Debt Relief Policy: Department of Justice and Constitutional Development briefing

Meeting report

Department of Justice and Constitutional Development on Insolvency Amendment Bill

Ms T Skhosana, State Law Advisor, Department of Justice and Constitutional Development (DOJCD), said that the main feature of the Insolvency Amendment Bill, developed by the Law Commission, was the procedure relating to liquidation or insolvency. It provided provisions relating to entities as well as natural persons, and appreciates technology by making provision for some of the payments to be made electronically. It also introduced the creditors’ committee and dealt with the treatment of creditors in relation to property rates and taxes.

Currently, the Insolvency Act made provision for compensation, which could be done only after the first meeting of the creditors. The insolvency or liquidation process must have commenced before the debtor could offer compensation. There were concerns regarding the court granting a liquidation order if the administration of the estate was going to the advantage of the creditors. Creditors would thereby get a share of the rent and also would not be required to make any contributions towards the administration of the estate.

There were concerns that debtors who did not have any assets or income could not apply for liquidation. A proposal was made to the effect that there should be compensation before application for the liquidation process. The Bill introduced a pre-liquidation compensation, which provided an option for a debtor who was unable to pay his/her debt to approach the administrator and offer compensation to his/ her creditors. The compensation would then be managed by the administrator, who would assist the debtor to draw up an offer of compensation. Once the compensation was accepted by the creditor, it became binding on all the creditors, with the exception of the secure and preferred creditors.

The Bill had already been published for public comment and was scheduled to be submitted back to Parliament within the current Parliamentary session. There were ongoing discussions to strengthen the amendments on the execution rules of the High Court and the Magistrate’s Court.

Rules of Execution

The rules were amended by the Rules Board. Under the rules, the application for the execution of immovable property must be supported by an affidavit setting out the market price of the property, the valuation price and also what was owed, in case the property was bonded, so as to inform the court on the reserve price.

However, this new provision required that the debtor should have a certain amount in order to apply for compensation. In effect, this may leave a debtor without the prescribed amount, without an option. Pre-liquidation compensation accommodated people who could offer payment to creditors, and may leave a debtor with no asset or income.

The Law Commission had conducted a comparative survey and found out that, in other jurisdictions such as the Republic of Ireland and the United Kingdom (UK), the law made provision for the estate of persons with no assets or income to be administered by a government institution or agency, whereby there would be a review process which would discharge any qualifying person from paying the debt.

The Bill was still a work in progress, with the DoJCD planning to establish an inter-departmental task team to look at policy issues. Thereafter, the Bill would be published for public participation. It was estimated that the Bill would be submitted to Parliament in the next Parliamentary session.

Debt Collector Amendment Bill

The Debt Collector Amendment Bill amended the Debt Collectors Act enacted in 1998, which dealt with debt collection and established the Council of Debt Collectors. The main objective of the Bill was to bring attorneys who were debt collectors within the ambit of the Act. Currently, attorneys and their employees, acting as debt collectors, were excluded from registering with the Council of Debt Collectors. The Bill also introduced the appointment of inspectors who would assist in the investigation of the complaints raised against debt collectors. The Bill was expected to be submitted to Parliament during this Parliamentary session.

The Rules Board was working on the Amendments to the Rules that dealt with execution, so as to strengthen the regulations in the Rules. The rules would have a uniform application in the High Court and at the Magistrate’s Court level. Among the amendments was a provision to make residential property executable, thereby requiring any judgment debtor to have to make an application to the court for the execution of a residential immovable property. The amendments also provide for procedures to object to the execution of such property, and sets out the factors courts should consider when granting the application. It also obligates the court to consider alternative measures before ordering the execution of the property. The amendments also require the sheriff to report to the court after the sale of any property being executed.

The amendments to the regulations had already been published for public comment, with the closing date being 30 June 2017. Thereafter, the rules would be considered for approval by the Rules Board and then handed over to the Minister for further action.

Discussion

Mr D Macpherson (DA) expressed his concern regarding the possible situation where a valuation might not reflect the correct the value of the property. There needed to be an agreed evaluation procedure to determine the market price of the property.

Mr G Cachalia (DA) said that in the sale or execution of the property of debtors, there may be potential for collusion between the lender and purchasers who bought the properties for lesser prices. If the selling price at the time of execution was less than the original purchase price of the property paid by the debtor, there should be a provision to re-compute the amount owing, based on the price of the sale upon execution, so as to be an in-built deterrent to prevent collusion. In effect, the purchaser would pay off the debt based on the value determined upon execution.

Ms Skosana responded that to some extent, the amendments to the Magistrates Court rules and the High Court rules did take that into account. However, the concerns would be forwarded to the Rules Board.

The Chairperson asked Ms Skosana to liaise with the Committee Secretariat in order to make the Debt Collection Amendment Bill available to the Committee. The Committee’s engagement with the DoJCD was important and necessary.

