National Credit Amendment Bill [B47-2013]: briefing by Department of Trade & Industry; Key issues emerging from Trade Workshop

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Trade, Industry and Competition

09 October 2013
Chairperson: Mr B Radebe (ANC) (Acting)
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Meeting Summary

The Department of Trade and Industry briefed the Committee on the National Credit Amendment Bill. The Department had the constitutional mandate to regulate the credit environment. The National Credit Regulator and National Consumer Commission acted in the interests of the public. The model followed by South Africa had drawn international praise and had protected the South African public and economy during the recent global recession.

The National Credit Act had been under review and a wide range of inputs had been received. After a public participation process, Cabinet had recently approved the Bill which would soon be introduced in Parliament. Section 89(5)(c) of the National Credit Act was declared unconstitutional as it provided that unregistered credit providers forfeited the right to reclaim the loan money. More powers would be assigned to the National Credit Tribunal. Tighter requirements would be introduced for debt counsellors. Norms and standards would be set for affordability assessment criteria. Reckless lending would be curbed. Alternative dispute resolution methods would be addressed. Further considerations were the problems resulting from garnishee orders. Payment distribution agencies were assisting with debt rehabilitation. The current financial situation of applicants for credit should be considered rather than their history. It was a problem that even a mortgage bond had to be paid off before a person could be regarded as being debt-free. An important role of the Department was to change the behaviour of the credit industry.

Members felt that the Bill would be a step in the right direction to address the issue of indebtedness in the country. Credit life and attachment orders were not addressed in the Bill. More issues should be the subject of legislation rather than regulations. Consumers should be protected from the complex language used in agreements. The maximum interest rate formula was wrong and needed to be re-assessed. Affordability tests were often conducted in scanty fashion. False advertising needed to be combated. The names of paid up debtors should be removed from debt registers automatically.

Members insisted that the Department was not the only stakeholder. Debt had a broad range of social consequences. The exploitation of pensioners and students was particularly disappointing. A culture of saving had to be encouraged. The variety of repayment periods and interest rates was questioned. Wider communication was needed, and the use of alternate media was needed. Lists of debt should be consolidated so that names would only be on one register. Malpractices of debt counsellors, such as forcing clients to change banks, were reported. Loan sharks should be subjected to harsher penalties given the devastating consequences of their actions. The fees charged by the payment distribution agencies were a further burden on those in already challenged financial circumstances.

The Committee agreed that the provision of credit was a major issue for the country, and resolved to form a sub-committee to interrogate the situation.

Members were briefed by the Committee Content Advisor on the key issues emerging from the Trade Workshop it held on 1 August 2013. The agricultural sector played a major role in the economy, but South Africa was tending to develop a trade deficit in this sector. The sector was highly liberalised. The majority of SA’s raw agricultural products were used as intermediary products in other sectors. Packaging was a high cost factor. South African farmers were not as protected as their overseas counterparts. The regulatory environment was complex. Organised business largely supported trade policy. There was an overemphasis on tariffs as opposed to other tools. Better alignment was needed between the policies of countries in the region. The African Growth and Opportunity Act (AGOA) treaty might be terminated, or South Africa could be excluded from it in the near future.

Members were told that the recent increase tariffs imposed on poultry imports from Brazil would not harm trade relations between the two countries.
 

Meeting report

Mr B Radebe (ANC) took the chair. He welcomed all present, including the media and interested groups. The agenda was adopted and apologies tabled.

National Credit Amendment Bill: briefing
Ms Zodwa Ntuli, Deputy Director-General (DDG): Consumer and Corporate Regulation Division (CCRD), Department of Trade and Industry (dti) introduced the team from the dti and the National Credit Regulator.

Mr G Hill-Lewis (DA) had a document entitled 'Project re Policy Review' in front of him. He asked if this was a different document to one circulated previously under the same name.

Mr Andisa Potwana, dti Director: Consumer & Competition Law, Consumer and Corporate Regulation Division, said that this was the copy of the document as approved by Cabinet in August.

