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THE NATIONAL CREDIT

ACT NO 34 OF 2005

MANAGING ITS IMPACT ON YOUR BUSINESS

Cornerstone Performance Solutions

Business Learning. Solved.

The National Credit Act Page 1 of 69

THE NATIONAL CREDIT ACT NO 34 OF 2005

MANAGING ITS IMPACT ON YOUR BUSINESS

Disclaimer:

All reasonable care has been exercised in the compilation of this material. Compliance of the Act however remains the responsibility of the delegate or reader, and BANKSETA, Cornerstone Performance Solutions Pty Ltd and other agents or employees can not be held liable for any error, omissions or misinterpretations contained herein, nor for any damages or losses arising from any compliance related or other business claims related to the contents of this training programme.

This manual belongs to:

______________________________________

Compiled by Cornerstone Performance Solutions (Pty) Ltd

Copy Right Reserved BANKSETA © 2006. This material may not be reproduced or copied by any means. It is for use in the client organisation alone. Sections of this material are original Cornerstone Performance Solutions material that has been incorporated in this manual. Copyright in respect of these sections is reserved by CPS, and they are loaned to BANKSETA for the purposes of this training project only.

CORNERSTONE PERFORMANCE SOLUTIONS

Powering Human Capital


Overview

What you will find in this skills programme:

• An Introduction giving an outline of the contents of this skills programme.

• Five modules, each with:

- An introduction to the specific content of the module

- Resources to give you the necessary knowledge and information required.

- Learning activities to be done either individually or in groups

• A CD toolkit with relevant documents

• A handout of the credit process

Introduction: The National Credit Act and its impact on your business

Legislation defines the space in which markets for goods and services develop. The Usury Act Exemption Notice created an environment in which large numbers of poorer people gained access to credit. That proved to be good for some consumers, and less good for others. It also created an environment in which consumers and microfinance companies could flourish when it was properly managed. The National Credit Act has defined the market space, and its impact on many institutions will be significant. Markets will change, competitors will change, practices will change and the players will have to become more professional. Not everyone will like this. Not everyone will succeed. The aim of this training is to alert microfinanciers to what they will have to consider if they are to succeed. The Act and its regulations are around 250 pages long in their current format. One day’s training cannot equip you to be compliant – this training should be seen as a step on the journey to understanding, compliance and success. It is NOT an end-point. We are starting the ball rolling. We couldn’t achieve more that that in a day. So the bad news is that there is a lot more work for you after today. The good news is that if you do it right, your chances of long-term success are that much greater.

Bon Voyage!


Detailed Contents of this Skills Programme: The National Credit Act

Module 1: Credit: the regulatory environment

Resources: Laws, regulations and compliance (Resource 1.1)

Legislation relevant to the credit industry (Resource 1.2)

The need for regulators and regulations (Resource 1.3)

The importance of complying with legislation (Resource 1.4)

Module 2: The NCA in Context

Resources: Financial services and transformation in the South African credit market (Resource 2.1)

Challenges of providing credit at the lower end of the market (Resource 2.2)

The history of credit regulation (Resource 2.3)

Module 3: An overview of the NCA

Resources: The National Credit Act: Highlights (Resource 3.1)

The structure of the NCA (Resource 3.2)

Unsecured credit: Importance of effective rate (Resource 3.3)

The key role players in the NCA (Resource 3.4)

Credit: Introducing the regulator. (Resource 3.5)

Module 4: The credit process: A frame of reference

Resources: An overview of a generic credit process (Resource 4.1)

Hand-out 1: A generic credit process

Module 5: The NCA – Impact on the credit process

Resources: Marketing & Advertising (Resource 5.1)

Application (Resource 5.2)

Assessment & Decision (Resource 5.3)

Agreement & Disbursement (Resource 5.4)

Repayments & Book Control (Resource 5.5)

Collections (Resource 5.6)

Appendix A: Extract from the National Credit Act - Credit marketing practices

Appendix B: examples of credit advertisements


Learning Objectives

Programme learning objectives:

� This skills programme will equip learners to:

I. Explain the importance of legislation

II. List the laws relevant to the credit industry

III. Identify the need for regulations and regulators

IV. Explain the meaning of complying with legislation

V. Outline the current situation of the South African credit market and identify the need for credit

VI. Identify the need for transformation in the South African credit market by describing the current socio-economic and political environment and the challenges in regulating the market for credit and how legislation can promote access to credit

VII. Explain the challenges of providing credit at the lower end of the market

VIII. Be able to reflect on past legislation regulating credit in South Africa

IX. Outline the NCA and identify its impact with regard to the socio-economic environment of the credit market

X. Comprehend the structure of the NCA

XI. Identify newly established institutions appointed as role players in terms of the NCA

XII. Outline the role of the National Credit Regulator and new registration procedures as stipulated in the NCA

XIII. Specify a general outline of the credit process by identifying each of the main steps in the process. And explain the impact of the NCA on your business.

XIV. Analyse the impact of the NCA on each step in the credit processes

Target population

� Managers and staff in microfinance businesses

� Education variable, assume most have matric, many will be English Second Language users

Programme Level

� Pitched at NQF 4 level (SGB / SAQA processes outside scope.)

Programme delivery

� Channel: Face-to-face

� Medium; English

� Venue requirements: accommodate 20 learners, group interaction required, use training rooms and not auditorium

Programme duration

� Full day, 0800 until 1600.

Training design � The trainer is not an expert on the content of the NCA

� The training material is not definitive

� The programme can achieve the learning outcomes and start the ball rolling for you


Module 1

Credit: the regulatory environment

Introduction

Introduction to the regulatory environment

In every sphere of business and for every industry in South Africa there is legislation that has to be followed. Otherwise the business could incur fines and penalties or have key staff members go to prison.

The business of credit is no different. There are certain rules and regulations that have to be followed in order to provide your customers with a safe environment in which they can lend money and not be taken advantage of. The legislation is there to protect the customer as well as the business. In order to ensure that the people working for the microfinance company or bank follow legislation, the company develops its own credit policy which encapsulates legislation as well as the internal rules which staff should follow in managing its loan customers.

In this module you will identify legislation relevant to the industry, the rules and regulations that apply and understand the importance of adhering to legislation.

Resources

The following resource should be studied carefully to assist you in mastering this module. They have been carefully created and selected to give you an accurate and simple view of the matter at hand.

� Laws, regulations and compliance (Resource 1.1)

� Legislation relevant to the credit industry (Resource 1.2) � The need for regulators and regulations (Resource 1.3) � The importance of complying with legislation (Resource 1.4)


Resource 1.1

Laws, regulations and compliance

The most fundamental concept we need to understand is that there are laws, regulators and regulations and that the public has an obligation to comply with law or face the consequences. Rules and regulations affect any company trying to run a business no matter what kind of business it is. These rules and regulations have to be followed carefully so as not to incur penalties and fines or even imprisonment. As we are concentrating on the credit environment, we will look more closely at the legislation affecting credit.

Regulations Regulators

The Public Businesses Etc.

LAW (statutes)

� Drawn up by government � Aim to create an environment of

security, stability, transformation and growth.

