SOUTH AFRICAN NATIONAL CREDIT REGULATOR

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 and satiric 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” — Bentham, British reformer, 1787 1

2. SOUTH AFRICAN NATIONAL CREDIT REGULATOR ACT RURAL HOUSING LOAN FUND 14th ANNUAL WORKSHOP Topic: General compliance to the NCA, reflections on consumer indebtedness Ramabaka Abel Tshimole 15 October 2010

3. Topics Overview Registration Compliance Consumer Credit Market Debt counselling Conclusion 3

4. South African credit market Legislative framework before National Credit Act There was no single unitary legislation regulating the credit market There were different pieces of legislation such as the Usury Act & Credit Agreements Act Exemption Notice promulgated under the Usury Act established a regulatory body to regulate micro lenders Legislative framework before National Credit Act • There was no single unitary legislation regulating the credit market • Different pieces of legislation such as the Usury Act & Credit Agreements Act applicable to different credit agreements • No single reporting framework & uniform standards to monitor compliance with legislation • Legislative framework before National Credit Act • There was no single unitary legislation regulating the credit market • There were different pieces of legislation such as the Usury Act & Credit Agreements Act • Exemption Notice promulgated under the Usury Act established a regulatory body to regulate micro lenders

5. National Credit Act in a nutshell … Interest & fees Reckless lending Marketing practices & disclosure National Credit Act Enforcement & debt collection Agreements & quotes Unlawful agreements, provisions Debt counselors Credit Bureaus National Credit Register

6. National Credit Act Consumer credit institutions National Credit Regulator • Registration of industry participants • Enforcement of the Act • Development of an accessible credit market • Research & publication of information National Consumer Tribunal • Adjudication of disputes & complaints

7. Consumer Credit Market in South Africa Credit Providers 10 x Credit Bureaus 36,3 million Credit Consumers R1.1 trillion $164 Billion consumer credit Credit Providers = 4,301 Branches = 33.875 1,847 Debt Counsellors

8. ACHIEVEMENTS • Unqualified (clean) Audit Report • Registration of 4,301 entities with 33,875 branches • Representing approximately R1.1 Trillion of credit, provided to 36,3 million credit agreements/clients • Registered 10 credit bureaus, • Registered 1,847 debt counsellors, arranged training, provided guidelines, accredited PDA’s 6 already • Complaints received 9,303, calls received 349,101 • Investigations underway 39, completed 414 • Compliance notices 47, Cases referred to Tribunal 20 • Received 206,045 applications for debt review, 61,682 consumers approved and under debt review • Awareness workshops held 1,741, radio/TV broadcasts 1,338/247, AVE R248m

9. Investigation Statistics

10. Enforcement Statistics

11. Registration of credit providers, credit bureau, debt counsellors The requirements • Minimum requirements are set which also specify disqualification criteria • Registration with SARS, appointment of accounting officers/auditor, • Confirmation of registration with CIPRO, criminal/ITC check, etc • Conditions of registration are stipulated and imposed • General conditions • Overall compliance with NCA & other applicable legislation • Specific conditions e.g for credit providers • Language policy proposals • BBBEE • Combating over-indebtedness of consumers

12. Development credit providers The requirements • Same requirementsconditions as those of general consumer credit, in addition having to • Provision of business plan – product offering; financial capacity, Human capital, systems, processes and procedures • May apply for permission to deviate from certain sections of the Act • The credit provider must specifically identify all areas in which documentation which it intends to use or procedures which it intends to apply deviate from the requirements that apply to other credit agreements. This must be done with reference to the specific sections of the Act through which discretion is provided to the NCR for approving specific documentation or procedures for developmental credit agreements (e.g affordability assessment procedures/provisions, statement of account); • The credit provider must motivate the departure from the requirements that apply to credit agreements in general; that is why is it necessary for the credit provider to depart from the procedures or documents that apply to other credit agreements; and • The credit provider must further motivate why it considers the procedure or documentation which it proposes to use to still afford the necessary protection to the consumer. This requires the credit provider to indicate which special circumstances exist or alternative procedure it applies which would ensure that the legislative objective of the particular section of the Act will still be met. Intention is to stimulate provision of developmental credit focusing on small business development/support, low income housing and educational loans 166 Development Credit Providers Registered with an approximate total principal debt/loan book amounting to R42bn.

