National Credit Amendment Bill [B47-2013]: public hearings Day 3

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Trade and Industry

30 January 2014
Chairperson: Mr N Gcwababa (ANC) (Acting)
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Meeting Summary

Submissions were presented by Mr Simon Mantell, Capitol Software, the National Clothing Retail Federation and the Black Debt Counsellors Forum.

Mr Simon Mantell said there were five reasons why the short-term credit industry in South Africa was strangling the economy. These were hidden charges and other costs built into a short-term loan; the effective interest rate charged that conspired to ensure the debtor would never be able to service the monthly installment; the debt became a life sentence because the debtor had no way out; this caused low employee morale and reduced their disposable income. From the government’s side, a first requirement should be to register employers who actively managed their employees’ debt and applications for credit as “responsible credit-managing employers” on a national database with a point scoring category for black economic empowerment (BEE) verification. Legislation should make it mandatory for any credit provider to ascertain whether any potential client was employed by an employer registered on the database. Credit provided without the approval of such a registered employer, waived all rights to an emolument attachment order in favour of the credit provider. Businesses assisting its employees actively in the management of their debt would register as an employer on the government’s database. Thereafter it would negotiate with its commercial bankers to consolidate all the debt of “identified and responsible employees” into one loan per employee at far more attractive rates. The employee would be able to access affordable credit and the development of a form of revolving credit would further allow these employees to purchase goods and services at discounted cash prices.

The Committee in discussion focused on the responsibility of the consumer, that caps should be placed on outrageous fees and charges and credit providers should be forced to state the cost of credit more clearly, the destructive impact of debt on employee morale and the judicial system.

Capital Software supported and applauded the registration and regulation of payment distribution agencies (PDAs). The section 44A amendment was vague when it spoke about objective criteria and there was no reference made to the National Payment System Act. There was no provision for a debt counsellor with sufficient capacity and capability to make the payments nor was there an option for consumers to elect to distribute payments themselves. This was an opportunity to investigate the costs of the PDA system. If the costs were excessive the system should be adapted so that monies rather went to earlier debt settlement. It was recommended that reference be made to the National Payment System Act and Directives 1 and 2 of 2007, that the requirements of registration and experience of PDAs in terms of the National Payment System Act and Directives 1 and 2  be included and that costs be reduced to industry norms and standards. The goals were that more money should be allocated to early settlement of debt, equal and fair access for all participants and stakeholders in the National Payment System, no barriers to entry, a level playing field and increased competition.

The National Clothing Retail Federation (NCFR) said the industry did not repossess goods in instances of default and rarely resorted to measures such as emolument attachment orders. On average, about 70% of clothes sold in South Africa was imported from the East, but the membership stores in NCFR sold the bulk of the 30% locally manufactured clothes. NEDLAC had asked the Department of Trade and Industry if this Bill could be submitted to them as part of the social dialogue agenda but there had been no response.

The Code of Conduct should not be issued by the NCR, but should be defined, drawn up and agreed to by stakeholders and inconsistencies in the Code could be changed by the regulator. There were similar concerns around the voluntary association with ombuds and the sincere attempts made by the industry to develop industry based solutions with stakeholders. The removal of adverse credit information project was of great concern to the industry. The information held by the various credit bureaus was very valuable to credit providers and was an effective tool when assessing risk and granting credit. The proposed affordability guidelines was also a matter of concern. The proposed extension of power and discretion to NCR and National Consumer Tribunal was too broad and would not afford sufficient protection to credit providers. The wording of section 140 gave wide powers to NCR to take any enforcement action contemplated in the Act.

The Committee asked about enforcement by the NCR and the concerns around the affordability guidelines.

The Black Debt Counsellors Forum (BDCF) noted debt counselling was an important aspect in the debt review process as well as within the National Credit Act. Its recommendations were:
- Voluntary debt mediation: Section 129 provided for consumers to engage with credit providers to discuss arrears. The legal status of the outcome of that negotiation was in question, because when the consumer approached the debt counsellor, the credit provider had a consent to judgment form that came from that arrangements made. It was recommended that voluntary debt mediation should only be done through section 86 and section 129(a) agreement should not be converted into an offer to settle.
- Consumers under debt review with rearranged mortgage loans were required by Regulation 27 to satisfy all debt obligation. This excluded consumers from the credit market for up to 30 years. It recommended that a clearance certificate be issued if all shorter obligations were satisfied and the mortgage was not in arrears.
- It recommended that section 88(3)(a) be amended to include clarification that the consumer in default under the credit agreement ‘is subject to debt review’. In section 88(3)(b)(ii), ‘consent order’ should be replaced with ‘rearrangement agreed between the consumer and credit providers’.
- Section 140 stated that an NCR official should first investigate criminal allegations, but the NCR did not have the expertise to deal with such allegations.

