Consumer Credit Insurance abuses / interventions, Debt Relief, African Bank; Remote Gambling Private Members Bill [PMB3-15]

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Trade and Industry

13 May 2016
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The meeting was attended by the South African Reserve Bank, National Treasury, National Credit Regulator and Financial Services Board.

National Treasury discussed consumer credit and the plethora of charges that went with it, as well as household indebtedness. The 2008 global financial crisis was discussed and its impact on South Africa. The Portfolio Committee were concerned with over indebtedness, reckless lending, abuse of insurance products sold with credit and failure of African Bank. There were high fees and layered charges made retirement funds difficult to understand for consumers and they should have been getting much more out of them. Twin Peaks was briefly discussed. Treasury suggested more joint parliamentary Committee sittings because just as the regulatory framework was fragmented, so was Parliament and more coordination needed to take place.

South Africa was ahead of the curve in 2008 during the global financial crisis, but it should not think it was still ahead now, as it was falling behind again. The financial sector was global but it was regulated nationally, so the only way to regulate it was through international standards. The IMF conducted a financial sector assessment programme every five years. The key areas of focus since 2008 were the Too Big to Fail bank, counter derivatives and shadow banking. The key objective of Twin Peaks was focused on prudential regulation. Market conduct on the other hand was whether financial institutions treated their customers fairly, and the National Credit Regulator (NCR) was the regulator in this regard.

The cap on credit insurance was discussed, however service providers always managed to circumvent caps eventually, which was why a long term solution would have to be developed.

The Financial Services Board (FSB) spoke about the consumer credit insurance landscape with particular focus on Treating Customers Fairly. There were different commission models that applied to long term and short term insurance. There was also a distinction between mandatory and optional cover. Regulation and supervision was complicated. There were six outcomes for treating customers fairly that had to be met by financial institutions.

FSB needed to look at how it could improve competition and disclosure and what sort of interventions could be put into place. Challenged faced by FSB were that they did not have a complete toolbox to deal with the challenges. Credit insurance was not a separate class. Life insurance could be sold by life or non-life insurers and there were commission concerns. FSB had some short term interventions planned for 2017 and consultations had already begun.

The Remote Gambling Bill was discussed. The Bill had been with the Committee since May 2015. A motion of desirability was considered by the Committee and was rejected. The DA voted in favour of desirability.

The Deputy Governor of the South African Reserve Bank spoke of reckless lending, moral hazard and the African Bank. He stated that writing off debt had three implications – the South African Reserve Bank (SARB) would not be able to provide financial support without collateral, they incurred the loss of the loan and it would have to be made good by the fiscus and it would compromise the good book.

There was a suggestion by a Member that an integrated social security system could be a solution. Members asked who benefited from retirement funds when beneficiaries were not being paid out. They made it clear that banks were to blame for South Africa’s current situation and they should take responsibility. They commented on reckless lending leading to reckless recovery, for example the newly released Auction Alliance findings. Another issue raised was of illiterate people not understand exactly what they were purchasing and they could not be expected to know what was in the fine print in terms of disclosure.

National Treasury said people got credit too easily. What they were suggesting were radical solutions but they were unsure whether everyone would rise to the challenge.

The SARB Deputy Governor said that SARB would never support a bank that had done anything recklessly. The African Bank had been resolved through a bail-in as opposed to a bail out. It was the first time this had been done in South Africa.

The Chairperson stated that the departments needed to coordinate and cooperate to combat these challenges. The interventions needed to solve these without destabilising the economy.

Meeting report

The Chairperson welcomed Department of Trade and Industry (dti), and recognised the Deputy Director-General, Mr N Macdonald and his colleague Mr S Kumkani, the Director of dti. She also welcomed the National Credit Regulator (NCR), Ms N Motshegare, CEO, Mr O Tongoane, the Deputy CEO, Mr L Mashepe, Company Secretary and Mr S Kumkani, in his capacity as the Director of CCID. The South African Reserve Bank (SARB): Mr F Groepe, the Deputy Governor, Mr K Naidoo, the Deputy Governor and Mr R van Wyk, Registrar. The Financial Service Board (FSB): Mr J Dixon, Deputy Executive Officer: Insurance and Ms L Jackson; National Treasury: Deputy Director-General Mr L Momoniat and Ms R Sheoraj, the Director.

National Treasury overview on consumer credit
Mr Ismail Momoniat, Deputy Director-General: Tax and Financial Sector Policy, said that the Committee was lucky to have the Registrar since this was probably his final public appearance as he was retiring. For all those present, they worked closely together which was not collusion but a good example of coordination. When they saw the Committee had queries on consumer credit, they had the same concerns about the plethora of charges payable when buying furniture, buying it on credit which was the first issue and then all the other charges, like insurance. Many did not even know they had that insurance. They certainly had many concerns about current practices in the market. The other concern was household over-indebtedness, a big challenge in South Africa, and something on which more had to be done, they had not done enough to deal with this problem.

They would also situate these problems and give the Committee a sense of the broader financial reports. He did this because the financial sector was unique in that it did not deliver any real products. It was a service and it facilitated. It was like the blood circulation system, which allowed the economy to work and allowed people to trade. If someone looked at the lessons of 2008, the failure of a bank could be a major disaster for the economy as a whole. In 2008, even the failure of an overseas bank like Lehman caused a recession in South Africa and at least a million people lost their jobs. Just imagine what a crisis there would be if one of the banks here were to fail. This was the big lesson from the 2008 financial crises. They used the word GFC often - Global Financial Crisis - because in a sense it was a paradigm changing event. It moved the world from a light touch regulation over the financial sector toward a very heavy touch regulation. It was no longer a touch; it had become a heavy strangulation regulation.

The issue was they needed to regulate and monitor the financial sector, but especially the SIFIs, which was the new jargon for Systemic Important Financial Institutions. They needed to regulate these intrusively, intensively and effectively. These were draconian words that had become appropriate in the international sphere. Most of the major banks, and even surprisingly smaller banks, were SIFIs. This means they got to boast more capital and they were regulated more intrusively. This was not restricted to banks; certainly, major insurance firms would be classified as SIFIs. There was an issue of being a Global SIFI, the international banks, the number was around 30 or so of the major financial institutions, one of which was Barclays. The other larger South African banks were regarded as domestic SIFIs and regional SIFIs.

The big question for National Treasury, was what problems they were trying to solve or what they knew to be problems. Just from the invitations that had been extended, parliamentary committees were concerned about over indebtedness, reckless lending, abuse of insurance products sold with credit, failure of African Bank, ensuring that they were always working towards avoiding another 2008 crisis. The question was whether all of these issues were inseparable and distinct, whether they could be put in separate boxes and solved one at a time. Unfortunately this was not possible, they were all connected. There was always the question of whether it could be solved within the system or whether there was a structural problem in the system, which would mean that if one wanted to solve the problem, they really were not going to solve it in a sustainable way. After 2008, most countries had assessed the architecture of their regulatory systems and tried to deal with the structural issues.

South Africa was not directly involved in the financial crisis in that none of our financial institutions were affected, so it had some time to solve the problem. It was eight years on now and they were probably running late in coming into line. South Africa may have been ahead of the curve in 2008, but the lesson learnt was to say that there was such a good system, so nothing would happen. The danger was that that set in a complacency. Also, while they may have been ahead of the curve, they were now behind. Taking something related, like money-laundering standards, they were certainly amongst the countries that were ahead of the curve. Today, South Africa’s application of anti-money laundering standards was behind the curve, and as a result the financial institutions risked being fined, if not by them then by their regulators, UK and US regulators and regulators in Tanzania for example. It was important to understand that South Africa was lagging. In a sense, another good example, was that South Africa was far ahead when we started regulating credit. However, South Africa was not ahead of the curve now. Since then, many other countries had set up regulators to regulate their national credit industry and may well be ahead of South Africa. South Africa should not take anything for granted.

Types of failure in the system – high fees and layered charges, trying to understand the retirement fund charges one realised that these were opaque and made you to feel like you were too stupid to understand, this was what people wanted you to believe, because they did not want anyone to ask questions. However, there were no stupid questions and the most basic questions needed to be asked. In the retirement industry, if one looked at particular assumptions, it was found that if one took 40% of the growth of retirement funds, assuming that one worked like in the old days from 20 to 65, it may be found that there was a small charge of 1%, which by the time one retired it could be 40% of the growth. This meant that one could have easily doubled their savings, however no one toy toyed because you never see the money. It was not as blunt as a bank charge. These were worse than bank charges in some industries and it was scandalous.

The over-indebtedness levels were high at 72%. There was a lot of credit mis-selling. There were failures from 1994 in Saambou Bank, African Bank and Fidentia. There was a bulking scandal many years ago. Payday lenders were allowed to operate as if they had the democratic right to do so, when they should be banned. Google had just stopped allowing them to advertise. There were ponsi schemes and the list could go on and on.

They were not present to speak on Twin Peaks, however the contents of the structural issues needed to be taken into account when looking at how they solved problems. The Financial Sector Regulation Bill, which implemented the Twin Peaks, was currently before the Standing Committee on Finance. National Treasury had hoped for more joint sittings, there had been a few, but Mr Momoniat thought that a few more were necessary, because just as the regulatory system was fragmented, Parliament was fragmented, purely because they fell under different ministries but the system was all interconnected and at some point the entire picture needed to be looked at.

The key challenges that National Treasury looked at in the Twin Peaks system, are structural, which required radical solutions. Most people were concerned about how safe financial institutions were; how safe were savings and retirement funds - if it says that in 20 years time one would be paid monthly from their retirement fund, would that be done as promised, would the institution be safe, would the bank go bankrupt and if so what happened to that person?

After 2008, most countries had assessed their architectural system. Not having been directly involved in the financial crisis, South Africa had some time to resolve issues. It was eight years on so the country needed to move along. South Africa was now behind standards.

Financial institutions were held to higher standards. How does a financial institution have ethics? Do they hide their charges, do they layer their charges, do they care about their customers, do they treat their customers fairly? These were systemic issues, whether the financial system was posing a risk to the stability of the entire system. This was important because if that happened, a former minister said it would be too ghastly to contemplate a bank failing.

One should not think that the country was ahead of the curve today. South Africa should not take for granted that they were ahead of the curve. There were constant moans about high fees and trying to understand retirement fees and the charges. One does not ask questions, no questions were stupid. They had to ensure that SIFIs were ahead of the curve.

