“All progress is based upon a universal innate desire on the part of every organism to live beyond its income.”

1. “All progress is based upon a universal innate desire on the part of every organism to live beyond its income.” — Samuel Butler , English composer, novelist, author (1835- 1902). “The business of a moneylender … has no where nor at any time been a popular one. It is an oppression for a man to reclaim his own money: it is none to keep it from him” — Jeremy Bentham, British reformer, 1787

2. Chatham House Conference Regulation and consumer finance Gabriel Davel July 2010

3. Millions of small transactions, affecting millions of consumers & thousands of credit providers. require explicit & specialised legislation maximise certainty to both consumers & credit providers ensure that there are no incentives for credit providers to engage in predatory or reckless activities General contract law or common law not sufficient given cost of litigation relative to transaction size control of credit provider over contract & over sales process … & role of staff in providing advice to consumers Consumer credit market profile …

4. Predatory & reckless providers gain most from weak regulation, often by new entrants with short term profit objectives misleading disclosure, “add-ons”, penalty fees, payment preferences, using courts as “debt collectors” often involving agents & brokers & dubious contractual practices causing a “Race to the Bottom” Permissive regulation & predatory practices negative for market development How things go wrong …

5. When things go wrong … Impact on credit providers • High risk + high level of uncertainty = high cost lending • Undermine long term growth strategies, lower margin products, investment in infrastructure, • Undermine asset based lending, long term lending & housing in particular … undermine creation of security for future business lending Impact on households, debt stress, repossessions, degradation of whole areas & communities Impact on consumption & level of economic activity(worse in mature markets)

6. Disclosure: standardized, comparable, early. Prescribed content & format. Enable price comparison. Negative option marketing prohibited, automatic increases in credit limits curbed. Reckless credit: Require affordability assessment. Define reckless credit, affects enforceability. Protect responsible lenders. Preferences & anti-competitive conduct prohibited, monitored. Interest rates & fees: Change basis of disclosure. Upper limits on interest & fees. Limit add-ons. Penalty interest + prepayment penalties removed. Debt collection fees regulated. Curb incentives for ‘debt farming’. Agents & brokers, standards + disclosure requirements Credit bureaus, regulated to improve credit information flow Typical requirements … to change market conduct & remove adverse incentives

7. Affordability assessments: reduced approvals, having to consider obligations on all agreements … cushioned losses, recovering Disclosure, lending practices & credit bureau information Enforcement & action against lending scams of various kind Research = cost of credit reduced, disclosure rules & regulation of credit life insurance, fees Financial crisis caused credit contraction, pressure on incomes, debt stress … but market shielded from fall-out … significant recovery since mid-2009 Gross Quarterly Credit Granted – 2007 to 2010 Cost - furniture Finance Experience in South Africasince introduction of National Credit Act in 2006

8. Concluding comments • Regulated consumer credit market curbed excessive credit extension, creating basis for lower but more sustainable credit growth, curbing social cost of reckless lending • Impact of financial crisis continues, driven by reductions in income as much as loss of employment. Contraction in domestic credit plays significant role. Process will continue, extreme caution required • Protection of households important priority, not just on protection of industry, • low income groups most vulnerable • household solvency & buying power critical to economic health

9. Francis Bacon (1625)… “By the balance of the commodities and the discommodities of usury, two things are to be reconciled. One, that the tooth of usury be grinded that it bite not too much; The other, that there be left open a means to invite monied men to the merchants, for the continuing and quickening of trade.”

10. Thank You www.ncr.org.za

11. Background information

12. Consumer Credit Market in South Africa 18 million Credit Active Consumers Credit Providers £99.5 bn consumer credit Registered Credit Providers = 4,120 Branches = 33.500 1,700 Debt Counsellors

13. Structure of key interventions in National Credit Act

14. Interest, fees & credit life insurance 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

15. Intention Provide information on credit cost at early stage of purchase cycle. While consumer is ‘shopping around’. Improve comparability. Greater honesty in advertising Consumer must agree, before an agreement can come into effect Increase agent & broker transparency & accountability How Negative option marketing & automatic limit increases prohibited = unlawful agreement Prescribed pre-agreement quote, binding for 5 days Prescribed info in credit adverts Opt-outs on telemarketing campaigns, information on-sold Limits on marketing & sales @ home & work Prescriptions on agents & brokers (ID in contracts, fee disclosure, liability for credit providers) Credit Marketing Practices S74 – S76, 89(1)b, 119(4)

17. Regulation of reckless credit & predatory practices Intention Penalise predatory lenders Assist consumers who are in desperate positions Protect responsible credit providers from impact of reckless operators “Normalise” low income credit market … often a marginalised shark-pool S78 – S88, S130 How Reckless credit • Over-indented = “per available information, consumer will be unable to satisfy in a timely manner all the agreements to which the consumer is a party” • Reckless = (1) no assessment; (2) consumer did not understand obligations; (3) agreement made consumer over-indebted • Subject to consumer “fully & truthfully disclose” If reckless, impact on court • No court orders for debt recovery; Court may suspend or reduce obligations Debt counselling • Registered debt counsellors, with statutory debt restructuring process • Recommend debt cancellation or restructuring for review by court Prohibition of payment preferences

18. Intention Reduce reputational risk which APR disclosure impose for main stream suppliers providing small loans, Payday lending: penalties for roll-overs, for incremental increases in loan sizes Curb ‘debt farming’ on small loan defaults, from collection fees & penalty interest How Disaggregate interest from initiation and monthly fee, impose limits on each Prohibit penalty fees and penalty interest Curb early settlement penalties Prohibit ad-hoc interest rate variations (e.g. teaser rates) Codify “in duplum rule” – (interest + fees post default limited to 100% of capital) Single premium credit insurance prohibited, only monthly premiums on declining loan balance Regulation of interest & fees • S100 – S106 • Regulation 39 - 48

19. Requirements of NCA Credit bureaus regulated Broad access to positive credit information Statutory obligation & liability for data quality & compliance audits Consumer access to records, complaints process, data removal for credible complaints S70 – S73 Regulations 17 - 20 Intention Efficient effective access to credit information, particularly, for low cost provision of small loans Pro-active regulation of bureaus to ensure credibility Privacy laws inappropriate, credit market requires accurate & efficient credit information Credit bureaus & credit information

20. Requirements of NCA Court powers substantially increased to block legal action if non-compliance Intervene if reckless or over-indebted Regulator Registration; compliance audits & investigations Enforcement instruments Reports to parliament Tribunal Status of “specialised court”, subject to appeal to high court; Significant fines & deregistration S13-16, S54/55, S129/130, S138 Intention Prevent non-compliant lenders gaining a competitive advantage, setting the standard Legal cost means reliance on consumer litigation totally inappropriate Enforcement, to change conduct, ensure interventions have the intended impact Effective enforcement over both bank & non-bank credit providers