National Credit Bill: hearings

Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
8 August 2005
NATIONAL CREDIT BILL: PUBLIC HEARINGS

Chairperson:

National Credit Bill [B18-2005]
Banking Association of South Africa submission
South African Insurance Association and Life Offices’ Association submission
Clothing Retailer Members of the Consumer Credit Association submission
The Furniture Traders Association submission
South African Chamber of Business submission
Veterans Association submission
Submission by Magistrate F Von Reiche: Pretoria Magistrates Court
Letter from Magistrate F Von Reiche: Pretotia Magistrate Court
MAFISA submission
Commentary on the Explanatory Memorandum on the Proposed Consumer Credit Act.

SUMMARY
The Banking Association of South Africa told the Committee that the Bill was anomalous as it applied to corporations up to a limit, but it applied to all natural persons. They suggested that there be a ceiling to the extent to which the Bill applied to natural persons. They were most concerned about the reckless lending provisions that seemed to allow lenders the right to claim long after the credit agreement was made. They also identified problems with price controls. Ceilings did not control the price of credit, but only drove borrowers underground to the ‘loan sharks’ and reduced competition. In terms of credit insurance, freedom of choice was important. Lenders must be prohibited from prescribing with whom the borrower is insured.

The South African Insurance Association and Life Offices’ Association followed. They submitted that Clause 102(1) had to be extended to include insurance premiums in a principal debt to give consumers more freedom of choice. Clause 106(4) was not entirely clear and needed rewording. Clause 107(b) had to be revised to allow consumers to keep insurance cover in place as a way of creating broader access to insurance after an unused portion of the premium was refunded. The LOA requested confirmation that policy loans granted by an insurer in terms of a policy of insurance were contained in the exclusions in Clause 8(2) and that long term insurers were not required to comply with the provisions of the Bill in respect of policy loans.

The Department of Trade and Industry responded to some of the submitted proposals. They said that where the premiums were high there had been a relationship between the insurer and the credit provider. The Bill put pressure on the credit provider to make sure the insurer had the best price policy. For the first time there was competition at the lower end of the market and this had to be encouraged. The DTI had made a compromise with the industry regarding the raising of consumers’ credit limits. Credit providers were now allowed to assess once a year how the consumer had repaid their debts, and increase the limit once a year without the consumer’s consent.

The Clothing Retailer Members of the Consumer Credit Association recommended that the current retention periods for the bureau were maintained so that the consumer’s repayment patterns for the last 24 months and details of accounts handed over for collection were maintained for three years from the date of hand-over. They also submitted that retailers be allowed to periodically increase credit limits provided they checked credit risk and the affordability of this. The Consumer Credit Association wanted the debt review process to apply only to transactions entered into after the effective date of the Bill and there should be a fixed time within which the Magistrate must make a decision. They felt that the penalties were too severe. They recommended that the penalty should be a specified amount, based on the severity of the breach.

The Furniture Traders Association believed that the Bill limited credit risk mechanisms, and limited credit providers’ sources of income by capping interest rates. There was also concern about the implementation and administration of the new legislation and the impact of the as yet unpublished regulations

The South African Chamber of Business said that credit bureaux performed a vital function in restraining irresponsible credit use. The Regulator needed professional, well-paid independent staff with experience in the credit industry and the education of consumers was crucial.

Magistrate Von Reiche said that the National Credit Regulator, the Consumer Tribunal and other institutions were unconstitutional. The Bill also discarded experience and legal certainty secured by legislation of long standing such as the Usury Act.

The Veterans Association said that the Bill ought to require the removal of judgement debt by credit bureaux on presentation of a court order by a practising attorney evidencing rescission of judgement. It called for the abolition of unfair business practices by the Consumer Credit Association relating to the non-removal of default data. The association called for a requirement that all creditors must consent to an application for rescission of judgement where the debt had been paid.

Members of the Committee wanted to know the difference between monthly and single premiums, whether the Banking Association would be satisfied if the Minister were given the power by the Act to decide what the cap was after consultation with all role players, and what the global experience was with price controls. They asked who performed an oversight function over the credit bureaux. Credit providers were asked to what extent the information they received from credit bureaux was accurate, and the attitude of the credit providers to debts that had prescribed. Could the credit providers guarantee that their scoring system did not discriminate against consumers in the low income bracket, and were all the rescinded judgements removed from the credit register held by credit bureaux? The Committee also asked for more information about collusion between banks.

