NATIONAL CREDIT BILL, 2005

MS ASTRID LUDIN

DEPUTY DIRECTOR GENERAL

DEPARTMENT OF TRADE AND INDUSTRY

MAY 2005

ORGANISATION OF PRESENTATION

• Need for a Review• Background• Process including consultation• Objectives and principles of Bill

• Scheme of the Bill• Detailed overview of the Bill

Need for a Review

Criticisms of a dysfunctional market based on:• Fragmented and outdated legislation;• Ineffective consumer protection, particularly in relation to

consumers in low income groups• High cost of credit & in some areas access remains a problem• Rising levels of over-indebtedness and;• Reckless behaviour by credit providers & exploitation by micro-

lenders, intermediaries, debt collectors & debt administrators

Research

Research at a cost of over R2 million...

Research Reports• The Cost Volume & Allocation

of consumer credit in South Africa. Dr. P Hawkins

• Credit Contract disclosure & associated factors. Reality Research Africa

• A Market Research Report. Rudo Research & Training

Expert Opinions

• Interest Rates & Usury in Emerging Markets. Prof G Dymski

• Assessment of current SA legislation

• Regulation of payday lending in the United States. Prof. P Meagher

Primary Findings

Consumers: - Feel disempowered, see certain products as

dangerous but do not believe they have much choice Would like more disclosure, better treatment Indicate that the urgency of obtaining credit/excitement

of making a purchase ‘overrides reason’ when entering a contract

Industry & Experts: - Agree current laws are weak, outdated & inconsistent

in treatment of different products & poor enforcement

Primary Findings

Legislative weakness & weak enforcement a major contributor to current problems, aggravated by problems in contract enforcement through the courts…

Compared to International Best Practices

SA at least 20 years behind other leading dispensations but current challenges very similar: over-indebtedness, marginal/high cash lenders, credit life insurance, disclosure/consumer awareness & credit bureaux

Key Findings

R362bn consumer credit market, approximately 19 million accounts, with South Africans paying about R95bn in interest & fees

BUT a large number of consumers are paying as much as 100% p.a. on loans & furniture finance..from micro-lenders as well as leading retailers & banks

The benefit of access to finance is undermined by this extremely high cost of finance, & skewed allocation, with least access to those who need it most

YET, discrimination not the main cause – rather legislative weaknesses

Suggestions

Recommendations of the Technical Committee:- Move away from a system of ineffectual price-control

that results in misleading disclosure – distorts the market & segregates it into the “Super Included” and “Super Excluded”

• Create a system that integrates the market• Provide for effective enforcement• Curtail over-indebtedness• Provide assistance for consumers who are vulnerable

or unfairly treated

Background

• No significant review of credit legislation: Usury Act, 1968 & Credit Agreements Act, 1980 – over past 25 years

• Need for a holistic review long acknowledged – despite various attempts, only recently significantly progressed

• Mandate from the dti to Technical Committee to review consumer credit policy and legislation – Report received by the dti in October 2003

Background

• Briefings to stakeholders, including to Parliamentary Committee on the findings of Technical Committee: October – December 2003

• Round Table meeting with International Review Panel: - June 2004

• Consumer credit policy framework and Bill finalized – Bill published for general information and comment in Government Gazette on 17 August 2004

• After consultation with stakeholders, revised Bill sent to the State Law Advisers in November 2004 for certification

Process

– Information sessions country wide on draft Bill: August – September 2004

– More than 80 submissions received from organizations and individuals: Consultation with stakeholders, including provinces: September – November 2004

– Workshop with Portfolio Committee in Parliament: October 2004

– Policy tabled at Nedlac and process concluded in agreement: September 2004 – April 2005

Objectives of Bill Promote enhanced

consumer protection• Pre-agreement disclosure, quotes

& contracts• Sales & marketing• Enhanced enforcement & redress

through new institutional framework

Promote competition & transparency

• All credit transactions treated equally but recognition of different products & categories of agreements