Ms Ntuli outlined the presentation. The regulation of credit was part of the Constitution. Consumer protection was also an issue, and the National Consumer Commission (NCC) had been established to safeguard the interests of consumers. It was important for the two regulators to work closely together. The dti had a mandate for consumer protection, particularly regarding credit. Most credit providers were financial institutions, and there was an ongoing relationship with National Treasury to discuss issues that might arise from a policy perspective. The regulators would enter into agreements to ensure that there was a protocol on matters relating to the industry.

Ms Ntuli said that the role of the dti was to create a fair regulatory environment. The mandate included investment, trade and enterprise development. The goal was to reduce the burdens on companies doing business.

Ms Ntuli said that the South African credit regulation regime was a role model to the rest of the world. The National Credit Act of 2007 had shielded the country from the worst impacts of the global recession. The dti was proud of this legislation, but it did have its challenges. The Act had come into effect in 2007 and had been developed from a policy framework developed in 2003. It introduced a new era in curbing reckless credit practice, and introduced a new practice regarding debt counselling. The National Credit Regulator (NCR) had been invited to give advice in various other countries.

Ms Ntuli said that the review process had been ongoing. When the Act was implemented the dti had started a constant impact evaluation process. The University of Pretoria (UP) had been contracted to work with the regulator and some major market players. This had helped to identify some of the challenges at an early stage. The main objective was to identify the need for legislative amendments. The relevance of the policy had been tested and found to be still applicable. UP had consulted widely on behalf of the dti. The Bill had been presented to Cabinet in April. Stakeholder workshops had been conducted in various provinces in June. The commentary period had been extended and written comments had been received from about 45 stakeholders. These comments had been taken into account. Some of the inputs had been very useful.

Ms Ntuli said that the Bill had been submitted to Cabinet in July after considering the public submissions. There had been a slight delay due to Treasury requesting more bilateral consultation. Cabinet had approved the Bill on 4 September 2013. The policy and the law aspects were sound although a little enhancement was needed. Stakeholders had indicated the need to issue more guidelines and to ensure compliance. The Act was not going to be overhauled to the same extent as with other legislation.

Mr Potwana said that there had been a monitoring process during the first five years of the inception of the Act. This had been very helpful, and some challenges had been revealed. One of the first issues was the drafting of certain definitions and cross-references, which had made implementation difficult. One of these areas was the circumstances regarding approaching the courts for relief.

Mr Potwana said that if a credit provider was unregistered at the time of making a loan, he or she stood to lose all money loaned. This was found to be too harsh and section 89(5) (c) of the NCA had been declared unconstitutional. The powers of the National Consumer Tribunal would be enhanced to curb reckless lending. The Tribunal needed to do more than it was at present. The introduction of the Act had brought in new players such as debt counsellors, but even they had mischievous members. Some qualifications were needed to identify fit and proper persons to fulfil this role, and whether this should be left to individual practitioners or could be company business.

Mr Potwana said that the dti was proposing that there be norms and standards for affordability assessment criteria. This would also impact on reckless lending. The Tribunal should be cost-effective for consumers. Court proceedings were expensive. The issue of de-registration of regulators had not been fully addressed in the Act. The proposal was that the NCR should be able to impose conditions on who could register as a debt counsellor, but there was no provision for a counsellor to withdraw from a process. This should not be allowed to happen for trivial reasons.

Mr Potwana said that there was already provision for alternative dispute resolution. Many claimed that they had a right to perform this function, but it was a contentious issue. Structures needed to be properly regulated under the NCR, which was the entity with the oversight power over all credit matters. Any body claiming to provide an alternative channel without being registered with the NCR would be prevented from doing this. Training was needed for debt counsellors and their staff. Non-registered counsellors could still gather information, but not provide a counselling service. Counsellors should be fit and proper persons and provision was needed for de-registration.

Mr Potwana said that those were the main issues. There had been extensive consultation. There was an issue of the high cost of credit life insurance. This would be investigated in the future. There were issues of high interest rates and profiteering. The claims to loss ratio indicated that vast amounts were being pilfered. Garnishee orders were administered by the magistrates courts under the Department of Justice and Constitutional Development (DOJCD). The relevant Act there should also be amended to prevent applicants being forced to sign such orders before receiving credit.

Mr Potwana said that the Matrimonial Property Act dealt with some issues adequately. Other issues were the prevention of touting by debt counsellors. There were other procedures to lift blacklisting. Stakeholders across the sector had asked why a person should have to wait for five years after rehabilitating before being afforded new credit. The proposal in the amendment was that if a person had paid off all debts except a mortgage bond, that person should be able to take on new but affordable debt.

