Companies and Consumer Protection Act Regulations: Department briefing

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Trade and Industry

21 June 2011
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The Department of Trade and Industry briefed the Committee on the new regulations drafted under the Companies Act and the Consumer Protection Act. It was noted that the regulations had to be published for public comment for a period of thirty days, before they became final. The Department noted that, in respect of both sets of regulations, it had held extensive consultation. The Companies Act regulations covered accounting practices, procedures for reporting financial statements and annual reports, auditing standards, business rescue standards, and par value shares. The Department stressed that although publicly-listed companies complete audited financial statements, State-owned companies had different requirements, and smaller companies, although they too needed to ensure transparency, had less stringent requirements, being able to do an audit themselves, or have an independent review, which would be less expensive than a full audit. In respect of business rescue, the Department emphasised that business rescue practitioners required ten years experience to work with large businesses, and five years to work with smaller companies. Large businesses must now also establish social or ethics committees.

The regulations for the Consumer Protection Act dealt with franchise agreements, privacy protection from direct marketing, fixed-term agreements, product labeling, genetically modified organisms, grey goods, intermediaries, promotional competitions, property syndication schemes, transportation contracts, feasibility studies, pyramid schemes, auctions, lay bys, and consumer protection group accreditation. Each of these aspects was explained in some detail, and it was emphasised throughout that the regulations sought to comply with and complement the intention behind the principal Act. The threshold of juristic persons to be protected under the Act would be R2 million at present, although this could be adjusted as more juristic persons became users of the Act. The Department had excluded some intermediaries from the ambit of the Act, who were already covered by regulation under other legislation, including financial intermediaries and estate agents. Thresholds also applied for promotional competitions. The Act allowed for incremental implementation. The focus was on facilitating transparency and accountability, and it was stressed that this was behind the regulation of franchise agreements, which were subject to a cancellation period, and required disclosure of certain documentation. Consumers would be able to opt out of receiving junk mail. Information in a registry to be operated by the National Consumer Commission would not be sold to other companies, although the regulations around this were not yet in force. In respect of fixed-term agreements, the dti had decided not to set a 10% cancellation penalty, as suggested originally, but to list factors to be taken into account in setting an appropriate figure. Product labeling requirements were now included for product of origin, and in respect of genetically modified organisms. Grey goods, which were goods brought in without warranties, or reconditioned second-hand goods, were legal, but disclosure of the lack of warranty was required. Alternative wealth-schemes were also obliged to disclose that there was no guarantee that an individual would actually become rich. Property syndication schemes could be subject to independent valuations, and transportation contracts, which had also been used for various scams in the past, would also be regulated, as would pyramid schemes, which were prohibited from offering returns above the bank repo rate. A person who was challenged would have the onus of proving the reasonableness of contract terms, and thresholds for authorization of repairs and maintenance, as well as provision of free quotations, was provided for. The auctioneering profession had asked for regulations. Lay-bys, if cancelled, would attract a 1% administration fee only. Accreditation guidelines were provided for creation of consumer protection groups. Direct marketing was now restricted to certain hours. The Department noted that, at the start, the National Consumer Commission (NCC) would be operating in two official languages, though it was hoped to increase this.

Members asked about the application of the Companies Act to small enterprises, and asked if records of shareholders had to be kept. A Member felt that there had to be more protection given to consumers during liquidation proceedings. Another Member urged that only experienced people be used for business rescue. Members raised concerns about tow truck scams, and said that more attention needed to be given to these, asked about regulation of holiday schemes, whether newspaper advertisements qualified as direct marketing, whether factory shops were covered and the position in relation to grey goods, on which Members thought that there needed to be more clarity and perhaps better definitions. Members also stressed the necessity of making people aware of the regulations, and asked about the relationship between the NCC and the ombudsman. They asked about certain scenarios, and the Department stressed that fraud would be separately dealt with. Members asked that the Department, in December, should report back with time frames for increasing the number of languages that the NCC would use.

The Committee noted that it would be considering gambling issues in the following week. The Committee also adopted the IAF Report, as amended.

Meeting report

Companies and Consumer Protection Acts: Regulations: Briefing by Department of Trade and Industry
Mr Lionel October, Director-General, Department of Trade and Industry, began by thanking the committee for their best wishes and visits to Deputy Minister Hon Ntuli, who was still ill in hospital.

The Chairperson noted that although the Committee had passed a resolution to send some flowers to Ms Ntuli, she had decided, since Ms Ntuli already had many flowers sent to her, rather to provide her with some essentials that she had not had the chance to pack before entering hospital.