Mr MacDonald Netshitenzhe, Acting Deputy Director General (ADDG), DTI, said that the DoJCD was one of the departments the DTI was working closely with. The Committee could request the Portfolio Committee on Justice to fast track the processing of the Insolvency Bill so as to facilitate a simultaneous implementation with the Debt Relief Bill.

Ubiquity Consulting: Role of Payment Distribution Agents (PDAs) and current risks undermining debt review and debt relief

Mr Kaveer Beharee, Consultant: Ubiquity Consulting, said that Ubiquity consulted for two of South Africa’s payment distribution agents (PDAs). PDAs were recognised in the National Credit Amendment Act No 19 of 2014. They distribute payment to creditors on behalf of consumers under debt review.

According to the recent National Credit Regulator (NCR) statistics, Ubiquity Consulting represented about 268 000 consumers under debt review and had distributed over R863 million to credit providers, debt counsellors and legal practitioners. Since the NRC had come into effect, credit providers had received more than R35.6 billion through the debt review process via PDAs.

As per the licensing agreement with the NRC, PDAs act in the best interest of the consumers. Consumers may approach a debt counsellor by telephone or by going to a debt counsellor branch, and the debt counsellor then opens his front-end system and captures all the details and performs a credit check. After determining debt review as the viable alternative, he would log on to the Debt Counselling Rules System (DCRS). The system was a rules-based engine developed by credit providers, and it would determine whether the rescheduling of payments was acceptable or not. Debt counsellors could therefore rely on the PDA’s system to enable them to run their business in their community.

The debt counsellor would collect all the payment details and provide them to the PDA, who would then collect the payment from the consumer and distribute it to credit provider. Ubiquity paid each credit provider and provided statistics to the NCR on a monthly basis.

On the DTI’s submission on debt relief and debt review, the DTI had noted the credit industry’s reluctance to embrace the debt relief process outside of the existing debt review process and the existing policy debt relief measures within the industry. The credit industry, particularly the banks, had cautioned against debt relief measures and their unintended consequences. There were calls for refining the current debt relief process and to make provision for low income consumers and the broad use of the DCRS rules.

The debt relief system did not accommodate low income earners, and there should be an effective debt counselling framework which provided an incentive for debt counsellors to provide assistance to low income consumers.

While there were new provisions for debt relief, there were still issues that needed to be addressed. One of these was the National Credit Act, which puts no obligations on credit providers to promote fair and equitable market conduct in debt review. Many of the comments on social media regarding debt review were negative, with more than 90% of these negative perceptions being payment exceptions. A payment exception was when a diligent consumer paid a PDA to distribute to credit providers, but his assets get repossessed because his payments did not get properly allocated against their account. This was mostly attributed to the conduct of credit providers to date. The second issue related to the provisions of the National Credit Regulations which came into effect May 2016 -- specifically regulation 10A 9(g) -- which required PDAs to distribute funds to creditors within five days of receiving the funds from the consumers, only for consumers to reverse their debit orders on day six. Generally, the credit providers would normally refund the PDAs, but the Banking Association of South Africa (BASA) refused to do the same, making the PDA industry highly unstable.

Further, Regulation 9E required PDAs to comply with any other requirements imposed by the National Credit Regulator (NRC). However, some of these requirements were not funded, which posed a problem not only to PDAs and the NRC, but to consumers as well.

Schedule 2 of the regulated ‘payment of the distribution fees’ was nonsensical, as even distribution agents had been making an average loss on every single consumer on debt review since the regulation came into effect. It was not known on what basis the fee framework was based.

On the conduct of credit providers in debt review, the consumer was always fully accountable for industry conduct. If a PDA was unable to properly allocate a payment or a debt counsellor incorrectly captured the consumers’ details, it would be the consumer who would be held responsible.

For example, recently 73% of customers who made payments via a banking app had been affected by significant interest charges or terminations after the bank could not provide adequate references for PDAs to identify consumers. The PDA, upon receiving payment instalments, realised that the app ensured that the payments were credited, but had then deleted the reference number, thereby leaving the PDA unable to distribute. Such scenarios result in a long and tedious process in an attempt to resolve the issues. As a result of the delay, consumers incurred interest and some agreements were terminated by the credit provider. The credit providers were not held accountable, since there was no provision that obligated them to act in the best interests of the consumer or the rest of the industry in the debt review value chain. The use of correct referencing by the banks remained one of the major challenges faced by PDAs.

BASA members, excluding Africa Bank and MFC (a division of Nedbank), inexplicably refused to refund PDAs when consumers reversed payment orders, leading to huge PDA shortfalls and losses. This was despite the fact that PDAs served debt counsellors (DCs) and creditors.

