South Africa’s Consumer Credit LegislationProcess, policy, legislation

Gabriel DavelCEO, Micro Finance Regulatory Council, Policy Advisor in the National Credit Law ReformSouth Africa

Context Legal environment for consumer credit

1968 “Usury Act” & “Credit Agreements Act, outdated & prohibitive interest limit

From 1992 an approach of “exempting” small loans - < US$ 1,600 - from Usury Act

Until then, black South Africans typically only had access to finance for consumer goods, and 1994 elections brought huge aspirations

… & no effective personal bankruptcy procedure Simultaneously a lack of access to banking services for a large

section of the population, with increasing over-indebtedness for others

In 2002 MFRC initiated credit law reform process In 2002 MFRC initiated a legislative reform process

March 2002: DTI appointed Technical Committee To assess credit market weaknesses & make recommendations

Timeline: Credit Law Reform

March 2002 Mandate from DTI to establish ‘Technical Committee’ for Credit Law Review

Jun’02 – May’03 Regular committee meetings Research projects through external consultants; Focus group discussions, industry meetings … & local government … consumer reps Draft Report written, Workshop govt officials, regulators

August 2003 Report to Minister

September 2003 parliamentary committee

Draft, discussed stakeholders & cabinet approval

Publication & national presentations multi & bi-party consultations 7 revised drafts

W/s parliament committee Parliament

Enacted ?

April - Jul 2004 Aug – Sept 2004

October 2004

January 2005 June 2005

+business plans

+budgets

+feasibility studies

+regulations

Credit Law ReformResearch Reports & Expert Opinion

Research

Cost, Volume & Allocation of Consumer Credit

Consumer Perspectives on Consumer Credit Products Focus group discussions

Industry & Stakeholder Views Workshops & interviews

Comparison of SA & International Legislation

Expert opinion

Regulation of Payday Lending in US,

Interest Rate Regulation Assessment of current SA

Legislation

Workshops

Reserve Bank, Treasury et al with local & international ‘experts’ to confirm statistics & discuss

conclusions with international experts in

London … policy & Bill

Research Reports & Expert Opinion Primary findings - 1

Consumers:- feel disempowered, see certain products as dangerous

but don’t believe they really have much choice Would like more disclosure, better treatment, but consistently indicate that the urgency of obtaining

credit/excitement of making a purchase ‘overrides reason’ when entering into contract

Industry & experts:- agree that current laws weak, outdated & inconsistent in

treatment of different products; and that lack of consistent enforcement a particular problem

Research Reports & Expert Opinion Primary findings - 2

Compared to leading dispensations SA at least 20 years behind, but current challenges very similar: over-

indebtedness, credit bureaux, marginal/high cost cash lenders, credit life insurance, disclosure/consumer awareness

Empirical research market into “super-included” and “super excluded” components extremely high cost for certain products huge differences between disclosed & actual cost of credit little real competition (price), with current Usury Cap distorting market, misleading consumers & providing no

real protection

Legislative weaknesses & weak enforcement a major contributor to current problems, aggravated by problems in contract enforcement through courts

Research Reports & Expert Opinion “Cost, Volumes & allocation of consumer credit in SA”

Credit landscape by Volumes

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0.0

0.2

0.4

0.6

0.8

1.0

1.2

-50 0 50 100 150 200Book Size

Com

petit

vene

ss: D

isclos

ure,

Mar

ket

Stru

ctur

e, S

ubst

itute

s

Mortgages-Large

Overdrafts & other loans

Installment sales

Leases

Mortgages - small

Credit & Store Cards

Non-bank Microloans

Pension-backed loans

Unregistered microloans

How does our market function ?Mortgage – independent acquisition of asset & finance

C/card, Vehicle finance – linked to mortgage

TV, HiFi - integrated asset & finance acquisition

Unsecured loans – worst case

Mortgage market many substitutes=cheapLow income no substitutes, inflated prices Prices inflated through credit life & charges

Effective cost of different products

0%

50%

100%

150%

200%

MortgagesOverdrafts Vehicles C/Cards &

accounts

Installment

sales

Term micro-

loans

exempt

Cap

Inflated prices consumer not able to differentiate between cheap & expensive providers, no consumer pressure for price reduction

0%

20%

40%

60%

80%

100%

Income Category

Dormant township property market, consumption debt dominant in low income communities

Retail

Family

housing

$10bn+ of housing without “market value” … no asset accumulation,

locked into high cost consumption debt … & “can’t afford” housing loans

Furniture

Exploitative & possibly racist credit providers making super-profits at the cost of the poor ?

