The Department of Trade and Industry briefed the Committee on the National Credit Amendment Act regulations and the prescription of a threshold for all credit providers. The implementation of the National Credit Amendment Act would make a huge impact in the reduction of over indebtedness and protect the rights of both the consumers and the credit providers in South Africa. The Department of Justice was also in the process of amending certain legislation in relation to debt collectors and the Magistrate’s Court Act, to try to bring them in line with the National Credit Act wording, and to standardise rates. The National Credit Regulator and the National Consumer Tribunal are now being empowered to deal with cases of reckless spending practices, backed by section17 (4) of the National Credit Amendment Act, No 19 of 2014. Coordination between regulators had been achieved, and a task team had been put in place comprising representatives of the Departments of Trade and Industry, Justice and National Treasury. The Minister of Trade and Industry had been empowered to issue binding regulations around affordability assessment criteria to ensure that credit providers would no longer choose to by-pass risk management processes associated with defaulting debtors by approving credit without first making the proper checks. The main concerns of Cabinet had been the extent of indebtedness (supported by statistics on good standing and impairment of debtors and their accounts), reckless lending, gaps in affordability assessments, the high cost of credit, lack of education and awareness about credit and the abuse of credit insurance. The National Credit Regulations and Affordability Regulations were published on 13 March 2015 in the Government Gazette, but their implementation was postponed by agreement with the industry for six months to allow the industry time to bring their systems in line. From September 2015 all industry role players were expected to comply fully and this was being monitored.
The decision to review interest rates was made in Parliament in 2013 after public hearings on the National Credit Amendment Act, and as a result of a court application by Microfinance South Africa on review of service fees. Interest rates charged to consumers were high, and had not been reviewed since 2007 and various adjustments were now being proposed in the different categories (outlined in slide 15). Consultative processes had been held and the final notice was published on 6 November 2015, and would apply to all new credit agreements entered into after 6 May 2016, based on the Repo rate of 5.75% then existing (it had since risen to 6.75%). Draft regulations on credit life insurance had been drafted by the dti and sent to the Minister of Finance for concurrence, and had been published for wider consultation on 13 November 2015 in Government Gazette No. 39407, with comments to be submitted by 6 January 2016. Some of the challenges raised were outlined, and the National Credit Regulator was conducting investigations into abuse of credit life insurance. Regulations relating to process and fees for registration of credit providers who previously fell below the threshold for registration were supposed to be published on 21 January but had been delayed. These should ensure that bad practices by loan sharks were censured, ensure that the informal and illegal credit markets are regulated and that consumers are protected.
A task team with representatives from National Treasury, the dti, Department of Justice, South African Reserve Bank and National Consumer Commission was working to try to improve credit bureau arrangements, review caps on interest rates and fees, cooperate and coordinate the regulators and regulate debt collection firms. Five cases of credit insurance were currently under review by the National Credit Tribunal.
Several Members raised queries on the interest rates; suggesting that long term loans must also be covered in limitations of fees and interests, and that the rates for unsecured and developmental loans were too high. A DA Member was particularly concerned that they were too high in respect of mortgages, did not feel that the limitations were meaningful and wanted to know if they had been benchmarked. He urged the Committee to reject those proposals, but the dti said that it would present the results of benchmarking to the next meeting. Members from all parties expressed their concern about hidden charges by banks, and also cautioned that a balance must be found to ensure that if regulations went too far in protecting consumers, this might affect the industry, which was a creator of jobs. It was pointed out that this was still work in progress and perhaps reductions needed to be done in phases.
National Credit Amendment Act and Regulations including Affordability Assessment Regulations: Department of Trade and Industry (dti) briefing
Mr McDonald Netshitenzhe, Acting Deputy Director General, Department of Trade and Industry, gave a background to the National Credit Amendment Act (the Act). He noted that research commissioned by the Department of Trade and Industry (dti or the Department) had shown inconsistency in the applicability of the affordability assessment guidelines by credit providers. Credit providers tended to overlook affordability tests, and extended credit based on listing information on the credit bureau. This prompted the dti and National Credit Regulator (NCR) to recommend to Parliament that the National Credit Amendment Act should empower the Minister of Trade and Industry to issue binding regulations on affordability assessment criteria.
Garnishee orders had also become an easy way to collect debt. Credit providers would often choose to by-pass risk management processes associated with defaulting debtors by approving credit without first making the proper checks. The Cabinet mandated the Ministers of Trade and Industry and of Justice and Correctional Services to look into the worrisome problem of the indebtedness of South African households. This Portfolio Committee also instructed the dti to attend to the cost of credit. As a result, a task team was formed comprising of the Department of Justice and Correctional Services, National Treasury and the dti. The Department of Justice amended the Magistrates Court Act to incorporate something similar to affordability assessment criteria in the National Credit Amendment Act, 2014. The Debt Collectors Act of 1998 was also amended, because attorneys had applied a different rate of interest. The judgment in the Desai matter also instructed the Department of Justice to amend the Magistrates Court Act to be in line with the affordability assessment criteria that are embodied in the National Credit Amendment Act of 2014.
