are,   other   than low turnover and adverse payment conditions. Moreover,   they   do   not   suggest how these distortions could be overcome, what the impact of the   dispensing fee will be on the economically disadvantaged rural pharmacies, and how that will affect access to   medicines in rural   areas.
………………………..
[403] The Pricing Committee has provided no models or other evidence to demonstrate how the dispensing fee was calculated or how the members of the Pricing Committee satisfied themselves that it was appropriate. It has not told us what assumptions   it   made about the probable SEPs in calculating   the   dispensing fee, or how it assessed the dispensing fee when it seems to have had no data dealing with dispensary revenue and expenses which it considered to be essential for that purpose. It has not addressed in any meaningful way   the contention that   the   dispensing fee will   lead to pharmacy closures that     will impair accessibility     to     health   care,   particularly     in   rural   areas.   The       assertions made by Professor McIntyre and Dr Zokufa about additional revenue sources and the subsidisation of the front shop by the back shop are,   at   best,   flimsy.   The failure to make provision for compounding in the dispensing fee is a material misdirection.
………………………..
[510] What lies at the heart of the challenge to the dispensing fees   is   the contention that   the   dispensing fees   as   determined in   the regulations are   not viable for pharmacies and will drive them out of   business. In effect the pharmacies contend that, in determining the dispensing fees, the Pricing Committee did not have due regard to the viability of the dispensing fees for pharmacies, as they were bound to do. This contention was upheld by the SCA, which in effect concluded   that   the fees   were not   viable for   pharmacies.   Failure   by a decision-maker to take into account a relevant   consideration   in   the   making   of an administrative decision is an instance of an abuse of discretion. As pointed out earlier, this is a ground of review   which is expressed   ins   6(2)(e)(iii)       of PAJA.
[511] There is obviously an overlap between the ground of   review   based   on   failure to take into consideration a relevant factor and one based on the unreasonableness of the decision. A consideration of the factors that a decision  maker is bound to take into account is essential to a reasonable decision. If a decisionmaker fails to take into account a factor that he or   she is bound   to take   into consideration, the resulting decision can hardly be said to be that of a reasonable decisionmaker. It seems to me to follow that if, in determining the dispensing   fees,   the   Pricing Committee   was bound   to take into consideration the viability of the fees for pharmacies, but   failed   to   do   so properly,   the   resulting fees can hardly be said to   be one that a reasonable Pricing Committee could     fix.
[512]   As I   see it,   therefore,   the   central   question   in   this   case   reduces   to   whether the Pricing Committee gave proper consideration to the viability of pharmacies in fixing the dispensing fees. This question raises two separate, but related, questions. The first is whether the Pricing Committee was bound, in fixing an appropriate dispensing fee pursuant to s 22G(2)(b),   to have   regard to the viability of pharmacies, so that failure to do so amounted to failure to take into account a consideration relevant to the determination of an appropriate fee. The second question, which only arises if the first question is answered in the affirmative, is whether the Pricing Committee gave due regard to the viability of pharmacies.
………………………..
[518]   As the   SCA held,   an appropriate   dispensing   fee must   be fair and     just. Indeed it can hardly be argued that a dispensing fee that is unjust or unfair is appropriate. The dispensing fee must be fair not only to the public, but also to pharmacies. The fee must   not be such that   it   will render   medicines   inaccessible   to the general public. Nor must it be such that it pharmacies out of business. Its determination requires a consideration of conflicting interests of the public, who are entitled to access to affordable medicines, on the   one hand, and the interests   of dispensers   who,   in terms of the Act, are essential   to   the   public for the supply of medicines and whose economic viability   is implicitly   recognised   by the   Act and is of   'national importance', on the other     hand.
………………………..
[526] Once it is accepted, as it must be, that pharmacists are crucial to the objectives of the Medicines Act, it must also be accepted that there is a need for them to survive. But those who are   involved   in   the   pharmaceutical   industry   do so for profit. An appropriate dispensing fee must be rationally related to the cost of doing business. It must be such that it makes it worthwhile for pharmacies   to remain in business. And the economic viability of pharmacies is implicitly recognised by the Medicines Act. As the Australian Federal Court observed in the context   of price fixing   for   pharmaceuticals   in   that country.
………………………..
