1. Presentation to Portfolio Committee on Trade and Industry – Debt relief in South Africa
17 November 2016
The information in this presentation is proprietary and no part of this document may be copied or distributed without FRB’s prior consent

2. Content Introduction Credit Industry Overview
Existing measures to combat over-indebtedness and provide debt relief (Industry)
Existing measures to combat over-indebtedness and provide debt relief (Voluntary FRB measures applied in addition to the industry measures)
Potential further solutions
Impact, consequences and challenges of legislating debt relief measures
Annexure: Response to some questions posed by Committee members on 15 November 2016 not addressed in this presentation

3. Introduction
FRB wishes to thank the Portfolio Committee for the opportunity to share our views on debt relief .
Finding appropriate sustainable solutions to assist consumers that are highly indebted is imperative to the bank and the broader economy.
We appreciate the opportunity to engage and would welcome further engagement in future on this topic.
The presentation aims to outline current debt relief measures already provided as well as recommendations for other legislative amendments that FRB believe would assist consumers

4. Credit Industry Overview
Levels of new credit granted has stabilised in light of the NCAA legislative changes introduced
Consumers with impaired records have been reducing since 2013 and is currently at levels last observed in 2008.
2008: Sharp reduction in credit granted following the increasing % of customers with impaired records in line with the global financial crises
Q3-2009: Credit granting starts to normalise and the level of consumers with impaired records start stabilising, albeit at a higher level.
A focus on tightening credit legislation: Mar’15 & Sep’15 – NCAA and Affordability Assessment Regulations published and become effective, May’16 – NCA Interest and Fee review lower caps become effective. The effect of these measures appear to have already resulted in a sustained improvement in the level of impaired records.
Apr’14: Removal of Adverse Credit Information and Paid-up Judgments implemented. Resulted in step change in level, but not a sustained improvement.

5. Credit Industry Overview
Debt Review:
New applications for debt review stabilised, however, the trend has started increasing in recent months.
The total banking DR portfolio value = R46b as at Sep’16. This speaks to the consumers already provided with debt relief through this mechanism.
What went wrong: Following the end of the global financial crises there was a significant increase in credit extended. Some credit granted may not have been granted based on sound affordability criteria.
However, the NCAA, Affordability Assessment Regulations and the reduced Interest and Fee caps aim to specifically address these practices. These constitute fundamental changes in the credit granting environment.
The full impact of these and other pending legislative reforms has not yet fully manifested, however, positive signs are evident with Consumer debt to Income ratio having stabilised.

6. Credit Industry Overview
Relief for customers in debt review, resulting in (the extreme) up to zero fees and interest for over-indebted customers.  Note these principles are not regulated (e.g. by the NCA), but are applied via DCRS by the major financial institutions.
FRB supports Debt review, in addition to the voluntary internal debt relief measures aimed at assisting consumers that find themselves in financial difficulty .
The bank is of the view that the recently introduced NCAA changes will bring about positive change and create a sustainable credit market – these changes need to be given appropriate time to show effect.
Despite this there are still some abusive mechanisms such as EAOs that need to be tackled via other legislative changes  Generally, if a customer is over-indebted on unsecured debt and does not want to pay, they simply do not pay and lenders are largely powerless, banks will not re possess movable assets etc to recover unsecured debt.

7. Overview of existing measures to combat over-indebtedness and provide debt relief - Industry measures
NCA
Debt Review
Prescription of debt (stricter application given NCAA)
Credit Life Insurance (Incl Draft Regulations to Introduce caps and minimum benefits. Reduction in cost of credit)
In-duplum
Stricter Affordability Assessment Criteria
Reduced Interest rate caps
Legislative reform underway / recently implemented
Addressing EAO abusive practices
Reviewing costs that can be charged by Collectors
Social Assistance Amendment Bill (extended support for disaster assistance and funerals) – Will help alleviate distressed borrowing
Industry initiatives
Subscribe to the use of DCRS (efficiency and agreed concessions)
Project Evolution – Reporting of data to credit bureaux within a shorter period after grant
Addressing debit order abuse through various initiatives
Interpretation of legislation that have assisted with debt relief
Constitutional Court judgment on EAO’s
Constitutional Court judgment on re-instatement of credit agreements
Constitutional Court judgment relating to common law in-duplum (law interpreted to benefit the consumer)

