National Credit Amendment Bill: Continuation of Public Hearings

Meeting report

National Credit Amendment Bill Continuation of Public Hearings
The South African Reserve Bank (SARB) submission
Mr Lesetja Kganyago, Deputy Governor, South African Reserve Bank, gave some background to put issues I context, referring to the 2008 Global Financial Crisis, and saying that the main lesson that should be learned from this crisis was the need for an economy to maintain financial stability. He explained that South Africa entered the financial crisis on a very strong footing, but stressed that even though South Africa had a well regulated and stable economy, the government did not adopt a complacent attitude. South African Reserve Bank (SARB) had decided to move from institutionalised control to a stronger objectives-focused, Twin-Peaks Regulatory System, whereby a Prudential Regulator would operate within the SARB, while a Market Conduct Regulator would operate within the Financial Services Board.

The SARB also realised that in order to protect financial stability within the South African economy, certain objectives would have to be met. The first objective would be to regulate the relationship between financial institutions and their consumers and make sure that financial institutions lived up to the promises they made to consumers. The second objective was to regulate the relationship between financial institutions and the government and ensure that these institutions were being run according to legislative regulations.

He stated further that another key factor that contributed to the SARB’s decision to change its regulatory approach was that financial regulators were often noticed to lag behind institutions that were regulated by them, by constructing weak regulations with many loopholes. Financial institutions would deliberately select the weakest regulators to whom they wished to account. This phenomenon had been referred to as Regulator Arbitrage, and the SARB was seeking to eliminate this with its submissions to the National Credit Amendment Bill (the Bill).

Mr Kganyago praised the National Credit Act (NCA), citing the fact that already in 2007, the SARB warned of the high levels of credit, but regulations held together by the NCA prevented the South African Economy from descending into a much deeper position than it did after the 2008 financial crisis.

He then explained the significance of the SARB and its role in the South African economy. The Constitution required the SARB to ensure financial growth and stability. It was for this reason that the SARB made submissions to the Department of Trade and Industry (dti) in 2013 on the draft Bill as published in May 2013, which would have made this role of the SARB into a mandatory one. One of the direct contributions to financial stability was to ensure that banks, regulated by SARB, protected their depositors, who were the primary source of funding of the credit system. Without depositors, credit would not exist. Without credit, investments would not be possible and economic growth would not occur.

Mr Kganyago then pointed out that the Revised Framework for Regulation: Financial Sector Regulation Bill 2012 was underway, which was approved by Cabinet on 4 December 2013 and was open for public comment until 7 March 2014.

He then explained the importance of aligning this Bill with the reforms that Cabinet was making in the financial sector, to avoid confusion, and said that SARB’s submissions were essentially aimed to make the whole financial system in South Africa safer.

Mr Kganyago focused firstly on section 17(4) of the NCA, which required the National Credit Regulator (NCR) to liaise with the Registrar of Banks on matters relating to consumer credit within the banking sector, and inform the Registrar of Banks, within an agreed time frame, of the intention to investigate a bank. SARB noted the need for regulators and the Registrar of Banks to reach consensus. Where it could not be reached, SARB was concerned that this could give rise to disputes between the parties, causing financial instability and Regulatory Arbitrage. This Bill should therefore outline procedures for resolving disputes, as well as the matters on which consensus would need to be outlined.

The other point on which he wished to comment was in regard to section 1 of the NCA, which defined a ‘Regulated Financial Institution’ to mean a Bank, a Mutual Bank or any other financial institution that was similarly licenced and was authorised to conduct the business and take deposits from the public in terms of any national legislation. SARB requested that a revised definition be included in the Bill, that also included a reference to a non-deposit taking financial institution, as this would recognise the evolving role that insurance and other financial institutions played in the economic sector, and ensure further financial stability.

Discussion
Mr B Radebe (ANC) appreciated the fact that the SARB was prioritising the protection of the depositors, so that the credit industry may flourish, but felt that banks also needed to regulate credit better. At the moment, many consumers were given credit they did not need, and were unable to pay it back and this resulted in financial instability. He asked whether Chief Executive Officers (CEOs) of banks would be held accountable for this. He also asked why the Registrar of Banks was going to be phased out, and which structure would replace this. Furthermore, Mr Radebe asked the SARB whether it was experiencing any problems in regard to payments made via the internet. He finally asked whether the SARB had a system of priority in place, in terms of which types of back-payments would firstly be deducted from a debtor.

