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The JD Group
| Date: |
25 March 2007 12:00 |
| Producer: |
Michael Duffett
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| Show: | Carte Blanche |
'Chris' (pseudonym) has been working for Joshua Doore as a salesman for several years.
'Chris' (Joshua Doore salesman): 'We feel bad about it because we know we're robbing our own people ... and I'm not just talking about coloured; we're talking about black, we're talking about whites as well.'
Linda Ellerston too has a gripe with her 'uncle in the furniture business'.
Linda Ellerston: 'I am tired. I have walked a long way to get food for the kids. It's too terrible.'
Linda is a widow. Her husband, who was a policeman, committed suicide two years ago.
Linda: 'I think it was as a result of money problems ... the police get a measly salary and sometimes I brought home more than he did. I was pregnant with our second child and it was just debt upon debt upon debt.'
Since then she has struggled as a single mom with two small children. There's one thing, though, that she's optimistic about...
Linda: 'It has been nine months since the case was presented and I am so looking forward to hearing what the judge has to say.'
In 2005 she set in motion a chain of events that may have opened a Pandora's Box in the furniture industry.
A Pretoria high court judge is expected to express an opinion soon on a question of law regarding the interpretation of the Usury Act, and this may have a profound impact on the way furniture retailers do business.
When Linda made her request to the court, she worked for a consumer-watch company run by Herman le Roux.
Herman le Roux (National Consumer Watch): 'In my opinion this is the greatest scam in the retailing industry of South Africa, in its history.'
Ruda Landman (Carte Blanche presenter): 'When you or I go to a furniture store to buy something on credit, we think we're getting a very good deal. We can take it home immediately and the deal is structured in such a way that we can afford the monthly instalments. Very few of us bother to read the documents we sign, nor do we understand the interest rate charged.'
Besides paying cash, there are two in-store credit options available to customers.
First, the instalment sales agreement - commonly known as HP [Hire Purchase]. The law requires that you pay a 10 percent deposit. You take the goods home and start paying monthly instalments over an agreed time period at an interest rate prescribed by the Usury Act.
With a furniture store loan agreement, you are not supposed to pay a deposit. The law says that there is no interest cap on loans under R10 000, and so the store loans you money on paper. Furniture store retailers who are registered moneylenders are charging interest of over 30 percent on the money they lend you.
We have established that the four major furniture retailers, with a combined 2 430 outlets nationwide, have all registered with the Micro Finance Regulatory Council as moneylenders.
Ruda: 'Why are the furniture stores doing it this way?'
Herman: 'Well, obviously the reason is the exemption allows a moneylender to be exempt of the Usury Act, there's no cap on the interest rate, they can charge any fees whatsoever and the furniture stores register with the Micro Finance Regulatory Council to become moneylenders in order to make use of the exemption.'
Ruda: 'This practice started in 1992, when the law was changed to give poor people access to credit. On paper, more often than not, a client would now get a micro loan instead of an instalment agreement - and be liable for a much higher interest rate.'
The JD Group, whose brand includes Joshua Doore, Electric Express, Russell's and Morkels, writes up more than 900 000 contracts a year of which 59.7 percent are loan agreements. Their loan book value for the 2005/6 period was R5.711-billion and their net profit for the same period was R1.45-billion.
The JD Group acknowledge their money lending trade in a letter to Herman le Roux: 'It is obvious that we also intend benefiting from the exemption of certain loan agreements from the provisions of the Usury Act,' signed by Johan Kok - Chief Operating Officer.
Here's an example of an instalment sales agreement and a loan agreement for the same item [on screen]. The cost of the item is R4 911.39. But with all the add-ons such as insurance and finance charges, the customer will pay off an amount of R10 245.96 after paying a deposit of R600. On a loan agreement, the amount payable will be R11 977.29. This means the customer with the loan agreement will be paying an additional R1 131.
Herman: 'Each and every case is not massive but if you add it together we are running into billions of rands of overcharging here. And that's really the point ... what we're talking about here ... exploitation on a mass scale.'
The business practices of furniture traders has been described by internal legal advisor to the Micro Finance Regulatory Council as creating 'a feeling of immorality, deception, and misrepresentation'.
As far back as 1992, Herman le Roux, who was an inspector for the Department of Trade and Industry, believed that these furniture loans were illegal because no money changed hands.