Cabinet had expressed a number of concerns about debts. These included reckless lending, a gap in affordability assessments, the high cost of credit, lack of education and awareness about credit and the abuse of credit insurance. Mr Netshitenzhe quoted statistics from consumer credit records of the NCR as at September 2015, showing that out of 23.11 million credit active consumers, 12.70 million (55.0%) are in good standing, while 10.41 million (45%) are impaired. These consumers have 82.04 million accounts – of which 59.66 million (72.7%) are in good standing while 22.38 million (27.3%) are impaired.
Mr Siphamandla Kumkani, Director: Credit law and policy, dti, continued with the presentation. He noted that the National Credit Regulations and Affordability Regulations were published on 13 March 2015 in the Government Gazette. The regulation covered the criteria for affordability assessment, the need for registration by all credit providers, the powers of the National Credit Regulator to adjudicate reckless lending matters, the power of the National Consumer Tribunal to adjudicate reckless lending matters. It also discussed the prohibition of sale and collection of prescribed debt and the automatic removal of adverse credit information. After discussions with the various industry players, the Minister had postponed the implementation of the affordability assessment regulations for a period of six months beginning from 13 March 2015 in order to give time for the industry to align their systems. The regulations came into legal force on 14 of September 2015, and all industry role players are expected to comply fully with the regulations. Currently, the NCR is conducting investigations and checking on compliance by the industry.
The decision to review interest rates was made in Parliament in 2013 after public hearings on the National Credit Amendment Act. However, this review also came about as a result of a court application lodged by Microfinance South Africa (MFSA) against the dti and the NCR, in relation to the review of service fees. The dti, through the NCR, commissioned a holistic review of the maximum interest rates, initiation fees and service fees. The research conducted on over-indebtedness showed that the interest rates charged to consumers were very high and no review of interest rates had been conducted since 2007. Government Gazette No 38911 proposed changes to maximum rates for unsecured credit, from 32.65% to 24.78%, for mortgage agreements from 17.65% to 17.75%, for credit facilities from 22.65% to 19.78%, for developmental credits from 32.65% to 32.78% and for other credit agreements from 22.65 to 22.75%. Short-term credit transactions remained at 5% per month for the first loan and a proposed 3% for subsequent loans within the same calendar year. Incidental credit agreements remained unchanged at 2%. The public was invited to comment in writing on or before 5 August 2015. As part of the consultative process the dti team convened sessions with all stakeholders during the month of July 2015.
The submissions from the affected stakeholders enriched the process and enabled the Minister to make a final determination, and he published the final notice on the limitations of fees and interest rates regulations in the Government Gazette No. 39379 on 6 November 2015. The limitation on fees and interest rates regulations, as reviewed, will come into effect on 6 May 2016 and will only affect new credit agreements entered into after the effective date. The Repo rate of 5.75% was effective at the time of the Government Gazette publication .The current Repo rate is 6.75%.
With regard to credit life insurance regulations the NCR consulted and agreed with the Financial Services Board on the regulations to cap credit life insurance. The draft regulations were finalized by the dti and sent to the Minister of Finance for consultation and concurrence as required in terms of section 106(8) of the National Credit Amendment Act. The dti and the NT agreed that the draft regulations must be published for wider consultation. The consultations between the NT and the dti occurred between March to October 2015. The draft credit life insurance regulations were published on 13 November 2015 in the Government Gazette No. 39407. Major key stakeholders consulted during the meetings included the Real People Group, Capitec Bank Limited, Standard Bank, African Bank, Nedbank, The National Clothing Retail Federation (NCRF), Microfinance South Africa (MFSA), the National Treasury, Finbond Mutual Bank and some other stakeholders. The public had till 6 January 2016 to submit their proposals to the Minister for consideration.
Research and investigations showed that credit insurance was sold to debtors and included products such as retrenchment cover for pensioners and self-employed people, however, excluded such products for debtors who were actually employed. The NCR is currently taking actions and conducting investigations against abuse of credit life insurance. The regulations relating to process and fees for registration of credit providers who previously fell below the threshold for registration has been approved by the Minister. These regulations were supposed to have been published for wider consultation on 21 January 2016 but due to some technical issues with the Government Printer, it was still in progress. These regulations will catch unscrupulous loan sharks below the NCR radar who continued to charge exorbitant interest on loans, hold credit cards and social grant cards as security and effectively continued driving the poor into a deeper life of poverty. They will also ensure that the informal and illegal credit markets are regulated and consumers are protected.