Aside from everything else, the system was very much interconnected. It was not just concentrated, where four banks would dominate the financial sector, four firms would dominate the insurance sector, or four firms would dominate short term insurance. It was found that the same institution was not only amongst the biggest banks, but also the biggest insurers and asset managers. So even when there was a small bank that failed, because of the interconnectedness, the entire system could come crashing down. It was a network -type problem.

With the failure of African Bank, it looked like it was not a major bank, that on its own it did not look systemic. However, when it was put under curatorship, many were very worried for weeks after because it was a systemic institution looking at the interconnectedness. SARB just released the Myburgh Report which outlined the events that led to the crisis and tried to look at who was responsible and the role of the board.

In terms of challenges, the regulatory system currently was fragmented. The more regulators you had, the greater the scope for arbitrage. There was SARB, FSB and NCR all doing different things. Even within the institutions, there may be different Deputy Registrars, and did they talk to each other? So the system was extremely fragmented in South Africa.

It tended to cover activities - there was a Long Term Insurance Act, a Short Term Insurance Act, a Banking Act - and when something did not fit into one of these pigeon holes, no one knew what to do. Mr Momoniat did not believe the current system protected customers adequately. If it did, South Africa would not have an over indebtedness problem, high charges, consumers would not be sold inappropriate insurance. In South Africa, many people bought funeral insurance, but not just one; three. People bought legal insurance as well. Looking at the claims ratios for those insurances, most people hardly use it. People, however, did not insure their car. The insurance industry was charging very high premiums and therefore two out of three cars on the road were not insured.

The regulatory system did not do enough to reduce scope for financial institutions failing. It was not to say that there should not be failures. It helped for those reckless institutions to go insolvent and for shareholders to pay the full price. Unfortunately, if it was a SIFI, one could not take such a blasé attitude and preventative measures had to be taken. That was what created moral hazards in the system.

There were many authorities in the system, and he asked the Committee to tell him whether it was possible to structurally coordinate all these players.

Given that the financial sector is global but regulated nationally, it was found that the only way to regulate the financial sector was through international standards. Therefore, banks had Basel lll, insurance had the IAIS, which Mr Dixon and Ms Jackson would explain, the securities industry and related sectors had IOSCO.

South Africa was involved in G20 and the Financial Stability Board. These had made a whole string of regulations which had to be adhered to. Over and above this were money laundering standards, which South Africa had signed up for. People did not take signing up as enough. Every five years, money laundering standards and how they were implemented were assessed through a mutual evaluation. The IMF conducts a Financial Sector Assessment Programme (FSAP) every five years. It was found that these looked at implementation of each of the standards. This test could not be passed 100%>. There were additionally, thick volumes, on banking, insurance, securities and an annexure on money laundering.

A number of recommendations had been made, some of which National Treasury liked, some of which they did not like and some of which they differed between themselves. FSAP did say that coordination was very weak. If this test was failed, overseas investors did not place reliance on your regulatory standards, which meant they looked much more closely at the institutions. There had been a recent incident where USA, UK and Tanzania all posed a fine on one of our banks. These fines could become very large. They needed to ensure that they were meeting those standards, otherwise international institutions would not want to deal with South African banks.

Even where South Africa does not agree with something - if the US has a ban against Iran, even though South Africa does not recognise sanctions, only UN sanctions, South Africa was forced to follow it, because if not, the banks do not have access to the dollar market, to the correspondent banking, and it is impossible for them to fund our trade transactions. Basically, our economy would grind to a halt. It was found that our own institutions end up taking strong steps, not because government tells them to do so, but because they fear action from overseas regulators, even where they did not see those areas affecting us.

The key areas of focus since 2008, the one is known as Too Big to Fail banks, over the counter derivatives and shadow banking. Shadow banking, since looking at credit banking, was important to look at. When institutions act like a duck, quacks like a duck and walks like a duck then it had to be regulated like a duck; not that its shadowing, because some shadow banking was good. If they did exactly as a bank did, you did not want regulatory arbitrage, there had to be some regulation. When there was a crisis and you had not regulated it, if there was a firm that did not call itself a bank and yet operated like one, it could very well, because of the interconnectedness, cause a crash that had not been foreseen. The regulators had to be watching all the time.

Looking at FSAP, it commented on the regulatory system being fragmented, regulators were uncoordinated, it looked at our regulatory regime. When a bank had a failure, it went into curatorship. It was not usually allowed to go insolvent, because people would rush to take their money out of the bank which would have had a spark effect on the rest of the financial sector. FSAP commented about South Africa’s current curatorship problems, even with the African Bank, National Treasury found gaps, they had to come in with special legislation to create a good bank and a bad bank. The big issue was that a lot of the powers needed to be enforced at an earlier stage, not only when there was a problem.

The key objectives of Twin Peaks was focusing on prudential regulation, in other words whether institutions could deliver on their promises.

The key objectives of Twin Peaks was focusing on prudential regulation, in other words whether institutions could deliver on their promises The key objectives of Twin Peaks was focusing on prudential regulation, in other words whether institutions could deliver on their promises. They had not looked at market conduct; that is how the interest rates had been manipulated. He assumed the Committee had heard about libor rigging.

The Chairperson asked Mr Momoniat to explain this.

Prudential meant, was the financial institution healthy? Could it deliver on its promises? If it kept peoples’ deposits, would it be able to pay out if people wanted to withdraw? If someone was a member of a retirement fund, was the retirement sound enough to pay today and on the day you die to you or your beneficiaries to provide the annuity income? Prudential was whether the banks were safe and SARB focused on that.

Market conduct was how the financial institutions treated their customers and whether they were fair. How much did it charge its customers? Did it dream up charges that it could not justify? When it set benchmarks, was there collusion? Did they conduct their business in an ethical way? Would it make the front page of the Sunday Times if it ever came out? This had become a big area. The 2008 crisis, whilst it was not a cause, a trigger was the sub-prime loans, where banks just kept giving loans. That was a form of market conduct failure, which if not watched could become a prudential issue as well.

NCR was essentially a market conduct regulator of credit. It did not do prudential regulation. National Treasury was saying that all institutions should now be subject to both prudential and market conduct regulation. For some, it would be more intrusive and intensive, and for others less so. There were degrees of proportionality that were needed.

SARB were good central bankers, but the bankers was not always friendly to consumers. They were, in the sense that they worried about prudential, but when it came to market conduct, it was not to say that SARB was not trusted, but they focused on making sure the banks were safe. There should be another regulator to do market conduct. There were inherent conflicts - the more banks charged, the more profitable the bank, the healthier it is. As a central bank, it would be happy with that from a prudential perspective. However, one also needed to look at it from the customer’s perspective, were the charges fair, were customers being treated fairly? There needed to be a separate market conduct regulator. Even though they knew they were fragmenting the sector and that created scope for arbitrage, but they were focusing on two very different objectives. In doing so, they both needed to be coordinated. They could have either one undermine the other’s objectives. For example, banks could not be told that they charge too much so should charge nothing and then the bank goes under, it became a prudential and financial stability crisis. So although National Treasury felt there needed to be a dedicated regulator for each of these objectives, it was critical there be effective coordination and co-operation.

If one looked at the system, there was a prudential regulator for banking, for insurance, for retirement. It was done by activity. Similarly, with market conduct, and hence there was the scope for arbitrage. One could take any institution, a well-known company that dominated medical aid, which was not regulated as a financial institution but rather by the Council of Medical Schemes. That same insurer offers insurance, and does banking. There were all these regulators but did they talk to each other? They were all doing prudential. That was where one saw serious weaknesses. He was not going to go into detail on Twin Peaks. SARB had been extended to not only be an overall macro prudential regulator, but also a micro prudential regulator, so that they were looking at everything, not only banking. The FSB was to be transformed into a market conduct regulator.

By having the dedicated responsibilities, the system would be more effective. Looking at systemic stability risk, even in the SARB, there was a Deputy Governor responsible for prudential authority and another for overseeing financial stability. With the Governor there were two objectives and coordination was important - there was Financial Services Oversight Committee - which NCR and other financial regulators formed a part of. The bigger Council of Financial Regulators could get a hold on a whole lot of others who may not be involved in the systemic issues.

For the consumer, the current system was confusing. Ultimately, National Treasury was working toward one system of licensing, so one would not go to one regulator for insurance, and another for banking. Here there were two authorities, and they were wanted to implement one system where both were involved. It would be one system of licensing, one system of supervision, one system of enforcement, one system of tribunals, one system of ombuds. At the moment, the system was structured so that there were two dedicated regulators; the NCR and the Financial Sector Conduct Authority (FSCA). Co-ordination was the watch word.

African Bank, and now that the Myburgh Report was out, as a holding company would not have been regulated before. Through the holding company there were even loans between subsidiaries, African Bank and Ellerines. NCR was responsible for the asset side of the balance sheet, the loans made by credit. The bank supervision department was responsible for the liabilities side, or the same institution for the same banking activities. South Africa’s system was quite fragmented.

He would not go into co-ordination except he wanted to note a challenge which was also one for Parliament. Just as with their architecture, Parliament had different committees overseeing different activities. This was similar with indebtedness, there was the Department of Justice, dti, National Treasury, NCR, FSB, SARB and National Consumer Commission (NCC). It was an ineffective system. No one parliamentary committee could look at this system effectively. They would love to come do a full presentation and deal with problems like garnishee orders, debt collection practices - because there also payment systems are involved.

Insurance was something they look at. It usually formed part of another sale. One could buy furniture and suddenly the furniture salesman was also a credit provider.

Ms Reshma Seoraj, National Treasury Director: Insurance, continued that the key point with insurance was were there steps taken to cap the cost of credit insurance? The practices seen emanating in the market were that service providers in the markets actually tried to circumvent caps, whether they were interest caps or caps on fees. In the public domain, everyone was aware of a few cases where consumers were charged delivery fees, extra cost on credit insurance and the like. So whilst, as an interim measure, National Treasury supported the proposal to cap the cost of credit insurance, they did think over a period of time, as part of a broader review of the effectiveness of these measures, they needed to look at a more holistic perspective of a broader cost of credit over a long time.

Mr Momoniat stated that the financial sector was a well-paid industry. Many thought simple solutions would solve the problems. But there were all kinds of other charges as well. People found ways around the system. So there needed to be holistic way of dealing with this. Unless the structure was looked at, National Treasury submitted that whilst they tried some of these mechanisms, the practice was that it was easy to avoid what was wanted. There may be perverse outcomes. In looking at solutions, it did require a lot more technical work, a lot more co-ordination between the regulators. Simple solutions were not as effective, especially in the financial system. If that was not acknowledged, it posed greater risk to the system.

Mr Momoniat concluded that this gave a taste of the entire system with a focus on the big problems. They needed to figure out what was structural and what could be resolved just by improving the current system.

