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11 All progress is based upon a universal innate desire on the part of every organism to live beyond its income. Samuel Butler, English composer, novelist.

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Presentation on theme: "11 All progress is based upon a universal innate desire on the part of every organism to live beyond its income. Samuel Butler, English composer, novelist."— Presentation transcript:

1 11 All progress is based upon a universal innate desire on the part of every organism to live beyond its income. Samuel Butler, English composer, novelist and satiric author (1835- 1902). The business of a moneylender … has no where nor at any time been a popular one. It is an oppression for a man to reclaim his own money: it is none to keep it from him Bentham, British reformer, 1787

2 SOUTH AFRICAN NATIONAL CREDIT REGULATOR ACT RURAL HOUSING LOAN FUND 14th ANNUAL WORKSHOP Topic: General compliance to the NCA, reflections on consumer indebtedness Ramabaka Abel Tshimole 15 October 2010

3 33 Topics Overview Registration Compliance Consumer Credit Market Debt counselling Conclusion

4 4 South African credit market Legislative framework before National Credit Act There was no single unitary legislation regulating the credit market There were different pieces of legislation such as the Usury Act & Credit Agreements Act Exemption Notice promulgated under the Usury Act established a regulatory body to regulate micro lenders Legislative framework before National Credit Act There was no single unitary legislation regulating the credit market There were different pieces of legislation such as the Usury Act & Credit Agreements Act Exemption Notice promulgated under the Usury Act established a regulatory body to regulate micro lenders Legislative framework before National Credit Act There was no single unitary legislation regulating the credit market Different pieces of legislation such as the Usury Act & Credit Agreements Act applicable to different credit agreements No single reporting framework & uniform standards to monitor compliance with legislation

5 5 National Credit Act in a nutshell … National Credit Act Marketing practices & disclosure Agreements & quotes Reckless lending Enforcement & debt collection Debt counselors Credit Bureaus National Credit Register Interest & fees Unlawful agreements, provisions

6 6 National Credit Act Consumer credit institutions National Credit Regulator Registration of industry participants Enforcement of the Act Development of an accessible credit market Research & publication of information National Consumer Tribunal Adjudication of disputes & complaints

7 7 Consumer Credit Market in South Africa Credit Providers 36,3 million Credit Consumers 1,847 Debt Counsellors R1.1 trillion $164 Billion consumer credit Credit Providers = 4,301 Branches = 33.875 10 x Credit Bureaus

8 8 ACHIEVEMENTS Unqualified (clean) Audit Report Registration of 4,301 entities with 33,875 branches Representing approximately R1.1 Trillion of credit, provided to 36,3 million credit agreements/clients Registered 10 credit bureaus, Registered 1,847 debt counsellors, arranged training, provided guidelines, accredited PDAs 6 already Complaints received 9,303, calls received 349,101 Investigations underway 39, completed 414 Compliance notices 47, Cases referred to Tribunal 20 Received 206,045 applications for debt review, 61,682 consumers approved and under debt review Awareness workshops held 1,741, radio/TV broadcasts 1,338/247, AVE R248m

9 9 Investigation Statistics Investigations Conducted453 Debt Counselling Investigations110 Credit Provider Investigations328 Credit Bureau investigations15

10 10 Enforcement Statistics Instructional letters110 Formal undertakings20 Compliance Notices47 Referrals to Tribunal20

11 11 Registration of credit providers, credit bureau, debt counsellors The requirements Minimum requirements are set which also specify disqualification criteria –Registration with SARS, appointment of accounting officers/auditor, –Confirmation of registration with CIPRO, criminal/ITC check, etc Conditions of registration are stipulated and imposed –General conditions Overall compliance with NCA & other applicable legislation –Specific conditions e.g for credit providers Language policy proposals BBBEE Combating over-indebtedness of consumers

12 12 Development credit providers The requirements Same requirementsconditions as those of general consumer credit, in addition having to –Provision of business plan – product offering; financial capacity, Human capital, systems, processes and procedures –May apply for permission to deviate from certain sections of the Act The credit provider must specifically identify all areas in which documentation which it intends to use or procedures which it intends to apply deviate from the requirements that apply to other credit agreements. This must be done with reference to the specific sections of the Act through which discretion is provided to the NCR for approving specific documentation or procedures for developmental credit agreements (e.g affordability assessment procedures/provisions, statement of account); The credit provider must motivate the departure from the requirements that apply to credit agreements in general; that is why is it necessary for the credit provider to depart from the procedures or documents that apply to other credit agreements; and The credit provider must further motivate why it considers the procedure or documentation which it proposes to use to still afford the necessary protection to the consumer. This requires the credit provider to indicate which special circumstances exist or alternative procedure it applies which would ensure that the legislative objective of the particular section of the Act will still be met. Intention is to stimulate provision of developmental credit focusing on small business development/support, low income housing and educational loans 166 Development Credit Providers Registered with an approximate total principal debt/loan book amounting to R42bn.

