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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
Regulation and consumer finance
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 consumersConsumer credit market profile …
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 developmentHow things go wrong …
Impact on credit providers
Impact on households, debt stress, repossessions, degradation of whole areas & communities
Impact on consumption & level of economic activity(worse in mature markets)
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 flowTypical requirements … to change market conduct & remove adverse incentives
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 FinanceExperience in South Africasince introduction of National Credit Act in 2006
“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.”
Credit Active Consumers
Registered Credit Providers = 4,120
Branches = 33.500
& credit life insurance
Regulate Credit Bureaus
Create National Credit
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)
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 payment preferences
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 balanceRegulation of interest & fees
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 informationCredit bureaus & credit information
Court powers substantially increased
to block legal action if non-compliance
Intervene if reckless or over-indebted
Registration; compliance audits & investigations
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 impactEffective enforcement over both bank & non-bank credit providers