Credit Amendment Bill

Credit Amendment Bill 

 Minister of Trade and Industry, Dr Rob Davies, to

National Assembly, 27 February 2014

By BRIAN KAJENGO 

Minister Davies start by it gives me great pleasure to introduce the National Credit Amendment Bill in the National Assembly.

The NCAB follows intensive assessments of the effectiveness of the National Credit Act, 2005 (“the Act”), as well as extensive consultation with various stakeholders, both within and outside Government. As the banking sector accounts for about 90% of the credit market, consultation with National Treasury was critical as these matters relate to this sector.

During the assessment of the effectiveness of the Act, all reviews revealed one thing in common, that this is one of the best pieces of legislation to pass by this Government. It was far sighted and its existence cushioned this economy from what could have been a disaster when the world hit by the financial crisis in 2008. The reviews further conclude that the policy basis and framework for this Act remain sound and relevant.

 The assessment highlighted the need to amend certain provisions of the Act, strengthen its regulations and develop industry codes to improve its effectiveness to fully achieve the intended outcome of a fair, transparent and accessible credit market in South Africa. We have over the years seen the increase in the accessibility of the credit market, but we have equally seen the increase in unsecured loans that are expensive to the poor, reckless credit caused by failure to conduct proper affordability tests, as well as levels of over-indebtedness and impaired consumer records.

For instance, gaps in the implementation of debt counseling and debt review processes have led to credit providers using parallel legal processes such as repossessions of homes in total disregard of the mechanisms in place to assist consumers to meet their obligations.

 It is a concern that almost 50% of about 21 million credit active consumers’ records is impaired, and many are currently unable to access employment due to negative credit records. During public hearings we heard many stories, sad stories, of consumers that had financial troubles and subsequently blacklisted at the credit bureaus. Things have since changed for some of them, with their financial position looking much better than before, but they battle to get access to credit based on these listings even though they can now afford the credit.

It is against this background that the NCAB introduce, and it covers the following important areas. 

The NCAB amends provisions in the Act that allowed for parallel legal action to taken against a consumer that is under debt counseling or review process. This was caused for instance by the court interpretation of section 129, which allowed credit providers to take action in respect of those credit agreements in terms of which a section 129 notice has been issued. This is the notice that a credit provider would send to a consumer notifying him or her of a default, and an opportunity to remedy such default. The Act intended to help a consumer that is in financial distress through debt counseling and restructuring of his or her debts to get them out of a debt trap, but some loopholes in the Act allowed for this intention to be undermined by legal proceedings leading to repossession of homes for many.

Talking about homes, the Act provides that a consumer may apply to a debt counsellor at anytime for a clearance certificate relating to the debt review. For the clearance certificate be issued, there are precarious conditions that need to be satisfied, such as settling all arrears in the original short term and mortgage/long term agreements.

This is an insurmountable task on the part of the consumer in that a consumer may be in a position to pay up all arrears and short-term debt, but a long-term debt such as a mortgage will take longer to settle. This means consumers be rehabilitated earlier as they would still be paying the mortgage for another 15 to 20 years. The effect of this is that a consumer not allowed accessing any further credit as they are still under debt review.

The NCAB seeks to alleviate this situation by allowing a consumer be issued with a clearance certificate if the consumer has paid up all other debt and the only outstanding debt being serviced by a consumer is a mortgage agreement, provided that there are no arrears on the mortgage agreement as re-arrange during the debt review.  

Our research and investigations by the National Credit Regulator (NCR) have revealed a serious gap in how affordability assessments conducted. Credit providers allowed in terms of the Act to develop their own affordability assessment models but research revealed serious discrepancies in how the credit providers do this, and in most cases it appears that such assessments not done at all. This means a lot of credit extended recklessly, again going against the spirit and objectives of the Act. The recent investigation by the NCR in Marikana found that 100% of the lenders looked at did not adhere to the Act, thus leading to reckless credit.

