National Credit Regulations & National Credit Regulator: briefing

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
16 August 2006
NATIONAL CREDIT REGULATIONS & NATIONAL CREDIT REGULATOR: BRIEFING

Acting Chairperson: Mr S Rasmeni (ANC)

Documents handed out:
Presentation on the National Credit Regulations
Presentation on the National Credit Regulator
National Credit Regulations

National Credit Regulator website

SUMMARY
The Committee was briefed on the National Credit Regulations and progress made by the National Credit Regulator. The National Credit Regulator was established on the 1 June and a few of the sections of the Act became effective on that date. All provisions pertaining to the regulations of credit bureaux and the establishment of the National Consumer Tribunal would come into effect on 1 September 2006. The remainder of the Act would come into effect on 1 June 2007. The Minister was currently busy finalising issues around the appointment of the Board of the Regulator and the Tribunal. The Department had already started drafting regulations on the removal of certain information from credit records and the regulations would be published sometimes in September. The regulations would be promulgated sometime in November 2006.

Research had indicated that there was no best practice in interest regulation. Different countries followed very different approaches and some of the approaches did not make any sense. The World Bank's subsidiary that dealt with micro-finance was of the view that there should be no interest regulations. Most countries had interest regulations despite the World Bank's position. The issue of interest caps was very politically charged and extremely complex. Most people did not have access to formal sector credit and tended to borrow from micro lenders and unregistered moneylenders. SA should expect one or two bank failures should the interest cap be put at 15%. The biggest impact of the legislation would not come through the caps but through matters such as reckless lending and disclosure rules. Anybody who had made loans that they should not have done would be forced to write them off.

The Act would drastically affect the credit market. The current situation was untenable given the undesirable practices, damages to consumers and lack of relief in current outdated legislation. Effective implementation of the Act was critical and not negotiable. Co-operation was critical for effective implementation. There has been outstanding co-operation but the Regulator was preparing itself for at least a few major legal challenges.

Members raised a number of questions including:
- If the new interest limits would affect current loans;
- Whether the Regulator had capacity to take the process forward;
- Whether a person's monthly loan repayments would be limited to the interest, initiation fee and the service fee;
- Whether it would still be possible for credit providers to charge interest on the initiation fee;
- What was the nature of the challenges that the Regulator was expecting;
- Whether the Act and Regulations would contribute to the lessening of the number of debt judgements that were handed done by magistrates;
- Whether there was any requirement that a debt counsellor should have an insurance or security in place when collecting money from debtors.

MINUTES
Presentation on the National Credit Regulations
Mr Johan Erasmus (DTI, Legal drafter), Mr Peter Setou (Manager: Education and Communication - National Credit Regulator) and Mr Gabriel Davel (CEO: National Credit Regulator) attended the meeting. Mr Erasmus briefed the Committee on the implementation issues around the National Credit Regulations. Mr Davel presented on the regulations and the establishment of the Regulator. (See documents attached).

Mr Rasmeni said that during the last meeting on the regulations the Committee had requested certain things to be done. He wondered if the concerns that the Committee had raised in relation to the regulations had been incorporated.

Mr Erasmus replied that all concerns had been taken on board. The bulk of the concerns were around the determination of interest limits. The regulations had already been promulgated. The Department could not interact with the Committee on the regulations due to time constraints. The National Credit Act was promulgated on the 1^st of June 2006 and the regulations had to be promulgated prior to that date to enable the Regulator to function properly.

He said that the National Credit Act required debt counsellors, credit providers and bureaux to implement very intricate systems before it could be implemented in its entirety.  The National Credit Regulator was established on the 1^st of June and a few of the sections of the Act became effective on that date. All provisions pertaining to the regulation of credit bureaux and the establishment of the National Consumer Tribunal would come into effect on 1 September 2006. The remainder of the Act would come into effect on 1 June 2007. The Minister was currently busy finalising issues around the appointment of the Board of the Regulator and the Tribunal. An interim Board was appointed. Section 73 of the Act referred to regulations that would clean up the credit bureaux. The Committee had dealt with how to clean up the records and remove certain information from the records. The Department had already started drafting regulations on this issue and the regulations would be published sometimes in September. The regulations would be promulgated sometime in November 2006.

Mr Davel said that the Department had done a huge amount of research on interest limits across the world. The research indicated that there was no best practice in interest regulation. Different countries followed very different approaches and some of the approaches did not make any sense. The World Bank's subsidiary that dealt with micro-finance was of the view that there should be no interest regulations. Most countries had interest regulations despite the World Bank's positions. The only exceptions were the United Kingdom and a couple of South American countries. The South American countries were easier to understand because of the high inflation. Bolivia had an inflation of 200% and one could not have a usury cap given such inflation.

