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Referral To National Consumer Tribunal - LEW01
Lewis Group Limited
Incorporated in the Republic of South Africa
Registration no: 2004/009817/06
JSE share code: LEW
ISIN: ZAE000058236
LEW01 ISIN: ZAG000110222
(“Lewis Group” or “the group” or “the company”)
REFERRAL TO NATIONAL CONSUMER TRIBUNAL, ACCOUNTING
TREATMENT, BUSINESS MODEL UPDATE AND WITHDRAWAL OF
CAUTIONARY ANNOUNCEMENT
Shareholders are referred to the group’s announcement published on SENS on 9
July 2015 and the cautionary announcement issued on 31 July 2015. These
announcements related to the referral by the National Credit Regulator (“NCR”)
of a complaint relating to two of Lewis’ operating subsidiaries, namely Lewis
Stores Proprietary Limited (“Lewis”) and Monarch Insurance Company Limited
(“Monarch”), to the National Consumer Tribunal (“Tribunal”) . In its referral the
NCR alleges that Lewis and Monarch contravened sections 106(2), 90(1),
(2)(a)(ii) and 91 (1) of the National Credit Act (“NCA”), by selling insurance
policies providing loss of employment and disability cover to pensioners and self-
employed consumers who, in terms of such policies, were not entitled to the
benefits provided thereunder. The NCR alleges further in this regard that the
insurance policies were for that reason unreasonable or were sold at an
unreasonable cost to the relevant consumers and that Lewis and Monarch sold
such cover with the intent to defraud such consumers.
NATIONAL CONSUMER TRIBUNAL
Lewis and Monarch are opposing the referral and have filed a comprehensive
answering affidavit in this regard. The affidavit deals extensively with the
substance of the referral, and also raises numerous challenges to the procedures
adopted by the NCR preceding and during the investigation and referral of the
complaint, including, but not limited to, the failure of the NCR to properly consider
the complaint, the failure to conduct a proper investigation as required by the
NCA, the failure to properly engage with Lewis and Monarch, the absence of
jurisdiction on the part of the NCR and the Tribunal over Monarch and the
absence of any rational connection between the complaint made, the
investigation undertaken by the NCR and the referral made by the NCR to the
Tribunal. Lewis and Monarch have in addition drawn the attention of the Tribunal
to the unlawful public disclosure of confidential information by the NCR.
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LOSS OF EMPLOYMENT INSURANCE
Lewis and Monarch have, in their answering affidavit, demonstrated that it is
patently untrue and there is no factual basis of any kind to the allegation made by
the NCR that the sale of loss of employment insurance by Lewis to pensioners
and self-employed persons, was fraudulent and deceitful, and was done with the
intention to defraud consumers.
Lewis and Monarch have also disputed that they have committed a contravention
of the NCA in this regard, as alleged by the NCR. Following an internal
investigation by Lewis going back to June 2007, it has been determined that a
small percentage of pensioners and self-employed persons were sold such
policies, through human error and contrary to Lewis’ own internal policies, which
expressly prohibit the sale of such policies to such consumers. Lewis is
presently completing the calculations necessary to determine the amount of
premiums plus interest that will need to be refunded to consumers, whether by
credit to the accounts of such consumers, which are current, or by repayment of
the amounts due to consumers in cases of concluded transactions. Although the
calculation exercise has not been completed, shareholders are advised that
Lewis estimates that an approximate amount of R46 million in premiums and
interest of R23 million, will be refunded to consumers.
DISABILITY INSURANCE
Lewis and Monarch have rejected the NCR’s allegation that the sale of disability
insurance to pensioners and self-employed persons constitutes a contravention
of the NCA. Their answering affidavit provides a comprehensive recordal of data
to indicate that notwithstanding the NCR’s allegations in this regard claims by
pensioners and self-employed persons in respect of disability policies have been
and continue to be honoured by Monarch.
RECENT MEDIA REPORTS AND STATEMENTS BY INDUSTRY
COMMENTATORS HAVE CONTAINED FALSE AND MISLEADING
INFORMATION ON THE GROUP AND ITS PRACTICES WHICH THE
DIRECTORS WISH TO ADDRESS:
CREDIT RETAIL BUSINESS MODEL
The group’s decentralised, store-centric business model is based on the principle
that the sale of furniture and the granting of credit are inter-dependent. This
model is well-suited to Lewis’ lower to middle income target market where
customers are reliant on store credit to buy products.
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This model has been consistently applied over several years and is regularly
reviewed to ensure it remains the most effective means of meeting customer
needs and expectations. The directors believe the group’s business model is a
competitive advantage. Other participants in the industry have separated
furniture retail and financial services, and utilise centralised call centre based
methods of contact with customers. Lewis does not consider that such a model is
appropriate or effective in addressing the needs of its target market customer.
