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TRADE AND INDUSTRY PORTFOLIO COMMITTEE Mr B Martins (ANC)
5 August 2005
NATIONAL CREDIT BILL: PUBLIC HEARINGS
Documents handed out:
TRADE AND INDUSTRY PORTFOLIO COMMITTEE
Mr B Martins (ANC)
National Credit Bill [B18-2005]
Black Sash submission
Agricultural Business Chamber submission
South African Catholic Bishop’s Conference submission
Emerald Van Zyl Consulting submission
The Department of Trade and Industry's Deputy Director General introduced the hearings by briefly outlining the background, policy objectives and an overview of the contents of the National Credit Bill.
The Agricultural Business Chamber (ABC) was concerned that the Bill constrained credit providers’ contractual freedom, and about the cost implications of the Bill on consumers. The ABC noted that the Bill gave more rights to persons who bought goods on credit than those who paid with cash as the credit buyer could return the goods within five days. The ABC supported the new Credit Bill, but not the increased cost of doing business that it created.
Black Sash welcomed the Bill as it provided refunds to consumers where the credit agreement was unlawful. This was a move from the position in the Usury Act that did not provide for compensation, but focused only on criminal convictions. The Bill had some problems though. The definitions of a debt counsellor and the ‘in duplum’ rule needed to be reviewed. Also, all references to ‘emergency loans’ needed to be deleted as there was a Social Security system to deal with unexpected life events. Black Sash also wanted the fee to access a debt counsellor dropped. The Bill was also silent about from where the money to fund the debt counsellors would come.
The South African Catholic Bishop’s Conference stated that emergency loans were unnecessary as they were dealt with by the Social Relief of Distress Grant, disability grants, the Compensation for Occupational Injuries and Diseases Fund and the Disaster Relief Fund. They also wanted a definition of debt counsellors placed in the Bill.
Emerald Van Zyl Consulting told the Committee that repealing the Credit Agreements and the Usury Acts took away the rights of consumers to claim back overcharges that occurred within three years prior to the promulgation of the Bill. Also, costs such as inception fees, yearly and administrative fees that were prohibited under the Usury Act were now recoverable. This was a disadvantage to bondholders and gave another reason why the Usury Act could not be repealed.
The Committee wanted to know if the ABC thought that the cost implications of the Bill were so great that previously disadvantaged people would not get access to credit. Members wanted to know if deleting ‘emergency loans’ from the Bill would limit consumers’ choice, especially as some people may actually prefer to borrow from micro-lenders. The Committee asked if the job of debt counsellors could not be fulfilled by non-governmental organisations under the supervision of state-appointed monitors in a compromise arrangement. Members were curious to know if people made use of resources such as the Disaster Relief Fund and the Social Relief of Distress Grant.
Ms M Mpahlele (DTI Deputy Director General) said that there had not been a critical review of credit legislation since 1980, with the only developments being the exemptions from the Usury Act first introduced in 1992 and reviewed again in 1999. The DTI recognised that a holistic review of the law was necessary, and conducted credit law review in May 2002. A technical committee was established and prepared a report. The DTI released the Consumer Policy and Credit Draft Bill in April 2004 for public comment. After submissions were evaluated, the final Bill was tabled before Parliament in June 2005. The new Bill will replace the Credit Agreements Act and the Usury Act which are outdated. This current legislative framework had been unable to deal with challenges such as over-indebtedness while balancing the need for access to credit as well as the need to deal with discriminatory lending practices that had affected poor people. There had not been enough protection for consumers.
Their research findings showed that the cost of capital for people in low income areas remained too high even ten years after democracy. Twenty-two percent of small to medium size enterprises received financing, but only seven percent of this was from banks. She said that the credit market was split between the ‘super-included’ and the ’super-excluded.’ Extension of credit to some consumers had led to excessive debt burdens. There had also not been effective regulation of marketing and disclosure practices which led to hidden costs to the disadvantage of consumers. They had also been victim to inaccurate credit bureau information which the DTI had identified as a serious problem.
