Public procurement and localisation & consumer credit regulation: dti briefing; Preferential Procurement Policy Framework: National Treasuty briefing; National Credit Regulator on African Bank crisis, with Minister

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Trade and Industry

22 August 2014
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The Department of Trade and Industry (DTI) lamented the fact that some harboured the illusion that public procurement for localisation was a uniquely South African imperative. There was unfortunately a substantial resistance from importers of procured goods to complying with localisation conditions.  Despite this, many local manufacturers were supportive and collaborated with entities entrusted with driving such programmes.

What made South Africa unique was that it had not, in fact, used the public procurement instrument adequately.  The key to unlocking value and building manufacturing sectors and thus creating jobs, was coherent trade and economic policy across government so as to bolster employment and lower total logistical costs. The DTI considered industrial procurement to be a part of this, and saw it as system of interlocking policy instruments and programmes, which was widely used in other countries. This required systematic and incremental strengthening across the public sector, as well as support from the private sector.

The promotion of private sector support for local procurement fell under the scope of the Department of Economic Development. However, it was safe to say that support for local procurement was meagre. For example, the mining sector procured over R110 billion annually.  Such large procurement expenditure represented a huge potential for localisation.  This was not limited to procurement in the SA mining industry, but pertained to the retail and health sectors as well, and could make an important difference in support for local manufacturing.

National Treasury said a lack of buy-in and commitment was central to the challenge of localisation.  The problem was more operational than legislative. SA did not seem to see the potential in supply chain management.  There were other systemic problems, such as corruption, where supply chain managers who did the right thing in their jobs were not secure in their tenure.  Over and above this, there was a slowness to adapt progressive technologies to deepen skills acquisition through online courses and implementing procurement systems that could increase productivity and effectiveness.

Treasury was reminded of the commitment made in the State of the Nation Address (SONA), which was to procure 75% of state expenditure locally. A Member suggested there was a need to move the programme of localisation to legislation, as this was the only way to enforce it.

The DTI told the Committee that successive Industrial Policy Action Plans had shown that escalating administered prices constituted a serious economic shock to the viability and competitiveness of SA's manufacturing sector, over and above external economic shocks such as the global economic recession.  Some dangers were inevitable, such as the proposed 'carbon tax'.  This could affect the manufacturing industry negatively, unless carefully calibrated policy interventions were developed. It was clear to the DTI that production needed to shift towards energy efficiency and greater competitiveness. Thus energy efficiency constituted an economic imperative as well an environmental one, as there was a need to live up to commitments made in multi-lateral forums.

The DTI, including the Minister, Dr Rob Davies, as well as the National Credit Regulator, briefed the Committee on consumer protection credit regulation.   A review had been carried out by the DTI, which showed there were 70 pieces of existing legislation purporting to protect consumers against unfair lending. There was a concerted effort to streamline these measures – in the form of the Consumer Protection Act, the National Credit Act and the Competition Act – in order to strengthen consumer protection and allow for the disclosure of information.  Issues of over-indebtedness and affordability assessment needed urgent attention.  Research had shown that there was a significant trend toward reckless lending, a lack of rigorous affordability assessments, abuse of credit insurance, high cost of credit, judgements and garnishees, lack of education and awareness about credit, listing requirements and finally, much needed honesty and disclosure by credit providers and consumers. The DTI had published a new regulation of affordability assessments – with a closing date for comments on 1 August 2014. This regulation would include allowance for discretionary income, including the creation of a buffer amount, clarifying statutory deductions as well as the need to declare child maintenance.

Both the DTI and the NCR agreed that unsecured lending and unscrupulous lenders that targeted lower income households were a problem.   The DTI emphasised that neither it nor the NCR were financial regulatory bodies, such as the Financial Services Board (FSB), but were mandated to regulate market behaviour with the express purpose of protecting consumers against unfair lending practices.  

Members were largely satisfied with the work of regulatory bodies and appealed for greater consumer education and financial literacy programmes.  Some expressed dissatisfaction with the action, or inaction, of the DTI and the NCR in particular, and felt that given the African Bank crisis and the numerous cases of reckless lending, government agencies had failed to protect consumers. 
 

