Making Credit Markets Work

A Framework for Consumer Credit

Portfolio Committee20 October 2004

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.

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)

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

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.

Policy Instruments

Addressing 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

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

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

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

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

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

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

Thank You!

Questions?