The Committee asked for clarification on the proposed amendments, affordability assessments and the of balance of power between credit providers and consumers.

The Chairperson concluded the three-day hearings by saying the Committee would take all the issues into consideration during deliberations. The direct and indirect cost of credit and the burden of over-indebtedness on consumers and creditors were key considerations. Everyone should take responsibility for reckless lending that kept consumers in perpetual over-indebtedness. The cost of credit should be fair enough to keep credit providers in business and competitive without overburdening consumers. Credit providers should do business prudently and consumers should be prudent payers. It was everyone’s responsibility to ensure that access to credit improved economic growth and inclusive economic participation.

Meeting report

In the absence of the Committee Chairperson and the Committee Whip, Mr J Gcwabaza (ANC) was the elected Chairperson for this meeting. The Chairperson welcomed everyone to the meeting.

Mr Simon Mantell’s submission on the National Credit Amendment Bill
Mr Simon Mantell, owner of Mantelli’s biscuit factory, said he wrote an opinion piece for Business Day in 2012 on the five ways micro lending was strangling the South African economy as a way of creating awareness of pernicious business practices. He followed the article up with another piece for Business Day that illustrated solutions to the challenges in the aftermath of Marikana and the role that emolument attachment orders are reported to have played in the tragedy. The National Credit Act was fatally flawed and any amendments to the Act are futile.

As an illustration, he said an employee of his borrowed R10 000 from African Bank in 2006 with an initiation fee of 7%. The loan period was 18 months with a monthly repayment of R1049 which meant total repayment would be R18 882, an effective rate of 92.3% was charged. She paid compound interest on the loan and an average of 6% bank charges every month. After 12 months she reduced the principal debt to R4 000, but fell into financial difficulties and the account was later handed over for collection and the Magistrate signed an emolument attachment order for R21 000. After contacting African Bank, they changed the rules and said they would write off R11 000 as a gesture of goodwill. His business was reflective of most standard businesses in South Africa and about 30% of his employees had emolument attachment orders. As long as a debtor was employed, these institutions were assured of payment because emolument attachment orders played into these practices.

The five reasons the short-term credit industry in South Africa was strangling the economy:
- Hidden charges and other costs built into a short-term loan created effective charges of more than 92%.
- The effective interest rate charged conspired to ensure the debtor would never be able to service the monthly installment.
- The debt became a life sentence because the debtor had no way out.
- This caused low employee morale.
- It reduced disposable income.

From the government’s side, a first requirement would be to register employers who actively managed their employees’ debt and applications for credit as “responsible credit-managing employers” on a national database with a point scoring category for black economic empowerment (BEE) verification. Legislation should make it mandatory for any credit provider to ascertain whether any potential client was employed by an employer registered on the database. Credit provided without the approval of such a registered employer, waived all rights to an emolument attachment order in favour of the credit provider. The business deciding to assist its employees actively in the management of their debt would register as an employer on the government’s database. Thereafter it would negotiate with its commercial bankers to consolidate all the debt of “identified and responsible employees” into one loan per employee at far more attractive rates. The employee would now be able to access affordable credit and the development of a form of revolving credit would further allow these employees to purchase goods and services at discounted cash prices.

Discussion
Mr G McIntosh (COPE) said Mr Mantell was a great South Arican and a great employer and should take pride in the issues and concerns that he raised, but Marikana could not be blamed on emolument attachment orders. Lower income people had a simple and uninformed concept of debt, and most had ways of financing like ‘stokvels’, the lay-by system, and farm workers in some instances accessed credit and funding through the landowners. In the micro lending arena, people usually needed smaller amounts of money urgently and the practicality of Mr Mantell’s proposals was questioned. What would have happened if the employee had approached Mr Mantell first when her debt was still at R4 000. The consumer had also a responsibility and micro lending had been described as the poor man’s overdraft.

