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TRADE AND INDUSTRY PORTFOLIO COMMITTEE Mr B Martins (ANC)
7 September 2005
NATIONAL CREDIT BILL: DELIBERATIONS
Documents handed out:
TRADE AND INDUSTRY PORTFOLIO COMMITTEE
Mr B Martins (ANC)
Department response to National Credit Bill hearing submissions
The Department of Trade and Industry gave the Committee its initial response to some of the issues raised during the public hearings. The Bill was an important initiative to address the underlying problems in the market. It was a single Bill that applied to all credit transactions, and so was very ambitious. Some submissions had expressed that the Bill was too long and complicated. However, this complexity had been balanced with a plain language draft. The Bill was long to limit undue discretion being given to the Minister and the National Credit Regulator (NCR). The Department envisaged a dual system where the courts dealt with the application or interpretation of law, while the Tribunal dealt with administrative matters, findings of fact and consumer rights. Affected parties always had a choice to bring a matter before a court or the Tribunal.
Some sectors, like the cellular phone companies and medical aid providers, wanted to be exempt from the Bill. The Department’s view was that all consumers had to be protected in all circumstances and across the income spectrum. There was a need to regulate incidental credit, but to a limited degree. As long as credit was provided, it would be regulated by the Bill. A number of groups had problems with emergency credit. The concern was that there was huge potential for abuse because micro-loans could be ‘dressed up’ as emergency loans. The reality was that there might be some real emergencies that needed funds. The Department felt that credit bureaux were necessary for a functioning credit market, but they had to be regulated. In this regard, strict guidelines would have to be drawn up. A very heated issue had ensued on an amnesty for all blacklisted consumers. A better approach was to verify and clean up the records held in credit bureaux or prohibit keeping a credit record when the debt was below a predetermined amount.
The Department said that door-to-door sales were ‘pressure selling’, and some of these practices contributed to over-indebtedness. The Bill protected consumers against unwarranted or reckless credit and established a fair compromise between business needs and consumer protection. There were also concerns about debt counselling. The Department proposed that there should be a suspension of the rights and obligations for both the consumer and the credit provider.
The Committee wanted to know if a consumer had to repay all the interest and other charges after an agreement was revived that had been suspended pending an investigation of reckless lending against the provider. Members also asked if the Bill did not make the charging of interest an automatic right, even though by law, there had to be agreement before interest was charged.
Ms A Ludin, the Department Deputy Director-General began by giving the context of the law reform. The Bill was an important initiative to address the underlying problems in the market. It was a single Bill that applied to all credit transactions, and so was very ambitious in character. The Bill sought to address the historical legacy of systematic discrimination against the majority black population and ensuring that the credit market functioned more cost effectively and competitively. The Bill would improve the understanding and knowledge of the market by informing and educating consumers to enable them to make better choices. It provided for necessary co-operation between the national and provincial Governments as well as industry, consumers and protection agencies.
It was raised during the public hearings that the Bill was too long and complicated. She agreed that it was complex given the nature of the Bill, but that complexity was balanced with a plain language draft. The Bill was long to limit undue discretion being given to the Minister and the National Credit Regulator (NCR). To deal with this complexity issue, the NCR had to initiate education programmes for consumers.
It was raised during the hearings that the Bill offended the Constitution, but the Constitution contemplated the existence of "independent and impartial" Tribunals to perform certain similar functions. The Department envisaged a dual system where the courts dealt with the application or interpretation of law while the Tribunal dealt with administrative matters, findings of fact and consumer rights. Affected parties always had a choice to bring a matter before a court or the Tribunal. Another concern was that the Minister’s actions were not regulated by the Bill. The Bill however compelled the Minister to publish his/her regulations for public comment.
Another issue was that of retrospectivity. Ms Ludin did not see any evidence of this in the Bill except in one clause that might be ambiguous. The public had raised the contention that the Bill retrospectively regulated some agreements made in terms of the Usury Act. The Bill set out a scheme where agreements that were in place when the Bill came into force, remained in force.
Mr J Strydom, Department Law Advisor, added that Schedule 3, Section 7(2) was unambiguous on the continuation of rights that existed before the National Credit Bill commenced. The Department proposed that Clause 166 be modified to avoid any potential interpretation conflict with the Prescription Act. Mr T Hercules, the State Law Advisor, re-iterated that the Bill did not remove vested rights.
Dr E Nkem-Abonta (DA) asked if the consumer’s right to go back to a credit provider and claim that they were lent to recklessly also fell away after the prescriptive period of three years.
Mr Strydom replied that the Bill worked both ways. The consumer’s right would fall away after three years. Clause 166 in the Bill did not unduly affect the Prescription Act but in fact protected vested rights.
Ms Ludin continued by saying that it had been proposed during the public hearings that there should be a limitation on the value of credit agreements that were governed by the Bill in respect of private individuals. Some sectors like the cellular and medical aid providers wanted to be exempt from the Bill. The Department’s view was that all consumers had to be protected in all circumstances and across the income spectrum. There was a need to regulate incidental credit, but to a limited degree. As long as credit was provided, it was regulated by the Bill. The Department was willing to reconsider the wording of Clause 8(3) to clarify the application of charges to agreements.
A number of groups had problems with emergency credit. The concern was that there was huge potential for abuse because micro-loans could be dressed up as emergency loans. The reality was that there might be some real emergencies that needed funds to be resolved. The Department proposed that the concept of emergency loans be retained, but amended to limit unforeseen consequences. If the Bill succeeded in the reduction of over-indebtedness, the need for emergency would diminish.
