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5

The Consumer Protection Act

15th March 2011

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Under the CPA, it is not only individuals that qualify as consumers (and hence qualify to be protected by the legislation) but also small juristic persons; the idea being that small businesses, many of which are really alter egos of a sole proprietor, are equally vulnerable in the market place and equally deserving of protection. Late in 2010 the long awaited announcement was made that juristic persons with asset or annual turnover values below R3 million would qualify as consumers for CPA purposes. This threshold value seems unduly high, and one would expect businesses which generate that kind of turnover to be well resourced and sophisticated enough to protect themselves without the CPA. A threshold of R 1 million and below strikes one as a more reasonable balance between the interests of suppliers and vulnerable consumers.

FRANCHISE AGREEMENTS
Franchise agreements get special treatment, with an overwhelming number of requirements now stipulated. Some of these requirements are likely to be very difficult to interpret with certainty, such as a stipulation that all franchise agreements must contain a clause about the general principles of honesty and equity that will guide the agreement. Existing franchise agreements that do not comply have six months to be amended failing which the obligations will be read in.

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The Act stipulates that the franchise agreement must contain details of various services offered by the franchisor – training, for instance - but does necessarily make it obligatory to provide such services. That said, the regulations do provide a valuable "tick box" list of all the provisions that a legitimate and well-organised franchise operation should have, and this may aid franchisees and lending institutions to identify franchise opportunities that accord with best practice.

DISCLOSURES
The regulations set out a long list of disclosures that an intermediary (which includes an agent for, and possibly a distributor of, goods and services) must make, both to consumers and the principal for whom they act. Amongst other requirements, consumers are entitled to full disclosure as to any money they make out of a business transaction. For example, sales agents, who are not employees of the supplier but independent contractors acting on the suppliers behalf, will need to tell consumers exactly how much commission they make off every sale. In addition, the regulations require intermediaries to disclose any information which "may be relevant" – a vague obligation that will do little to add certainty to an intermediaries obligations. The CPA provides for vicarious liability of a principal for anything done or omitted by the agent in the course of acting on behalf of the principal, so those who make use of agents or distributors will need to be sure that agents are aware of and adhere to the requirements.

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DIRECT MARKETING AND THE CPA
Direct marketing is another element of business that is heavily regulated by the CPA. The Act states that all consumers may pre-emptively block any direct marketing attempts. The Protection of Personal Information Bill will also ensure direct marketing by electronic means can’t take place without the express prior consent of the consumer, other than in certain narrow circumstances.

This is great news for harassed consumers, but not good news for the direct marketing industry as the Act and regulations will seriously impede the whole model of direct marketing. In the first instance, although consumers are ostensibly required to "opt out" of direct marketing by registering their details with a registry to be established, the regulations require marketers to assume that a consumer has opted out unless and until the registry has confirmed in writing that the consumer in question has not acted to block direct marketing. Any request for such confirmation must be copied to the consumer, effectively giving her a further opportunity to pre-empt direct marketing. In terms of the regulations, even paper junk mail is a form of direct marketing and consumers have the right to pre-emptively block junk mail from being placed in their post boxes by placing a "no junk mail" notice to this effect on the box. Direct marketers may also not contact consumers directly after 9pm on a weekday, or after 12 noon on a Saturday, and not at all on a Sunday or public holiday.

A likely downfall of the regulations is their reliance on a variety of human interveners (consumers, registries, postal workers, marketers, the regulator) for implementation. The possibility of human error at any stage could result in a breakdown of the intended regime. The regulations also give parents of those under 18 the exclusive right to block (or un-block) access to direct marketing to their wards – even if the minor concerned approves or even solicits direct marketing material.

The R1 THRESHOLD
The regulations have set at merely R1.00 the threshold value above which all repair or maintenance services must be expressly pre-authorised by consumers. This means that consumers will in virtually every instance have to be furnished with a written estimate of costs, which must be accepted in writing before the repair can be done. The supplier will not be able to exceed the quote without authorization from the consumer prior to continuing the work. This will increase paperwork and administration for both suppliers and consumers.

CANCELLATION OF BOOKINGS
The CPA also stipulates that all consumers have the right to cancel advance reservations, bookings and others (other than for special order goods) and that cancellation fees that are charged by hotels and airlines, for example have to be reasonable.