� Contain definitions of rights, obligations and control.

Offences & Penalties

� Appointed in law to implement the specific law

� Fall under public service department

and cabinet portfolios

� Define the detailed requirements regarding the specific implementation of the law – how the statutes will be implemented.

Compliance requirements

Obligations


Resource 1.2

Legislation relevant to the credit industry

The main laws governing the credit industry in South Africa are the Banks Act and the National Credit Act. In addition to these laws, the National Payment Systems Act is the controlling framework that covers repayment systems, and particularly the Early Debit Order (EDO) System, which will have a considerable impact on the industry.

The Act The Regulator The reason

The Banks Act The South African Reserve Bank The main purpose of the Banks Act of 1990 is to provide for the regulation and supervision of the business of public companies taking deposits from the public and to provide for matters connected with this. The definition of the business of a bank covers all activities covered by banks. As most microfinance companies are not banks, they are barred from taking deposits.

The National Credit Act

The National Regulator The National Credit Act aims at ensuring that all consumers who make use of credit are treated fairly and are not discriminated against. This Act, which is currently being phased in, replaces the current acts governing credit, namely the Usury Act, the Exemption Notice to the Usury Act and the Credit Agreements Act. Banks operate under the Usury Act, microfinanciers under the Exemption Notice to the Usury Act, and the Credit Agreements Act governs instalment sales, such as hire purchases.

The National Payment Systems Act

The South African Reserve Bank The purpose of the Act is to provide for the management, administration, operation and supervision of payment, clearing and settlement systems in the Republic of South Africa and related matters. (These systems need to be perceived by users in the domestic and international markets as being stable, secure and robust.)

For the purpose of this skills programme, only the National Credit Act will be discussed in detail.


Resource 1.3

The need for regulators and regulations

Just as any society has rules to protect its people, the microfinance industry needs rules and regulations to ensure that customer and employees are not harmed in any way. These rules ultimately also serve to protect businesses that observe these rules.

The need for effective regulation Imagine there were no rules on how we drive on our roads. Just think of what would happen. People would do their own thing and take chances – without any traffic tickets being issued. People would get hurt; feel unsafe, confused and unsure with all the disorder. Quite a problem, wouldn’t you say? If the microfinance and banking industry had neither rules nor regulations, people would feel just as unsafe and they would be at risk. Consumers would not:

� Trust or have confidence in an industry that is unstable

� Feel safe or protected from irresponsible and reckless lending

� Feel that their money was secure � Know what their rights are � Know which the lenders with a good

reputation are Financiers would not:

� Have any guidelines as to what interest rates they may set, what products they may offer, or how loan repayments can be collected

� Know what their rights are For this reason, rules, implemented and overseen by regulators, was introduced in the financial industry and are continually updated and improved. An example of this is the new National Credit Act, which’s main purpose is to protect the consumer.

Overview of regulatory structures Credit transactions fall under several different sets of rules depending on the type of lender, the form of the transaction and the amount of the loan. The current regulatory structure in the financial sector gives authority mainly to four main regulators. They ensure that rules are implemented and guidelines set for financial sector companies to follow. These main regulators are:

1. The South African Reserve Bank and the SA Banking Council

2. the Financial Services Board 3. The National Credit Regulator 4. the Department of Trade and Industry

Their aim is to maintain financial stability and a sound, efficient banking system. They issue licenses and they monitor that the registered institutions work within set laws. They do this based on whether the institution operates within the:

� Banks Act or the � National Credit Act

Taking into account that this is quite a complex situation, with different regulators overseeing different industry players, the challenge is for the regulators to ensure clear-cut governance, good co-ordination and information glow between them.

The National credit regulator, who oversees all activities in the microfinance industry, will be discussed in greater detail later in this programme. Also see “NCA Regulations.pdf” on your toolkit CD.


Resource 1.4

The importance of complying with legislation

Legislation is important in that not only does it provide a framework in which the financial services industry can operate, but that it protects the bank, the consumer, the customer and the economy as a whole. For this reason it is vital that you understand what is meant by compliance and why you need to comply with legislation.

For any economy to be successful, it must be: � As stable as possible � As secure as possible � Fair to all stakeholders �

If these conditions are not met, economies break down. Instability leads to a lack of investment, a lack of security leads to inefficiencies and unfairness leads to conflict and in extreme cases, revolt. None of these are desirable for the growth and prosperity of a country. The common aim of all legislation governing the financial services sector is to set down ground rules that create these conditions of stability, security and fairness. Compliance management simply means working within the law and hence contributing to the creation of a dynamic, prosperous and fair economy. In order to comply with law, the starting point is to understand what the law actually requires. Once a legal or regulatory requirement is understood, measures can be put in place to ensure that compliance is achieved. Of course, non-compliance is always an option – you can choose to exceed the speed limit, for example, but if you do, you face risks – for example you could lose your license. Non-compliance with legislation always brings risks with it, such as the risk of a fine, or even being closed down or jailed. Identifying applicable legislation

� First, determine what industry you are in. � Second, if you do not know the answer

yourself, receive help from a lawyer to identify the legislation affecting your industry.

� For example, if you are in the meat industry, there will be very specific legislation on how animals should be transported and slaughtered; and how butcheries need to be kept clean (according to health requirements).

Those two points alone will result in complying with two different Acts. There will also be legislation that affects the actual running of the business such as the Company’s Act and the Basic Conditions of Employment Act that are not industry specific.

� Third, determine who the regulatory

authorities are (that will be enforcing the legislation).

� Fourth, the Act or piece of legislation has to

be interpreted to see how it affects you or your company.

� A further search has to be undertaken as the

fifth step. To almost every Act, there exist regulations and even guidelines, which give you more specific details of how you should go about interpreting and carrying out the legal requirements.

� The sixth step is to then take the Act, the

regulations and any guidelines on the matter and extract from that the specific directives that affect you or your company.

� The seventh step is to identify the risks

attached to that legislation that will affect you or your company.

� The eighth step is to determine how you will

handle those legal risks because, inevitably, in the legislation, there will be penalties or even jail terms for not following the letter of the law.


� The ninth step is to build within your team at work the steps that need to be taken to ensure that you comply with this legislation and to ensure that you put in procedures and processes that will minimise any risks in this regard (in other words, develop controls).

� The tenth step is to determine what formal

documentation is required. � The final and eleventh step is to comply with

all the reporting requirements to the authorities.

