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

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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.

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