The Chairperson said she hoped that this broad overview, with the focus on household indebtedness, would enable the Committee to move forward. She added that they were not closing this matter this session, which ended shortly, but it would be picked up again in August. It enabled the staff to approach other Committees, particularly Finance and Justice, to get together on this matter so there was not duplication. At the same time each Committee would be able to address the issues specific to its mandate.

Consumer Credit Insurance abuses: briefing by Financial Services Board (FSB)
Mr Jonathan Dixon, FSB Deputy Executive Officer: Insurance, hoped the presentation would give context to the consumer credit insurance landscape, and particularly the acronym TCF, which stood for treating customers fairly. TCF was the approach to market conduct regulation and supervision which underpinned how under Twin Peaks, the future FSCA would perform its mandate. FSB wanted to show how market structure concerns were picked up and look at actions to date. They also wanted to show how the regulatory framework needed to be further strengthened to deal more effectively with concerns and abuses in the market. They would also talk about next steps in terms of plans and interventions.

The consumer credit insurance (CCI) landscape was not homogenous. There were different segments of the CCI market. Part of it was about the distinction between long term insurance (life insurance) that was credit life insurance when someone died or was disabled and short term insurance, which was mainly asset insurance - where debt was paid off if the asset itself was lost, stolen or damaged. What was confusing was that short term insurers could also do credit life insurance. That confusion was to be addressed going forward.

Different commission models applied to short term and long term insurance which further complicated things. There was also a distinction between mandatory cover in terms of s106(1) of the National Credit Act (NCA) versus optional cover in terms of s106(3) of that Act. There were policies written on an individual risk rate basis depending on the risks of an individual versus those written on a group basis. There were also target markets with different levels of sophistication, so there was credit life for home loans which could run into millions of rands. On the other hand, it was credit life for small unsecure loans. So there was a broad spectrum of markets. Lastly there were different distribution models, some sold directly by brokers and others through retail outlets. The point was that it was a complex market - different pricings, different benefit offerings and sometimes different regulatory treatment depending on sub-segments.

The market was also subject to a fairly complex landscape of regulation and supervision. On the one hand there were the insurers who were subject to the Long-Term Insurance Act for life insurance or the Short-Term Insurance Act for asset insurance. The FSB for insurers covered prudential regulation, looking at the financial soundness of the institutions, but also market conduct regulation of insurers, in terms of policy holder protection rules. To note upfront was that the current policy holder protection rules did not cover product regulation powers themselves. That was an issue they wanted to come back to. Basically, a current challenge was that the current market conduct framework in insurance regulation did not give FSB the power to regulate products themselves. That was a gap that needed to be addressed.

There were the people who sold or gave advice on credit insurance. Those could have been the insurers themselves or it could have been their agents, sometimes retailers. They were subject to the Financial Advisory and Intermediary Services (FAIS) Act. This was supervised by the FSB, which covered the intermediary services and advice.

There was also the National Credit Act covered by the NCR where costs of CCI charged by credit providers was subject to regulation in terms of having to be reasonable. The insurance supervision was guided by international standards set by the International Association of Insurance Supervisors (IAIS). FSB made sure their framework stayed in line with that. They were currently busy ensuring they met with international standards. One was on prudential side, which was Solvency Assessment and Management. That was going to be like the Basel lll for insurers. TCF which they were busy implementing, was also making sure that they met international standards on market conduct. This was all subject to international review and peer review. TCF was core to how FSB was handling its job. He introduced Ms Jackson who responsible for driving and embedding TCF in the FSB, to talk about conduct and structural concerns in the market.

Ms Leanne Jackson, FSB Head of Market Conduct Strategy Department, stated that TCF was about seeking to ensure that a set of specific outcomes was delivered by financial participants and the financial institutions regulated by the FSB. The six outcomes listed were not a set of rules, there was no legislation. When it came to the Twin Peaks legislation under the FSR Bill, it would follow that, these steps would be embedded in a more explicit way. These six outcomes were used to assess the conduct of financial institutions, used as a yardstick to see if they were meeting the outcomes and not just ticking boxes. It was also used to assess FSB’s own regulatory frameworks. Within their rule making powers, where they do set rules and requirements, they were establishing whether the framework was supporting the delivery of these six outcomes or whether they needed to potentially intervene to make them happen.

The first outcome was probably the most important, and it spoke to the culture of the financial institutions. What it wanted was for customers to be confident that they were dealing with entities where fair treatment of customers was central to their corporate culture. This was not just about having nice slogans on their walls but to actually be aware of their risk management processes, their governance structures, to see whether those processes actually reflected an interest in the customer.

The other five outcomes spoke to the life cycle of a specific financial services product. From product design stage, were those products being designed in a manner that they thought through the target market. It talked through the distribution chains - so where advice was given was it suitable to a particular customer. Was adequate information being given and was it the right type of information for the target market. When it got to delivery, did the product ultimately deliver on the customer’s expectations? Certain expectations were created when the product was sold, and were those actually being met when push came to shove. When it came to the point where customers had to access their funds, make a claim against the institution, they should not be faced with unreasonable barriers imposed by the financial institutions in order to do so.

Judging the consumer credit market against those six standards - it was not a homogenous market so not every form of credit insurance was as problematic - but in the retail space, FSB was concerned that it did not deliver on these outcomes. For instance, certain product features were not always suitable to the target market and the NCR had been focusing on the sale of retrenchment insurance to the unemployed. Customers were required to be offered a freedom of choice about which credit insurer to use. Practically, though, that did not happen as it should.

There were also concerns that the information provided to consumers was not always appropriate for the target market. There was a lot of stuff said on paper, but the appropriateness and checking whether the consumer actually understood, FSB found wanting. Many credit insurers were not transparent and this was exacerbated by the fact that it was bundled with another transaction. The consumer’s mind was not on buying the credit insurance, it was on securing the loan or purchasing the asset. Regarding the outcome that advice given was suitable, the concern was that in most of the distribution models there was no advice, even though sometimes there should be. They were typically sold on a non-advice basis coupled with the fact that it was a bundled transaction that the customer was not necessarily focused on and potentially where the sale of the credit with the asset was done relatively aggressively. The risks to consumers was apparent. It also tended to be an upfront transaction. The credit insurance, if focused on at all, was done with little or no ongoing information or reminders about the cover. The products were very difficult to substitute. It was all but impossible for a consumer to decide once he has a cover to replace it with one he considers better. It was theoretically possible but very hard to do in practice. Submitting claims and complaints became difficult.

However, over and above these conduct concerns, what concerned FSB was that the failing not only showed that potentially the culture of the firms was not what it was supposed to be, but also they were systematic of the structure of the CCI market. This was not true of every single CCI model, but certainly a large proportion of those impacting consumers.

The value chain - the different players like the credit provider, insurer, intermediary who sold the products were all interconnected and it was highly complex. The same entities or companies in the same group of entities, were the credit provider, the insurer, the intermediary and sometimes even the policy holder, the credit provider was also the policy holder, plus it was getting commission for selling the policy plus selling the credit. It became ripe for conflicts of interest. It made it difficult for FSB when they tried to determine what was happening in the market. FSB had to reasonably look at where the costs and profits were sitting on those value chains because they sat upon multiple entities. In many instances, when speaking of excessive profits in some of these insurance models, the response from those entities was that FSB could not look at insurance in isolation because the credit provider was running at a loss, whereas this was a group and it needed to be looked at collectively. So it was important for them to have a big picture view, and not just look at insurance on its own.

FSB was also concerned that, within these complicated group structures, because it was possible to potentially make very high profits from insurance, there may be less incentive for credit providers to worry about the quality of the credit provision and how good the credit risk assessment they do is. If that book proved not to be profitable, it did not matter, because high costs could be charged on the insurance side. That interconnectedness make that kind of cross-subsidisation a greater risk. The very fact that one was dealing with a captive market, in terms of South African law, a credit provider was allowed to insist on taking out credit insurance as a precondition to granting the credit and as a result the customer cannot meaningfully opt out of it. They were captive and were not focused and were not concentrating on the terms and conditions of the policy at the time of transaction. Their immediate need was to obtain the asset.

As a result, the competitiveness, of shopping around and looking for different options, did not fully materialise in the market, which made substitution difficult. Part of this was that because this was a different kind of distribution model with different interrelations, the price from a pure insurance cost perspective of credit structured as credit life policy, was by comparison a lot higher than a free standing cover. These were not practically available, there were no products on the market where one could buy life insurance from a separate insurance company just to get a loan to pay for a fridge. It tended to be part and parcel of a larger transaction.

At the other end of the product line, there were other obstacles to post sale services, claiming difficulties, improving disability cover, beneficiaries not always being aware the cover existed and under claiming, and providing advice in this market was also difficult. The provision of advice and the regulatory obligations that came with it, made it a pricey model which in turn drove up the costs of the cover.

Mr Dixon spoke about what actions had been taken to date and the plans going forward. The first thing to report was that in 2014 there was a joint technical report by the National Treasury and FSB on the Consumer Credit Insurance Market in South Africa that was published and shared with Members. That spoke to the TCF and market structure failings which Ms Jackson had outlined but also put forward proposals for public consideration.

The report dealt with various proposals, the first being regulating the price of consumer credit insurance. The options included capping premiums, or alternatively capping the total cost of credit. FSB was very supportive of dti’s credit life premium caps. They believed it was an urgent and necessary intervention to deal with the worst case outliers. What was also discussed with dti and NCR was the monitoring of effectiveness of these regulations over time and FSB wanted to work jointly with them on that. In a two year period they would have a sense of whether they were working or whether alternative interventions were necessary.

The second part of the paper noted that additional interventions were needed over and above pricing interventions. This was important because whilst FSB did think pricing interventions were important, it did deal only with half the problem. There could be a situation where an insurer was charging a premium below the cap but there were still very low claim ratios on those policies. It was therefore still very profitable for the insurer and the credit provider who was partnering with the insurer, but was not really adding value for the consumer. That from a market conduct perspective was what FSB really cared about, whether the policies were actually offering real value to clients.

One could see the usual market forces that were to make for competition and proper pricing and value of items did not work. That was why a specific section of the report spoke to the need for product standards, product interventions and to look at whether there a minimum set of product features, were there certain terms and conditions that should be prohibited, especially exclusion clauses and excesses. This was doubly so because disclosure was problematic in this market. Insurers would give long disclosures in fine print but everyone knew those were not read by customers. FSB could not rely upon disclosure as the silver bullet to solve these issues. FSB did need to make disclosure easier and more effective but they could not fool themselves that it would solve the problems. This was why they believed there needed to be product standards and product interventions.