13. Compliance Monitoring 1. Statutory Reports Processing 2. Compliance Analysis of Statutory Reports 3. Conditions of Registration 4. Market Conduct – Flavour of the Quarter 5. Compliance Research and Education 5.1 Compliance Research 2.1 Significant Entities (Top 20) 3.1 Language Policy 1.1 Statistical Returns 3.2 Commit-ment to BBBEE 2.2 Remaining Significant Entities (Biennially) 1.2 Other Statutory Reports (AFOR, AFS, AER, ACR) 5.2 Industry Workshops 3.3 Combat of over indebtedness 2.3 Cyclical Reactive Review (Other entities) 3.4 Review of Conditional Registrations Compliance monitoring

14. Compliance reporting • Compliance reporting by different registrants • The reporting is standard and additional information may be requested • Information in the reports used to monitor market trends, market conduct/practice

15. Proactive Currently we are concentrating on desk top analysis (Off-site analysis) Credit providers submit returns and reports Plans to introduce on-site analysis Assess the level of compliance in terms of the documents submitted to us in comparison to what is really happening in the companies by interviewing management team and staff Proactive general assessment and evaluation of business practices and business models to identify areas of concern and aspects that may be good for the industry (best practices in a way) Market conduct studies Focus on initial inspection before the files could be escalated to investigations and enforcement to lessen the workload on them Proactive investigations Compliance Framework to inform the sequence, standards and methods to use Reactive Media reports Advertisements/ Marketing materials Reportable irregularities Following up on the non-compliance reported by IRBA on the reportable irregularities received Complaints and call centre reports On going depending on the non-compliance received This will be the focus of complaints department Pro-active and reactive monitoring 15

16. Statutory reporting All registrants are required to submit reports at given times Guidelines and industry workshops are provided to enlighten registrants Consistency, accuracy, correctness, reliability, validity • Registrants, accounting officers/auditors, compliance officers • Systems, processes and procedures

17. Enforcement Tools • Conditions of registration • Reports, statistics, research • Explanatory notices, letters of undertaking • Consumer complaints & various ombud • Compliance notices & criminal action • Tribunal, courts Consultation requirement relating to enforcement action on banks, but note does not apply to insurers

18. NCR Investigations Present Focus and areas of concern • Consumers losing homes due to unlawful practices • Debt Counsellors: Receiving/distributing money & adhering to the time frames • Debt collection practices of credit providers • Section 73 Audits – Credit Bureaus • Micro lenders: Adherence to interest caps and costs, card and pin, emergency loans, disclosure requirements, • Non-registrants • Major concern: The use of the NCA to further fraudulent activities • Marketing and advertising • Pre-agreement quotes and disclosure • Right to set-off • Priority payments

19. Independent Professionals/ Practitioners Independence of some of the reports The NCA somewhat rely on independent professionals like auditors or accounting officers i.e. Assurance Engagement report 19

20. Compliance Reporting feedback • Reporting the outcome of the analysis of Statutory returns and others reports • Consumer Credit Report • Credit Bureau Monitor • Research Reports from various research done to monitor performance and conduct of the credit industry players • Pricing and Access Study • Report on Over-indebtedness • Impact of credit crisis on the consumer credit industry • Relevant stakeholders • MRCC (Management Registrations and Compliance Committee • MECC (Management Enforcement and Complaints Committee) • CEO/COO • Various government departments • Registrants and/or associations of registrants (e.g banking association) • NCR website • Media release

21. Current state of the consumer credit market Statutory Statistical Returns submitted by Credit Bureaus & Credit Providers (including banks)

