UN Guidelines for Consumer Protection

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• UN Guidelines for Consumer Protection
• to address imbalances in economic terms,
  educational levels, and bargaining power
• create market conditions to provide consumers
  with greater choice at lower prices.
• adequate information to make informed choices
  individual wishes and needs
• protected from contractual abuses as one-sided
  standard contracts, exclusion of essential rights
  in contracts, and unconscionable conditions of
  credit by sellers.
• National Credit Act
• To promote a fair and non-discriminatory
  marketplace for access to consumer credit
• To promote responsible credit granting and use
  and for that purpose to prohibit reckless credit
  granting
• To provide for debt re-organisation in cases of
  over-indebtedness

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• Financial crisis, impact of the NCA and role of
  debt counselling
• March 2010

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National Credit ActImpact since implementation?

• Improved disclosure, contracts
• Change credit provider behaviour
• Legal action, repossession
• Credit bureau conduct records

• Enforcement
• (Rudco housing scams Counsellors etc)
• Impact on cost, debt counselling

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National Credit Regulator
Department of Trade Industry
Departments of Finance, Housing Social
Development
Board of Directors
100 staff members R70 million pa budget
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Consumer Credit Market in South Africa
Credit Providers
Credit Bureaus
18 million Credit Consumers
R1.1 trillion consumer credit Credit Providers
4,120 Branches 33.500
1,571 Debt Counsellors
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Credit Provider Statistics Overview of consumer
credit market
Outstanding balances

• Approximately R1.1trillion consumer credit,
  provided to 17 million consumers consisting of
  36m accounts
• Registration
• 4120 credit providers with 33,500 branches
• 11 credit bureaus, managed 22 audits, 16,8 m data
  removals
• Mortgages biggest category, other secured next
  biggest (m/vehicles furniture)
• Banks 90 of total, non-bank vehicle 3,
  retailers 3

Banks 90
(exclude micro-lenders other small providers)
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Statistical overview of the consumer credit
market in South Africa

• Statistics from Credit Bureaus
• Credit Providers
• (including banks)

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Dramatic decline in gross credit granted

• R51.7bn credit granted in 2009Q1 to 3.9m
  agreements (R102bn in 2007Q4)
• 47 of credit in Gauteng, WC 15 KZN 13
• Ongoing decline in quarterly credit granted (loan
  book remains flat)
• Most significant declines in mortgages motor
  vehicles
• Middle / low income products performing better

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- 8
- 22
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Analysis of decline by type - mortgages other

• Mortgage disbursements consistently down
• For Q408, 52,000 mortgages granted, at R27bn
  For Q109, down to 36,000 mortgages at R19bn
• Decline in other products less significant

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Applications, rejection rates
Disbursement by segment

• Consumer demand for credit fairly static
• Gradual increase in banks rejection rates, (41
  in 2008Q1 to 45 in 2008Q4)
• Greater increase in Big 4 banks rejection rates
  (50 - 58 - 53 in qtrs to 2009Q1)
• Significant contraction in demand for credit

Rejection rates
Decline in demand for credit!
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Credit Bureau Statistics impaired records

• 18 million credit active consumers.
• For nearly 2 million people, credit records
  deteriorated over last 2 years
• Banks, retailers, doctors, dentists,
  municipalities all affected
• Ongoing increase in consumers with impaired
  records, from 36 in June 2007 to 44 in
  September 2009
• Nearly 50 000 people/month being added to the
  impaired" category

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Impact of financial crisis on consumers

• Special research projects

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Distribution of credit across different income
groups

• Lowest gross exposure in Gr1, but more
  significant relative to income. Gr 2 Gr 3
  greatest levels of debt stress. Gr 4 also
  significant, but greater ability to adjust.
• Reduction in income as much a risk as job loss

• With time, short medium term debt levels
  reducing automatically
• Mortgage vehicles greater threats given payment
  term loss in asset value if repossessed
• Protection of housing greatest priority

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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 (lt 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 2nd properties. Income
  reduction biggest threat.
• Greater ability to resolve own problems. But
  often resorts to DC assistance / protection.

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Policy response - consumers
Income Risk of job losses Debt stress Potential debt fall-out Policy response ?
Gr 1 - low 0 to R1,800 Moderate Low to moderate Low, getting better Awareness education on protective measures behaviour change Access to support debt counselling Protection of primary residence
Gr 2 - R1,800 R6,100 High Moderate to high Moderate/ high, debt improving Awareness education on protective measures behaviour change Access to support debt counselling Protection of primary residence
Gr 3 R6,000 R17,000 Moderate to high High High Awareness education on protective measures behaviour change Access to support debt counselling Protection of primary residence
Gr 4 R17,000 Low, but risk of income loss High, but have options Moderate Awareness education on protective measures behaviour change Access to support debt counselling Protection of primary residence

• 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?