The National Student Financial Aid Scheme wanted to be exempted from the Bill but student loans were classified as developmental credit agreements and so were exempt from certain provisions in the Bill. Credit Unions also wanted to be exempt from parts of the Bill. Their specific requirements could be accommodated under the developmental credit provisions.
A lot of submissions dealt with credit bureaux. The Department’s response was that credit bureaux were necessary for a functioning credit market, but they had to be regulated. In this regard, strict guidelines would have to be drawn up about the type and validity of the information they kept, the availability of records to consumers and the expunging of records under certain circumstances. The NCR was responsible for ensuring adherence to these guidelines. Most of the submissions from industry argued against expunging credit records even after consumers had paid outstanding debts. Ms Ludin said that the Bill established a fair regime and was of the view that consumers should not be punished for their past mistakes.
A very heated issue was that of an amnesty for all blacklisted consumers. The Department understood the background and reasons for an amnesty. However, the amnesty could severely affect the credit market especially over-indebted consumers and small enterprises. A better approach would be to verify and clean up the records held in credit bureaux or to prohibit keeping a credit record when the debt was below a predetermined amount.
The retailers had problems with the provisions in the Bill that dealt with language. Ms Ludin did not see these provisions as being too onerous. The issue was about balance, the need for consumers to be given information, and the need to reduce the cost to the providers.
Another big issue was that of insurance. Clauses 102 and 106 called for insurance premiums to be capitalised and included in the principal debt. Research confirmed that capitalisation of the insurance premiums could increase the principal debt by as much as 50%. Capitalisation meant that the consumer was paying interest also on the insurance cost. Ms Ludin said the Department proposed a system where monthly premiums were paid for intermediate and small agreements.
There were submissions that discussed the methods used by some companies in selling credit. Ms Ludin said that some of these practices contributed to over-indebtedness. Door-to-door selling was pressure selling. The Bill protected consumers against unwarranted or reckless credit and established a fair compromise between business needs and consumer protection. Developmental lenders were exempt from these provisions. Motor vehicle dealers were concerned that Clause 92 would have serious consequences for their businesses. But this clause actually referred to the quotation for provision of credit and not the asset. The credit should remain available for five days and the quoted interest rate and associated costs. Mortgage originators argued that Clause 163 undermined the benefits brought by them, and allowed banks to increase their dominance. Ms Ludin said that there was a need to evaluate where the real competitive issues lay. Another option was to provide an exception for large agreements or go for a holistic review of the principles.
There were concerns raised about fixed rate credit. It was argued that the Bill made it too easy for a consumer to settle the agreement. The Department’s response was that an early termination charge of no more than three months of interest that would have been payable under the agreement established a fair compromise. Another proposal was to give the Minister the power to determine a different penalty for fixed rate loans.
There were also concerns about debt counselling. The Department proposed that there should be a suspension of the rights and obligations for both the consumer and the credit provider. There were problems with the way the in duplum rule was codified in the Bill. The Department was aware of this and included debt collection costs on purpose as they could be a way of increasing costs as a whole.
The Chairperson said that the issue of an amnesty was a complex one. If there was an amnesty, the credit provider still had access to the consumer’s credit history. There was no guarantee that all the providers would actually expunge the credit records.
Dr Nkem-Abonta asked if a consumer had to repay all the interest and other charges after an agreement that had been suspended pending an investigation of reckless lending against the provider, was revived. He wanted to know if the Department was aware of the fact that the volume of credit would contract if the Bill was passed as lenders would become more cautious in how they provided credit. The poor would suffer in this case. He said it was important to assess how the market would react to an amnesty. What was bad for the market was ultimately bad for consumers.
Mr Strydom replied that the provider may not charge interest or levies during that period of suspension and so there would be nothing to claim once the agreement was revived. Ms Ludin added that it was a court that decided that the lending was reckless. It was important to reduce the amount of risk for providers as this would benefit the consumers ultimately. The Bill reduced the availability of credit to those who were over-indebted, but they received some assistance in terms of debt counselling. Mr G Daval, the Chief Executive Officer of the Micro Finance Regulatory Council, said that there must be fewer short-term extortionist loans. This market had to contract. Lending should be more long-term and secure.
Ms Ntuli (ANC) asked if the Department really meant that if there were no more over-indebtedness there would be no need for emergency credit. She asked if the Department was aware that there were usually more than two languages in each region. How would the Bill address this? She wanted to have the five-day cooling off period extended.
Ms Ludin said that the Bill called for consumers to receive documents in a language that they understood, not necessarily a language of their choice. The cost implications for providers had to be considered. There was nothing in the Bill that prevented someone who was not over-indebted from securing emergency credit. She said that the five-day period could be extended but again the needs of the industry had to be assessed in this determination.
Mr M Stephen (DA) said that the scoring systems used by providers were not transparent. How would the Bill deal with this? Did the Bill not make the charging of interest an automatic right, even though by law, there had to be agreement before interest was charged?
Ms Ludin replied that the Bill did not entitle anyone to charge interest. It only regulated situations where interest was charged. The Bill also tried to stop the unregulated sharing of credit information
Mr L Zita (ANC) said that the Committee really had to apply its mind to the issue of the amnesty and blacklisting. Maybe the solution was to reduce the period of time that the person was listed, and it was important to consider the amount of money owed.
Mr S Rasmeni (ANC) asked what the Department proposed as an amendment in regards to emergency loans. He asked what the real difficulty was in having an amnesty. Ms Ludin said that the Department did not give clear proposals in regards to emergency loans.
The meeting was adjourned.