1

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

Financial crisis, impact of the NCA and role of

debt counselling

March 2010

3

National Credit

Act

Agreements& quotes

Unlawful

agreements,

provisionsCredit BureausNational Credit

Register

Debt counselling

Enforcement &debt collection

Reckless

lending rulesMarketing

& sales practices

Interest & fees

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 …

4

National Credit Regulator

Executive OfficeCEO, COO

RegistrationsComplaints

& Call Centre

Investigations&

Prosecutions

Consumer awareness & education

100 staff membersR70 million pa budget

Department of Trade & Industry

Board ofDirectors

Departments of Finance, Housing &Social Development

Debt Counselling monitoring &support

Credit BureauRegulation

Statistics& Research

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Consumer Credit Market in South Africa

Credit Providers

18 millionCredit Consumers

1,571Debt Counsellors

R1.1 trillionconsumer credit

Credit Providers = 4,120Branches = 33.500

CreditBureaus

6

Credit Provider Statistics Overview of consumer credit market

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%

Outstanding balances

Banks90%

Gross loans outstanding AccountsBanks 90% 19 mMotor dealers 3% 286,000Retailers 3% 15,8 m

approx R1.1 trillion(exclude micro-lenders & other small providers)

Mortgages, 63.97%

Short Term , 0.06%

Un-Secured, 4.18%

Facilities, 12.01%

Secured(Other),19.78%

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

Trend in disbursements over year

0

10

20

30

40

50

60

70

80

90

2008Q2 2008Q3 2008Q4 2009Q1

Bill

ion

s

-16%

- 8%

- 22%

Quarterly disbursements by type - 2009-Q1

0

5

10

15

20

Mortgages Other CreditAgreements

Un-Secured Short Term Credit Facilities

Bill

ions

9

Analysis of decline by type - mortgages & other

Mortgage disbursements consistently down

For Q4’08, 52,000 mortgages granted, at

R27bn; For Q1’09, down to 36,000

mortgages at R19bn

Decline in other products less significant Gross disbursements per quarter - Mortgages, Rbn

0

5

1015

20

25

3035

40

45

2008Q2 2008Q3 2008Q4 2009Q1

-21%

-19%

-31%

Number of accounts - Mortgages

0

10 000

20 000

30 000

40 000

50 000

60 000

70 000

80 000

90 000

2008Q2 2008Q3 2008Q4 2009Q1

-19% -

21% -30%

Credit granted by industry type

R 1 000 000 000

R 10 000 000 000

R 100 000 000 000

2008-Q2 2008-Q3 2008-Q4 2009-Q1

2008-Q2 R 71 441 412 503 R 7 590 792 297 R 3 248 491 011 R 3 342 576 539

2008-Q3 R 62 380 941 745 R 3 920 472 859 R 3 296 974 148 R 2 729 071 722

2008-Q4 R 54 954 750 229 R 3 825 018 702 R 4 570 058 406 R 2 725 428 406

2009-Q1 R 43 033 877 946 R 3 529 893 440 R 3 174 245 605 R 2 046 117 784

BanksNon-bank vehicle

f inanciersRetailers

Other credit providers

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Applications, rejection rates

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

Q2/Q1 Q3/Q2 Q4/Q3Bank -5% -13% -11%Non-bank Vehicle Finance-2% -48% -2%Other 1% -17% -13%Retail -10% -3% 53%

Disbursement by segment

Rejected/Received2008Q1 2008Q2 2008Q3 2008Q4

Banks 41% 42% 44% 45%Non Banks financiers 57% 60% 52% 51%other 46% 46% 47% 35%Retailers 43% 48% 44% 43%

Rejection rates

Applications received vs Applications rejected

-

500 000

1 000 000

1 500 000

2 000 000

2 500 000

3 000 000

2008Q1 2008Q2 2008Q3 2008Q4 2009Q1

Applications received Applications rejected

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

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

o Low credit exposure, mainly furniture & unsecured. BUT – more significant relative to income!

o Position may be improving if new credit limited

o 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

o Significant exposure, both unsecured (< 3 years), vehicles & mortgages

o Short term credit exposure ‘self-correcting’ over time, but mortgages & vehicles require assistance

Group 3 = middle income, R6k to R17k/m

o High level of exposure to all products & high debt stress

o Most vulnerable, to debt stress & loss of house if affected by either job loss or reduced income

Group 4 = high income, R17k/m +o high credit exposure, mainly

mortgages, vehicles & credit facilities. Also 2nd properties. Income reduction biggest threat.

o 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 & 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

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

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. o 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.

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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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 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 Counsellingcurrent position

Monthly Distributions

R 0

R 20

R 40

R 60

R 80

R 100

R 120

R 140

R 160

R 180

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

Millions

Month

Amou

nt (R

's)

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

42,000 consumers

Consumer Applications

0

20000

40000

60000

80000

100000

120000

140000

160000

Apr

-08

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb

-09

Mar

-09

Apr

-09

May

-09

Jun-

09

Jul-0

9

Aug

-09

Sep

-09

Oct

-09

Nov

-09

Dec

-09

Jan-

10

Month

Nu

mb

er o

f A

pp

licat

ion

s

Applications

Monthly Payments

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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

o 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.

o But, major improvement recently, with banks taking a more constructive approach

o 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.

o 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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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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15%

30%

25%

2%

3%

3%

1%

5%

4%

12%

0 5000000 1E+07 1.5E+07 2E+07 2.5E+07 3E+07 3.5E+07 4E+07

Credit Card All

Home Loan All

VAF All

Cheque All

Overdraft All

Store Card

Furniture

Legal

Personal Loan All

Other

Amount (R's)

Type of Product

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” …

o Taking clients fees, doing no worko Refusing to use PDAs, misappropriating client repaymentso Restructuring proposals unprofessional and meaninglesso Confrontational with credit providers, running to courts when

consensual solutions possibleo Time-lines not met; Bad administration (e.g. account numbers); o Delegate counselling to unregistered employees

Biggest risk: debt counselling becoming a payment holiday

o 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. o 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)

o University of Pretoria review to identify problems

o Audits on PDA’s

o 552 on-site visits + 65 investigations

NCR Task Team to investigate problems

o Banks

o Debt counsellors

o Payment arrangements

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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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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 consumero While minimizing social cost,o 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, o noting that crisis impacts differently on different consumer groupso the longer the downturn lasts, the more households with high debt burdens run

out of options

Concluding comments

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Thank You !www.ncr.org.za