He said that the countries that the Department had looked at fell into two or three categories. There was the one size fits all approach (Australia, Brazil and Switzerland) and the structured cap. The cap was 48% in two of the States in Australia and the cap covered all forms of credit. The States had looked at the most expensive credit and put a cap that would accommodate such credit. The theory was that everything would fit under that cap. They knew very well that 48% would be far too much for mortgages and the assumption was that the market would regulate itself. Belgium and France had different caps for different products. They would segment their market and put high risk and low risk credits in different baskets. Different interest caps applied to high and low risk credits. This was the approach followed in the National Credit Act. The feeling was that the one size fits all approach would not work in SA given the market complexities. Certain transactions were excluded from interest regulations in the European Union (EU). All micro loans would be outside the cap if SA were to follow the EU approach. This would mean that all the people who required protection in the form of a cap would be excluded from the Act. The issue of interest caps was very politically charge and extremely complex.

He said that most people did not have access to formal sector credit and tended to borrow from micro lenders and unregistered moneylenders. There was least competition and high costs in that sector. There was a lot of people involved but very less credit. SA should expect one or two bank failures should the interest cap be put at 15%. Some banks had major lending to the low-income market and they could not sustain such lending at a 15% limit. The biggest impact of the legislation would not come through the caps but through things like the reckless lending and disclosure rules. Anybody who had done loans that they should not have done would be forced to write them off.

Discussion
Mr Rasmeni asked how sure was the National Credit Regulator that banks would begin to invest in the townships. Would the initiation fee not perpetuate the status quo?

Mr Oliphant (ANC) asked if the interest caps would affect current loans.

Mr Davel replied that the caps would become effective as from 1 June 2007. The current formulae would apply until that date. This meant that there would be no caps on small loans until 1 June 2007.

Dr M Sefularo said that it seemed that a person who had a R300 000 mortgage agreement would pay an initiation fee of R1000.

Prof. E Chang (IFP) used an example a mortgage agreement in relation to a house of R300 000. The interest would be 20% and the initiation fee would not exceed R5000. This would mean that a person who had borrowed R10 000 would pay an initiation fee of about R1000. Anyone who wanted to buy a R300 000 house would have to pay an initiation fee of 1, 7%.

Ms D Ramodibe (ANC) asked for more explanation on mortgage agreements.

Mr Davel replied that mortgage agreements would have an interest limit of 20%. The initiation fee would be R1 000 per credit agreement plus 10% of the amount of the agreement in excess of R10 000 but would never exceed R5 000. Using an example of a house priced at R300 000, one would deduct R10 000 and the balance would be R290 000. The next step would be to calculate 10% of the R290 000 and this would be R29 000. The R29 000 would be added to the R1000 initiation fee to come to a theoretical initiation fee of R30 000. The R5000 limit would apply in any case and this means that the initiation fee would be R5000 and not R30 000. One would use the amount derive from using the formula as an initiation fee should it be less than the limit. The limit would be used should the amount arrived at using the formula be more than R5000.

With regard to a small loan of R5000, the formula would be R150 per credit agreement plus 10% of the amount of the agreement in excess of R1000 but never to exceed R1000. The initiation fee would be the R150 plus 10% of R4000. The total initiation fee would be R550 and this was smaller than the limit.

Mr Erasmus added that the initiation fee was intended to allow the credit provider to recover the costs of incurred in lending the money. The costs would include costs of making photocopies and sending valuators to value the house. The initiation fee would not increase as the value of the property increased. It would be limited to a maximum of R5000. The initiation fee was also capped in other categories of products to ensure that exorbitant amount were not charged.

The Chairperson said that it seemed that there would be need for a further process to allow the Committee to gain a better understanding of the formulae and the various fees.

Ms F Mohamed (ANC) said that it was unacceptable that the Department said that it could not come to Committee before promulgating the regulations. It was good to have a regulatory framework but often there was a lack of capacity. She asked if the Regulator had capacity to taking the process forward. She also asked for an explanation of the Belgium APR cap on differentiated products. How different were the new interest limits from the old regime?

Mr Davel replied that at the moment a loan could be under the Usury Act or could be completely exempted from the Act. There was no interest limit if the loan was under R10 000 and if the lender was a registered micro lender. The regulations would cover such loans. The Act would apply to both registered and unregistered lenders. 

He said that the Belgium caps were similar to those in the Act but not quite similarly structured. They had credit facilities and other agreements. They had amounts limitations in each category. They had tried to link their products to the European market rates but they did not succeed in doing so. The Act had stripped out the fees and this was not the case in Belgium.

