Debt Relief Committee Bill: public hearings Day 2

Meeting report

Opening remarks
The Chairperson welcomed everyone to the public hearing on debt intervention legislation, including Acting Director General of the Department of Trade and Industry, Mr MacDonald Netshitenzhe. She noted the concerns raised about Capitec Bank and suggested the National Consumer Regulator (NCR) CEO comment briefly on Capitec Bank from the perspective of NCR.

Ms Nomsa Motshegare, NCR CEO, indicated that the NCR had undertaken a compliance check the previous year and had not identified any reckless lending and that we will continue to look into the matter. 

The Chairperson noted the confidence and requested the Committee be advised of any updates.

Summit Financial Partners submission
Mr Clark Gardner, Summit Financial Partners CEO, supported by his colleague, Ms Mariesa Kreuser, Head of Legal at Summit Financial Partners, made a case for better enforcement and more easily enforceable law.

Mr Gardner expressed the opinion that previous submissions made on the National Credit Act and amendments by Summit Financial had not been heard, or incorporated in any way, despite the fact that Summit was regularly involved in legal work to protect consumers. He presented a narrative describing the hardship that poor and low-income people experienced because Summit’s previous submissions had not been taken into consideration. Consequently, they had seen extensive hardship, especially by grant recipients who were charged exorbitant interest rates and compulsory fees, such as exaggerated delivery and administrative fees. He claimed that his organisation was the only body that really represented the poor consumers. 10 million people had missed an instalment on their debt which meant that the scope of the Bill could be too broad. He also noted that people were caught in a debt spiral where they were paying 300% to 400% of the original debt. He noted that generally 70% of miners’ income goes to debt repayment.

He added that he would love to extend the discussion on Capitec Bank. Summit Financial had had claims against the Capitec multi-loan product in December 2016 in a case where matters had been unreferred by the NCR.

Ms Kreuser addressed the role of the NCR in debt intervention, saying the time taken by the NCR to intervene in reckless credit complaints was excessive for people living on the poverty line. She noted that unrealistic calculations of minimum expenses were being used in assessing consumers’ minimum expense tables, thereby allowing consumers to become over-indebted. Preventative measures had to be improved.

Mr Gardner reminded the Committee of the African Bank crisis some years previously when it had taken on the lion’s share of low-income borrowers and warned that Capitec Bank had taken over the majority of that market and had previously been accused of issuing risky loans. Good lenders were at risk from bad lenders. He made a plea for a simple process for dealing with over-indebtedness that would make the process easier for the consumer. He noted that the Bill was looking at First World legislation while the consumers were in a Third World environment.

Discussion
The Chairperson thanked Summit Financial Partners for the clear points made in the submission.

Mr A Williams (ANC) welcomed the submission but noted that they had spoken about problematic clauses but had not submitted proposals as to how the clauses ought to read. He asked that Summit submit specific proposals for those clauses so that the Committee could see exactly what they were talking about and what it was that they wanted. If not the National Credit Regulator, then who should be doing the job that the NCR should be doing? Was Mr Gardner suggesting that there were problems with the administration or that the whole system was problematic? If the whole system was problematic, then the Committee really needed to know that upfront.

Ms P Mantashe (ANC) agreed that the presenters should give advice on the amendments that the Committee should apply to the Bill, instead of simply asking questions. If Summit believes they were the only voice of the poor, what did that mean? She asked if Summit was a non-profit organisation.

Mr G Cachalia (DA) noted that it was clear to everyone that reckless credit had to be addressed and that, globally and locally, there had been time-honoured efforts to strike a balance between the provision of healthy credit and to ensure that the time-honoured practice of credit, which dated back to biblical times, was protected and dealt with in an honest, decent and proper way. It cut both ways and there needed to be protection. He needed to understand if the presenters had vested interests in that particular area as a service provider or paid service provider, and in what capacity they acted. It was important for the Committee to understand from where the presenters were coming.  He was concerned about the comment about First World laws for a Third World country. The logical line of that particular argument resulted in problematic law and faulty law being enshrined. He noted that if First World laws were not enshrined, the country was in deep, deep trouble. He would not countenance a retreat into Third World law.

Mr S Mbuyane (ANC) asked the presenters to elaborate on their impressions of the incapacity and failures of the NCR. What were the reasons for those failures? He wanted to double-check who the presenters were representing and their demographic representation.

Mr Cachalia added that they should provide written responses as to what they were particularly advocating, but perhaps they could inform the Committee, orally and in summary, about what they wanted.  Perhaps the NCR could give a reason for the non-referral of the Capitec multi-loan product as it was raised by the presenters.

The Chairperson noted that Summit Financial Partners had said that they had not been invited before, but she advised the company to take advantage of the general invitation to provide input. She asked how Summit was funded and if it was an NGO, and if it were an NGO, how did they survive?

Mr Gardner informed the Committee that Summit Finance had submitted inputs on the National Credit Act since 2004 but their submissions had never been taken note of and, as a result, they sat with debt counselling provisions that did not work, reckless lending that was very difficult to prove and the current Bill would be unenforceable.

The Chairperson indicated that the Committee Secretary would ascertain what had happened in 2004 before she was there, although she took responsibility for what had occurred at that time. She hoped that since 2009 anything that Summit had submitted would have been responded to by letter and reasons given for not including the suggestions. She had never signed such a letter to Summit Finance.

Mr Gardner explained that Summit Finance was a purpose-driven entity. Its purpose was to bring positive change to the financial services industry by doing great things for consumers. That was the primary motive. They were not a not-for-profit organisation. They did make profits and were funded primarily by employers who paid them to look after the financial health of their employees and identified financial irregularities that had taken place. There was also pool of people to whom they gave assistance, coming predominantly from the Stellenbosch Law Clinic. They were profitable and therefore sustainable. “In order to do good, you have to do well.”

