Regulatory requirements

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National Credit RegulatorSouth Africa

• Regulatory requirements experience re Credit
  Bureaus
• Gabriel Davel
• 22 October 2008

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In 2005, South Africa passed a National Credit
Act, regulating all credit providers, credit
bureaus debt counselling

• New legislation passed in response to bank
  failures in 2002,
• Inefficient allocation high cost, particularly
  for low income SME finance
• Extensive research confirmed that credit market
  was dysfunctional
• based on international best practice, but with
  significant modifications
• Act covers all consumer credit, bank and non-bank
  finance, furniture consumer goods finance
  developmental credit
• National Credit Regulator created to enforce Act
• Approximately US140bn of consumer credit,
  provided to 17 million consumers
• 3,232 credit providers with 29,811 branches
• National Credit Act also covers
• regulation of credit bureaus
• regulation of debt counsellors
• collection publication of statistics on credit
  market

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Overview of National Credit Act
Interest fees
Reckless lending rules
Marketing practices disclosure
National Credit Act
Enforcement debt collection
Agreements quotes
Unlawful agreements, provisions
Introduce debt counselling
Regulate Credit Bureaus Create National Credit
Register
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Political perspective on regulation of credit
bureaus

• Prior to the Act, public anger at bureaus with
  demands to close credit bureaus, or
  alternatively, wipe out all records as a once off
  amnesty for the poor demonstrations marches
• Partly motivated by over-indebted persons with
  bad repayment records, partly contentious
  judgment practices doubtful credit provider
  practices impacting on credit records
  creating consumer resentment
• Also bureaus sloppy unprofessional data
  management practices
• Self-regulation ineffective, little credibility
  bureaus not able to force credit providers, who
  are their clients, to change practices
• Since legislation, credit bureaus not a political
  rallying point
• there are now rules created by parliament to
  resolve valid concerns threat to ban bureaus
  averted, or to impose limitations on data sharing
  
• ? credit bureaus de-politicised

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Better to regulate credit bureaus through
specialist credit market legislation, not through
"privacy legislation

• Considerations in regulation of credit bureaus
  vastly different from generic privacy
  considerations
• Recognising that credit bureaus are in the
  business of trading in consumers private credit
  information
• Thus
• regulatory objective is not to minimise data
  sharing, but to optimise data sharing, accuracy,
  efficiency completeness
• regulate bureaus as part of credit market
  attention to accuracy,
• Enforced through annual compliance reviews by
  auditors ad hoc inspections for benefit of
  credit providers (credit risk assessment) and
  consumers (limiting of over-indebtedness)
• Audits at implementation of Act revealed
  significant data problems
• reflect reality that bureaus earn living from
  credit providers, little incentive to take action
  that may upset their clients high tolerance
  for both data inaccuracy under-reporting

6
Summary of requirements of the Act Fairly
simple, concise 5 sections 4 regulations,
approx 15 pages

• Credit Bureaus
• Bureaus registered, pre-registration audits
  focusing on capacity to manage data deal with
  consumers
• Negative positive data sharing, shorter
  retention periods for subjective data, longer for
  objective repayment data judgments
• Legal obligation on bureaus for data accuracy
  (a) to assess validity of data prior to loading,
  (b) to take reasonable steps to ensure reports
  are accurate
• Usual stipulations re definition of sources,
  types of information, retention periods, purposes
  for which data may be released
• Consumer
• Notified before adverse info to bureaus Free
  access to credit report, annually
• If information disputed, may not be reported
  until accuracy confirmed
• Provisions for data cleansing at inception of
  Act
• Certain data had to be removed (once-off),
  requirement for audit on data accuracy
  procedures

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Act also creates legal obligation for credit
providers re submission of data

• Information submitted must be accurate
• Provision of data to bureaus not compulsory
• But implicit requirement Act requires
  affordability assessments and credit providers
  need the bureau reports to do affordability tests
  have to supply in order to do enquiries
• To inform consumers before adverse information
  supplied to bureaus
• Consumer may claim cost for correcting inaccurate
  information

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Enforcement
Credit Info Ombud Established by bureaus to
resolve complaints

• Initial audit
• Policies
• Data verification
• procedures
• Complaints management
• Statistical samples
• to assess data quality

Inspections by NCR (own inspectors or forensic
investigators)
Inspection Pre-registration Registration
Annual compliance audit (own auditors)
Enforcement Undertakings Agreements (between
bureaus regulator) Compliance Notice (public
notice of areas of non-compliance) Referral to
Tribunal (deregistration or fine up to 10 of
turn-over) Prosecution in court
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Observations from credit bureau audits

• Inconsistent treatment of complaints
• Insufficient follow-up where complaints indicate
  patters
• Insufficient reasonability checks on data
  received from providers
• Insufficient action on providers that provide
  inaccurate data
• Certain data sources unreliable, yet no action
• Policies procedures not formalised,
  insufficient oversight by Boards of Directors
• Self-regulation ineffectual

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Monitoring credit market through statistics
received from credit bureaus
aggregated information on credit
market published quarterly

• Bureaus submit quarterly report to regulator,
• on aggregate credit activity performance
  indicators
• Published as overall indicator of credit market
  performance

• Also-
• Total enquiries vs approved
• Disaggregated by different sub-sectors of credit
  industry
• Average impairment for different income groups

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Thank You !
www.ncr.org.za
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• Background information

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National Credit Actkey aspects that deal with
fairness in credit market

• Negative option marketing automatic increases
  in credit limits prohibited
• Compulsory, standard 1-page pre-agreement quote
  on all agreements
• Penalty interest prohibited In Duplum rule
  introduced Single premium credit life insurance
  prohibited
• Changed structure of disclosure, away from APR,
  to separate disclosure regulation of interest,
  initiation fees monthly service fees
• Prohibited arrangements that give one credit
  provider a preference over others, particularly
  in payment system or through payroll deduction
• Prohibit specific contractual clauses that are
  considered unfair (not unconscionable contract
  approach)
• Create Register of Credit Agreements regulate
  credit bureaus to provide complete accurate
  picture of payment profile indebtedness

Fairness, predictability, consistency
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Disclosure

• Disclosure of cost of credit prior to
  establishment of agreement critical
• 1 page pre-agreement statement applies to all
  small agreements
• Also prescribes minimum disclosure in
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