Meeting report

Department of Trade: Procurement and localisation
Mr Garth Strachan, Deputy Director General, Industrial Policy, DTI, said there were a number of key instruments that were fundamental to implementing localisation and procurement development. Those were, inter alia: the amended regulations of the Preferential Procurement Policy Framework Act (PPPFA) which allow public sector tenders to contain local content provisions; the Competitors’ Supplier Development Programme (applicable to state-owned entities and companies); the National, Industrial Participation Programme (NIPP); provisions in renewable Import Parity Pricing (IPP) contracts and other public procurement in the renewable energy space; as well as the identification of further opportunities to secure localization with appropriate policies and institutional arrangements, including defence procurement.

There was unfortunately a substantial resistance to the designations from importers of procured goods in complying with localisation conditions.  Despite this, many local manufacturers were supportive and collaborated with entities entrusted with driving such programmes.

The Competitive Supplier Development Programme (CSDP) was meant to leverage State Owned Companies’ procurement for development and transformation.   Investment in plant, skills and technology was imperative. CSDP was increasingly incorporated into the procurement frameworks and practices of Eskom and Transnet.  Its main objectives and key performance indicators were industrialisation and empowerment, involving local content, technology transfers, skills development, investment in plants, small business participation, Broad-based Black Economic Empowerment (BBBEE) and job creation.

The National Industrial Participation Programme was an initiative launched in 1997 that sought to leverage government spending and thus promote investment, exports and technology transfers.  It put conditions in place binding all procurement contracts above US$10 million so that suppliers invested in the domestic economy under the terms and guidelines provided.  These measures needed to be put in practice, as non-compliance was a serious issue across government, SOEs and the public sphere.

Renewable energy independent power producers provided another opportunity to leverage procurement for industrialisation and localisation, with accompanying spill-over effects.  Renewable energy fell under the ambit of the Department of Energy, but significant milestones had been achieved. Due to localisation targets set out, extensive capital investment had taken place and some 30 to 40% of local content had been achieved in the manufacture of renewable energy technologies.

Mr Strachan said South Africa now had strong capabilities in aerospace and land systems, as well as some in boat building, despite limited defence industry capabilities inherited from the apartheid regime. These needed to be used by defence procurement so as to create a 'spill-over' effect.  Experience suggested that strong capability existed in components and systems integration.  The A400M Airbus project illustrated that local manufacturers could be integrated into global supply chains.

The defence and aerospace industries required a 'joined up' strategic model to leverage procurement for building industrial capabilities. The 'Canada-first' leveraging defence procurement model was an example of how to build industrial capabilities from localised defence procurement.

The promotion of private sector support for local procurement fell under the scope of the Department of Economic Development. However, it was safe to say that support for local procurement was meagre. For example, the mining sector procured over R110 billion annually.  Such large procurement expenditure represented a huge potential for localisation.  This was not limited to procurement in the SA mining industry but pertained to retail and health sectors as well, and could make an important difference in support for local manufacturing.

There was an agreement in the DTI that it would support local manufacturers in the clothing, textile, footwear and leather goods sector, based on security of supply, a quick turn around for niche products, and fashion.   However, there was a need for more focused “Proudly South African” (PSA) campaigns, such as the “Buy Back SA”.   PSA was nearing completion of a review which would feed back recommendations for a stronger focus.

There had been significant improvements over the life of successive Industrial Policy Action Plans (IPAPs), ramping up procurement levers to support local manufacturing.  However, stronger policy coherence, improved legislative framework, and alignment across departments, spheres of government and entities, was needed.   Efforts also needed to be made to secure private sector support for local manufacturing.

Discussion
The Chairperson thanked Mr Strachan for his thorough overview of the procurement landscape and reminded the Committee that the South African private sector was governed by the World Trade Organisation (WTO). Despite this, it was good to recognise that the Committee had in the past appealed to the private sector to increase local procurement so as to grow the economy, and in particular manufacturing, and should continue to do so.

Dr Z Luyenge (ANC) reiterated the appeal for localisation, local procurement and the furthering of Black Economic Empowerment. He asked what the state of affairs of the nuclear energy projects in the Eastern Cape was, and if there was any opportunity for localisation. He expressed concern over the slippage in local government procurement, and asked if there was any remedial action that could be taken.

Mr D Macpherson (DA) said he thought it untrue that there was resistance to localisation and/or local procurement, as most of South African business was supportive of the idea. He disagreed with the not “splitting of contracts,” asking if such an approach would not work towards ensuring different companies benefited from government business, as the problem was much more linked to certain companies receiving most government contracts.  He welcomed the guidelines on procurement and localisation, but remarked that the most important aspect of such initiatives and frameworks was the spill-over effects, which had not taken place with the arms deal, for example.