Mr Mantell said he probably would have made contact with the bank, but in most cases people did not seek help before the amounts got out of control.

Mr G Hill-Lewis (DA) said he wished Mr Mantell could have been there the day before to put these questions to the banks. Caps should be placed on all the outrageous fees and charges and credit providers should be forced to state the cost of credit more clearly.

Mr Mantell said it was possible that those issues could be addressed through proposed amendments, but the National Credit Act as it stood, was supposed to protect consumers against the abuse and it simply did not.

Mr X Mabasa (DA) said the submission showed clearly how the working class got trapped. He asked for proposals or specifics how the Bill could be amended to address the challenges.

Mr Mantell said there was little faith in the system because of the abuses and there was not much he could see that could be practically done to address the issues.

Mr Z Wayile (ANC) said the proposed amendments had specific objectives and there were expectations that these proceedings would address the over-indebtedness endemic. He asked what the relationship and the collaboration was between the employer, the credit provider and the judiciary with regard to the garnishee order and the administration process. He asked what impact did over-indebtedness have on employee productivity and how many workers used their provident fund as mitigating measures against over-indebtedness.

Mr Mantell said in the judicial system it so happened that a consumer had a principal debt of R10 000 and four years later an emolument attachment order was attached for R21 000 and that could not be right. The National Credit Act stated that the costs and interest could not amount to more than the principal debt and this should be enforced in the courts but it was not. In most cases the debt collecting agency was from another province and consumer and court processes were heard without the consumer given a chance to attend, contest or respond. Over-indebtedness had a tremendously destructive impact on productivity. It was destructive to the morale of workers who had to do manual or menial work knowing at the end of the week or month a substantial amount would be deducted from one’s salary.

Mr D Swanepoel (ANC) asked what solution was proposed, specifically with regards to compound interest. He asked would it not be considered patriarchal if an employer started making decisions on behalf of staff regarding access to credit.

Mr Mantell said as it stood people were already told what amount of credit, if any, they could access by banks or credit providers. If employees signed up to the system as proposed, Standard Bank, for example, would charge 15% interest on R20 000, which was relatively low, because they knew the business was sound and there would be revolving credit available to an employer that could go and buy cash products, which meant no additional lines of credit were incurred.

The Chairperson asked Mr Mantell to provide the Committee with written succinct proposals that could be incorporated into the Bill.

Capital Software Presentation on the National Credit Amendment Bill
Managing Director, Mr Jacques De Wet, said Capitol Software supported and applauded the registration and regulation of payment distribution agencies (PDAs). With specific reference to section 44A, the proposed amendments were vague when it spoke about objective criteria and there was no reference to the National Payment System Act. There was no provision for a debt counsellor with sufficient capacity and capability to make the payments nor was there an option for consumers to elect to distribute payments themselves, because if PDAs failed to make payments, the consumer would be held responsible. This was an opportunity to investigate the costs of the PDA system, and if the costs were excessive, the system should be adapted so that monies rather went to the earlier settlement of debt.

It was recommended that reference be made to the National Payment System Act and Directives 1 and 2 of 2007, that the requirements of registration and experience of PDAs in terms of the National Payment System Act and Directives 1 and 2 of 2007 be included and that the costs be reduced to industry norms and standards. The goals should be that more money is allocated to early settlement of debt, equal and fair access for all participants and stakeholders in the National Payment System, no barriers to entry, a level playing field and increased competition.

There was no questions from the Committee, but the Chairperson said the Committee could contact Mr De Wet for written comment at a later date.

National Clothing Retail Federation (NCFR) submission on National Credit Amendment Bill
NCRF Executive Director, Mr Michael Lawrence said most consumers started their credit journey through clothing purchases and the NCRF comprised membership of the Woolworths Group, Edcon group, Foschini Group, Mr Price Group, Truworths International and Queenspark. The industry did not repossess goods in instances of default and rarely resorted to measures such as emolument attachment orders. On average, about 70% of clothes sold in South Africa were imported from the East, but the membership stores held by NCFR sold the bulk of the 30% locally manufactured clothes. NEDLAC had asked the Department of Trade and Industry (DTI) if this Bill could be submitted to them as part of the social dialogue agenda for which there had been no response yet. This was a matter of concern as the public participation process had not been satisfactory.