Herman: 'We commenced with inspections, me and the team, from Cape Town to Messina, from Barberton to Kimberley; you name it, we collected hundreds of documents in order to submit it to the attorney general for prosecution. Unfortunately nothing came about it because the powers that be stopped it.'
Ruda: 'In what way, and why?'
Herman: 'I wouldn't know why, but it was stopped and I left the service in '96, and it was only about three years ago that I started a consumer protection company and that's when our secretary actually [got] her loan agreement with a furniture store, and we decided to take the matter further to the high court.'
Linda Ellerston had bought a lounge suite from Joshua Doore in Silverton in 2001.
Linda: 'The lounge suite we saw there we decided together we'd take it because we could afford it.'
Ruda: 'What did it cost?'
Linda: 'The amount was R3 999.'
But with all the add-ons such as insurance and finance charges she ended up paying R8 006. She showed her contract to Herman who immediately saw that she had been given a loan agreement.
He advised her to write to one of the registrars of the Usury Act, Jeremiah Mela of the Dept of Trade and Industry, to get a legal opinion.
That was in June 2005. She heard nothing from him for six months so she believed that her only recourse was to apply to the high court for an opinion.
One person who dearly hopes that the court will make a ruling soon is Clark Gardner, who heads up Summit Finance. His company advises employees of blue chip companies to manage their debt.
Clarke Gardner (Summit Financial Partners): 'I believe someone must be protecting the consumer. Here we are dealing with approximately 800 000 to a million consumers who have got these micro loans instead of instalment sale agreements. So I believe the court should be there to protect the consumer.'
Ruda: 'The court sat in June last year. The legal representative of the registrar, from whom Linda Ellerston had requested an opinion more than a year earlier, argued that the application was ill-conceived.'
He said that while the registrar did not intend to suggest that what Linda was complaining of was acceptable, if the allegations she was making were proved to be prudent, then the Joshua Doore Group would have acted unlawfully and would face serious sanctions.
Herman: 'One would think the registrar, who is the one protecting the consumers against exploitation and contraventions of the Usury Act, would love to have the matter clarified in court.'
One of the issues that arose in court was the cooling off period. When you get a micro loan, the law says that you can return the money you received within three days and the contract will be cancelled.
Herman: 'But here's the problem - no money is advanced. Furniture is advanced. Now the customer cannot bring the furniture to terminate the agreement, he has to bring back the cash, and he never received the cash. And on that basis, no doubt, there's no loan agreement.'
Ruda: 'In an affidavit Linda Ellerston said that she had not been made aware that she was signing for a loan at the much higher interest rate. In response the JD Group produced two affidavits from Joshua Doore staff members at the Silverton branch and they insisted that Mrs Ellerston had been made aware that she was signing for a loan.'
In addition they said that customers were always given the choice between the two alternatives, and that all details would be meticulously explained.
Just as well, because the people we approached on the street, some of whom had bought furniture on credit, had no clue.
'Chris': 'They don't understand loan agreement ... they sign the papers, they don't know what they're signing for ... all they look at is the instalment.'
We asked Chris if he ever offered a customer the choice between the two credit transactions.
'Chris': 'Never happened before ... we don't know about that ... we were told a memo has come through, that all sales must be done on UB which is a loan agreement sale, not on HP ... forget about HP ... that's what we were told.'
Chris provided us with a 2002 internal memo reminding sales staff to increase their exposure to loan accounts and to: 're-direct' accounts that normally would have qualified as HP accounts.
The memo also stated that 'we are in desperate need of the additional finance charge income that these accounts attract'.
Chris: 'If a customer is clever enough and understands the HP, and the loan agreement sale, then he insists that he wants a HP agreement, then we do it on an HP, but if he doesn't know it, then we do everything on loan agreements.'
We put the JD Group to the test. We went into several stores and each and every time, except for one store in Claremont, we were offered only loan agreements. No mention of instalment sales agreements. We went through a whole credit application process as well - again, no mention of instalment sales agreements.
Herman: 'To me, it's quite laughable. In other words the customer will be told: 'Now here is an HP, an instalment sales agreement, in terms of that agreement we charge 20 percent. Here is a loan agreement at 34 percent. Sir which one would you pick?' You think he is going to pick the 34 percent? It is a blatant lie ... they don't even know.'