Control over-indebtedness & reckless lending

• Debt counselors & debt review with recommendations to the Magistrates’ Court

•Debt enforcement by repossession & judgment

•Obligation to properly assess consumers ability to meet obligations

Scheme of the Bill

Chapter 1: Interpretation, purpose & application

Chapter 2: Consumer credit institutions

Chapter 3: Consumer credit industry regulation

Chapter 4: Consumer credit policy

Chapter 5: Consumer credit agreement

Chapter 6: Collection, repayment, surrender & debt enforcement

Chapter 7: Dispute settlement other than debt enforcement

Chapter 8: Enforcement of Act

Chapter 9: General provisions

Schedules 1-3

Chapter 1

Interpretation, Purpose & Application • Part A: Interpretation- definitions• Part B: Purpose & application• Part C: Classification of credit agreements: -Small

(pawn & small credit transactions); Intermediate (credit facilities & mid sized transactions); Large (mortgages & large transactions)

Chapter 2

Consumer Credit Institutions

• Part A – National Credit Regulator

Core functions include registration of all credit providers operating in more than one province, compliance monitoring & enforcement; complaints investigation (liaison with relevant regulators & provincial consumer desks).

• Reporting to Minister & Parliament• Funded from fees & government allocations

Chapter 2

Consumer Credit Institutions

Part B – National Consumer Tribunal• Establishment & constitution of Tribunal• Prosecution of credit providers by Regulator• Declaratory orders

Part C – Administrative Matters

Chapter 2

Consumer Credit Institutions

Part D – National & Provincial Co-operation• Co-Operative exercise of concurrent jurisdiction• Provincial regulators if provincial legislation passed &

institutions established• Provincial registration if credit provider has branches in

only one province

Chapter 3

Consumer Credit Industry Regulation

Part A – Registration requirements, Criteria & Procedures Who must register?: - credit providers: >100 agreements or book

> threshold (R500,000+); juristic persons & individuals; minimal ‘fit & proper’ tests on owners & directors; BEE commitment –’balanced score card’

• Also registration requirement for credit bureaus & debt counselors• Special category for “developmental credit providers” – credit

unions; education; small business & housing Part B• Compliance procedures & cancellation of registration

Chapter 4

Consumer Credit Policy

The Bill codifies a number of fundamental rights of consumers

Part A – Consumer Rights Protection against discrimination in credit granting, right to

reasons for credit being refused, right to information in official language, right to receive documents

Chapter 4

Consumer Credit PolicyPart B – Confidentiality, Personal Information &

Consumer Credit Records• Minister may require National Credit Regulator to establish a

National Register of credit agreements- to contain minimum data, to perform affordability assessments –loan and repayment status only; no ‘payment history’ & compulsory submission by credit providers

But: Affordability assessments not necessarily linked to NCR data• Credit Bureau information- right to accurate information, access to

information & notification of adverse reports

Chapter 4

Consumer Credit PolicyPart C – Credit Marketing Practices Prohibited – “Negative option marketing”; automatic

increases in facility limits (except annual = ave monthly cash advances/ credits); telemarketing & sale of client information only if consent; agreements at home only if invited; Marketing or agreements at work only if agreement if employer/union

• Advertising practices- prescribed statements & disclosure of cost; unregistered providers prohibited from advertising

Chapter 4

Consumer Credit Policy

Part D – Over- indebtedness & Reckless Credit Over-indebtedness – criteria to determine status of

consumer – Failure to take reasonable steps to assess repayment history and “existing financial means, prospects and obligations” and extending credit “despite the fact that the preponderance of information available to the credit provider” was not supportive of such a decision

Chapter 4

Consumer Credit PolicyPart D – Over- indebtedness & reckless credit• If reckless – Magistrates may not issue court orders for

debt recovery; Debt counselor may recommend debt cancellation or restructuring; Agreement may be suspended or obligation reduced by Court or Tribunal; Provider may be prosecuted by Regulator

BUT these provisions only available when consumers disclosed accurately + unjust enrichment prevented

Chapter 5

Consumer Credit Agreement

Part A – Unlawful Agreements & provisions• Sets out the application of the provisions of unlawful

credit agreements together with criteria for unlawful provisions of credit agreement

• Prohibits the inducement by the credit provider of the consumer to enter into a supplementary agreement or sign a document containing an unlawful provision