Mr Gardner responded that their written submission gave details and exact suggestions for specific clauses. In response to Mr Cachalia, he said that they learnt by example. Section 106 of the National Credit Act on credit life insurance stated that it had to be market-related. He pointed out that the man in the street could not enforce that clause as it was difficult to prove that his credit life insurance was not market-related. It would require going to court to get it to a declaratory order. One could not win anything with the kind of law that had been written. That was what he meant by First World law. It was ambiguous and difficult to prove and required a strong ombudsman to obtain declaratory orders using the courts. In the Third World, one did not have strong regulators to obtain declaratory orders. Summit Financial would be involved in the biggest case in the country on the National Credit Act, in March, trying to prove the in duplum rule on Section 101 and 103 of the Act.  No person had previously taken that piece of law to court to get a declaratory order. Various opinions on the sections, including by the NCR, had resulted in R500 debts ballooning to R11 500. It would cost between R1 million and R2 million, and a lot more if Summit lost the case. They were going up against Steyn Attorneys. Mr Gardner declared that that was what he meant when he said that the law should be written so that it did not require a declaratory order. Laws needed to be enforceable and not expensive and time-consuming or they removed justice from the man in the street.

On the question about the system being broken, Mr Gardner replied that the Regulator and the National Consumer Tribunal (NCT) were brought in to ease the process and avoid the expensive route of going to court. It would be easier and less expensive to go direct to court. Statistics showed that Summit did not get any joy in their complaints to the NCR. In a case against Lewis Stores, the court had sent him back to the NCT to get the relevant papers which had cost R200 000 because he had lost in court. NCR and NCT removed access to justice to the man in the street. On credit life insurance, he suggested that a specific amount be identified, for example: credit life insurance could not be more than R4.50 on the reduced balance, and not on the outstanding balance. He appealed to the Committee to write the law in very accurate and distinct terms. The legislation needed to define unsecured credit so that the man in the street could approach the court and get reckless credit written off. The system was not broken; it should work, but it was not working. The law was not being enforced at regulatory level. Reckless credit needed to be addressed. Healthy credits needed to be defined and highlighted. The cut-off in terms of total debt instalments towards unsecured debts should be 40% of net income. That would be enforceable and understood by everyone.

He agreed that he did have a conflict of interest as employers paid him to look after their employees’ financial health. The easier and cheaper he could enforce the National Credit Act, the better he could do this and the more value he could add. Summit Finance was also a registered debt counsellor for a small percentage of the clients. He was personally registered to undertake alternative dispute resolution. He was also a shareholder in a company called Q-Link. However, he was at the hearing with the intention of trying to bring positive change to the financial services industry. He recalled a case in 2003, where a mineworker from Finch Mine who stole food stamps because he had six garnishee orders on his pay, was caught stealing, was fired and committed suicide. He gave an example of a grant recipient who had R150 taken off the grant illegally and R400 debit orders, leaving him with R200 a month to live on. Why was the law not protecting such a person or why was the law not enforced? It was a case that he would be taking to court.

He suggested that the Committee looked at the Scorecard as the best way to determine the financial health of the consumer. People were using short-term credit to live which led to arrears and the charging of endless penalties. 10 million people had missed instalments. Only 1.2% of mortgages went to people who were earning under R5 000. Debts which had stood at R1 000 were resulting in debt collections of R7 000 via payroll deductions. No one was enforcing the law. The only time there was any improvements in the number of people who had missed instalments had been when law was written to write off debt, which he considered window dressing or putting lipstick on a pig.

In terms of the demographics of Summit Finance, the majority of clients were black, coloured, mineworkers and grant recipients. He had 80% non-white staff.

Ms Kreuser explained that she was not so much against First World law but that the problem came in when one looked at the South African consumer. There was a need to understand the average South African consumer and to write laws that were practical and not theoretical. The pre-agreement quotes which had come into effect along with the National Credit Act in 2005 was a great idea as it gave consumers an opportunity to shop around. However, it was not the practice of the average South African consumer to shop around. They would sign any document placed in front of them and would not understand the terms and conditions of that document. The introduction of the credit card multiple with the last amendments had been another oversight that meant nothing to the average South African consumer. As a lawyer, she herself had not understood it and had to refer to the Act. The law and practice did not mesh. It was about creating access to real justice for consumers.

The Chairperson noted the emphasis on a more efficient, effective implementation of the law. The point that Summit Finance was making was that enforcement was not strong enough. She had noted their comments on over-indebtedness. Would they agree that some of the preventive measures needed would be financial literacy, on the one hand, while also trying to make the law more accessible to ordinary people? That had been a principle and a goal of the government since it had come into power. However the presenters were saying that government had not really achieved that. Was Summit Finance saying that it was not achieved in the National Credit Act? It was not a question of First World versus Third World. It was something deeper than that.

Mr Gardner agreed that it was a case of better enforcement and more easily enforceable laws, but he strongly disagreed on the need for financial literacy as a preventative measure. The reason was that financial health or financial discipline was a behavioural aspect. Awareness would assist, but it did not have a great success rate. The success rate was 10-15% because it was about behavioural habits, such as impulse, control and discipline, which was very different to financial literacy training. People had to spend less then they earned. That was the primary principle behind financial health and the only way to deal with desire from the consumer, was to regulate the credit provider to protect the consumers from themselves.

Mr Williams informed the presenters that the written submission that he had from Summit Finance was very unclear and he asked that a new submission be submitted, which contained the specific clauses in the Bill and the clauses proposed by Summit Finance.

Ms Mantashe said that her colleague had covered her points but she wished to contest the space claimed by Finance Summit and stated that she believed that the only voice of the poor was the ANC.

The Chairperson noted that everyone claimed to be the voice of the poor, but she thanked Ms Mantashe for emphasising that. The Chairperson thanked Summit Finance for their submission.

The Chairperson stated that the Committee might call on presenters to submit further information as the goal was robust legislation.

Consumer Goods Council of South Africa (CGCSA) submission
Ms Patricia Pillay, Executive: Stakeholder Engagement and Legal Affairs at CGCSA, and Claire Morrissey, Legal Advisor for CGCSA.