Mr D Swanepoel (ANC) asked Mr Kganyago what his views were on the effect of the reduced amount of data-sharing that banks would be allowed. He also asked that the full submission of the SARB to the NCAB be forwarded to him. He also asked what Mr Kganyago thought would be the effect of the increased Repo Rate on the financial system.

Mr G McIntosh (COPE) commented that the contractual arrangements mentioned in the NCA were necessary for financial stability. He felt the Committee should give favourable consideration to amending the sections that Mr Kganyago had raised.

Mr Z Wayile (ANC) asked how the balance between financial stability and political stability could be found, in the midst of high levels of strike action. He also asked how the SARB was planning on dealing with the problem of workers choosing to live beyond their means, perhaps choosing to use private facilities and institutions instead of the public ones provided. He asked what effect there would be on the economy, of workers choosing voluntary retirement packages.

Mr G Selau (ANC) echoed the concerns of Mr Radebe, asking what would become of the position of the Registrar and which post would be replacing this.

Mr X Mabasa (ANC) asked what regulations could be put in place to better control micro-lenders and how they operated. He felt that they were abusing the system, by lending to people who could not afford to pay  back. He also said that the insurance companies needed to be regulated better, as he felt that they were too freely enterprising. He echoed the sentiments of Mr Radebe with regards to the need for better regulation of loans from banks so consumers may not borrow money above their means.

Mr Kganyago responded that indeed the practice of lenders offering exorbitant amounts to people who could not afford them would need to be curtailed. Members of the public tended to accept the loans, simply because they were offered, instead of when they really needed them. The manner in which debtors paid back their creditors, and the order in which they did so remained the responsibility of the debtor, not the banks, but this was a valid point. He added that in regard to debtors borrowing more than they could afford, the Committee may need to discuss the manner in which creditors would need to evaluate a potential debtor’s affordability, and perhaps limit how much that person was permitted to borrow. He felt that the potential drop in the data-sharing between financial institutions was acceptable, as it would allow potential borrowers who may have had a bad credit history, but who still managed to repay their debt, to start on a clean slate when intending to take out loans in the future. He noted the point that workers may opt to resign and withdraw their provident fund packages at an early age, but said that regulations needed to be put in place that would prevent them from being able to withdraw more than a certain proportion before their retirement age. He also commented that there were too many different regulators for the financial sector, an that there was an ombudsman for too many different aspects of the financial sector.

The Chairperson raised the issue of houses being repossessed when people were not able to repay their mortgages. She asked whether this was due to the fact that the mortgage structure in South Africa was so different from that in other countries, and if this meant that the mortgage system needed to be reworked.

Mr Kganyago said that the best way to manage the mortgage system was for debtors to repay their mortgages in the shortest time possible, to ensure that they had to repay less interest.

Judge HCJ Flemming submission
Judge HCJ Flemming started his presentation by saying that his primary concern and reason for making his submission was to ensure that there was protection of the consumer. He said that the NCA, in its current form, did not protect many people, least of all the consumer. According to his understanding of the NCA, the first 80 sections of the Act were not problematic, but the last 20 sections were.

Judge Flemming compared the NCA to the Hire Purchase Act of 1942. Unlike the Hire Purchase Act, the current NCA did not make provision for the consumer to have the option of a lease on an asset if the consumer could not afford the payments related to a contract. He felt that a lease would not only provide an easier form of payment for those who could not afford contracts, but it would also provide better protection to the consumer because the consumer would not be threatened by the binding nature of the contract. The Act excluded a debtor who was under debt review from acquiring more debt while paying off a bond. He believed that this was unfair and impractical, especially when the debtor had a good credit history otherwise, and considering the fact that bonds took up to 20 years to repay.

Judge Flemming felt that the NCA over-regulated contracts. He made the example of the drawing up of Consent Agreements in court which he felt were unnecessary, costly and impractical for the low-income consumer. He said that all of this could be avoided if an agreement was merely reached between the debtor and the creditor. He believed that section 129 should include this option. He believed that another option that needed to be included in section 129 was that of reconstruction of debt via an administration order, which could be effected, free of charge, at a magistrate’s court.

Judge Flemming also pointed out that banks were offering consumers too much credit and thereafter collecting large amounts of interest from them. In addition to this, banks were also charging consumers interest rates on initiation loan amounts which, essentially, were small amounts used to determine a consumer’s reliability. These, and other such administration processes, needed to be done solely at the cost of the financial institution instead of burdening the consumer.

The Chairperson interrupted Judge Flemming, advising him to complete his presentation within the allotted time frame given to him, as he was over-elaborating on many points and had in fact already exceeded his presentation time.