22. Credit granted vs Debtor’s book

23. Demand and supply of credit

24. Credit granted per industry

25. Gross value of book – credit type 64.85% 5.29% 11.18% 18.62% 0.06%

26. Gross value of book – provider type • Banks continue to dominate the consumer market with 89% of book • Other providers enjoy approx. equal share

27. CB impaired records • Credit bureaus have records for 18.32 million credit-active consumers • The # of consumers with impaired records continued to increase reaching 8.59 million this quarter • 26.1% of accounts are impaired

28. Status of the arrears levels and credit standing of consumers and accounts • There has been a slight improvement in the numbers of accounts that are going into arrears • The % increase for the number of consumers and accounts with impaired records on a quarter to quarter basis is showing signs of recovery even though there has been an overall increase in the impaired records. • 217 205 (mortgage) accounts out of 1,8 m accounts are in arrears. Rand value = R113 billion out of R736 billion. Equates to 15% of the rand value of the mortgages in arrears.

29. Debt Counselling

30. Debt Counselling DEBT COUNSELLING ASSOCIATION OF SOUTH AFRICA A new profession was born in 2007 The aim is to assist the over indebted consumer For some role players in the credit market this was an unwanted baby

31. Debt Counselling: Update Discussions between Credit Providers and Debt Counsellors New rules and standardized procedures Notifications and financial information Response to Debt Counsellors’ proposals Restructuring rules Terminations in terms of Sec. 86 (10)

32. Importance & role of debt counselling • Role of debt counselling, in the context of the lack of appropriate personal insolvency mechanisms in SA. • No appropriate “personal insolvency mechanisms”. US, UK & EU have range of different mechanisms for personal insolvency. The mechanisms in SA are outdated and ineffective. • As result, when debt stress occurs there is no effective mechanisms to resolve the issues, or for creating a “settlement” in which the obligations of the consumer and the demands of different credit providers are reconciled. • Negative social impact of debt stress • No mechanism to resolve a personal financial crisis and enable an individual to get another chance. • Household income is permanently reduced through debt payments. Household needs not met and social welfare receipts are diverted to debt servicing. • School fees not being paid, arrears on municipal service payments and a multitude of related areas.

33. Group 1 = informal sector, domestic workers, social grant recipients & agricultural sector Low credit exposure, mainly furniture & unsecured. BUT – more significant relative to income! Position may be improving if new credit limited Often unaware of protective measures, e.g. UIF, insurance or counselling Group 2 = Entry level workers in public & private sector, earning R1.8k to R6.1k/m Significant exposure, both unsecured (< 3 years), vehicles & mortgages Short term credit exposure ‘self-correcting’ over time, but mortgages & vehicles require assistance Group 3 = middle income, R6k to R17k/m High level of exposure to all products & high debt stress Most vulnerable, to debt stress & loss of house if affected by either job loss or reduced income Group 4 = high income, R17k/m + high credit exposure, mainly mortgages, vehicles & credit facilities. Also 2nd properties. Income reduction biggest threat. Greater ability to resolve own problems. But often resorts to DC assistance / protection. Debt profile & vulnerability of different groups

34. Low income groups least aware of protective measure, whether counselling, UIF or others. Awareness programme important – also on ‘self-protection strategies’ Debt counselling huge role in resolving cases of reduced income –legal problems major obstacle Debt counselling little value in case of job loss, no income to service debt … some form of personal bankruptcy, while protecting housing? Policy response - consumers

35. Causes of debt stress & implications in the current environment • Borrowers • Reckless & aspirational borrowing, • External factors – loss of income / relationships breaking up / death and sickness • Credit providers & consequences of hard selling • Hard selling by credit providers contribute to over-indebtedness. • Reckless lending • Call centre agents & misleading disclosure = consumers taking on credit which they cannot afford. • Resist implementation of debt counselling • Job losses + reduced income = debt stress • Debt counsellors confronted with huge demand. • Additional impact of the financial crisis. Job losses + significant reductions in income. Reduced overtime; sales commissions; year-end bonuses etc. • Even people who were not over-indebted are affected. • Staff of credit providers also under pressure (sales targets, collection targets, clients …). Challenge is to recognise these realities, and to find mechanisms to reconcile the conflicting claims. Engagement between debt counsellors and credit providers critical.