Ms Pillay explained that CGCSA was an NGO, funded by retailers and manufacturers, predominantly in the fast-moving consumer goods space, and had, in 2010, merged with furniture goods retailers, which added 35 small furniture traders and the large furniture groups of Lewis Group, JD Group and Shoprite. It was not a consumer body. Although CGCSA represented business, the ultimate aim was to assist the consumer. The organisation had submitted an extensive submission, including wording, but in the oral submission, would simply highlight key areas.

Ms Morrissey explained a key concern to CGCSA was the need for a proper impact assessment. There needed to be a socio-economic impact assessment as well as a quantitative impact assessment. She referred to some of the negative effects of the Bill, including the fact that a large part of credit providers’ current debt books would be at risk and there would be ongoing future risk. There was an atmosphere of uncertainty and increased risk for lenders which would lead to strict approval processes for consumers earning less than R7 500 as they would be viewed as high-risk consumers and would be charged higher interest rates and subjected to strict lending conditions. This was against the purpose of the Act. CGCSA believed that the qualifying earning threshold of R7 500 was too high as the object of the Bill was to assist the indigent. The Act needed to consider additional eligibility and qualifying criteria. The organisation pointed out that the “no realisable assets” criterion was complex. CPCSA believed that the ex parte application for debt intervention was highly problematic and that the audi alteram partem rule had to be applied. CPCSA suggested that there needed to be a cut-off date and proposed six months after the Bill had taken effect. The Minister’s powers were considered too broad and they did not believe that there should be mandatory credit life insurance supplied by the credit provider. Criminalisation of reckless lending offences was taking a step backwards and was totally inappropriate.

Discussion
Mr Williams objected to the approach of CPCSA that threatened that if the Bill was passed, then interest rates would be increased and there would be less access to credit for the vulnerable, who were still mostly black people in South Africa, and he thought that that attitude was completely unacceptable. It was not an appropriate way to move things forward or to persuade the Committee to agree to their way of thinking. He asked if Ellerines had been a member of their organisation and what actions the Council was taking currently to prevent a recurrence of the Ellerines situation amongst their members. He was disappointed with the attitude that if the Committee went ahead with the Bill, the sector would respond in a particular way. That was not helping as the country had a massively over-indebted, mostly black population because of the disparities that had been inherited from apartheid, and were still in place. He expressed concern about the attitude that if the Committee tried to alleviate suffering, then they would make it impossible for people to borrow money. That attitude had also come from other people and he did not think that it was healthy in the Committee at all and he was very disappointed with the submission.

Mr J Esterhuizen (IFP) agreed that unrealistic debt repayments made the poor subsidise the rich and could have a very big impact on the industry. He could not agree with the threshold of R7 500. Section 88(F)(2) referred to widespread job losses, but Section 88(F)(3)(6) referred to people earning under R7 500. Where did it go? Was the Bill for people who were unemployed or people who were earning under R7 500? The cost of debt review, where the maximum interest charged was 27%, was simply unaffordable. Instead of eliminating debt, it was being moved around. It was not debt elimination but debt displacement. People with a bad credit record had no muscle to negotiate a better interest rate. The powers for the NCR, set out in 88(C), were too wide and periods of 12 months and two years would have a negative effective on financial institutions and make it more expensive for people to borrow money. The Minister’s unlimited power was unacceptable, and the matter should be limited to consumers who had lost their job and were unemployed for long periods. If the Minister had unlimited power, it could have a very negative impact on financial institutions. His opinion was that very little thought been put into the long-term impact of the Bill on the economy. Creating offences that lead to imprisonment was not practical, nor was it desirable.

Mr Cachalia said that he had not been intending to make comments as he had hoped that the Committee would take advantage of the well-structured and informative submission, and take on board many of the suggestions which were properly researched, in his opinion, and had been delivered very eloquently. He had been forced to enter the discussion as a result of the comments by Mr Williams, which he had found a little odd. He had discerned no threat, but the flagging of certain unintended consequences from the market. They were not threats but realities which the Committee needed to take into consideration in drafting a Bill that dealt with people’s lives and livelihoods, and whose aspirations were met by the credit industry.

Ms Mantashe had concerns. She was not sure if the presenter believed that CPCSA was competing with the NCR. CPCSA had said that NCR and Minister had been given too much power. The task of the Committee and government was to protect vulnerable people. She did not understand. The Committee wanted to broaden the Minister’s role so that he could protect the vulnerable from the hyenas who were the credit lenders. She asked what CPCSA expected from the Committee. Why were they behaving as if they were competing with the NCR? They were not competing with the NCR. The NCR was a government entity which had a duty to protect the vulnerable. She wanted to give them more power.

Ms Pillay noted that Mr Cachalia had already responded to Mr Williams. She assured Mr Williams that there had been no intention to issue a threat, but simply to inform the Committee of the reality facing their members. CPCSA should be granted the opportunity to put forward the concerns of its members. The Council had also been practical in putting forward solutions, which it had done in its written submission. CPCSA had made every effort to be constructive in providing input.

Ellerines had been a member of CPCSA at that time. The Council was a voluntary body, not a regulatory body. The Council acted in terms of the code of conduct and there was a strong process in terminating memebership, but members could resign at any point. What the Council did do, was to share best practices and update member on information and various gazettes and make every effort to ensure that its members conducted themselves in a proper way.

She assured Ms Mantashe that the Council was not against the NCR. The submission had, in fact, advised that the NCR needed more capacity. The Council was, by no means, in competition with the NCR. The submission had indicated the critical role that the NCR was playing and should continue to play. CPCSA would continue to support NCR, but there was a concern around enforcement.

Ms Morrissey apologised that she had come across in a threatening manner. She had been trying to explain a concern that the CPCSA had, particularly in the absence of an impact assessment study, that would give comfort to the market. She hoped that the Bill would be rolled out in the manner everyone wanted it to be rolled out and not have unintended consequences.