In large companies, this legislative risk is usually facilitated by people within the legal department or by a compliance officer or both, with the co-operation and active participation of management and all other staff. In small companies the responsibility lies with the manger. Implication of interpreting legislation and compliance A risk arises that legislation can be incorrectly interpreted and this could be to the detriment of the company. It is therefore important that somebody with the necessary legal background and qualifications interprets legislation for you and your team and gives you guidance in this respect, in order that management and staff can develop control to ensure adherence to legislation. Reporting systems In the eleventh step mentioned above, mention was made of reporting requirements. Each regulatory authority, whether it is the South African Reserve Bank, the Financial Services Board, the Receiver of Revenue, etc. will require a certain amount of regular reporting or even exception reports on request. Where reports have to be sent regularly – could be monthly, quarterly, or annually – most companies will have in place a reporting system. Such a reporting system will have all the requirements as set out by the regulatory authority (probably as indicated in the regulations). A system means that the correct details are sent consistently to the authorities in order to not have any queries. Too many queries on your reporting details, makes the authorities nervous and sometime they will

make visits on-site (at your offices) to see how your team is managing the role of compliance to the legislation. Stakeholder input A stakeholder is a person or entity that has an interest in your business for one reason or another. For example, a supplier will have an interest in your business (so that he feels comfortable that he will get paid); or a customer will have an interest in whether the company has a good reputation for dealing with customers and that the product or service complies with quality requirements. Stakeholders will also be the shareholders (who want to see the company grow) or even the community if the company in some way or the other affects the environment. It is therefore essential to ensure that where it is applicable or desired (from a reputation point of view) that stakeholders are asked for their input which may add value to how the company complies with rules and regulation and also with dealing with the aspects of risk brought about by such legislation. Communication Communication is an important component of how a company complies with such legislation. The compliance department is only one area that has a stake in the process. Included will be all the employees from management to blue-collar workers. � They need to know what legislation affects

them and how. � They need to be trained in how to respond to

the necessary requirements and to understand the legislation that affects them.

� They need to be alerted to any responsibilities they have in terms of reporting or providing reports that will be used for reporting purposes.

� They need to be made aware of the consequences of their actions with regard to the legislation.

� They need to understand why legislation generally is an important component of the work environment.


It is usually the duty of the compliance officer to monitor that all the staff members are trained in areas of the legislation that affect them. Process for reporting non-compliance A very important part of the process of dealing with legislation is that companies have to report non-compliance. Therefore, if the company (and, usually, this is through staff members who have not done as they are supposed to) has done something that is wrong in that it does not comply with the rules and regulations, staff should report it to their compliance officer. Non-compliance can result in loss of reputation that in the long run can have a financial implication or there can be direct financial loss probably over and above any penalties that the company has to pay. The compliance officer will then decide exactly what has to be reported to the regulatory authorities and what information must be submitted with such report. Transparency and Disclosure Sometimes, depending on the legislation involved, penalties may not be applied, but it is necessary for companies and any other business entities to be totally transparent on how they run their companies and the serious mistakes that they make that infringe on the law. It is called disclosure. Taking appropriate action for non-compliance The compliance officer needs to take appropriate action where there has been non-compliance. Staff should always feel free to contact their compliance officer. Each company will have their own process in place, but it would include the following: � Check whether there are processes and

procedures in place that will help to prevent non-compliance in future. These are typically

the controls that are devised and implemented by management.

� Ensure staff are suitably trained so that they are aware of the issues and possible consequences.

� Teach them to refer to the compliance officer when in doubt rather than wait until “after the fact”.

� Find out whether the staff member was not complying or whether the processes and procedures were not in place, that is, determine how the non-compliance came about.

� Investigate, and if necessary, initiate disciplinary action against the necessary staff member.

� Ensure all staff are communicated to about the event so that mistakes can be learnt from.

� Ensure the regulatory authorities are suitably informed and satisfied and any penalties paid as required.

The compliance officer is there merely to assist and facilitate compliance with rules and regulations. All staff members are responsible for ensuring that they conduct their business within the parameters of applicable rules and regulations. Where staff members are not certain as to the rules and regulations that apply to them or their work, they are free to contact the compliance officer. Similarly, where staff members suspect that there is non-compliance in their business area, they are free to consult with the compliance officer, and should do so in the interests of the organisation as well as themselves. So, compliance risk is always present: the risk that knowingly or unknowing you will break the law and be subject to all manner of negative consequences. Compliance risk management is therefore a most important responsibility of any company and any manager.


Conclusion

In this module we saw that there is legislation that regulates every industry in our country. We had a look at the legislation that relates to the microfinance industry, why we need regulators and regulators and lastly we looked at the importance of compliance. In Module 2 we will put the NCA into context, by exploring the history of legislation in the industry and the current situation of the financial services sector, which led to the need for an adjusted and improved credit act. What you will have to do in your own time:

� Read the Act and associated regulations carefully � Consider each practice in your business relative to the requirements of the Act and the

regulations � Look at any gaps and determine your degree of compliance and risk � Take action as per resource 1.4

� What is your ‘risk appetite’?

Learning Activity # 1

� Given the Risk Analysis Matrix, discuss the risk associated with non-compliance with the NCA.

High

4

Impact

Low Probability 4 High


Module 2

The NCA in Context

Introduction

Introduction to the foundation of effective credit management in South Africa The South African Market for credit is made up of a very wide spectrum of customers and needs, from high-end commercial and corporate finance customers, and wealthy private banking clients, right down to impoverished people who are forced to rely on loans from time to time, in some cases merely in order to meet basic needs. The focus of this skills programme is the management of credit offered to the lower end of the market – that is, the market for microfinance. Our more particular focus is on consumer lending, although small business and micro-enterprise lending is fairly similar in nature to lending into the consumer market. In the past, people in this market segment were effectively excluded from access to credit from mainstream credit providers such as banks, and have relied on smaller specialist credit providers to fulfil their needs.

The need for credit at the lower end of the market It is fundamentally important to recognize that the people who have historically been excluded from access to mainstream credit facilities typically fall into the lower end of the market – living standards measure (LSM) 5, 4, and below. This market has been growing for several years, and it is now sizeable in itself, although it only represents a small portion of the entire credit market in South Africa. It is clear that there is a massive demand for small loans in these market segments. Although the total amount of credit extended in this market is a relatively small proportion of total borrowings in South Africa, the number of loans and the number of people borrowing in this segment is very large. So it is a segment characterized by large volumes of relatively low value loans. This is illustrated by the following press release from the regulator in early 2006.

CONTINUED GROWTH FOR MICROLENDING INDUSTRY

For the 12 months ending November 2005, disbursements stood at R25.4bn – a R6.2bn or 32.2% increase on the R19.2bn reported for the year ending November 2004. Rand value disbursements increased by 19.7% from R6.29bn in the quarter ending August 2005 to R7.52bn in the quarter ending November 2005, while the number of loans disbursed increased by 17.3% from 3.79m to 3.5m. These trends indicate that the average size of loans grew by 2.1% from R1 657 to 1 691.

Source: MFRC MEDIA RELEASE; 15 FEBRUARY 2006

Loan disbursements (R)

R (billion)

2003

R 14.61 bn

2004

R 19.21 bn

2005

R 25.4 bn

Average Loan size (R)

Ran

d

2003 2004 2005

R 1236 R 1657

R1691


Who are the ‘un-banked’? An analysis of the market segments of the 17, 6 million ‘unbanked’ South Africans has shown, inter alia, the following distinct groups:

− Economically active: The 5,7 million economically active individuals who do not have bank accounts are found predominantly in the rural areas (35 per cent), informal shacks or settlements (25 per cent) and in the townships (24 per cent). Not all are unemployed: 21 per cent of this group work in full time or part time formal employment, some with large companies.