13 13 Compliance monitoring Compliance Monitoring 1. Statutory Reports Processing 1.1 Statistical Returns 2. Compliance Analysis of Statutory Reports 3. Conditions of Registration 1.2 Other Statutory Reports (AFOR, AFS, AER, ACR) 2.1 Significant Entities (Top 20) 2.2 Remaining Significant Entities (Biennially) 2.3 Cyclical Reactive Review (Other entities) 5. Compliance Research and Education 3.1 Language Policy 5.1 Compliance Research 5.2 Industry Workshops 4. Market Conduct – Flavour of the Quarter 3.2 Commit- ment to BBBEE 3.3 Combat of over indebtedness 3.4 Review of Conditional Registrations

14 14 Compliance reporting Compliance reporting by different registrants The reporting is standard and additional information may be requested Information in the reports used to monitor market trends, market conduct/practice

15 15 Pro-active and reactive monitoring Proactive Currently we are concentrating on desk top analysis (Off-site analysis) –Credit providers submit returns and reports Plans to introduce on-site analysis –Assess the level of compliance in terms of the documents submitted to us in comparison to what is really happening in the companies by interviewing management team and staff –Proactive general assessment and evaluation of business practices and business models to identify areas of concern and aspects that may be good for the industry (best practices in a way) Market conduct studies –Focus on initial inspection before the files could be escalated to investigations and enforcement to lessen the workload on them –Proactive investigations –Compliance Framework to inform the sequence, standards and methods to use Reactive Media reports –Advertisements/ Marketing materials Reportable irregularities –Following up on the non-compliance reported by IRBA on the reportable irregularities received Complaints and call centre reports –On going depending on the non-compliance received –This will be the focus of complaints department 15

16 16 Statutory reporting All registrants are required to submit reports at given times Guidelines and industry workshops are provided to enlighten registrants Consistency, accuracy, correctness, reliability, validity Registrants, accounting officers/auditors, compliance officers Systems, processes and procedures

17 17 Enforcement Tools Conditions of registration Reports, statistics, research Explanatory notices, letters of undertaking Consumer complaints & various ombud Compliance notices & criminal action Tribunal, courts Consultation requirement relating to enforcement action on banks, but note does not apply to insurers

18 18 NCR Investigations Present Focus and areas of concern Consumers losing homes due to unlawful practices Debt Counsellors: Receiving/distributing money & adhering to the time frames Debt collection practices of credit providers Section 73 Audits – Credit Bureaus Micro lenders: Adherence to interest caps and costs, card and pin, emergency loans, disclosure requirements, Non-registrants Major concern: The use of the NCA to further fraudulent activities Marketing and advertising Pre-agreement quotes and disclosure Right to set-off Priority payments

19 19 Independent Professionals/ Practitioners Independence of some of the reports The NCA somewhat rely on independent professionals like auditors or accounting officers i.e. Assurance Engagement report

20 20 Compliance Reporting feedback –Reporting the outcome of the analysis of Statutory returns and others reports Consumer Credit Report Credit Bureau Monitor Research Reports from various research done to monitor performance and conduct of the credit industry players –Pricing and Access Study –Report on Over-indebtedness –Impact of credit crisis on the consumer credit industry Relevant stakeholders –MRCC (Management Registrations and Compliance Committee –MECC (Management Enforcement and Complaints Committee) –CEO/COO –Various government departments –Registrants and/or associations of registrants (e.g banking association) NCR website Media release

21 21 Current state of the consumer credit market Statutory Statistical Returns submitted by Credit Bureaus & Credit Providers (including banks)

22 22 Credit granted vs Debtors book

23 23 Demand and supply of credit

24 24 Credit granted per industry

25 25 Gross value of book – credit type 64.85% 18.62%11.18% 5.29% 0.06%

26 26 Banks continue to dominate the consumer market with 89% of book Other providers enjoy approx. equal share Gross value of book – provider type

27 27 CB impaired records Credit bureaus have records for 18.32 million credit-active consumers The # of consumers with impaired records continued to increase reaching 8.59 million this quarter 26.1% of accounts are impaired

28 28 Status of the arrears levels and credit standing of consumers and accounts There has been a slight improvement in the numbers of accounts that are going into arrears The % increase for the number of consumers and accounts with impaired records on a quarter to quarter basis is showing signs of recovery even though there has been an overall increase in the impaired records. 217 205 (mortgage) accounts out of 1,8 m accounts are in arrears. Rand value = R113 billion out of R736 billion. Equates to 15% of the rand value of the mortgages in arrears.

