NATIONAL CREDIT BILL, 2005

1. MS ASTRID LUDIN DEPUTY DIRECTOR GENERAL DEPARTMENT OF TRADE AND INDUSTRY NATIONAL CREDIT BILL, 2005

2. Scope • Introduction • Policy context • Objectives and principles of Bill • Overview of the scheme of the Bill • Core principles of the Bill

3. Introduction • No significant review of credit legislation (Usury Act, 1968 & Credit Agreements Act, 1980) over past 25 years • Current process initiated in May 2002 with establishment of a Technical Committee with the mandate to review consumer credit policy and legislation – Report received by the dti in October 2003 • Drawing on report and other processes (Nedlac Financial Sector Summit), the dti prepared a policy and draft Bill by April 2004. • The National Credit Bill represents 3 years of research, discussion and debate and consultation with various stakeholders

4. Need for reform • Outdated and fragmented legislative framework (1968, 1980) – creates loopholes that are exploited • Current legislative framework is inadequate for the challenges we face in SA (some of which are mirrored internationally in many jurisdictions) and has in fact exacerbated the problems. These challenges include: • over-indebtedness – particularly the challenge of balancing measures to contain over-indebtedness with measures to increase access to credit; • discriminatory market practices; • limited access and high cost of credit for low-income individuals; and • adequate protection for all consumers.

5. The credit market Lack of access for majority • Access and cost of capital for low-income people remains a problem after 10 yeas of democracy, reflecting and reinforcing the “two economies”:- • 67% of population receives less than 6% of credit extended; • 22% of SMMEs receive financing (only 7% from banks); • Lowest income group faces highest cost (average 175%); • Credit market effectively split between “super-included” and “super-excluded” (Usury Act versus Exemption Notice)

6. The credit market Excessive credit for some income groups • Excessive credit extension to some consumers, resulting in unsustainable debt burdens:- • Reckless credit extension by some credit providers (not limited to micro lenders); • Consumer abuses due to need on part of credit provider to put themselves first in line for repayment; • “No way out” for consumers – resulting in deviant consumer behaviour and spawning other abuses ( e.g. Administration Orders);

7. The credit market • Inadequate protection for consumers, especially low-income consumers • No effective regulation of marketing and disclosure – “hidden costs” include credit insurance, club fees, transaction fees etc across the board; no pre-contractual disclosure and contracts with lots of fine print; • No protection from excessive interest rates for low-income consumers; • Perceptions of discrimination, reinforced by inadequate disclosure of reasons for refusal of credit • No protection for consumers from inaccurate credit bureau information • Differential treatment of transactions due to inconsistent credit regulation

8. Objectives of Bill • Credit Policy and Bill is one component of overall programme to promote sustainable access to finance • Objectives of Policy and Bill are to: • Promote competition and transparency by treating all credit transactions equivalently while recognizing different market segments • Provide all consumers (and some businesses) with equal rights and outline rules of conduct • Provide measures for over-indebted consumers & reckless credit extension • Provide for a central register of consumers’ debt obligations • Create a scheme for the regulation of credit providers, debt counselors and credit bureaux

9. Chapter 1: Interpretation, purpose & application Chapter 2: Consumer credit institutions Chapter 3: Consumer credit industry regulation Chapter 4: Consumer credit policy Chapter 5: Consumer credit agreement Chapter 6: Collection, repayment, surrender & debt enforcement Chapter 7: Dispute settlement other than debt enforcement Chapter 8: Enforcement of Act Chapter 9: General provisions Schedules 1-3 Overview of Bill

10. Application of Bill • All credit to individuals • But only “arms length” transactions; NOT: stokvels, family loans & share holder loans • Special treatment for “developmental credit” • Credit to legal entities included in ambit, except • Large businesses (threshold) excluded; large agreements excluded • … & legal entities excluded from certain sections (marketing & advertising limitations, reckless credit provisions & interest & fee limitations) • Small, intermediate & large agreements • Small: (pawns & small credit transactions); Intermediate: (credit facilities & mid-sized transactions); Large: mortgages & large transactions

