UN Guidelines for Consumer Protection

1. UN Guidelines for Consumer Protection “… imbalances in economic terms, educational levels, and bargaining power … “… market conditions which provide consumers with greater choice at lower prices. “… adequate information to make informed choices … individual wishes and needs “… protected from contractual abuses as one-sided standard contracts, exclusion of essential rights in contracts, and unconscionable conditions of credit by sellers.

2. National Credit Regulator Credit Law Conference Gabriel Davel September 2009

3. A luta continua … • “Credit Law Review” • Committee • Report • Investigation • - Cost of Credit • Reckless lending • International comparison of bank cost • Consumer perceptions • Papers on interest regulation • Parliament • approved • Extensive debate & modification • External workshops & consultations • 1 June 2007, Act effective • Awareness & discussion • 100’s of meetings & workshops • Magistrates College training • D/Counsellor training • C/Provider registration • Trench warfare • To undermine implementation • E.g. • ‘set off’ • ‘In duplum’ • Debt counselling • A Luta Continua • Declaratory order • - Audits • Investigations • Compliance Notices • “letters of undertaking” • Tribunal • Amendments

4. Why did SA introduce NCA, and everybody else went into the opposite direction? • Ongoing research: The MFRC statistics on the extent impact of reckless lending, & level of debt stress which it causes. MFRC’s continuing research, over a period of around 5 years, on the micro-economic dynamics of consumer debt, cost of debt & credit market practices … and ongoing effort to improve our understanding of the reasons for the market to produce the negative outcomes which we could observe from our empirical research • IRIS Report (2002); Deutsche Bank report in 2001; Competition in Banking report • The Policy Board’s reports on SME Finance & on Competition in Banking • “Credit Law Review” (mandated by Dr Ruiters from the DTI) • Input of leading international experts in areas of banking & credit legislation As in many countries, the SA credit market dysfunctional, with big sections of population being negatively affected by abusive credit provider practices

5. The Credit Law Review built on the work that had already been done in the “Competition in Banking” report

6. MFRC & Credit Law Research:-The cost of doing nothing • Slides from Credit Law Review:-

7. Domestic research – input into formulation of NCA

8. International research – considered in formulation of NCA • Aggressive industry lobbying prevent reform in many countries

9. The National Credit Act Interest & fees Reckless lending rules Marketing & sales practices National Credit Act Enforcement & debt collection Agreements & quotes Unlawful agreements, provisions Debt counselling Regulate Credit Bureaus Create National Credit Register

10. Impact of the Act On credit granting practices On credit marketing & disclosure On debt enforcement On the contractual relationship between credit providers & consumers

11. Mortgage & vehicle finance Strong shift in mortgage assessment from approval based upon % of income, to considering all obligations, with similar shift in motor vehicles Data sharing through credit bureaus Note the implications of the fact that 50%+ of mortgages were not reported to credit bureaus (e.g. joint mortgages), which were thus generally not considered in credit assessment. A number of significant credit providers had similarly not shared information through bureaus. Pre-agreement quote Disclosure in prescribed format in order to enable comparison of cost. Objective is to force transparency on cost & enable comparison of cost between providers Impact of magistrates’ scrutiny of applications for judgment In approving credit, provider have to consider that if default occurs, courts may assess documentation for compliance with NCA & potential reckless credit Impact of the Act on credit granting practices

12. Restructuring in the foundation of legal relationship Remember, contract developed by credit provider, to protects its rights Also note: impact of solicitation, deceptive marketing, aggressive call centre origination = level of effort of credit provider to get consumer to accept credit offering, to prevent caution or rational analysis by consumer NCA fundamentally altered the relationship In legal action, unequal power modified, abusive practices curbed. Ensure that basic rights protected, that abusive or misleading practices not included in contracts & enforced by courts Curb “debt farming” Curb “debt farming” = the extent to which people made profit from slowly milking a debt stressed consumer over long term In duplum = limit on aggregate interest & fees after point of arrears; No penalty interest; Set-off. Interpretation of S90(2)(n) & S103(5) Intention of Act absolutely clear, yet bankers & their lawyers pursuing every argument to prolong ‘debt farming’. Impact of the Acton debt enforcement