The Code of Conduct should not be issued by the NCR, but should be defined, drawn up and agreed to by stakeholders within the industry and inconsistencies in the Code of Conduct could be changed by the regulator. There were similar concerns around the voluntary association with ombuds and the sincere attempts made by the industry to develop industry based solutions with stakeholders.

The ‘removal of adverse credit information’ project was of great concern to the industry. The information held by the various credit bureaus was very valuable to credit providers and was an effective tool to be used by them when assessing risk and granting of credit. The proposed affordability guidelines was also a matter of concern. The Bill proposed NCR and National Consumer Tribunal were given an extension of their power. The discretion given was too broad and this change would not afford sufficient protection to credit providers. The wording of section 140 cast wide powers onto the NCR to take any enforcement action contemplated under any section of the Act.

The emphasis should be on robust interaction and conversation on issues around the National Credit Amendment Bill.

Discussion
Mr Wayile said there was a statement made about the Department of Trade and Industry (DTI) not responding to social dialogue at National Economic Development and Labour Council (NEDLAC) level and he requested clarification. There was emphasis in the submission on the Code of Conduct and it seemed the proposal called for self-regulation in the industry, but the government represented all spheres of society and was a custodian to the cause to ensure that all role players were represented. He asked for clarification on the concern about enforcement by the National Credit Regulator (NCR).

Mr Lawrence said NEDLAC sent a note to the Minister in November 2013 to ask if this Bill could be submitted to them as part of the social dialogue agenda and there had been no response from DTI. NCRF in no way opposed the amendments, but it should be allowed within the context of the regulatory and legislative space for the industry to establish voluntary based agreements that could be moved into the regulatory space. The proposed amendment spoke very broadly about NCR enforcement and there was no clear information on possible appeals processes.

Mr Hill-Lewis referred to the written submission and said he understood the clarification needed about section 129 and the definition of ‘dispute’. This would be better addressed by DTI. He asked for clarification about the concerns mentioned on the affordability guidelines in section 82.

Mr Lawrence explained that there were different nuances to the conversation that happened at different levels and there were much to learn from others, not only from other credit providers, but also other stakeholders and this could only be achieved with robust conversation. The industry was incredibly reliant on the integrity of consumers to provide correct information and many consumers had an additional stream of informal income that could not be proven with documentation. This was an ongoing conversation with the NCR and it could open the door to unintended consequences.

Mr Mabasa referred to the NCRF proposal for section 82 that a provision should be included that required an open and transparent public participation process, and asked what could be done to improve the process beyond what it was. The concerns about section 83 that extended the powers of the NCR and the National Consumer Tribunal would address the overburdened court system. He asked how these amendments would negatively affect the industry.

Mr Lawrence replied that the amendments to the powers of the NCR and the National Consumer Tribunal were very broad. Credit providers were part of the society and clear guidelines were needed that would sufficiently protected both the consumer and the credit provider. These issues should be addressed through robust dialogue. If there were mechanisms in place for the consumer and the credit provider to resolve a matter before referral to the NCR, most cases dealt with by the NCR would only be the extreme cases.

Mr McIntosh said he was glad to see the person responsible for selling South African clothing and asked why other retailers like Pep Stores was not a member of the federation. He referred to the Ethiopian clothing traders, which was quite extensive in Johannesburg and asked if contact had been made to include them in the federation.

Mr Lawrence said NCRF was a voluntary federation with no limitation and any retailer could join, but the quantum of clothes in most of the stores were imported.

Black Debt Counsellors Forum (BDCF) submission on National Credit Amendment Bill
Mr Keystone Sono, BDCF member, said the forum supported the amendments to the Act. Debt counselling was an important aspect in the debt review process as well as within the National Credit Act. The submission addressed aspects of the amendments that would cause contradiction and confusion.

Voluntary debt mediation
Section 129 provided for consumers to engage with credit providers to discuss arrears. The legal status of the outcome of that negotiation was in question, because when the consumer approached the debt counsellor, the credit provider had a consent to judgment form that came from that arrangements made. It was recommended that voluntary debt mediation should only be done through section 86. The Section 129(a) agreement should not be converted into an offer to settle.

Regulation 27- Clearance certificate
Consumers under debt review with rearranged mortgage loans, under regulation 27 were required to satisfy all debt obligation. This would exclude consumers from the credit market for up to 30 years and it was recommended that a clearance certificate should be issued when all shorter obligations were satisfied and the mortgage should not be in arrears.