Ms M Tsopo (ANC) asked the Department to elaborate on how best it could address the issue of compliance to localisation and the industrial procurement strategy, as there was the question of capacity.  In addition, how would this be done across the spheres of government?

Adv A Alberts (FF+) remarked that the plans were great, but SA was limited by its human resource capacity, such as skills in critical areas like engineering. Furthermore, there was a question of skills transfer. Would SA benefit in terms of skills when renewable energy companies invested locally?  He was similarly concerned about patents South Africa should have won and did not, as was the case with a South African-produced Zebra battery.  The patent had been won by Ballard, a Canadian company.

Responding to Dr Z Luyenge (ANC), Mr Strachan said the nuclear bill did not fall under the DTI, but under the Departments of Energy and Public Enterprises.  The DTI was responsible only for localisation. However, localisation in the nuclear 'island' was very difficult, as the expertise was concentrated in a few companies in the world.  Arresting of corruption -- that is to say, slippage in government procurement -- was best left to National Treasury, as they awarded spheres of government their equitable share and prescribed preferential procurement.

Answering Mr McPherson, Mr Strachan argued that there was actually serious resistance to the use of procurement as a multi-pronged approach to addressing localisation. What was needed was policy coherence and convergence on procurement strategies and the goal of localisation.  The splitting of contracts was problematic. When it came to economies of scale, splitting contracts affected profitability and would make sense only where it did not compromise local manufacture.  With respect to guidelines on procurement and the intended spill-overs, he agreed that there was a need to specify detailed goals or expectations.

He said Adv Alberts was certainly correct to highlight the skills shortage in general, but the skills shortage in critical industries and the renewable energy sector were most concerning.  However, he argued that South Africa had the potential to keep highly technical jobs in the country, as well as foster skills transfer. He made an example of a company called United Technologies, a South African firm which had been bought out by an American company and was scheduled to move to Poland.   However, the Minster and the Department had intervened and managed to save about 300 jobs and keep them in South Africa.

Presentation by National Treasury
Mr Kenneth Brown, Chief Procurement Officer at National Treasury, said that when it came to localisation and procurement, one should actually start by examining the clothes one wore.  Were they manufactured in SA?   South Africans needed an attitude change at a personal level and even more so at government level. He made an example of a conference he attended, where government supply chain practitioners/buyers admitted to not knowing the sector procurement designations. A lack of buy-in and commitment was therefore central to the challenge of localisation.  The problem was more operational than legislative. SA did not seem to see the potential in supply chain management.

There were other systemic problems, such as corruption, where supply chain managers who did the right thing in their jobs were not secure in his or her tenure.  This was an unfortunate reality.   Over and above this, there was a slowness to adapt progressive technologies to deepen skills acquisition through online courses and implementing procurement systems that could increase productivity and effectiveness.  Many benefits stood to be gained from using available technologies in planning education – the delivery of textbooks on a yearly basis was not working – and re-engineering processes to improve efficacy.  Data management at department level was also an area in which progress needed to be made, and National Treasury was currently addressing this issue.

Mr Brown cautioned against unrealistic expectations, however.   He said that a UK Department of Health official had advised him that the UK took seven years to re-engineer their procurement and supply processes.  Similarly the KZN Department of Health, which had improved their procurement and supply processes, had achieved this over a five year period.

Discussion
Mr Macpherson reverted back to the issue of local procurement and said that the question needed to be asked: why do local firms procure internationally, as opposed to domestically?  The 'sweet to business' rationale necessitated that producers procured at the lowest possible cost and best quality.  He made an example of Pakistan's textile industry that was export-dominated in terms of procurement and which had managed to move its procurement to the local market.  He added that SA had a competitive advantage in terms of quick response times, and this should be exploited. However, a stumbling block was the need for smooth demand in state procurement, as well as the private sector.

Mr B Mkongi (ANC) questioned the extent of transformation in the supply chain management sphere and the capacity to procure locally. He said he would like to know how much progress had been made since 1994 and a demographic break-down of procurement officials across the country.

Mr F Shivambu (EFF) asked Mr Brown to speak to the commitment made in the State Of the Nation Address (SONA), which was to procure 75% of state expenditure locally. He felt that there was a need to move the programme of localisation to legislation, as this was the only way to enforce it.

