Making Credit Markets Work

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 Committees 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 Africas 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
• ProPoor 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?