− Pensioners: 1, 9 million people in this category without accounts, typically found in marginalised black rural communities. Their homes are shacks or informal settlements. They feel bypassed by society and live in a world of poverty and survival.

− Students: 2, 9 million people over the age of 16 who are currently in secondary or tertiary education and who do not have bank accounts.

The vulnerability of the poor Poorer people who do not have a bank account or only have basic banking facilities are more vulnerable. Being less sophisticated, they are easy prey for unscrupulous operators who take advantage of their lack of understanding and their financial need. This is the backdrop to the National Credit Act.

Resources


� Financial services and transformation in the South African credit market (Resource 2.1)

� Challenges of providing credit at the lower end of the market (Resource 2.2)

� The history of credit regulation (Resource 2.3)


Resource 2.1

Financial services and transformation in the South African credit market

When implementing legislation and systems aimed at providing greater access to credit and financial services to the general public, the law and regulations are not the only important factors to consider. The social aspects of financial services, which incorporate the political aspects, are equally important.

The socio-economic and political situation According to the Financial Sector Charter of August 2002, South African society remains characterised by racially-based income and social services inequalities. These inhibit our ability to achieve our full economic potential, despite the significant progress that this country has made. Inequalities are also present in the South African financial sector. There is an urgent need for a financial sector that contributes to the establishment of an equitable society by effectively providing accessible financial services to black people and by directing investment into targeted sectors of the economy. With 4.3 million unemployed people in South Africa in March 2005, the official jobless rate being the highest among black South Africans at 31.6%. South Africa, in particular the financial services sector, still have a long way to go to abolish rules, laws and attitudes inhibiting so many of the poorer communities from sharing in the financial opportunities that should be accessible to all citizens of this country. Challenges in regulating the market for credit The main challenges inhibiting access to financial services by the poor are summarised in the table below.

Physical accessibility:

� Location: Most banks or branches of other financial institutions are more than likely to be located in the city/town centre, making it a lengthily and time consuming trip from rural areas.

� Transport: Physical accessibility or lack thereof is a problem for customers from poorer, rural communities. Public transport such as taxis, busses and trains may be absent or unreliable.

� Business Hours: Most financial institutions close for end-of-day business between 3:30 and 4:30 pm, making it almost impossible for employed customers to reach them during business hours.

� ATM Location: Limited availability of ATM’s in rural areas also contributes to inaccessibility. Government has an imperative to make more ATM’s available - 1 within every 20 km by 2009.

Access implies the ability (right) to use a service without the obligation to use that

service.


Cost:

� Cost of Transport: In addition to the unreliability of SA’s transport system, the cost of transport is also very high, which makes travelling to the financial institution quite difficult.

� Cost of services: Affordability plays a key role in current usage patterns. If the monthly fee for a financial product is R40, a person who earns R900 a month will not have access in this regard.

� Cost of Finance: High interest rates charged on small, short and medium terms loans are relatively high. This influences access to financial products as repayment is unaffordable to many ‘poor’ customers.

Product Features:

� Product Terms: Many banks do not provide the types of products to suit the needs of these customers. For example, most lower and emerging middle class customers only have the need for small short term loans in order to pay for basic necessities, household needs and personal commodities such as cell phones and school fees.

Risk:

� Payment Risk: Discrimination against lower income groups still prevails within the financial sector. These people are perceived as high-risk customers, unable to make payments and fulfil their obligations.

� Collateral: Poorer customers seldom have liquid assets to offer as collateral. Loans are therefore impossible to acquire if the person does not meet the bank’s strict criteria.

The ‘Digital Divide’:

� Unavailability of the internet and cell phone banking to

lower- income customers and insufficient knowledge regarding technology hinders the delivery of cheap, easy to use and accessible banking.

Lack of Financial Sophistication:

� Illiteracy and innumeracy: With SA’s relatively high illiteracy rate and only 27% of adults over 16 years of age having matriculated and only 41% having completed some high school education, basic literacy, not to mention financial literacy, plays a major role in consumer education. Only half the population know what a credit card is and understand the concept of a service fee.

� Product Knowledge: Most of the ‘poorer’ customers are uninformed about products that are available. Lack of information regarding application criteria and loan process also discourages this group from acquiring essential financial products such as a saving account or a short term loan.

� Knowledge of rights and obligations: Legal and administrative information such as obligations and rights is often not freely available to potential customers.


Many developing countries including South Africa have become increasingly aware of the importance of developing their economies, and some are paying the price in failing to do so, not only in terms of injustice caused by the denial of access, but also those who do not abide by the law. As we have seen, every economy has to have regulations in place that oversees and manages the provision of credit. One of the most important problems in SA’s banking industry has always been the lack of access by low-income customers to the formal financial industry. Therefore, the National Credit Act aims to develop a financial industry which protects and is fair to all banks, regulators, other industry role players and clients, in the quest to improve service delivery to the poor.

“Second Economy”

Absent

“First Economy”

First world

standards

Banking Services & Payment Systems

Financial services in SA reflect the existence of two distinct economies.


According to Financial Services for the Poor, various other changes are creating more opportunities for pro-poor financial services: � Technological changes that are constantly reducing the cost of distribution and increasing competitive

entry at the low-income end of the market. � Changes in the regulatory environment to facilitate services to the poor while maintaining current

stability of the financial sector. � Commercial opportunities and other factors driving banks to extend their services to lower-income

customers. � Leveraging of existing non-financial infrastructure such as retail outlets, welfare infrastructure and cell

phone networks to extend financial services to the poor. Promoting Access to Services via Legislation We know that legislation has been put in place to regulate the technical and operational aspects of the finance sector. But legislation does not end there. During the past year, legislation addressing the social aspects of the finance sector, such as the rights of customers, has been finalised. Examples of such ‘social’ legislation include the National Credit Act and the Dedicated Banks Bill, both aimed at increasing accessibility and improving customer protection. National Credit Act The National Credit Act aims at ensuring that all consumers who make use of credit are treated fairly and are not discriminated against. This Act, which came into effect in June 2006, replaces the Usury Act, the Exemption Notice to the Usury Act and the Credit Agreements Act. Banks operate under the Usury Act, microfinanciers under the Exemption Notice to the Usury Act, and the Credit Agreements Act governs instalment sales, such as hire purchases.

Dedicated Banks Bill of 2004 The DBA aims to improve access to basic banking services for low income and historically disadvantaged communities. The Bill creates the opportunity for companies such as, amongst others, large retail outlets, cellular phone companies, the Post Bank and existing banks to expand their banking services to these communities, by becoming Savings Banks or Savings and Loans Banks (dedicated banks). This will be possible by lowering the existing requirements provided for in the Banks Act of 1990. From participating in a global economy to establishing our own financial industry and considering the social aspects of the financial sector, it is evident that the common thread is to transform South Africa’s financial sector in order to provide the majority of SA’s population with safe and stable financial services, while developing SA’s destination for global capital. This goal can however only be realised if easy access to and availability of financial services, facilities and products and protection in doing so, is available to all citizens of this country, irrespective of social and income class.