Section 88(3)(a) and Section 88(3)(b)(ii)
It recommended that section 88(3)(a) include clarification that the consumer in default under the credit agreement ‘subject to debt review’. In section 88(3)(b)(ii) ‘consent order’ should be replaced with ‘rearrangement agreed between the consumer and credit provider’.

Section 140
This section states that an official in the NCR should first investigate criminal allegations, but the NCR did not have the expertise to deal with such allegations.

Discussion
Mr Hill-Lewis referred to the recommendations for sections 88(3)(a) and 88(3)(b)(ii). He interpreted the recommendations to be exactly the same, just with different wording, and asked for clarification. The recommendation on the forum for section 140 was also interpreted to read the same, unless it was suggested that the preliminary investigation in practice by the NCR was too extensive thereby delaying the criminal justice process. If so, this needed to state that the preliminary investigation was to establish prima facie evidence to be referred to the NCR.

Mr Sono said an agreement that was subject to debt review was a process that would culminate in an order and a consent order was the product of such a process. Complicated cases with fraud and criminal allegation that are referred to the NCR should be referred to the National Prosecution Authority after establishment of prima facie evidence. The NCR was not capacitated to deal with such cases and section 140 should clearly state that.

Mr Swanepoel asked if the forum ever came across debt where no affordability assessments had been done, and asked for comments on the fairness of affordability assessments.

Mr Sono replied that the debt counselling industry was very complex. The affordability assessment procedure was compromised by both desperate consumers that needed money and credit providers desperate to make a profit. Debt counsellors had come across debt incurred where no affordability assessments had been done. The amendment that the National Consumer Tribunal should deal with reckless lending would simplify the process, because it was difficult to prove through the court process.

Mr Wayile asked if practical examples could be given of agreements between credit providers and consumers specifically with regards to the balance of power in such agreements. He asked for clarity on  regulation 27 and the issuing of clearance certificates. He asked what the magnitude of fraudulent activities were in the debt review process and whether the capacity existed to deal with these activities, because it was an issue raised by many stakeholders.

Mr Sono replied that in practice when consumers approached credit providers to discuss arrears, the credit provider would produce an emolument attachment order and in terms of section 129 the agreement between credit providers and consumers should have clear objectives on how to deal with arrears. Consumers did not have the ability or knowledge to negotiate for an extension of the credit agreement because in most cases consumers had to negotiate with the attorneys of the collection agencies. The balance of power as it concerned legal agreements should be dealt with in section 86. Consumers who were placed under debt review with rearranged mortgage loans and who had settled all their debt after five years, were not able to access credit because of the mortgage loan and should be cleared in terms of regulation 27.

Mr Sono said fraudulent activities were rife especially with garnishee orders and consent to judgments and as long as these activities were dealt with within the NCR, there would be no tangible results. Hence the proposal that these allegations should be forwarded to experts to investigate. An investigation into a credit provider showed that this provider was not registered with either the DTI or NCR, had no tax number, but had been trading for a long time. Its investigation was still not completed because of the capacity challenges of the NCR.

Mr Hill-Lewis asked how the consent to judgment forms to enforce emolument attachment orders could be restricted.

Mr Sono said section 129 could be amended to include reporting that could be done on the arrangement between credit providers and consumers.

Mr McIntosh said it was a very good submission that spoke directly to the issues as they happened in practice.

The Chairperson said the Committee would take all the issues that had been raised in the past three days into consideration during the deliberations. The direct and indirect cost of credit and the burden of over-indebtedness on consumers and creditors were key considerations. Everyone should take responsibility for reckless lending that kept consumers in perpetual over-indebtedness. The cost of credit should be fair enough to keep credit providers in business and competitive without overburdening consumers. Credit providers should do business prudently and consumers should be prudent payers. It was everyone’s responsibility to ensure that access to credit improved economic growth and improved inclusive economic participation. It was every person’s responsibility to create a prosperous nation. Failure thereof, needed to be evaluated through the service delivery protests and strikes, because municipality revenue came from people who were able to pay for services and the rising costs of living drove employees to strike action. The private sector wanted to grow and be competitive, government wanted to govern the country successfully and the people of this country wanted to live reasonably comfortably and earn their living.

The meeting was adjourned.

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