After these problems were assessed, the DTI had developed its objectives for the new legislation. The Credit Policy and Bill formed part of a programme to promote sustainable access to credit. The Bill was intended to promote competition and transparency by treating all credit transactions equally while recognising different market conditions and products within the market. Consumer protection was enhanced by the promotion of pre-agreement disclosure and standardised quotations and contracts. The new institutional framework would redress problems of the enforcement of the rules. Over-indebtedness and reckless lending was addressed through the appointment of debt counsellors and through the debt review process. The overall aim of the Bill was to promote and advance the social and emotional well-being of South Africa through a fair, transparent, competitive, sustainable and effective credit market and industry.
Agricultural Business Chamber submission
Mr T Doyer from the ABC said that the group fully supported the initiative of the DTI to reform credit legislation as agriculturalists that had based their business on access to credit. It was important however, to look at the credit market holistically. The National Credit Regulator would need many resources to function, with highly paid and skilled officials needed to administer it. The cost of providing credit must be assessed. The higher the costs, the more difficult it was to provide access to credit.
ABC’s first area of concern was the constraint of the credit providers’ contractual freedom. Agriculture was one of the safest areas in which to invest even though the returns were low. It was important to have a transparent and well regulated market but it was also important to have cognisance of some of the long running practices within this industry that had been effective. The ABC was concerned that this Bill restricted credit providers’ ability to limit their risks contractually. This would affect access to credit. The second concern of the ABC was the cost implications to credit consumers. There was a big difference between usury and price controls. Price controls reduce access to credit. If price controls were introduced, it must be done in a way that would not reduce the attractiveness of investing in the industry. Thus, the additional administrative burdens in this Bill damage the ability to access credit in South Africa.
Credit providers were obliged to take administrative precautionary measures to ensure that credit is not provided recklessly. But these penalty clauses were not applicable to consumers. It was important that the credit providers themselves were also protected from reckless borrowers so that they were not unduly exposed. The ABC said that the Bill gave more rights to someone who bought goods on credit than someone who paid with cash as that credit buyer could return the good within five days. As compensation, the credit provider could claim for any depreciation from the use or rental of the good, but this creates an added administrative burden on credit providers. Some of the penalties were also too extravagant. The ABC supported the new Credit Bill, but not the increased cost of doing business that it created (see submission).
Mr M Stephen (UDM) asked if the ABC could outline some of the consumer rights that could be limited within credit agreements that were unfair to credit providers. He also wanted to know if the ABC thought that the cost implications of the Bill were so great that previously disadvantaged people would not get access to credit. The ABC had said that someone who bought goods on credit were in a better position than those who paid with cash. Mr Stephen wanted to know if the ABC wanted all people to be able to return goods within five days.
Mr Doyer replied that unnecessary administrative burdens imposed by the Bill increase costs, such as costs in verification. To demonstrate how some credit agreements could be unfair to credit providers, he gave the example of a partnership where the partners contracted not to be held jointly liable for debts. He said it was difficult to numerate exactly the cost implications of the Bill that affected businesses. In response to Mr Stephen’s last question, Mr Doyer said that there must careful analysis of the transactions so that credit providers were not unduly disadvantaged.
Black Sash submission
Mr N Mafongosi (Black Sash Advocacy Co-ordinator) said that Black Sash welcomed that the Bill provided refunds to consumers where the credit agreement was unlawful. This was a departure from the position in the Usury Act that did not provide for compensation but focused only on criminal convictions.
The Bill did have some challenges. The definitions of a debt counsellor and the ‘in duplum’ rule needed to be reconsidered. Also, all references to ‘emergency loans’ needed to be deleted. The State social security system was obliged to provide relief for people who had anticipated unexpected life events. It left the door open for abuse by unscrupulous credit lenders, it was unrealistic and it made uncapped interest rates a substitute for Social Security provisions. Therefore, there was no need for people to go to micro-lenders to access ‘emergency loans.’
Mr Mafongosi said that the purpose of the Consumer Credit Bill was to include a provision for debt counselling services. However, the National Credit Bill has included a fee for this service. This is unfortunate as consumers only required debt counsellors when they were over-indebted. Thus the service was unavailable to consumers who were unable to pay the application fee. As a result, Black Sash wanted this fee dropped. The Bill was also silent about where the money to fund the debt counsellors would come from.
Black Sash welcomed that in the Bill, any interest that accrued during the time that a consumer was in default under the credit agreement at the time that the default occurred, may not exceed the settlement value of that debt (unless there was an agreement to the contrary). This development was frustrated however by the continued running of fees and charges and the fact that interest ran again after the payment was made. One suggestion to fix this was to amend the Bill to prevent these from happening (see submission)..