Resource 2.2

Challenges of providing credit at the lower end of the market It has been said that credit businesses are not in the business of lending money. Rather they are in the business of getting back the money they lend, and at a margin! What this comes down to is that there is always a risk that when you lend money - you may not get it back.

Risk at the lower end of the market The lower end of the credit market unfortunately has lower income-stability, lower disposable income, and small or non-existent asset bases, and people in this segment are therefore financially vulnerable. They therefore tend to be relatively more risky to lend to than people with greater disposable incomes, bigger asset bases, and greater income stability. So it a case of the most needy also being the most risky. This has had the effect of pushing up pricing and encouraging a range of risk-management practices that may have been effective, but which have had certain drawbacks. Most of these practices relate to preferential methods of receiving payments, all of which are outlawed under new legislation. Microfinanciers: The need to manage risk It is a statistical fact that borrowers in this segment are unfortunately more likely to default on repayment obligations than those in the higher income segments of the market. (Consider that the default rate on loans in many microfinance businesses can be of the order of up to 3 to 5%, where in banks the value is typically far lower.) Risk-management in this end of the market is absolutely critical to the success of a lending business – or indeed for any financial services provider. (An insurance company offering RA’s or Funeral Policies must be able to rely on the receipt of premiums if it is to operate as a sustainable business. The risk is different in such a business, in that they do not stand to lose capital - but there is risk nonetheless.) It is widely recognized that pricing and risk-management practices have to be adapted to this end of the market. (Hence the previous Usury Act Exemption Notice providing for unlimited pricing on loans within certain constraints.) The need of the micro-financier for credit granting and collection methods that actually work in this market segment is clearly legitimate. When micro-financiers manage risk, they aim to lend with the assurance that they will be able to collect their debtors’ book. Risk management techniques may be applied at every step of the credit process - from properly identifying a customer, to verification of application details, to credit history checking, to application scoring, to making robust collection arrangements, etc. Building a Sustainable Credit Business A sustainable credit business must manage its risk through a number of avenues – it must:

� Attract enough good accounts to offset the inevitable bad accounts that every lender will get � Control loan sizes, to optimise repayments and risk � Encourage use of loan facilities by good customers � Discourage or control the bad customers � Manage profitability by being consistent and building up a predictable business.

The NCA provides the broad outlines with which professional microfinanciers face the challenges of managing risk and building sustainable credit businesses.


Resource 2.3

The history of credit regulation

According to the Department of Trade and industry, there is a need for radical reform to the credit market and its regulations. Therefore it was decided to implement new credit legislation which will cover microfinance companies, banks, pawn brokers and retailers. The NCA seeks to develop a more equitable credit market for consumers and replaces the Usury Act of 1968, the Credit Agreements Act of 1980 and the Exemption to the Usury Act. Let’s take a look at how this change came about.

Legislation Purpose Impact

Usury Act 1968 The primary purpose of the Usury Act was to provide the limitation and disclosure of financial charges or interest on money lending, credit and leasing transactions.

This Act was primarily concerned with controlling the interest charged by banks to middle and high income consumers and SMME’s.

The Credit Agreement Act of 1980

The Credit Agreement Act protected consumers who buy goods on leases, hire-purchases or credit and certain services on credit. It aimed at regulating the contents of the contracts entered into between the credit grantor and credit receiver.

The CAA brought with it the “due process”, a mechanism, which ensures that where goods need to be repossessed, the re-possession is done on an orderly basis. The Act also made it necessary for agreements to be in writing, with prescribed clauses, required terms and disclosure mechanisms to obtain information on assets , valuations, procedural issues, documentary evidence, maximum deposits, manner in which price id displayed or advertised, inducement, copies limitations on security en reinstatement. The amendment GN R407 of 27 February 1981 places a limit on the transactions from R0 up to R500 000.

Usury Act Exemption of 1992

Exempting loans under R6000 from the Usury Act

This exemption resulted in a he growth of the cash-loan industry, mostly for consumption loans and emergency finance, making the industry worth about R15 million by 1999.


Exempting loans under R10 000 and loan repayments period of 36 months. All microfinanciers were t be registered with the Micro Finance Regulatory Council 9MFRC)

This exemption replaced the earlier one and included more protection for consumers through the MFRC. This protection included disclosure, the cooling off period, collection mechanisms and confidentiality.


Legislation Purpose Impact


This exemption Notice was promulgated on the 8th of August 2005 and replaced the 1999 Exemption

This exemption included the MFRC rules within the notice. The cooling off period was taken out of the notice, replacing it with a pre-agreement quote which lasts for 5 days. The early settlement clause was amended so that early payment only covers the interest and insurance costs for the actual period of debt rather than the contractual period of debt. The notice also contains provisions regarding the content of loan agreements, rather than a requirement what the MFRC approve loan agreements.


Conclusion

In this module we looked at financial services and the transformation of the credit market in South Africa as well as the need to provide credit to the lower end of the market, in particular we considered credit risk management. We also explored the history of legislation regulating the microfinance industry. In module 3 we will look at the NCA in more detail.

Learning Activity # 2

� Consider each of the major legislative changes. What was the effect on the lower end of the credit market? Consider the following:

o Providers of credit o Security of consumers


Module 3 An overview of the NCA

Introduction

“The purpose of this Act is to promote a fair and non-discriminatory marketplace for access to consumer credit and for that purpose to provide for the general regulation of consumer credit and improved standards of consumer information; to promote black economic empowerment and ownership within the consumer credit industry; to prohibit certain unfair credit and credit-marketing practices; to promote responsible credit granting and use and for that purpose to prohibit reckless credit granting; to provide for debt re-organisation in cases of over-indebtedness; to regulate credit information; to provide for registration of credit bureaux, credit providers and debt counselling services; to establish national norms and standards relating to consumer credit; to promote a consistent enforcement framework relating to consumer credit; to establish the National Credit Regulator and the National Consumer Tribunal; to repeal the Usury Act, 1968, and the Credit Agreements Act, 1980; and to provide for related incidental matters”.

– Extract from: GOVERNMENT GAZETTE, 15 MARCH 2006, Act No. 34, 2005 – NATIONAL CREDIT ACT, 2005

Resources


� The National Credit Act: Highlights (Resource 3.1)

� The structure of the NCA (Resource 3.2)

� Unsecured credit: Importance of effective rate (Resource 3.3)

� The key role players in the NCA (Resource 3.4)

� Credit: Introducing the regulator. (Resource 3.5)

The complete NCA is available on your CD toolkit

Risk to Prosperity Page 24 of 69

Resource 3.1

The National Credit Act: Highlights

New legislation is expected to impact the activities of all groups legally participating in the microfinance industry. The South African credit sector will undergo a substantial reform after the National Credit Act (NCA) is phased in over a twelve-month period, coming into full force on the 1st of June 2007. The Act is designed to protect consumers from unscrupulous lending activities by creating a well-regulated credit economy. The NCA will ultimately replace the existing Usury Act 1968, the Integration of Usury Laws Act 1996 and the Credit Agreements Act 1980.