Judge Flemming then continued with his scrutiny of section 129, saying that he felt that the NCA overall needed to make the process of debt recovery and arrangements for repayments of debt easier for the consumer, by offering more affordable and practical options. The section advised consumers who are in dispute with their creditors to approach consumer courts, debt counsellors and ombudsmen, all of which were long processes that could not be resolved in less than ten days.

Judge Flemming then referred to parties that were not registered credit providers and noted that lay persons generally offered and accepted loans from one another without drawing up paperwork, so these creditors were setting interest rates that were not viable to the debtor.

Overall, Judge Flemming felt that the NCA needed to make the process of debt counselling and debt reconstruction more affordable for the consumer. He said that there were many alternatives to the expensive options laid out in the NCA and that these needed to be included and considered.

The Chairperson asked Judge Flemming to end his presentation at this point, and asked him to include more elaboration by way of examples and explanations in his written submission.

Discussion
Mr G Hill-Lewis (DA) commended Judge Flemming on his presentation and urged him, as the Chairperson had asked, to add elaborations to his submission. He then gave an example of a case in which a garnishee order was awarded by a court on an application that requested more than the in duplum limited amount, and asked how this could be done. Any increase in the repo rate resulted in an increase in credit rate, which affected the poor most severely, and he asked Judge Flemming if he thought that this should be dealt with in the Bill itself, or the regulations.

Mr Swanepoel referred to the section which excluded a consumer from acquiring more debt while paying off a bond, and asked how Judge Flemming suggested that this could be reworded to exclude payment of bonds.

Mr Johann de Jager, Member of the General Council of the SARB, referred back to the Twin-Peaks System that was explained by Mr Kganyago, saying that when this new system was put into place it would cover many of the concerns expressed in members’ questions.

Judge Flemming responded that it was not abnormal for a court to make decisions that went against regulation, and stressed that in a civil court, decisions would be taken based on the information placed before the court, which was why it was necessary to have an appeal system. He suggested that the regulations ought to cover the interest and repo rates, as they typically fluctuated and therefore would be easier to amend outside of the Bill. With regards to debtors under review, their bond repayments and the accumulation of more debt, he said that the section merely needed to include provision for the debtor to present a court with evidence to allow the consumer to be considered for credit once more.

Personal Finance
Ms Angelique Arde, Reporter, Personal Finance, presented the Personal Finance submission on the Bill. The primary concern was linked to reckless lending on the part of the banks. She gave an example of that a customer had applied for a home loan from a bank, but needed to await approval. Pending that approval, the bank then offered her a personal loan of R60 000 and an overdraft of R24 000 both of which could be approved immediately. She could not afford the repayments and told the consultant of this. However, the consultant assured her that as soon as the home loan was approved, she could repay the personal loan. Five weeks later, her application for a home loan was rejected. She immediately took steps to repay both the  personal loan and the overdraft, neither of which she had not touched, but was then informed that she needed to pay the bank an additional R4 000 for administration fees, which she could not afford at the time.

Ms Arde felt that banks were employing people who were not properly trained and were unqualified to make decisions on the affordability of consumers. They were also not following strict systems that measured this. Guidelines were not enough when it came to governing this process, and it was submitted that regulations needed to be set in place. She also urged that regulations be put in place that excluded consultants from receiving commissions on credit given, as this created a conflict of interest which led to reckless lending. She also asked that the Bill should contain a provision that obliged the NCR to investigate cases of such reckless lending. She also asked that the Bill make provisions for the cancellation of an unused credit facility at a nominal fee.

Ms Arde then referred to another case to illustrate concerns about debt counselling. A 45 year old single mother was retrenched and remained unemployed for a year. After finding a job as a personal assistant, at a salary of R5 000 per month, she applied for debt counselling. Her total debt amounted to R70 000. The debt counselling company took on her case, but she was informed by a consultant to state on her application that she was earning R9 000 per month, even though the debt counselling company had a copy of her payslip. Even though some of her creditors accepted the proposal of repayment made by her debt counsellors, many of them were still calling her to make repayments and some had even handed her over to debt collectors and attorneys. Furthermore, she also owed the debt counselling a consultation fee. Over and above all of this, other concerns with regards to the debt counselling company were raised. There was concern that no actual  counselling was given to her to help he manage her expenditure, that the debt counsellors were concerned about her debt and not her finances. She felt that she was in fact much better off before undergoing the counselling process than she was during it.

