National Credit Bill: discussion

Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
14 June 2005
NATIONAL CREDIT BILL: DISCUSSION

Chairperson:

National Credit Bill [B18-2005]
Department of Trade and Industry (DTI) briefing on National Credit Bill
DTI's Consumer Credit Reform

SUMMARY
The Department of Trade and Industry continued with its formal briefing on the National Credit Bill intended to regulate consumer credit, improving standards of consumer information and prohibiting reckless lending and unfair credit marketing practices. The National Credit Bill would repeal the Usury Act, 73 of 1968 as well as the Credit Agreements Act, 75 of 1980. The national regulator, the Micro Finance Regulatory Council, would carry the legal costs of consumers pursuing their rights guaranteed by this legislation.

Members asked questions about the public register for micro-lenders for protection of consumer rights; the retrospective application of the Bill on existing credit agreements; the verification of credit information incorrectly listed by credit bureaux and the right of recourse by the aggrieved consumer in cases of material breaches of consumer rights.

MINUTES
Ms Astrid Ludin (Department Chief Director, Corporate and Consumer Section) briefly recapped the previous meeting's presentation on the Bill aimed at balancing the rights of consumers and credit providers. The Bill afforded consumers protection from unfair business conduct by credit providers. The consumer rights provision in the Bill gave consumers rights to compel provision of information in cases where credit was refused. Thus the credit provider is by law obliged to provide information regarding the refusal of credit.

The Bill envisaged the establishment of a public register of micro-lenders. This register would ensure protection for the consumer and provided for de-registration in cases of serious contravention of the National Credit Bill. The Bill also provided for collection practice by debt collectors which was sensitive to consumer rights. The Bill provided for an alternative dispute resolution (ADR) mechanism in cases of disputes between consumers and credit providers. The credit bureaux in South Africa were not regulated and functioned as a law unto themselves.

The Bill sought to regulate the trading and information sharing about consumers. The Bill outlined the charges that could be levied on consumers who took loans from credit providers. The Bill also provided for consumers to reinstate their credit agreements once they were able to repay the loan.

Discussion
Professor Ben Turok (ANC) requested an explanation regarding the applicability of the National Credit Bill on the banking sector. He asked if the legislative provisions of the Bill were applicable to banks.

Mr Gabriel Davel (Chief Executive Officer: Micro Finance Regulatory Council and Department Policy Advisor) stated that the banks were currently regulated by the Reserve Bank Act. However that Act did not cover the credit finance aspect of the banking sector. Therefore the Bill sought to cover this loophole and tighten regulations in regard to banks. It was critical that banks be covered by the Bill as they were responsible for eighty percent of the micro-lending in our country. Hence there were consequential amendments for the Banking Act contained in the National Credit Bill. He noted that DTI would have to engage with the Treasury on the envisaged amendments.

He continued that the credit industry in South Africa was responsible for R95 billion in interest and fees generated by banks and other credit providers. He noted that SA had more people with credit than insurance. The substantial indebtedness of South Africans was closely related to social ills such as suicide, divorces and homelessness. He stressed that financial credit needed to be properly regulated and the National Credit Bill provided the impetus.

Mr Labuschagne (DA) asked if the DTI had already conducted a regulatory impact assessment. He expressed concern about the impact of the Bill on micro-lenders, especially the so-called loan sharks. He suggested that the Department must consider the establishment of specialised Consumer Courts.

Ms Ludin replied that the Department needs to consult with the Justice Department on question of specialised courts. The Constitution explicitly provided for the establishment of tribunals. The strongest measure to manage the risk of credit fraud and scams like the 411 Scam was to have significant penalties. The government had a responsibility to ensure there were no significant contravention of consumer rights.
However the Department was concerned about technical aspects of the Bill and reckoned that a tribunal was a more appropriate forum than courts.

She said that even though the Bill did not require registration, the loan sharks were adequately covered by the Bill. They were not exempt from the provisions of the Bill. The enforcement of registration of credit providers was relatively successful. Credit providers who were not registered could not enforce their rights arising from the credit transactions. The number of credit providers not registered was negligible and enforcement had improved dramatically. Regulations were necessary to ensure legal certainty. Matters such as reckless lending had to be clearly defined in the Bill to ensure certainty. She believed that the Bill allowed certainty as well as flexibility within the credit finance industry.

Ms Ludin explained that the issue of regulatory impact assessment was fairly new in South Africa. Nonetheless DTI had done such impact assessment jointly with the Office of Presidency and National Treasury. DTI invited all stakeholders within the industry to submit reports on the impact of regulations on financial credit business. She lamented the fact that not one of the role-players had yet submitted a report on the regulatory impact of this Bill.