Mr Potwana said that the regulator had looked to plug gaps. Codes of conduct should be converted into regulations. The structure of the NCR needed to be adjusted. The procedures of making complaints in the Consumer Protection Act (CPA) had been investigated.

Mr Potwana said that issues raised by Mr M Oriani-Ambrosini in his Private Member's Bill had been discussed with stakeholders. Re-arranging debt would prolong the period of indebtedness. None of the stakeholders raised the issues which Mr Oriani-Ambrosini had put forward.

Mr Potwana said that dti had met regularly with Treasury. Treasury wished to beef up the issues on proper co-ordination between the Department and regulators. Cabinet had introduced its 'removal of adverse credit information project' in response to the requirement for a credit amnesty. The powers of the NCR should include de-registering credit providers. The current proposal was that this power should remain with the Tribunal. Treasury had feared that banks might be closed as a result.

Mr Potwana said that the Amendment Bill would empower the Chief Executive Officer (CEO) to define employee remuneration for the NCR. Persons who were not fit and proper would not be registered as debt counsellors. There was a better understanding of payment distribution agents.

Mr Potwana said that Cabinet had approved the Bill. The notice was published the previous day and the dti planned to introduce the Bill to Parliament before the end of October 2013.

Ms Ntuli felt that the proposals would address the issues that had been raised. There had been comments in the media and in correspondence to the dti. Some extreme measures had been put forward. The dti needed to balance the interests of consumers, the industry and the interested groups in the credit sector. She expected that the public would have a chance to address Parliament on the issues when the hearings were held. The Act had introduced debt counselling as a profession. It had also introduced the payment distribution agencies (PDA). These agencies would reduce some of the burden on consumers by taking care of all payments, but would remain on an agreement basis and would have to be closely monitored.

Ms Ntuli felt that the issue of debt rehabilitation also needed to be looked at carefully. A person was seen as being in debt still even if the only remaining debt was a mortgage bond. The other aspect of the removal of adverse credit information, which was the initial amnesty, was that this should be on an ongoing basis. A paid-up debtor should be removed from the register on an ongoing basis. The decision to extend credit should be based on the current financial standing of the applicant. A new look was needed at the structure of the NCR. There had been several discussions on regulatory agencies. The powers for enforcement might rest with the chief executive even if a board was in place. This would be discussed at a later date. The structure of the board should be relevant to the organisation. Most of the commissions had a Commissioner with a support structure. Too many layers might complicate decision=making. There was a need for enhanced education. NCR would need additional resources to improve this aspect. The main drive should be to change the behaviour of the industry rather than in having to enforce penalties.

Discussion
Mr Hill-Lewis felt that the draft legislation was a step in the right direction to solve the problem of over-indebtedness. He was happy to see almost all of the proposed amendments of the previous private member’s bill. He did have a concern over credit life insurance and attachment orders. These were not addressed in the Bill. There was massive abuse of consumers on a daily basis. Consumers were getting ripped off by credit life insurance being stuck onto every agreement at exorbitant prices. His second issue was that there were some significant problems that should be addressed by legislation rather than in the regulations. The total costs were often hidden from consumers in complex documents. Credit agreements were often presented in consumers in misleading manners. The calculation of the maximum interest rate was provided for in the Act and set in regulations. The current formula was wrong and hurt poor consumers more. This had to be revised. This was a good time to address this issue. On the affordability test, this was a great step forward to standardise tests. Many companies conducted the scantiest tests and relied on consumers having provided correct information when appearing at the Tribunal.

Mr Hill-Lewis asked if default judgements were included in adverse credit information. Those judgements should be included.

Mr X Masasa (ANC) agreed that the Amendment was a step forward. He agreed with Mr Hill-Lewis on the complexity of credit agreements. The intention might be to confuse the consumer. This needed attention. False advertising was another aspect. Much was going wrong in that area. His aunt was no longer using a cellular telephone because of the unexpected charges being levied. NCR needed to develop an effective communication strategy. When people had paid up their debt they should be removed from the list. He called for a more proactive approach to remove the onus from the consumer.

