Debt forgiveness engagement with National Credit Regulator

Meeting report

National Credit Policy Review

Mr MacDonald Netshitenzhe, Acting Deputy Director-General: Department of Trade and Industry, (DTI) began with an introduction into the policy review. Parliament had amended the National Credit Act in 2014, together with the regulations that came into effect on 31 March 2015. The regulations had covered the criteria for affordability assessments, the powers of the National Credit Regulator (NCR) to investigate reckless lending, and the powers to the National Credit Tribunal (NCT) to adjudicate reckless lending matters. The review of the Limitations on Fees and Interest Rates regulations, which came into effect on 6 May 2016, had provided for the capping of fees and interest rates charged as a cost of credit.

The need to monitor and regulate all credit providers had resulted in the Minister of Trade and Industry issuing a final notice on the threshold required for credit provider registration on 11 May 2016. The Credit Life Insurance Regulations were in the final stages of completion, and they would put a cap on the amount that a consumer was required to pay for insurance in order to cover the cost of credit granted by a credit provider should the consumer fail to repay the loan.

The Department realised, however, that reckless credit lending continued, and had seen fit to approach the Committee to propose, amongst others, extending the powers of the National Credit Regulator to conduct pro-active investigations and impose administrative fines on perpetrators. The Committee had approved the proposal and given approval for the Department to approach Cabinet for approval of the proposed National Credit Amendment Bill to Parliament.

Mr Netshitenzhe proceeded to outline the challenges and the recommended solutions.

Challenge 1: The NCR was not empowered in terms of the National Credit Act (NCA) to impose fines after completion of their investigations.

When the National Credit Amendment Act (NCAA) empowered the NCR to investigate reckless lending practices and refer to them to the NCT, the NCT was empowered to review and impose fines accordingly. This meant that the NCR could no longer efficiently execute the NCA, which had resulted in there being no deterrent on reckless lending, which continued unabated. The high volumes of referrals to the NCT were overwhelming, while it was not able to implement the NCA efficiently. The consumer was left with no proper redress.

The solution for this was to extend the powers of the NCR to impose administrative fines on credit providers involved in reckless lending and other prohibited conduct. The imposition of fines would be akin to the imposition of fines by other regulatory agencies, such as the South African Reserve Bank (SARB) and the Financial Services Board (FSB).

Challenge 2: Backlogs at the NCT

Referrals from the NCR, particularly those caused by the lack of imposition of fines, made it impossible for the expeditious finalisation of matters. Direct referrals by consumers to the NCT caused it to be unable to cope with the volumes. Consumers currently referred reckless spending cases to the NCT, but in an ideal situation, referrals should also be made to the Magistrate’s Court. These challenges were being addressed by the Department of Justice and Constitutional Development through the Courts of Laws Amendment Bill 2016. Part-time NCT membership of presiding officers also caused unwarranted delays and postponement of matters.

More capacity had to be given to the NCT through additional resources, such as human capital, information technology (IT) and financial capacity. Additional retired judges should be appointed on a full-time basis, as this would enhance the independence of the NCT and reduce unwarranted postponement of cases.

Challenge 3: Non-reportable irregularities in terms of the NCA

Prohibited conduct and reckless lending were not regarded as reportable irregularities in terms of the NCA and other legislation, such as the Companies Act of 2008 and the Auditing Profession Act of 2005. There was a lack of coordination amongst enforcement agencies in relation to their enforcement activities. There was a need to enforce this coordination.

The NCA should be amended to include prohibited conduct and reckless lending as reportable irregularities. Enforcement agencies such as the Independent Regulatory Board for Auditors (IRBA), the SA Police Service (SAPS), the SA Revenue Service (SARS), the National Consumer Commission (NCC) and the National Prosecuting Authority (NPA) should coordinate their enforcement strategies as envisaged in section 17(4) of the NCA. The respective Ministers and Directors-General should enter into memoranda of understanding to ensure effective implementation of the coordination of enforcement strategies.