MINUTES
Banking Association of South Africa submission
Mr B Tucker, Chief Executive, said that it was an anomaly that the Bill applied to corporations up to a limit, but yet it applied to all natural persons. This was anomalous as the Bill allowed for example, someone who had borrowed millions of Rands a number of years ago to come back and claim that it had been reckless lending. It did not make sense. Their first suggestion was that a ceiling be placed to the extent to which the Bill applied to natural persons. If someone borrowed at least two million Rand, they were financially able to look after themselves, and so they proposed that the Bill not apply to anyone who borrowed at least two million Rand.

The BAS were most concerned about the reckless lending provisions that seemed to allow lenders the right to claim long after the credit agreement was made that it had been reckless lending. The three year prescriptive period was a good standard to apply here. There were problems with price controls also. Ceilings did not control the price of credit, but only drove borrowers underground borrowing from ‘loan sharks.’ They also reduced competition. If the ceiling was set too close to the market rate, all the lenders pegged their rate at the ceiling.

The changes to interest, credit fees or charges created a cost problem for banks. There were about 20 million variable rate contracts. It was not possible to give immediate notice to all of these people that interests rates had changed as it would cost about R400 million to do using the postal service. If the period were set at three months, the consumer could, at no extra cost, be advised of the changes in their normal quarterly statements.

In terms of credit insurance, credit providers had a ceiling on the interest rate they could charge, so they force the borrower to take out an insurance policy, (probably with the same group) and then the providers maximised on the premiums as this area was unregulated. If it was said that the lender could only insure up to the amount that was lent, the borrower was forced to look after their own insurance for the balance. This was wrong. The solution was to insist on freedom of choice. The lender must be prohibited from prescribing who the borrower is insured with. In South Africa, fixed term lending was unknown. The BAS suggested that cancellation fees were included in fixed rate contracts.

The BAS was confused about the wording of Clause 90(2)(m) regarding payment processing provisions. The South African Reserve Bank believed that the section prohibited a provision in a credit agreement that purported to direct an employer to give priority to payments in favour of the credit provider over other persons. The BAS saw that this placed other creditors such as insurers at a disadvantage as they were not at an ‘employer’ level. They sought clarification from the DTI on this point.

South African Insurance Association (SAIA) and Life Offices’ Association (LOA) submission
SAIA said that the insurance sector supported the general principles of the National Credit Bill. There were however some areas of concern. Clause 102(1) did not allow the inclusion of insurance premiums in a principal debt even where the consumer chose this as a method of payment. Freedom of choice for the consumers was important here. The section had to be extended to include insurance premiums in a principal debt. The amendment suggested will ensure that insurance cover was in place, for example where the consumer was retrenched.

Clause 106(1) referred to the type of insurance a credit provider may require a consumer to have. Where the insurance was being used to cover damage or loss to property that was being pledged to secure a debt, it was not sufficient to only have cover in place for the consumer’s outstanding obligations to the credit provider. SAIA said that another paragraph must be added to this that allowed the consumer greater choice. The consumer must be protected for personal loss as well. Clause 106(4) was not entirely clear and needed rewording. Clause 107(b) had to be revised to allow consumers to keep insurance cover on place as a way of creating broader access to insurance after an unused portion of the premium was refunded. In terms of Mortgage Protection Cover, the Bill did not distinguish between insurance linked to immovable property credit and other types of credit insurance. The problem was that some to immovable property insurance did not cover all eventualities. This necessitated a revision of Clause 106(4).

For loans that related to long term insurance policies, SAIA submitted that these loans should not form part of the Bill as the costs of complying with the Bill were costly to consumers if insurers were obliged to comply for every loan granted to the policyholder. The LOA requested confirmation that policy loans granted by an insurer in terms of a policy of insurance were contained in the exclusions in Clause 8(2) and that long term insurers were not required to comply with the provisions of the Bill in respect of policy loans.

Discussion
Mr M Stephen (UDM) had a problem with the inclusion of insurance premiums in the principal debt especially where the policy lasted for a long time.

Mr Lategan from SAIA replied single premium policies were available for a duration of around five years with fairly predictable risks. They were usually cheap if they were paid initially with the debt.

Dr E Nkem-Abonta (DA) wanted to know the difference between monthly and single premiums. He also wanted to know if the Banking Association would be satisfied if the Minister were given the power by the Act to decide what the cap was on the price control was after consultation with all the role players.

Mr C Coovadia (BAS Managing Director) replied that if the Minister were compelled to decide what the cap was, much of the problem would be resolved. But, this was mainly a political decision which had implications. He welcomed placing an imposition on the Minister to consult with all the interested parties.