On the issue of capacity, he said that the Act was being implemented in stages and this would help in relation to capacity challenges. One advantage was that some of the Regulator's staff had been dealing with credit and consumer issues for years. Mr Setou replied that the MFRC had five to six years of experience in regulating the micro finance sector. The Regulator had competent staff members and was also in the process of recruiting more people. The phase-in approach would allow for an opportunity to ensure that the Regulator would be ready on 1 June 2006.

Ms D Ramodibe (ANC) asked for more explanation on mortgage agreements. Would a person's monthly payments be limited to the interest, initiation fee and the service fee?

Mr Erasmus replied that a person would pay the interest and the monthly service fee of R50. The initiation fee was once off and the consumer could pay it up front. The consumer could also add the initiation fee to the borrowed amount and pay it off over the life of the loan agreement.

Ms L Mabe (ANC) said that lenders often charged interest on the initiation fee if it was not paid up front. She asked if this would still be possible.

Mr Erasmus replied that it would still be possible should a consumer prefer not to pay the initiation fee up front.

Mr D Dlali (ANC) said that banks did not understand how they calculated their costs. He wondered how ordinary people would understand the formula of calculating the costs. There were ways on manoeuvring and cheating that could ensure that the objectives of the Act were not reached.

Mr Davel replied that there was a multitude of fees for various things. The regulations would only allow banks to charge one fee: the service fee. The service fee was limited to R50 and banks should begin to compete under this cap. The regulations provided for a form that all banks should use in the same manner. The form would help in ensuring that banks complied with the Act. The Regulator had a number of mechanisms to ensure compliance. Banks would be expected to submit certain returns to the Regulator. There was also an audit compliance certificate and this meant that auditors should check compliance with the Act when auditing banks. The Regulator also had some inspection capacity that would allow it to go into institutions and check if there was compliance with the law.

Ms Mohamed asked for an explanation on the formulae for different transactions.

Mr Davel replied that at the moment a loan could be under the Usury Act or could be completely exempted from the Act. There was no interest limit if the loan was under R10 000 and if the lender was a registered micro lender. The regulations would cover such loans. The Act would apply both registered and unregistered lenders.

Mr L Labuschagne (DA) said that a person who would borrow R800 and pay back in six months would end up paying R1 460. The Department was saying that this was still better than the current usury rates. Looking at the mortgage bond and the initiation feel, interest would run on the initiation fee should it not be paid up front.

Ms Mabe asked that most people who lived in the township had no access to credit. She asked how the Act and regulations would help them.

Presentation of the National Credit Regulator
Mr Davel gave a 77 days report on the Regulator. (See document attached). He said that the Act would drastically affect the credit market. The current situation was untenable given the undesirable practices, damages to consumers and lack of relief in current outdated legislation. Effective implementation of the Act was critical and not negotiable. Co-operation was critical for effective implementation. There has been outstanding co-operation but the Regulator was preparing itself for at least a few major legal challenges. Some parties were trying very hard to find loopholes in the Act. Every credit provider would be required to have a credit provider certificate and a sticker indicating that they were registered credit providers. There were no significant problems in the Act and there was no reason why it should not be implemented effectively.

Discussion
Ms Ramodibe said that banks normally did not give thorough explanations to consumers. The initiation fee was just thrown into the borrowed amount and interest charged on it. People were never informed that they could pay it up front and that it was a once off payment. She asked where the Regulator conducted its awareness campaigns. Members of the Committee or Parliament in general had the right to be informed of the workshops so that they could assist where possible. The Committee was better placed to reach out to its constituencies.

Mr Dlali said that Mr Davel had referred to major legal challenges that the Regulator would face. Co-operation had been outstanding. It was important to understand that people co-operated for different reasons. Any legislation could have one or two loopholes. He asked how far the Regulator had gone in ensuring that all possible loopholes were closed. He also asked if the Regulator had ensured that it research activities were not concentrated in metropolitan areas. It was equally important to cover areas outside the borders of metropolitan areas and areas that had no banks.

He asked the presenter to indicate areas in which workshops had been conducted. Were the workshops held across all nine provinces? Information materials should be developed in all official languages. There should be a strategy to deal with illiterate people in order to ensure that they understood everything. He noted that the reckless lending provisions would reduce loan volumes. He asked how the Regulator would ensure that people who wanted to have access to credit would still have access and not be refused credit due to the caps. It had been said that small loans were more costly than large loans. He hoped that this would be addressed because one could not assume that everybody would apply for large loans following the implementation of the Act. The monitoring of the implementation was very critical. He asked the presenter to give a clear illustration of how there would be effective monitoring of the implementation of the Act.