[531] The Pricing Committee   and the   Minister   must   therefore   do more   than pay lip service to the viability of pharmacies. They must address the need for pharmacies to exist in a meaningful way when fixing the appropriate fee, and be able to demonstrate that they   have done so.   This could   be done by   explaining the manner in which the viability of pharmacies   was given effect. They   must   give an explanation of how the appropriate fee was calculated. This   explanation   is crucial to the process of determining an appropriate   fee. It   explains   to   the   public and the pharmaceutical industry the manner in which the   fee   was   arrived   at.   It discloses   the   reasoning   process   of   the   Pricing   Committee.   And   it   enables those who have   an   interest   in   the   fee   to   assess   whether   the   Pricing Committee   has properly discharged its statutory duty. This explanation should generally be contained in the report   of   the   Pricing   Committee   making   a   recommendation   to the Minister.
………………………..
[535] What is singularly lacking in the record is   an   explanation   of how the dispensing fees were arrived at. There is no explanation   as   to   why   the   Pricing Committee chose the   figures   that   it   chose. While the Pricing Committee indicated       that the fee covers both the professional   remuneration   and   operating   costs,   it does not explain what was allocated to   each   of   these component   parts   of   the fee. As the SCA observed, 'except for a general   statement   that all factors   were   taken   into account,   there is no evidence or document that shows what those   factors   were,   what   weight they bore, whether any calculations were made and, more particularly,   whether   any   regard   was given to   the viability   of the dispensing profession'.
It was this lack   of   explanation   for   quantum   of   the   dispensing   fees   that   led   the SCA to   conclude   that   there   was   no   rational explanation   for   the   quantum   of   fees and   that   therefore   the   fees were not appropriate. [3]
[19]   The requirements   which   the   decision   maker   in New   Clicks   was found   to have to comply with, apply mutatis mutandis to   the   regulator   and   the   Minister in the present matter. Had the recommendations of   PWC   been followed,     the     maximum     service     fee     would     have     been     R80.54.       Without any explanation, the regulator simply   suggested   an amount   of R65.00   to the Minister. The Minister, also without any explanation,   reduced   the   amount to R60.00. Furthermore, the Minister of   his   own   accord   and   without being advised by the regulator to do   so   and   without   any explanation,   added   a rider   that the   fee should   be calculated   pro rata the number of days if   a credit agreement   was concluded   during the course   of   a calendar month. No reason or explanation   is given for the   reduction   of   the interest rate from 5% to 3% per month for further loans after the first during a calendar. All that is referred to is a policy to reduce the over  indebtedness of consumers. There is, however, no evidence   that   the existing initiation fee, service fee and interest rate were the cause of such over-indebtedness.
[20]   I have referred above to the requirements of s 105(2) and regulation 45(2) with which the Minister and the regulator have to comply.   These include the need to make credit available to historically disadvantaged persons and low income   persons   and communities,   the impact of access   to finance for such persons, and the conditions prevailing in the credit market, including the cost of providing credit. Apart   from   the   regulator stating in general terms that research was done, no evidence has been provided of how these matters were investigated or considered.   The   Minister and the regulator have not addressed in any meaningful way the applicant's contention   that   the amended   fees and interest   rates   will lead   to   closures of the businesses   of many   of the applicant's members and     will impair access to credit by those members of the population who require   short term credit provided   by the applicant's     members.
[21] In view of the aforegoing, I agree with   Mr   Michau's   submission   that the Minister's decision to promulgate the regulations   insofar as they relate   to short term credit is reviewable in terms of   either   s   6(2)(e)(iii),   s 6(2)(e)(vi)   or s   6(2)(h)   of PAJA.
[22] I therefore make the following order:
[a]                 The first respondent's decision to promulgate the   regulations   published in Government Gazette 39379, Vol. 605 of 6 November 2015, is reviewed and set aside insofar as it relates to short term credit.
[b]                 The first and second respondents are ordered to pay the applicant's costs jointly and severally, such costs to include the costs of senior counsel.

Counsel for applicant: Adv. R Michau SC 
Instructed   by:   Lewies Attorneys, Pretoria

Counsel for first respondent: Adv. TV Norman SC; Adv. P Jara 
Instructed by: State Attorney, Pretoria
  
Counsel for second respondent: P L Carstensen SC 
Instructed   by   Edward   Nathan   Sonnenbergs,   Sandton

[1] In     terms   of   s   13(a)   the   National   Credit   Regulator   is   responsible   to-
(a)           promote and support the development, where the need exists, of a fair, transparent, competitive, sustainable, responsible, efficient, effective and accessible credit market and industry to serve   the needs     of-
(i)           historically   disadvantaged persons;
(ii)           low income persons and communities;     and
(iii)           remote, isolated or low density   populations and communities, in a manner consistent with the purposes of the     NCA.
(iv)             

[2] 2006 (2)   SA   311   (CC).   Footnotes   have   been omitted.

[3] My   emphasis   in   all   of   the   quoted   passages.