The NCAB therefore empowers the Minister to prescribe affordability assessment regulations to achieve uniformity and consistency in this area. The affordability assessment regulations will include elements relating to discretionary income as well as determine the buffer in respect of income that taken into account when conducting affordability assessments. This will assist as most credit providers have provided credit to the maximum of the consumer's income, leaving the consumer with not much income for other things. Such consumers end up turning to expensive quick short-term loans and are unable to get out of that debt trap in the long run.

“It is important to also point out that consumers must be honest in providing information for the purposes of affordability assessments. If a consumer provides wrong information, the affordability assessment will give incorrect results, and reckless credit extended. Clearly such a dishonest consumer will battle to repay and will find it difficult to get protection under this Act.” 

 Debt counselors handle matters that are sensitive and critical to a person's life, and some obvious instances of incompetence have led to consumers left with more problems than they started with. As debt counselors also file matters with courts in regard to reviews, errors been picked up resulting from their failure to pay necessary attention to basic detail at times. Improved standards and training requirements introduced to assist in this area. Also, procedure introduced for the process to handover where a debt counselor De-registered for any reason. 

The NCAB requires all ADR agents to register and monitored by the NCR. This means any person who offers mediation; conciliation or arbitration in respect of a credit matter of a consumer be registered with NCR. The number of practitioners purporting to be ADR agents, with most falsely advertising ability to get people out of credit bureaus, has increased. These practitioners, if not regulated and monitored closely, add a huge cost on a consumer that is already over-indebted. Also, the quality of services offered to consumers not monitored by anyone, but worse, some disappear without trace after a consumer has paid for services not offered. This includes lawyers who have entered this space and charging fees that not regulated by the Act to the detriment of a financially distressed consumer.

Payment distributing agents came into being to assist consumers that are under debt review to be able to pay all creditors on time and consistently. This practice not envisaged in the Act, but became a necessity through practice. It currently regulated through a service level agreement to ensure that fees capped and standards are set in an attempt to protect consumers. There is, however, a need to cater for this appropriately in the legislation and to allow for objective requirements and qualifications of these entities to be set, as well as fidelity funds to be established protecting consumers.

There was one risk with PDAs, which is the same as the one that existed with insurance brokers previously. This is that a consumer may pay a PDA, and a PDA may delays payment to the creditor, thus putting a consumer in a space where they are in default, which may result in the debt review process being cancelled by the credit provider. Also, another risk was the cost associated with their service. If PDAs not properly regulated, they could charge consumers a lot, and thus adding to their costs. But worse, is a risk where a PDA could go bankrupt, or close down and flee with consumers’ funds.

The NCAB introduces strict measures for regulating PDA’s registration and De-registration processes, including the fees that may be charged by them to consumers. It further prohibits a credit provider from having any interest in the management or business of a PDA to prevent the inherent conflict in this area. Consultation with stakeholders has indicated that there is value in this service, but that it properly regulated.

The amendments also extend the power of the NCT to consider and pronounce on reckless agreements, as well as confirming arrangements between consumers and credit providers where no disputes exist. These matters currently take time awaiting the normal courts, and the NCAB empowers the NCT to speedily provide redress to consumers.

The NCAB amends sections dealing with removal of adverse consumer credit information to allow for immediate removal after payment on an on going basis. This means that a consumer with a judgment listed at the credit bureau need not approach the court anymore to rescind a judgment and spend money they don't have.

Immediately on payment, the consumer's record must be updated to remove such negative information. This will allow consumers to get back to the credit market and access credit if they can afford it. It will also allow listed persons to be able to get employment as prospective employers currently reject them on the basis of their negative credit listing. A decision not to grant credit should be based on whether or not a consumer can afford such credit and not on negative information recorded against the name of the consumer in the past.

In this regard, Parliament has spearheaded the regulations issued yesterday by the Minister through Government Gazette No. 37386, which deals with once off removal of all adverse information from the records held by credit bureaus. This includes the removal of information relating to paid up judgments on an on-going basis.

