Making Credit Markets Work A Framework for Consumer Credit Portfolio Committee 20 October 2004

1. Making Credit Markets Work A Framework for Consumer Credit Portfolio Committee 20 October 2004

2. Background • No significant review of current credit legislation - Usury Act, 1968 and Credit Agreements Act, 1980 - over past 20 years • Need for a holistic review long acknowledged – but despite various attempts, only recently significantly progressed • Credit Law Review initiated in May 2002 –Technical Committee’s recommendations and report received by the dti in October 2003. • Consumer Policy Framework and Bill finalised by the dti April 2004.

3. A dysfunctional credit market • 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” • 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 to be “first in line for repayment” • “No way out” for over-indebted consumers – spawns abuses (Administration Orders)

4. A dysfunctional credit market • Inadequate protection for consumers, especially low-income consumers • No effective regulation of marketing and disclosure • 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

5. Objectives of Consumer Credit Policy The objectives of the Credit Policy are to:- • Address South Africa’s historical legacy of systematic discrimination • Promote a cost-effective, competitive, fair and sustainable credit market • Assist consumers to make informed choices through improving their understanding of the market • Reduce over-indebtedness and provide redress for highly indebted consumers • Enhance enforcement and redress through creating a new institutional framework • Promote consultation and partnerships.

6. Policy InstrumentsAddressing Systematic Discrimination • Unlock Collateral and Savings • Revitalize township property market (estimated R115bn stranded assets); • Investigate other forms of non-traditional collateral; • Promote low-cost savings opportunities through 2nd and 3rd tier banking (incl. co-operative banks); • Reform contract and security enforcement • Pro–Poor Apex • Address the racial bias in credit allocation • Improved regulation of credit information to improve the integrity and accuracy of information (possible role for privacy legislation) • General prohibition on discrimination in credit allocation (with a possible exception for positive discrimination for targeted groups) and reasons for refusal of credit

7. Policy Instruments Promoting a fair, competitive and sustainable credit market • Creating a single, comprehensive law that treats transactions equivalently • Regulation of interest and fees • standardization and limitation of charges i.e. Application fee + Service fee + Interest + additional rules on credit insurance • Remove opportunities for preferential access to repayment • Review of rules regarding payments system

8. Policy Instruments Helping consumers make informed choices • Regulation of marketing and disclosure • prohibitions on negative option marketing, unsolicited credit, harassment and solicitation at home or at work • specific disclosure requirements and general rules • compulsory pre-contractual quotations in standardized formats • Standardisation • Standardised contracts and statements of account • Standardised pre-contractual quotations • Promotion of consumer education • Implies institutional and financial support from and by the state

9. Policy Instruments Dealing with debt • Reduce reckless lending • Review of legislation pertaining to debt collection and court orders • Penalties for reckless lending • Provide effective relief for over-indebted consumers • System of debt counselors to re-negotiate debts on behalf of consumers • Mechanisms to enable rescheduling of debts as well as debt reduction • Prescribed procedures tpo reduce uncertainty • Not-for-profit environment

10. Policy Instruments Dealing with debt • Address indebtedness and over-indebtedness • National credit register of outstanding debt obligations • General requirement for pre-agreement affordability assessments with penalties for reckless credit provision • Address unsolicited credit • Implies prohibitions on negative option marketing, unsolicited credit, harassment and solicitation at home or at work

11. Policy Instruments Securing compliance and access to redress • National and Provincial Credit regulators • Policy anticipates concurrent jurisdiction – provides for national and provincial registration of credit providers and debt counselors with regulators • Strong national credit regulator with powers to investigate, enforce, monitor market conduct, conduct research, educate consumers and establish network of debt counselors • Consumer Tribunal • Adjudicative function with ability to impose administrative fines; • Supplements courts, but does not usurp functions of courts • National Consumer Credit Council • Consisting of Minister of Trade and Industry and MECs as voting members; national and provincial regulators as non-voting members; • Primary function to harmonize concurrent jurisdiction and prevent disputes • Advisory Committee • Consisting of industry, consumer and debt counseling representatives; advisory in nature

12. Policy Instruments Consultation and Partnerships • The Policy seeks to promote consultation and partnerships by setting out a framework fo: • Consultation with government departments • Consultation with economic stakeholders • Adopting international benchmarks

13. Thank You! Questions?