Mr Z Wayile (ANC) also praised the dti. Credit provision was a nerve centre of the nation. This should not be the sole responsibility of the dti. A broad range of social partners should be involved. There was a direct link to the socio-economic climate in the country. South African society was still one of the most unequal. Many families did not have houses. Orphans had lost some of the property left to them. There was a huge effect on marriages, with many people committing suicide because of debt problems. This broad range of issues had to be considered. Some people always targeted pensioners, and scoundrels held onto the identity documents. This made it difficult to register deaths of the elderly. Pensioners were left with nothing the day after they were paid. These people had to look after siblings and orphans. Even students were deeply in debt. Some of these realities had to be considered. There needed to be a bigger impact through preventative measures. The culture of saving needed multi-stakeholder involvement. This culture should be taken up as a national campaign, considering other social realities. The media brought so many temptations, either through advertising by credit providers or simply encouraging unaffordable life-styles. There were a number of people in the value chain regarding garnishee orders. Some workers were not considered in the process. The majority of workers across the board had resigned in order to utilise their pension funds. This was a glaring problem. A joint programme was needed by social partners to address this. He did not understand the rationale between longer repayment periods for houses than cars. After paying off a mortgage for twenty years the original price had been paid five times over. More forums were needed. Community radio stations and churches should also be involved.

The Chairperson agreed that this was an emotive issue.

Mr N Gcwabaza (ANC) asked whether credit listings could be consolidated so that a person only had to remove him or herself from one listing. He also felt the need to reduce the high interest rates. Some houses cost less than a car, but cost five times more once paid off. Debt counsellors did collect money while PDAs consolidated payments. There had been complaints from consumers over debt counsellors who forced their clients to change their bank.

Mr G McIntosh (COPE) arrived and noted he had been at another Committee meeting.

Mr Hill-Lewis had heard the concerns on the issue. In the majority of cases, over-indebtedness was due to illegal operators offering credit at rates of up to 200% to people who would not qualify for such loans. The maximum penalty was twelve months in prison, but such people were ruining the lives of their customers for decades. He advocated much harsher penalties. There was a credit company that owned its own credit life company. This was a serious conflict of interest.

Mr G Selau (ANC) said that the PDAs were a middleman between the consumer and the creditors. This would not be a free service, and would impose an extra burden on consumers. He asked in whose interest they were working.

Mr Mabasa said that there was a question of who would resolve the issue of illegal moneylenders, which Members referred to as 'mashinistas'. Banning such people would drive them underground and cause more harm. They should be legalised but strictly regulated. A greater policing capacity was needed with heavy penalties for any contravention of the law. In many places this style of credit was a way of life.

Mr McIntosh asked if the policy review was the one conducted by University of Pretoria (UP).

Mr Potwana replied that it was.

Mr McIntosh agreed with Mr Mabasa. It was easy to pass a law only to see unintended consequences. It was an imperfect society and there would always be people trying to access funds. He had made a private loan to one of his employees that morning who needed dental treatment, and would be committing an offence if he charged interest. The moneylenders were often unscrupulous. These people were well known in the community. Government needed to act carefully as these people were already operating underground and were technically in breach of the law if not registered. Credit was vital to drive the economy, but people must not be exploited. He could not see anything wrong if this form of business was properly regulated.

The Chairperson said that serious issues had been raised. He did not favour the American system of government, but their Congressmen were able to assert themselves. Such an approach was needed when Members were confronted with such everyday issues. He added the example of a lady in Soweto who had lost her home due to debt. He thought that the regulator would monitor such issues. The issue of credit was the oxygen of the economy, but some responsibility was needed. This was the initial briefing on the Bill, and he saw the need for the Committee to form a study group across party lines to interrogate the matter.

Mr Hill-Lewis was in full agreement, and the issues needed to be investigated thoroughly. He cited a lady who had been given a credit card from a major bank. The card was in the colours of Orlando Pirates, and she had been told that the card was for fans of the club. She had not been appraised of the repayment conditions.

Ms S van der Merwe (ANC) proposed a major advertising campaign to remind the public of the old adage: “If it's too good to be true, it probably is”.

The Chairperson agreed on the need for a thorough approach despite the looming rising of Parliament. A lot of harm could be done in the five years before another review was possible.