But surely the greatest test would be at the Silverton Joshua Doore where Linda had bought her furniture. We wanted a quote for this fridge
Advocate for the Registrar of the Usury Act (Court transcript, June 25 2005, High Court Pretoria): 'If she [Linda Ellerston] is right on the facts that she was given to believe that she was entering into an instalment sales agreement when in fact she was given a loan agreement to sign, then we say that it is unlawful because it would be a misrepresentation.'
Back at the Silverton branch we appeared to experience first hand this same misrepresentation.
Journalist: 'Is this HP or what is this?'
Salesperson: 'Yes this is HP.'
Journalist: 'It says store loan agreement, but it is HP isn't it?'
Salesperson: 'Yes. It is HP.'
Herman: 'The irony behind it is in fact that it is an HP - but the interest levied was 32.5 [percent] and it should have been 20.'
Surprised, we went into another Joshua Doore store in Rand Park. Same story.
Salesperson: 'I did a quotation on Hire Purchase.'
The quote she handed us was in fact for a loan agreement.
Journalist: 'So this is what they call the instalment sales agreement?'
Salesperson: 'Yes'
Journalist: 'Its hire purchase?'
Salesperson: 'Yes.'
But there's more ... for good measure we went into a JD Group Russell's Store. When we queried the furniture loan quote, we were referred to the manager.
Journalist: 'So is this your normal HP loan, your instalment sales agreement?'
Manager: 'Yes sir that's right - it's actually a UB account, we don't do hire purchase.'
Journalist: 'What's UB mean?'
Manager: 'It's like a loan.'
Journalist: 'So you don't do HP accounts?'
Manager: 'No sir, we don't do HP accounts.'
Journalist: ''Cause that's got a much cheaper...'
Manager: 'Hire purchase has got a lower rate but we don't do hire purchase accounts any more ... it's UB, it's like a loan.'
Journalist: 'So you can't ... I mean, who says that? The head office?'
Manager: 'Ja, it's on our system - it's a fixed system for us, unfortunately.'
Journalist: 'So you never do HP instalment sales agreements?'
Manager: 'No sir, not any more ... for a long period now...'
Furthermore, according to the law and in the JD Group's own court papers, when a customer chooses a loan agreement, a deposit is not required.
Yet at every JD store we visited, a deposit was indeed required.
Herman: 'A deposit on a loan? Such an animal does not exist. Borrowers are people that receive money not pay money!'
In a letter from the MFRC to Mrs Ellerston, the legal advisor agreed that by paying a deposit the contract constituted a credit agreement and not a loan.
We invited the JD Group chief operating officer Johan Kok onto the programme to show him the hidden camera footage of his sales personnel who did not seem to know the difference between a loan agreement or an instalment sales agreement, and that they were only offering loan agreements. Johan declined the offer, saying that the matter is sub judice.
We also wanted to know, amongst other things, what criteria they use in determining which customers are offered the more expensive furniture loans. After all, our journalist, who repeatedly was offered furniture loans, earns a reasonable salary and would not be a credit risk. Again, no answer.
We wanted to know from the JD Group if the majority of their defaulters were the clients who had the more expensive furniture loans. No answer.
Clarke Gardner points out that the JD Group makes provision for a high percentage of defaulters.
Clarke: 'The fact that 27 percent of their outstanding debtors book is provided for shows that there is definitely default of approximately 27 percent of their customers. We have encountered more than 100 000 garnishee orders out there if we have to extrapolate our figures. That is a sign that 100 000 of their customers have not been able to afford the repayments of their debt. Hence they have defaulted in which case the JD Group has gone to court and got a debt judgment against them.'
Linda Ellerston and thousands of others will await the ruling of the court with interest. In the meantime Linda, if she's going to buy furniture on credit again, will try and be more assertive with the salesperson.
Linda: 'People are scared ... they are really scared. Many people are quiet and withdrawn and don't want to come forward and ask, 'But sir, this is how things seem to me'.'
Ruda: 'How does it feel knowing you could be the person to break this cycle?'
Linda: 'It's going to be a big thing, a really big thing. There are hundreds of thousands of people that will come out in support of it.'
IMPORTANT DISCLAIMER:While every attempt has been made to ensure this transcript or summary is accurate, Carte Blanche or its agents cannot be held liable for any claims arising out of inaccuracies caused by human error or electronic fault. This transcript was typed from a transcription recording unit and not from an original script, so due to the possibility of mishearing and the difficulty, in some cases, of identifying individual speakers, errors cannot be ruled out.
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