Mr October then briefed the Committee on the new regulations that had been drafted in respect of the Companies and Consumer Protection Acts. He reminded the Committee that the regulations formed secondary legislation, for which the Minister was responsible. These particular regulations had been issued in April and May. The law required that a 30 day period for public comment must lapse, before the regulations were deemed to be final. That period had expired. The regulations dealt with technical matters aimed at providing consistency with the intent of the primary legislation. Because of the complexity of these two Acts, the dti had held consultations on the regulations with business associations, accounting authorities, and other stakeholders in the sector, over a period of two to three years.

Mr October noted that the Companies Act was an “essential piece” of legislation, that affected every consumer. Any regulations framed under this Act had to be consistent with the purpose and wording of the primary Act. The regulations under the Companies Act dealt with several issues. On the financial side, they set out what must be in accounting records, how the financial statements must be reported, and how, and by whom, companies must be audited. On the administrative side, they dealt with how companies must submit annual returns. They also dealt with business rescue, and par value shares.

In respect of the accounting records, the primary aim for creating regulations was to ensure transparency in the accounting practices of companies. It was important that businesses be able to rely on the financial viability of companies with whom they were doing business. The regulations covered, amongst others, what must be submitted when the company registered.

The financial statement regulations set out the requirements that companies must meet when reporting. A publicly-listed company needed to have a complete audited statement. State-owned companies had different requirements. These regulations were also focused on fostering transparency and setting stringent standards for large companies, but less stringent standards for smaller ones. If a company was publicly-listed or State-owned, the audit would have to be performed by a registered auditor. Smaller companies could do an audit themselves, or get an independent review. These latter options were less expensive than a full audit.

The regulations also set out the requirements for annual returns. A company was required to submit its annual return 30 days after the anniversary of the registration of the company.

The new Companies Act also dealt with business rescues. The new regulations for this area allowed for business rescue practitioners to assist a company that was in a troubled financial state. They also set out the qualifications for business rescue practitioners, who must, for example, have ten years experience to work with a big business, or have five years experience to work with smaller companies.

The new regulations also established obligatory social/ethics committees for large businesses. The Department of Trade and Industry (dti) wanted to promote companies as responsible citizens. The regulations set out the time period to establish this committee and stipulated that there should be a minimum of three directors on such a committee. This committee would deal with issues concerning the environment, health and safety, labour and employment, and consumer issues.

While the new regulations allowed individuals to hold par value shares, these would not be issued any longer. The regulations provided details on how these shares would be allocated.

Mr Andisa Potwana, Director: Consumer and Competition Policy and Law, dti, continued with a briefing on the regulations under the Consumer Protection Act. He noted that the dti had also consulted extensively on these regulations, with several stakeholders, to harmonise the regulations with the intention of the primary legislation.

The Minister of Trade and Industry could, in terms of the Consumer Protection Act, prescribe a threshold for juristic persons who would be protected under the Act. The dti had initially proposed a threshold of R3 million, but this was later reduced to R2 million, after the dti and National Consumer Commission (NCC) had agreed that consumers, rather than juristic persons, would be the primary users of the Act. A higher threshold raised capacity issues. Since the Act allowed for incremental implementation, that threshold could grow, as institutions grew, to create further protection.

The Consumer Protection Regulations also now regulated franchise agreements, which had previously been unregulated. The focus was on facilitating transparency and accountability. The regulations provided an opportunity for prospective franchisees to note, in advance, what was envisaged, when they entered into these agreements. The regulations provided a 10-day cancellation period, and required disclosure documents that would include financial statements, so that the prospective franchisee would have a sense of where his or her investment was going. The regulations also required that the documents to written in “plain language,” and that the parties had the right to seek legal advice on them. Mr Potwana also noted that if there was anything in a franchise agreement that conflicted with the regulations, the agreement would be regarded as void. Finally, if intermediaries were involved, that information needed to be disclosed.

The next regulation created a mechanism for individuals to protect their privacy, so that they would not receive junk mail. Consumers could place a sign stating “no junk mail,” which would have to be honoured. He also noted that the dti was satisfied with the definition of “junk mail”, which would cover all unwanted advertisements.

The regulations also dealt with the creation of a registry that would be operated by the NCC or another body appointed by the NCC. The objective was to protect the security of the information in the registry as information that could not be sold to other companies. The dti also wanted consumers to be able to access the registry without undue difficulties. This regulation, however, was not yet applicable, because the Minister wanted to ensure that all the security and accessibility issues were resolved before it came into force.