Mr Strachan said he agreed with Mr Macpherson that quick response was a competitive advantage in the textile and niche fashion industry.  However, quick response time was not a competitive advantage in the mining sector, for example. Another problem was that the Mining Charter, as it stood, did not contain any clause on localisation. Localisation was not sufficiently utilised.

He reiterated that there was a lack of localisation even in industries where SA companies were market leaders. This was best exemplified by the David Brown company in Ekurhuleni, which used to manufacture mining gears to a particular specification but now made its revenue from merely servicing mining gears manufactured in China – where the economies of scale existed.

South Africa therefore needed to drive a localisation program predicated on quick response times, quality assurance and after sales service.  However, the challenge of improving these areas was a problem facing the private as well as the public sector.

Mr Strachan agreed with Mr Macpherson regarding smoothing demand. He said this was a challenge, and the best example of this was the renewable energy independent power producers. The sector experienced 'lumpy' demand, which made supplier development/growth a challenge, but securing smooth demand from the state’s side was not easy.  A solution, however, lay in developing export opportunities and export credit guarantees. SA was lagging in this regard.  This was clearly seen with the 2010 Marco Polo bus project, where a South African company had received export guarantees - and procured at cheaper rates - from a foreign country, to import buses to South Africa for the World Cup.

The Chairperson interjected that the Committee had a report being drafted on the need to guarantee cheaper rates for producers.  Therefore the best way forward was for the presenters to cover concerns raised by Committee Members.

On the lack of transformation, Mr Brown said that a website had been set up to track tenders and provide a greater degree of transparency.  He had also engaged the Black Business Council and was receiving notifications of published tenders that were not awarded to B-BBEE compliant companies, or which were transformational in nature. He was investigating where qualified and compliant enterprises did not receive those tenders.

Responding to Mr Shivambu, he said that in the United States the buses used for public transport were identical for the most part, and were manufactured by the same company.  In SA, the BRT system had been introduced in a fragmented way.   Buses in different cities had been manufactured in different ways and by different suppliers.  What was even more problematic was the inability of the SA procurement system to accurately and easily provide data on what was supplied by whom.  A good example was the school furniture expenditure in the Eastern Cape, where procurement was not localised due to the fact that it had been an emergency intervention.  SA spent close to R1 billion on school furniture annually, so this was a good area in which to implement preferred procurement strategies. He again cautioned that it was not an over-night process, and it would take some time to reach the 75% stipulated in the State of the Nation Address. Preparation and care were key when implementing preferential procurement and localisation initiatives.

The Chairperson touched on Mr Mkongi’s question on what exactly had been achieved in terms of transformation since 1994, and asked him to repeat the question.  She suggested that the answer be put to the Committee in writing by Mr Brown, to avoid unnecessary travel expenditure.

Mr Mkongi repeated that he was interested in seeing an overview or surveillance of the transformation trajectory from 1994 to date, in terms of supply chain management and procurement throughout the entire state.

Mr Brown said the Minister of Finance had agreed that on 1 October a public procurement review for SA would be published. This would answer the Committee's questions on the state of procurement in the country and what the strategies were going forward to deal with the issue of transformation in the supply chain. He asked if this would suffice, but said that given the comments of the Committee, he could provide a summary of the data and present it to the Committee.

The Chairperson said this would suffice, but requested that the document be made available before he appeared before the Committee. She then asked Mr Strachan to brief the Committee on the impact of administered prices on industrialisation, reminding Members that the issue of administered prices had been addressed in the fourth parliament, and would be carried over in the fifth.

Impact of administered prices on industrialisation: DTI
Mr Strachan cautioned that the figures given in the presentation on the impact of administered prices on industrialisation were from 2012.  The regulation of administered prices (electricity; port and freight rail and road, water tariffs) was neither a function or core competency of the DTI.  However, successive Industrial Policy Action Plans had shown that escalating administered prices constituted a serious economic shock to the viability and competitiveness of SA's manufacturing sector, over and above external economic shocks such as the global economic recession.  A caveat, however, was that reliable data was difficult to obtain in a complex regulatory and institutional environment.  Some dangers were inevitable, such as the proposed 'carbon tax'. This could affect the manufacturing industry negatively, unless carefully calibrated policy interventions were developed. It was, nonetheless, clear to the DTI that production needed to shift towards energy efficiency and greater competitiveness. Thus energy efficiency constituted an economic imperative as well an environmental one, as there was a need to live up to commitments made in multi-lateral forums. All of this was reflected in DTI programmes and initiatives, such as the National Cleaner Production Centre and other incentives, like tax cuts and the Manufacturing Competitive Enhancement Programme (MCEP).