In many cases, if a consumer books a hotel stay or a flight, they are charged a cancellation fee if they decide to cancel. The CPA states that the consumer is entitled to cancel his booking and the cancellation fee charged should take into account the likelihood of the hotel or airline finding an alternative customer.

Airlines mostly have a rigid termination policy; the CPA states that this policy must take into account the timing of the cancellation. If there is more than enough time to find a new buyer for the hotel room or air ticket, then the cancellation fee should be paid back almost in full. If it’s a last minute cancellation, then a bigger fee can be charged.

The regulations add to the suppliers woes, by providing that where a consumer cancels a fixed term contract (for example, a cell phone contract) the maximum amount that may be charged in respect of the unexpired portion of the contract is 10% of what would have been payable.


OUTLAWED BUSINESS PRACTICES
The regulations describe a number of business practices that are now outlawed or heavily regulated – including offering speculative software (claiming to predict movements in share prices or winning horses), property syndication schemes, alternative work schemes and the bane of the internet, so-called 419 schemes. Interestingly, in the latter case, for a consumer to become involved in a 419 scheme is as illegal as offering one.

The regulations' approach to genetically modified foodstuffs is interesting. Currently, it seems that only suppliers of maize, soya bean and "imported" canola oil must disclose where the product is likely to subject to genetic modification. However, there are no requirements to disclose what, if any, dangers arise from genetic modification thereby contributing to the demonization of GM foods. Moreover, the regulations are less than clear about whether products made from the list of goods must include a similar disclosure.

PROMOTIONAL COMPETITIONS
The regulations serve to clarify that for promotional competitions entered via sms, the costs of the sms may not exceed the minimum that a consumer is likely to pay for an ordinary sms message, thus ending the practice of inflating the costs of an sms to cover the costs of the promotion. Furthermore, consumers that qualify for a prize of a value greater than R1.00 must sign an acknowledgement of receipt of the prize or giveaway, and supply their ID number.


GREY GOODS
Unfortunately, the regulations turn out to be a bit soft on so-called grey-goods or parallel imports. Many legitimate importers and their suppliers had expected the regulations to stipulate a clear notice that goods have been imported without the authorization of the manufacturer, which may impact on the validity of the manufacturer's warranty. In their current form, the regulations merely deal with reconditioned and rebuilt goods, leaving purchasers of grey goods none the wiser, and legitimate importers unprotected.

AUCTIONS
Auctions will also be heavily regulated. Among the more interesting developments is the general obligation to keep records of all bidders (including bids over the internet and where a bidder acts on behalf of another) thus doing away with the concept of an anonymous bidder. Apart from very limited circumstances, all auction lots must be advertised to the general public. It will also be illegal to advertise an auction as a "sale in execution" or "insolvency auction" unless true.

UNFAIR TERMS AND CONDITIONS
The regulations also contain a long list of terms and conditions that are indicated as being most likely unfair and unreasonable, and hence should not appear in consumer agreements but this is stated to be “indicative only” as well as "non-exhaustive" - placing an element of uncertainty into what businesses can put into an agreement and how clauses will be treated. In a peculiar throwback, certain key communications that may "be of interest to the consumer" must be delivered by pre-paid registered post – thus precluding the use of email, increasing expenses for suppliers and hassle for the consumer.

THE OBLIGATION TO EDUCATE
The Consumer Commission has an obligation to educate the consumers as to what their rights are in terms of the CPA. This is essential as the CPA, and particularly the emphasis on alternative dispute resolution over court action, will be for naught unless consumers and suppliers are aware of its intricacies, which now include a complex set of regulations. The Commission has its work cut out for it, and will need to spend the first few years getting people to understand the Act at least as much as pushing compliance.

NO ROOM FOR COMPLACENCY
One thing about the dawning era of consumer protection is certain. There is no room for complacency. Every business transacting with consumers needs to take a long hard look at its products, services, business methodologies and terms of trade. The consequences of non-compliance can be serious and with other state regulators leading the way in demanding complete compliance with the law, while punishing non-observance heavily (just look at the Competition Commission's recent track record) there is no reason to believe that the Consumer Commission won't follow suit.


Written by Nick Altini and Chris Charter, directors in the competition and regulatory practice area at Cliffe Dekker Hofmeyr business law firm.


 

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