29 Debt Counselling

30 30 Debt Counselling A new profession was born in 2007 The aim is to assist the over indebted consumer For some role players in the credit market this was an unwanted baby DEBT COUNSELLING ASSOCIATION OF SOUTH AFRICA

31 31 Debt Counselling: Update Discussions between Credit Providers and Debt Counsellors New rules and standardized procedures Notifications and financial information Response to Debt Counsellors proposals Restructuring rulesTerminations in terms of Sec. 86 (10)

32 32 Importance & role of debt counselling Role of debt counselling, in the context of the lack of appropriate personal insolvency mechanisms in SA. oNo appropriate personal insolvency mechanisms. US, UK & EU have range of different mechanisms for personal insolvency. The mechanisms in SA are outdated and ineffective. oAs result, when debt stress occurs there is no effective mechanisms to resolve the issues, or for creating a settlement in which the obligations of the consumer and the demands of different credit providers are reconciled. Negative social impact of debt stress oNo mechanism to resolve a personal financial crisis and enable an individual to get another chance. oHousehold income is permanently reduced through debt payments. Household needs not met and social welfare receipts are diverted to debt servicing. oSchool fees not being paid, arrears on municipal service payments and a multitude of related areas.

33 33 Debt profile & vulnerability of different groups Group 1 = informal sector, domestic workers, social grant recipients & agricultural sector –Low credit exposure, mainly furniture & unsecured. BUT – more significant relative to income! –Position may be improving if new credit limited –Often unaware of protective measures, e.g. UIF, insurance or counselling Group 2 = Entry level workers in public & private sector, earning R1.8k to R6.1k/m –Significant exposure, both unsecured (< 3 years), vehicles & mortgages –Short term credit exposure self- correcting over time, but mortgages & vehicles require assistance Group 3 = middle income, R6k to R17k/m –High level of exposure to all products & high debt stress –Most vulnerable, to debt stress & loss of house if affected by either job loss or reduced income Group 4 = high income, R17k/m + –high credit exposure, mainly mortgages, vehicles & credit facilities. Also 2 nd properties. Income reduction biggest threat. –Greater ability to resolve own problems. But often resorts to DC assistance / protection.

34 34 Policy response - consumers Low income groups least aware of protective measure, whether counselling, UIF or others. Awareness programme important – also on self- protection strategies Debt counselling huge role in resolving cases of reduced income –legal problems major obstacle Debt counselling little value in case of job loss, no income to service debt … some form of personal bankruptcy, while protecting housing? IncomeRisk of job losses Debt stressPotential debt fall-out Policy response ? Gr 1 - low 0 to R1,800 ModerateLow to moderate Low, getting better Awareness & education on protective measures & behavior change Access to support & debt counselling Protection of primary residence Gr 2 - R1,800 – R6,100 HighModerate to high Moderate/ high, debt improving Gr 3 – R6,000 – R17,000 Moderate to high High Gr 4 – R17,000 + Low, but risk of income loss High, but have options Moderate

35 35 Causes of debt stress & implications in the current environment Borrowers oReckless & aspirational borrowing, oExternal factors – loss of income / relationships breaking up / death and sickness Credit providers & consequences of hard selling oHard selling by credit providers contribute to over-indebtedness. oReckless lending oCall centre agents & misleading disclosure = consumers taking on credit which they cannot afford. oResist implementation of debt counselling Job losses + reduced income = debt stress oDebt counsellors confronted with huge demand. oAdditional impact of the financial crisis. Job losses + significant reductions in income. Reduced overtime; sales commissions; year-end bonuses etc. oEven people who were not over-indebted are affected. oStaff of credit providers also under pressure (sales targets, collection targets, clients …). Challenge is to recognise these realities, and to find mechanisms to reconcile the conflicting claims. Engagement between debt counsellors and credit providers critical.