Regarding ‘the five-day rule’ in regulation 10A 9(g), banks were unfairly profiting from debt review at the expense of PDAs. This had destabilised the industry to the extent that PDAs would not survive within the next two years. Consumers would then be paying to a monopoly PDA or would be personally making payments to credit providers directly. Research showed that if the time was increased to 15 days, only a few consumers reversed their transactions. However, BASA should be held accountable for its members’ conduct if they were genuinely interested in debt review.

On behalf of its client, Ubiquity had alerted the DTI and the NCR on the debit order issue, but to date, despite positive talks, there had been no progress on the issue. For example, when a consumer paid an instalment of R5 000, banks would receive 71% of that instalment, the other retailers would receive 18%, debt counsellors 7%, legal practitioners 3 %, and PDAs 1% of the instalment. In the event of a reversal, PDAs got money from the other creditors, but the BASA members, with the exception of MFC and African Bank, refused to do the same, causing a loss of about R2500 on such debit orders.

Since the inception of the National Credit Act, PDAs were the only institution in the value chain where their work had increased significantly in terms of the service level agreement on licence conditions, while their fees had decreased by 62%, yet in the public participation to consider the amendments to the regulation, there had been a lot of questions regarding the cost of PDAs in the debt review process. PDAs’ fees had dropped by an average of 3% of the consumer’s total instalment, to about 1% currently. This meant PDAs made a loss on average for any single consumer who came under debt review.

The fees which PDAs were allowed to charge consumers made no provision for transactions below R100. This accounted for 23% of all transactions of debt relief today, forcing PDAs to provide the service for free. The price determination process should be done through a fair administrative process. The DTI had been engaged to provide the necessary information, but their response appeared not to be forthcoming.

The implications of PDA failure would be a surge in payment exceptions, to the extent that consumers may lose confidence in debt review, or the collapse of the system. Consumers would also be unable to adhere to debt review payment schedules, especially when payment schedules were adjusted into a cascading formula. Also, the debt counselling industry would be forced to consolidate, while smaller community-based debt counsellors would not survive. Poorer consumers would be the most adversely affected by the market structure, as it would change fundamentally.

As a proposal, the Committee, the DTI and the NCR should consider minimum requirements for the efficient and effective execution of debt review transacting. PDAs could provide technical assistance to credit providers so as to provide proper understanding. This would make a significant difference in eradicating some of the adverse practices highlighted.

Banks, being the main beneficiaries of debt review, should not charge banking fees in debt review-related transactions. This was because the PDAs take on the majority of the risks, despite the fact that it was the banks that are the end beneficiaries. The Committee should consider making the debt relief process cost effective.

There was a need for incentives for credit providers to act in good faith, to stop the payment exceptions and to refund the money owed to PDAs. Despite debt counsellors being the most qualified individuals to identify reckless lending, under the current legislation there was no incentive for them to do so. The debt counsellors should be incentivised to identify reckless lending before even engaging in the debt review process. The payment period should be adjusted from five days back to 15 days, since it would benefit the industry and not prejudice the consumer. The National Credit Act should be amended to force all banks to refund all sums due to PDAs through debit order reversals.

Regarding the debit order authentication, it was a new system that would come in during the 2019/20 financial year, and would not allow consumers to reverse a debit order. This would not sort out the current issues regarding the debit orders, as the cost would prohibit it. The regulator should be able to change the regulation as per the regulation 9E, but it should be amended to apply only when it was funded and the PDAs could cover the cost.

Schedule 2 of the Regulation was in contradiction with section 9E, and did not consider transactions under R100. The fee schedule should therefore be set aside through a declaration by the Minister, pending review by any third party at the discretion of the Minister. Regulators must not profit at the expense of consumers.

These recommendations would result into a wider net of consumers considering debt review, and protect them from creditors.

Discussion

Mr Macpherson agreed that debt review was debt relief. The Committee’s recommendations should be implemented simultaneously with the amendment to the National Credit Act (NCA). However, the allegations regarding banks and the suggested possible adverse outcomes should be tested. BASA and other lenders should be given an opportunity to respond to the issues raised. He asked what cases had been reported to the NCR and if there was a list of Ubiquity’s clients, so that the Committee could know who they represented. Debt counsellors did not need to be incentivised to report reckless lending, since they were legally obligated to report it. However, debt relief alone was not sufficient

Mr Beharee said that despite the faults of the debt review process, it was a system that worked. The challenge was how to get more people into the net. Regarding the potentially adverse outcomes to the industry, there were confidential submissions to support these assertions, and the Committee could interrogate Ubiquity’s financial studies if it wished. Ubiquity had made written submissions with documentary evidence, which had been provided to the DTI and the NCR for their review.

The Chairperson said she appreciated the submissions made, but other parties would have to make their submissions as well to enable the Committee to have a comprehensive understanding of all the issues. It would also need to know where the statistics had been obtained, and what assumptions had been made. Due to time constraints, the responses to the issues raised should be made to the Committee in writing.

The meeting was adjourned.