1. NCA Introductory Workshop for BANKSETA and with Institute of Bankers Dr. Penelope Hawkins Dr. Penelope Hawkins F E A S i b i l i t Y February – March 2006 SESSION 1

2. FEASibilitY (Pty) Ltd NCA Workshop: Session 12 Workshop Programme 8:30Welcome 8:45Session 1: Setting the scene 9:45Q & A Session 1 10:00Session 2: Complying with the NCA 10:20Tea Break 10:40Session 2 continues 11:30Q & A Session 2 11:45Session 3: Debt enforcement and counseling, information, phasing in 12:30Q & A All Sessions 13:00Closure

3. FEASibilitY (Pty) Ltd NCA Workshop: Session 13 1. Setting the scene 1.Background and history of the NCA The Consumer Credit Landscape Existing legislative and regulatory framework and its consequences Cost and volumes of Consumer Credit International trends in consumer credit protection 2.Aims and purpose Objectives of the NCA Provisions of the NCA and their intended impact 3.New institutions and registration procedures The National Credit regulator The National Credit register The Consumer Tribunal Registration and Licencing

4. FEASibilitY (Pty) Ltd NCA Workshop: Session 14 1.1.1 Existing legal framework  Usury Act (1968) applicable to transactions up to R500 000. Usury cap imposed  Credit Agreements Act (1980). Movable goods, term >6 months. Deposit stipulated.  Usury Act Exemption Notice (1992). Micro loans less than R10 000 with a duration < 36 months Consumer credit before NCA

5. FEASibilitY (Pty) Ltd NCA Workshop: Session 15 Estimate outstanding balances As at Sept 2002 R million Mortgages198, 822 Overdrafts & other loans 71,769 Leases10,409 Installment sales 53,999 Credit & Store Cards 19,059 Micro-loans (non-bank) 7,307 Unregistered micro-loans 900 362,265 1.1.2 Extension of credit, by type: value

6. FEASibilitY (Pty) Ltd NCA Workshop: Session 16 Estimated number of accounts As at Sept 2002 Millions of accounts Mortgages > R100 000 1.2 Mortgages < R100 000 0.75 Overdrafts & other loans 5 Leases0 Installment sales 3 Credit & Store Cards 5 Microloans2 Unregistered microloans 1 19.8 1.1.3 Extension of credit by type: volumes

7. FEASibilitY (Pty) Ltd NCA Workshop: Session 17  Segmented market  High rates in exempt market, but also high variability  Exempt market main source of formal credit for LSM4-6 (6 m or 25% of pop)  Usury credit above cap – esp. short term – other fees such as admin, club, credit life Source: FEASibility, 2003; MFRC, 2004 1.1.4 Credit Landscape

8. FEASibilitY (Pty) Ltd NCA Workshop: Session 18 Source: Cost, volumes and allocation of credit, FEASibility 2003. Consolidation of report’s findings and data Incidence of the cost of credit per income grouping 1.1.5 Consumer credit spectrum

9. FEASibilitY (Pty) Ltd NCA Workshop: Session 19  R362bn market, 19 million accounts  High rates a consequence of: weak information sharing Payments system preferences Poor access to funding for some providers Legislation which has fostered: opportunities for arbitrage; uncertainty; short-term view Weak disclosure to consumers and bundled products undermines rational choice Inability to review personal credit record, no mechanism for redress Limited choice for some consumer groups 1.1.6 Credit Landscape: Outcomes

10. FEASibilitY (Pty) Ltd NCA Workshop: Session 110  A number of countries such as Canada, Australia, EU, New Zealand and US have recently reviewed their consumer credit laws  Response to dynamic market, new products and increasing levels of consumer credit and indebtedness  Disclosure, consumer education and redress, regulation of advertising, agreements, interest rate regulation “standards” 1.1.7 International Context

