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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

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Historical perspective

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

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


Historical perspective

National Credit Act

  • To promote a fair and non-discriminatory marketplace for access to consumer credit

  • To promote responsible credit granting and use and for that purpose to prohibit reckless credit granting;

  • To provide for debt re-organisation in cases of over-indebtedness

    Gabriel Davel

    November 2009


Executive summary

Executive Summary


Executive summary 1 historical perspective

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.

Executive Summary - 1Historical perspective


Executive summary 2 process extensive research consultation awareness of problems

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.

Executive Summary - 2 Process: extensive research, consultation & awareness of problems


Historical perspective

Research into credit supply

MFRC investigations & research reports

“Cost, Volume & Allocation of Consumer Credit”, Dr Hawkins, FEASibility

Consumer views

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

Workshops

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.


Executive summary 3 philosophy analytical framework

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.

Executive Summary - 3Philosophy & analytical framework

“if a system produces unacceptable outcomes, cannot expect outcomes to change until we change the system”, Niccolo Machiavelli


Executive summary 4 incentives for adverse behaviour

Disclosure

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

Credit bureaus

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.

Executive Summary - 4Incentives for adverse behaviour


Historical perspective

Weak, misleading & manipulative disclosure + adverse incentive structures prevent credit market to function in an optimal manner

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


Results mfrc credit law research levels of debt stress the cost of doing nothing

Results, MFRC & Credit Law Research:-Levels of debt stress & the cost of doing nothing

  • Credit Law Review:- increasing debt stress, as result of (a) reckless credit extension, (b) little attention to affordability assessment, (c) 1000’s of lenders not using credit bureaus, (d) vehicle & other lenders focus on security, rather than affordability, (e) collection preferences, (f) easy access to courts for debt enforcement, even on loans granted recklessly.


Mfrc credit law research cost of credit impact on consumers cost of doing nothing

MFRC & Credit Law Research:-Cost of Credit - impact on consumers, cost of doing nothing:

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!


Question what are the causes for such significant market failure

Question: What are the causes for such significant market failure?


Executive summary 5 changes implemented through credit act

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”).

Executive Summary - 5Changes implemented through Credit Act


Historical perspective

Interest, fees

& credit life insurance

Reckless

lending rules

Marketing

& sales

practices

National

Credit

Act

Enforcement &

debt collection

Agreements

& quotes

Unlawful

agreements,

provisions

Debt

counselling

Regulate Credit Bureaus

Create National Credit

Register


The structure of a few of the key interventions

The structure of a few of the key interventions


Curb undesirable marketing and sales practices practices of credit intermediaries

Intention

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

How

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)

“… curb undesirable marketing and sales practices & practices of credit intermediaries”

S74 – S76, 89(1)b, 119(4)


Historical perspective

Intention

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

How

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 …”

  • S100 – S106


Interest fees disaggregated with structured limits depending on product type

Interest & fees disaggregated, with structured limits depending on product type

Credit facilities

Mortgages

Other secured credit

Unsecured

Short term

Development credit

Interest = RRx2.2+x%

Initiation = R150 + m x loan

< max limit

($125 / $625)

Service = single monthly

amount < $6


Historical perspective

“… focus to shift from price control to protection against over-indebtedness + penalties on predatory lending practices”

Intention

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

How

Reckless credit

  • Over-indented = “per available information, consumer will be unable to satisfy in a timely manner all the agreements to which the consumer is a party”

  • Reckless = (1) no assessment; (2) consumer did not understand obligations; (3) agreement made consumer over-indebted

  • Subject to consumer “fully & truthfully disclose”

    If reckless, impact on court

  • No court orders for debt recovery; Court may suspend or reduce obligations

    Debt counselling

  • Registered debt counsellors, with statutory debt restructuring process

  • Recommend debt cancellation or restructuring for review by court

    Prohibition of preferences most important


Historical perspective

Requirements of NCA

Credit bureaus registered

Statutory obligation & liability for data quality

Compliance audits

Consumer access to records, complaints process, data removal for credible complaints

Intention

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

“credit bureaus critical for credit assessment, to prevent credit bubbles, to curb debt stress. Not sufficiently regulated”


Effective enforcement critical to change market conduct of participants

Requirements of NCA

Courts powers substantially increased

to assess compliance in case of legal action

Intervene if reckless or over-indebted

Regulator

Registration; Monitor market conduct (& report to parliament); Compliance; Redress

Instruments: Notice of non-referral; ‘undertakings, resolutions & agreements’; compliance notices, Tribunal action

Tribunal

Status of “specialised court”, subject to appeal to high court; Significant fines & deregistration

Intention

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

“effective enforcement critical, to change market conduct of participants”

S13-16, S54/55, S129/130, S138


Executive summary 6 impact since implementation

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

NCR statistics

allowed more detailed assessment of impact of fin crisis; NCR focus on consumer credit market enable pro-active response

Executive Summary - 6Impact since implementation


Impact of the act

Impact of the Act

On credit granting practices

On credit marketing & disclosure

On debt enforcement

On the contractual relationship between credit providers & consumers


Consumer credit market in south africa

Consumer Credit Market in South Africa

17,8 million

Credit Active Consumers

Credit Providers

US$142 bn

consumer credit

3,971 credit providers 32,311 branches

1,252

Debt Counsellors


Credit bureau statistics debt stress defaults

Credit Bureau StatisticsDebt stress & defaults

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!


Monitoring the impact of the financial crisis

Job losses by LSM – severe impact

Monitoring the impact of the financial crisis


Impact of the act on cost of credit

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

Impact of the Act on cost of credit

Feasibility Consulting


I mpact of the act debt counselling debt enforcement

Impact of the Act Debt Counselling, debt enforcement

  • 1,036 debt counsellors registered, with independent payment distributors. Extensive monitoring + support mechanisms + investigations & enforcement.

  • 116,000+ applications cumulatively, growing at 9,000 pm. Monthly distributions to creditors now above R100 m

  • Despite challenges, debt counselling already playing a huge role in mediating between debt stressed consumers and credit providers. Resulting also in change in credit provider behaviour towards debt-stressed clients

  • Massive change in approach of courts, using requirements of Act to intervene in cases


Debt counselling case studies to illustrate profile of consumers

Debt Counselling Case studies to illustrate profile of consumers


Concluding observations

Concluding observations:-

  • Impact of NCA: curbed excesses, creating basis for lower but more sustainable credit growth – without courts acting as debt collectors, curbing social cost of reckless lending

  • Debt counselling – reconcile claims of different credit providers, creating sustainable repayment stream on non-performing consumer

    • While minimising social cost,

    • And, lets not forget the hard-selling that took place in the good times!

    • BUT, significant implementation challenges

  • Fall-out from debt stress still increasing, driven by loss of variable sources of income as much as loss of employment.

  • On-going external impact of financial crisis, with risk of 2nd fall post stimulus

  • In response to crisis, important to focus not just on protection of industry, but also on protection of households,

    • noting that crisis impacts differently on different consumer groups

    • loss of income & loss of employment each have an impact

    • the longer the downturn lasts, the more households with high debt burdens run out of options


Thank you

Thank You !

www.ncr.org.za


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