The next regulation dealt with fixed-term agreements. The primary issue centred on a consumer’s right to cancel such contracts, as was set out in the principal Act. The dti had considered whether simply to set a cancellation penalty of 10%, but had eventually decided rather to list a number of factors that could be taken into account in working out what would be appropriate. These included the value of the transaction, the value of the goods that remained with the consumer after cancellation, the value of the goods returned, the duration of the contract, and any losses suffered. As time went by, the dti would be able to identity certain industries that would set a prescribed cancellation penalty. The dti thought that this was preferable to having a 10% penalty applying across all industries.

Insofar as product labeling was concerned, the new regulations required disclosure of the product of origin for particular goods. This was to prevent counterfeit goods from coming into the market, and would also protect local goods.  

In regard to genetically modified organisms (GMOs), the dti determined that if goods comprised more than 5% GMO, then a label disclosing that GMO content was mandatory. Goods that contained under 1% GMO could be labeled as "GMO free." 

The new regulations also dealt with grey goods -- goods brought into the country without warranties or reconditioned for second-hand sale. Sellers of grey goods were required to disclose to customers that the goods were not under warranty.

The dti developed a broad regulation to cover intermediaries involved in certain transactions. This regulation would not apply to intermediaries who were already subject to regulation from other legislation. For example, financial intermediaries or estate agents would not be regulated under the Consumer Protection Act Regulations, but under those applying specifically to their own professions.

Mr Potwana then moved on to the issue of promotional competitions. The Minister was given authority to prescribe a threshold for application of the regulations. This particular regulation would, at present, apply to all promotional competitions with a value over R1. Consumers could be required to pay up to R150 for entering these competitions. This cap would protect in respect of pricing. In addition, consumers could not be forced or compelled to have their images used pursuant to these promotions without consent. Finally, records needed to be kept about these competitions, including a record of who were the winners of each competition.

Alternative wealth schemes also were covered by the new regulations. While these schemes would not be banned, any advertisement must contain a warning that the "get rich quick" offer was not a guarantee that the participants would actually become rich.

Property syndication schemes would also be regulated. The primary problem in the past had been incidents of fraudulent valuations of property. Now, investors could seek independent valuations to ensure they knew the real worth of a building or property.

In the past, there had also been a number of scams with transportation contracts, so that these too would in future be subject to the new regulations. For example, many retired persons were investing their money in transportation contracts and losing everything. The regulations provided that intermediaries could not collect on these contracts unless the contract was finalised and secured.
 
T
he new regulations prohibited guarantees that would induce a party to enter into a contract, to their detriment. The dti recognized that these feasibility studies were important tools for prospective businesses and wanted to maintain their accuracy and value.

Pyramid schemes were now subject to regulation. An individual or business would be unable to promise returns above the Banking Repo rate, which the dti believed was a tried and tested formula.

Auctions were another area that had, previously, been subject to regulation, but the auctioneering industry had asked the dti to provide for regulation. The new regulations covered auction advertisements, the conduct of the auction, the bidding process, reserves, and the fees required for participating in the auction. Consumers would only be liable for the cost of advertising the auction or 10% of the auction price, whichever was lower.

In regard to the lay-by facilities offered by many stores, the dti had originally given consideration to a cancellation free of 10% should the purchase agreement be violated. However, it had, after discussion, thought that the figure was too high, and now, if the consumer returned the goods, a 1% fee could be levied to compensate the store for administrative or storage costs.

Mr Potwana stated that the new regulations also provided accreditation guidelines for the creation of consumer protection groups. These guidelines would foster greater credibility.

The National Consumer Council (NCC or the Commission) would conduct business in two official languages. Whilst the dti recognized the right of every consumer to complain in the language of his or her choice, the dti also wanted to maintain manageability and efficiency in the new Commission. The starting point was to prescribe that it would use two official languages, but this number could grow as the Commission became more stable.

The regulations also considered unfavorable contract terms, which were terms presumed to be unfair and invalid. An individual, if challenged on validity, would have the onus of proving the reasonableness of a term in order that it be deemed valid.

Mr Potwana noted that the Act provided that the Minister could also provide a threshold for authorisation of repair and maintenance. In terms of the regulations, consumers could get free quotations to determine the cost of repairs, and this particular regulation was introduced to protect individuals who were concerned about the currently high costs of obtaining quotations, which could be levied in addition to the actual repair costs.

