Historical perspective …. Aristotle, 350bc: “Very much disliked is the practice of charging interest; and the dislike is fully justified … money intended to be a means of exchange … of all ways of getting wealth this is the most contrary to nature
Aristotle, 350bc: “Very much disliked is the practice of charging interest; and the dislike is fully justified … money intended to be a means of exchange … of all ways of getting wealth this is the most contrary to nature
Cicero, 50 BC: “Gentlemen should not toil themselves with means of livelihood which provokes ill-will, such as collecting customs dues and money-lending”
Bacon, 1597: “a vanity to conceive … ordinary borrowing without profit; … number of inconveniencies that will ensue if borrowing be cramped …”
Bentham, 1787: “The business of a moneylender … has no where nor at any time been a popular one. It is an oppression for a man to reclaim his own money: it is none to keep it from him”
Keynes: “Avarice & usury & precaution must be our gods for a little longer still … for only they can lead us out of the tunnel of economic necessity into daylight
National Credit Act
Until end 1980’s, limited access to finance for black South Africans. Mainly furniture finance and in government-supported housing finance. Latter geared to broadening ‘black middle class’, getting support for the capitalist system!
Sunnyside Group initiated various exemptions: Group of academics & practitioners lobbied for exemptions to remove legal constraints. Usury Act Exemption for small transactions & change to Pension Funds Act, allowing benefits to be used as security for home loans. Also facility to deduct loan payments from salaries.
Period of strong growth. Exemptions aimed at housing market. Massive growth in consumer lending. Predatory & abusive lending practices by both commercial lenders & NGOs who commercialized
Dual structure from 1999:
Micro Finance Regulatory Council established, maintaining exemption, but improving consumer protection.
Larger transactions remain under Usury Act & Credit Agreements Act – dated & inappropriate legislation.
Personal insolvency totally inappropriate. No regulation of credit bureaus.
Limited access to banks, savings or loans, but continuing growth in ‘exempted loans’.
Mini banking crisis in 2002 / 2003: Lending practices and governance failures both contributed. Highlighted need for reform.
MFRC research highlighted problems. Initiated credit law reform project in 2002. Govt sponsored Task Team established. Drafting started in 2004. NCA adopted in 2005, effective 2007.
Extensive empirical research,
To define (a) market practices, (b) quantify reckless lending & indebtedness, (c) quantify cost of credit, (d) get consumer views, (e) get industry & expert views.
To gather evidence on what is wrong in the market, quantify the cost of doing nothing;
Research on international dispensations
To evaluate options, ensure equivalence – assess rationale / theoretical basis for different approaches. Build case for reform.
Extensive consultation with local & international experts.
Public briefings & consultation in all provinces.Strong public support. Rationale for intervention clear. Opponents started backing down.
Parliamentary process: Extensive briefings on research & on specific sections. Huge support from all parties, despite lobbying.Public hearings, direct engagement between technocrats & industry. Extensive scrutiny and amendments.
Defense against counter-revolution: Arguments: ‘unintended consequences’, ‘cost of compliance’, ‘increased cost of credit’, ‘regulatory burden’, ‘decreased access’. Also personal attacks. We did detailed research on each of these topics. Approach: Speed, big bang, not piecemeal.
Research into credit supply
MFRC investigations & research reports
“Cost, Volume & Allocation of Consumer Credit”, Dr Hawkins, FEASibility
Focus group discussions by market research company
Industry & Stakeholder Views
Comments from range of stakeholders on their assessment of problems
Comparison of SA & International Legislation
Theoretical basis for reform & assess alternatives
Regulation of Payday Lending in US, Partick Meagher, University of Maryland (IRIS)
Interest Rate Regulation (Prof Dympski, University of California, Prof Schierenbeck, Basle University; Dr Falkena, SA Reserve Bank; Prof Llewellen, UK
Legislation in SA, Rudolph Willemse, Hofmeyr, Herbstein, Ginwala
with SARB, Treasury et al
with local & international ‘experts’
to confirm statistics & discuss conclusions
with international experts in London … policy & Bill
The process: Through MFRC investigations & Credit Law research, increasing understanding of problems, Extensive consultation with all stakeholders. Evidence to support reform.
Not an attempt to maximise consumer protection.Rather: Deal with consumer credit market, as a market in which 1000’s of credit providers, debt collectors and others engage with millions of consumers to originate millions of transactions;
The manner in which this market functions determines consumption patters, allocation of income and social welfare.