FSB also needed to look at how they could improve competition. It was difficult because there were captured customers and there were no real stand-alone insurance providers. Having said that, FSB was aware of parties thinking about setting up stand-alone credit life insurance, but FSB needed to ensure that the regulations support the ability of competition to grow. A big part of it was how to improve portability of cover between different providers. One thing that was flagged in particular was that sometimes credit providers tried to restrict that portability by saying that customers could only have cover that met very specific benefit options. It was basically designed to say that it was the insurer in that particular group that met the requirements. So FSB was looking at product standardisation to improve transferability of cover between providers.

The last part of the report spoke about a more radical idea which was whether it made sense for this insurance to be sold to the individual customers themselves.

The Chairperson interrupted Mr Dixon to ask him to go back to disclosures. He had said that it was difficult to rely on this to assist. Was disclosure not linked to the affordability process, which she understood was obligatory for insurers to pursue?

Mr Dixon said a big part of the problem, what the research revealed, was that most times customers did not really know whether what they were buying was mandatory cover or voluntary cover. It was very hard for customers to understand that and there was not very clear disclosure about that. The data gathering and research found that there was a particular retail group that had an insurer as part of that group, and the insurer provided the benefits that were mandatory by the NCA, but actually the retailer does not sell that. 100% of what it sells included items that were not part of the mandatory cover. This included funeral benefits and other things that were not specified in the Act. The customer was not aware that they did not have to take out cover that included funeral policy benefits etc. That was a stark example of the disempowered position of the customer and that disclosure was not working. There was a requirement that the retailer disclosed these things but it was clearly not effective.

FSB needed to see if they could improve disclosure, but even improved disclosure may not be the solution, which was why they believed they needed to intervene more directly in the products as well.

On how disclosure and affordability linked, Ms Jackson added it was important and part of FSB’s work plan to coordinate with NCR on their standards for disclosure because the disclosure around credit insurance and its pricing together with the cost of the loan is what would ultimately inform the affordability. That coordination and streamlining and coming up with more meaningful disclosure templates was definitely something FSB wanted to work on with NCR.

The Chairperson referred back to Mr Momoniat’s comment on the spider web of linkages between insurance and the other entities made it difficult to track down the extent as to what kind of measures needed to be applied. They had asked the NCR to be present as the Committee needed to take a decision that was balanced for both the consumer and creditor. Right now the Committee’s concern was with the indebted consumer, and it appeared to have arisen because of three things. On the one side, the recklessness of credit providers and the lack of knowledge on the part of consumer and perhaps a lack of responsibility. Whatever it was, the matter had become too serious for the Committee to leave it as it was right now.

Mr Dixon continued that there was a follow up on the 2014 paper that National Treasury was expected to release shortly, which was to provide an update on the comments that were received

Since the technical report was published, FSB and National Treasury commissioned an independent actuarial review of what would constitute a reasonable credit life insurance premium, focusing on identified concerns. The Committee was aware that the Minister of Finance also had to concur with the credit life premium regulations. The FSB and National Treasury had been preparing themselves to advice on this question of reasonableness of premiums. Those findings were also shared with the dti and NCR.

FSB issued an information request to all credit insurers requiring detailed statistical information on various aspects of CCI including but not limited to pricing information. This was a follow-up to the data that informed the 2012 Technical Report, but this data requested in 2015 was much more detailed, a lot more consistent and gave the FSB the ammunition to identify where the real problems were amongst this sector and identify outliers. FSB was busy analysing that data.

The dti and NCR had published draft credit life insurance premium capping regulations for comment. Both the FSB and National Treasury had commented on this and they continued to engage on those draft regulations and had another meeting set up soon.

On FSB’s side, they were engaging with specific insurers brought before the Tribunal by the NCR for them to understand and then confirm remedial actions that they were taking pending the Tribunal findings.

In the range of interventions, FSB had also carried out thematic reviews of insurance complaints handling and claims handling. This was not only of major CCI insurers, and those findings would inform future CCI standards. There was a major retail distribution review (RDR) going on, which looked at how insurance and other financial products were distributed and sold in the market. Dealing with the fact that too many times there were conflicted distribution models, flagged as a particular problem in the CCI market as well. What was being done on the RDR side would impact the CCI side when it came to what types of commission intermediaries received that drove them the sell certain kinds of products. In the CCI market there were complex intergroup relations, which meant that retailers who were the intermediaries were receiving excessive remuneration to push these credit life products. RDR would help to deal with that problem.

FSB was busy finalising and piloting a Conduct of Business statutory return. This was to become a regular reporting that all insurers would have to do on their conduct indicators, such as their claims ratios, their claims statistics, the complaints, their lapses in surrenders, and this would promote more intensive and intrusive conduct supervision. The same was happening with FAIS intermediaries.

It was important to recognise that some insurers, including within banking groups, had proactively reduced their premiums on CCI products, to below the draft premium caps to act ahead of time. This was not only about bringing premiums down. Some had already proactively addressed the more unfair terms and conditions of policies, like waiting periods, exclusion and so on. FSB liked to think that this was at least partly in response to their TCF efforts and the engagements with insurers to date. This was the critical point, in that this was ideally how it should work through TCF, because TCF placed the onus on the product providers themselves including insurers. They should be the ones to be providing on the six outcomes of fair treatment for customers. The boards and senior managers should be thinking about whether their business practices were fair to customers and they should be making the changes themselves. They should not be waiting for the regulators to come along and impose rules that helped fair treatment of customers. It was about changing the culture themselves so that they do their own introspection and they changed what was necessary to promote fair treatment of customers. They did believe it was a positive thing that some insurers had acted proactively to bring about fair outcomes for consumers.

He did want to flag some specific interventions that FSB had made in the past year or so. Some examples were that they had negotiated an enforceable undertaking, which was a promise by a firm which FSB could take action against them if they did not make good on the promise. This credit life insurance group had to do a major review of all of their credit life group scheme arrangements, including improving governance and oversight, making sure they had meaningful data and dealing with inappropriate remuneration structures. That was something the FSB had been driving. Some of the firms referred to the Tribunal by the NCR were also subject to action from FSB. In the first insurer’s case they also referred the retail intermediary in the group for possible enforcement action because of mis-selling. So including retrenchment and disability benefits for people who could not claim was also a contravention of the FAIS Act.

The Chairperson said that this related to the work they had been doing.

Mr Dixon stated that there were two aspects: it spoke to reasonable premiums, because they were charging on something that the person could not claim on. But it was also a breach of the selling and advice obligations under FAIS, so it was mis-selling of products. FSB was also making sure that the insurer in the same group was taking remedial action and enforcing governance over the retailer, who was selling on its behalf.

For another insurer, they cleaned up on weaknesses on site relating to poor organisation and culture potentially leading to poor outcomes for customers which FSB required remedial action on.

For another insurer, the FSB was having robust ongoing engagements about potential excessive remuneration structures to distribution channels which were also pushing these products.

He now wanted to reflect on the fact that one of their challenges was that they did not have a complete toolbox to deal with all of these challenges. FSB wanted the regulatory framework to be improved to give them the right kind of tools. The next few slides looked at the current framework and the gaps that they had identified in the current framework. On the right hand side of the slides were the changes brought in to address that through the pending Insurance Bill and the Financial Sector Regulation Bill, which was the Twin Peaks Bill. FSB was hopeful that both Bills would progress through Parliament before the end of the year which would help give them the power they need to further strengthen supervision in this area.

One of the problems was that credit insurance was not currently a separate class of insurance in the legislation so it did not have to be separately authorised. This made it difficult for FSB to supervise because they could not get specific information on that authorisation class. This was being addressed. In the Insurance Bill it would be a distinct class and they would be able to see exactly what was happening in that class of insurance.

Secondly, this was the big problem flagged upfront, there was no clear enabling power to set product or pricing standards in the current long term or short insurance acts. This was where FSB was different to NCR, in that NCA gave that power to the NCR, it spoke about reasonable premiums. FSB was putting in place explicit product standard setting powers.

Third problem, currently life insurance could be sold by a life insurer or a non-life insurer, a long term insurer or a short term insurer. Only credit life insurers would be able to sell life insurance going forward.

The FAIS Act did provide for non-advice intermediaries but the standards around that were not well developed and so RDR and FSR Bill would be setting specific standards for non-advice selling practices. A lot of the sales in the CCI landscape were non-advice.

The RDR picked up that the FAIS framework and the distribution channels were overly complex. RDR set out proposals that simplified the framework and mitigated conflicts of interest in the distribution space.

There were commission issues. Commission was capped at the moment but where there were group schemes, there was additional commission if they did administration. What was seen was there were retailers getting this 22% commission but also getting additional fees for doing administration, so there was double dipping going on. This was just adding to costs in the system so it was being addressed but more importantly, they were addressing the group scheme in the credit life space because it was a big problem. This was the idea that the credit provider was the policy holder for the group scheme and the customers were just the lives insured under the policy. It complicated where the duty of care and interest lay. Those group schemes were being prohibited going forward.

Another complication was that FSB regulated insurance sales and advice but did not have any power on the credit offering itself. This had been a discussion under the FSR Bill. He understood that the current version of the FSR Bill envisioned the future FSCA would also have authority over advice on the credit itself. So FSB could also help with the mis-selling on that side.

The Chairperson asked him to explain the overlap as she thought that credit was part of the NCA.

Mr Dixon replied that National Treasury was responsible for legislation. He understood that it would continue to be that the credit agreement itself would continue to be the sole mandate of the NCR. However, there were sometimes services done for credit agreements, like intermediaries who give advice on credit or selling. That, the FSB believed, was the an area that should be subject to the same requirements as any other product that was sold or advised on, so there needed to be alignment there.

Moving onto the next steps or short term interventions planned for 2017, FSB wishes to begin consultations on them this year. FSB wanted to make sure that they covered any cracks in the system. The dti and NCR credit life premium cap regulations applied to credit providers for mandatory credit life. They wanted to ensure that they impose corresponding standards on the insurers themselves, through the policy holder protection rules. They thus covered both the credit providers and insurers.

The price capping was important. So through the policy holder protection rules they wanted to introduce additional conduct standards, for instance picking up on the differences between mandatory and optional cover, claims and complaints handling and particularly the problem of underwriting at claims stage, which they thought may be responsible for some of the very low claims ratios seen, and they were going to dig in here quite deeply especially after they received the data they were getting. FSB was seeing some insurers with claims ratios as low as 18% which was remarkably low.