Mr Setou replied that the Regulator had developed an elaborate strategy on awareness and education. It had created a clear distinction between awareness and educational activities. Awareness creation would be done through radio and television coverage and adverts in newspapers. With regard to education, the Regulator had invested in running capacity building workshops for consumer intermediaries that included non-governmental organisations. There were over 1000 community based advice centres and the Regulator was targeting and capacitating them so that they could deal with the communities. Community based centres served as first ports of call for communities and the communities had trust in them. The Regulator was also targeting human resource practitioners, shop stewards and educators within the trade union environment.

He said that the educational programmes were in line with the different phases of the implementation of the Act. Community based workshops were held in conjunction with the Legal Resources Centre (LRC). The LRC supported about 45 legal advice centres. One could have up to 45 advice centres from all over the country participating in a workshop under the auspices of the LRC. The Regulator had strong working relationships with provincial consumer directorates. Consumer protection was a concurrent responsibility for national and provincial governments. There were workshops with all nine provinces and there had been a few workshops with some constituency offices. The Regulator would welcome opportunity to collaborate with any constituency office.

Mr Setau said that all materials would be in all nine official languages. The staff complement of the Regulator could collectively communicate in all languages and this had made it easier to communicate with the illiterate. There was a plan to work with traditional authorities. The Regulator had strong relations with provincial consumer directorates and the directorates already had relationships with traditional authorities. It was a question of sharing resources and maximising the impact.

Mr Davel said that access to credit went hand in hand with reckless lending. People would start complaining that they had been refused credit as from 1 June 2007 and in most cases the reason would be the over indebtedness of the applicant. There would be a number of unhappy consumers. The challenge was to pay debts and get out of indebtedness before accumulating more debts. Rural areas were characterised by lack of access to credit as opposed to over indebtedness. The Act would not force anyone to land money. However, it provided that people should be treated in the same manner. The anti-discrimination clause in the Act was very specific. There was a provision that provided that no person should be refused credit only on the basis they did not have a credit record. This was a general practice at the moment.

Prof. Chang asked if there were there were minimum and maximum interest limits for each category of product.

Mr Erasmus replied that there was a general maximum for the entire Act. Any agreement under R1 million would be under Act.

Mr Davel replied that the R1 million limit applied to small businesses and there was no limit in relation to private individuals.

Ms Mabe asked how people who wanted to buy houses in villages would be assisted. People did not have access to credit to buy houses in villages. Townships were classified as high risk by financial institutions. Villages were not even considered for finance.

Ms Mohamed said that the Committee should explore avenues to be used to reach the poorest of the poor. There was a need of a special shit of institutions that would service this constituency. The regulator had a role to play because it had direct contact with service providers. There was a problem of over indebtedness and this applied all over the world. She asked if the Regulator had applied its mind to the issue of encouraging people to start saving. The management team of the Regulator had one woman. She wondered if there was no space to explore a 50-50 representation in the management team. There were many women who were experts in this field.

Mr Davel replied that section 13(a) of the National Credit Act provided that "the national credit regulator is responsible to -
(a) promote and support the development, where the need exists, of a fair, transparent, competitive, sustainable, responsible, effective and accessible credit market and industry to serve the needs of -
(i) historically disadvantaged persons;
(ii) low income persons and communities; and
(iii) remote, isolated or low density populations and communities,
in a manner consistent with the purposes of this Act".

He envisaged that the Regulator would be called to account before the Committee on a yearly basis. The Regulator would report on what it was doing in this area. The biggest areas of over indebtedness were in metropolitan areas. He noted the question on composition of management. Women already constituted 60% of the general staff. The balance would be corrected as more people were appointed.

Ms B Ntuli (ANC) supported the idea of a credit provider certificate and the sticker. The problem was that people were always manoeuvring with everything. She asked what would differentiate the certificate or sticker from fakes? People could simply draw something that resembled the original sticker and stick it on the window. The South African money had something in it that differentiated it from fakes. The Regulator's office was in Sandton and the question was how it would spread all over the country and monitor even the rural areas.

Mr Davel replied that the certificate had a greyish security feature that made it fairly difficult to copy through a photocopier. There was a lot less in the window sticker. The Regulator could also provide a list of registered people. It would be the Regulator’s task to check if a person registered should a consumer lay a complaint.

Dr P Rabie (DA) noted that the Regulator was preparing for a few legal challenges. He asked what was the nature of the challenges. It was also said that there were about 80 000 debt judgements a month and this amounted to close to one million per year. Would the Act lessen this number? Would it protect the lenders or consumers in lessening the numbers?