11. FEASibilitY (Pty) Ltd NCA Workshop: Session 111  The National Consumer Credit Act lists as its objectives: Increased access to credit at reasonable rates by reputable credit providers. Promotion of a fair, competitive and sustainable credit market. Helping consumers make informed decisions. Creation of mechanisms to deal with debt. Provision of protection for consumers, securing redress and ensuring compliance. 1.2 Aims & purpose of NCA

12. FEASibilitY (Pty) Ltd NCA Workshop: Session 112 1.2.1 Objectives of the Act  Promote fair non-discriminatory market place  Improve standards of consumer credit industry  Prohibit unfair practices  Promote responsible credit granting  Regulate credit information  Provide for debt restructuring in a regulated environment

13. FEASibilitY (Pty) Ltd NCA Workshop: Session 113 1.Reckless lending 2.Interest rate regulation 3.Disclosure 4.Debt counseling 5.Debt Collection, payment preferences and other consumer protection 6.Exclusion of legal entities from reckless lending and interest rate control 1.2.2 Provisions of the Act

14. FEASibilitY (Pty) Ltd NCA Workshop: Session 114  Chapter 4, sections 78-88, aims to reduce reckless lending.  Change in lender behavior so that riskiest consumer cohorts will be excluded.  Exclusion of high risk clientele will improve levels of default.  As default levels fall, and the providers re-adjust their pricing, those who do obtain credit should be able to do so at a lower price.  Encouragement for reputable lenders to enter the short-term, small loan market.  Removal of restrictions on product type may lead to innovations where lower priced products to the lower-income consumers are offered. 1.2.3 Reckless lending

15. FEASibilitY (Pty) Ltd NCA Workshop: Session 115  Chapter 5, in particular sections 100-106, sets out prescriptions relating to fees, including credit life insurance and the proposed structure for capping interest rates and fees.  A structured cap means avoiding the use of a single percentage to cover the total annual cost of credit provision in a year. (No APR).  Short-term, small loans tend to amount to a very high interest rate (cost of origination relative to size of loan). 1.2.4 Interest rate regulation

16. FEASibilitY (Pty) Ltd NCA Workshop: Session 116  The structured interest rate and fee cap will allow for: An origination fee - that reflects the cost of originating the different categories of loan agreement so that the origination costs do not have to be recovered from the interest margin. A monthly service fee - covering collection fees and production of statements, etc. An interest rate cap - linked to financial market indicators to accommodate automatic changes in market conditions. 1.2.5 Interest rate regulation

17. FEASibilitY (Pty) Ltd NCA Workshop: Session 117  Chapter 5, particularly sections 92 ff, seeks to encourage improved disclosure through binding quotes, pre-agreement disclosure and standardised disclosure.  Standardised disclosure on structured cap will be an improvement on ad hoc, partial and sometimes obscure disclosure currently practiced. 1.2.6 Disclosure

18. FEASibilitY (Pty) Ltd NCA Workshop: Session 118  Mechanism for prevention of over- indebtedness, but also for over-indebted to improve their position over time.  Reckless lending and interest rate regulation provisions likely to exclude over- indebted  In past little option but to abscond, now re- arrangement and postponement is a possibility 1.2.7 Debt counseling scheme

19. FEASibilitY (Pty) Ltd NCA Workshop: Session 119 1.2.8 Debt collections, payment preferences & consumer protection  Sets out principled behaviour, nature and extent of payroll deductions, prioritisation of payment processing  Should improve commitment to risk assessment, as won’t be able to use preferential access or garnishee orders as collection mechanisms and substitutes for assessment processes  Curtailment of door-to-door selling and restricting increases of automatic limits on credit cards limits pushing of credit and allows consumers to actively seek credit rather than become “passively” over- indebted

20. FEASibilitY (Pty) Ltd NCA Workshop: Session 120 1.2.9 Exclusion of legal entities  Legal entities (such as firms) excluded from reckless lending and interest rate limitations.  Break from the past – previously all transactions up to a certain threshold were restricted by usury cap.  International precedent to allow for risk pricing.  Should encourage loans to small firms and fill identified “credit gap”.

