Section 2: Credit Law Review

1
Section 2Credit Law Review

• Technical Committee appointed by
• Dr Alistair Ruiters
• September 2003

2
Section 2Specific proposals for the regulation
of Consumer Credit

• Presented by Kgosi Pule,
• Member of the Technical Committee

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Specific Proposals

1. Scope
2. Protection Redress
3. Disclosure
4. Credit Life Insurance, fees charges
5. Sales, Marketing Intermediaries

1. Payroll Deductions collection prefs
2. Consumer Education
3. Enforcement
4. Over-indebtedness
5. Interest rate control
6. Credit Bureaux

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Specific Proposals

1. Scope
2. Protection Redress
3. Disclosure
4. Credit Life Insurance, fees charges
5. Sales, Marketing Intermediaries

1. Payroll Deductions collection prefs
2. Consumer Education
3. Enforcement
4. Over-indebtedness
5. Interest rate control
6. Credit Bureaux

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1 Scope of Legislation

• One Consumer Credit Act, replacing Usury Act,
  Credit Agreements Act Exemption Notice
• All transactions treated equally, irrespective of
  form
• Include natural persons lt R500,000, exclude legal
  entities

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Specific Proposals

1. Scope
2. Protection Redress
3. Disclosure
4. Credit Life Insurance, fees charges
5. Sales, Marketing Intermediaries

1. Payroll Deductions collection prefs
2. Consumer Education
3. Enforcement
4. Over-indebtedness
5. Interest rate control
6. Credit Bureaux

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2 Protection redress

• Prohibit unfair or abusive conduct contracting
  terms,
• Prescribe minimum, standard contracting terms
• Prevent exclusion of common law protections
• Create statutory mechanisms for complaints
  resolution redress,
• including provision for financial compensation
  debt rescheduling
• Create enforcement mechanisms within national
  consumer credit regulator provincial government

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Specific Proposals

1. Scope
2. Protection Redress
3. Disclosure
4. Credit Life Insurance, fees charges
5. Sales, Marketing Intermediaries

1. Payroll Deductions collection prefs
2. Consumer Education
3. Enforcement
4. Over-indebtedness
5. Interest rate control
6. Credit Bureaux

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3 Disclosure (a)

• Simple, standardised disclosure, comparable
  between credit providers,
• both content and format of disclosure being
  regulated prescribed forms for different
  contract types
• prevent inflation of cost through add-on
  charges, e.g. credit life insurance, club fees
  etc

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3 Disclosure (b)

• Focus not (only) on contractual disclosure, but
  to apply to any media that refer to the
  availability of consumer credit, (adverts,
  product brochures, shop floor notices )
• Where disclosure reqments not met, legislation
  to provide for (a) financial relief to consumers
  (b) penalties against credit providers

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Specific Proposals

1. Scope
2. Protection Redress
3. Disclosure
4. Credit Life Insurance, fees charges
5. Sales, Marketing Intermediaries

1. Payroll Deductions collection prefs
2. Consumer Education
3. Enforcement
4. Over-indebtedness
5. Interest rate control
6. Credit Bureaux

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4 Credit life insurance and other fees charges

• Interest rate to be shown inclusive of credit
  life insurance similar charges
• Special disclosure rules for compulsory credit
  related services bank charges
• Power to Minister to make further regulations,
  prohibitions where required

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Specific Proposals

1. Scope
2. Protection Redress
3. Disclosure
4. Credit Life Insurance, fees charges
5. Sales, Marketing Intermediaries

1. Payroll Deductions collection prefs
2. Consumer Education
3. Enforcement
4. Over-indebtedness
5. Interest rate control
6. Credit Bureaux

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5 Sales marketing techniques and conduct of
intermediaries

• Prohibit solicitation at home or job, except
  after consumers invitation
• Prohibit deceptive or hazardous credit terms,
  e.g. residual balances on vehicle finance,
  incremental repayment terms, zero interest
  marketing
• Principals held responsible for intermediaries
  (training, liability etc)
• Ministerial power to prohibit practices/terms, or
  issue additional regulations

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Specific Proposals

1. Scope
2. Protection Redress
3. Disclosure
4. Credit Life Insurance, fees charges
5. Sales, Marketing Intermediaries

1. Payroll Deductions collection preferences
2. Consumer Education
3. Enforcement
4. Over-indebtedness
5. Interest rate control
6. Credit Bureaux

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6 Payroll deductions collection preferences
(a)

• Retain potential benefit, limit negative
  consequences
• Ensure at least minimum level of competition,
  consumer choice,
• Prescribe higher disclosure standards
• Prescribe max deduction level compulsory
  affordability assessment
• Allow Minister to issue additional (specific)
  regulations if consumer choice, protection or
  competition undermined

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6 Payroll deductions collection preferences
(b)

• Minister, in consultation with National Treasury
  SA Reserve Bank, should introduce regulations
  that will ensure neutrality of National Payments
  System in respect of (a) payments processing ,
  (b) treatment of different credit providers, to
  remove the current discrepancy with international
  standards

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Specific Proposals

1. Scope
2. Protection Redress
3. Disclosure
4. Credit Life Insurance, fees charges
5. Sales, Marketing Intermediaries

1. Payroll Deductions collection preferences
2. Consumer Education
3. Enforcement
4. Over-indebtedness
5. Interest rate control
6. Credit Bureaux

