Caveat Emptor! Alive and well and living in South Africa

Caveat emptor is Latin for "Let the buyer beware". It refers to a contract law principle mostly applied in the real estate industry, but may also be used to selling of other products and services. The phrase caveat emptor arises from the fact that buyers typically have less information about what they buy, while the seller has more information.

Caveat Emptor! Alive and well and living in South Africa

Article by Dr Leon van Vuuren

20 February 2016

Caveat emptor is Latin for "Let the buyer beware". It refers to a contract law principle mostly applied in the real estate industry, but may also be used to selling of other products and services. The phrase caveat emptor arises from the fact that buyers typically have less information about what they buy, while the seller has more information. The quality of this situation is known as information asymmetry. Facts about products or services may be hidden from the buyer, and only known to the seller.

We have recently seen several applications of ‘let the buyer beware’ in the South African retail sector.

Buy now pay later

A number of years ago a domestic worker bought a fridge on credit from a well-known furniture retailer. The 63-year old woman diligently paid off the fridge in 12 equal instalments over a year. Given her newly acquired ‘exemplary credit record’, she soon received three letters in the mail. These contained credit card type shopping cards from three of the largest clothing and general consumer goods retailers in South Africa. The tone in the wording of the letters was congratulatory, as she had ‘qualified’ for shoppers’ cards. All the offers included a ‘you can buy products to the value of R6000-00 and only pay later’ invitation. One of the retailers actually allowed for the concession that she could commence with her instalments by paying the first instalment six months after the original date of purchase. Of course, “Ts and Cs apply” was prominently visible on all the letters. She was very excited and asked her employer to drive her to one of the retailers’ stores so that she could buy clothes for her grandchildren.

It can be surmised that some credit clearance bureau’s computer categorised her as a type of ‘green flag’ credit risk. The three invitations described above were computer-generated. Although she had clearly proved, albeit in a once-off deal with the furniture retailer, that she was a relatively low credit risk, the domestic worker was semi-literate and had a monthly income of R2000-00 only. She clearly did not understand how the system worked, as she was never contacted by any of the retailers. Nor had she ever received any personal financial planning orientation. This consumer was vulnerable. And thus easy to exploit. Caveat emptor.

This is the correct cellphone package for you

It is a fact that many cellular phone service subscribers, the so-called post-paid market, hold packages that offer hundreds of free minutes and megabytes of data. Their airtime and data usage figures are, however, often way below what they are entitled to. They could thus have purchased a cheaper package and saved a few hundred Rand per month. Cellular phone service providers are under no obligation to inform their customers of potential cost savings of migrating to cheaper packages. Since such migrations would substantially affect the companies’ revenue, they do not inform customers. Caveat emptor. Even though the majority of post-paid customers cannot be classified as ‘vulnerable consumers’.

Banking ‘miles’

Several South African banks have reward schemes based on ‘the more you swipe the more you earn’. These earnings are passed on to clients by means of reward schemes, similar to earning frequent flyer miles offered by airlines, which can be converted into cash at any time.

A colleague at EthicsSA, who is actually classified as a premium customer that qualifies for private banking facilities, was unaware that he qualifies for his bank’s reward scheme. Membership of the scheme is not automatic, however. He was never informed that he had to apply for membership. In the process he has forfeited thousands of potential ‘frequent swiper’s miles’ (Rands in real terms) in the last few years since the scheme has come into operation. Caveat emptor. And he is definitely not a ‘vulnerable’ consumer.

The R18 000-00 washing machine

A large furniture retailer recently sold a washing machine on credit to a customer. The purchase price of the machine was R6000-00. With cumulative interest and other contract and insurance costs, the machine would actually cost the customer a total of R18 000-00 upon completion of the 36 months credit period. The customer was a vulnerable consumer, as he was a low-income earning gardener.

