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1

“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

SOUTH AFRICAN NATIONAL CREDIT REGULATOR

ACTRURAL HOUSING LOAN FUND 14th ANNUAL WORKSHOP

Topic: General compliance to the NCA, reflections on consumer

indebtedness

Ramabaka Abel Tshimole15 October 2010

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3

Topics

• Overview• Registration• Compliance • Consumer Credit Market• Debt counselling• Conclusion

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South African credit market

Legislative framework before National Credit Act

There was no single unitary legislation regulating the credit marketThere were different pieces of legislation such as the Usury Act & Credit Agreements ActExemption 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

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National Credit Act in a nutshell …

National Credit

Act

Marketing practices

& disclosure

Agreements& quotes

Reckless

lending

Enforcement &debt collection

Debt counselorsCredit BureausNational Credit Register

Interest & fees

Unlawful

agreements,

provisions

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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

Consumer Credit Market in South Africa

Credit Providers

36,3 millionCredit Consumers

1,847Debt Counsellors

R1.1 trillion$164 Billion

consumer credit

Credit Providers = 4,301Branches = 33.875

10 x CreditBureaus

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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 PDA’s 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

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Investigation Statistics

Investigations Conducted 453

Debt Counselling Investigations

110

Credit Provider Investigations 328

Credit Bureau investigations 15

10

Enforcement Statistics

Instructional letters 110

Formal undertakings 20

Compliance Notices 47

Referrals to Tribunal 20

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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 conditionse.g for credit providers

• Language policy proposals• BBBEE• Combating over-indebtedness of consumers

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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.

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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

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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

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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

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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

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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

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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

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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

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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

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Current state of the consumer credit market

Statutory Statistical Returns submitted by Credit Bureaus & Credit Providers (including banks)

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Credit granted vs Debtor’s book

R 1

02

.37

R 8

8.9

3

R 8

5.6

2

R 7

2.3

3

R 6

5.7

6

R 5

1.7

0

R 5

0.6

7

R 5

3.5

8

R 6

3.3

0

R 6

1.5

5

R 6

7.5

5

R 1,0

26

R 1,0

84R 1

,117 R 1

,131

R 1,1

34

R 1,1

41

R 1,1

25

R 1,1

29

R 1,1

33R 1

,145

R 1,1

55

950

1,000

1,050

1,100

1,150

1,200

2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2

R' B

illi

on

s

0

20

40

60

80

100

120

R' B

illi

on

s

Total credit granted Gross debtors book

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Demand and supply of credit

R 9

3.9

7

R 8

0.7

1

R 7

6.9

8

R 6

4.7

2

R 5

8.5

3

R 4

5.4

5

R 4

4.2

8

R 4

7.3

5

R 5

6.3

9

R 5

4.4

2

R 5

9.7

4

0

10

20

30

40

50

60

70

80

90

100

2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2

R B

illi

on

s

0

1

2

3

4

5

6

7

8

9

10

R B

illi

on

s

Credit Transactions entered into Credit Facilities entered into

2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2Applications received 7,068,174 6,012,322 6,474,416 6,304,617 6,576,186 5,702,287 5,584,308 5,814,849 6,456,059 6,037,622 6,541,174Applications rejected 2,917,187 2,561,144 2,878,822 2,825,442 2,911,252 2,505,197 2,475,790 2,565,806 2,811,042 2,432,613 2,633,419% of applications rejected 41.27% 42.60% 44.46% 44.82% 44.27% 43.93% 44.33% 44.13% 43.54% 40.29% 40.26%

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Credit granted per industry

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Gross value of book – credit type

Gross debtors book per credit typeJune 2010 - R billion

R 749,032

R 215,018R 129,115

R 61,138

R 683

Mortgages Other credit Credit facilities Unsecured credit Short-term credit

64.85%

18.62%11.18%5.29%

0.06%

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Credit Type 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2

Banks 86.86% 87.21% 87.38% 89.81% 89.61% 89.59% 89.41% 89.51% 89.35% 89.50% 89.45%

Non-bank vehicle financiers 3.99% 3.90% 3.83% 3.84% 3.78% 3.80% 3.89% 3.92% 3.94% 3.94% 3.96%

Other credit providers 5.65% 5.65% 5.63% 3.28% 3.33% 3.28% 3.29% 3.25% 3.24% 3.21% 3.27%