• Low income groups least aware of protective
  measure, whether counselling, UIF or others.
• Awareness programme important also on
  self-protection strategies

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Debt Counselling
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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
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Importance role of debt counselling

• Role of debt counselling, in the context of the
  lack of appropriate personal insolvency
  mechanisms in SA.
• Not have appropriate personal insolvency
  mechanisms. US, UK EU have range of different
  mechanisms for personal insolvency. The
  mechanisms in SA are outdated and ineffective.
• As 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
• No mechanism to resolve a personal financial
  crisis and enable an individual to get another
  chance.
• Household income is permanently reduced through
  debt payments. Household needs not met and social
  welfare receipts are diverted to debt servicing.
• School fees not being paid, arrears on municipal
  service payments and a multitude of related areas.

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Causes of debt stress implications in the
current environment

• Borrowers
• Reckless aspirational borrowing,
• External factors loss of income / relationships
  breaking up / death and sickness
• Credit providers consequences of hard selling
• Hard selling by credit providers contribute to
  over-indebtedness.
• Call centre agents misleading disclosure
  consumers taking on credit which they cannot
  afford.
• Resist implementation of debt counselling
• Job losses reduced income debt stress
• Debt counsellors confronted with huge demand.
• Additional impact of the financial crisis. Job
  losses significant reductions in income.
  Reduced overtime sales commissions year-end
  bonuses etc.
• Even people who were not over-indebted are
  affected.
• Staff 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.

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Debt Counsellingcurrent position
Applications

• 1,571 debt counsellors registered, and 5
  independent payment distributors
• 140,000 applications for counselling, growing at
  9,000 pm (Feb 154 000)
• 42,000 consumers making payment R150 million pm

Monthly Payments
42,000 consumers
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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.

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Consumers Case studies
Consumer Net. Income Distributable Amount Contractual Instalments Credit agreements Total exposure Reason for over-indebtedness
A Auditor R13 539 R7 000 R21 153 16 R300 407 Excessive family spending
B Medical doctor R18 503 R11 357 R63 423 10 R1.4m Business collapsed
C Ex-employee of bank R59 000 R43 000 R87 568 19 R6.1 m Irresponsible lending
D Property Trader R36 315 R19 225 R200 000 15 R22.3 m Business collapsed
E Nurse R5 155 Nil R5 845 10 R80 000 Irresponsible lending
F Clerk, spouse unemployed R5 512 R500 R4 500 10 R46 000 Irresponsible lending
G (Taxi owner) R25 000 R17 000 R42 000 15 R1.6m Living beyond his means
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Challenges in resolving cases

1. Certificates of balance, timelines,
   administration process
2. Reckless credit
3. Reconcile claims of different creditors
4. Interest, term extension capital write-off
   consent
5. Repayment arrangements

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PAYMENTS

• Payments Per Product
• Home Loans 30 of payments
• Vehicle Asset Finance 25
• Banks 74 of payments
• .

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Problems Debt counsellor behaviour

• Majority of debt counsellors working very hard,
  under great pressure. But also a number of bad
  apples
• Taking clients 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)
• Delegate counselling to unregistered employees
• Biggest risk debt counselling becoming a
  payment holiday
• Creditors must terminate enforce if not comply
  with process, no payments made

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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.

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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
• Compliance 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.

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NCR implemented a range of interventions to
support debt counselling

• 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

• 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.

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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

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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!!

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Concluding comments

• Impact of NCA curbed excessive credit
  extension, creating basis for lower but more
  sustainable credit growth, curbing social cost of
  reckless lending
• Debt counselling reconcile claims of different
  credit providers, to create a sustainable
  repayment stream on non-performing consumer
• While minimizing social cost,
• BUT, significant implementation challenges
• Fall-out from financial crisis still increasing,
  driven by reductions in income as much as loss of
  employment. Contraction in domestic credit a
  significant negative impact, aggravating domestic
  position
• In policy response, important to focus not just
  on protection of industry, but also on protection
  of households,
• noting that crisis impacts differently on
  different consumer groups
• the longer the downturn lasts, the more
  households with high debt burdens run out of
  options

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Thank You !www.ncr.org.za