His employer and consumer watchdog groups accused the retailer of reckless lending. The retailer was adamant in its response:

“The company’s CEO told Fin24 in an emailed response that interest and all costs were charged in accordance with the National Credit Act and that all processes required by the act and its related regulations were followed. He stated further that the company denies any allegations of reckless lending, as an affordability assessment in terms of company policy and as required by the National Credit Act was conducted” (Salie, FIN24, 2016).

Caveat emptor.

It is interesting to note that during the third quarter of 2015 the same company was taken to task for selling loss of employment insurance products to pensioners and self-employed customers (Fin24, 2015). The company refunded R67.1m to a group of its customers for the cost of loss of employment insurance.

In the classic free market economic system practices such as these are viewed as good business. Sales targets are met, performance bonuses are awarded and shareholders are happy with their returns. Yet information asymmetry may persist. And what happens when ‘good business’ have bad consequences?

In the case of the R18 000-00 washing machine, the retailer’s annual financial results for the term ending March 2015 indicate that they had R2.5bn worth of merchandise sales, but R5.7bn in total revenue. This means that they earned an additional R3.2bn, which emanated from financial (e.g. cumulative interest) and ancillary fees (Salie, Fin24, 2016). The furniture business has thus become the credit business.

One could reflect on practices such as these from three perspectives. Firstly, from a macro ethics perspective, such practices would probably be termed ideal capitalism. The companies end up using customers instrumentally for shareholder enrichment, under the assumption that companies have an obligation to their shareholders only, and that sufficient ‘good’ will be done through corporate taxes paid by the companies. This appears to be selective amorality, in that companies will be ‘good’ to other stakeholders, e.g. consumers and suppliers only if that good is in the interest of shareholders. Conditional ethics therefore.

Secondly, keeping in mind the triangulated relation between the good, the self and the other that define ethics, an ethics perspective could shed light on the possible reasoning that inform such practices. A pro-active and fair balance that could be created between the self (the retailer) and the other (its customers) could result in mutual satisfaction for both parties. Sellers satisfy their ‘reasonable greed’ and buyers are more or less satisfied with their products and what they had to pay for them. A challenge arises when the needs of the self outweigh the legitimate needs of the other (buying safe products at fair prices). Such selfishness tip the scales to ‘greed beyond reason’, which, in turn, causes harm to consumers, and in particular to vulnerable consumers.

The third perspective relates to the interface between ethics and the law – for ‘law’, read also rules, policy and regulation. As we all know, there are many phenomena that may be legal but could be totally unethical. A good example of this is apartheid. During the apartheid era 256 acts were promulgated by the government of the day to maintain the apartheid doctrine. At the time apartheid was thus legal, but is was unethical at the time and remains to be exactly that. In a business sense charging R18 000 for a washing machine is legal, but ethically questionable. In response to media criticism of its practices the furniture retailer stated that an affordability assessment was conducted in terms of company policy and in line with requirements set by the National Credit Act. The company’s defence was thus based on ‘it is entirely legal, therefore it must be right’-principle. If something is legal, it being ethical is true in many instances, but the ethics of an action that is merely in adherence to the law is not guaranteed.

To prevent harm to the other, companies in the free market economy could consider basing their business principles and practices on ‘capitalism with a conscience’. An understanding of the strategic importance of ethics in business, from a business case for ethics perspective, could go a long way in preventing harm. So could an enhanced awareness of business ethics in companies and much reflection on the potential ethical consequences of business decisions. Ethical courage is also often required to withstand the ‘it’s-all-about-the-bottom-line’-mentality that is rife in business and a mantra of many shareholders.

Should companies have caused harm to (vulnerable) consumers and other stakeholders, establishing a call centre to help customers ‘understand the fine print’ is no solution to redeem actions that are legal, but unethical. Nor could an admission of ‘we made a mistake’ or financial restitution for those that were harmed.  What is required is looking at business and its ethics through a new clean lens, being truthful in all actions, considering potential unethical consequences of business deals and rewarding not only for performance targets achieved but also for the way in which such targets are pursued. Caveat emptor is thus replaced with a sensitivity for the ethical consequences of business practices.