Discussion
The Chairperson thanked the DDG for the presentation, and asked him to make the 2013 figures for administered prices available to the Committee as soon as possible.

Mr Mkongi asked why SA was unable to shift relative prices in favour of less carbon intensive sectors, in particular below import parity levels.

Adv Alberts said escalating electricity and other administered prices was a serious problem. He was aware that the Minister of Transport was in the process of establishing a super regulator that would deal with high port charges. This might be a good avenue for the DTI to use in terms of addressing total logistics costs in the country.   A differentiated and well thought out carbon tax would have to be introduced so as to create jobs.

The Chairperson interjected, stating that the issue of a carbon tax was a separate issue, and would be addressed in future.

Ms M Tsopo (ANC) said it was imperative to get everyone into the same room to discuss electricity supply in the country, as this was critical to industry and citizens alike.

Mr Macpherson said that administered prices was definitely an issue the state could do something about. This was vital, as the exorbitant costs in electricity, port, road and rail logistics were harming business and needed a solution.

Dr Luyenge reiterated the need to address the electricity problem, as municipalities in some cases had arbitrary rates and performed poorly.

Mr Strachan, responding to Adv Alberts said that putting in place a transport regulator was not a solution, as there already was a ports regulator, which struggled to regulate tariffs.  However, coherent, aligned, industrial and economic policy across government departments could effect desirable changes and bring down barriers to trade, as well as provide a developmental return.   There was an alarming rate of light engineering companies shutting down in significant numbers, and unless something was done about this, job creation would not happen.

The Chairperson repeated that the issue of administered prices had been addressed in the fourth colloquium, in which consultation with municipalities, the ports regulator and representatives from manufacturing had taken place. This had uncovered some discrepancies in the information which parties had received. In these engagements, some objectives had been achieved. Port tariffs had been lowered to some extent. This was not sufficient, but was a sign that the Committee had taken action and that further engagements could produce similar outcomes.  These issues would be further addressed in an upcoming fifth colloquium on value added manufacturing

African Bank issue: the Minister and National Credit Regulator
The Chairperson welcomed the Minister of Trade and Industry, Dr Rob Davies, the Deputy Director-General for Consumer and Corporate Regulation, Ms Zodwa Ntuli, and the Chief Executive Officer of the National Credit Regulator (NCR), Ms Nomsa Motshegare.  She reminded Members that despite the Committee being briefed on the African Bank issue, it was in fact not responsible for prudential matters but was tasked with protecting consumers. She handed over to the Minister.

Dr Davies said the presentation on the African Bank matter would not be made by himself but by the DDG responsible for Consumer and Corporate regulation and the CEO of the NCR.  He highlighted another issue, and said that there was a worrying trend by so-called 'intermediaries' who stood outside the Companies and Intellectual Property Commission (CIPC) offices, claiming to have contacts in the Commission with the promise of being able to fast track company registration applications.  This matter was being investigated as there were possible links to individuals in the CIPC. This was not desirable and would not be tolerated. The setting up of a company was a seamless process that could be done electronically within 20 minutes.

Reverting back to the issue before the committee, the Minister explained that there were two types of regulators operating within the financial sector in terms of the “twin peaks” model. There was a prudential regulator. which sits in the banking division of the South African Reserve Bank (SARB) and was responsible for stability in the sector, and dealt with matters of the capital adequacy of banks, ratios etc.  It reported to the SARB, the Minister of Finance as well as the Portfolio Committee on Finance. The other kind of regulators were market conduct regulators, and they were charged with protecting consumer rights . The NCR was one of those, but its jurisdiction went beyond financial operators, as many institutions extended credit and did not fall into the category of lender. The NCR was tasked with protecting consumers against reckless lending, and targeted lower-income lending that was scrupulous and unfair. Thus the NCR was not a financial stability regulator. Therefore, neither the NCR, nor the DTI, nor the Minister himself, had the mandate to deal with or to comment on any matters of financial stability regulation in general and/or particularly the matter of African Bank. The issue of the African Bank was a market sensitive matter in terms of credit ratings etc, and the DTI would not be commenting on prudential regulatory issues. The Minister said the presentations would focus on the work done by the NCR in dealing with transgressions by the African Bank and others, the amendments to the National Credit Act, as well as other measures that needed to be put in place to protect consumers.