Ms Arde suggested that in cases such as this one, where debt counsellors presented fraudulent debt-payment proposals or where proposals were written up merely so they would be more acceptable to credit providers, the debt counsellors should face strict penalties or be deregistered. She also asked that debt counsellors should hold face to face meetings with consumers, in which they explained all fees thoroughly. Counselling and legal fees should be kept to a minimum and paid on the consumer’s monthly debt-repayment amount. Debt counsellors should also assist consumers in working on their budgets and reducing their unnecessary expenditure. Finally, she asked that credit providers furnish debt counsellors and consumers with statements reflecting the receipt of the repayments received.

Discussion
Mr Mabasa commented that Ms Arde’s presentation showed empathy towards the debtors and their plight.

Mr Radebe concurred, commending Ms Arde on the personal nature of her presentation as well as on the fact that she asked for the tightening of regulations on debt counselling and credit providers. They were two sides of the same coin, pushing consumers into uncomfortable corners from both sides.

The Chairperson mentioned a case in which a fashion boutique charged exorbitant amounts to customers for being in arrears.

Ms Arde responded that she agreed with Mr Radebe that creditors and debt counsellors needed to be held accountable for their actions.

The Chairperson urged Personal Finance to investigate these cases in depth, because the consumers that were most affected by this were low to middle income earners.

Wonga Finance SA (Pty) Ltd
Mr Kevin Hurwitz, Chief Executive Officer, Wonga Finance SA (Pty) Ltd, presented the submissions on the Bill. He started his presentation by highlighting the fact that Wonga used a unique model of determining the affordability of its applicants, by using a strictly web-based system, one which he believed was the only one in South Africa. As someone who had also had experience in developing credit legislation in other countries, he felt qualified to make submissions on the Bill. He would focus on development of legislation that would govern online lending, such as that done by Wonga.

Mr Hurwitz referred to some of the previous comments made with regards to over-indebtedness and reckless lending and said that his submissions aimed to assist in the development of measures to combat reckless lending. He believed that the best starting point was to look at the arrears rate – how long it would generally take consumers to repay particular amounts of money, and how much interest was earned over that period.

Mr Hurwitz then gave a brief overview of when and how Wonga was started in 2006, in the United Kingdom, by two South Africans. From the time of its inception, the company looked at revolutionising the financial services industry by targeting key issues in the credit market that caused discomfort to the two founders of the company. The first, which echoed a point that was raised in the previous presentation, was the incentivising of agents who granted credit to consumers. The second was the lack of transparency with regards to fees and the terms of repayment.

The founders of Wonga noted that the rest of the world was moving to a digital way of doing things, but the financial sector was being left behind, so they believed that pivotal changes were needed to ensure transition of the financial sector to a digital environment. In a digital environment, a computer determined the amount of credit, based on the information the consumer provided. All terms and conditions were provided to the consumer on the website, to read and accept before credit was granted.

Mr Hurwitz went on to give further examples of the differences between Wonga’s online processes of providing credit as opposed to conventional banking systems. Wonga provided short-term loans over repayment periods of no longer than 6 months. The loan amounts were determined by a system that calculated the loan amounts, repayment terms and the interest rate. In addition to this, unlike credit card providers who preferred their customers to repay their debt over time, having their balances rolled over and paying more interest on them, Wonga preferred that a customer repaid the loan in full before applying for a more credit. Furthermore, Wonga was unique in the fact that it would “freeze” the interest added to a customer’s loan after that customer had been 90 days in arrears. It also offered interest-free loans to customers who were under debt review.

The Chairperson interrupted Mr Hurwitz at this point, asking him to skip his explanations on the differences between Wonga and other companies that operated in a conventional manner, and move on to its submissions on the Bill itself.

Mr Hurwitz said his first submission related to the guidelines, in which Wonga felt that some clauses were regressive. Clauses 5.1 and 5.2, which required the manual collection and verification of documentation from customers, was not only a step back from Wonga’s own online process, but was also impractical as it required customers to make use of equipment like scanners and fax machines, which were expensive. In addition, Wonga said that there was no evidence that showed that manual verification ensured a better arrears rate than online applications for credit.

In relation to clause 6, Mr Hurwitz agreed with the previous presenters on the expansion of customer data. Wonga agreed that customer data should not be retained by a credit provider after the customer’s relationship with the provider had ended.

He also asked that the Committee prohibit the selling of life insurance on short term loans, subject to the loan amount.

He closed by summarising briefly his submissions again.