Dr E Nkem-Abonta (DA) asked if deleting ‘emergency loans’ from the Bill would limit consumers’ choice, especially as some people may actually prefer to borrow from micro-lenders. Also, consumers may want a choice between debt counsellors: state appointed ones and private ones.
Mr Mafongosi replied that by categorising a loan as an ‘emergency’ one as distinct from an ‘ordinary’ loan, could create the situation unscrupulous money lenders were looking for to circumvent the system. This would defeat one of the Bill’s aims to reduce over-indebtedness. There must be a proper assessment of customers needs. He conceded that debt counsellors had an impact on costs.
Mr Stephen said that there should be a two-tier system as some people can afford private assistance.
Mr Mafongosi replied that those who were financially able to pay debt counsellors should do so. But this raised the question that if they were able to pay the debt counsellor, why were they unable to pay their debts in the first place or arrange a repayment schedule with the creditor?
Prof B Turok (ANC) questioned if Black Sash would not prefer the job of debt counsellors to be fulfilled by non-governmental organisations under the supervision of state-appointed monitors in a compromise situation. Ideally, in emergencies, people should go to the state, but it was not always the best route to take.
Mr Mafongosi replied that Black Sash had no problem with NGOs fulfilling the role of debt counsellors.
Mr S Rasmeni (ANC) wanted to know who was responsible for developing the raw information about consumers’ bad credit history.
Prof Turok wanted to know if credit bureaux provided credit, or did they provide the information upon which the decision of whether to grant credit was based?
Mr Mafongosi replied that it was the credit providers who accumulated the credit information and passed it on to credit bureaux. The credit providers had their own formulae to determine consumers’ credit rating, and in this way they were a ‘law onto themselves.’ Credit bureaux did not themselves grant credit.
South African Catholic Bishop’s Conference (SACBC) submission
Mr C Chagunda (SACBC researcher) said that the SACBC supported the Bill as it tried to balance the rights and obligations of creditors and consumers. The SACBC was concerned however about the issue of debt counsellors. They proposed that debt counsellors be defined in section one and that they not be appointed or employed by credit providers. The SACBC was also concerned about where the money would come from to finance debt counsellors.
Mr Chagunda said that emergency loans were unnecessary as they were dealt with by the Social Relief of Distress Grant in the case of deaths, disability grants and the Compensation for Occupational Injuries and Diseases Fund in the case of medical care, and the Disaster Relief Fund and Social Relief of Distress Grant in the case of natural disasters (see submission).
Mr L Zita (ANC) wanted to know how many people made use of resources such as the Disaster Relief Fund and the and Social Relief of Distress Grant. Were people aware of them?
Mr Chagunda said that the SACBC worked closely with Black Sash in terms of consumer awareness and education. Mr Mafongosi added that many people did not know about this assistance.
Mr P Nefolovhodwe (APO) wanted to know the format of the information that the credit providers passed on consumers’ credit information to credit bureaux. Was it gathered in the same way to ensure that it was not discriminatory?
Mr Mafongosi said that section 60 contained a list of rights that explained what a credit bureau could and could not do with the credit information.
Mr Rasmeni disagreed with the SACBC’s view that the Social Relief of Distress Grant was sufficient to deal with all deaths in the country. Other lenders would augment this governmental function, and it had a social responsibility aspect to it as well.
Emerald Van Zyl Consulting submission
Mr E Van Zyl from Emerald Van Zyl Consulting said that the Bill was heavily focused on the micro-finance industry which was where most of the reckless lending and consumer abuse occurred. Repealing the Credit Agreements and the Usury Acts took away the rights of consumers to claim back overcharges that occurred within three years prior to the promulgation of the Bill.
Another area of concern was that all mortgage bonds were registered at the Deeds Office and fell under the Usury Act. Costs such as inception fees, yearly and administrative fees that were prohibited under the Usury Act were now recoverable. This was a disadvantage to bondholders and gave another reason why the Usury Act could not be repealed.
Dr Nkem-Abonta asked if on balance, would there not be a net benefit for consumers if this Bill was passed.
Mr Van Zyl replied that contracts that were concluded under the Usury Act were valid until they ran their course, but he saw a place for the National Credit Bill in the market.
The meeting was adjourned.
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