Challenge 4: Defined criteria on settlement of cases

No criteria had been set for the settlement of cases between the regulator and regulated entities. This did not take into account consumer interest or redress. The lack of criteria had led to the behaviour of regulated entities not abating, and therefore not being deterred from reckless lending or prohibited practices.

The NCR should be empowered to negotiate the settlement of consumer disputes with regulated entities within a defined set of criteria. The objective of such settlements should be to provide redress to consumers and change the behaviour of the regulated entities. Settlements would substantially minimise the time periods of resolving disputes and costs for both the regulator and the regulated entities.

Challenge 5: Too formalistic approach of the NCT

The NCT was operating too much as a court of law, and was too involved with legal technicalities. The formalistic approach should not take precedence over the informal/inquisitorial approach, which had been the purpose of the tribunal. There was over-reliance on rulings on technical points that denied the parties an opportunity to resolve the merits of cases and provide redress to consumers in appropriate cases. Parties that were legally represented took advantage of the legal technicalities and the consumer was left without redress.

The NCT must desist from acting as a court of law, and be concerned about fairness and equity. The main objective for the establishment of the NCT had been to resolve consumer problems fairly, equitably and expeditiously. The NCT should always deal with the merits of each case in an informal manner, notwithstanding the legal technicalities that might have arisen. The inquiries should lead to expeditious redress for consumers, regardless of legal representation.

Challenge 6: Prescription of debt relief measures

There was no empowering section in the NCA for the Minister to prescribe debt relief for categories of persons or sectors of the economy or community during hard economic conditions, or to prescribe debt forgiveness under adverse economic conditions. The previous processes resorted to, regarding the removal of adverse credit information, was not the same as prescriptions by the Minister through regulations to provide for debt relief or forgiveness measures.

There was a need for the NCA to make provision for the introduction of debt relief/forgiveness measures to alleviate household over-indebtedness in difficult economic circumstances. The criteria for this process should be informed by the prevailing economic conditions in the country. The Minister should be given power to prescribe debt relief measures through regulations, and the circumstances to be considered under such regulations may include, but were not limited to, the prevailing economic circumstances in the country or sector, or a section of the community.   

Challenge 7: Debt writing off not leading to debt relief

In law, writing off of a debt by a credit provider did not necessarily relieve the debtor of their obligation to repay the debt. Credit providers sell the loan book, and the buyer was entitled to demand payments on debt written off in the loan book. Writing off a debt did not mean that the debtor’s credit record was no longer impaired or removed from the Credit Bureau.

In all circumstances where the Minister, through regulations, had prescribed debt relief/forgiveness measures, the credit providers should be barred from invoking the right to claim after writing off the debt. The credit bureau should remove adverse credit information against all persons whose credit record had been cleared.

Challenge 8: Resale of repossessed property without compensation to the consumer

Credit providers were able to repossess properties that were almost paid up, and resell them. Even where the property was bought at an astronomical amount, the consumer was not reimbursed the difference of the owed amount and the profits from the sale of the property.

Where goods were repossessed for resale by the credit provider at an astronomical amount, the NCR should be empowered in terms of the NCA to provide for guidelines to regulate repossession of such property.

Challenge 9: Declaration of credit agreements as reckless and unlawful by the NCR

The NCR did not have the power to declare credit agreements, including pawn transactions, as reckless and unlawful. The NCA should be amended to give powers to the NCR to declare credit agreements as reckless and unlawful.

Challenge 10: Delinquency of directors in terms of the NCA

Directors of credit providers who were habitual transgressors of the NCA, were not declared delinquent directors in terms of the NCA. Contraventions of the NCA were not viewed as maladministration leading to a delinquency declaration in terms of the Companies Act.

The NCA should be amended in order to deal with habitual transgressors as delinquent directors, in terms of the Companies Act.