Certain vendors were now required, under the Regulations, to keep records of their transactions, and this would generally apply to street vendors.

Finally, consumer regulations set time constraints on when direct marketing could be carried out, stating that marketing efforts could not operate after 8 o'clock in the evening, on Sundays, or on public holidays.

Mr October added that the dti had in all cases sought to take a pragmatic approach, particularly in regard to exemptions and deferments.

Discussion
The Chairperson asked Mr Radebe to take over as Acting Chairperson, when the dti was giving its responses to the questions.

Mr X Mabaso (ANC) wanted to find out if small and medium enterprises (SMEs) would be exempt from the Act, noting that they had some difficulty in complying with some of the regulations.

Ms F Khumalo (ANC) asked if there was any assistance available for a company that did not meet the requirements for the accounting standards.

Mr McDonald Netshitenzhe, Director: Commercial Law and Policy, dti, said that there was flexibility for smaller companies, since the regulations applying to them were not as onerous. For example, smaller companies could do self-audits or seek independent reviews, rather than doing a full audit.

Mr S Mabaso (ANC) asked about tow truck scams, saying that tow truck drivers often took advantage of vulnerable drivers and charged high rates for storage of the vehicles, which the owners may not be able to pay.

Mr Potwana admitted there were problems with towing scams and said that the dti had met with key stakeholders on this issue when forming regulations. He said that the proprietors would need to disclose the costs upfront, and any agreement would need to be in writing for it to be valid. He also added that dti would continue to look into other areas that remained unregulated. Although the Companies Act and Consumer Protection Act were overarching legislation, there was still a need to examine specific areas. He added that while there was some sector-specific regulation in place elsewhere, the Consumer Protection Act also did not replace the common law.

Mr Radebe stressed that people were very vulnerable to such scams.

Mr Mabaso wanted to know if there were any regulations covering holiday schemes, in terms of which people would sign up for holiday clubs and pay annual fees without actually getting a holiday.

Adv A Alberts (FF+) asked if the Act required that a record of shareholders be made available, in respect of private companies.

Mr Netshitenzhe said that individuals could request shareholder information from companies and the companies were required to provide that information upon payment of a fee to cover the cost of collecting the information. There was some information, however, that would remain private.

Adv Alberts asked if newspaper inserts would qualify as direct marketing, and if attorneys were subject to regulation as intermediaries.

Mr Potwana responded that since the advertisements were not targeting specific goods, they were not junk mail and were therefore valid.

Mr B Radebe (ANC) asked how people would find out about the new regulations, and how the relationship between the NCC and the ombudsman would work.

Mr Potwana responded that the NCC had a mandate to provide that information. Within the NCC, there was a division dedicated to advocacy and educational outreach. The dti hoped that the consumer ombudsman would continue to do its work and would develop a good relationship with the NCC. Consumers would still lodge complaints with the ombudsman if they so desired.

Mr October added that the NCC was given some funding for that purpose, and other resources would be set aside to make sure people knew about the regulations.

Mr Radebe enquired if factory shops would be affected by the new regulations.

Mr Potwana noted that consumers would still be able to return goods from factory shops. However, if the goods were grey or reconditioned goods, then that status must be disclosed, and such goods may not be returnable.

Mr J Selau (ANC) asked about junk emails and spam under these regulations.

Mr Selau wanted to know if there were provisions for consumers to amend fixed-term agreements.

Mr Potwana responded that the right to take legal advice on these fixed-term agreements implied that there was the possibility of amending those contract agreements.

Mr Selau asked if grey goods were legal, and, if not, why they were being regulated.

Mr N Gcwabaza (ANC) asked if the grey goods regulations would apply to instances such as tainted food being sold in the stores.

Mr Netshitenzhe emphasised that grey goods were legal, and there were many benefits for consumers in purchasing grey goods, chiefly the low price of these goods.

Mr Potwana noted that the dti, as with GMOs, was not dealing with the health aspects of food being sold, but merely the packaging and labeling requirements.

Mr Radebe thought that there must be a better definition of grey goods.

Mr Gcwabaza wanted to know how regulations would protect both consumer and the institution in a case where a consumer might receive a fraudulent e-mail noting that he was entitled to claim a refund or amount from a particular company.

Mr Netshitenzhe responded that it was likely that such an instance would fall under the regulations dealing with fraud. It would be necessary for the parties to look carefully at the facts of the case, in conjunction with the consumer protection regulations.

Mr J Smalle (DA) said it would have been useful to have dealt with the Companies Act and its regulations together, as this would have made for easier debate.