The NCAB is amending section 17(4) to enhance cooperation between the NCR, the Financial Services Board and the Registrar of Banks. This extends only to the NCR notifying the other regulators of any investigations or action against the regulated entities. However it does not mean that NCR or any regulator will need permission or concurrence of another in order to take action against a bank, or any credit provider for that matter. This amendment will also help achieve coordinated enforcement action to deal decisively with reckless practices within the industry.

It is of concern that the cost of credit continues to increase, especially to the poor. Parliament has asked questions about what done, what entailed in these costs, and appealed to the Minister to deal with this urgently. The costs of credit, which includes amongst other things, initiation fees, service fees and interest, and regulated through in terms of the Act. The Minister will within six (6) months of the passing of this NCAB revise the caps to control the cost of credit.

The NCAB introduces the capping of credit insurance, which is informed by the obvious abuse of credit life insurance, as the Act currently does not provide capping directly. Consumers mostly made to take multiple credit life insurance at additional costs, which is not necessary. This capping done in consultation with the Minister of Finance.

Also, costs associated with administration and collection of debt will be reviewed in consultation with the Minister of Justice and Constitutional Development. This means all persons charging fees from collection of debt arising from a credit agreement, or incidental credit must fall within the regulations and that their fees be capped as well. The NCAB also makes it an offense for credit providers to charge above capped amounts.

Complaints were raised about consumers being enticed and tempted to take credit, especially short term credit with high interest rates. These adverts come through emails, SMS, etc., and include offers of per-approved loans and credit cards, which prey on vulnerable consumers. It is sad that most legitimate credit providers are involved in these kinds of practices. The Act already empowers the NCR to deal with these practices, and we have impressed on them to closely monitor and take action against these unscrupulous companies. Naming and shaming of these entities will be explored. This means we will need more financial resources for the NCR and NCT to fulfill their mandate effectively.

Information received from stakeholders and raids by the NCR has revealed that there is a large number of illegal credit providers, who still keep as collateral bankcards, IDs and SASSA cards, and are often found at various SASSA pay points as well. It is a criminal offense for any person to operate as a credit provider illegally, and these people be reported to the NCR.

It has been agreed that the threshold of 100 credit agreements for registration of as a credit provider in the Act has allowed for a loophole in that unregistered and unscrupulous credit providers play in this space. The NCAB requires that all credit providers registered, irrespective of the threshold or number of credit agreements. However, it proposed that the requirements for registration and fees payable should be less for smaller lenders in recognition of their size. If registered, if will be easier to identify unlawful ones, shut them down and prosecute the owner.

Consumers continue to harassed by companies that they have never had interaction or credit agreement with, claiming that consumers owe them because they had bought loan books from credit providers. These companies add exorbitant costs to the debt and often such debt sold without a consumer notified by the credit provider. Worse, credit providers sell debt that already prescribed, some dating five (5) to ten (10) years back. The NCAB prohibits the sale of expired (prescribed) debt as part of the loan books by credit providers. Credit providers also urged to notify consumers when they decide to sell their debt to another company. This transparent process is required and be dealt with fully in the regulations and code of conduct.

We have reviewed the structure of the current regulatory agencies to determine the most effective and efficient structure to carry out the mandate. This done through rationalization project, which revealed unequivocally that regulatory agencies do not require boards as a governing structure, as in most cases such impacts on the efficiencies and speed in decision making in regard to enforcement matters.

The NCAB amends the Act to remove the board, which means the NCR will have direct reporting to the Minister and Parliament like all other effective regulatory bodies such as the Competition Commission. Relevant mechanisms within the PFMA and as guided by the Companies Act in regard to governance will be introduced to ensure governance is not compromised at all. Practice has shown us that this is the best approach, and the independent assessment supports this. 

Having said the above, conclude by extending my thanks to Honourable Fubbs for her thought leadership, the Portfolio Committee for the robust deliberations and contribution during the consideration of the NCAB, and stakeholders for their valuable input, all of which assisted in strengthening the NCAB. I also want to extend my gratitude to members of the dti team who have worked tirelessly on this process.