Ms Ntuli replied that many of the issues raised fell under the NCR. Some of the credit practices did undermine the purposes of the Act. Disclosure of information was an often-ignored requirement. Stakeholders had made it clear that if the consumer did not understand a contract then it should be ruled invalid. An unregistered credit provider would not be bound by the provisions of the law, and should forfeit any money loaned to consumers. This could then not be used as a deterrent if this provision was set aside by the Constitutional Court. There were trends where entities that established credit providers were providing the same services as the unregistered operators. More proposals would be brought to the Committee at a later stage of the processing of the Bill.

Ms Nomsa Motshegare, NCR CEO, was well aware of the problems with credit life. NCR had identified that credit life constituted about 11% of the cost of credit. It was sad to see how this product was being abused. NCR was working on this, and some banks were working on capping these payments. Four PDAs had now been accredited. Once a consumer fell under a PDA they were no longer liable to pay fees to debt counsellors. The formula was working. More than R10 billion had been distributed to credit providers which might otherwise have had to be written off. There was some money going to costs but she felt this was not exorbitant.

Ms Motshegare said that there had been raids on the mashinistas in most provinces. Some of these persons had been arrested for illegally retaining identity documents and bankcards. It was difficult to regulate someone who operated from the boot of his car, but pension payout days were one place where such people could be encountered

Mr Lusiba Mashaba, NCR Company Secretary, said that there was a code for credit providers. A reasonable cost of credit life assurance had been determined as well as the way in which this should be disclosed in an agreement. The eventual intention was to consult with the dti. Garnishee orders would be addressed in regulations, and a limit would be set. Many consumers were left with nothing after these orders had been serviced. Credit providers would have to conduct a financial assessment when applying for a garnishee order. The dti had calculated the formula for interest payments. Previously disadvantaged communities had been seen as higher risk customers by the banks and higher interest rates had been charged. This had motivated the need to standardise costs.

Mr Potwana said that a structure had been calculated for reasonable credit life insurance.
The proposal on garnishee orders had been forwarded to DOJCD. No person should be forced to sign a blank attachment order. The old method was calling a debtor to appear in court, where affordability would be determined before a garnishee order was issued. The total cost of credit was assessed from time to time. The smaller the loan the higher the interest rate. There might be reasons for that. One of the reasons might be the risk associated with unsupported loans to low income earners. On default judgements, the adverse information provision would include that. The CPA prohibited false marketing practice, and there should be a look as to how this permeated into the credit sector.

Mr Potwana replied on mashinistas. Thresholds were set to allow for people to make private loans. The prescribed rates of interest would still apply whether or not the credit provider was registered. The thresholds were perhaps too high, and this could be investigated. He doubted that a private person would make loans to more than ten people. Sometimes people took the mashinista route in order to avoid being subjected to affordability assessments. He hoped that there would be very strict affordability measures to prevent those who cold not afford the repayments from receiving credit. Study loans were a particular case.

Mr Potwana said that banks did offer lower rates for secured lending. The proposed amnesty should be automatic. People had now known how to apply for the previous amnesty. Within seven days of a debt being paid up, the credit provider was obliged to remove any adverse credit information. The PDAs were a new animal brought up by the Act, but the dti was starting to appreciate their value. The cost charged had been assessed. PDAs brought value across the credit sector. Consumers were better able to pay rearranged instalments.

Mr Potwana said that the code of conduct would find the practice of debt counsellors favouring a particular bank as being unethical.

Ms Ntuli said that important issues such as garnishee orders had been raised, and would be considered by the dti in further processing the Bill. Abuse of these practices was leading to poverty. Companies often over-collected, and the consumer had to fight to get the extra deductions returned. The issue of the mashinistas was important. The NCA had been introduced to nullify their influence, as people were being kept in a cycle of debt. The dti wanted to facilitate responsible credit advancement while combating reckless lending. Some things could not be brought into the law but the Minister could issue regulations as issues arose. The sale of debtor books was one issue. Debtors should be advised of this possibility as small issues cumulated into major issues. She noted the criticism of the formula and it was time to reconsider this. Consumers were being made to sign up for a number of other things.