Discussion
Mr Swanepoel asked a question on how Wonga charged interest on a day to day basis. He said that if this was the case, it could mean that a customer was paying up to 398% interest over one year, which he did not think was feasible, and asked if Mr Hurwitz if there was not a need to review this system.

The Chairperson asked Mr Hurwitz how transparent Wonga was, as she had not heard any mention of an administration fee. She asked Mr Hurwitz to provide the Committee with a practical example of an amount that could be borrowed, and how much interest would be charged on that amount.

Mr Hurwitz responded that it made no sense to annualise the interest rate on short-term loans and that Wonga’s average loan period was 23 days. He then added that the service fee charged by Wonga was R50, that the initiation fee was 10% of the loan amount, that Wonga charged 0.1% interest per day and that all of this information was on the home page of the website, the only place at which prospective applicants could apply for loans, which Mr Hurwitz believed was highly transparent. He said that all processes used by Wonga fell within the prescribed measures as set out for short-term credit as set out by the NCA. He then said that he would support a pure interest rate as he did not approve of the current rate that was divided into three categories.

Mr Swanepoel questioned the assertion that customers were not allowed to apply for more credit while they were paying off existing credit with Wonga. He was concerned that this would cause customers to continually apply for credit with Wonga, increasing the loan amounts every time, thus sinking deeper into debt.

Mr Hurwitz answered that a system was put in place where a reputation score card was used to assess why a customer required the loan and, in this way, Wonga tried to discourage over-borrowing. In terms of affordability, Wonga requested different types of data from customers, including their salary scales and declaration expenses, all of which were added to an algorithm and from this point a system calculated the loan amount that was to be granted to a customer.

Mr Swanepoel noted that the presentation had mentioned that Wonga requested information from the South African Revenue Services (SARS) with regards to the credit history of customers, but he was under the impression that such information was confidential, and asked how Mr Hurwitz managed to obtain this information.

Mr Hurwitz responded that the information Wonga enquired about with regards to customers’ credit records came from the Credit Bureau, and he had assumed that this was, by extension, obtained from the SARS.

Mr Swanepoel finally asked for comment on the involvement of Wonga in a fraud investigation in the United Kingdom.

Mr Hurwitz responded that Wonga had become involved in the law suit because the United Kingdom did not have all-governing legislation, such as that embodied in South Africa’s NCA, and therefore introducing any type of unconventional credit system in the United Kingdom was fraught with contention.

Mr Mabasa asked whether Mr Hurwitz believed that Wonga’s method of doing business was completely within the bounds of the NCA. He also wanted to know how the Wonga went about determining the credibility of applicants if it did not require physical communication with customers, and whether this did not also contribute to reckless lending. Finally, he was concerned about the fact that, because of the convenience and the technologically charged manner in which Wonga operated, the youth, and especially students may be lured into debt at an early age and so increase the arrears rate.

Mr Wayile said that Mr Hurwitz mentioned the need for tighter regulations on credit providers and he asked him which particular regulations he felt needed to be addressed. Mr Hurwitz had mentioned that banks assisted fraud and asked Mr Hurwitz what the magnitude of this was and what he thought legislation needed to do to combat this. He then asked how Wonga managed to maintain its profitability when its business processes were much more flexible than other credit providers. His last comment related to the fact that the submission stated that there were numerous perceptions about Wonga and the products it was offering. He asked Mr Hurwitz to clarify this statement.

Mr Hurwitz defended Wonga’s digital stance, saying that manual documents were usually prone to fraud. Wonga would be able to provide the Committee with evidence that showed that the online, paperless process was more fool-proof than manual paperwork. With regards to students and young people applying for credit, Mr Hurwitz referred back to the data that had to be provided by customers, and the fact that information would also be obtained from the Credit Bureau and said that these stages would ensure that there was no reckless lending. He also said that he did not believe it made sense to offer life insurance credit on as small and short-term loans as those offered by Wonga. Regarding the ways in which banks assisted with fraud, he said that customers would often go to banks and claim that they knew nothing about Wonga when payments needed to be made from their accounts, and would tell banks to stop these payments. Despite the fact that the banks were supposed to investigate these payments properly, the paperwork for them was time consuming, and so banks tended not to do so. With regards to Wonga’s profitability, Mr Hurwitz said that because all of its work was done online, costs relating to physical branches were cut out. Mr Hurwitz said that he was not sure what the basis was for the misperceptions that people had regarding Wonga.

The Chairperson assured all presenters that the Committee would study their submissions thoroughly and report back to them.

The meeting was adjourned.