Ms Ntuli, DDG for Consumer and Corporate Regulation, said that a review had been carried out by the DTI, which showed there were 70 pieces of existing legislation purporting to protect consumers against unfair lending. There was a concerted effort to streamline these measures – in the form of the Consumer Protection Act, the National Credit Act and the Competition Act – in order to strengthen consumer protection and allow for the disclosure of information.  Such legislation was part of the general laws of application, but sector specific regulators did exist for the banking, energy and telecommunications industries.

Ms Ntuli emphasised the issues of over-indebtedness and affordability assessment, which needed urgent attention.  Research had shown that there was a significant trend toward reckless lending, a lack of rigorous affordability assessments, abuse of credit insurance, high cost of credit, judgements and garnishees, lack of education and awareness about credit, listing requirements and finally, much needed honesty and disclosure by credit providers and consumers. The DTI had published a new regulation of affordability assessments – with a closing date for comments on 1 August 2014. This regulation would include allowance for discretionary income, including the creation of a buffer amount, clarifying statutory deductions as well as the need to declare child maintenance.

Ms Motshegare, CEO of the National Credit Regulator, said she would take the Committee through the work done by the NCR around the African Bank matter and highlight related matters the NCR had engaged in. In terms of ensuring that creditor providers complied with the relevant Acts, regulatory assessments had been carried out to try and prevent reckless lending.  The Minister had spoken at length about the structure of financial regulation in South Africa, delineating the “twin peaks” model of prudential regulation and market conduct regulation.  Prudential regulation dealt with the safety and stability in financial systems and banking, while the NCR regulated the consumer credit industry in South Africa from a consumer protection perspective.

She said that statistical data on consumer credit trends was published on a quarterly basis. This was information submitted by credit providers, which allowed the NCR to look at types of credit being granted to consumers and also assisted them in understanding broad trends and developments in the consumer credit industry as a whole.

Unsecured credit had been topical for some time and had reached its peak in December 2012. The NCR had raised the debate on unsecured credit in 2011, as it was worried about the implication this had for consumers, even though unsecured credit at the time constituted only 10% of the total book of R1.3 billion. The NCR was now looking at a total book value of R1.5 billion. This had been raised time and again by the NCR as the rise in unsecured credit had begun to swell. There had been a contraction in the market, and in terms of the prospectors’ book, year on year unsecured credit had grown by only 5%. So there had been a slowdown.  This was a welcome trend, as the NCR believed credit could be developmental in nature but should be extended responsibly to consumers. However, consumers needed to make sure that they borrowed responsibly.

In terms of reckless lending at the individual level, the NCR looked at whether the income that was disclosed was verified by the credit provider.  Living expenses altered by consumers had to be verified. This was a loophole that had been plugged through the amendments.  Credit bureaus should see a decline in their listings if credit providers were supervised in the provision of proper affordability assessments. This was a necessary intervention, as even though affordability assessments were done, some consumers did not fully understand what they were getting themselves involved in.  Therefore, full disclosure of their obligations by credit consumers was very important.  Credit providers needed to ensure that they did not end up with over-indebted consumers, and proper affordability assessments were key to ameliorating the unsecured lending situation.

Ms Motshegare indicated there were further remedies available. A court could set aside a credit agreement or suspend it.  What the NCR normally did, in terms of referring reckless matters to the tribunal, was to designate them as prohibited conduct, as only the courts could pronounce on civil matters.  Through the amendments, however, the National Consumer Tribunal was now able declare those loans “reckless loans”. These were some of the tools at the disposal of the NCR, and they issued compliance notices to get credit providers to adjust their behaviour.  It had also addressed the issue of credit bureau listings and rescission judgements, and the removal of individuals from such lists.

In terms of the African Bank matter, the NCR had received a number of complaints from consumers dating back to 2012.  The NCR had investigated these complaints, and from the investigations, 669 loans had been found to be reckless.  Most of these loans were found to have been entered into at the Dundee branch, while 48 other loans had come from 25 other branches. The net had been cast far and wide and the investigation had stretched across a number of branches.  She emphasised this, to counter rumours that only one branch -- the Dundee branch – had been investigated.