They were working on improving up-front and on-going disclosure standards, including key information documents that were to be developed in consultation with the NCR.

Once they had fully analysed and engaged more with insurers, there may be further conduct standards they wanted to apply on other types of CCI, so not only the mandatory covered by the NCA, but possibly also the optional as well, where they believe there may be room for abuse. They might also possibly provide guidance on a reasonable claim ratio, so covering things from both angles, and enhanced substitutability. This data request would enable them to identify outliers with respect to premiums, claims ratios and engage directly with problematic product providers.

Lastly they had discussed and agreed with the NCR on further engagement to better coordinate data collection and information gathering so that the two regulators worked closely together.

The Chairperson said that what FSB had told the Committee, they would want to explore with the NCR. She referred to what Mr Momoniat had said about how many more regulators did one need, who should they leave credit with and the coordination thereof. This was certainly bringing them closer to understanding this.

Debt Relief and African Bank: briefing by South African Reserve Bank (SARB)
Mr Kuben Naidoo, SARB Deputy Governor, read out part of the letter sent to the Governor SARB by the Committee to put the presentation in context. “During the Portfolio Committee’s oversight of the National Credit regulators, the Committee discussed the possibility of introducing debt relief measures for vulnerable and over indebted consumers. In our discussion of debt forgiveness, the National Credit Regulator recommended that the African Bank bad loan book be targeted as part of these debt relief measures. The Committee raised whether the Reserve Bank had investigated the extent to which the loan book was the direct result of reckless lending.”

He noted that between 2010 and 2011, there was a significant increase in reckless lending. By 2012, reckless lending was growing by about 30% per year. That included lending from banks that were regulated by SARB. SARB was concerned with the rate at which unsecure lending was growing. It peaked in about 2012. By 2012, SARB started to take measures to regulate unsecure lending amongst regulated banks. Two main instruments were used. First they met with the boards and CEOs of the banks and told them that the growth was unsustainable. They also raised with them the social concerns of unsecured lending growing at that rate. At the time it was not necessarily an economic problem, however, it was clearly a social problem. The second was, in some cases, to increase the capital requirements of the banks, if they thought they were entering riskier markets than their normal business activity. This was essentially to reflect risk in the banking sector and to discourage banks from taking excessive risk in the unsecured sector. By 2014/15 the growth of the unsecured lending by banks had fallen very sharply to around 2 or 3% per year. SARB was quite confident and comfortable that they have been able to deflate what they called an unsecured lending boom without crashing the economy. Their intent was never to damage unsecured lending structures, the intent was to reduce the rate of growth because it was unsustainable. The current low single digit growth rates in unsecured lending was far more sustainable than what we had at that time.

In banking, moral hazards were a major part of public policy considerations. Moral hazard ran two ways - if governments bailed out banks, then over time banks would take excessive risks. There was a second element of moral hazard, that was if consumers thought that government would continually bail them out, then they also tended to take more risk as well. Both sources of moral hazard had to be guarded against in public policy. It was in that context that he wanted to deal with the proposal around debt forgiveness.

African Bank was put under curatorship in 2014. The process of curatorship had been to separate it into a good book and a bad book. The bad book included loans that people had not paid in a few months or where the ability of this being collected was lower. SARB had given a loan to the Residual Debt Services Company (RDS) and they were not allowed to give unsecured loans. They used the debt book as collateral. It was their intention to use that to recover that to make good on the loan in bad bank. The good bank had been converted into a new bank, it would still be called African Bank and was re-launched in April this year. African Bank, or good bank, was responsible for the collection of both good book and bad book. In many cases there were people on the good book and bad book. In many cases individual customers would not know whether they were on the good book or bad book.

If they were to write off the debt in the bad book, it would have three implications. The first implication was that by law SARB would not be able to provide financial support without collateral, they could not provide unsecured loans. They would have to withdraw financial support if the debt was written off because there was insufficient collateral. Their loan for bad book included a R3 billion guarantee and a R3.3 billion loan. If the debt in bad book was written off, they would not be able to provide financial support.

The second issue was that if part of the debt was written off, and they incurred the loss of the loan, that was the taxpayers’ liability. So any losses they made on the transaction or the loan, it would have to be made good by the fiscus. Only the Minister through a Money Bill or the budget could make good on that loss. So it was a fiscal decision whether that debt was written off.

The third point he wanted to make was that if the debt was written off, it would compromise the vitality and success of the good bank. The reasons were two-fold. One was that there were many people who had loans in the good book and bad book. If they wrote off the one, there was a serious incentive for them to stop paying on the other because it could get written off. Secondly, SARB’s financial support on the whole package was contingent on their being able to collect a portion of that balance of the bad book. Thirdly, what happened when you got amnesty on credit markets, was that it actually tightened credit conditions in the market. For example, if Ms Fubbs, had a loan with xyz bank, and she had not paid or they wrote off the loan. The next time Ms Fubbs went to bank, either they had no information because the information on the debt had been expunged, or they put her into a higher risk category, which meant they either refused her loan or charged her much more for the loan. There was a significant repricing of the credit. That was what happened with amnesties, they actually reduced the supply of credit and increased the pricing of credit, and therefore tightened credit conditions in the unsecured lending market. So while it may benefit some consumers, it also had unintended consequences that then had systemic risks.

The Committee had asked if SARB had investigated reckless lending with regards to African Bank. SARB had not investigated reckless lending in African Bank. It was not within their mandate. The Myburgh Report did look into aspects of that and the report was released yesterday. The Myburgh Commission did not find fraud, it did not find that the Bank directly attempted to defraud consumers or depositors. However, he left the analysis of the report to the Committee at a future date.

There was an issue where African Bank picked up a problem at the Dundee branch of African Bank. They reported it to NCR. In the view of the bank this was fraud. Two officials of the bank had notched up fraudulent loans. NCR viewed this as reckless lending, unlike the Bank which viewed it as fraud. The Bank agreed to write off all the loans involved and there was a settlement between NCR and the Bank to impose a fine of R20 million before the issue got to the Tribunal. So there was a specific allegation of reckless lending, but it was mutually dealt with by the Bank and NCR. The Bank agreed to write off the loans and to pay a fine, which was much less than the original fine requested. It did not agree that there was reckless lending.

The Chairperson asked Mr Naidoo to go back to the point about it not being SARB’s mandate to look into reckless lending. She understood that NCR had identified the reckless lending and it seemed that SARB agreed that it was reckless lending after all. The Bank said it was not reckless, it was fraud. She asked what SARB’s opinion was of that or whether they had even entered into this arena.

Mr Naidoo stated that SARB did not enter into this arena. They had had discussions with NCR and African Bank on the matter, but mainly from a prudential point of view, for the sustainably of the bank. SARB made no judgment on whether this was reckless lending. It was not their place, it belonged in the ambit of NCR.

Mr Naidoo skipped to the conclusion slide. He repeated the point that SARB had not conducted investigations on reckless lending. In this respect he fully agreed with Mr Momoniat when he said that separation of market conduct and prudential conduct was a good thing institutionally, because when those were put together there were often conflicts of interest. He thought separation of market conduct would ensure better market conduct and better protection for customers than the present arrangement.

African Bank, the good bank, that had been launched on 4 April 2016, would be placed in jeopardy if relief was given on the bad book. SARB would have to withdraw its financial support of the processes if there was insufficient collateral in the bad book and at the moment they thought there was sufficient collateral. They did see further contagion risks to the good bank and to other unsecured lenders because of the moral hazard he had mentioned earlier. If there were any losses incurred on the loan SARB had given as a result of any debt write out, it would be on the fiscal account. So the fiscus would have to make good on any losses.

The Chairperson thanked the Deputy Governor, but asked the Registrar of he wanted to add anything, because it would obviously have a serious impact on society.

Mr Rene van Wyk, Registrar of Banks, stated that from a baking regulator’s perspective, they were fully supportive of the National Credit Act. They believed it was healthy for the banking system if there was responsible lending and supported that 100%. At the same time they respected the boundary between market conduct and prudential supervision.

The Chairperson stated that one of the issues that the Committee thought about was if this was the ‘bad debt’, if one had a bad book, in the normal course of things, it was written off. They would list you, you would not be able to do xyz, but now you are listed, you may not get more credit but life could continue. It would appear though, that some of the debt in the bad book was also in the good book. It did seem quite confusing how one could be in both books at the same time and she asked for clarification.

Mr Naidoo explained that they segmented the loan book by loan. It was possible for a person to have two loans from one bank of R1000 and pay R100 a month, and then stop paying on one of the loans. After two or three months the loan got bucketed into a loan that had gone bad, the Bank had to start making provisions after a certain number of months, but the other loan the person continued to pay. In the unsecured lending market it was quite common for people to have more than one loan and to run the loans in good record in a one and bad on another. Even if a person had a loan on the bad book, they would attempt through good bankers, the agent, to attempt to recover part of that loan. The total number of loans in the gross bad book was about R17 billion. There was a net book which was much less than that, in other words, what they thought they could actually recover. They would still attempt to recover as much as possible, both because they wanted their loan back but also because the way the bail-in of African Bank was structured, it serviced subordinate debt holders and maybe even shareholders might get something back if collection levels were high enough.

The Chairperson said that it seemed clear that the mandate on reckless lending was with the NCR, and yet here it would appear that some of the bad debt was given out recklessly. It was pertinent for the Committee to know the kind of income groups involved. Were they talking about the ‘big boys’, or people like herself who earned a good salary or people with very low incomes who at this point may not be employed given the state of the situation at the moment. This was what prompted the Committee to gain understanding. From Treasury they were aware of the progress of how Twin Peaks would pan out eventually.

Mr B Mkongi (ANC) stated that all the presentations were an eye-opener into the deepness of the issue on South Africa. As all the presentations were moving, before SARB, he thought a solution was the completion of the integrated social security system in South Africa that could intervene in the number of challenges faced. People would not go into consumer credit insurance for small issues that could be covered under the integrated social security system. While he was sitting in the meeting, Hollard had sent him three different messages for different products. He thought Hollard dealt with life insurance but they spoke about cars, mortgages, a lot of things and that was one consumer dealing with one institution for different products, which may even be against the law because it was not what the institution applied to do in the first place. This was very complex. When a person paid insurance on a particular credit, when that person passes away, where did that money go? When people completed payments, who benefits? Consumers were not being paid back the money paid for insurance for credit. This was very important, and they needed to deal with it.