Evaluate the legal system within which these transactions take place; To evaluate the “rules” which the legal system creates; to assess whether these rules create incentives for particular behaviour by credit providers & consumers
Expand the regulators’ duties, or change the underlying legislation? Employ more cops, or change the rules of the road? If the rules of the road are inappropriate and encourages reckless and predatory driving, regulators cannot solve the problem.
Impact of reckless, predatory or misleading practices
on competitors (supply): (a) cautious & low cost providers lose market share; (b) predators set standards; (c) increase cost and risk for all participants
on consumers (demand): (a) unable to evaluate options, bad choices; (b) inflated finance cost reduces wealth; (c) lose homes, unable to meet social obligations
on society: sub-optimum allocation of resources; biased against efficient finance options; social welfare resources diverted to debt payment & financial sector
Therefore, have to review all aspects of credit legislation,to remove incentives for adverse behaviour, prevent participants from passing cost of adverse behavior on to competitors or society. Assess systemic implications of transactional incentives. Create a sound basis for the contractual engagement between credit providers & consumers.
“if a system produces unacceptable outcomes, cannot expect outcomes to change until we change the system”, Niccolo Machiavelli
Too late to affect purchase decision / misleading, undermine price comparison benefit high cost suppliers / complex disclosure on complex products undermine consumer ability to make informed choices.
Negative option marketing & automatic increases in credit limits
Undermine choice, comparison of cost, competition. Increase debt stress.
Add-on fees & credit life insurance
inflate cost, undermine disclosure & product comparison. Favour predatory operators & undermine competition.
Early settlement penalties, penalty fees, debt collection fees
Not transparent, subject to price comparison. Reduce switching & competition.
“Debt farming” based on penalty fees & debt collection fees, benefit predators & increase default by vulnerable consumers
Preferential collection mechanisms & easy access to court orders for debt collection
Encourage predatory lending & over-indebtedness
APR disclosure & deregulated interest
APR biased against small transactions;
High i% abused in marginalised market segments
Weak, incomplete & biased credit information.
Undermine creditors’ client selection & risk management.
Insufficient debt rehabilitation mechanisms
Increasing pool of marginalised & debt stressed consumers. Increasing risk & fraud.
Weak regulation (monitoring & enforcement)
Undesirable practices & trends not detected.
Allow predators to set standards.
Market segmented into ‘shark pool’ and main stream.
Lower standards for low income market, discourage main stream suppliers from serving low income market. Even when entering, following pricing of existing suppliers. Reduced supply & competition & increase cost.
Disclosure not reflective of true cost or risk. Consumer unable to make choices that would drive optimal outcomes
Low income consumers have little access for to home loans & main stream credit. Excluded from asset growth.
“… every individual … can, in his local situation, judge much better than any stateman or lawgiver can…” Adam Smith
Credit Law Review:- cost for low income credit very high, 100%+ not unusual; in prime markets, actual cost also far above usury cap; huge impact of additional fees & credit life insurance; actual cost well above disclosed interest rates; disclosure meaningless & competition dysfunctional; cost ( & risk) reduction from economies of scale or collection preferences not passed on to consumers; no integration between main stream & low income markets; cheaper main stream products such as credit cards not available to low income market … low income consumers marginalised!
Disclosure: standardized, comparable, early. Prescribed content & format. Enable price comparison.
Negative option marketing prohibited, automatic increases in credit limits curbed.
Reckless credit: Require affordability assessment. Define reckless credit, affects enforceability. Protect responsible lenders.
Interest rates & fees: Change basis of disclosure. Upper limits on interest & fees. Limit add-ons.
Early settlement penalties removed. Debt collection fees regulated. Curb incentives for ‘debt farming’.
Preferences & anti-competitive conduct prohibited, monitored.
Agents & brokers, different disclosure requirements.
Debt counselling to restructure income, rehabilitate consumers.
Credit bureaus, registered, monitored … regulated.
Dedicated regulator, to monitor & enforce. Compliance reviews by auditors; investigations; market practice reviews, compliance notices. penalties through Tribunal (“special court”).
& credit life insurance
Regulate Credit Bureaus
Create National Credit
The structure of a few of the key interventions
Provide information on credit cost at early stage of purchase cycle. While consumer is ‘shopping around’.