21. FEASibilitY (Pty) Ltd NCA Workshop: Session 121 1.3 New institutions & registration procedures  National Credit regulator  National credit register  Registration and licencing  Consumer Tribunal

22. FEASibilitY (Pty) Ltd NCA Workshop: Session 122 1.3.1 National credit regulator  National Credit Regulator All Credit Providers operating in more than one province will have to register Compliance monitoring; Prosecution at Tribunal Complaints investigation (coordinated with Banking Adjudicator & provincial consumer desks; ADR’s) Monitoring credit market prices, volumes, competitiveness, access to finance

23. FEASibilitY (Pty) Ltd NCA Workshop: Session 123 1.3.2 National credit regulator Will report to Minister & Parliament Funded from fees & government allocations  Provincial Regulators If provincial legislation passed, & institutions established Provincial registration if credit provider has branches in only one province

24. FEASibilitY (Pty) Ltd NCA Workshop: Session 124 1.3.3 National Credit Register (NCR)  Chapter 4, Sections 69-72, seeks to increase the breadth of credit information available across the client cohorts and create a basis for greater competition in information-sharing between credit bureaux.  Better, more accurate information, and better information-sharing between consumer credit providers should improve risk assessment.  Improved risk assessment should reduce risk associated with servicing the lower-income market and improve access to cheaper, longer term credit by those currently disadvantaged.

25. FEASibilitY (Pty) Ltd NCA Workshop: Session 125 1.3.4 The National Credit Register  National Credit Register (NCR) One single register Established and monitored by the National Credit Regulator Reflecting all outstanding agreements Duty on credit providers to report information on entering, settling or transferring of agreements

26. FEASibilitY (Pty) Ltd NCA Workshop: Session 126 1.3.5 Tribunal  Independent from National Credit Regulator  Operate independently with chairperson and members  Direct access by credit providers and consumers in certain instances  Single member hearings or full bench  Order will be equivalent to a High Court order

27. FEASibilitY (Pty) Ltd NCA Workshop: Session 127 1.3.6 Tribunal  Prosecution of credit providers by National Credit Regulator  Confirmation of debt restructuring if by consent  Appeals by consumers & credit providers  Decisions can be appealed or taken on review to High Court

28. FEASibilitY (Pty) Ltd NCA Workshop: Session 128 1.3.7 Courts  Magistrate Courts  Cases brought by providers against consumers (as at present, although consumers’ ground for defense are expanded / codified)  Prior to approving court orders, compulsory indebtedness & reckless lending enquiry

29. FEASibilitY (Pty) Ltd NCA Workshop: Session 129 1.3.8 Who must register?  Registration: Credit providers: > 100 agreements or book > threshold (R500 000 +) Juristic persons & individuals Minimal “fit and proper” test on owners and directors/members BEE commitment (subject to certain provisions) Commitment to combating over- indebtedness (i.e.. score cards)

30. FEASibilitY (Pty) Ltd NCA Workshop: Session 130 1.3.9 Who must register?  Special category for ‘developmental credit’ Credit unions; educational; small business; low income housing Subject to ‘special rules’ but not exempt from the Bill  Also registration requirements for Credit Bureaux Debt Counselors Only applies to “arms length” transactions. Stokvels, family loans and shareholder loans are excluded

31. FEASibilitY (Pty) Ltd NCA Workshop: Session 131 1.3.10 Which type of credit?  Credit to legal entities included in ambit, except – Large businesses (threshold) excluded; the state; organ of state Large agreements Legal entities excluded from certain sections (marketing & advertising limitations, reckless credit provisions & interest & fee limitations) Will not apply to policies of insurance or leases in respect of immovable property Incidental credit

32. FEASibilitY (Pty) Ltd NCA Workshop: Session 132 Session 1 Question & Answer Session