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7 Consumer Education

• Incorporated consumer education in mandates of
  consumer credit regulator provincial consumer
  agencies
• Agencies should report on the achievement of
  targets
• Create incentives for consumer education by NGOs,
  CBOs credit providers
• Provide joint government / private sector funding
  to make consumer education sustainable

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Specific Proposals

1. Scope
2. Protection Redress
3. Disclosure
4. Credit Life Insurance, fees charges
5. Sales, Marketing Intermediaries

1. Payroll Deductions collection preferences
2. Consumer Education
3. Enforcement
4. Over-indebtedness
5. Interest rate control
6. Credit Bureaux

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8 Enforcement Consumer Credit Regulator (a)

• Establish Consumer Credit Regulator to regulate
  all form of consumer credit, including bank
  credit
• Mandate (a) protect consumers (b) create
  regulatory environment that would facilitate
  increased access to finance (c) increase
  competition between credit providers.
• Statutory body with board including consumers
  credit providers
• Decisions subject to review by court

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8 Enforcement Consumer Credit Regulator (b)

• Credit providers should be registered provide
  annual compliance certificates from auditors
• Regulator to perform inspections, (a) issue
  fines, (b) instructions for consumer
  compensation, (c) withdraw certificates (d)
  prohibit rogue entities individuals from market
• Regulator to create co-ordinate education,
  complaints resolution establish a debt
  counseling framework
• Create Office of Access to Finance in regulator
  to monitor credit market in general access to
  finance in particular

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Specific Proposals

1. Scope
2. Protection Redress
3. Disclosure
4. Credit Life Insurance, fees charges
5. Sales, Marketing Intermediaries

1. Payroll Deductions collection prefs
2. Consumer Education
3. Enforcement
4. Over-indebtedness
5. Interest rate control
6. Credit Bureaux

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9 Over-indebtedness (a)

• Introduce legislative requirement on all credit
  providers to assess consumers ability to meet
  their debt service obligations, prior to
  advancing credit
• Monitor through inspections compliance audits,
  subject to fines deregistration if not
  compliant
• Revise Magistrate Court Act to make access to
  court orders subject to creditor showing proof of
  affordability assessment

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9 Over-indebtedness (b)

• Enable comprehensive affordability assessment
  through formal regulation of credit bureaux
  broader information sharing on all types of debt
• National network of debt counseling, with
  provisions for debt rescheduling debt reduction
• Limitations on solicitation, hazardous terms
  (discussed before)
• Investigate feasibility of penalties on consumers
  that provide false information or act
  fraudulently

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Specific Proposals

1. Scope
2. Protection Redress
3. Disclosure
4. Credit Life Insurance, fees charges
5. Sales, Marketing Intermediaries

1. Payroll Deductions collection prefs
2. Consumer Education
3. Enforcement
4. Over-indebtedness
5. Interest rate control
6. Credit Bureaux

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10 Interest Rate Control (a)

• Already discussed Improved, standardised
  disclosure, curbs on marketing, affordability
  assessments enforcement
• THUS Discontinue general interest rate control
  as per the current Usury Act Credit Agreements
  Act
• BUT Minister to retain power to introduce
  limits on rates, fees or charges for specific
  products or providers if there are limited
  competition or price manipulation

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10 Interest Rate Control (b)

• An alternative approach considered by the
  committee, was the introduction of a structured
  cap,
• consisting of different caps for interest,
  origination fee and monthly loan administration
  fees, set at different levels for different loan
  sizes, in order to be more reflective of the
  different cost of originating different types and
  sizes of credit
• However, this would have to be set at levels high
  enough not to amount to government prescribed
  credit prices (as in current regulations)
• It introduces many complexities, e.g. the danger
  that these prices be accepted as government
  prescribed prices and thus further undermine
  competition

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10 Interest Rate Control (c)

• Irrespective of the above, to
• Legislate the In Duplum Rule, i.e. place a
  statutory limit on interest when accounts are in
  arrears
• Regulator to perform an annual review of the cost
  of all credit products publish results

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Specific Proposals

1. Scope
2. Protection Redress
3. Disclosure
4. Credit Life Insurance, fees charges
5. Sales, Marketing Intermediaries

1. Payroll Deductions collection prefs
2. Consumer Education
3. Enforcement
4. Over-indebtedness
5. Interest rate control
6. Credit Bureaux

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11 Regulation of Credit Bureaux Credit
Information Exchange (a)

• All credit bureaux should be registered
  regulated in terms of (a) the full range of
  their operations, (b) the activities of credit
  providers in relation to information provided to
  the bureaux, (c) use of information received
  from the bureaux

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11 Regulation of Credit Bureaux Credit
Information Exchange (b)

• Drastically curtail all other exchange of
  consumer information (e.g. client lists for
  marketing)
• Compulsory consumer consent
• Free access for consumers to their records
• Introduce standards for data validation
  correction
• Provide ministerial power to force information
  sharing by creditor providers in order to enable
  comprehensive affordability assessment

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Summary

• Key features of the legislative regulatory
  proposals being proposed

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Summary

• To a system that integrates the market are
  effectively enforced,
• that forces simple, comparable disclosure,
• that curtails over-indebtedness,
• and that assists consumers that are vulnerable or
  treated unfairly

• Move away from a system of ineffectual price
  control, that results in misleading disclosure,
  that distorts the market and that segregates it
  into the super included and super excluded

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Discussion of this second section of the
presentation