Mr Netshitenzhe acknowledged this point, but said that in most cases, this was not possible, because Parliament, in passing the Act, set the tone for what the Minister and the Department should do to develop consistent regulations.

Mr Smalle asked how consumers would be protected in liquidation sales.

Mr Netshitenzhe responded that the dti had consulted widely on how to protect consumers during liquidation. He said consumers should have a say in determining the reserve price, otherwise they would be prejudiced. There needed to be a balance between protecting the investor, often a bank, and protecting a consumer.

Mr Smalle noted that banks that had initiated liquidation sales would seek to benefit from the sale without thinking of the impact on a consumer, who might, for instance, lose out on sales of goods below their market value. He suggested that the dti needed to protect consumers more actively in such instances, or at the very least have consumer guidelines in place, to assist them through a liquidation.

The Chairperson was pleased to know that National Treasury had been consulted on these issues, and welcomed the regulations on business rescue. However, she was not in favour of having junior practitioners with no experience being involved in those rescues.

Mr Netshitenzhe conceded that it would be undesirable to have someone with no experience attempting to do a business rescue, but said that most business rescue practitioners came in with experience. He noted that their academic experience could also be valuable, even without practical experience in the field.

The Chairperson asked whether the regulations would cover goods sold under false pretenses, for example old tires being sold on a newer car.

Mr Potwana said that this would also be likely to fall under the regulation of fraudulent schemes.

Mr Smalle wanted to know if there was any requirement as to the length of time for which companies must keep information, and what would happen with the information after that period.

Mr Selau asked if there was a way to protect consumers at auctions from prices that were far above the book value of the goods being purchased.

Mr Selau also noted his concern about limiting the NCC to two official languages.

Mr October said that dti had debated the issue of languages thoroughly and still maintained the principle of wanting to promote all of South Africa's official languages. However, this was a new Commission, and dti wanted to be able to get the Act and Regulations running as soon as possible. He reiterated that the NCC would be extending the number of languages in which it operated as soon as possible.

Mr October also commented that the dti was trying to cast a wide net, but was well aware of the differences between industries. The dti was trying to cover as much as possible with the basic minimum regulations, but had discussed having “higher” regulations for those areas that were made particularly vulnerable due to the global economic crisis.

Mr October also commented that estate agents were already tightly regulated, and it was for this reason that it was not thought necessary to cover them also under the Consumer Protection Act. He also noted that the Estate Agents Act would be amended later in the year.

Mr October said that he had noted the concerns around grey goods, but wanted to reiterate that these goods were neither illegal nor defective. They were, however, cheaper. Consumers needed to simply be conscious of the risk of buying something without a warranty.

Mr Potwana also stressed that all information that could be relevant to a potential consumer needed to be disclosed. He referred to concerns about the tow truck scams cited, and said that the regulations would require full disclosure of the costs of the work performed and the storage costs, upfront. He said the dti was very conscious of how the regulations would affect how business was done, particularly in certain sectors.

Mr Radebe said that the Committee would be able to examine these issues further during oversight. He suggested that, in December, the dti should also provide the Committee with a more defined time-frame for expanding the number of languages to be used by the NCC.

Mr Radebe thanked the delegation from the dti for the time they had put into crafting the regulations, and said that people in South Africa could be proud of what was being done.

Other business: Gambling
The Chairperson remarked that the Committee would still be dealing with the gambling issue, which she likened to “the pregnancy of an elephant – the longest in the animal kingdom”. The Committee had now received the Gambling Commission’s Review and would be able to deal with the issues once again. She reminded the Committee that gambling had been dealt with in 2009, when this Committee debated extensively on the regulations, and had concluded that there was a need to amend the principal Gambling Act, since the Act had been passed ten years previously, when the focus had been on regulation of the industry, but the focus had gradually shifted to revenue-generation, so that there were calls for setting up of casinos. The Committee would need to consider the
social impact of gambling, and the need for regulation. She noted that the Committee would be discussing the issue in the following week.

International Astronautical Federation: Committee Report adoption
The Committee considered the adoption of the Committee’s Report emanating from the International Congress recently held in Prague.

Adv Alberts suggested that there be more focus on technology training for the future development of skills in space and science generally, particularly in the light of the revised Industrial Policy Action Plan (IPAP).

Adv Alberts, at the request of the Chairperson, then drafted and read out an addition to the Report.

Members adopted the Report, as amended by the additions suggested by Adv Alberts.

The meeting was adjourned.


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