The High Court ruling changes debt collection practices
Common law “set-off” is not applicable to credit agreements
In the matter between the National Credit Regulator v Standard Bank, South Africa the Regulator approached the court to declare the common law right to set-off is not applicable in respect of credit agreements which are subject to the National Credit Act.
The National Credit Regulator( herein referred to as “Regulator”) approached the court after receiving various complaints from consumers regarding the Bank’s practice to apply the common-law principle of set-off against amounts received by consumers into accounts they hold with the bank. The bank debited the accounts of consumers without the consumer's consent to collect the debt owed to the Bank
What is the difference between the common-law set-off and the set-off practices in the act?
In the aforementioned ruling the set-off practices described in section 124 of the Act has the following characteristics:
“ Under s124(1), read with s124(1)e), for set-off to be valid, the consumer's prior authorisation is required, in writing.
Under s124(1)(a), set-off may only be applied against an asset, account or amount specifically named by the consumer in the authorisation.
Under s124(1)(b), set-off may only be applied to satisfy obligations specifically named by the consumer in the authorisation.
Under s124(1)(c) and (d), set-off can only occur in respect of amounts specified, and on dates specified in the authorisation.
Under s124(2), the credit provider is required to give notice to the consumer in the prescribed manner before set-off can be effected.”
Whereas the common-law principle was summarized as follows: “Common-law set-off permits a creditor, like the Bank, who is owed money by its customer, immediately to debit a customer's account when funds are credited to it. It can do so without notice to the customer; without the customer's authorisation; and in any amount that the Bank considers to be validly due to it. In short, under the common law, set-off gives a creditor like the Bank, full control of the set-off process without any input, let alone authorisation, from the customer.”
Submissions from the Regulator and the Bank
The Regulator argued that the effect of Section 90(2)(n) and Section 124 of the Act is that common-law set off principles is not applicable to credit agreements regulated by the National Credit Act. The Bank, on the other hand, interpreted the sections of the act to only regulate the set-off provision that is expressed in terms of a credit agreement.
After hearing submissions for both parties and that of the South African Human Rights Commission the Court agreed that credit providers will have no incentive to elect to regulate set-off under Section 124 and will prefer to resort to the common-law rights as this is less stringent. In light of the last-mentioned, the Court declared in the common law right to set-off is not applicable in respect of credit agreement subject to the National Credit Act.
Banks and other credit providers that relied on this particular method to collect the debt will be required to follow a different route to collect debts.