The National Credit Act

The National Credit Act aims at ensuring that all consumers who make use of credit are treated fairly and are not discriminated against. This Act, which is currently being phased in, replaces the current acts governing credit, namely the Usury Act, the Exemption Notice to the Usury Act and the Credit Agreements Act. Banks operate under the Usury Act, microfinanciers under the Exemption Notice to the Usury Act, and the Credit Agreements Act governs instalment sales, such as hire purchases.

Chapter 1 1. Aims of the National Credit Act

The aim of the NCA is to: � Increase access to credit at reasonable rates

by reputable credit providers. � Promote a fair, competitive and sustainable

credit market. � Help consumers make informed decisions. � Create mechanisms to deal with debt. � Provide protection for consumers, securing

redress and ensuring compliance.

2. The objectives of the National Credit Act

The objectives of the NCA are to: � 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

Chapter 2 (relates to Chapter 7) 3. The Regulator 3.1 The National Credit Regulator

The National Credit Regulator (NCR) has been established as the regulator under the National Credit Act and is responsible for the regulation of the South African credit industry. It is tasked with carrying out education, research, policy development, registration of industry participants, investigation of complaints, and ensuring the enforcement of the Act.

The National Credit Regulator is responsible to:

a) promote and support the development, where

the need exists, of a fair, transparent, competitive, sustainable, responsible, efficient, effective and accessible credit market and industry to serve the needs of: i. historically disadvantaged persons; ii. low income persons and communities; and iii. remote, isolated or low density populations

and communities, in a manner consistent with the purposes of this Act;

b) set appropriate conditions for the

supplementary registration of credit providers wishing to enter into developmental credit agreements, in order to promote access to credit in the manner, and for the persons, contemplated in paragraph (a).

c) monitor the following matters and report to

the Minister annually in respect of: i. Credit availability, price and market

conditions, conduct and trends;


ii. market share, market conduct and competition within the consumer credit industry, the credit industry structure, including the extent of ownership, control and participation within the industry by historically disadvantaged persons;

iii. access to consumer credit by small businesses or persons contemplated in paragraph (a)(i) to (iii);

iv. levels of consumer indebtedness and the incidence and social effects of over-indebtedness; and

v. any other matter relating to the credit industry; and

d) conduct research and propose policies to the

Minister in relation to any matter affecting the consumer credit industry, including but not limited to proposals for legislative, regulatory or policy initiatives that would improve access to credit for persons contemplated in paragraph (a)(i) to (iii).

The National Credit Regulator will be directed by a board, consisting of members appointed by the Ministers of Trade and Industry, Finance and Social Development, as well as individuals with specific expertise in the area of credit extension and consumer protection. It will be accountable to Parliament through the Minister of Trade and Industry. The National Credit Regulator has started operating in terms of the National Credit Act from the 1st June 2006.

4. National Consumer Tribunal

The Tribunal is an independent body, established independently from The National Credit Regulator and will operate separately with its own chairperson and members appointed by the President. It will allow for direct access by credit providers and consumers in certain instances in the form of either single member hearings or full bench hearings. The Tribunal will deal primarily with administrative and disciplinary matters, as well as the prohibited activities of registered or unregistered entities. An order will be equivalent to a High Court order and decisions can be appealed or taken on review to the High Court. Credit providers and consumers may appeal to the Tribunal against decisions of the National Credit Regulator.

4.1 Functions of Tribunal

The Tribunal or a member of the Tribunal acting alone in accordance with this Act may- a) adjudicate in relation to any-

i. application that may be made to it in terms of this Act, and make any order provided for in this Act in respect of such an application; or

ii. allegations of prohibited conduct by determining whether prohibited conduct has occurred and, if so, by imposing a remedy provided for in this Act;

b) grant an order for costs in terms of section 147; and

c) exercise any other power conferred on it by law.

The National Consumer Tribunal was established in September 2006.

Chapter 3 5. Registration

� Registration with the Regulator

All credit providers and credit bureaus must register with the National Credit Regulator within 40 working days from June 1, 2006. In the first year after 1 June 2006, once an application has been submitted to register with the Regulator, the credit provider will automatically be considered to be registered until a decision is taken by the NCR. If not registered with the NCR, the credit provider cannot extend credit or trade as a credit provider. Debt counsellors must register by 1 June 2007 The National Credit Act requires the following to register with the NCR:

� Credit providers Registration requirements:

• Credit providers who have entered into at least 100 agreements or have a total outstanding book of credit of more than R500 000;

• Are juristic persons and individuals;

• Have a commitment to combating over-indebtedness.

Although basic registration of credit providers is under this Act:

• The Regulator may impose conditions to address matters relating to the purpose of the Act generally;


• The Regulator will further consider the application relating to BEE and over-indebtedness concerns specifically; and

• A credit provider who intends to enter into developmental credit agreements must apply for supplementary registration, and satisfy the requirements for such registration.

� Providers of Developmental credit In addition to registering as credit providers, as laid out above, providers of developmental credit are required to comply with Section 41 of The Act. This includes credit co-operatives and suppliers of credit for education, small business development, and low income housing.

� Registration of Credit bureaux The Act requires registration of all credit bureaux. This excludes credit providers or employees of credit providers. An entity qualifies to register as a credit bureau if it is engaged in the business of receiving reports or investigating credit applications, credit agreements, payment history or patterns, or consumer credit information relating to consumers or prospective consumers. These entities must also be in the business of compiling and maintaining data and issuing reports concerning consumers.

� Registration of Debt Counsellors The Act makes provision for the registration of debt counsellors which have complied with all the provisions of The Act and satisfied the training requirements of the NCR. Debt counsellors will conduct independent enquiries into consumer’s financial circumstances and make recommendations to the courts concerning debt restructuring and suspension of reckless credit agreements.

� Records and reporting The Regulator is given powers to require that registered entities keep detailed records of customers and business activities and to submit periodic or ad hoc reports, as required.

Chapter 4

6. Consumer rights

The Credit Act is very explicit about the rights of consumers. These rights include the following:

� Non Discrimination � The right to written reasons for: refusal of

credit agreement, offering a lower credit limit than requested, reducing the credit limit on an existing agreement, refusing to increase the limit.

� The right to information in one of two official languages

� The right to information in plain and understandable language

� The right to receive all documentation � The right to confidential treatment � The right to access and challenge information

and credit records � The right to not receive punitive treatment if

the consumer upholds or enforces his/her rights in terms of the act

These rights will result in a number of requirements for lenders in terms of business processes and procedures. Violations of these rights will be referred to the equality court.

7. The National Credit Register (NCR)

The National Credit Regulator is required to establish and maintain a single national register of outstanding credit agreements. Upon entering into or amending a credit agreement, other than a pawn transaction or an incidental credit agreement, the credit provider must report information on entering, settling or transferring of agreements either directly to the national register or to a credit bureau.

Chapter 5

8. Reckless lending The Act aims to create a change in lender behaviour so that riskiest customers are unable to receive a loan. This exclusion of high risk clientele will improve levels of default, which in turn means that credit providers can re-adjust their pricing in order for those who do apply for a loan to do so at a lower price.