Or economic & legal causes for market failure ? Usury Act & Exemption Notice “segments market”, prevents integration, cap makes main

stream products unprofitable in low income market; Exemption conditions locks micro-lending into small, short term, high cost products

Legislation fragmented, inconsistent … undermines security-based lending … enforcement inefficient, costly

Weak disclosure, too late … no consumer pressure for lower prices

Predatory & reckless behaviour of some raises risk for all ... many incentives for reckless behaviour Payroll deductions; Debit order preferences; Being able to get a court order, even if the

loan was extended recklessly

Very many factors that undermine competition (preferences, access to NPS …)

Regulatory uncertainty played a big role (Persal, danger of exemption notice being withdrawn … others)

Credit providers not making super profits, & avoiding certain market segments

High rejection rates, high origination cost, high defaults

Credit bureaux information incomplete, unreliable

Enforcement in courts inefficient, time consuming, costly

Credit risk high, uncertain (predators, fraud, court action, preferences)

High level of uncertainty: unpredictable government intervention, legislation (& ‘exemptions’) uncertain, treatment by courts uncertain

Profitability uncertain, volatile

Recommendation from technical committee

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,

forces simple, comparable disclosure,

that curtails over-indebtedness,

& assistance for consumers that are vulnerable or treated unfairly

New Consumer Credit Legislation for SA

Outline of the main features of the Bill

Consumer Credit BillScope & institutions

All loans & credit agreements, differentiating in prescriptiveness, in areas such as pre-agreement disclosure binding quotes, early settlement etc.

Small: highly prescriptive Intermediate: more flexibility Large: flexible, focus on disclosure

Registration of credit providers & of credit bureaux & creation of a regulated network of debt counsellors

Enforced through a statutory “Consumer Credit Regulator”, and “Tribunal” for action against institutions

Consumer Credit BillContracts, disclosure, sales & marketing Unlawful agreements & Unlawful provisions

No “unconcionable contract clauses”, but prescriptions on compulsory and prohibited clauses

& ability for courts to restructure contracts

Pre-agreement disclosure & quotes Small agreements: prescribed pre-agreement disclosure and quotation

binding for 7 days; flexibility in ‘intermediate’ & ‘large’ agreements

Marketing Prohibition of ‘negative option marketing’, with opt-in for increases in

facility limits & within strict limitations Prescribed advertising information

Limitation on marketing & entering into agreements at home or work

Consumer Credit BillMeasures to combat reckless lending & over-indebtedness

Affordability assessments reasonable steps to determine consumer’s existing

financial means, prospects and obligations … & assess ability to meet obligations under agreement

If reckless Magistrates may not issuing court orders for debt recovery Debt counselor may recommend debt cancellation or

restructuring Agreement may be suspended or obligation reduced by

Court or Tribunal Provider may be prosecuted by Regulator But: these protections only available when consumers

disclosed accurately

Create statutory “indebtedness register” Only debts & repayments, not a credit bureaux ! … & de-linked from affordability assessment requirement

Consumer Credit BillRegulation of Credit bureaux

To be registered & regulated No limitation on current negative & positive data sharing Except regulation of data collection, retention & supply And free access for consumers to records, & procedure for

error correction

And create a public “Credit Register” Containing only indebtedness information Envisage that this will interface with private bureaux,

integrating indebtedness data and ensuring consistency ... basis for effective control against over-indebtedness

Consumer Credit BillRegulation of interest & fees

Income on loans limited to Interest, Application Fee & Service fee Minister to impose limits, whole market or by sub-sector But, not to distort market or reduce access Without limiting delivery, collection charges & bank charges that

are unrelated to credit provision

Codify ‘in duplum rule’ Arrears interest limited to loan principal

Credit life insurance, If ‘proposed’ by credit provider:- must be ‘reasonable’ & conform to prescribed standards charged monthly prohibit capitalisation of ‘single premium’ insurance regulator to monitor premiums & claims

Consumer Credit BillMeasures to increase competition

Prohibit preferential processing on bank accounts

Consumer choice through Standardised, comparable disclosure of cost Obligation to provide binding quotes

Regulator Regular survey of cost of credit products monitoring competition & referring anti-competitive practices to

Competition Commission

Other No early settlement penalties on small transactions Limit “exclusive” payroll deduction arrangements & others …

Conclusion

We are trying to Integrate low and high income credit supply remove reckless operators and curb aggressive lender behaviour improve disclosure, competition, “contestability” of credit market in order to improve supply & reduce costs; While creating specific protection for distressed consumers

Providers argue that the Bill will reduce access to finance & increase cost of finance …

We believe that a better regulated market will improve allocation, change profile of products made available … and reduce costs for performing clients

Who is right, who wrong … any bets ?

thank you !thank you !