This is evidenced by the current consolidation taking place in the industry , where
there have been widespread closures of stores of furniture retailers where this
separation has taken place, and in particular, following the recent demise of the
Ellerines Group.
ACCOUNTING TREATMENT
Following consideration of allegations regarding certain of the group’s accounting
treatments, particularly re-insurance profit commission and ancillary services, the
directors are of the view that the consolidated financial statements present fairly,
in all material respects, the consolidated financial position and performance of
the Lewis Group in accordance with International Financial Reporting Standards
(“IFRS”).
The consolidated financial statements of Lewis Group Ltd. in respect of the 2015
financial year have been audited by PricewaterhouseCoopers Inc., the group’s
auditors, who have expressed an opinion that the consolidated financial
statements present fairly, in all material respects, the consolidated financial
position of Lewis Group Ltd. as at 31 March 2015 and its consolidated financial
performance for the year then ended in accordance with IFRS and the
requirements of the Companies Act of South Africa.
These audited financial statements have not been amended subsequent to the
aforementioned allegations being made.
DEBTORS’ IMPAIRMENT PROVISION
The group has also taken the opportunity to review the impairment provision for
instalment sale and loan receivables. We confirm that the provision conforms
with the requirements of IAS 39 which governs the recognition and measurement
of financial instruments including loans and receivables. The group’s provisioning
policy has been consistently applied. Debtor costs, which include the annual bad
debt write-off and impairment charge, have never exceeded the impairment
provision raised at the end of the preceding year, pr oof that the group adequately
provides for bad debts.
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AFFORDABILITY ASSESSMENTS
Comprehensive affordability assessments are undertaken in relation to all
customers applying for credit, as required by the NCA. This includes applying
Lewis data, credit bureau information as well as the customers’ data and living
expenses. Customers are required to supply personal identification, and proof of
income and living expenses. Credit applications are transmitted to the Lewis
Group head office where credit application scorecards (for new customers) and
behavioural scorecards (for existing customers) are applied. All customers are
referenced at the credit bureau taking into account the applicants’ payment
record with other providers to ensure that risk and affordability assessments are
current. The living expenses are checked for reasonableness against the
company’s internal data table. The decision to grant or reject the application is
then taken. Lewis has proven to be resilient through the recent downturn in the
credit cycle and has responsibly declined more than 40% of all credit
applications.
TOTAL COST OF CREDIT
Lewis is transparent in disclosing the total cost of credit on all contracts,
including the cost of merchandise, interest charges and any other charges
including, where applicable, credit life insurance, product insurance, delivery
fees, extended warranties and club membership. The store manager interviews
customers before a credit agreement is completed and in terms of the NCA the
key elements of the contract, the total cost of credit and affordability are
explained. The total cost of credit is disclosed in all marketing communications
and in-store promotional material.
INSURANCE COVER
As part of a credit agreement it is a requirement that the merchandise be insured
and that the purchaser takes out credit life cover while there is money
outstanding to the credit provider. Lewis customers are given the option to
provide their own insurance policies and they are not obliged to take up the
Lewis insurance offering. The cost of this insurance cover is fully disclosed to the
customer and included in the total cost of credit. Death, disability, retrenchment
and product cover are offered separately and the cost thereof is disclosed
individually.
ANCILLARY CHARGES
Extended warranties are not compulsory and customers can choose to buy an
extended warranty at the time of making a purchase. The extended warranty is
offered by Lewis and comes into effect after the supplier’s warranty has expired.
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MYSTERY SHOPPING
As part of its ongoing customer service the group has for several years
undertaken mystery shopping in its stores through an independent research
house. The group remains fully committed to this process and has embarked on
an enhanced mystery shopping programme at all stores to determine whether
store staff are complying with operating standards and policies. The feedback
from this mystery shopping will also provide valuable information on the
performance of staff in relation to the offer of insurance products and general
compliance with the NCA. Staff training will continue to enjoy top priority.
DRAFT REGULATIONS ON LIMITATIONS OF FEES AND INTEREST RATES
The Draft Regulations on the review of limitations of fees and interest rates
published by the Department of Trade and Industry in the Government Gazette
on 25 June 2015 refers.
It has come to the company’s attention that there is confusion relating to the
interest rate that Lewis applies to its credit agreements. Lewis applies the interest
rate applicable under credit type 6 namely ‘Other credit agreements’. The
proposed maximum rate for ‘Other credit agreements’ is 22.75% compared to the
rate of 22.65% charged by Lewis at the time of the publication of the Government
Gazette.
WITHDRAWAL OF CAUTIONARY ANNOUNCEMENT
Following the release of this announcement, shareholders are advised that they
are no longer required to exercise caution in their dealings in Lewis shares.
7 August 2015
Debt Sponsor
Absa Bank Limited (acting through its Corporate and Investment Banking
division)
Attorneys: Edward Nathan Sonnenbergs
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Date: 07/08/2015 08:57:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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