Mr L Zita (ANC) asked what the global experience was with price controls.

Mr Tucker said that it was important for the low income borrower to know what they were committed to regardless of whether the Reserve Bank changed interest rates. Regarding the global experience, the richness of the South African market must not be underestimated. What countries like Australia had done had also been assessed. The only short term borrowing facilities available in South Africa were ‘loan sharks,’ which led to an uncontrolled, abusive process. This had to be fixed and this Bill had done a lot to do so.

DTI Response
Ms M Mpahlele (DTI Deputy Director General) said that the Department had done a lot of research on all the areas raised in this meeting. Mr G Davel (Micro Finance Regulatory Council Chief Executive Officer) added that the insurance issues affected low income earners the most. The DTI insisted on monthly payments because the premiums were calculated as an ‘up front,’ single premium so that there was one premium for the whole duration of the loan. Where the premiums were high there had been a relationship between the insurer and the credit provider. The added interest and the added premiums went to the same group of companies. The Bill put pressure on the credit provider to make sure the insurer had the best price policy.

Ms P Hawkins (DTI Policy Advisor) said that the Department had conducted extensive research including that on interest ceilings in other countries. Interest rate ceilings did not necessarily reduce competition. There were aspects in the market now such as usury cap and the exemption in the market that had stifled competition. For the first time there was competition at the lower end of the market and this had to be encouraged. It was not a ‘rich versus poor’ issue. Mr Tucker was misleading in this aspect.

Clothing Retailer Members of the Consumer Credit Association (CCA) submission
Mr I Wood from the CCA said that the current practice in respect of new applications for credit was to obtain consumer information on an application form. The information was run through application scorecards that assessed the risk of the application while simultaneously checking the applicant’s details at the credit bureau for accuracy. The CCA recommended that the current retention periods for the bureau were maintained so that the consumer’s repayment patterns for the last 24 months and details of accounts handed over for collection were maintained for three years from the date of hand-over.

Retailers assessed consumers for credit limit increases on a regular basis by evaluating the credit risk on recent payment behaviour and the affordability of such an increase. The retailer checked the manner in which the customer conducted their account as well the credit bureau records to evaluate the credit risk with reference to the consumer’s ability to service the credit. Mr Wood recommended that retailers be allowed to periodically increase credit limits provided they checked credit risk and the affordability of this. When the credit increases were implemented, the customers were given complete information about the increase.

There was no firm period during which a consumer’s application to a debt counsellor for debt review had to be resolved and this could result in repeated referrals between the debt counsellor and the Magistrate for 60 day periods. This business risk would result in less credit being extended to consumers. The CCA wanted the debt review process to only apply to transactions entered into after the effective date of the Bill and there should be a fixed time within which the Magistrate must make a decision.

A maximum fine of 10% of annual turnover could be imposed. The CCA felt that this could place many retailers out of business and seemed to be disproportionately severe to the offences that could take place. Ultra-conservative risk management would result, that would reduce the granting of credit. The CCA recommended that the penalty should be a specified amount, based on the severity of the breach. The CCA disagreed with the Bill capping interest rates as it affected their ability to take on more risk. They preferred there to be no caps but rather a full disclosure on the costs of credit so that consumers can make informed decisions.

Mr Wood said that Clause 106(1) that related to compulsory cover was confusing and needed review. There was a need to specify how reasonableness was established in the event of a dispute in Clause 106(3). Clause 106(4) had to be reviewed to benefit consumers by providing the possibility for credit providers to cap the premium irrespective of the value of the risk. Clause 106(8) as it stood could stop parties other than the insurance company from earning commission. The CCA also wanted Lost Card Insurance to be billed as a flat amount that provided cover of up to twelve months.

Furniture Traders Association submission
Mr Strauss said that the FTA fully endorsed the objectives of the National Credit Bill although there were some concerns. The Bill limited credit risk mechanisms, and limited credit providers’ sources of income by capping interest rates. The Bill imposed restrictions on credit marketing and the FTA was concerned about the effects and costs of the new statutory entities. There was concern about the implementation and administration of the new legislation and the impact of the not yet published regulations in terms of costs and technology. The FTA supported the initiative of debt counselling, but was concerned that they were prevented from earning interest during the debt counselling process.