He was interested in Treasury’s presentation because he was looking at the IMF interventions in relation to the advanced economies and the less developed economies, and how quickly those interventions were being implemented. Were those interventions equal and open between the two economies. He wanted to suggest, he hoped the ANC would agree, to give the complete toolbox. If they said there should be this complete toolbox, then there needed to be structural coordination, because product regulation impacted both FSB and NCR. The issue was where the mandate would lie and which coordinating structure there was supposed to be in dealing with that.

Mr A Williams (ANC) started with the Reserve Bank. As he had said before, the Members’ duty was to put the people first. Due to bad practices by banks and the lack of intervention by SARB, South Africa was facing a highly indebted society. Tightening credit as an unforeseen product of debt forgiveness was a good thing that could happen in South Africa. He wanted to know why this had not been done before in South Africa when they started seeing massive amounts of indebtedness. They just continued to lend until we ended up in this situation so he blamed the banks for this situation. He thought it was unreasonable for the government to say that if they moved for debt relief then the taxpayer had to pay for it. The banks had to take some responsibility for the situation they were in. We cannot have a situation where the banks cause the situation and now the taxpayers had to pay for it.

He thought the Committee needed more information as to who was in that bad book. Was it the rich, middle class or poorest of the poor. Recently, the Committee had received a report from the NCR which spoke to no income, no assets. Those people, if they were in the bad book, they should be given debt relief and the bank should pay for that and not the South African people. It was important to say that the banks had created this situation. If they had tightened credit in 2010, then we would not be in this situation now. They did not though, and continued until we were forced to stop that practice. It was their fault.

There was a lot of talk in the other presentations about treating the consumer fairly, ethically and market conduct. He wanted to know, when it was said that we should hold the financial institutions to higher standards, higher than what? Right now the financial institutions were basically running amuck with the South African people. An example would be, when a person took out a home loan, and more importantly, when that person defaulted on that loan, their house was sold immediately or as quickly as possible for the lowest possible price. That borrower was then left in massive debt and is homeless. There was nothing to compel the banks to sell the homes at market value. He wanted to know what these standards were that people kept talking about because people in the community were suffering because of banks just pushing their money back regardless of the consequences, regardless of how our society was going to be affected. He wanted everyone to respond, what they thought their responsibility was when it came to bad debt that South Africa found itself in, to the high level of indebtedness, and what would they do about it?

Mr N Koornhof (ANC) stated that Mr Williams had touched on what he wanted to ask. He thought that credit was part of economic growth, one could not run an economy without credit. However, when it became reckless, it became dangerous for the economy. After everything that had been done, unfortunately reckless lending was out there. All the banks were testing the waters every time. They were winning in courts on technical points, not on substance. With reckless lending came reckless recovery. They just saw that the Auction Alliance report was out, it was in the Business Day, Auction Alliance did not want Business Day to print it. Reckless recovery was where banks would just go and sell a house on auction at 30% of the value. Who should take the blame for that? It could not be the debtor, it had to be the bank. The bank could not sell an asset clearly, openly under market value, then they have to keep it. That was reckless recovery. It was driven by many forces, the lawyers and auctioneers, but also mainly by the banks.

Mr M Kalako (ANC) assumed that there was fragmentation in the system as there was absence of coordination, as reflected in the presentations. It was complex, but it was a reality, which dealt with the day to day lives of the people. Most of us, when signing contracts, did not look into the fine print, and on what was proposed, consultations between you. What was not seen, when someone went to the buy a loan, was those selling the loans were not trained to explain to you. He did not think the training aspect in the companies was there. When engaging with a person who was supposed to help, you would find him wanting. This was a problem, whether in retail shops, insurance institutions or banks themselves. This issue needed to be addressed. For him the main thing was, how did anyone expect a poorly educated person to read a set of fine print rules that he had to sign and commit himself to. That was not possible. Even those who took the time to read the fine print, it was worse now. There were now remote electronic loans, the quick loans, which were done over the phone. These were things that regulators needed to immediately stop. It was getting people more and more into debt. For him the problem was inherent in the capitalist system. Until they changed the relations of production in this country, and changed the capitalist system itself. Not that it was the position of the ANC, this was his personal view. These structural issues that had been raised he did not see them addressing the problem, because they were addressing an inherent problem, the system itself. By nature, the system itself was based on greed, maximum greed. There would be these problems but that did not mean they should not deal with them, because unfortunately we are in this system.

They had discussed with the NCR the debt of the South African people. They discussed debt forgiveness thoroughly. SARB was saying debt forgiveness ignored the total value chain by focusing only on one element. Maybe they could explain what they meant by that. He asked if any action was taken against the executive of African Bank? Did they take their responsibilities? What actions were taken by state to make sure they were held accountable? In the powers so far they did not have, from National Treasury, NCA, NCR, FSB, did they have powers to take people to court and charged and sentenced for recklessness and face prison terms? That needed to be looked at because if that was not done, this problem would continue. They concluded that debt relief was likely to be costly for the financial sector, taxpayers and the overall economy. Did this mean that as taxpayers, African Bank did all the negligence, they get shares and dividends? Unfortunately one of them who passed away was his friend, he knew him for a long time, he was rich, another was getting millions, how did that happen? The Bank went down, it was built by taxpayers money, he did not hear about shareholders, but he heard about executives getting money. Those who were running the day to day business were getting money.

Mr Mkongi raised the question of buying and selling of debt, was it legal? When talking about debt forgiveness, what was fundamental to the Committee was the poorest people. Other countries had done this and successfully. Did SARB do any research on the matter, when speaking about using taxpayers' money, even in the collapse of African Bank on trying to save it by curatorship. They were now not benefiting and it would cost taxpayers’ money.

Mr Momoniat responded that not a cent was paid by taxpayers yet. Unless they wanted them to adopt policies they may force them to, but so far nothing. That was the point, they had created the good bank and needed to collect on the bad bank. There were a whole lot of underlying assumptions, though they were not out of the woods yet, if it continued on a successful path, they did not anticipate any recourse. There were guarantees from Treasury, and SARB itself had given its own guarantees as well although they had explained some of their limitations. However, it could be assured that nothing had been paid.

Blame was something easy to throw around, we may look in the mirror and find that we were also to blame. Credit was punted as something we needed to give, there was a financial sector charter, financial sector campaign. Previously, banks were lambasted for not lending. There were pay day lenders, they were not banks and yet were not banned. He asked his NCR colleagues why they were not banned yet. He did not know why they were delaying. It was not to blame. It was very difficult for NCR to stop mashonisas. Commenting on the gambling issue, things like drugs and gambling - you did not want it - but if people do it you had to find a way to regulate it and regulate effectively. Otherwise people still did these bad things that we did not want them to do. At the end of the day, each institution had to take responsibility. None of them could defend a bank or institution. Any bank which had taken people to court or sold homes for mahala, let them answer for that. They should be named and shamed.

The worst practices, many banks have stated that they do not do that anymore. Part of the big problem in South Africa was the debt collection system. That fell under Justice. The people who were exempted were the first offenders, they were the kind of people who ran away to Australia. Legal firms were the biggest debt collectors, and they were exempt. What they did was shameless. One needed to be much stricter. This was where Twin Peaks came in. It did not matter who did the activity, whether it was legal firm, the regulation must apply. Otherwise, people operated in dark corners and did bad things. His sense was that people often went to major banks, they were licensed, they had to follow procedure. He was not saying they did it well, but once people did not get a loan there, they went to mashonisas and others. The only way to know if someone was indebted was to focus on the individual and much as he would like, the security system would prevent that, he did not think it was that simple. There was an element of greed, of conspicuous consumption. People took loans from anywhere. It was a societal problem that needed to be dealt with. A lot of education was needed. Looking at our system, did they think that NCR should work on education on credit, FSB should do education on insurance, SARB to do education for banking. They should be pulling these things together. It was not only education. People who were fooled by Tannenbaum, were CEOs and clever people, it was greed. Looking at the 419 scams. You knew it was too good to be true. When something was too good to be true, you did not go there. These were complex issues. The worse way to start was to blame. All the roles should be looked at as parents, as teachers, through the school system, financial advice etc. The more fragmented they were, they were not doing it. The more fragmented they were, the less effective. It was a hard job, but it was made almost impossible.

When designing the systems, they were trying to change defaults, so that the person who cannot read was not exploited. This was why they needed good defaults. For example, you have a retirement policy, you resign. The HR department wanted to get rid of you so they pay you out. You pay a huge tax on it. They were changing the default to say when someone resigned they should not be given the money. They should be given the money but it should be put into a preservation account and then say the person would have to go to five financial advisors. The person could get it, but they should take financial advice.

People got credit too easily. Pay day lenders wanted to give small loans at very high interest rates until pay day. They knew when to target the system, the day a person was paid. To stop these practices there needed to be a lot of education but also some of these practices needed to be banned. They needed to be strict and take action. They needed to ensure that in the system, the way the defaults were structured, that they also went the other way. Pay day lenders, before giving a loan, should be subject to FICA. Why do the money laundering laws not apply to them? In other words, slow them down. That all got into the area of market conduct as well. At the moment there was no legislation there. The only legislation there was the NCA, to the extent that it applied.

 So when they said they wanted financial institutions to have higher standards, they were saying they should have higher standards than that that applied in terms of the NCA. It was not like selling a vacuum machine, you go home and it is not working so you take it back to the store. A pension fund may only give problems in 60 years time, after you took 5 years off your pension, it went bankrupt, then you were in trouble. They had to ensure the transaction was complete, the pension may last 70 or 80 years and it had to be solvent in that period. That was what they wanted regulators to do. Regulators were not God. They could not prevent all problems. They still needed to educate. People were not expected to read the fine print. That was why the law was going to be intrusive and there had to be certain standards when selling financial products.

What they were offering was a radical solution. He wondered whether everyone would rise to the solution. Taking issues like debt relief, one had to watch moral hazards, and do not give perverse incentives. If people knew they would get debt relief, they would borrow every two years. As Treasury, they did not think that the amnesty given last time would work. He submitted that most of those people were back in debt. The information got destroyed and therefore the cost goes up and the market became tighter. In all of this he thought there was an important role for credit bureaus, in fact, at the time of NCA, there was even a call for a National Bureau, because they did need to record all of this information. Even recording the debts people had with Eskom or municipalities, so that when a bank or anyone lent money, they had the full credit history. They had seemed to move away from that and then wanted to beat up those who lent, because they should have known it was reckless lending. They have the excuse to say that they did not know because the information was destroyed. Everyone could point fingers at each other. Where they sat, they certainly wanted to resolve problems. They had long engagements with NCR and dti over indebtedness. Many institutions were willing to take haircuts. Not over the entire debt but if they started paying, they would reduce the interest by 20%. There was voluntary debt mediation, it went nowhere. He thought the reality was that the debt counselling system was broken. According to a NCR report, it worked for people who had money and the debt counsellors could also get money. The outcomes were perverse. The agreements they sought out and the higher income you were, the more money they made. They did not care about the poor people in debt. In fact, South Africa did not care about the poor people who were in debt, because the insolvency legislation only applied when there was benefit to the creditor. So a poor person in debt was worse off now than in the time of Dickens because they would forever be paying their debt, they could never get out of insolvency.