Upon concluding the investigation, the NCR had consulted with the South African Reserve Bank as required by the Act, and informed the registrar on the outcomes of the investigation.  African Bank had agreed that those loans were reckless and explained that the loan origination system that they were using had been manipulated by agents, in collaboration with consumers. The NCR did not accept the explanation and had referred the matter to the Tribunal, despite numerous attempts to negotiate and enter into a consent order with African Bank.  African Bank had not agreed to this, and the NCR had thus been forced to notify the Reserve Bank.

African Bank had subsequently approached the NCR with a settlement agreement, which was agreed upon, and a fine of R20 million was paid by the bank. In arriving at the R20 million figure, the NCR had relied on section 151, which allowed the regulator to look at other sectors and use a benchmark to arrive at a reasonable figure, which had been done. The leniency shown in terms of the R20 million fine was in part due to the fact that African Bank had co-operated throughout the investigation, and it was their first offence. They had also agreed to remove the consumers’ names from the credit bureau records, and to write off the loans.

The NCR had conducted a study on affordability assessment weaknesses in the industry and come to a number of conclusions.  There was a lack of verification of income which applied across a number of credit providers, both banks and retailers.  This included under-disclosure of living expenses by consumers in credit applications; no credit bureau reports; delays in granting credit after obtaining consumer credit reports; lending to the maximum of the consumer’s available disposable income; and some loans were not recorded at credit bureaus. This information fed into the work that the DTI was doing, in terms of coming up with affordability assessment regulation.

Ms Motshegare took the Committee through the enforcement action taken around the issue of reckless lending.  In 2012, the NCR had conducted raids on a number of credit providers, among them 16 credit providers in the Marikana area, and a number of contraventions had been uncovered. The NCR had subsequently referred the matter to the tribunal. This had led to some collaboration with the police at the time and had ended up with a number of credit providers being arrested. On revisiting the raided areas in 2014, it was found that those scrupulous credit providers who made use of illegal practices – such as the retention of ATM cards, pin codes and ID books of consumers – had ceased to make use of such methods. Some had even closed shop, while certain loans had been cancelled by the National Consumer Tribunal.  In 2014, a similar raid had been carried out, this time in the Rustenburg area, where over 15 credit providers were picked up on contraventions.

The investigations conducted were part of the NCR’s pro-active measures being undertaken.  Over and above that, 13 compliance notices had been issued, including issues of unlawful easy credit advertising. Instances had been recorded where magazines allowed credit providers to advertise in the finance section of their magazines. That kind of advertising was not in accordance with the National Credit Act, and needed to be dealt with, so compliance notices had been issued and those magazines had since complied. Progress was being made.  Eight matters had been referred to the tribunal, and others were in progress.

Ms Motshegare said the NCR Enforcement Act would guide their actions regarding the African Bank matter.  The NCR was working with the World Bank in developing an “early warning system” for non-bank entities in the credit market.  It had been receiving quarterly reports from credit providers, and was now going to insist on getting monthly reports so that unforeseen early market trends would become detectable. Furthermore, the National Credit Amendment Act would bolster the drive to curb unsecured lending. Also, the NCR was working on the capping of credit life insurance, as huge abuses in credit life insurance were becoming prevalent.  Finalisation for that was under way, in consultation with the Financial Services Board (FSB) and the DTI.

Affordability audits would be conducted across different types of credit providers and would be tackled as soon as possible. The NCR would continue to work with credit providers to assist them with compliance assessment regulations, as well as with the Registrar of Banks and the FSB so as to ensure co-ordinated efforts in educating consumers on credit and in enforcing the various pieces of legislation.

Discussion
Mr Mkongi acknowledged that great strides had been made in protecting consumers from unscrupulous lenders. However, he questioned affordability assessments and asked how far, for example, these were being carried out adequately in retailers such as furniture and clothing shops.   Did the new regulation deal with this?  He asked the NRC to follow up on their investigations into unethical reckless lending as the investigations were now two years old.

Dr Luyenge said that consumer education was very necessary.  Had the fall of African Bank prompted the NCR to check other lenders, as well as the big four banks, as unsecured lending was not an issue to be taken lightly?

Mr C Mathale (ANC) commended the work of the DTI and the NCR, as unscrupulous lenders had been curbed. He asked if the NCR thought financial education could be incorporated into formal school education.