South African Chamber of Business submission
Mr Vic van Vuuren, Chief Operating Officer of Business Unity South Africa, gave the SACOB submission to which BUSA fully subscribed and which presented a small business perspective on the legislation. He said that it was important to consider small businesses when the final determinations on the Bill were made. An impact assessment study had to be carried out to analyse the impact of this Bill on small businesses. Credit bureaux performed a vital function in restraining irresponsible credit use and they should be encouraged. There was consensus that access to credit was not a right in itself and credit legislation was a market instrument. The Regulator needed professional, well-paid independent staff with experience in the credit industry. The education of consumers was crucial. The industry must pledge all its resources to promote consumer education in understanding the National Credit Bill.

DTI Response
Mr Davel said that what was in the Bill already represented certain compromises that had been made. The Department’s said that it was fine when a consumer did not utilise their full credit limit. It was a problem when the consumer became over-indebted. Repeatedly raising this consumer’s limit would be detrimental. The DTI’s position was that if the limit was to be raised, the provider must obtain the consent of the consumer first. An offer must be made, and this must be accepted before the limit was raised. The compromise the DTI made with the industry was to allow the providers to assess once a year how the consumer had repaid their debts, and increase the limit once a year without the consumer’s consent. The debt counsellor had 60 days to make a decision. If after this period had lapsed there was no decision, the credit provider could go to court for a judgement. From their research of the furniture industry, the DTI had found that credit providers made a lot of money from the interest rates and the credit-like premiums. The market had to be more transparent.

Discussion
Prof B Turok (ANC) said that the Committee was aware of the importance of small businesses. He asked who performed an over-sight function over the credit bureaux. Was it an unmonitored, unregulated part of the law?
The FTA conceded that their industry needed more control. At present there was currently no regulatory mechanism for the industry.

Mr Stephen asked who did the scoring for credit providers in assessing a consumer’s risk for credit. He also wanted to know what weight was attached to demographics such as race, gender and income. He asked to what extent the information was accurate, and the attitude of the credit providers to debts that had prescribed. Were all the rescinded judgements removed from the credit register held by credit bureaux?

The FTA said that individual credit providers had their own scoring systems depending on the consumer’s ability to repay and their credit history.

Dr Nkem-Abonta asked if it was true that the CCA and FTA supplied the credit data to the credit bureaux and if they blacklisted consumers. Could the credit providers guarantee that their scoring system did not discriminate against consumers in the low income bracket?

The FTA said that all positive and negative information held by credit bureaux was supplied by them, the credit providers. The individual credit providers would use their own scoring systems to decide whether to extend credit to the consumer. Credit bureaux only acted as a holder of information.

Submission by Magistrate Von Reiche: Pretoria Magistrates Court
The Magistrate noted serious flaws in the Bill. The explanatory memorandum to the Bill did not justify such a radical departure from the current legal position. The National Credit Regulator, the Consumer Tribunal and other institutions were unconstitutional. They were not civil or criminal courts but were kangaroo courts which were ‘draconian.’ If it were assumed that the provisions were not unconstitutional, its provisions negated the functioning of the public administration and the judiciary and removed consumer protection by decriminalising legislative provisions. The Bill discarded experience and legal certainty secured by legislation of long standing such as the Usury Act.

DTI response
Ms Mpahlele said that the Department was not in a position to respond. The Bill had been to the State Law Advisors who had approved it.

Discussion
Dr Nkem-Abonta said that the Department must be compelled to reply point by point to the Magistrate’s submission.

Veterans Association submission
Their representative from Logan Attorneys said that the Bill ought to prescribe that complete credit data be given to the consumer’s authorised representative, such as an attorney. It ought to require the removal of judgement debt by credit bureaux on presentation of a court order by a practising attorney evidencing rescission of judgement. At present, credit bureaux refused to remove judgement information, even when presented by an attorney with an original court order rescinding the judgement.

The Veterans Association also sought the automatic removal of all default data where the related debt had been fully paid. It called for the abolition of unfair business practices by the CCA relating to the non-removal of default data. All joint bank default data must be removed from the register where the debt had been fully paid. A new section must be placed in the Bill to empower the National Credit Regulator to revise the data retention periods periodically. The association was of the view that prescribed claims must not be listed. There must be a requirement that all creditors must consent to an application for recession of judgement of judgement where the debt had been paid. The National Credit Regulator had to be empowered to specifically address the issue of illegal credit repair.

Discussion
Mr Stephen commented that credit bureaux operated in an abusive system that grew up during apartheid shrouded in secrecy. He said that these bureaux were in fact publishers of information and were thus liable in law for passing on inaccurate information just as a newspaper was.

Prof Turok asked for more information about the collusion between banks.

The Veterans Association replied that a joint bank credit bureau exists. The information held by this group of banks was only accessible by those banks and was shared by them. Consumers were unable to access this information.

The meeting was adjourned.