8. Overview of existing measures to combat over-indebtedness and provide debt relief- Voluntary FRB measures applied
General
Facilitate the process of claiming against Credit Life Insurance where applicable
Bespoke Payment Arrangements
Settlement Campaigns: Providing the consumer with an opportunity to settle his/her account/s at a discount (as offered by the bank), based on the consumer’s individual circumstances
Payment Holidays: Allowing the customer a temporary respite to aid them in improving their financial position
Not utilising EAO’s in collecting debt from consumers
Offering low cost, simple banking solutions
Credit facility limit conversion into budget facility with a repayment plan, on specific campaigns offer a refund of interest paid if arrangements are kept
Providing support /assistance to vulnerable consumers who demonstrate willingness to pay

9. Overview of existing measures to combat over-indebtedness and provide relief - Voluntary FRB measures applied in addition to industry measures
Additional measures applicable to mortgages
Bank Assisted Sales: Voluntary sales per month far greater than SIE’s
An internal committee reviews individual cases, especially in relation to vulnerable individuals
At loan grant stage, customers are supplied with educational brochures and workshops are conducted with lower income customers to ensure they understand the risk, costs and responsibilities that come with owning a property (e.g. servicing the debt, maintenance etc)
SIE: For the vast majority of consumers sales are cancelled multiple times and do not end up in SIE. If there is any chance that the customer can pay the required amount, the sale is cancelled (some sales have been cancelled 10 or more times)
Both the Ombudsman for Banking Services and the Human Rights Commission have set out parameters for the allocation of funds relative to the buying in of properties. Banks adhere strictly to these parameters which does not allow for the banks to profit from subsequent sales at higher values

10. Overview of existing measures to combat over-indebtedness and provide relief - Voluntary FRB measures applied in addition to industry measures
Additional measures applicable to vehicle finance
Voluntary assistance to consumers to sell the vehicle in order to alleviate financial stress. This is done in partnership with the bank instead of incurring expensive recovery costs and the credit bureau record does not reflect a repossession as would be the case where the customer defaults and no arrangement is made.
If the vehicle is sold through this process and there is a short fall, a discount will be applied to the shortfall balance and the balance will be repaid at a lower interest rate. The benefits remain in place while the consumer adheres to the agreed repayment.

11. Placing customers in control of their banking
Overview of existing measures to combat over-indebtedness and provide relief - Voluntary FRB measures applied in addition to industry measures
Placing customers in control of their banking
Many consumers find themselves in financial difficulty due to a number of factors e.g. over indebtedness, over insurance, unauthorised debits etc
FNB provides customers with the ability to dispute invalid debit orders with the aim of protecting customers from rogue debit order users
Debit order disputes are, however, not always done for valid reasons, consumers abuse the mechanism for “cash flow management purposes". Such practices highlight the importance of balancing consumer rights and obligations, whist also protecting Credit Providers' interests
FRB will continue to engage with customers on an individual basis to ensure that debt relief measures are tailored to the individual circumstances
In addition, FRB is committed to providing suitable banking solutions at lower cost to consumers, e.g. E Wallet and entry banking solutions