11. Disclosure & contracts • Pre-agreement, quotes & contracts • Pre-agreement statement on terms & conditions • Quotation, binding for 5 business days • Prescribed for small agreements; more flexible for intermediate & large • Unlawful agreements • Effect: void, consumer payments to be refunded • When: minors; mentally unfit; under administration; unregistered provider; “negative option credit” • Except if credit provider “induced” or “misled” into entering into agreement • Unlawful provisions • Effect: Void; and could be ‘struck out’ or altered by court • When: Deceitful; Fraudulent; Defeat Act; Waive prescribed “common law rights”; Automatic increases in credit limit; Alterations without consent; Retains Bank Card ID or PIN; Representative is agents of consumer; Pre-authorisation to enter premises for repossession; Power-of-attorney; consent to payment prioritisation; allow general set-off; interest variations

12. Sales & marketing • Marketing • Prohibited: ‘Negative option marketing’; automatic increases in facility limits (except annual = ave monthly cash advances / credits); Telemarketing & sale of client information only if consent; Agreements at home only if invited; Marketing or agreements at work only if agreement with employer / union • Advertising • Prescribed statements, disclosure of cost • Unregistered providers prohibited from advertising; • Personal solicitations must include prescribed information • Prescribed cost of credit disclosure on goods offered on credit • Comparable info when shopping around

13. Interest & fees • Income on loans limited to:- • Interest, Application Fee & Service fee • Minister to impose limits for all three • Some other costs allowed e.g.‘default administration charge’; ‘collection costs’, ‘extended warranty’, etc • Codify ‘in duplum rule’ • Default interest (and other collection costs) limited to settlement value at point of default • Credit life insurance • Must be ‘reasonable’ and limited to amount owing to credit provider • Little intervention in insurance from independent insurer • If policy proposed by provider: charged monthly for small and intermediate agreements, no capitalisation of ‘single premium’ insurance; annual premiums permitted for mortgages • Regulator to monitor premiums & claims • Does not prohibit insurance on value of goods purchased (if selected by consumer)

14. Credit Information • Credit Bureaux registration requirement & entry criteria • Regulated • Free records & data correction requirement • Data acceptance, verification, retention • Uses of credit bureaux data • Rejection of application for credit • Prohibition of refusing credit on discriminatory grounds • Right to reasons for credit refused • “Amnesty” • Monitored by Regulator, could be prosecuted if non-compliance

15. Reckless credit • Reckless credit • Failure to take reasonable steps to assess repayment history and “existing financial means, prospects and obligations”; and extending credit where the “consumer will be unable to satisfy in a timely manner all the agreements to which the consumer is a party” • If reckless • Magistrates may not issue court orders for debt recovery • Debt counselor may recommend debt cancellation or restructuring • Agreement may be suspended or obligation reduced by Court • Provider may be prosecuted by Regulator • But: these protections only available when consumers disclosed accurately + ‘unjust enrichment’ prevented

16. Over-indebtedness • Debt Counselors • Registered & overseen by Regulator, independent from providers = assisting over-indebted consumers & facilitating debt restructuring • Debt review • Not if collection procedure commenced • Not over-indebted = voluntary re-arrangement only (even if particular agreement reckless) • Over-indebted: propose reckless credit suspended + rest rescheduled • May be accepted by consumer & credit providers & become consent order, or • Go to Tribunal (or court): to confirm or modify … & implement per Chapters VIII & IX

17. Credit Regulators • National Credit Regulator • Registration of all CPs operating in more than one province • Compliance monitoring; Prosecution at Tribunal • Complaints investigation (coordinated with Banking Adjudicator & provincial consumer desks) • Monitoring credit market prices, volumes, competitiveness, access to finance • Reporting to Minister & Parliament • Funded from fees & government allocations • Provincial Regulators • If provincial legislation passed, & institutions established; Provincial registration if credit provider has branches in only one province

18. Tribunal & Courts • Tribunal • Prosecution of credit providers by Regulator • Prohibited conduct (everything that is not an offence) • Appeals by consumers & credit providers • Courts • Cases brought by providers against consumers (as at present, although consumers’ ground for defense are expanded / codified • Declaratory orders • Prior to approving court orders, compulsory indebtedness & reckless lending enquiry • Confirmation of debt restructuring • Enforcement of debt • Contractual matters

19. Summary • Complete overhaul of current credit law • In order to modernise & integrate legislation; • Provides same rights to all consumers & address possible discrimination in the market • Removes perverse incentives to credit providers; • Improves disclosure, contracting standards & marketing practices • And in particular, deals with reckless lending & over-indebtedness • Create institutional capacity for effective enforcement

20. THANK YOU