Mr  Macpherson said that two and half slides on the failure of African Bank was not acceptable. He had a number of questions around unsecured credit, reckless lending and the lack of action by the NCR to prevent the many cases of reckless lending.  Essentially, the NCR had failed in their mandate, which was to prevent and regulate the credit industry, as well as protect consumers.   He would like answers to a number of questions:
- Did the NCR also receive complaints from debt councillors or only from consumers?
- When did the NCR first become aware of reckless lending by African Bank and when did it begin investigating?  
- Did the NCR ever investigate African Bank on their affordability assessments and ICT reports?   Section 18 of the National Credit Act stipulated that the NCR should inform the Minister on worrying trends, therefore it was important to know if and when the NCR first informed the Minister. He further disagreed with the DDG of Consumer Regulation and that it was the job of the regulator to police credit providers.

Mr N Matiase (EFF ) said that the situation was indicative of how government, and the executive in particular, managed and protected the business of the owners of capital and the bourgeoisie to the point where the Minister of Trade and Industry was not at liberty to comment on how multi-lateral rating agencies ended up hurting consumers.  He questioned the issue of rating agencies having cart blanche to negatively impact sovereign countries’ markets.  The SA banking system had been terribly undermined.  The African Bank and reckless lending crisis was self made, and indicative of global capitalism in crisis. The issue of mine workers in the Marikana area should be highlighted, and those mine workers who were now debt ridden should be exempted and struck off the credit bureau listings. However, he did recognise the commendable work done by the NCR in the Marikana area, where it had tackled the issue of unscrupulous and reckless lending to vulnerable communities.

Adv Alberts said that many people used credit not to address an urgent need, but as a means to survive, and he therefore welcomed the early warning system regarding non-bank entities. The Committee, as well as the NCR, had been misled as the banks had appeared before the Committee last year and explained why they were lending to unreliable candidates, yet the problem seemed to persist. A good question was why banks were not lending to entrepreneurs or potential home owners. He concurred with those Members raising the issue of credit rating agencies. 

Ms Tsopo said she commended the work of the DTI, as well as the NCR, as it was not the job of a regulator to police credit providers, and it could not do so.

Mr Rob Davies agreed that unsecured lending was a problem, but this needed to be balanced against transformation and developmental goals, as the poor needed to have access to credit. This would ideally be for developmental purposes, but not much of this was happening. He further took issue with the financialisation of the retail sector, as shops were beginning to try to make money not so much from the sale of clothes, but from the interest generated.  Shops were increasingly extending credit, but did not fulfil any of the requirements or comply with regulation. The other problem was affordability assessments, which were non-existent.   What was not possible was to have government agencies inspecting every transaction and all goods coming into the country.  His directive to the NCR had been always to pursue their mandate, and not to be soft on their mandate. On the issue of public education, he reiterated that this was important work and should be linked with financial literacy. However, the crux of the matter was unequal power; where poor people had little choice in taking unfair loans.

Ms Motshegare said the new affordability assessments were key to addressing the unsecured lending trends. Financial literacy was another issue being looked at by the NCR.

Mr Lesiba Mashapa, NCR Company Secretary, responded to Mr Macpherson and said that the NCR would have to consider their answers carefully, as some things could not be disclosed in a forum open to the public.  However, the NCR was willing to furnish the Committee with answers to some of their questions, and this should dispel the notion that the NCR was not monitoring credit providers.

Ms Ntuli said that the early warning system needed to include retailers, as there was a worrying trend which was being stimulated by certain marketing strategies.  Another issue that needed to be looked at was the marketing strategies of credit providers which were unhelpful.

The Chairperson opened the floor for the last time and asked for remaining questions to be answered in writing.

Mr Macpherson complained that his questions had not been dealt with.

Adv Alberts said that it was bad for the SA economy when downgrades took place, such as was the case with the African Bank crisis. Therefore it was perhaps best if the Committee had oversight over micro lenders as well.

The Chairperson said that the African Bank crisis needed to be arrested before it became a contagion.  It was, however, necessary to exercise caution and sensitivity around an issue that was actually a prudential matter. The issue of rating agencies unilaterally affecting countries was not unique to SA, and she made an example of how France had railed against the downgrading by one such rating agency.

In response to Mr Macpherson, the Chairperson said that her ruling was for his questions to be answered in writing by the NCR.

The meeting was adjourned.
 

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