The National Treasury and dti were mandated by Cabinet in December 2013 to take necessary measures to assist the currently over indebted households and also prevent them from becoming over indebted in the future. As a result of this, an inter-governmental task team was established and comprised of NT, the dti, Department of Justice, South African Reserve Bank (SARB) and National Consumer Commission (NCC). The team had a mandate to improve credit bureau arrangements, review caps on interest rates and fees, cooperate and coordinate the regulators and regulate debt collection firms.
Mr Netshitenzhe added that the interdepartmental teams all worked within their respective mandates, though they worked together. Sometimes the work was put on hold due to bureaucratic arrangements for individual members of the team, and he wanted to add that December was usually not counted as a full month for the purpose of consultation.
Mr Lesiba Mashapa, Company secretary, NCR, stated that five cases concerning credit insurance have been referred to the Tribunal because garnishee orders were obtained fraudulently, and the NCR is continuing with monitoring to ensure compliance.
The Chairperson stated that this process had been running for the last seven years.
Mr G Hill-Lewis (DA) stated that there were more people with credit than those actually employed and this was worrisome. He urged the need for speedy resolution of the credit issues of South Africans. Referring to slide 15, he observed that there was no form of concession and stabilisation of interest rate charges. He thought a rate of 18% on mortgages made no sense and felt the limitations were not impressive. He wanted a benchmark and asked for transparency from the banks on credit, since a lot charges were usually hidden from the consumers.
Mr A Williams (ANC), elaborating on the issue of hidden costs, stated that the hidden charges were usually very well concealed and insisted that a process must be put in place to ensure that such costs would become visible to the consumer. He also wanted long term loans included in the limitations of fees and interests.
Adv A Alberts (FF+) was of the opinion that people used credits for consumables, not for capital projects, because of the rising economic problems facing the nation. He insisted there had to be a perfect balance between the industry and consumers because if the regulations were to go too far in protecting consumers, it would affect the industry and it must be remembered that this industry was creating jobs.
Mr D Macpherson (DA) stated that consumers were seldom educated about their rights in relation to hidden disclosures. He agreed with the position of Mr A Williams on long-term loans. He also wanted to know if the consumers understood the content of the agreements they signed and if the contracts were prepared in languages understood by the consumers.
Mr N Koornhoof (ANC) also referred to slide 15 and felt that the rate of 27% for unsecured loans is still high, and needed to be reviewed. He asked for an explanation on how that figure was obtained. In his opinion, that was not protective of the poorer consumers. He also wanted an explanation on the increase in the mortgage loan rate.
The Chairperson asked for a full explanation on the Repo rate and wanted to know if some of the loans could be converted to long-term loans. She too was concerned about the figures presented for the developmental loans.
Mr Netshitenzhe firstly responded to the issues raised on the mortgages and stated that the credit providers had no desire to be involved when the Amendment Act was being prepared. He stated that the dti and NCR would ensure that there is a balance between consumers and creditors and that more consultations will be carried out before the Act was to be finalised, and any feedback would be gets passed to the Committee.
Mr Netshitenzhe noted the comments on hidden cost, and promised that a process would be put in place to ensure that everything about credit would be open and transparent. He assured the Committee that banks would be held responsible for any hidden costs associated with credits.
Mr Kumkani noted the views and positions of Members on the percentage rates, but pointed out that the document presented was still work in progress. He stated that there was an attempt to create a balance between the consumers and the credit providers, so that businesses would not close down. He also pointed out that no review of the figures had been done in seven years. The Repo rate formula used in calculating the rates was the easiest to use and understand, but if there was a better and easier alternative to calculating the rates, such a formula would be adopted. The issue of developmental credits was being looked into but at the same time the dti and NCR wanted to ensure that the reduction in the rates would be done in a gradual process to avoid any situation where banks would close down units dealing with developmental credits. In regard to the concerns about hidden costs, he said that banks and all credit providers were being made to disclose the total cost of any credit they gave and anyone breaching this law would have to give a total refund and be penalised.
Mr Mashapa again reiterated the need to seek a balance between the credit providers and consumers. The cost of funding credits by the providers was taken into consideration when the Amendment Act was being prepared. If a drastic reduction was done in the rates, there might be business closures, which would worsen the unemployment rate in the country. He believed that further reductions in these rates should be done gradually and in phases.
Mr Hill-Lewis again raised the issue of benchmarks and said that his question was not answered. He asked the Chairperson if the Committee would be prepared to reject slide 15 of the presentation altogether, because he was not happy with what had been presented. In his opinion, it was morally wrong for the banks and credit providers to have such high developmental rates. He asked for a downward revision of the figures.
Mr M Netshitenzhe assured Mr Hill-Lewis that the benchmarking exercise would be done and the results presented to the Portfolio Committee at the next engagement.
The Chairperson told Members she would consult with the legal department of Parliament for guidance and give them an appropriate feedback.
The meeting was adjourned.