Chapter 5

Consumer Credit Agreement

Part B – Disclosure, form and effect of credit agreements• Requires pre-agreement disclosure – statement on terms &

conditions• Outlines treatment of forms of agreement, including delivery to the

consumer & liability for lost or stolen cards or other identification devices

Provisions set out for: - charges deferrals & waivers, address for notice and consumers obligation to disclose location of goods, substituted goods

• Obligations of pawn-brokers

Chapter 5

Consumer Credit Agreement

Part C – Consumer’s liability, interest, charges and fees• Provisions on the cost of credit

income on loans limited to interest to: - application & service fees

Minister to impose limits, whole market or by sub-sector (but not to distort market, reduce access)

Allowed: default administration charge; collection costs; extended warranty; delivery, installation & fueling, connection taxes, charges unrelated to credit provision …at cost recovery

• Codify in duplum rule – default interest limited to settlement value at point of default

Chapter 5

Consumer Credit Agreement

Part C – Consumer’s liability, interest, charges and fees• Credit life insurance:

-Must be reasonable and conform to prescribed standards; if policy proposed by provider – charged monthly, no capitalisation of single premium insurance

–Regulator to monitor premiums & claims

–Does not prohibit insurance on value of goods purchased (if selected by consumer)

Chapter 5

Consumer Credit Agreement

Part D – Consumer’s liability, interest, charges and fees

Provisions applying to the delivery, form & content of statements of accounts in so far as certain transactions – excludes pawn transactions, discounted & incidental credit agreement

Chapter 5

Consumer Credit AgreementPart E – Alteration of credit agreement• Procedures regarding the alteration of original or

amended credit agreement & changes by agreement & provisions dealing with reductions & increases under a credit facility

Part F- Rescission & termination of credit agreements• Provides for consumers right to rescind agreement and

procedures for the termination of agreement by either consumer or credit provider

Chapter 6

Collection, Repayment, Surrender & debt Enforcement

Part A – Collection & repayment practices• Provisions regarding settlement of agreement,

including early payments

Part B – Surrender of goods• Provisions outlining process in the surrender of goods

Chapter 6

Collection, Repayment, Surrender & Debt Enforcement

Part C – Debt enforcement by repossession & judgment• Court proceedings only commence: 20 days after

default + 10 days since informed of right to approach debt counselor, Ombud etc

• Court to enquire whether or not reckless Repossession – Notify – Value – Consumer nominate

buyer or resume obligations – No response: sell at best price

Chapter 7

Dispute Settlement other than Debt Enforcement

Part A – Alternative dispute resolution• Provisions for the choice of the appropriate forum for the

resolution of disputes, including Consumer Courts & OmbudsPart B – Initiating Complaints or Applications• Provisions for the initiation of complaints to the National Credit

Regulator & applications to the TribunalPart C – Informal Resolution or Investigation of Complaints• Provisions for the proactive resolution of disputes by the National

Credit Regulator

Chapter 7

Dispute Settlement other than Debt Enforcement

Part D – Tribunal consideration of complaints, applications & referrals

• Provisions for the functioning of the Tribunal, including rules of procedure, costs & appeals & reviews

Part E- Tribunal Orders• Provisions outlining circumstances for the Tribunal to

make & enforce orders & impose administrative fines

Chapter 8

Enforcement of the Act

Part A – Searches• Procedural requirements in respect of authority and the conduct to

‘enter & search’ premises

Part B - Offences • Administrative matters set out in respect of the implementation of

the Act, including failure to attend a hearing and applicable penalties in terms of the Act

Part C – Miscellaneous Matters

Provisions including the ‘onus of proof’ and the service of documents

Chapter 9

General Provisions• Matters dealt with include the publication of regulations

by the Minister, conflicting legislation, consequential amendments, repeal of laws & transitional arrangements

Schedules 1 – 3• Provisions setting out the application of the Act,

including to pre-existing agreements and Provincial regulatory capacity

Summary

Complete overhaul of credit law, with reference to international best practices: - in order to

Modernise & integrate legislation; Remove perverse incentives to credit providers; Improve disclosure, contracting standards & create

effective access to redress; Deal with reckless lending & over-indebtedness …that will evolve & improve through case law &

revisionCreate institutional capacity for effective enforcement

THANK YOU