Consumer Credit Policy Reform

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Trade, Industry and Competition

10 September 2003
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Meeting Summary

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Meeting report

10 September 2003

Acting Chairperson: Ms September (ANC)

Documents handed out

Briefing by the department on the Credit Law Review Process
Credit Law Review (Section 1)
Credit Law Review (Section 2)

The Department of Trade and Industry briefed the committee about the policy reform process for consumer credit law. In order to accelerate the policy process, the Department had mandated a technical committee to conduct research into the credit market and its problems and to make recommendations for policy. The technical committee presented its findings to the Committee and made specific proposals for the regulation of consumer credit. Chief amongst the recommendations was the need for a single "Consumer Credit Act" to replace the Usury Act, Credit Agreement Act and the Exemption Notice.

The Chairperson welcomed the panel from the Department of Trade and Industry and the members of the Consumer Review Committee.

Briefing by the Department of Trade and Industry
Ms Ludin (Deputy Director General: Consumer & Corporate Regulation) pointed out that the intention of the presentation was to engage the Committee at the beginning of the policy process and seek the input of the Committee into the policy process. The briefing focused on the policy context for credit law reform and secondly, it explained the findings and recommendations of the technical committee (Consumer Review Committee).

She pointed that chief amongst the issues that were distorting the consumer credit market was the existing legal framework, which included the Usury Act 73 of 1968, and the Exemption Notice; as well as the Credit Agreement Act 75 of 1980.

She explained some of the problems that were prevalent in the consumer credit market such as:
- rising over-indebtedness of some consumers with no mechanism for relief from excessive debt burdens
- unequal "rationed" access to credit
- increasingly unpalatable market practices

In the light of these problems there was a need for affordable productive credit for the majority of the population plus a need to ensure that consumers have enforceable rights and are able to make choices. Effective measures were needed to prevent and deal with excessive debt.

Ms Ludin pointed out that the department had been working on the policy for consumer credit policy reform for some time, and to accelerate the process, the Department had mandated a technical committee to conduct research into the credit market to assess its problems and make recommendations. The input of the Committee would further add value to that process.

Briefing by the Technical Committee on Credit Law Review
Mr Davel (Chief Executive Officer : Micro Finance Regulatory Council) outlined the terms of reference for the technical committee that had been mandated to conduct research into the consumer credit market. In conducting its research the technical committee reviewed international dispensations for regulation of consumer credit; it then reviewed the South African market practice in order to assess its legal framework and the perceptions of it.

Mr Davel added that the research conducted by the technical committee had been informed by the United Nations' Guidelines for Consumer Protection and was also based on international benchmarks like New Zealand, Australia , European Union, United Kingdom, US, and Brazil, India and Malaysia

In its report the technical committee made the following primary findings:

-compared to leading dispensations, South Africa was at least 20 years behind, but the current challenges in respect of over-indebtedness, credit bureaux, high cost cash lenders, credit life insurance and consumer awareness were very similar.
-empirical research indicates that there were huge costs variations in sub-markets; huge differences between disclosed and effective cost credit and the Usury Act was distorting the market and segregating it into "super included" and "super excluded" components.
-that there were legislative weaknesses and weak enforcement mechanisms
-that there was a general dissatisfaction with disclosure, with consumers feeling that they were not informed about the actual costs of debt finance
-that there was a need to replace the existing consumer credit laws with one consolidated Credit Act
-low income credit providers were less compliant and less effectively regulated than high income clients
-that fees and charges, and credit life insurance in particular were inflating the costs of credit and they were circumventing the Usury Act cap
-that there was a need for a national register of loans
-that the consumer credit market was highly inefficient
-that in a number of areas there was a very high level of regulatory uncertainty

In the light of these findings, there was a need to deal with the fragmented, inconsistent and inefficient legislation and the very many factors that were undermining competition and to focus on price control or protection against over-indebtedness.

