Ministers present wish list to end abuse of debt

Considering the impact of over-indebtedness on households, the ministers of finance and of trade and industry this week issued a statement that reads like a wish list of all that needs to be done to stamp out abusive practices. But an action plan has yet

The conduct of some credit providers has been “atrocious” and over-indebted South Africans today are worse off than debtors in Dickensian times, who would get thrown into jail for their debt. “Now you work it off for life, without taking home a salary,” says Ismail Momoniat, deputy director-general at National Treasury, referring to over-indebted people whose salaries or wages are depleted by numerous emolument attachment orders (EAOs), often referred to as garnishee orders.

“Some lenders’ business model is that you will default, they will get an EAO, and then they will get first bite at your salary [ahead of other creditors]. It’s a very serious problem and we think there needs to be a much tougher approach by the regulators. They haven’t been tough enough,” he says.

Momoniat’s comments follow the issuing of a joint statement by the Minister of Finance and the Minister of Trade and Industry this week that listed a raft of measures to prevent households from becoming over-indebted and to help those who are trapped in debt.

“Government is very concerned about the scale of over-indebtedness and is particularly concerned about the conduct of ‘ pay- day’ lenders,” he says (see “What are short-term loans?”, above).

“It’s not just household debt that is rising. Many working people – low- to middle-income earners – are getting short-term loans that they can’t afford. These loans are being rolled over, and people are becoming enslaved by debt. A low- income person can’t be declared insolvent. So we need to find ways for people to get out of this situation,” Momoniat says.

Government feels that regulators Short-term loans are microloans, which are sometimes referred to as “pay-day” loans.

A short-term loan, as defined by the National Credit Act, is a credit transaction where the amount does not exceed R8 000 and where the whole amount is repayable within six months. The Act allows credit providers to charge interest of up to five percent a month on such a loan. should be enforcing the various laws more stringently and that they ought to co-ordinate their efforts, he says. “The message from cabinet is: either the law is being too weakly applied or there are regulatory gaps. It’s a call for all regulators to sharpen their teeth.”

PREVENTATIVE STEPS

The statement by the ministers says that preventative steps to minimise the risk of over-indebtedness in the future will include the following:

◆ Setting affordability criteria that all retail lenders will have to adhere to and clearly defining a reckless loan, thus enhancing reckless lending controls under the National Credit Act (NCA). Zodwa Ntuli, the deputy director-general for consumer and corporate regulation at the Department of Trade and Industry (DTI), says the absence of affordability guidelines has resulted in some consumers getting credit that they can’t afford.

◆ Ensuring that the provision of credit is not only affordable but suitable. “For example, it is clearly inappropriate to promote a short-term (30-day) loan as being suitable for Pay-day lenders tend to charge the highest interest rates they can, and provide loan extensions or “rollovers”, which incur more fees and interest. This can keep you in debt.

In the United Kingdom, pay-day lenders have been labelled “legal loan sharks”. Wonga.com is a major player in this market. The UK regulator is planning to limit to two the number of times that a loan can be rolled over. supporting borrowing over longer periods,” the statement says.

Ntuli says consumers often don’t know what options are available to them or what the best product is for them. She says: “The issue is one of disclosure. Credit providers have a responsibility to consumers to explain the pros and cons of a product and provide information in the simplest way. Government is saying to creditor providers: enhance disclosure, explain your product and offer consumers products that suit their circumstances.”

◆ Reviewing the pricing caps (interest rate limits) under the NCA to ensure that they are appropriate, “especially for pay-day loans where rates are excessive”, the statement says. Ntuli says low-income earners pay the most for credit, and the DTI is reviewing the formula used to calculate the maximum interest rates that credit providers can charge you. The formula is under review in terms of the National Credit Amendment Bill.

◆ Strengthening regulatory monitoring, supervision and enforcement to ensure the shutting down of unregistered credit providers and full compliance by registered credit providers. Ntuli says cabinet has noted the need for better co-ordination and co-operation between all sector regulators – the National Credit Regulator (NCR), the Financial Services Board (FSB), and the South African Reserve Bank – in order to regulate the credit market more effectively.

“If the regulators work better together, they can have a bigger impact. This refers to practical operations, enforcement strategies and enhanced powers to deal with reckless lenders. The National Credit Amendment Bill makes provision for beefing up the NCR’s powers.”

◆ Reviewing the regulatory framework for credit insurance policies that are sold with, or linked to, credit. A task team made up of representatives from the DTI, Treasury, FSB and the NCR has almost completed its review of the credit insurance market. The task team was set up because of the widespread abuse of consumers.

“This market can’t be left unregulated,” Ntuli says. The task team will advise on the best way of regulating it, she says.

◆ Setting norms and standards for access to the payments system, including for debit orders. “Persistent reckless lenders should be denied access to the payments system,” the statement says.

◆ Setting norms and standards for EAOs issued for credit. Almost half a million employees in the private sector and almost 200 000 people employed by provincial and national government have EAOs against their salaries, according to recent research by the Pretoria Law Clinic.

Abuse of consumers who have EAOs is rife. Ntuli says many of these orders have been found to be fraudulent and there is a need for mechanisms to protect consumers.

◆ Extending and strengthening the debt collection laws to apply to law firms. Debt collection fees are regulated by the Debt Collectors Act, but when attorneys do debt collection, their fees are regulated differently.

The NCA provides an extension of the in duplum rule by limiting the interest and “all other” costs that a creditor may charge on an account that is in arrears. This includes collection costs. This limit is meant to protect debtors from exploitation by creditors.

The maximum amount that can be collected is double the capital amount outstanding at the time the consumer defaulted, including any interest or collection costs.

◆ Regulating credit- linked deductions allowed on employer payroll systems.

◆ Investigating simpler and lower-cost insolvency arrangements for lower- income and middleincome people.

RESCUE EFFORTS

The statement by the ministers says government is:

◆ Engaging with lenders and their industry associations to provide relief to qualified distressed borrowers by reducing their instalment burden, without additional cost to the borrower.

◆ Engaging with lenders to take steps to withdraw certain categories of existing EAOs for credit, and to use such orders for future credit only as a last resort and according to a robust code of conduct.

◆ Encouraging employers to investigate the legitimacy of all EAOs they may be enforcing against their employees (for purposes of credit, not child or spousal maintenance) and to write to credit providers to reduce or even remove all onerous orders. Public- sector employers will be expected to lead by example and implement the above proposals early next year, as soon as guidelines for the public sector are published. Government is also considering: ◆ Regulating debt- collection firms, including law firms, to ensure they do not indulge in unscrupulous debt-collection practices.

◆ Enabling major lenders to provide voluntary debt relief measures to distressed borrowers without charge, in addition to the current debt counselling process, subject to compliance with the NCA and Financial Advisory and Intermediary Services Act.

The statement says that the household disposable income- todebt ratio has risen to 76 percent, from 50 percent in 2003.

“The economic slowdown after the 2008 global financial crisis resulted in many households falling into arrears and/or defaulting or deleveraging. However, reckless lending and the abuses in pay-day loans have aggravated this problem, driving many over-indebted households into a vicious cycle of debt,” the statement says.

While government recognises that access to credit is critical for household consumption expenditure and economic growth, government is concerned about the very high levels of household debt and over-indebtedness.

The ministers will develop a detailed implementation framework early next year, the statement says.