Section 2: Credit Law Review

Section 2:Credit Law Review Technical Committee appointed by Dr Alistair Ruiters September 2003

Section 2Specific proposals for the regulation of Consumer Credit Presented by Kgosi Pule, Member of the Technical Committee

Scope Protection & Redress Disclosure Credit Life Insurance, fees & charges Sales, Marketing & Intermediaries Payroll Deductions & collection prefs Consumer Education Enforcement Over-indebtedness Interest rate control Credit Bureaux Specific Proposals

1 – Scope of Legislation • One “Consumer Credit Act”, replacing Usury Act, Credit Agreements Act & Exemption Notice • All transactions treated equally, irrespective of form • Include natural persons < R500,000, exclude legal entities

2 – Protection & redress • Prohibit unfair or abusive conduct & contracting terms, • Prescribe minimum, standard contracting terms • Prevent exclusion of common law protections • Create statutory mechanisms for complaints resolution & redress, • … including provision for financial compensation & debt rescheduling • Create enforcement mechanisms within national consumer credit regulator & provincial government

3 – Disclosure (a) • Simple, standardised disclosure, comparable between credit providers, • … both content and format of disclosure being regulated … prescribed forms for different contract types • prevent inflation of cost through “add-on” charges, e.g. credit life insurance, club fees etc

3 – Disclosure (b) • Focus not (only) on contractual disclosure, but to apply to any media that refer to the availability of consumer credit, (adverts, product brochures, shop floor notices …) • Where disclosure req’ments not met, legislation to provide for (a) financial relief to consumers & (b) penalties against credit providers

4 – Credit life insurance and other fees & charges • Interest rate to be shown inclusive of credit life insurance & similar charges • Special disclosure rules for compulsory credit related services & bank charges • Power to Minister to make further regulations, prohibitions where required

5 – Sales & marketing techniques and conduct of intermediaries • Prohibit solicitation at home or job, except after consumer’sinvitation • Prohibit deceptive or hazardous credit terms, e.g. residual balances on vehicle finance, incremental repayment terms, “zero interest” marketing • Principals held responsible for intermediaries (training, liability etc) • Ministerial power to prohibit practices/terms, or issue additional regulations

Scope Protection & Redress Disclosure Credit Life Insurance, fees & charges Sales, Marketing & Intermediaries Payroll Deductions & collection preferences Consumer Education Enforcement Over-indebtedness Interest rate control Credit Bureaux Specific Proposals

6 – Payroll deductions & collection preferences (a) Retain potential benefit, limit negative consequences: • Ensure at least minimum level of competition, consumer choice, • Prescribe higher disclosure standards • Prescribe max deduction level & compulsory affordability assessment • Allow Minister to issue additional (specific) regulations if consumer choice, protection or competition undermined

6 – Payroll deductions & collection preferences (b) Minister, in consultation with National Treasury & SA Reserve Bank, should introduce regulations that will ensure neutrality of National Payments System in respect of (a) payments processing &, (b) treatment of different credit providers, to remove the current discrepancy with international standards

7 – Consumer Education • Incorporated consumer education in mandates of consumer credit regulator & provincial consumer agencies • Agencies should report on the achievement of targets • Create incentives for consumer education by NGOs, CBOs & credit providers • Provide joint government / private sector funding to make consumer education sustainable

8 – Enforcement & “Consumer Credit Regulator” (a) • Establish Consumer Credit Regulator to regulate all form of consumer credit, including bank credit • Mandate: (a) protect consumers; (b) create regulatory environment that would facilitate increased access to finance &; (c) increase competition between credit providers. • Statutory body with board including consumers & credit providers • Decisions subject to review by court

8 – Enforcement & “Consumer Credit Regulator” (b) • Credit providers should be registered & provide annual compliance certificates from auditors • Regulator to perform inspections, (a) issue fines, (b) instructions for consumer compensation, (c) withdraw certificates; (d) prohibit rogue entities & individuals from market • Regulator to create & co-ordinate education, complaints resolution & establish a debt counseling framework • Create “Office of Access to Finance” in regulator to monitor credit market in general & access to finance in particular

9 – Over-indebtedness (a) • Introduce legislative requirement on all credit providers to assess consumers’ ability to meet their debt service obligations, prior to advancing credit; • Monitor through inspections & compliance audits, subject to fines & deregistration if not compliant; • Revise Magistrate Court Act to make access to court orders subject to creditor showing proof of affordability assessment;

9 – Over-indebtedness (b) • Enable comprehensive affordability assessment through formal regulation of credit bureaux & broader information sharing on all types of debt; • National network of debt counseling, with provisions for debt rescheduling & debt reduction • Limitations on ‘solicitation’, hazardous terms (discussed before) • Investigate feasibility of penalties on consumers that provide false information or act fraudulently

10 – Interest Rate Control (a) • Already discussed: Improved, standardised disclosure, curbs on marketing, affordability assessments & enforcement; • THUS: Discontinue general interest rate control as per the current Usury Act & Credit Agreements Act • BUT: Minister to retain power to introduce limits on rates, fees or charges for specific products or providers if there are limited competition or price manipulation

10 – Interest Rate Control (b) • An alternative approach considered by the committee, was the introduction of a ‘structured cap’, • consisting of different caps for interest, origination fee and monthly loan administration fees, set at different levels for different loan sizes, in order to be more reflective of the different cost of originating different types and sizes of credit • However, this would have to be set at levels high enough not to amount to government prescribed credit prices (as in current regulations) • It introduces many complexities, e.g. the danger that these prices be accepted as ‘government prescribed prices’ and thus further undermine competition

10 – Interest Rate Control (c) Irrespective of the above, to • Legislate the “In Duplum Rule”, i.e. place a statutory limit on interest when accounts are in arrears • Regulator to perform an annual review of the cost of all credit products & publish results

11 – Regulation of Credit Bureaux & Credit Information Exchange (a) All credit bureaux should be registered & regulated in terms of (a) the full range of their operations, (b) the activities of credit providers in relation to information provided to the bureaux, & (c) use of information received from the bureaux

11 – Regulation of Credit Bureaux & Credit Information Exchange (b) • Drastically curtail all other exchange of consumer information (e.g. client lists for marketing) • Compulsory consumer consent • Free access for consumers to their records • Introduce standards for data validation & correction • Provide ministerial power to force information sharing by creditor providers in order to enable comprehensive affordability assessment

Summary Key features of the legislative & regulatory proposals being proposed …

Move away from a system of ineffectual price control, that results in misleading disclosure, that distorts the market and that segregates it into the “super included” and “super excluded” To a system that integrates the market & are effectively enforced, that forces simple, comparable disclosure, that curtails over-indebtedness, and that assists consumers that are vulnerable or treated unfairly Summary

Discussion of this second section of the presentation

Section 2: Credit Law Review