Regulatory requirements & experience re Credit Bureaus Gabriel Davel 22 October 2008 National Credit Regulator South Africa

2 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 US$140bn 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

3 Overview of National Credit Act Marketing practices & disclosure Agreements & quotes Reckless lending rules Enforcement & debt collection Introduce debt counselling Regulate Credit Bureaus Create National Credit Register Interest & fees Unlawful agreements, provisions National Credit Act

4 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

5 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

7 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

8 Enforcement Inspection Pre-registration + Registration Initial audit 1.Policies 2.Data verification procedures 3.Complaints management 4.Statistical samples to assess data quality 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 Credit Info Ombud Established by bureaus to resolve complaints Inspections by NCR (own inspectors or forensic investigators) Annual compliance audit (own auditors)

9 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

10 Monitoring credit market through statistics received from credit bureaus  Bureaus submit quarterly report to regulator,  on aggregate credit activity & performance indicators  Published as overall indicator of credit market performance … aggregated information on credit market published quarterly Also:-  Total enquiries vs % approved  Disaggregated by different sub-sectors of credit industry  Average impairment for different income groups

11 Thank You !

Background information

13 National Credit Act key 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 …

14 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 advertisements