Challenge 11: Personal liability of directors and management of credit providers

Where directors and management of credit providers had been habitual transgressors of the NCA, the Act did not view them as people who should attract personal liability when the company was sued. The Companies Act provision dealing with personal liability of directors emanating from abuse or misconduct should apply where reckless lending or prohibited conduct had taken place

Challenge 12: NSFAS unable to collect funds from former beneficiaries

Beneficiaries did not repay the funds that were used to assist them during their studies, even after they had completed them. This resulted in sustainability challenges. The National Student Financial Aid Scheme (NSFAS) should be empowered, in terms of the NCA, to be able to properly notify the former beneficiaries and employers to collect the debt.

Challenge 13: Technical amendments

This policy review contained a lot of technical amendments that were associated with the issues raised above. Debt forgiveness needed to be included for retrenched miners/steel workers.

Mr Netshitenzhe said that the department recommended that the draft bill, at the extreme, should not let the state be a debt collector in the area of garnishee orders. The bill should address a proper mandate on the coordination of debt relief informed by the definition of “indigent”. People who were not employed, or did not have a sustainable form of income, should not be given credit. Repetitive transgressors of the NCA should be deregistered as a last resort. Shareholder activism in terms of the Companies Act of 2008 should be fostered, as these were issues of corporate governance. Settlement agreements should be to the ultimate benefit of the consumer.

Ms Nomsa Motshegare, Chief Executive Officer, National Credit Regulator, said that she wanted to make the Committee aware that when one spoke of debt relief, the country had 24 million credit active consumers as at end of June 2016, and 40% of these consumers – 9.6 million -- were stretched. These were people who were classified as impaired consumers because they had accounts that were in arrears, and had judgments against them and adverse listings. The consumers needed to be given ways to get back into the mainstream economy, especially those that deserved assistance.

Discussion

Mr Hill-Lewis (DA) said that he was concerned about what he had heard in the presentation, because it was very dangerous language that was being used. He wanted to know exactly what was meant by “deserving customers.” It went without saying for the NCR to insist that one could not foster a culture in South Africa where people did not take responsibility for the debt that they had signed themselves up for. It would be an impossible situation where people felt that they could take on more debt than they could handle because they knew that at some point the government would just write it off. No company would ever offer credit under those circumstances, because they could never plan how they were going to recover their money or what their loss would be, and businesses could not be planned in that environment. He asked for an explanation for exactly what was meant by “debt forgiveness,” because the language used was important. If the presentation were to land in the hands of the public, then people would go and buy new cars on credit knowing that the debt would be written off in the event that they could not pay.

Every single person who was employed, and who had a credit agreement, should be covered against loss of income, retrenchment and disability. If they were impaired, it was most likely because they were a victim of reckless credit given to them, or they had lied about their financial means and engaged in more credit than they could handle. If the income was lost, the credit life agreements should cover the credit agreements. The debt counselling and debt re-arrangement process should not be rendered obsolete by the debt forgiveness programme.

Adv A Alberts (FF+) said that he agreed with the notion that the NCT was not functioning properly at the moment due to technicalities. Large companies got away with murder, so to speak, because they raised technical problems through legal representation. The NCT was in dereliction of its duties, because it had changed its rules without informing the National Consumer Commission. This had resulted in a situation where, when the Commission had made its application to the NCT with regard to the holiday clubs matter, it had been dismissed because it had not complied. No one had informed them that the rules had changed. The rules were now upside-down versions of civil procedure in our courts. As far as he was concerned, the NCT was a non-functional entity at the moment, and it protected large role players who victimised the consumers. He wanted to know what the Department and the NCR envisaged would be the procedure that would be put in place of what was the current procedure, the status of the life credit regulations, and what would be the sliding scale. He agreed with Mr Hill-Lewis about the debt forgiveness, and asked what the relationship would be between the Prescription Act and the intervention period by the Minister.

Mr N Koornhof (ANC) said that the problem in the country was that reckless lending needed to be stopped. Reckless lenders gave credit to innocent South Africans who never read the fine print, which had led to the current problems. Debt forgiveness must kick in against those who were in the business of reckless lending. That was what should be targeted. A consumer’s circumstances could change, and what was seen was that there would be repossession sales, but the debt was not written off. There were many issues to this that needed to be addressed.