Mr Rasmeni argued that the Department was obliged to give regular briefings to Parliament and it would not be necessary to request a special briefing on the regulations and the impact assessment. Prof Turok rejected this argument saying that Parliament was unable to keep track of all the regulations and guidelines introduced by DTI. He suggested that DTI should give quarterly reports on the regulatory implications for the credit market. Parliament had a constitutional duty to oversee regulations and guidelines issued by various departments. The Chair supported this suggestion and observed that public hearings were yet to be held on the National Credit Bill. Therefore the fine tuning of the envisaged Act was far from over.

Mr Labuschagne asked why small micro-lenders were not being regulated separately with the big credit providers being under separate legislative regime.

Mr Moeletsi explained that the Bill provided regulatory framework for both micro-lenders as well as big credit providers like banks. The purpose was to avoid duplication and create a common framework for all key players within the credit finance industry.

Mr Labuschagne expressed the view that too many powers were vested in the regulatory body established by the Bill. He said that Parliament was indeed entitled to make these regulations other than leaving it for the regulators.

Mr M Moeletsi (Department Chief Director of Legal Services) responded that the powers bestowed upon the regulator were purely administrative and were necessary to enable monitoring of the credit market industry.

Mr S Rasmeni (ANC) said that he welcomed the Bill as it offered protection to previously disadvantaged communities. The Bill created a balance between consumer rights and large credit finance corporations. He deplored the misery caused by reckless lending by corporations preying on already over-indebted individuals. He urged the Department to fight reckless lending. He noted that credit bureaux were currently a law unto themselves and traded consumer information as they pleased.

Mr Rasmeni challenged the DTI to investigate the employers in mining and farming who he charged were engaged in reckless lending to their employees. Reckless lending had devastating consequences on families. He pleaded with the Department to introduce strong measures against reckless lending by banks and micro-lenders.

He also highlighted the question of private education institutions which were charging exorbitant fees in order to control access to these institutions by students from disadvantaged backgrounds. He asked the Department to investigate institutions involved in such unfair practices.

Ms Ludin replied that her Department had conducted an investigation into bogus institutions which were marketing courses they did not offer in the print media. The investigation did not cover practices by such institutions to control access through astronomical admission fees. However she undertook to refer the matter to the Consumer Affairs Council for consideration.

Ms D Ramodibe (ANC) wanted to know who was responsible for identifying unlisted micro-lenders as the majority of these credit providers were preying on unsuspecting individuals desperate to find credit.

Mr Labuschagne said he held the view that credit bureaux were good institutions that assisted the credit industry in managing the risk inherent in the consumer credit market. The credit bureaux performed a very important function. He challenged the Committee to compare reckless borrowing by consumers with reckless lending by credit providers.

Mr Peter Setou (Education and Communication Manager: Micro Finance Regulatory Council) replied that the Bill imposes rights and duties on both consumers and credit providers. It was difficult to regulate reckless borrowing as compared to reckless lending. Therefore education of the consumer became a social imperative. Clause 16 of the National Credit Bill imposed an obligation on the Micro Finance Regulatory Council (the Regulator) to educate consumers on the responsible use of credit and on over-indebtedness. Further, the Regulator had to give a report to the Board on how the Regulator is performing this education function.

Mr Labuschagne wanted to know if there was amnesty for people who were listed by the credit bureaux given that some information obtained by them might be inaccurate.

Mr Moeletsi explained that Clause 72 of the National Credit Bill outlined the process for the removal of names of blacklisted individuals. The Regulator was empowered to investigate business conduct of credit bureaux in listing people on their database for the trading of such information. However the final responsibility lay with the individual listed by the credit bureaux to correct the record

Mr Moeletsi added that Schedule 1 of the Bill dealt with already existing credit agreements.

Mr Davel explained that credit bureaux all over the world were regulated, especially in the European Union countries. The South African credit bureaux did not comply with international best practice in sharing information about consumers. The bureaux possessed huge volumes of information and profited through exchanging the information. He pointed out that countries like Australia and most EU nations allowed bureaux to have extremely limited credit information. He cited an international case where conduct of an employment agency was declared illegal when it used credit records for employment purposes. The South African situation was unique and required strict regulation to ensure consumer protection in information sharing. Many companies were using credit records extensively in their dealings with consumers. He urged Parliament not to tolerate this and believed that the Bill was a good mechanism to curb this practice. Most companies were now using blacklisting to threaten individuals who are defaulting on their repayments. The method of blacklisting is much cheaper and faster than the long court process of debt recovery.

