Court rules car financiers allowed to add extra costs on to purchase agreements

30 Jan 2023

BMW, Mercedes-Benz and VW Financial Services have won on appeal, which now gives dealerships the green light to charge extra to prepare vehicles for sale.

Car dealerships and their banking partners have cause to pop champagne corks: the Pretoria High Court has ruled that on-the-road (OTR) or service fees, which are lumped – often surreptitiously – on to the price of financed vehicles, are above-board.

OTR fees have long been a blight on the industry, with consumers understandably objecting to being “tricked” into paying extra for everything from flowers, ribbons and sparkling wine to personalised key rings, valet services, pre-delivery checks and even staff costs.

The costs can run into thousands of rands, depending on the car and dealership.

Now, the court has ruled that OTR fees are not part of the cost of credit, but rather part of the initial transaction agreed upon by the dealer and consumer.

The matter first came to a head five years ago when the National Credit Regulator (NCR) issued compliance notices against the financial services divisions of VW (VWFS) and BMW (BMWFS) and Mercedes-Benz (MBFS) in 2017, contending that lumping OTR fees on vehicle finance agreements was not permissible under the National Credit Act.

The regulator then ordered the financiers to furnish it with a list of all consumers who were charged the OTR fee since 1 June 2007 (when the NCA came into effect), show evidence of how much they were charged, and refund all affected consumers by 14 December 2017.

At the time of the initial investigation, the NCR contended that the act only allows for initiation fees, actual delivery of a vehicle, extended warranties, a tank of fuel, and licence and registration fees, but that any additional expenses – such as operating costs – should not be built into the purchase price.

Section 100 of the NCA says that if a consumer buys a vehicle, they aren’t allowed to be charged fees that aren’t set out clearly; section 101 deals with allowable fees and section 102 sets out the fees or charges that can be part of the transaction, which include the initiation fee, extended warranty, initial fuelling charges, connection fees, taxes, licence and registration fee.

This meant that if dealerships charge for a tank of fuel, they were only allowed to charge for what was actually put into the tank and had to provide slips to prove their expenses. The rest — the champers, the big red ribbon, inspection fee and other “value-adds” – were for the dealership’s account, not the consumer.

Appeal

The core matter lies in the correct interpretation of these sections of the NCA: VWSA lodged an appeal with the court after the National Consumer Tribunal confirmed and modified the NCR’s compliance notice. But in the MBFS and BMWFS matters, the tribunal concluded that OTR fees are not only allowed, they do not contravene the NCA, which led to the setting aside of the NCR’s compliance notice. This is what the regulator challenged in court.

All these appeals were consolidated to be heard by the full bench of the high court, with a dissenting judgment written by Judge Graham Moshoana.

In the judgment delivered on 20 January 2023, reported in TimesLive, the Pretoria High Court ruled in favour of the three financiers, finding that the charging of OTR fees did not offend the provisions of the act.

The matter involved four interrelated appeals, which were consolidated into a single appeal.

The three financiers denied charging OTR fees and other pre-delivery services, saying the dealers were doing so to ensure that vehicles were delivered to the consumer in a satisfactory manner.

In his ruling, Acting Judge Patrick Malungana wrote that there was no vagueness in section 100, which “prohibits the credit provider from charging or imposing monetary liability upon the consumer. No obligation or financial liability has been imposed by the credit provider when the latter finances the principal debt which has been pre-determined by the dealer.

“Section 101 will only be triggered if the credit provider were to charge for the goods or services prohibited in s 100, as that would increase the cost of credit. The dealers and financiers perform separate roles which complement each other in the process leading up to the conclusion of the credit agreement.”

He said the conundrum in the NCR’s interpretation is that the financiers become the owners of the vehicle upon purchasing the vehicle from the dealer, when it is the consumer who negotiates the sale and specifications with the dealer.

“The NCR concedes that the dealer and the consumer add the extras to the purchase price payable for the vehicle selected by the consumer in the pre-agreement stage. It seems to me that the financier merely finances the principal debt which constitutes the purchase price, and other extras including the ‘on-the-road’ fee plus other services.”

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The financiers, he held, have correctly argued that the NCA does not define what may be financed by the credit provider at the request of the consumer.

“Under the circumstances there [are] no merits in the NCR’s argument that the credit provider had charged consumers ‘on-the-road fees’ in contravention of the provisions of the NCA. The dealer imposes the monetary liability on the value of the fees and services which it provides to the consumer at the initial stage of the sale process.”

The NCR, which urged the court not to grant a costs order against it in the event its application failed, because they were merely fulfilling the statutory obligations, lost on that count too.

Judge Moshoana, though, noted that credit providers are prohibited from charging or imposing monetary liability on to a consumer:

“The said charge or monetary liability must be in respect of a credit facility where the credit provider undertakes to supply the goods to the consumer. Therefore, even in an instance where OTRs were directly ‘charged’ to the consumer by the dealer, the moment the credit provider advances a credit facility and undertakes to supply the goods [movable property and the OTRs included] and defers the obligation for the consumer for the cost of the goods, a monetary liability is imposed on a consumer in respect of the fees, commission, expense or other amounts payable by the credit provider to a third party [dealer] contrary to the provisions of the NCA.”

He said the “only saving grace” for the fees, expenses, commission or any other amounts payable by the credit provider to a third party, is when — in section 102 or elsewhere in the NCA — such payment is allowed, namely the principal debt; initiation fee; service fee; interest; cost of any credit insurance; default administration charges and collection costs.

“Anything outside the listed costs or fees by the credit provider is a prohibited payment required from the consumer. The OTRs as defined elsewhere in this judgment fall outside the costs or the fees listed.

“Accordingly, the credit provider is by law prohibited [from requiring] the consumer to pay for the OTRs.”

The majority ruling is a blow for consumers, who have been unfairly paying for add-ons to their credit agreements, which are couched as “admin costs”.

For now, the NCR is keeping its options open, telling Business Maverick only that it was “looking into exploring other avenues”. BM/DM

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