The Chairperson referred to Ellerines. The points CPCSA appeared to have made, were that the current provisions and the Act itself needed to be enforced rather than a new Bill created and that three of the items that the Council had highlighted were in the Act and that the Bill should have addressed these more effectively, such as reckless lending and enforcement. Having said that, the Chairperson felt that the organisation ought to ensure its members towed the line, especially in terms of good governance. She explained that the engagement was not simply to draw out negative reactions, and so the Committee would appreciate positive proposals. [Ms Mantashe assumed the position of Acting Chairperson].

National Clothing Retail Federation of South Africa
The National Clothing Retail Federation of South Africa (NCRF) represents clothing retail businesses such as TFG (Foschini Group), Mr Price, Edcon Group, Truworths, Woolworths and Queens Park, a smaller member which would not be as impacted as the larger members. Mr Michael Lawrence, NCRF Executive Director, explained that it would not be possible, in the oral submission, to cover everything that was contained in the written submission. He noted that retailers had been a significance employment growth sector in the past decade and, as a sector, had the largest geographic footprint in the country. He believed that those were healthy aspects in the economy that would be negatively impacted by the Bill and, therefore, he believed it was necessary to rethink some aspects of the legislation. As 75% of the retailers’ shelf space contained South African produced products, the legislation posed a risk to South African manufacturers, as well as to their employees. He stressed the importance of an impact assessment before the Bill was passed.

The Chairperson asked NCRF to submit details on the amount of goods imported for sale in the members’ stores.

Ms Jane Fisher, Managing Director: Financial Services at The Foschini Group, explained that credit offered by the retailers was often the first line of credit that a consumer would be granted and that it would assist consumers in building up a credit record that would ultimately enable them to access mortgages, etc. The primary aim of clothing retailers was to offer affordable credit to enable merchandise sales and the profit was, therefore, in the sale of the merchandise, as opposed to the credit agreements. It was also in the interest of retailers that debt was affordable and initially low credit limits were granted to establish a good payment record.

NCRF believed that, based on opinion from senior counsel, the Bill was not constitutional because it would arbitrarily deprive retailers of their property. New legislation was not necessary, and the existing Acts should be changed, improved or better implemented, to assist consumers. Specific concerns were linked to the income of R7 500 as there was no clarity on how the income would be verified. It suggested that debt counselling would be a viable route for those earning over R3 500 and that there should be improvements to the debt counselling process. It believed there were far too many opportunities for delays, and that there was no maximum period specified for the duration of the debt intervention application. NCRF would prefer that suspension of credit agreements, which were formal legal agreements, remained within the ambit of the jurisdiction of the courts. There was great concern about the proposed criminalisation of credit providers.

NCRF wanted to work together with the legislature and the NCR and wanted to assist needy consumers.

Discussion
Mr Williams asked what percentage of profit was derived from credit facilities. If retailers did not offer credit facilities for profit, then he did not understand, as they were in business and the goal therefore was to make a profit. He commented that during the public hearings, nobody had denied that the population was over-indebted. The question was how so many South Africans had become so over-indebted. The population did not give itself credit. NCRF had argued that they were the first line of credit. Therefore, one could argue that they were the ones who had created the problem in the first place. NCRF had said that they would be the ones most affected by the new legislation but they had created the problem in the first place. Where did NCRF get the figure R3 500 instead of R7 500? He needed clarity why that figure was chosen and suggested that perhaps it was simply because it was the minimum wage.

Mr Cachalia had no objection to companies and businesses making money from credit as it was legitimate and should be responsibly done, but he objected when they said that they did not make profit out of it. Could they disaggregate the profit that was made from credit provision? Retailers should factor into that club fees, magazine subscription and all of those good things that they did. Those things should be transparent so that the Committee could take a view on those items. He wanted to know about the share of wallet and how that wallet was filled with notes so that people could buy. Everyone was aware of how the public was enticed, and there was nothing particularly wrong with that, but retailers had to be transparent about it.

Mr Mbuyane was concerned about aggressive campaigns to gain consumers. He asked if the presenters were aware of such campaigns and what they were doing about. He had been told that some people got a credit card or cheque allowance without even applying for it. People found that they had a lot of buying power, for example when they went to Woolworths, without even requesting it. He wanted to check what they were doing about it.

Mr Esterhuizen noted that South African consumers were the most over-indebted consumers in the world, owing something like R1.7 trillion. There needed to be regulations in place. The Committee needed to look at gaps in existing legislation. He was concerned about people getting easy credit from the retail sector in the form of store cards. The Committee should never forget the shame of the African Bank saga that continued to hang over the Regulator. It was shameful the way in which shop cards are given. People should be locked up. Stricter controls were necessary. The Committee could not force banks and the retail sector to write off debt. As the economy relied largely on spending, the legislation would turn the economy upside down. The Committee had had so many meetings about the legislation and it had been agreed not to call it debt forgiveness, which would create misconceptions. It was getting boring talking about writing off debt. Debt counselling had to be at the core.

Ms J Fubbs (ANC) asked for clarification on the research that shows that 48% of consumers who had been retrenched, had successfully maintained their accounts for 12 months. That might well be the case. Retrenched workers found money for food as it was an essential, but they did not pay for doctors, schools, hospitals, etc at all. Retail accounts were continued at the cost of paying for an ambulance.

Ms Mantashe asked NCRF to prove her wrong: the reason that they did not want the Bill was because retailers extended credit, even to students who had no income.

In response to questions about retailers making profit from providing credit, Ms Fisher explained that clothing retailers were in business to sell clothes. The margins and the profits were in the clothes. They were not banks, nor were they in the business of credit provision for credit sake. She could speak specifically on behalf of TFG as their figures were publicly available. She could show the exact figures on profit on credit, including bad debt etc. Her aim in running the Credit Division in the Foschini Group was to break even. She tried not to put too many fees on. Legislation permitted a maximum service fee of R60 but TFG charged R9.95. They did not charge administration fees. They kept it as low as possible as the purpose was to sell clothes. Magazine and insurance products were treated as separate income streams as they were not compulsory.