Mr Davel replied that there were no legal challenges yet but the Regulator had a secret list of areas wherein people might want to litigate. He had no doubt that by the time legal challenges come the Regulator would be more than ready to deal with them. The Act was well written and people were aware that there was consistency in the way it was drafted. There would be problem in cases where people disguised credit agreements as something else. For example, furniture traders could say that they did not charge interest. They would say that the furniture was R5000. On a closer look one might find that the actual price was R3 000 and that interest was capitalised up front. The Act covered such practises and it was up to the Regulator to find people involved in such activities and deal with them accordingly.

He said that the 80 000 judgements were debt judgements and not only credit related judgements. It included people owing municipal fees, Telkom accounts or cellphone accounts. The number related to credit was actually smaller. Section 130 of the Act provided that a magistrate should assess if there was reckless lending before giving judgement. The magistrate would not be able to give a judgement if the credit was given recklessly but be compelled to cancel the credit agreement. The Magistrate could also refer the matter to a debt counsellor who could recommend the restructuring of the debt. The assessment was that this section would reduce the volume of debt related cases that went to the magistrates courts.

Mr J Maake (ANC) asked for more explanations on the Belgian "lie factor" and "political problems". The Committee had debated at length on developmental credit and the interest limit was still at 35%. The Committee had said that the rate was too high if one was trying to push the development of small business. It was too high for people who did not even have collateral.

Mr Davel said that the Department had looked at the fees being charged by NGOs in coming up with developmental credit limits. He gave an example of an NGO based in Tzaneen. The organisation gave loans in rural areas around Tzaneen. One of the areas was 80 km away from Tzaneen. Loan officers travelled to remote areas where they would have meeting with communities before giving loans to people. The initiation fee and interest limit were a little bit higher for developmental credit so as to cover the cost of originating the loan agreements. The alternative was that put the limit at the same level as other products but the organisation would argued that it would not be able to recover the cost of initiating the agreement. The borrower would then be expected to go to the lender and incur the cost of going to the lender.

He said that Belgium had conducted research on what were the actual credit profile and interest rates so that they could change their caps. One government official had said that the industry had begun to manipulate the numbers once they became aware that the government was reviewing the caps. The political factor had to do with the fact that in the Belgian Parliament there was one party that was close to business and another that was close to consumers. The parties were pulling in different directions. There was a change and the party that was close to the industry took over government and blocked the revision of interest regulation.
 
Prof. Chang said that the job of the Regulator was not easy. It was important for the Committee to understand the calculations so that could be in better place to explain to the people. She asked if a consumer would be expected to pay an initiation fee for each and every renewal of a credit agreement. A small loan had been defined as one of six months or less. The question was whether a person who wanted to pay a small loan over a year would have to pay the initiation fee twice.

Mr Davel replied that a credit provider would not be able to get an initiation fee on a replacement agreement. One could charge an initiation fee on a new loan.

Mr Labuschagne asked if there was any requirement that a debt counsellor should have an insurance or security in place when collecting money from debtors. It was mentioned that one could not force anybody to lend money but credit providers would be forced to disclose why they had decided not to give credit. He asked if one was not dealing with catch 22 situation.

Mr Davel replied that there were conditions to the registration of debt counsellors. The issues of securities and insurance policies were built into the conditions. The Regulator was in the process of appointing one single payment distribution agency. The debt counsellor would do debt restructuring and propose the restructuring to a magistrate. The payment distribution agency would collect the debts and distribute to the credit providers.

He said that consumers would be entitled to get reasons as to why they had been refused credit. This was one mechanism to counter discrimination. The Regulator would also conduct direct inspection of credit providers to check if there was any discrimination. This could include getting a sample of both refused and approved credit application, sorting them by race and checking the credit scores of refused applications against those of applicants who had been given credit. There would be clear discrimination should it be established that black clients had the propensity of being rejected despite that their scores compared favourably to those of other races. A legal case of discrimination would then follow. Clients should be treated in the same manner. The Regulator would not tell credit providers who should or should not be given credit.

Mr Rasmeni asked if the Regulator would consider having a workshop with the Committee to enable it to gain a deeper understanding of the regulations. He wondered what would make credit providers to become active in rural areas. He asked for an outline of the requirements for registration. Banks had said that the law would make it difficult for previously disadvantaged people to get access to credit. He asked for a comment on this.

Mr Davel replied that the Committee could call the Regulator to host the workshop at anytime. It might be important to invite credit bureaux to the workshop.

The meeting was adjourned.