Part of the initiative with the Justice Department was to introduce insolvency mechanisms that were easier. So poor people could get out of those situations when they could not get out of those debts. So National Treasury would love to come to Parliament and do a comprehensive report on the work done as departments and jointly. He did think there were issues as to how to get the debt counselling system to work because the incentives were perverse. The financial system should not be designed to serve the interests of debt counsellors but rather the best interests of customers, those who were in debt. He did not think the law was helpful on this issue.

They would love to put more radical solutions forward, but they wondered if the Committee was ready for such radical solutions. They needed to keep the system stable. The easiest thing was to focus on African Bank, but he thought they could take a more systematic approach on these issues, but they had to get the incentive right. There had to be a payment culture, which was a problem in South African, people did not want to pay. These were complex issues. If a particular bank had done an abusive practice, they must be charged and dealt with. It was banks, non-banks, everyone was responsible.

The sheriff system also needed to be looked at because he believed there was collusion on some of the cheap housing options that they got. On the Myburgh report, just looking at the newspapers, they took a strong stance on directors. Unfortunately in South Africa it took a long time to charge someone, if at all. Certainly, in terms of the report, the directors were named.

The Chairperson stated that the concern should not be forgotten; NINA - no income no assets. They knew the current unemployment situation and the reality was that people had no money and no assets and no work. Something had to be done. It was their intention to work jointly with the Justice Department and the financial entities. They had to do something.

Mr Momoniat stated that if someone had no income and no assets, then they needed to look at other mechanisms of the state. That was where the social security system came in, including educating people, skilling people for jobs. The worst thing to do was lend money to people who had no income and no assets because you knew they were not going to be able to pay and then punish them afterwards when they cannot pay. That was reckless lending. The problem with these things was that everything worked in economic cycles. In boom times, if the regulator tried to stop the boom, everyone would be protesting and accusing them of being anti-transformation and not lending. After the event, when everything crashes, because they needed to be party poopers. If they were successful, no one would know that they were successful. When a crisis happens though, everyone points fingers. He wanted everyone to have perspective. Looking at newspapers and campaigns over time, you could see everyone’s fingerprints on there in some way. Regulators could not be God, could not see them always. Regulators failed to see what they should have seen to begin with.

Mr Naidoo stated clearly and emphatically that SARB would not defend any bank that they supervised if they had been reckless. If a bank had committed any breach of the law, the process of the law had to take its course. If there was any bank that operated recklessly, lent recklessly, SARB would not support them or protect them, they had to face the consequences. They had not done a detailed analysis of who had taken loans in African Bank, what income group they came from, perhaps the NCR had done so, but they had not. In general though, African Bank’s clientele, were mainly working people, mainly the lower-middle spectrum. A very large proportion of public servants were their customers.

There certainly were times for debt forgiveness, and times when both institutions should be forced, and society as a whole, to forgive debt. Insolvency law was one way of doing it, but there were other ways as well. However, often the intent of the policy maker was to support the poor individual. So the effect was to write off someone’s loan. If they tightened credit conditions for the whole group of people, specifically, there were 10 people who had bad debt or who had loans and he wrote those 10 loans off. The bank then decided that the area where these people were from was too risky and so they would not lend to anyone from there. Credit conditions tighten, and those who get, get it at a much higher price, so they did need to take into account the law of unintended consequences. He was not saying that there should not be debt forgiveness or instances where they should not tell banks to take haircuts on their loans. He was saying in general, credit amnesty and the expunging of information often led to higher interest rates and tighter conditions that impacted on the very people that they intended to benefit.

He wanted to speak about how they resolved African Bank. It was one of the first times they had done it and one of the first times in the world that they had a bail in. So African Bank was not bailed out. Shareholders, by the time the process was completed, it may take another five to seven years, would lose almost all of their investments. They may get a small percentage back, maybe 2-3%. Subordinated debtors would probably lose about 62% of their investments. Senior debtors would have lost about 10% of their investment. Retail depositors would have lost nothing and they had provided cash loans as SARB. Treasury stood as surety behind that. If they resolved this bank properly, there should be no taxpayer payment. If it did not work, there may have to be some taxpayers money. This was the first time this had been done in South Africa. It was too early to tell whether it was successful, it would take two to three years, but so far it was successful. They had forced the shareholders and creditors to take a haircut of 62% of R40 billion debt. The bail-in was important.

Mr Francois Groepe, SARB Deputy Governor, thanked the Committee and commended them as the care for the people showed through the remarks given. Public policy, in terms of a balloon, if one pushed a balloon at one end, at the other end the air was displaced. Public policy was often about trade-offs: what was the policy objective that should be pursued, what were the pros and cons and how did they optimise the trade-offs? The issue of debt forgiveness or amnesty was interesting because he thought everyone would be in favour of financial inclusion. So do they promote financial inclusion on the one hand and on the other say that they may take a policy avenue that may actually erode financial inclusion because of the example given by Mr Naidoo, that if the risk became so high that institutions stopped offering credit to a particular segment of society, it would also create problems. It should be borne in mind that there may be significant unintended consequences. Banks decided, for example, particular risk profiles were such that they did not wish to advance those.

The second issue, which was coming through in academic literature on the global financial crisis, was this - regulation often had unintended consequences in that it encouraged people to engage in regulatory arbitrage practices. One of this big risks was if the banks and insurance institutions were well regulated, they had to be careful not to regulate in such a way that it created a perverse incentive for people to move into the shadows, the shadow financial sector. The shadow financial sector had played an important role in the run up to the global financial crisis, if one looked at the US and the events of 15 September 2008. Policy by its nature was a delicate balancing act.

The point had been made and today there was a front page article in the Business Times about the liquidation industry, and it was something that had to be addressed. However, also forcing banks to hang onto the stock created huge problems. The root of the global financial crisis was rooted in the housing market in the US, because for them when there was foreclosure, the borrower walked away and the banks sat with the housing stocks. This created issues. Firstly, there was the wealth erosion effects because of the housing stock surplus and the house prices fell at a precipitous rate. If he owned a house and he continued to pay, suddenly his net wealth dropped because his house used to be worth R1 million but suddenly it was worth R750 000. Secondly, these houses that banks took onto their values sheets, there was huge value erosion and banks may fall below their regulatory minimum capital levels, which may trigger a huge systemic crisis within the financial sector. They had to think through these unintended consequences.

Regulation was a tight rope and a balancing act and they all had to be committed to research at SARB to ensure the economic wellbeing of society at large. That was something that they were totally committed to. But he thought they needed to have meaningful engagement because how did they achieve a particular policy objective in a manner that did not lead to unintended consequences. Part of this challenge was that the level of private household indebtedness had dropped since the global financial crisis. On the revise measurement method, it had dropped from 87% to about 78%. Secondly, there was a challenge in that they had not had mortgage growth in their market. Total growth last year for the previous four years was by just over 8%. Mortgages from 2014 only grew by 2.4%. Last year it started moving up, and it was just over 4% at the end of last year. So they still had a situation where credit extension was not what it should be, and this was in part contributing to the pedestrian economic growth. In the absence of credit, economic growth could not occur. There were many factors that needed to be weighed up.

Mr Dixon wanted to cover two issues - one was questions around how to address the root cause of abuse in the credit life space and secondly questions around whether those who were selling these credit life policies understood what they were selling and were they sufficiently trained, which Ms Jackson would deal with.

On the credit life side, these were products that potentially did have value to clients. They heard the example of how someone who was unable to pay the mortgage payment on their house. If there was credit life cover in place and the reason for not paying the instalments was due to bad luck risks, bread winner dies, or was retrenched or was disabled, then in those cases, the insurance policy should pay out and the person should be able to pay the debt and keep a roof over their heads. There was value when it worked properly. It was the other risks when they could not afford to pay the instalments that they had the bigger issues. They underlined that it potentially had value. The reality at the moment was that there were a whole of reasons why customers were not getting value from these products. They appeared to be overpriced, low claim ratios suggested it was fully a question of being overpriced or there were problems in people’s understanding that they could claim on these policies.

Disclosure was a problem, they could not expect customers to read the fine print or understand it. Due to the market structure, there has clearly been a high profit motive. They were all related so they got profit on selling, commission on selling, profits on insurance, profits on credit, it was a vicious cycle. It was precisely because of these reasons, normally in capitalist system, you should have a market that restricted the amount of profit that people could make, drive down prices using competition, offer value through competition. Their report said that this was a market where they could not rely on competition to do that job. This was a typical example of a market failure in economics terms. The market was not working, it was dysfunctional. That was way they believed they needed strong structural interventions in this market and actually, an extreme form of regulation that said that they needed to intervene in pricing and product features. It was never first choice. Ideally, you wanted the market to work, but when it did not, regulators had to intervene. That was why they believed they had to intervene on pricing, to cut excessive profits and, on the other side, address the product features to ensure insurers were not changing what people could not claim on. Whilst there were clearly huge market structure problems in this market, the hope was that by having strong regulatory structural interventions, they could improve the value that customers get so that the potential value of products better matched the reality on the ground.

Ms Jackson replied on the level of knowledge and training of people. It was true to say that in many of these models, the person the customer interacted with did not necessarily have the level of product knowledge that they would like to see. The emphasis on the regulatory framework for intermediaries, those people selling the products, over the last few years had largely been skewed toward ensuring that people who gave financial advice were competent and met standards and were licensed correctly. There was slightly less emphasis on those who gave non-advice sale. The argument there was that if people were just providing information then they did not need to have the same level of knowledge as when they were providing advice. The difficulty was that the quality of the information provided was also important. What they could not do was to simply say that everyone who gave information must meet unreasonably high standards because you start impacting on employment of those people, costs of employment, and the nature of the people who could get jobs as furniture salespeople and so on. It was a balancing act.

An identified gap was the need to set clearer standards for people who did selling without advice. One of the solutions historically was to just focus on the quality of the information they provided, so a disclosure solution, Yes, disclosure could be better, it could be bigger print, it should be subject to much clearer standards, and they had already published draft material on improving those standards. Disclosure alone was not enough, it did not matter if people had financial literacy, they were not going to understand. It needed to be done in multiple layers, if they had to accept that disclosure on its own was not enough in some of the distribution models, then they needed to make the product itself safer. There needed to be less risk in the product itself so they could have a slightly light touch on the disclosure and training standards of the people who sold the product. That was why the product standard frameworks were being worked on. Together with the premium caps, this would help to make the product itself safer.