In response to the question about consumers being over-indebted because of retailers, Ms Fisher explained that retailers initially gave consumers very low levels of credit. Most consumers ultimately needed a home loan to buy a house and a store card was a start for their credit profile. Research showed that if a consumer had started the credit journey with a store card, that consumer was eight times more likely to get a home loan than those who did not. NCRF did not believe it was responsible for over-indebtedness. Instead, retailers started people on the journey to owning their own homes.

Mr Lawrence replied about the proposal for a threshold of R 3 500 versus R7 500, saying that NCRF was not trying to change legislation, but sought a solution that leveraged off the current legal and regulatory based instruments and R3 500 was the number that had been decided upon at Nedlac under the Deputy President. That was a nationally agreed number. NCRF could not see the rationale behind the R7 500. Consumer aggression was a question of the extent to which marketing took place. All marketing was within the framework and confines of existing legislation and regulations. NCRF had a robust relationship with NCR.

Mr Lawrence agreed with Mr Esterhuizen that there was existing legislation, but there were gaps in the legislation and under-utilisation of the legislation. He responded to the Chairperson’s concern about local supply, informing the Committee that the NCRF was working very closely with the Department of Trade and Industry and would shortly be presenting to the Committee a programme for how the retail sector would increase the percentage of locally-made products. Proudly South Africa had undertaken an independent investigation of local content in the retailers, and had been impressed by what they had seen. In respect of the items that did not get paid when someone had been retrenched, retailers could only assist consumers with the credit that they had provided and not with broader debt in terms of current legislation. There might be a need to have a healthy conversation on aggressive marketing.

Ms Fisher replied that clothing retailers did not pre-approve credit. No one could get credit unless an application had been completed. It was not permitted under the current legislation and was not practised by the retailers. Writing to people to ask if they desired credit was marketing but did not imply approved credit. Retail credit was not easy to get, and the acceptance rates ranged from just over 20% to just over 40% of applicants.  More than one in two people were declined for retail credit because it was in the interest of retailers to get the money back. If they did not, they suffer a double loss on credit and clothing. She explained that students needed to have a regular income coming into their account to be approved for credit.

Mr Esterhuizen noted that it was easier to get home loans if consumers had had store cards. He was concerned that credit bureaus collated information on credit but not on retail store cards, and so comprehensive information was not available via credit bureaus. He was also concerned that the R7 500 threshold was too high and that people “who did not want to work”, could benefit from the legislation.

The Chairperson asked that the NCRF to respond to the questions in writing.

Ms Mantashe requested that Mr Esterhuizen, as a Committee Member, refrain from questioning the Bill in the hearing. The Committee was there to hear input from stakeholders and so, he was out of order.

Banking Association South Africa (BASA) submission
Dr Abba Omar, BASA Senior General Manager: Strategy and Communications, headed the BASA delegation as Mr Cas Coovadia, BASA Managing Director, was out of the country. He had sent an apology. Dr Omar was accompanied by Mr Alfred Cockrell, Senior Counsel at the Johannesburg Bar, and representatives from several banks.

BASA had been actively involved with the Committee throughout the process. Dr Omar made reference to existing debt intervention measures, the current credit landscape and a market view of that landscape, as well as the unsecured credit landscape. He spoke about the importance of giving consideration to the economic and social impact of the proposed legislation. He narrowed this down to look more specifically at the impact on the banking sector. He referred briefly to legal and operational impact before handing over to Adv Cockrell to express BASA’s concerns on the constitutionality of aspects of the Bill.

Adv Cockrell explained that it was not in the interests of the Committee to put forward a Bill that would be unconstitutional. His intention was therefore to explain those aspects of the Bill which could be deemed to be unconstitutional. He focused on Section 88 of the Bill which detailed the Debt Intervention Application. He explained, as a first principle, that debt became a claim for the amount on a bank’s balance sheet, which was, therefore, an asset to the bank and so, extinguishing a debt would remove the asset from the bank’s balance sheet. That would be an arbitrary interference with bank’s rights and profits, which was unconstitutional. The bank would be denied the right to claim that amount of money from the consumer.

Mr Omar noted a need to bring in National Treasury.

Discussion
Mr Williams asked if BASA members were prepared to extinguish any of the debit. He accepted Adv Cockrell’s assertion that banks could not be responsible for an earthquake, but he asked if BASA was responsible for the over-indebtedness in the country as the banks were the original source of all credit.

Mr Esterhuizen noted the willingness of banks to find ways of dealing with over-indebtedness and asked if better enforcement measures were necessary, or whether that would take away the bank’s flexibility to deal with cases on an individual basis. Banks were also not without fault. Banks were just as guilty of taking advantage of vulnerable people. When a person applied for debt counselling, the debt was being refinanced and extended for an excessive time instead of being re-rearranged. In that way a R50 000 loan could eventually cost R1 million. Why did the in duplum rule not count unless the person had been in default?

Mr Mbuyane asked about the difference between repayment of a car and a house if he borrowed R1 million to purchase a car and R1 million to purchase a house. What was the difference between the two in interest and repayments? Why could the car be paid off in five years and a housing bond took 20 years to pay off?

Ms Fubbs, who had resumed her role as Chairperson, noted that some of Dr Omar’s comments were quite positive, while others were measured, and others again were highly critical. He had spoken of the system of debt help and support working very well, and it seemed as if the behaviour of consumers had improved, but in the same breath, he went on to state that many could not access the debt assistance process. If many people could not access the system, was that not a qualification of his statement that the system was working very well? She used the example of only allowing one’s best students to write the exam and how it was then inevitable that good results would be obtained. That statement had worried her because it had led her to assume that consumer behaviour had improved.