Mr D Macpherson (DA) said that he had been stunned by the presentation, and wanted to know what consultations had been held with credit lenders such as banks, to discuss the issue. To put something like this on the table in a Committee that was open to the public had the potential to be very dangerous. Consumers could go and start spending recklessly, and banks would start withholding credit fearing what was to come. He was concerned with the language, what the prevailing economic conditions were, and the regulations to determine a community that was in need. The language suggested a populist approach to dealing with a problem that was very serious. He wanted to know why it was expected of students to pay back the money to NSFAS, but at the same time advocating for consumers to have their debt written off. If the presentation were to inform a Bill without consulting stakeholders and making it open for comment, it would result in problems for the economy.

Ms P Mantashe (ANC) said that she thought that when the proposal was made, the concern had been about the retrenched miners and steel workers. The presentation, however, had suggested that the people who needed help with their debt being written off were those people who were the victims of reckless lending in particular. She sought clarity on whether this could be likened to the NSFAS loans, because an NSFAS beneficiary was expected to pay after employment. It was different from a retrenched miner, whose chances of getting other employment in the near future were very limited. Indigent people were often the victims of reckless lending, because stores extended loans to them, yet by definition they were the poorest of the poor. Debt relief could not be offered to every citizen of the country. The #FEESMUSTFALL matter should not be used opportunistically, because the two issues were not the same.

Mr Netshitenzhe responded by saying that he would start by clarifying the student loan issue, saying that the presentation had not been dealing with the bigger picture of what was happening now. It was about students who were employed, and willing to pay off their NSFAS loan. When claiming for these amounts, the amount debited should not exceed 25% of what they earned so that they could to live off the balance and continue working. It would be unfair for them to be left with nothing. An affordability assessment should be done to see how much the student could afford to pay.

The Department of Justice was in the process of amending their laws to address the issue of creditors and garnishee orders, so that they could take only a quarter of the salary.

The issue of consultations would be dealt with after the Bill had been approved. Ms Motshegare would speak more on what the first consultations with the banks had brought forward. It should be a prohibited act to claim a debt that had prescribed. It should be dealt with, and have the creditors reimburse the debtors.

The changing circumstances referred to the retrenchment of employees. Where the debtor had paid off 90% of the debt, negotiations should be held with the creditor to write off the debt. There were creditors who offered credit to students who did not have an income, and did not do a verification of income. This resulted in students defaulting on a payment, which affected their credit record.

The rules of the Tribunal were there, and it was the responsibility of the institution to consult with and educate practitioners in the field to let them know that the rules have changed.

Ms Motshegare said that initial consultations had been held with the four big banks, African Bank and Capitec Bank, regarding the issue of debt relief and debt forgiveness. She agreed with Mr Hill-Lewis’s observations about the need to have a balance and not to foster a culture of not paying debt, with the hope of the debt being written off. The banks had said that they were practising their own form of debt relief and were doing so with a number of measures, such as reducing the interest rates on a debt until such a time as the debtor had recovered.

Mr Siphamandla Kumkani, Manager: Credit Law and Policy, DTI, said that he would respond to the question of credit life insurance. They were working hard to reduce the abuse taking place in the area, because there were consumers who were not aware that they have taken out credit life insurance. Where a consumer had paid the capital amount on a loan and was left with less than ten percent of the loan, but was unable to pay it off due to retrenchment, then such a person should be considered for debt forgiveness. The retailers had taken the Department and the NCR to court regarding the verification of income. They were seeking to dismiss Regulation 21A, which speaks to verification of income, proof of income and address, and an ability to service the loan. Retailers continued to grant students credit agreements while they knew that they were not working and that their only source of income was the allowance. This resulted in students defaulting on payments, and the negative credit record affected their opportunities for employment.

Mr Netshitenzhe said that the Department would respond in writing to any other questions that had not been responded to.

The Chairperson thanked the Department and NCR for the presentation.

The meeting was adjourned.