Retailers 3.50% 3.24% 3.15% 3.08% 3.28% 3.33% 3.40% 3.32% 3.46% 3.35% 3.33%

Total 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

• Banks continue to dominate the consumer market with 89% of book

• Other providers enjoy approx. equal share

Gross value of book – provider type

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CB impaired records

Consumers with impaired records

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10

Con

sum

ers,

mill

ions

34%

36%

38%

40%

42%

44%

46%

48%

Consumers with impaired records (#) Consumers with impaired records (%)

Accounts with impaired records

0

2

4

6

8

10

12

14

16

18

Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10

Acc

ou

nts

, m

illi

on

s

0%

3%

6%

9%

12%

15%

18%

21%

24%

27%

Accounts with imparied records (#) Accounts with 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

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Status of the arrears levels and credit standing of consumers and accounts

% of accounts that are in arrears for different credit types

0.00%

10.00%

20.00%

30.00%

40.00%

2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3

Mortgages Credit facilities Unsecured credit

Short term Secured Credit

% of consumers and accounts with impaired records

36.4% 37.8% 37.7% 38.4% 39.6%40.5% 41.6% 42.4% 44.1% 44.9% 45.3%

21.8% 22.5% 22.5% 22.0% 22.2% 22.1% 22.5% 23.7% 24.7% 25.5% 25.6%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

Consumers with impaired records Accounts with impaired records

• 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.

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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Debt Counselling: Update

Discussions between Credit Providers and Debt Counsellors

New rules and standardized procedures

Notifications and financialinformation

Response to DebtCounsellors’ proposals

Restructuring rules Terminations in terms of Sec. 86 (10)

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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. o No appropriate “personal insolvency mechanisms”. US, UK & EU have range of

different mechanisms for personal insolvency. The mechanisms in SA are outdated and ineffective.

o 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 stresso No mechanism to resolve a personal financial crisis and enable an individual to

get another chance.o Household income is permanently reduced through debt payments. Household

needs not met and social welfare receipts are diverted to debt servicing. o School fees not being paid, arrears on municipal service payments and a

multitude of related areas.

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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 (< 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

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?

Income Risk of job losses

Debt stress

Potential debt fall-out

Policy response ?

Gr 1 - low0 to R1,800

Moderate Low 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

High Moderate to high

Moderate/ high, debt improving

Gr 3 –R6,000 – R17,000

Moderate to high

High High

Gr 4 –R17,000 +

Low, but risk of income loss

High, but have options

Moderate

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Causes of debt stress & implications in the current environment

• Borrowerso Reckless & aspirational borrowing, o External factors – loss of income / relationships breaking up / death and sickness

• Credit providers & consequences of hard sellingo Hard selling by credit providers contribute to over-indebtedness. o Reckless lendingo Call centre agents & misleading disclosure = consumers taking on credit which they cannot afford.o Resist implementation of debt counselling

• Job losses + reduced income = debt stresso Debt counsellors confronted with huge demand. o Additional impact of the financial crisis. Job losses + significant reductions in income. Reduced overtime; sales

commissions; year-end bonuses etc. o Even people who were not over-indebted are affected.o 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 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 Distributions

R 0.00

R 50.00

R 100.00

R 150.00

R 200.00

R 250.00

May-08

Jun-08

Jul-08

Aug-08

Sep-08

Oct-

08

Nov-08

Dec-08

Jan-09

Feb-09

Mar-09

Apr-

09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-

09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-

10

May-10

Jun-10

Jul-10

Aug-10

MillionsMonthly payments to creditors

Web - based database

0

50000

100000

150000

200000

250000

Total applications

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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, 1000’s of consumers have already benefited both from debt counselling and from internal restructuring by banks

• NCR’s 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

Creditagreemen

ts

Total exposure

Reason for over-indebtedness

AAuditor

R13 539 R7 000 R21 153 16 R300 407 Excessive family spending

BMedical doctor

R18 503 R11 357 R63 423 10 R1.4m Business collapsed

CEx-employee

of bank

R59 000 R43 000 R87 568 19 R6.1 m Irresponsible lending

DProperty Trader

R36 315 R19 225 R200 000 15 R22.3 m Business collapsed

ENurse

R5 155Nil

R5 845 10 R80 000 Irresponsible lending

FClerk, 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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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); o 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. Can’t 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

o 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 …

• 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 PDA’s

– 552 on-site visits + 65 investigations

• NCR Task Team to investigate problems

– Banks

– Debt counsellors

– Payment arrangements

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

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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Thank You !www.ncr.org.za