Ms Fubbs raised concern with the comment made by Adv Cockrell that had sounded as if the government should be responsible for something, such as a natural disaster, and not the banking or other sector. She reminded BASA that the gazetted Bill, on page 24, stated that the Minister had to consult with the Ministers of Finance and Justice, NCR, NCT and the credit industry. She pointed out that there was a measured approach to writing off debt. She cited the example of the fires in Knysna which were so severe that the wealthy and the poorest of the poor slept together on mattresses in halls and on the beach as there was nothing left. She asked that BASA look at this provision again because such incidents did occur and needed to be addressed in a different way.

Dr Omar indicated that it was not a good policy for banks to expunge all debt because that would be rewarding the behaviour that had created the situation. He responded that the debt counselling system did work, but that there was a category of people who fell outside of that system. One of the main reasons people did not access the debt relief system was because they could not afford the cost thereof. BASA had therefore proposed that consideration be given to subsidising that group of consumers that could not afford debt counselling.

Bank responses in the case of an earthquake had to be considered in the context of the full system, which included the NCR, the banks, etc. When looking at an approach, one needed to be careful not to target just one section of the spectrum of credit. There needed to be a systemic approach.

Dr Omar explained the different approaches to debt related to a house and a car. For example, a car lost value as it is driven out of the showroom, whereas a house was most consumers’ biggest asset, which appreciated in value, and the one that was most costly, and so the extended loan period made sense.

Adv Cockrell explained the way in which the in duplum rule worked. If one paid a loan over the life of the loan, the initial amount could be paid many times over. It was therefore only when one was in default that the in duplum rule operated because, in layman’s terms, when one fell into arrears to the extent that the interest matched the capital, then the interest would stop running.

As far as Section 88(F)(4)(5) was concerned, Adv Cockrell agreed that the Minister was obliged to consult but the point was that the Minister was not obliged to take the views of the credit industry into account. In circumstances where it was not fair, the actions of the Minister could wipe several noughts off a bank’s balance sheet, while at the same time saying that he had consulted, but had not agreed with the credit industry. The consultation did not give adequate checks and balances.

Mr Esterhuizen stated that he shared Mr Williams’ concern that there were people who took advantage of the poor. There were gaps in the regulation. The Committee should not allow banks to take advantage of the poor by making them pay multiple times the capital borrowed.

Mr Mbuyane asked if BASA was prepared to assist the process moving forward. And, if so, what were they proposing. If they were not prepared to transform the economy by extinguishing the debt, would they be willing to transform the economy by making strategic moves in the country?

Mr Cachalia asked BASA if the Bill were to succeed as it stood at the time, would BASA pursue a constitutional challenge? He believed this could assist the thinking of the Committee and clarify the minds of Members because of the clout that BASA had as an organisation.

The Chairperson agreed that such a response would assist the Committee to understand the gravity of the situation.

Ms Mantashe asked BASA for an explanation of its comment on clause 106(4)(a).

Dr Omar responded that as of March 2015, debt in the amount of R10 billion had already been expunged and that that continued. Interest rate concessions were made all the time and at least R4 billion debt had been expunged in 2017. In response to Mr Mbuyane , he said BASA was engaging with the Standing Committee on Finance, preparing for the April Nedlac Summit, making recommendations with Business Unity South Africa (BUSA) and so on, so BASA was continually engaged with the question of how the banking sector could lift the economy. It was an ongoing question as the private sector could not thrive in a low-growth economy.

Adv Cockrell could not answer whether BASA would go to the Constitutional Court as that would not be his call. He was, however, able to respond to Ms Mantashe’s question on Section 106(4)(a). BASA had been unable to reconcile that clause with Section 106(1)(a) which stated that the credit provider had to conclude credit life insurance with the consumer. Section 106(4)(a) stated that a consumer had to be informed of the right to waive credit life insurance. The two clauses contradicted each other and could not be reconciled.

Dr Omar trusted that it would not be necessary to go to the Constitutional Court, so BASA would continue engaging the Committee as long as it could.

The Chairperson noted that there were no guarantees that there would not be a legal challenge but BASA would prefer to avoid it. She suggested that the wording in Section 88(F) be changed to “in consultation”.

Dr Omar asked that BASA be given permission to respond in writing.

The Chairperson asked for advice on “criminalising” the credit provision sector. She was aware that people believed that the legislation needed teeth. Did BASA think that 10 years’ imprisonment was excessive for robbing the poor?

Dr Omar suggested that there was sufficient legislation and that it covered dealing with non-compliance.

The Chairperson queried by the NCR and a judicial comment had suggested that the Committee needed to consider strengthening the way in which non-compliance was dealt with

She suggested that presenters should stay on after their submissions as they would be better informed if they heard what others in the sector had to say.

Large Non-Bank Lender Association (LNBNA) submission
Mr Rudolf Willemse, LNBNA Director, said the Association represents bigger non-bank credit providers such as Sunland Personal Loans, Bayport, Old Mutual Finance, Real People, Home choice, RCS, which provide unsecured loans, developmental credit and facilities. Together they have a book of R32 billion.

LNBLA appreciated the need for intervention where people are over indebted and appreciated the work that the Committee had done. The submission contained, mainly, concerns that members of the Association had raised. They were concerned that the criteria were not clear and that, despite the intention of the Bill, loans could be extinguished even where the credit provider had not been reckless. LNBLA expressed concern about the effect on credit providers because it had potential for systemic risk as loans had been funded and the fund needed to be repaid. The Association was concerned that a segment of the credit market would be stigmatised following the intervention. Constitutional issues were raised about the arbitrary deprivation of property, ongoing future declarations and the fact that access to courts was excluded. The Association objected to a process that excluded the credit providers. They were seeking a better balance of interests in the legislation. Compulsory credit life insurance was a concern due to the cost of the insurance and the risky segment of borrowers. The complexity of determining reckless lending had not been fully explored and the difficulties with credit bureaus and the information needed to be addressed.