13. Impact of the Act on institutional structure • Debt counsellors, a new profession with legal obligations and increasing capacity • Creation of specialised payment distribution agencies (PDA) • Creation of NDMA, to facilitate engagement between credit providers & debt counsellors. • Tribunal, to create specialised capacity enforcement capacity • Increased role for ombud schemes, including specialised ombud scheme for credit information • Impact on credit provider behaviour of external oversight & inspections Despite challenges, the reality is that a new environment has been created - noting that credit agreements the biggest financial commitment for most consumers

14. The NCA changed the consumer credit market in a number of ways … Integrating previously capped Usury market with exempt market for micro-loans Price reductions in most segments, biggest in micro-loans & furniture finance Improved quality of access for the low-middle income consumer Increased transparency & competition Furniture Finance – R5,000 Store Cards – R1,500 Impact of the Act on cost of credit Feasibility Consulting

15. Impact of the Act Debt Counselling • 1,036 debt counsellors registered, with independent payment distributors. Extensive monitoring + support mechanisms + investigations & enforcement. • 103,000+ applications cumulatively, growing at 9,000 pm. Monthly distributions to creditors now R97 m (Aug ’09), for approx 25,000 consumers. • “Declaratory order” addressed some issues, but legal amendments required • Despite challenges, debt counselling already playing a huge role in mediating between debt stressed consumers and credit providers. Resulting also in change in credit provider behaviour towards debt-stressed clients

16. Concluding observations:- • Impact of NCA: curbed excesses, creating basis for lower but more sustainable credit growth – without courts acting as debt collectors, curbing social cost of reckless lending • Debt counselling – reconcile claims of different credit providers, creating sustainable repayment stream on non-performing consumer • While minimising social cost, • And, lets not forget the hard-selling that took place in the good times! • BUT, significant implementation challenges • Fall-out from debt stress still increasing, driven by loss of variable sources of income as much as loss of employment • On-going external impact of financial crisis, with risk of 2nd fall post stimulus • Dramatic reduction in domestic credit a major negative impact, aggravating domestic decline • In response to crisis, important to focus not just on protection of industry, but also on protection of households, • noting that crisis impacts differently on different consumer groups • loss of income & loss of employment each have an impact • the longer the downturn lasts, the more households with high debt burdens run out of options

17. Thank You ! www.ncr.org.za

18. Appendix 1 Summery of (some of) the key sections of the NCA and the objectives which they are trying to achieve

19. National Credit Act Reckless loan defined, may be suspended Repayment capacity at time of origination Debt counselling legal debt restructuring process “In duplum rule” limit on arrears interest & fees Policy objective Create disincentives for credit providers to cause over-indebtedness Curb “debt farming” (extracting maximum fees from defaulters over long term) Reckless lending, affordability & debt counselling

20. National Credit Act Disaggregate interest from initiation and monthly fee, limits on each Prohibit penalty fees or interest Prohibit early settlement fees Prohibit ad-hoc interest rate variations (e.g. teaser rates) Objective Remove reputational risk of high APR rates from preventing main stream suppliers providing small loans Curb roll-overs, curb large high interest loans (non-recurring initiation fee; effective rate decline with larger loan size) Curb ‘debt farming’ on small loan defaults Regulation of interest & fees

21. National Credit Act Prescribed info in adverts Prescribed, binding pre-agreement quote Curb solicitation at home or work Prohibit certain contractual practices Objective Force provision of comparable information on cost of credit at early stage of purchase cycle, … so that purchase decision & credit selection can take place simultaneously … intervene to create appropriate conditions for the competitive market to function Disclosure - compulsory, standardised, early

22. National Credit Act Prohibit certain contractual practices – not “unconscionable conduct” approach Any form of preferential collection prohibited, whether through payroll deductions or preferential debt order processing Objective Prevent credit provider from developing a business model based upon preferences, which would artificially lower the risk of default, and lower incentive for caution Unfair contractual practices & competition

23. National Credit Act Credit bureaus registered, audited Special rules to create statutory obligation for data quality Objective Efficient effective access to credit information, particularly, for low cost provision of small loans Regulated as part of credit industry, not under privacy laws Privacy laws inappropriate, credit market requires accurate & efficient credit information Credit bureaus