Lastly, there was the higher layer of trying to move some of the fundamental conflicts of interest out of the system in the first place, to ensure real competition worked and people could have better choices.

Mr McDonald Netshitenzhe. Acting Deputy Director General: Consumer and Corporate Regulation Division (CCRD) said he had read the documents of National Treasury, SARB and FSB, and he saw complementarity. However, with complementarity they needed to take things cumulatively. The issue of debt relief, could it be sped up if they moved in tandem? It could be said that they did so when they came with the National Credit Amendment Act, and that was complementarity from FSB, National Treasury and SARB. The Consumer Protection Act and the Companies Act, were sector specific. They needed to balance the two. One should not usurp the mandate of the other. They needed to move as one government. The Twin Peaks was being concluded. The straddling needed to be driven very well. On the issue of coordination, that was where they were struggling. If one read s17(4) of the NCA, it emphasised coordination which was agreed on by the former Ministers of Finance and Trade and Industry, In conclusion, he heard there was support for credit life insurance regulation and it could bring relief. So he proposed that the technicians should move with speed over the next week or two, so that the policy makers could make a decision and go to the two Ministers. There was the NINA issue. On the categories of people in the debt book, the question was raised if they had they analysed the categories of people. It seemed as though it was not yet done, so he requested, whether it was NCR or SARB, let us come with information and assist the House to be able to take a decision. If it was left hanging they would not be able to know whether NINA could be done in South Africa because NINA was done in other jurisdictions.

The Chairperson wished to clarify NINA, no income no asset, was not that people got into debt with no income, but rather they incurred such credit when working but due to changed circumstances they no longer have income which they did not anticipate. The interest continued and the debt grew and it became impossible for such people to dig themselves out of the hole. The little bit of work seen by the NCR indicated New Zealand and Wales had implemented this but of course with conditionalities attached. It was not for those who got into debt without an income, but those who got into debt thinking they would be paying it off.

The other areas explored with Higher Education and NSFAS, were graduate debt, where they had every intention to pay but now circumstances in the family also changed. Social grant beneficiaries, these issues of cards being used just to get credit and being regarded as a credit card. Credit cards not only fell under NCA but also the banks, garnishee orders, the mis-selling of insurance and she hoped Mr Momoniat hit them hard, because this could not go on for another 22 years as it had gone on too long. On the reckless lending, looking at s10(a) of the FSB Act, it allowed the FSB to establish an enforcement committee which had the power to enforce penalties and fines, and they were able to recognise reckless lending. These were reported as defaults. The point made by everyone was that they needed to coordinate these activities. They had to recognise that they had separate mandates, but not to the point where it created a form of arbitrage across them. Vulnerable people were being caught up and they could not negotiate for themselves.

They had to look at the measures which did not destabilise the financial system, but at the same time they had to think about the consumers. There were people paying off debt for five years who were still paying off just the interest on these R5000 loans. What has gone wrong? They were determined to try working with everyone. To ensure that the NCR had sufficient power to effect its mandate but cooperatively and at the same time was there any debt relief one could look at without encouraging people to borrow again in a reckless manner. There were all kinds of examples internationally. South Africa had to look at that. From the Committee’s point of view, they wanted to get to this point by the end of May, that this was where they were. They had to hold out for consumers who were indebted through no fault of their own.

Speaking of Dickensian times, God help us, South Africa was nearly getting there. They all had to be very careful now and work together. They were going to be engaging further with the NCR, so that these matters could be resolved for consumers and for the country, in a balanced manner.

Remote Gambling Private Members Bill: voting
The Chairperson stated that Mr Hill-Lewis (DA) had already spoken at length about the Bill but as it had been tabled for a while, the Committee wanted him to comment, He was obviously promoting the Remote Gambling Bill, he tabled it, and asked the Committee to consider it. The Committee had asked for policy first, which they had had now for nine months.

Mr G Hill-Lewis (DA) stated that in the course of a year, since they had formally begun considering the Bill in May 2015, the Committee had become accustomed to his views on the subjects covered in the Bill. It was hardly necessary for him to go into those views again. He wanted to thank the Committee for taking the Bill seriously and for considering it properly. He thought this Bill was a model for Private Member’s legislation in Parliament, in the way the Committee had dealt with the legislation, so he expressed his appreciation for that and for the very serious hearing and questions that were received from Members as well.

The policy before them came subsequent to the Bill and was in many ways a continuation of the debate of gambling regulation debate in South Africa about what to do about online gambling. This was certainly a debate that would continue in the years ahead, it would not be settled by the voting on this Bill today and neither would it be settled by the adoption and legislative reality of the policy, or realisation of the legislation before the Committee. As the Committee knew, his view was that the policy was wrong. It would come to be seen as a bad policy through the passage of time and the weight of evidence that would accumulate.

The Chairperson asked whether he was speaking specifically to those sections in the policy dealing with remote gambling.

Mr Hill-Lewis said he was. With that, he asked Members once again to vote favourably for the motion of desirability so that they could take the Bill forward. The Bill provided as rational a solution as possible given South Africa’s complex constitutional arrangement with regards to gambling regulation. That was not to say that it did not need some additional amendment, which was entirely possible and appropriate. However, today they were voting on a motion of desirability, and he asked them consider in favour of that motion.

The Chairperson appreciated his conciseness. Whenever dealing with legislation it was a serious matter. One needed to add that this was why she was asking whether he was rejecting the entire policy or specifically those sections relating to remote gambling. He made it clear that it was the specific sections, although not exclusionary in this matter. This had been a matter before this Committee for a long time. In 2009, she was confronted with regulations in this regard. It has had a long life, and in many ways there remained a lot of debate on the matter. Much more information was available to them, as well as an understanding of the role that intermediaries play in this regard. dti had been asked to make a short input. The Committee had invited others to make submissions. National Treasury had even commented on this Bill. This was to remind the Committee that the principal act did have a great area in this regard as well. There was also the point made that what was regarded as illegal gambling now was accessible from neighbouring countries and utilised. All of these issues were raised with the Committee.

The Chairperson read out the Long Title of the Remote Gambling Bill [PMB3-2015].

Mr A Williams (ANC) believed that the role of Members was to put South Africans first and facilitate a caring society. Although gambling was legal, he believed that gamblers should have to travel to the places where they gamble or think very seriously about it rather than press a button to win or lose. Mr Williams did not think the government should put any legislation in place that made it easier for people to lose money.

Mr N Koornhof (ANC) stated that it was a tricky issue. The Remote Gambling Bill was clearly taking South Africa into an extension of the gambling industry, which did not have his support at this stage. He wanted to use the opportunity to congratulate Mr Hill-Lewis, he thought Mr Hill-Lewis had taken Private Members Bills to another level. He did not see that this was the end of the road with regards to this, but the department needed more time to do investigations and it may be appropriate for the Committee to call them back in a year’s time to see the progress that had been made on clamping down on remote gambling. If there had not been any progress then, they would have to relook at this Bill.

Mr B Mkongi (ANC) stated that the Committee had discussed this matter extensively and he thought the Committee had to stick to the values of the Constitution. He wanted to read the values for the purposes of this meeting. South Africa was founded on human dignity, achievement of equality and the advancement of human rights and freedoms. The second was the question of the supremacy of the Constitution and the rule of law. When speaking of the question of human dignity, gambling dehumanised people. By virtue of going to gambling, you become addicted, after addiction you lost a lot of money, after losing all the money, families were destroyed and their human dignity was destroyed. South Africa entered into negotiations allowing gambling because of the integration of the Bantustans, which encouraged black people to stick with gambling. Cabinet had just adopted the National Gambling Policy, which had reemphasised that remote, online and other related gambling were not supposed to be recognised in the Republic. They could not have a parallel Bill that competed with the actual policy of the State. He had been articulating since the beginning, his rejection of the Remote Gambling Bill. He thought it should be rejected, it was not desirable. If they wanted to come after five years after the national elections and there were new Members, then they could table it, but for now they needed to let it rest in peace.

Mr M Kalako (ANC) agreed. However, he wanted to commend the colleague. The Bill was well done and well-researched. It had some valid points and arguments. Hence he agreed that perhaps the country may have to revisit it as the country developed. It was true that they were confronted with a situation some things in the economy and society were taking huge resources to regulate. They should give the policy a chance and see how it would deal with the problem of remote gambling. It may need a review of the policy itself but at the moment he agreed with his colleagues.

The Chairperson underlined what had already been said. It was the best crafted Bill from a Private Member, that Parliament had seen. It was well-crafted and well-researched, but there was a principle that they did not agree with. Some of the areas that this looked at were challenges faced by the Gambling Board, of policing, monitoring, of exercising oversight - that was a reality. It would appear that there were insufficient funds to be done as effectively as it should be. It may even be pertinent in the next few years to look at the whole architecture of ICT in relation to gambling, and to examine that. This area was moving so fast, it was becoming pertinent for dti not only to have policy and a piece of legislation in due course but could it be implemented effectively. This was the question that the Remote Gambling Bill also asked.

As Chairperson, she thanked Mr Hill-Lewis. It was a well-crafted Bill and a credit to him. After due deliberation, which was had previously, they wanted to consider the motion of desirability on the Remote Gambling Bill. She submitted this motion of desirability on the Remote Gambling Bill for the Committee’s consideration, to accept or reject it. 

Mr Mkongi raised the motion of rejection. Mr Koornhof seconded. Mr Kalako stated this was ANC’s position that the Bill was rejected.

The Chairperson asked Mr Hill-Lewis to speak for the DA.

Mr Hill-Lewis stated that DA voted in favour of the motion of desirability.

The Chairperson appealed to colleagues and compatriots in Parliament, to have other Private Members Bill to have this level of crafting. In fact, it was lesson to some departments. She thanked Mr Hill-Lewis.

The Committee adopted its Report on the Bill.

The Chairperson said that it was difficult for Mr Hill-Lewis to support the report given that he was the actual proponent of the Bill itself. She asked Mr Hill-Lewis if he at least did not have an objection to the report.

Mr Hill-Lewis did not have objections to the report.

The Chairperson thanked the Parliamentary Legal Advisor, Ms Cassim, for assisting the Committee process of that legislation and for assisting that the crafting of the Bill followed the legal processes.

The meeting was adjourned. 

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