Mr Willemse believed that there would be capacity challenges in terms of those young lawyers who would be dealing with credit reports and making assessments. He suggested that there might be difficulties in conducting the process. There was concern about the Protection of Personal Information Act and that sending credit information by email may not be as secure as is required in terms of the Act. The Association was completely against the criminalisation of credit providers, especially because reckless lending was not easy to determine. In the view of LNBLA, the route to go would be to support debt counselling as the current legislation would not build responsible borrowing and a mature credit market.

The Chairperson noted that Mr Willemse was raising issues that had not been raised by other presenters and she asked for detail around the points that he was making. She was particularly interested in his idea that young lawyers would need training and requested constructive suggestions from him.

Mr Willemse suggested that courses should be offered to young lawyers who would be working in the credit provider field. He also thought that NCR would have to appoint a number of people to assist in the process.

The Chairperson was concerned since Mr Willemse had found difficulty in enforcing payment of debt, especially as he gave as an example, a worker in Parliament who had not repaid and indicated that he had had no intention of repaying the debt.

Discussion
Mr Williams asked why LNBLA wanted to include the criteria that a consumer had to be over-indebted.

Ms Mantashe asked Mr Willemse who should subsidise debt counsellors as it should not be government.

Mr Mbuyane asked if the NCR Director and its members were not qualified and what it would take for them to acquire capacity.

Mr Willemse replied that the important thing was that the criteria had to be clearly spelt out and this was a fundamental flaw in the Bill. He did not want to assist people who were not over-indebted. If a person was not over-indebted, he should repay the loan. The lenders were not in the donor market and if they had lent people money, they expected them to repay it. If there was a valid reason that a person was unable to pay loan, then, obviously they would be sympathetic. The criteria should include more than simple over-indebtedness. There had to be a very good indication that person would never be able to repay the loan.

On the subsidies, the proposal was that all costs were to be subsidised by the credit providers. That could not be the case. He thought that the industry would be open to looking at ways in which the costs could be subsidised, but it was a responsibility of not only credit providers, but also government.

On capacity, he did not believe that there was a lack of qualifications amongst NCR permanent staff or directors. He was more worried about the young legal persons who would be assisting in the process and making the referrals. They would need training as very specific credit-related training was not offered at universities. Those young lawyers would need to know what a credit bureau report looked like, they would need a thorough knowledge of the NCR and they would need to have some practical experience and be able to make good judgement calls. There needed to be a training program of between three and six months, at least, for those persons.

The Chairperson referred to the point about “the complexity of determining reckless lending.” She was particularly interested in the point made that credit bureau information was not in real time and there was a lack of detail in the information they provided.  Mr Willemse was the only person who had raised this point. She asked what he was proposing.

Mr Willemse replied that there was a realisation that the lack of liable credit bureau information was problematic. Measures had been introduced to improve credit bureaus all the time. He was not attacking credit bureaus, but one had to know how to read the reports. Certain information had to be ignored, while other information was very important. There was no indication as to how many judgements a person could have before it would become an act of reckless lending to lend to that person. There was no rule around that fact. Credit providers had to build their own assumptions and rules around the facts that were available and understanding differed from one credit provider to another. It was essential to have a much more clinical understanding of whether it would be reckless to lend to a particular person or not. It should be easy to determine but was not a simple calculation. He was certain that cases were going to be referred en masse.

The Chairperson noted that she had raised the credit bureaus with BASA who had said that the problems had been resolved.

Mr Willemse replied that it was not about unreliable data, but the fact that it took the credit bureaus a considerable amount of time to upload the data. In addition, one had to apply one’s mind to the data.

The Chairperson asked for Mr Willemse’s points in writing.

The Chairperson acknowledged that the Committee had addressed applying the legislation retrospectively. She noted the proposal that debt should never be extinguished and that the process should be limited to 12 months without an immediate extension. Although LNBLA proposed that there should be no criminalisation whatsoever of directors, she pointed out that governance in the private sector was currently being reviewed to ensure more effective penalties. About what to do with young people coming in, she thought that it was an obligation of the industry to train people and government was already giving a levy for training in the workplace. She asked Mr Willemse to try and share his experience with the Committee in writing.

The Chairperson asked presenters to email the race and gender employee profile of their organisations as the country was in the process of transformation. The vast majority of those who were over-indebted were black people and therefore it was important for the Committee to know the profile of the people who would be engaging with them.

National Debt Counselling Association (NDCA) submission
Mr Benay Sager, NDCA Chief Operating Officer, represented the National Debt Counselling Association. His own company, the IDM Group, has 300 people of whom 15% are white, 4% are Indian, 35% coloured and 46% African, which gave the association and overall percentage of 85% black employees.

NDCA was pleased with the Bill and supported it but wanted to point out ways in which the Bill could be operationalised as quickly as possible. Key points included suggestions on how the Bill could utilise the existing infrastructure of debt counsellors by allowing debt counsellors to make the assessments on behalf of consumers and to create a wider awareness. He presented a profile of the low-income consumer. He believed that it was possible to use the National Credit Act provisions and existing avenues. He believed that existing credit life insurance could cover outstanding debt, towards which consumers had already paid significant amounts of money and which would provide relief to consumers using an existing avenue. He recommended a holistic approach to reckless lending, where the affordability of each loan would be assessed. NDCA proposed that there be a targeted approach and that the population that would benefit the most be targeted by including other qualifying criteria to ensure that those who could afford to pay down their debt did so within existing debt relief avenues.

Discussion
Mr Esterhuizen was of the opinion that debt counselling should be about money cash flow. For debt counselling to work, a person needed to understand what he owed, what the interest was and whether he would be eligible for a consolidation loan. The sole purpose of the Bill should be to look after the poor. He noted that consolidation loans were unsecured and ran at over 27% interest which meant that it was unaffordable for many, and would cost more in the long run. He suggested that people use a home loan to consolidate debts rather than an unsecured loan as the interest rate was much lower.