9. Interest rate regulation


A structured cap means avoiding the use of single percentage to cover the total annual cost of credit provision in a year. A structured interest rate and fee cap allows for an origination fee and monthly service fees. The interest rate cap will be linked to financial market indicators to accommodate automatic changes in market conditions.

10. Disclosure This Act seeks to encourage improved disclosure through binding quotes, pre-agreement disclosure and standardised disclosure. Standardised disclosure on the structured cap will be an improvement on ad hoc, partial and sometimes obscure disclosure that is currently practiced.

11. Interest rates

Until 31 May 2007, Usury Act interest rate caps will apply to credit transactions that fall within the ambits of the Usury Act and the Credit Agreements Act. Credit transactions entered into under the Exemption Notice will not be subject to an interest rate limitation provided the credit provider is registered with the NCR and in addition is also registered in compliance with the Exemption Notice. In practice, this means that banks must still adhere to the maximum rates defined under the Usury Act, microfinanciers must still meet all the requirements for disclosure to borrowers as required under the Usury Exemption Notice, and the provisions of the Credit Agreements Act will continue to apply. After the 1st of June 2007, the Minister is to impose limits on the whole market or sub-sectors of the market. Interest rates and fees will be capped, depending on the nature of the credit and the size of the transaction. Interest rates must be disclosed as a percentage per annum, even at a level slightly higher than the usury, but no exemptions. The “In Duplum Rule”, i.e. the default interest limited to settlement value at time of default, will come into account, implying that the outstanding interest and costs can never exceed outstanding capital. As per the National Credit Act from 1 June 2007:

Interest may be calculated daily and may be added to the deferred amount monthly at the end of the month, periodically as defined in the credit agreement or on the last day in the final month of the agreement.

7.1 Short term credit transaction vs. other agreements

• Short term credit transaction implies a credit transaction where the deferred amount does not exceed R 8 000 and the repayable period less than 6 months.

• The rand amount of interest for any particular day must be calculated as follows for short term credit transactions: =

Deferred amount for the day x monthly interest rate

Number of days in the month

• Other agreements include agreements such as mortgage agreement, credit facilities, unsecured credit transactions, developmental credit agreements and incidental credit agreements.

• The rand amount of interest for any particular day must be calculated as follows for any credit agreement other than short term credit transactions: =

Deferred amount for the day x interest rate

Number of days in the year

7.2 Maximum prescribed interest rates

� Mortgage agreements: [(RR x 2.2) + 5%] per year

� Credit facilities: [(RR x 2.2 + 10%] per year

� Unsecured credit transactions: [(RR x 2.2) + 20%] per year

� Developmental credit agreement for the development of small business: [(RR x 2.2) + 20%] per year

� Developmental credit agreements for the development of low income housing (unsecured): [(RR x 2.2) + 20%] per year

� Short term credit transactions: 5% per month

� Other credit agreements:


[(RR x 2.2) + 10%] per year

� Incidental credit agreements: 2 % per month

RR = SARB’s repurchase rate.

12. Fees

12.1 Initiation Fees

The initiation fee will be prescribed and limited and is only applicable if the application results in a credit agreement. It will also vary according to the type of loan. The initiation fee may never be greater than 15% of the loan amount. Initiation fees may be levied on the date stipulated in the agreement, but no earlier that the date of approval of the credit application.

12.2 Service fees

The maximum monthly service fee prescribed by the Act is R50 or a proportional charge if less than a month. In most cases a monthly or annual fee will apply, but in the case of a credit facility such as a credit card it may apply per transaction, but the total of such fees may not exceed the monthly or annual limit.

Monthly service fees may be levied at the end of the month to which they relate. Annual service fees may be levied at the end of the year to which such fees relate, or an annual date specified in the credit agreement or at the termination of the agreement.

12.3 Other fees

Allowances will be made for cost recovery of defaults administration charges, Debt collection costs, extended warranty, delivery, installation and fuelling, taxes and charges unrelated to credit provision.

Transactions based service fees may be levied at the end of the month in which the transactions occurred

Chapter 6 13. Debt Collection, payment preferences

and other consumer protection

The Act aims to have greater control over principled behaviour, aiming at eliminating the nature and extent of payroll deductions and prioritization of payment processing. This will improve credit granter’s commitment to risk assessment as they will no longer be able to use preferential access or garnishee orders as collection mechanisms and substitutes for assessment processes.

13.1 Exclusion of legal entities from reckless lending and interest rate control

Legal entities such as firms are excluded from reckless lending and interest rate limitations. Previously all transactions up to a certain threshold were restricted by the usury cap. This should encourage loans to small firms and fill the “credit gap”.

14. Debt counselling Debt counselling is a mechanism aimed at preventing over-indebtedness. It is also made available for those who are over-indebted in order to improve their position over time. In the past very little was done to assist those in trouble, there was no option but to abscond. Now rearrangement and postponement is a possibility.

Chapter 7

15. Dispute settlement other than debt enforcement Provision is made for the resolution of disputes outside the ambit of the courts.

Chapter 8

16. Authority to enter and search under warrant


A judge or magistrate may issue a warrant to enter and search any premises that are within their jurisdiction and if there are grounds to believe that prohibited conduct has, is or will take place, or if anything connected to the investigation of the misconduct is on that premises or person on that premises. A warrant to enter and search may be issued at any time and must specifically identify the premise to be entered and authorise an inspector or a police officer to enter and search the premises.

17. Breach of confidence It is an offence to disclose any confidential information concerning the affair of any person or juristic person who carries out any function of this Act or as a result of initiating a complaint or participating in any proceedings in terms of this Act.

Source: The National Credit Act http://www.bankseta.org.za

National Credit Act Workshop, Dr. P Hawkins, June 2006 The NCR, www.ncr.org.za


Resource 3.2

The structure of the National Credit Act

Chapter 4 (June 2007) Consumer Credit Policy

- Consumer rights - Information & confidentiality - Credit Marketing

- Over indebtness & Reckless credit

Chapter 1 Interpretation, Purpose

and Application

Chapter 3 Industry Regulations:

- Registration (by July 2006) - Compliance & Cancellation

(June 2007)

The NCA

Chapter 2 (June 2007) Institutions:

- Regulators

- Tribunal

Chapter 5 (June 2007) Credit Agreement

- Unlawful agreements - Disclosure, form &

effect - Consumer liability,

fees & interest - Statements - Alterations - Terminations

Chapter 6 (June 2007) Collection, Repayment & Debt enforcement

- Collection and repayment practices - Surrender of Goods - Debt enforcement by repossession

or judgment

Chapter 7 (June 2007) Dispute Settlement other than Debt Enforcement

- Alternative dispute resolutions - Initiating complaints - Informal resolution & investigation - Tribunal operation and orders

Chapter 8 (June 2007) Enforcement of the Act

- Searches - Offences

Chapter 9 (June 2007)

General provisions


Resource 3.3

Unsecured credit: Importance of effective rate

Term (Months)

1 4 1 4 1 4

Loan amount R750 R750 R2000 R2000 R5000 R5000

Interest p.m 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%

Interest charged R38 R150 R100 R400 R250 R1000

Origination fee R113 R113 R250 R250 R550 R550

Service fee R50 R50 R50 R50 R50 R50

Total repayment R950 R1063 R2400 R2700 R5850 R6600

Monthly repayment

- R950 - R266 - R2400 - R675 - R5850 - R1650

TCOC p.m 26.67% 15.55% 20.00% 13.19% 17.00% 12.11%

TCOC p.a 320.00% 186.59% 240.00% 158.24% 204.00% 145.32%

Source: Dr. Penelope Hawkins, NCA Workshop – June 2006


Resource 3.4

The key role players in the NCA As we well know, there are certain institutions or bodies in each industry assigned to regulate that industry and ensure that all legislation is communicated, implemented and adhered to by those involved. With the commencement of the NCA came the establishment of a new regulating body and several other role-players, who will all play a vital role in ensuring that the purpose and objectives of the NCA is realised.