12. Focus of the presentation
Proposed solutions
Evident from the debt relief measures covered in the previous slides are that flexibility and non-prescriptiveness in respect of the types and application of debt relief measures and criteria play a significant role in ensuring that a suitable debt relief measure is offered based on the customer’s unique circumstances
FRB is of the view that existing legislation should be optimised and voluntary measures allowed instead of additional legislation introduced and:
Increase use of DCRS where customers qualify
Finalise and implement the Draft Credit Life Insurance Regulations
Investigate a possible industry solution that allows for customer to enter an out of court / voluntary debt review process. This could assist customers that cannot afford the formal debt review fee.
Review the Insolvency Act
Amendments to the Insolvency Bill were previously proposed to assist NINA (No Income No Assets) debtors that would not usually be able to afford Insolvency proceedings)
Focus of the presentation

13. Proposed solutions
Magistrates' Court Act amendments : Emolument Attachment Orders – Various abusive practices in the debt collection environment thathave lead to the financial hardship of consumers have been addressed in the High Court and Constitutional Court Judgments. The Department of Justice has also proposed changes to the relevant pieces of legislation enabling these practices. This would also bring debt relief to consumers
Magistrates' Court Act: Administration Orders The South African Law Reform Commission has suggested various changes to the administration order debt relief mechanism contained in the Magistrates' Court Act. The Banking Association of South Africa has commented on these proposed changes and also made alternative suggestions – we believe that these suggested changes would be of benefit to consumers

14. Focus of the presentation
Impact, Consequences and Challenges of legislating debt relief measures
In line with the BASA view expressed, FRB does not support debt forgiveness.
We highlighted a number of voluntary debt relief measures that we provide on an ongoing basis tailored to the individual circumstances.
In FRB’s view, we need policy certainty and stability in the financial sector and additional legislated debt relief measures will negatively impact on the stability of the financial sector and the economy at a time when SA Inc cannot afford this.
Additionally, FRB is of the view that legislated debt relief measures do not enhance responsible borrowing and lending practices. While the bank supports the principle of debt relief and the strengthening of mechanisms as identified, in the extreme, 'debt forgiveness' does not make sense as it could easily cause systemic risk to banks and other financial institutions.
The cost of bank failure has been felt across most developed and developing markets and can be severe.  In SA, the big-6 banks had to participate financially to support African Bank and the cost to the SA government (and taxpayer) was minimised.  Yet the cost to the banks, in terms of increased (term) liquidity cost was severe, impacting on ability to perform term lending.  
Focus of the presentation

15. Impact, Consequences and Challenges of legislating debt relief measures
In many markets the prevalence and cost of bank failure has been much higher,  leading to significant cost to governments (and taxpayers), significant reductions in credit supply and a significant increase in the cost of credit.  The primary driver of bank failures has been the inability or unwillingness of clients to repay bank lending.  In this context, the unintended consequences of forced ‘debt relief or forgiveness’ could be significantly adverse to the country and the populace in general.
We respectfully request that Industry players including BASA be allowed the opportunity to engage with the sub-committee in more detail as we believe that a joint partnership between the public and private sector will assist in achieving sustainable solutions THANK YOU

16. Focus of the presentation
Annexure – Response to question posed by Committee members on 15 November 2016
Why are there risk premiums on Mortgages
New business lending in the mortgage industry typically happens at average Loan to Value (LTV) Ratios of between 80-85%. From the Deeds register information we estimate that around one third of new loans in the market is granted at around 100% LTV, i.e. customers do not put down any deposit when acquiring property.
When customers pay their home loans the balance would decrease on a monthly basis. However when customers are not servicing their loans, the loan balance actually increases due to non-payment, given that customers are typically not even settling the interest levied to the account.
We have also found that customers who are unable to make the required payments on their home loan, also tend not to perform regular maintenance and upkeep of the property, which may actually mean that no price growth or even price reductions are often experienced on the properties of customer where the properties fall into a state of disrepair.
A further factor that influences the recoveries that banks make in terms of the selling of the properties in question is that there are also sheriff’s fees and other transactional costs involved as part of the selling process. Any outstanding rates and taxes owed to the municipality is also first set off against the proceeds given that municipalities have claims to the property proceeds that rank ahead of the banks’ 
Focus of the presentation