Ms S van Schalkwyk (ANC) noted that NDCA was excited about and supportive of the legislation that the Committee was introducing. She asked if the services that Mr Sager had spoken of would be provided free of charge. If not, what would they charge government? She noted that that he had data and she asked for additional data on the percentage of clients who had experienced reckless lending. She wanted to know how many reckless lending practices NDCA had identified and at what level they occurred.

Mr Sager informed Mr Esterhuizen that a debt consolidation loan generally looked great, but the consumers went into further debt, so it was not a sustainable solution. In terms of using home loans to pay down debt, he had noted that, unfortunately, when people came for debt counselling, it was often too late. Those consumers who came had been in debt for a long time. Often, consumers had taken out a home loan, a vehicle loan and then started taking personal loans and payday loans. That was the pattern for those who became over-indebted. It was the function of debt counsellors to offer financial advice whether people signed up with them or not. Consumers were given a consultation and a copy of their free credit report.

Responding to Ms van Schalkwyk, Mr Sager explained that the Association was helping low-income and no-income consumers. He believed that the Association could get costs to a minimum if the debt counsellors were permitted to do an assessment and check if there was credit life insurance. The service could be offered at a fair cost. He suggested that debt counsellors compile a file on people so that it was available, should information be requested. He did not have a figure in mind but considering the work required, he would suggest that there ought to be fair compensation for this. The ultimate goal ought to be to get those people reintroduced back into the credit industry as one of the engines of growth in the country. On the request for data, he referred to Slide 16 which was a snapshot for 2016 and showed how many cases of reckless lending were suspected and how many were actually reckless. Together, they added up to just over 800 of 150 000 to 200 000 credit agreements so less than 1% of consumers faced reckless lending. He could make data available.

The Chairperson asked about the practice of increasing, quite significantly, the interest on consolidated loans. What informed the practice of higher interest on lower loan amounts over the same term? The more money that one had, the lower one’s ledger fees. She agreed that people needed a reasonable amount of money for basic living expenses. That could not be emphasised too strongly. She asked about the subsidy for low-income consumers. Why had the subsidy for debt counsellors been stopped? Why was it that the day that one turned 70, one reached the highest risk level and one was unable to take out a loan? People were told, quite frankly, that that was the policy. Even with a sound profile, even if a person was working, those people could not access a loan. What was it? She thanked Mr Sager for his constructive points.

Mr Sager replied about what determined the interest rate, saying he believed it was the nature of the loan and if there was an asset that could be attached. The income level was also a factor. A loan at a higher percentage of the income would have a higher interest rate because it was a higher risk. He pointed out that he was a debt counsellor, not a banker. He had no idea why the subsidy had been stopped as that had occurred before he had joined the industry. When assessing the amount that consumers could afford to spend on debt, 40% was a reasonable percentage. If a consumer spent more than 40% on debt repayments, soon or later, they would default on at least one of the loans. It was an important threshold from a sustainability perspective. As regards lending at an older age, he pointed out that 70 used to be considered the end of one’s life span. Life expectancy had long since shot way beyond that, to the extent that some people would probably never be able to afford to retire. That was the only explanation that he could offer as to why that limit was used in that way.

 The Chairperson said that many people who could have retired but were still working had experienced the refusal of a loan. However, when one spoke to the banks, the risk profile of the aged was more stable than others. Banks and elsewhere had to have a hidden guiding principle.

The Chairperson recognised the presence of the National Credit Tribunal. She noted that they were paying careful attention to all the submissions.

Submission by Yvonne Oberholtster
Ms Oberholtster was accompanied by her spouse, Deon Oberholtster. She presented in her private capacity.

The Bill was an outstanding piece of legislation because low-income people had been marginalised. Farm workers had been marginalised and had no clue about banking and what their rights were. It was those people who were taken advantage of as they did not have a clue as to what they were signing for. She agreed that those who made reckless loans should not be entitled to get the money back.

Ms Oberholtster was concerned that the implementation was going to quite difficult. Organs of state, and especially the NCR, were stretched for resources. Staff were courteous but there was always a bottleneck. There was a need to recognise the lack of education of the targeted consumers. She herself had been sequestrated for going under debt review. She noted that the Superior Courts Act, No 10 of 2013 was applied differently at different court. Her point was that if the Bill was not properly drafted, unscrupulous people would be able to take advantage of people who were facing debt problems.

Mr Oberholtster presented his project in Ceres for uplifting people.

Mr Esterhuizen noted that the ruling on the debt review reflected the practice of the National Credit Act that had a practice of intimidating those who spoke out.

Discussion
The Chairperson noted that Ms Oberholtster had welcomed the Bill and had noted the lack of capacity at NCR and the abuse of the debt review policy. She stated that it was unfortunate that Mrs Oberholtster had had such a negative experience.

Mr Williams noted the viciousness of the banks in the way that they acted towards people who missed payments.

Mr Oberholtster commented that Mrs Oberholtster had not missed a payment and that a particular law firm had abused her. The loophole had been plugged after she had been sequestrated. He asked that there be no loopholes in the legislation under review and that it protect especially low-income and uneducated consumers.

The Chairperson promised to access Ms Oberholtster’s judgement to ensure that her situation did not persist. The Chairperson had previously tried to get some redress for Mrs Oberholtster, but it seemed that she had had no redress. The Chairperson noted that she did not want to enter into a dialogue.

Mr Esterhuizen said that it was very scary that loans were re-arranged and then the in duplum principle fell away.

The Chairperson requested that Ms Oberholtster send a short email with the details of her case. Ms Oberholtster’s case was a reminder that not everything was green in the garden.

The Chairperson asked the National Clothing Retail Federation (NCRF) to confirm that a retail store card did not have to be RICA’d.

In response, the NCRF representative agreed and added that a credit card had to be RICA’d because it used a banking service, but stores did not use banking services.

The Chairperson suggested that NCRF deal with their members whose retail stores were demanding that store cards be RICA’d. The NCRF members should review the systems that they were using.

Meeting adjourned