36 36 Debt Counselling 1,847 debt counsellors registered, five accredited payment distribution agencies. Extensive monitoring + support mechanisms + investigations & enforcement. 206 045+ applications cumulatively, growing at 7950 pm. Monthly distributions to creditors now estimate R2.7 b (to date), for approx 61,682 consumers. Declaratory order addressed some issues, but legal amendments required Despite challenges, debt counselling already played a huge role in mediating between debt stressed consumers and their credit providers. Resulting also in change in credit provider behavior. Monthly payments to creditors Total applications

37 37 Backlogs, reasons & risk to debt counselling Interpretation of NCA & Magistrates Court procedures exploited by industry to prevent magistrates court hearings from taking place –Credit providers exploited every area of uncertainty to oppose hearings. NDMA not implemented. Delays in providing documents, cause overruns on time limits. Opposing application of certain section of Act, eg 90(2)(n) and 103(5). Irregular terminations & repossessions. –But, major improvement recently, with banks taking a more constructive approach –And, 1000s of consumers have already benefited both from debt counselling and from internal restructuring by banks NCRs Application for Declaratory Order, 21 August. –clarified number of issues; certain issues not addressed; some complications Still problems. Require amendments to NCA & Regulations.

38 38 Consumers Case studies ConsumerNet. Income Distributable Amount Contractual Instalments Credit agreements Total exposure Reason for over- indebtedness A Auditor R13 539R7 000R21 15316R300 407Excessive family spending B Medical doctor R18 503R11 357R63 42310R1.4mBusiness collapsed C Ex-employee of bank R59 000R43 000R87 56819R6.1 mIrresponsible lending D Property Trader R36 315R19 225R200 00015R22.3 mBusiness collapsed E Nurse R5 155 Nil R5 84510R80 000Irresponsible lending F Clerk, spouse unemployed R5 512R500R4 50010R46 000Irresponsible lending G (Taxi owner) R25 000R17 000R42 00015R1.6mLiving beyond his means

39 39 Problems: Debt counsellor behaviour Majority of debt counsellors working very hard, under great pressure. But also a number of bad apples … –Taking clients for fees, doing no work –Refusing to use PDAs, misappropriating client repayments –Restructuring proposals unprofessional and meaningless –Confrontational with credit providers, running to courts when consensual solutions possible –Time-lines not met; Bad administration (e.g. account numbers); oDelegate counselling to unregistered employees Biggest risk: debt counselling becoming a payment holiday –Creditors must terminate & enforce if not comply with process, no payments made

40 40 Problems: Credit providers Certificates of Balance: not provided or late & inaccurate Unrealistic payment expectations. Unsecured creditors unreasonable. Competitions between products. Cant find settlements. Not cancel old debit orders. New restructured debit orders thus rejected Preventing hearings in magistrates courts from taking place Practices of collection departments & outsourced legal representation. Not adjusting account details.

41 41 Problems: Payment distribution Payment distribution by counsellors not acceptable. –Debt counsellors neither trained nor equipped to do payment distribution. Conflicts of interest and huge threat to integrity of process oCompliance with Reserve Bank rules Many problems created by information supplied by debt counsellors. And bank system problems. Volumes and administrative complexity a challenge, but the system works.

42 42 NCR implemented a range of interventions to support debt counselling … Training & support: Accredited specialised training institutions & provided initial material. Implemented before effective date of Act. Also arranged follow up courses & workshops, to support debt counsellors & improve expertise. NCR capacity: NCR appointed special call centre agents & complaints officers specialising in debt counselling – to deal with problems, intervene when things go wrong, protect homes from repossession wherever possible. Payment distribution: NCR accredited specialised payment distribution agencies. To separate debt counselling from payment distribution. To limit risk of fraud & theft of consumer payments. Audits & inspections: Performing ongoing audits & inspections on debt counsellors, PDAs and credit providers (including banks) –University of Pretoria review to identify problems –Audits on PDAs –552 on-site visits + 65 investigations NCR Task Team to investigate problems –Banks –Debt counsellors –Payment arrangements

43 43 Challenges: Magistrates Court process Delays = risk to the banking sector + incentive for consumers to use it as a payment holiday … Differences between requirements of different courts = increase cost, complexity & confusion

44 44 Latest developments Despite these challenges, debt counselling already made a significant contribution in creating a mechanism to mediate between consumers and multiple creditors, & limiting losses through repossession of houses & cars BUT: cannot allow consumers to abuse process for payment holiday!!

45 45 Thank You !

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