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Kim Edwards - Is charging interest really worth it? – Cox Yeats

Generally, where the payment of money is deferred and interest, a fee or another charge has been raised, one should consider whether the provisions of the National Credit Act, 2005 (the NCA) would apply to that transaction. Over the years parties have been able to avoid the application of the NCA by structuring transactions so that they fall within an exemption or are “incidental credit agreements”.

Recent amendments to the definition of an “accountable institution” in the Financial Intelligence Centre Act, 2001 (the FICA) appear to negate these loopholes by requiring compliance with arguably even more onerous provisions of FICA.

The Changes to FICA

Originally the definition of an “accountable institution” in FICA simply included a person who “carries on the business of lending money against the security of securities.” The amendments to FICA have now widened this to:

“(a) A person who carries on the business of a credit provider as defined in the National Credit Act, 2005 (Act 34 of 2005).

(b) A person who carries on the business of providing credit in terms of any credit agreement that is excluded from the application of the National Credit Act, 2005 by virtue of section 4(1)(a) or (b) of that Act.”

Incidental Credit Agreements

The definition of a “credit provider” in the NCA includes a person who supplies goods and services in terms of an incidental credit agreement.

An incidental credit agreement is one where goods or services are supplied and interest is only charged when the purchaser fails to pay on a date specified in the agreement for payment. Most businesses structure their terms and conditions as incidental credit agreements.

Agreements Between Entities and Large Credit Agreements

Section 4(1)(a) of the NCA exempts transactions between juristic persons whose asset value or annual turnover exceeds a certain threshold (currently R1 million) from the application of the NCA and Section 4(1)(b) of the NCA exempts transactions because they constitute a large credit agreement – an agreement between juristic persons (regardless of their asset value or annual turnover) where the principal debt is at least R250 000 or more.

These exemptions are typically used in once off funding agreements between businesses or other non-traditional credit transactions such as sales of shares where payment is deferred.

Far Reaching Consequences

Once you fall within the definition of an “accountable institution” in terms of FICA, compliance with the full suite of FICA provisions is triggered. The fact that advancing credit does not form part of an institution’s “core business” is irrelevant.

This means that a once off loan and interest charged on unpaid invoices could result in a business who would otherwise not be required to register with the Financial Intelligence Centre having to register, develop a risk management and compliance plan, train staff and conduct customer due diligence on all transactions within its business going forward.

Unless another exemption or exclusion in the NCA applies to the transaction, parties need to weigh up the cost of compliance with FICA against the gain that would be made by charging interest.

If no interest is charged it will not be regarded as a credit agreement under the NCA and it will also shield you from being caught within the new FICA definition.

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