The future regulation of retail credit markets Presenter: Ingrid Goodspeed | Chief Director: Financial Sector Development, National Treasury 17 May 2016 All Africa Credit Conference

Globally policymakers seek financial sectors that are stable, inclusive, competitive, ethical and protect consumers Maintain the stability of the financial system and institutions and manage potential risks to that stability Provide affordable and sustainable access to finance and financial services for individuals and SMMEs Increase competition and the diversity of financial institutions to encourage efficient and innovative financial services Protect the financial sector from financial crime and address illicit and illegal money flows Protect financial customers by mitigating the risk of poor conduct and taking steps to end unfair or harmful practices and deliver good customer outcomes

Assessing the retail credit value chain to identify potential market failure i.e., where are consumers treated unfairly Customer acquisition Account origination Account granting and fulfillmen t Account management Delinquency and bad debt recovery Credit value chain Collection of repayments Administration of account Management of portfolio Description Advertising Selling Collateral evaluation Rating of borrower Pricing Insurance Credit approval Account opening KYC Bad debt recognition and provisioning Bad debt collection Debtor rehabilitation Abusive collection mechanisms e.g., retaining card and PIN Abuse of debit orders and payroll deductions Inadequate statements of account Poor and slow management of arrears that places unrealistic demands on debtors Possible areas of market failure Misrepresentation Inappropriate product features e.g. large residuals / balloon payments Unconscionable conduct e.g. coercion Granting of loan contingent on sales of other financial products such as insurance Inappropriate incentives (financial and performance) Product is unsuitable Credit is reckless i.e. not affordable Risk is not correctly priced Full cost of credit not disclosed Inappropriate add-ons such as ‘club’ fees Incorrectly priced credit and other insurance Credit information is not correct / invalid Inappropriate, overly complex or insufficient disclosure Failure to assess borrower’s credit worthiness Race to the cash – securing first bite of the cherry with no regard for the debtor or other credit providers Unconscionable conduct by debt collectors and failure to comply with codes of conduct Unconscionable conduct by debt counselors Abuse by legal firms of mechanisms such as emolument attachment orders Inappropriate provisioning Failure to provide an internal (and free) consumer complaint process

Regulatory initiatives to achieve financial objectives in the credit market: regulatory and supervisory framework Prudential and market conduct objectives need dedicated regulators to ensure equal attention is given to each objective Dual regulation means fragmentation and opens up opportunities for arbitrage and requires effective co-ordination and co-operation between regulators Regulators should be operationally independent and accountable All financial services providers must be appropriately regulated Regulatory framework should include –Crisis management and resolution framework –Enforcement and appeal mechanisms –Consumer recourse devices like alternative dispute resolution and ombud schemes –Inspections and investigations –Framework for subordinated legislation –Oversight and standards for credit information services and reporting Single harmonised system for –licensing and fit and proper assessments –Information provision by financial institutions

Regulatory initiatives to achieve financial objectives in the retail credit market: stability and market conduct Stability Norms and standards for access to the national payment system for deductions Non-preferential treatment of deductions /collections o Authenticated collections o Prohibit payroll deductions Improved statements of accounts Product standards Standards for advice Key information statements that allow comparisons across providers Product approval process standards Guidelines for marketing and promotional material Incentives schemes that reward correct and sustainable selling behaviour Affordability and suitability criteria assessments Price caps to change behaviour and encourage use of credit for productive purposes and to create wealth Credit bureau information clean up and updates Credit infrastructure for SMMEs o Movable asset register o credit information bureau o Guarantee scheme Standards for responsible lending Guidelines for collateral management Verify financial information obtained particularly income history and pre- existing debts Assess whether credit meets customers needs, requirements or objectives and whether consumer can repay the loan comfortably Codes of conduct and fit and proper standards for debt counselors and collectors Standards for outsourced debt collection Limit abuse of EAOs Insolvency and discharge provisions for low-income low- asset consumers Market conduct Customer acquisition Account origination Account granting and fulfillmen t Account management Delinquency and bad debt recovery Credit value chain Capital and other prudential requirements requirements Fit and proper standards for directors and executives Governance Risk and compliance management Access to internal complaints and dispute resolution mechanisms Consumer education stressing “good” credit to encourage mortgage lending to create wealth and the productive use of credit

Regulatory initiatives to achieve financial objectives in the retail credit market: financial inclusion Financial inclusion is the responsible provisioning to and use of regulated financial services by those segments of society where financial services are needed but not provided or inadequately provided. The financially excluded do not have savings accounts, do not receive credit from formal credit providers, do not have any insurance and rarely make or receive payments through formal financial institutions Financial inclusion is not an end in itself – it is an enabler of sustainable economic development and empowerment by improving the quality of life of households and contributing to the elimination of poverty and inequality Financial policy seeks responsible access to credit to ensure economic development and improve the quality of lives of households Purpose and level of usage in some product categories is suboptimal. –Unproductive and overuse of retail credit, which leads to over-indebtedness, debt spirals and poverty –Undersupply of responsible and sustainable credit to SMMEs

South Africa is implementing a structural reform of its financial sector regulatory framework The Financial Sector Regulation Bill to implement the “twin peaks” (prudential and market conduct) system for regulating the financial sector is currently being considered by the Standing Committee on Finance. Key questions the twin peaks reforms aim to deal with: –How safe is a financial institution? Can it deliver on promises it makes to customers? –How does the financial institution conduct its business? Is it up to standard? How much does it charge its customers? Is it treating its customers fairly? Do consumers have good recourse mechanisms? –How safe is South Africa from another 2008 financial crisis? Does the financial institution pose risks to stability? Is the financial institution systemically important? How will the system survive the failure of a systemically important institution? 7

In South Africa a key problem to address is household over- indebtedness Household debt is 77.8% of disposable income (December 2015) About 10 million of the 24 million credit active consumers have impaired records (3 months or more in arrears, adverse listings, judgement/admin orders) Highly-leveraged households are more vulnerable to adverse shocks in income and interest rates Government is extremely concerned On 4 December 2013 Cabinet approved measures to address over-indebtedness –Preventative measures to prevent future over-indebtedness –Remedial measures to assist currently over-indebted households 8

9 Progress made on Cabinet approved measures aimed at assisting over-indebted households Affordability criteria Suitability criteria (for pay-day loans) Interest pricing caps Consumer credit insurance Strong regulatory monitoring supervision and enforcement Norms and standards for access to the national payment system (including debit orders) Norms and standards for EAOs Regulate payroll credit-linked deductions Simpler low-cost insolvency Appropriate unilateral relief by credit providers (e.g., Debt Counseling Rules System) Voluntary debt mediation Withdrawal of certain EAOs and to only use EAOs as a last resort and subject to a robust code of conduct Ensure debt-collection firms (including legal firms) do not indulge in unscrupulous practices. Extend debt collection law to legal firms. Investigate legitimacy of EAOs (private and public sector)

The future regulation of retail credit markets Presenter: Ingrid Goodspeed | Chief Director: Financial Sector Development, National Treasury 17 May 2016 All Africa Credit Conference