Improve comparability. Greater honesty in advertising
Consumer must agree, before an agreement can come into effect
Increase agent & broker transparency & accountability
Negative option marketing & automatic limit increases prohibited = unlawful agreement
Prescribed pre-agreement quote, binding for 5 days
Prescribed info in credit adverts
Opt-outs on telemarketing campaigns, information on-sold
Limits on marketing & sales @ home & work
Prescriptions on agents & brokers (ID in contracts, fee disclosure, liability for credit providers)
S74 – S76, 89(1)b, 119(4)
Reduce reputational risk which APR disclosure impose for main stream suppliers providing small loans,
Payday lending: penalties for roll-overs, for incremental increases in loan sizes
Curb ‘debt farming’ on small loan defaults, from collection fees & penalty interest
Disaggregate interest from initiation and monthly fee, impose limits on each
Prohibit penalty fees and penalty interest
Curb early settlement penalties
Prohibit ad-hoc interest rate variations (e.g. teaser rates)
Codify “in duplum rule” – (interest + fees post default limited to 100% of capital)
Single premium credit insurance prohibited, only monthly premiums on declining loan balance
“… usury limits & APR disclosure segments market into ‘‘prime market’’ and ‘‘marginal market’’ … regularly circumvented … misleading disclosure … little benefit to majority of population …”
Other secured credit
Interest = RRx2.2+x%
Initiation = R150 + m x loan
< max limit
($125 / $625)
Service = single monthly
amount < $6
Penalise predatory lenders
Assist consumers who are in desperate positions
Protect responsible credit providers from impact of reckless operators
“Normalise” low income credit market … often a marginalised shark-pool
S78 – S88, S130
If reckless, impact on court
Prohibition of preferences most important
Requirements of NCA
Credit bureaus registered
Statutory obligation & liability for data quality
Consumer access to records, complaints process, data removal for credible complaints
Efficient effective access to credit information, particularly, for low cost provision of small loans
Pro-active regulation of bureaus to ensure credibility
Privacy laws inappropriate, credit market requires accurate & efficient credit information
Requirements of NCA
Courts powers substantially increased
to assess compliance in case of legal action
Intervene if reckless or over-indebted
Registration; Monitor market conduct (& report to parliament); Compliance; Redress
Instruments: Notice of non-referral; ‘undertakings, resolutions & agreements’; compliance notices, Tribunal action
Status of “specialised court”, subject to appeal to high court; Significant fines & deregistration
Prevent non-compliant lenders gaining a competitive advantage, setting the standard
Legal cost means reliance on consumer litigation totally inappropriate
Enforcement, to change conduct, ensure interventions have the intended impact
S13-16, S54/55, S129/130, S138
Dramatic change in all aspects of market behaviour, impacting both on prices & debt stress
Some examples only
Reduced cost in most high cost segments, + reduced credit life insurance
Disclosure resulted in price reduction, both as result of consumer pressure and comparison between credit providers
Without negative option marketing, greater debt run-off
Removal of preferences & reckless rules – greater focus on affordability
Change in mortgage & motor vehicle lending, to consider debt burden (not only credit record & repayment as % of income)
Debt collection practices much more restrained, increased economic basis, less predatory
Dramatic change in court’s treatment of cases for debt enforcement
Scrutiny of credit provider behaviour; Repossessions; Default judgments; Reckless lending practices
Debt Counselling create statutory mechanism to deal with impact of fin crisis;
In response to fin crisis, credit providers consider debt restructuring as 1st choice, rather than repossession
NCR monitoring & enforcement action
Against credit bureau - audits revealing massive weaknesses in data management
against predatory lending to strip housing equity
against “loan sharks”
supporting debt counselling
allowed more detailed assessment of impact of fin crisis; NCR focus on consumer credit market enable pro-active response
Impact of the Act
On credit granting practices
On credit marketing & disclosure
On debt enforcement
On the contractual relationship between credit providers & consumers
Credit Active Consumers
3,971 credit providers 32,311 branches
Through credit bureau statistics, monitor trends in credit market performance
Audits & compliance notices, quality of data improved, political pressure diminished
Information critical to combating over-indebtedness; critical to efficiency of credit market … must be regulated!
Job losses by LSM – severe impact
The NCA changed the consumer credit market in a number of ways …
Integrating previously capped Usury market with exempt market for micro-loans
Price reductions in most segments, biggest in micro-loans & furniture finance
Improved quality of access for the low-middle income consumer
Increased transparency & competition
Furniture Finance – R5,000
Store Cards – R1,500