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“All progress is based upon a universal innate desire on the part of every organism to live beyond its income.” — Samuel Butler , English composer, novelist, author (1835- 1902).

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“All progress is based upon a universal innate desire on the part of every organism to live beyond its income.”

— Samuel Butler , English composer, novelist, author (1835- 1902).

“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”

— Jeremy Bentham, British reformer, 1787

chatham house conference

Chatham House Conference

Regulation and consumer finance

Gabriel Davel

July 2010

consumer credit market profile
Millions of small transactions, affecting millions of consumers & thousands of credit providers.

require explicit & specialised legislation

maximise certainty to both consumers & credit providers

ensure that there are no incentives for credit providers to engage in predatory or reckless activities

General contract law or common law not sufficient

given cost of litigation relative to transaction size

control of credit provider over contract & over sales process … & role of staff in providing advice to consumers

Consumer credit market profile …
how things go wrong
Predatory & reckless providers gain most from weak regulation, often by new entrants with short term profit objectives

misleading disclosure, “add-ons”, penalty fees, payment preferences, using courts as “debt collectors”

often involving agents & brokers & dubious contractual practices

causing a “Race to the Bottom”

Permissive regulation & predatory practices negative for market development

How things go wrong …
when things go wrong
When things go wrong …

Impact on credit providers

  • High risk + high level of uncertainty = high cost lending
  • Undermine long term growth strategies, lower margin products, investment in infrastructure,
  • Undermine asset based lending, long term lending & housing in particular … undermine creation of security for future business lending

Impact on households, debt stress, repossessions, degradation of whole areas & communities

Impact on consumption & level of economic activity(worse in mature markets)

typical requirements to change market conduct remove adverse incentives
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.

Preferences & anti-competitive conduct prohibited, monitored.

Interest rates & fees: Change basis of disclosure. Upper limits on interest & fees. Limit add-ons.

Penalty interest + prepayment penalties removed. Debt collection fees regulated. Curb incentives for ‘debt farming’.

Agents & brokers, standards + disclosure requirements

Credit bureaus, regulated to improve credit information flow

Typical requirements … to change market conduct & remove adverse incentives
experience in south africa since introduction of national credit act in 2006
Affordability assessments: reduced approvals, having to consider obligations on all agreements … cushioned losses, recovering

Disclosure, lending practices & credit bureau information

Enforcement & action against lending scams of various kind

Research = cost of credit reduced, disclosure rules & regulation of credit life insurance, fees

Financial crisis caused credit contraction, pressure on incomes, debt stress

… but market shielded from fall-out

… significant recovery since mid-2009

Gross Quarterly Credit Granted – 2007 to 2010

Cost - furniture Finance

Experience in South Africasince introduction of National Credit Act in 2006
concluding comments
Concluding comments
  • Regulated consumer credit market curbed excessive credit extension, creating basis for lower but more sustainable credit growth, curbing social cost of reckless lending
  • Impact of financial crisis continues, driven by reductions in income as much as loss of employment. Contraction in domestic credit plays significant role. Process will continue, extreme caution required
  • Protection of households important priority, not just on protection of industry,
    • low income groups most vulnerable
    • household solvency & buying power critical to economic health
francis bacon 1625
Francis Bacon (1625)…

“By the balance of the commodities and the discommodities of usury, two things are to be reconciled.

One, that the tooth of usury be grinded that it bite not too much;

The other, that there be left open a means to invite monied men to the merchants, for the continuing and quickening of trade.”

thank you
Thank You

consumer credit market in south africa
Consumer Credit Market in South Africa

18 million

Credit Active Consumers

Credit Providers

£99.5 bn

consumer credit

Registered Credit Providers = 4,120

Branches = 33.500


Debt Counsellors


Interest, fees

& credit life insurance


lending rules


& sales





Enforcement &

debt collection


& quotes






Regulate Credit Bureaus

Create National Credit


credit marketing practices

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)

Credit Marketing Practices

S74 – S76, 89(1)b, 119(4)

regulation of reckless credit predatory practices
Regulation of reckless credit & predatory practices


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


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 payment preferences

regulation of interest fees

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

Regulation of interest & fees
  • S100 – S106
  • Regulation 39 - 48
credit bureaus credit information
Requirements of NCA

Credit bureaus regulated

Broad access to positive credit information

Statutory obligation & liability for data quality & compliance audits

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

S70 – S73

Regulations 17 - 20


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 & credit information
effective enforcement over both bank non bank credit providers
Requirements of NCA

Court powers substantially increased

to block legal action if non-compliance

Intervene if reckless or over-indebted


Registration; compliance audits & investigations

Enforcement instruments

Reports to parliament


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

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


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 over both bank & non-bank credit providers