Mr Davel criticised the lack of accuracy in verifying the identity of debtors after a default judgement was obtained. In some instances a debtor was not allocated an identity number after a default judgement was granted. This gave rise to individuals wrongly blacklisted by the credit bureaux. He stressed the need for regulation to ensure full protection of consumer rights and the appropriate exchange of information between credit providers, debt collectors and credit bureaux. Information sharing was necessary for the protection of business and thus should not be illegal but must be properly regulated.

On the issue of reckless lending, he stated that reckless borrowing was direct result of reckless lending. He quoted the provisions of the Bill which clearly defined reckless lending. Reckless lending occurs when the credit provider gives credit with the knowledge that the debtor was unable to repay the loan. Once the debtor is in default the credit provider would obtain default judgement in order to get statutory deduction and interest on the loan. He warned that the great majority of people were over-indebted and over-indebtedness was feeding on the poorest of the poor.

Ms Ludin replied to the question of individuals being incorrectly listed by credit bureaux, saying that the Bill provided for redress in cases of incorrect listing. But it was equally important to educate the consumer about their rights and duties to ensure that consumers enforce their rights. She noted that the over-selling of insurance products was partly responsible for cases of over-indebtedness. Clause 72 of the Bill entitled consumers listed by credit bureau to the right to access and challenge credit records and information

Ms. Ramodibe asked if the National Credit Bill would apply with retrospective effect as there were credit agreements which had been concluded more than ten years ago over which consumers were dissatisfied.

Ms Ludin replied that credit agreements concluded ten years previously would not be covered by the Bill. She remarked that it would not be fair to investigate something which had happened a long time ago. But the Usury Act provided for a window in which the Regulator could investigate material contravention of the law. She pointed out that Saambou was not being investigated by the DTI material contravention of the Usury Act in regard to interest rates. The Usury Act was not applicable to any of issues related to the collapse of Saambou. The Saambou matter had now been over to the curators for settlement.

She noted that the Usury Act was an old piece of legislation and needed overhauling to cater for new circumstances within the credit finance industry. The DTI had received complaints from people who were wrongly blacklisted by credit bureaux. She stressed though the importance of credit bureaux but said the Department was concerned about the manner in which credit providers were using credit information. She mentioned that reckless borrowing could only occur where the debtor takes more credit than his current income. In cases where the debtor is unable to pay debt and had no fixed assets such person could not be declared insolvent. Therefore there was a need to curb reckless borrowing and part of that initiative was the review of the Insolvency Act.

The Chairperson commented that the process of public hearings on the Bill was still in the pipeline.

Mr Rasmeni voiced his concern about unscrupulous lawyers who claim to remove people from credit bureaux. He asked the Regulator to investigate this business conduct by some lawyers and bring them to book. The Chairperson added that there were scammers who were masquerading as lawyers and preying on unsuspecting and desperate people. He knew of some Members of Parliament who had been trying to remove their names from credit bureaux without success. He cautioned that the process of removing names from the credit bureau was a long and cumbersome one.

Ms Ludin added that the Bill created an obligation on the credit provider to verify credit information. In the event of an individual been wrongly listed, the person could pursue a civil claim where he/she suffered damages.

Mr Labuschagne asked if the "In Duplum Rule" was clearly codified within the provisions of the National Credit Bill.

Mr Gabriel replied that the "n Duplum Rule" was inserted in the Bill and is codified in terms of Clause 105 of the Bill.

Ms Ntuli (ANC) wanted to know who would be responsible for educating consumers about their rights and responsibilities pertaining to the Bill.

Mr Setou replied that that was a duty imposed on the Regulator by law and both national and provincial directorates of the Regulator were educating consumers. However he pointed that there was a corresponding obligation on credit providers to educate their clients. In cases of contravention, the consumer concerned could lodge complaints with the Regulator directly.

Ms Ntuli asked how the credit provider would deal with incorrect disclosures by credit bureaux.

Mr Gabriel replied that Clause 73 dealt specifically with credit marketing practices. It stipulated specific requirements of how credit marketing should be done. The Bill prohibited any form of marketing which was misleading and deceptive.

Nevertheless Ms Ntuli maintained that service providers should be obliged to educate the consumers. She wanted to know who would bear the legal costs where the consumer pursued a civil claim. Mr Gabriel explained that according to the Bill, the Regulator would carry the cost of legal action by the consumer.

Ms Ludin concluded that the National Credit Bill was law of great importance as well as great complexity. Therefore it was critically important that there was close interaction amongst the DTI, Parliament and the general public.

The meeting was adjourned.