36. Debt Counselling • 1,847debt counsellors registered, five accredited payment distribution agencies. Extensive monitoring + support mechanisms + investigations & enforcement. • 206 045+ applications cumulatively, growing at 7950 pm. Monthly distributions to creditors now estimate R2.7 b (to date), for approx 61,682 consumers. • “Declaratory order” addressed some issues, but legal amendments required • Despite challenges, debt counselling already played a huge role in mediating between debt stressed consumers and their credit providers. Resulting also in change in credit provider behavior. Total applications Monthly payments to creditors

37. Backlogs, reasons & risk to debt counselling • Interpretation of NCA & Magistrates Court procedures exploited by industry to prevent magistrates court hearings from taking place • Credit providers exploited every area of uncertainty to oppose hearings. NDMA not implemented. Delays in providing documents, cause overruns on time limits. Opposing application of certain section of Act, eg 90(2)(n) and 103(5). Irregular terminations & repossessions. • But, major improvement recently, with banks taking a more constructive approach • And, 1000’s of consumers have already benefited both from debt counselling and from internal restructuring by banks • NCR’s Application for Declaratory Order, 21 August. • clarified number of issues; certain issues not addressed; some complications • Still problems. Require amendments to NCA & Regulations.

38. Consumers Case studies

39. Problems: Debt counsellor behaviour • Majority of debt counsellors working very hard, under great pressure. But also a number of “bad apples” … • Taking clients for fees, doing no work • Refusing to use PDAs, misappropriating client repayments • Restructuring proposals unprofessional and meaningless • Confrontational with credit providers, running to courts when consensual solutions possible • Time-lines not met; Bad administration (e.g. account numbers); • Delegate counselling to unregistered employees • Biggest risk: debt counselling becoming a payment holiday • Creditors must terminate & enforce if not comply with process, no payments made

40. Problems: Credit providers • Certificates of Balance: not provided or late & inaccurate • Unrealistic payment expectations. Unsecured creditors unreasonable. Competitions between products. Can’t find ‘settlements’. • Not cancel old debit orders. New restructured debit orders thus ‘rejected’ • Preventing hearings in magistrates courts from taking place • Practices of collection departments & outsourced legal representation. Not adjusting account details.

41. Problems: Payment distribution • Payment distribution by counsellors not acceptable. • Debt counsellors neither trained nor equipped to do payment distribution. Conflicts of interest and huge threat to integrity of process • Compliance with Reserve Bank rules • Many problems created by information supplied by debt counsellors. And bank system problems. • Volumes and administrative complexity a challenge, but the system works.

42. Training & support: Accredited specialised training institutions & provided initial material. Implemented before effective date of Act. Also arranged follow up courses & workshops, to support debt counsellors & improve expertise. NCR capacity: NCR appointed special call centre agents & complaints officers specialising in debt counselling – to deal with problems, intervene when things go wrong, protect homes from repossession wherever possible. Payment distribution: NCR accredited specialised payment distribution agencies. To separate debt counselling from payment distribution. To limit risk of fraud & theft of consumer payments. Audits & inspections: Performing ongoing audits & inspections on debt counsellors, PDAs and credit providers (including banks) University of Pretoria review to identify problems Audits on PDA’s 552 on-site visits + 65 investigations NCR Task Team to investigate problems Banks Debt counsellors Payment arrangements NCR implemented a range of interventions to support debt counselling …

43. Challenges: Magistrates Court process • Delays = risk to the banking sector + incentive for consumers to use it as a payment holiday … • Differences between requirements of different courts = increase cost, complexity & confusion

44. Despite these challenges, debt counselling already made a significant contribution in creating a mechanism to ‘mediate’ between consumers and multiple creditors, & limiting losses through repossession of houses & cars BUT: cannot allow consumers to abuse process for payment holiday!! Latest developments

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