The Chairperson said that it was up to Members to take the issue further. The Committee would roll out a plan to deal with it once the Bill was introduced. A lot of issues would arise from the Bill, and the State Law Advisor (SLA) would be called on to provide assistance.

Mr McIntosh had skimmed the policy review. He suggested that the only hard fact was that 19.6 million people in the country had active credit records. The extent of the problem was not really known. The mashinistas were operating in what could be called a grey market. Perhaps a marketing company could do research into the extent of the lending problem.

Mr Hill-Lewis felt that the extent was known. Workers were striking because all of their salaries were going to garnishee orders and mashinistas. In any township, one could see signs advertising quick loans. The signs were mostly hand-written, and these people were not registered. He was glad that the dti had accepted his criticism of the formula. He would like to see a copy of the Constitutional Court judgement on the forfeiture of loans. Companies were selling credit agreements, most of which were under garnishee orders. This sounded ethically questionable. These services were widely advertised.

Key issues emerging from the Trade Workshop held on 1 August 2013
Ms Margot Herling, Content Advisor to the Committee, briefed Members on the Trade Workshop held on 1 August 2013. She said that agricultural issues raised at the Trade Workshop included the fact that 70% of agricultural products ended up as intermediary products in other sectors. Although the sector contributed to employment, there was relatively low support for farmers in South Africa. There was a problem with the production of smaller farms. About 3% of SA gross receipts were supported as opposed to higher percentages in other countries. Imports were now exceeding exports. The agricultural sector was highly liberalised. There was still a trade-off in favour of manufactured goods. The costs of packaging eroded profits, accounting for about 30% of costs. There were a number of players in domestic food control. Each had its own set of interpretations. Current mechanisms were not tight enough. A World Trade Organisation (WTO) compliant policy was needed.

Ms Herling said that organised business generally supported trade policy. Trade policy over-emphasised tariffs against other tools. New trade issues were climate change, private standards, unfair global value chain practices and the effect of internal market structures. Trade agreements were being implemented too slowly. There was a benefit from a shift in global values and new procedures would be needed regarding technology, skilled labour and efficient and affordable services.

Ms Herling said that there was a need for South Africa to jettison non-tariff barriers, such as differing axle loads on trucks and rules on origin. Non-tariff barriers normally impacted on small, medium and micro-enterprises (SMME) which contributed up to 60% of trade volumes. Rules-based agreements had not been enforced properly. Political will was needed to enforce Southern African Customs Union (SACU) policies. Regional policy had to be better aligned.

Ms Herling continued that in terms of the AGOA pact, there was an increase in the export of manufactured projects. AGOA would end in 2015 and the possibility of termination, even if only of South Africa's involvement, was being considered.

Ms Herling said that exports to the European Union (EU) were concentrated on mining products, whole vehicles and automotive components. There were many threats from EU policies.

Ms Herling said that there were investment concerns over the termination of bilateral investment treaties. The service sector should received more attention. The cost of services was an issue, including energy. If there were unfair global competitive practices, these would nullify any gains being made.

Discussion
The Chairperson said that the report would not be adopted at this meeting.

Dr Brendan Vickers, the dti Head: Research and Policy: International Trade and Economic Development (ITED), said that South Africa and Brazil were the last major countries to ratify the agreement. A written list of the parties still to ratify the agreement could be provided.

Mr Hill-Lewis asked what the ramifications of the increased tariffs would be on trading relationships, particularly regarding imported poultry, with Brazil would be.

Mr Selau asked what the 28% was.

Dr Vickers responded that there were strong relations with Brazil. The increased tariffs on poultry was a business matter, just as Brazil was investigating tariffs on South African products. Business should proceed.

The Chairperson said that Brazil was taking the issue to the WTO.

Ms Herling said that the trade balance was the difference between exports and imports. This was negative at present.

The Chairperson said that this was an incentive to export more goods.

Dr Vickers said that EU was still looking for more market access while not reciprocating by importing South African goods. This would further impact on the trade balance.

Conclusion
The Chairperson said that there had been a number of apologies for the meeting the following day. It would be impractical to bring a Deputy Minister from Pretoria to address just three Members. The meeting would be rescheduled. A briefing was needed on the anti-piracy campaign as South African artists were suffering.

The meeting was adjourned.
 

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