VDMS information to DCs May 2012

Directors: J. de Ridder (Acting Chairperson); M. Mphahlele (CEO); K. Fuller; P. Pillay;

H. Ferreira; M. Lawrence; C. Otto; B. De Beer; J. Magerman; L. Norval.

Company (Non-Profit) Reg. No 2008/023383/08 Public Benefit Organisation (PBO) Reg. No. 930 037 406

Tel: +27 (0)86 111 6362 | Fax: +27 (0)11 781 0589 | E-mail: [email protected] | Web: www.ndma.org.za

Communication to Debt Counsellors and other Stakeholders

Voluntary Debt Mediation Pilot (VDMS)

The magnitude of the socio-economic impact of debt related financial distress in the SA credit consumer market

is significant and to date the statutory debt counselling process has, due to various factors not been capable of

providing a significant degree of relief to the affected market. While a combination of factors has contributed

the central issue seems to be the reluctance of consumers to take up available assistance either through debt

counsellors or other private alternative dispute resolution agents.

The VDMS aims to address issues in the debt rehabilitation environment, by means of piloting a voluntary

industry-led institutional solution. A core condition of support by the NCR and the dti is that the VDMS must not

undermine but enhance the rights that consumers have under the statutory process and must be subject to

oversight by a neutral and representative governance structure made up of credit providers and individuals with

sufficient knowledge of consumer issues.

More specifically, the VDMS proposes to:

1) Design and pilot a new process that proactively filters consumers effectively into the most appropriate

channel to resolve their specific form of over-indebtedness;

2) Reduce the costs to credit providers of pursuing the normal product lead collections process (via the

courts) by having a process that can deal with multiple (secured and unsecured) credit agreements and

provide a comprehensive and fair solution for all stakeholders involved;

3) Create a strong incentive for participation by customers by offering a service that is fully endorsed and

supported by the industry provided that the consumer operates in good faith;

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4) Achieve a higher degree of financial rehabilitation, as a result of a comprehensive treatment of credit

agreements at the customer rather than the product level;

5) Ensure an efficient and effective process that provides a high standard of debt advice by standardising

and enforcing practices, tools and templates agreed by all stakeholders; and

6) Introduce an industry agreed framework which defines eligibility criteria for voluntary debt mediation,

thereby ensuring that the right type of consumer enter the debt mediation process.

Project Goals and Objectives & Benefits

Current experience shows that the take up of statutory debt counselling is quite low when compared to the

total number of consumers in arrears. The NCR reports on average between 5000 and 6000 applications, of

which close to 50% end up being rejected, terminated or withdrawn. As a result a different method of consumer

acquisition and referral has to be tested.

The PILOT VDMS seeks to test if more consumers can be rehabilitated, by increasing the number of consumers

who take up debt mediation instead of being subjected to legal action. It will also accommodate consumers who

have been issued with section 129 notices or summons. The Credit provider will proactively identify these

consumers through industry agreed criteria and rules and then refer them into the VDMS process after acquiring

the consumer’s consent. An independent assessment of affordability and restructuring will still be conducted by

the Debt Counsellor.

Some of the advantages of this method of consumer acquisition into the VDMS Pilot are:

No cost to debt counsellor to acquire consumer with guaranteed inflow;

Upfront consent from the consumer;

Upfront Eligibility assessment by the credit provider reducing initial assessment time;

Possible increase in take up and commitment by the consumer thus eliminating the need to take

legal action against the consumer.

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The PILOT VDMS project goals are to deliver:

The right treatment for the right type of “over indebted” consumers - where Industry can agree the

eligibility criteria so that truly over-indebted consumers are identified;

Improving the solve rate and the numbers of customers rehabilitated - improving the solve rate for the

controlled rehabilitation of distressed borrowers in the voluntary environment.

Simplification and improvement of existing debt rearrangement processes - Consumers can be offered

predictable relief through an efficient process aimed at their rapid rehabilitation. Debt Counsellors can

engage in offering a debt mediation service to consumers with a high degree of certainty that efficient

creditor consent can be achieved, rendering their business models more economically viable and efficient.

A cost effective solution –The PILOT VDMS aims to make the voluntary process more affordable and

accessible. This will be especially true for the consumer, as the legal costs will be eliminated.

Stakeholder Participation

A Credit Industry Steering Committee consisting of all the credit industry associations has been set up to reach

agreement on the scope and cost of the VDMS. The relevant industry associations involved are:

Banking Association of South Africa

Micro Finance South Africa

Motor Finance Association

National Clothing Retail Federation

Consumer Goods Council of South Africa representing Furniture Retailors

The National Credit Regulator has been consulted and has participated in some of the Industry Steering

Committee Meetings. The dti and the two Debt Counselling Associations (DCASA and the Alliance of

Professional Debt Counsellors) have also been consulted. While parties have raised practical process concerns,

there is general consensus that the pilot is necessary.

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Debt Counsellor Participation

The pilot aims to leverage off capacity and expertise that exists within the debt counselling industry. As a result

the NDMA will elect three Debt Counsellor Companies to participate in the pilot based on defined criteria. The

core criteria is that the debt counsellor should be in the top three of users of the Debt Counsellor Rules Engine

as the existing industry agreed debt restructuring rules will be used to solve consumer cases.

As the pilot progresses more debt counsellors may be requested to participate either in the pilot or in the

project going forward and at that point the NDMA will issue communication to that effect.

Duration

The VDMS PILOT is planned for duration of 6 to 12 months with regular progress reviews.

Conclusion and Way Forward

The NDMA and the Credit Industry are quite excited about the pilot. If successful, the pilot will contribute to a

future where a sufficient number of consumers can be effectively rehabilitated through a process that is

cheaper and efficient. This will contribute to stable households and fresh participation in the economy by

rehabilitated consumers. Debt Counsellors will benefit in that they will be able to offer consumers an affordable

and guaranteed option for debt relief in addition to the existing statutory process.

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Enquiries

The NDMA will issue monthly communication to all stakeholders on a monthly basis regarding progress with the

project. Enquiries regarding the Project can be addressed to:

Darryn Dauth

Project Administrator: VDMS

Email: [email protected]

End…………..

mailto:[email protected]

Documents

VDMS information to DCs May 2012