Specific Proposals for the Regulation of Consumer Credit
Mr Pule (Member of the technical committee) presented the specific proposals the technical committee had made for the regulation of consumer credit, which included:
- the need to have one "Consumer Credit Act" to replace the Usury Act, Credit Agreements Act and the Exemption Notice so as to treat all credit transactions equally irrespective of form and to prohibit unfair conduct and create enforcement mechanisms within the national consumer credit regulator and provincial government
- the need for simple, standardised disclosure, comparable between credit providers and to prevent inflation cost through "add-on charges" like credit life insurance
- need to prohibit deceptive or hazardous credit terms like incremental repayment terms and "zero interest" marketing
- need to prescribe higher disclosure standards
- need to incorporate consumer education in the mandates of the consumer credit regulator and provincial consumer agencies
- the need to establish a single Consumer Credit Regulator to regulate all form of consumer credit, including bank credit
- need to introduce legislative requirement on all credit providers to assess consumers' ability to meet their debt service obligations, prior to advancing credit
- need to investigate feasibility of penalties on consumers that provided false information or act fraudulently.

In conclusion Mr Pule pointed out that there was a need to move away from the existing legal framework as it was distorting the market and segregating it into the "super included" and "super excluded" towards a system that integrates the market and curtails over-indebtedness so as to assist the consumers that were vulnerable or unfairly treated.

DiscussionMs September (ANC) pointed that there was a need for another meeting for members to make input because a lot of information had been presented to the Committee.

Mr Lockey (ANC) noted that there was a need to limit interest rates on credit because the most vulnerable people in the country were paying up to 100% interest rates. He proposed that that there was a need to use price control to protect the most vulnerable.

Mr Moloi (ANC) pointed out that in addressing the problem, there was a need to address the use of language that was used in drafting contracts preceding the credit transactions. She asked if there were any problems foreseeable with the use of limited price control.

Ms Hogan (ANC) was concerned that there were quite a number of regulators already existing in the financial services, hence the addition of a consumer credit regulator could lead to jurisdictional problems between the financial services and the credit services regulator.

She noted that the issue of the debt collection service agency did not fall within the mandate of the Department of Trade and Industry but rather within that of the Department of Justice. She added that there was not enough evidence for the findings of the technical committee on how to tackle indebtedness.

She pointed out that whilst she appreciated the intention of the technical committee to open up the market, she was concerned that most of the micro-lenders were charging exorbitant interest rates.

Ms Ntuli (ANC) asked how the department was planning to educate consumers on consumer credit law.

Ms September (ANC) asked whether the technical committee had made any links between its findings and poverty levels. Was it necessary to react through legislation to the problems existing within the consumer credit market? She also asked whether the Department had considered holding public hearings on the issues raised by the technical committee.

Ms Ludin (DTI) pointed out that the issue of financial service regulators had to be put into context. There were various types of regulators, firstly there were ones focusing on technical issues and secondly there were economic regulators like the competition regulator. She pointed out that it was important to have one regulatory agency to ensure certainty and to prevent the proliferation of the sector regulations.

Mr Moeletsi (Technical Committee) agreed that the people most affected by consumer credit law were from the low income groups and poverty was one of the issues that made them vulnerable. However, through its findings and recommendations the technical committee was trying to address the anomalies in the consumer credit market.

Mr Pule (Technical Committee) added that the existing law was spread out and was distorting the market, hence there was a need for a single piece of legislation. On the issue of educating the public, funding would be provided through regulatory body but where necessary NGOs and government would also have to intervene.

Mr Davel (Technical Committee) agreed that there was need to tackle the weaknesses of the existing laws. He also emphasised the need for standardised disclosure for credit providers.

Ms September (ANC) reiterated the need for public hearings and for other parliamentary committees such as the Portfolio Committee on Finance to make further input on the policy process. She then thanked the department and the technical committee for its comprehensive report on consumer credit law.

The meeting was adjourned



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