1 all progress is based upon a universal innate desire on the part of every organism to live beyond...
TRANSCRIPT
1
“All progress is based upon a universal innate
desire on the part of every organism to live beyond its income.”
— Samuel Butler , English composer, novelist, author (1835- 1902).
“The business of a moneylender … has no where nor at any time been a popular one. It is an oppression for a man to reclaim his own money: it is none to keep it from him”
— Jeremy Bentham, British reformer, 1787
Regulation and consumer finance
Gabriel Davel July 2010
Chatham House Conference
3
Consumer credit market profile …
Millions of small transactions, affecting millions of consumers & thousands of credit providers. require explicit & specialised legislation maximise certainty to both consumers & credit providers ensure that there are no incentives for credit providers to engage in
predatory or reckless activities
General contract law or common law not sufficient given cost of litigation relative to transaction size control of credit provider over contract & over sales process … &
role of staff in providing advice to consumers
4
How things go wrong …
Predatory & reckless providers gain most from weak regulation, often by new entrants with short term profit objectives misleading disclosure, “add-ons”, penalty fees, payment preferences,
using courts as “debt collectors” often involving agents & brokers & dubious contractual practices causing a “Race to the Bottom”
Permissive regulation & predatory practices negative for market development
5
When things go wrong …Impact on credit providers
High risk + high level of uncertainty = high cost lending Undermine long term growth strategies, lower margin products,
investment in infrastructure, Undermine asset based lending, long term lending & housing in
particular … undermine creation of security for future business lending
Impact on households, debt stress, repossessions, degradation of whole areas & communities
Impact on consumption & level of economic activity (worse in mature markets)
6
Typical requirements … to change market conduct & remove adverse incentives
Disclosure: standardized, comparable, early. Prescribed content & format. Enable price comparison.
Negative option marketing prohibited, automatic increases in credit limits curbed.
Reckless credit: Require affordability assessment. Define reckless credit, affects enforceability. Protect responsible lenders.
Preferences & anti-competitive conduct prohibited, monitored.
Interest rates & fees: Change basis of disclosure. Upper limits on interest & fees. Limit add-ons.
Penalty interest + prepayment penalties removed. Debt collection fees regulated. Curb incentives for ‘debt farming’.
Agents & brokers, standards + disclosure requirements
Credit bureaus, regulated to improve credit information flow
7
Experience in South Africasince introduction of National Credit Act in 2006
Affordability assessments: reduced approvals, having to consider obligations on all agreements … cushioned losses, recovering
Disclosure, lending practices & credit bureau information
Enforcement & action against lending scams of various kind
Research = cost of credit reduced, disclosure rules & regulation of credit life insurance, fees
Financial crisis caused credit contraction, pressure on incomes, debt stress … but market shielded from fall-out … significant recovery since mid-
2009Cost - furniture Finance
Gross Quarterly Credit Granted – 2007 to 2010
8
Regulated consumer credit market curbed excessive credit extension, creating basis for lower but more sustainable credit growth, curbing social cost of reckless lending
Impact of financial crisis continues, driven by reductions in income as much as loss of employment. Contraction in domestic credit plays significant role. Process will continue, extreme caution required
Protection of households important priority, not just on protection of industry,o low income groups most vulnerableo household solvency & buying power critical to economic health
Concluding comments
9
“By the balance of the commodities and the discommodities of usury, two things are to be reconciled. One, that the tooth of usury be grinded that it bite
not too much; The other, that there be left open a means to invite
monied men to the merchants, for the continuing and quickening of trade.”
Francis Bacon (1625)…
10
Thank You
www.ncr.org.za
Background
information
12
Consumer Credit Market in South Africa
Credit Providers 18 millionCredit Active Consumers
1,700Debt Counsellors
£99.5 bnconsumer credit
Registered Credit Providers = 4,120
Branches = 33.500
Structure of key interventions in
National Credit Act
14
National Credit
Act
Marketing & sales
practices
Agreements& quotes
Reckless
lending rules
Enforcement &debt collection
Debt counselling
Regulate Credit BureausCreate National Credit
Register
Interest, fees& credit life insurance
Unlawful
agreements,
provisions
15
Credit Marketing Practices
Intention
Provide information on credit cost at early stage of purchase cycle. While consumer is ‘shopping around’.
Improve comparability. Greater honesty in advertising
Consumer must agree, before an agreement can come into effect
Increase agent & broker transparency & accountability
How
Negative option marketing & automatic limit increases prohibited = unlawful agreement
Prescribed pre-agreement quote, binding for 5 days
Prescribed info in credit adverts
Opt-outs on telemarketing campaigns, information on-sold
Limits on marketing & sales @ home & work
Prescriptions on agents & brokers (ID in contracts, fee disclosure, liability for credit providers)
S74 – S76, 89(1)b, 119(4)
16
17
Regulation of reckless credit & predatory practices
HowReckless credit
Over-indented = “per available information, consumer will be unable to satisfy in a timely manner all the agreements to which the consumer is a party”
Reckless = (1) no assessment; (2) consumer did not understand obligations; (3) agreement made consumer over-indebted
Subject to consumer “fully & truthfully disclose”
If reckless, impact on court No court orders for debt recovery; Court may
suspend or reduce obligations
Debt counselling Registered debt counsellors, with statutory debt
restructuring process Recommend debt cancellation or restructuring for
review by court
Prohibition of payment preferences
IntentionPenalise predatory lenders
Assist consumers who are in desperate positions
Protect responsible credit providers from impact of reckless operators
“Normalise” low income credit market … often a marginalised shark-pool
S78 – S88, S130
18
Regulation of interest & fees
Intention
Reduce reputational risk which APR disclosure impose for main stream suppliers providing small loans,
Payday lending: penalties for roll-overs, for incremental increases in loan sizes
Curb ‘debt farming’ on small loan defaults, from collection fees & penalty interest
How Disaggregate interest from initiation and
monthly fee, impose limits on each
Prohibit penalty fees and penalty interest
Curb early settlement penalties
Prohibit ad-hoc interest rate variations (e.g. teaser rates)
Codify “in duplum rule” – (interest + fees post default limited to 100% of capital)
Single premium credit insurance prohibited, only monthly premiums on declining loan balance
S100 – S106Regulation 39 - 48
19
Credit bureaus & credit information
Requirements of NCA
Credit bureaus regulated
Broad access to positive credit information
Statutory obligation & liability for data quality & compliance audits
Consumer access to records, complaints process, data removal for credible complaints
S70 – S73
Regulations 17 - 20
Intention
Efficient effective access to credit information, particularly, for low cost provision of small loans
Pro-active regulation of bureaus to ensure credibility
Privacy laws inappropriate, credit market requires accurate & efficient credit information
20
Effective enforcement over both bank & non-bank credit providers
Requirements of NCA Court powers substantially
increased to block legal action if non-compliance Intervene if reckless or over-indebted
Regulator Registration; compliance audits &
investigations Enforcement instruments Reports to parliament
Tribunal Status of “specialised court”, subject to appeal
to high court; Significant fines & deregistration
S13-16, S54/55, S129/130, S138
Intention
Prevent non-compliant lenders gaining a competitive advantage, setting the standard
Legal cost means reliance on consumer litigation totally inappropriate
Enforcement, to change conduct, ensure interventions have the intended impact