The following regulating bodies have established according to the requirements as set out in the NCA: The National Credit Regulator and Register The National Credit Regulator (NCR) has been established as the regulator under the National Credit Act and is responsible for the regulation of the South African credit industry. It is tasked with carrying out education, research, policy development, registration of industry participants, investigation of complaints, and ensuring the enforcement of the Act. The National Credit Regulator is required to establish and maintain a single national register of outstanding credit agreements, know as the National Credit Register Who must register? All credit providers and credit bureaus must register with the National Credit Regulator within 40 working days from June 1, 2006. In the first year after 1 June 2006, once an application has been submitted to register with the Regulator, the credit provider will automatically be considered to be registered until a decision is taken by the NCR. If not registered with the NCR, the credit provider cannot extend credit or trade as a credit provider.

Debt counsellors Debt counselling is a mechanism aimed at preventing over-indebtedness. It is also made available for those who are over-indebted in order to improve their position over time. In the past very little was done to assist those in trouble, there

was no option but to abscond. Now rearrangement and postponement is a possibility. A borrower may approach a debt counsellor of his or her own accord. When a court thinks somebody is over indebted, the court may also refer the person to a debt counsellor to determine whether the person is over indebted, and to report back to court. Before a loan can be enforced a notice must be sent to the borrower drawing the debt counselling option to the borrower’s attention. This may also lead to the borrower approaching a debt counsellor. Debt counsellors must register by 1 June 2007 Tribunal The Tribunal is an independent body, established independently from The National Credit Regulator and will operate separately with its own chairperson and members. The Tribunal will deal primarily with administrative and disciplinary matters, as well as the prohibited activities of registered or unregistered entities. The Consumer Tribunal will play a role similar to the Competition Commission. There are four agencies or individuals that can refer matters to the Tribunal:

� Credit Providers � Consumers � National Credit Regulator � Debt Counsellors

The Consumer Tribunal is an independent body with a registrar and chairperson. Some judgements from the tribunal can be appealed through the high court.


The Consumer Tribunal can issue fines of: � Up to 10% of annual turnover or � R1 million

Courts Magistrate courts will handle cases brought forward by providers against consumers, but consumers’ ground for defence will be expanded. An enquiry into the possible indebtedness of the consumer and possible reckless lending practises by the provider will be made before a court order is approved.

The above mentioned role players and their responsibilities will be discussed in greater detail in the resources that follow.


Resource 3.5

Credit: Introducing the Regulator

From the 1st of June 2006, a new regulatory entity, the National Credit Regulator (NCR), has been put into place to protect South African consumers from reckless lending, high interest rates and unfair lending practices in the credit industry. This new institution is established in terms of the National Credit Act No. 34 of 2005, which was signed into law by President Thabo Mbeki on March 15 2006.

The purpose of the National Credit Act (NCA) is to promote a fair, transparent, accessible and responsible credit market that. It also aims to promote a market that is competitive and sustainable. However, the overriding objective of the Act is to protect consumers. It specifically prohibits practices such as reckless lending and automatic increases in credit limits, and regulates interest and fees. The Act covers all forms of consumer credit, including bank loans, credit cards, store cards, pawn transactions, furniture finance and motor vehicle finance. From the 1st of June 2006 the Regulator will play a vital role in ensuring enforcement and promotion of access to redress. The National Credit Regulator is established to ensure proper implementation of the provisions of the Act. The Act empowers the Regulator to also deal with any contraventions on existing loan and credit agreements. Although the National Credit Act replaces the Usury Act and Credit Agreements Act, the Regulator will be able to assist consumers with problems that fall under these previous Acts, and to investigate complaints that fall under these Acts. On the 5th of April 2006, Mr. Gabriel Davel, was appointed as the first CEO of the NCR. The appointment is effective from June 1 2006. Davel said the role of the regulator would be to monitor the conduct of all registered entities in order to ensure that they comply with the Act. “Loan agreements are frequently complex and difficult to understand, with many of the fees and obligations hidden in the fine print. The vulnerability of people that have become so used to being rejected by credit providers is frequently exploited. More honest disclosure by both the credit provider and consumers, and harsh penalties on credit providers that approve loan applications knowing that clients cannot afford the repayments, would help in creating an environment in which people can benefit from access to credit, without being damaged by credit”.

According to Davel, the immediate challenge to the National Credit Regulator is to create capacity within the regulator, to get credit providers registered and to be able to deal with complaints from borrowers. He added that it is a priority to engage with the banks, retailers and others, in order to establish a constructive and effective working relationship between the regulator and the institutions that are affected by the Act. “Parliament has made a huge effort in creating legislation that balances consumer rights with the requirements of the credit industry. It is our responsibility to make sure that this gets implemented effectively”. Jeremiah Mela, Acting Deputy Director General in the dti, is confident that the new regulator will hit the ground running. Through the transfer of the Micro Finance Regulatory Council’s staff and Usury Act inspectorate into the NCR, the new entity has a ready-made team, therefore saving this new institution the challenge of setting up an institution while simultaneously recruiting and training new staff. The new consumer credit legislation seeks;

• To make the credit market function more cost effectively and competitively by promoting a fair, competitive and sustainable credit market;

• To ensure that increased access to credit will not lead to over indebtedness;

• To ensure protection for consumers and secure redress for unacceptable practices

• To ensure compliance with regulatory requirements; and

• To provide for necessary cooperation between national and provincial government as well as industry, consumers protection agencies to ensure a coherent and integrated regulatory framework.

Source: Department of Trade & Industry www.dti.gov.za, 2 July 2006


Conclusion

Now that we know a little more about the NCA and the bodies involved, we will be taking a look at its impact on business, in particular the impact on the credit process in general, in the next module.

In small groups, discuss the questions:

� How important is each question to you?

� What further information do you need to know to work out the answer?

� What do you think the answers might be, given what you know at the moment

Learning Activity # 3 There appear to be 4 key questions that smart business people are asking:

- Will my business survive? (Sustainability)

- How much will this effect my business? (Scale)

- How am I going to approach the compliance process? (Compliance)

- What new risks are involved? (Risk)


Module 4

The credit process: A frame of reference

Introduction

The credit process is the series of steps that have to be executed in order to run a successful credit business. This process does not vary much, whether the loan is a cash loan or home loan.

In this module we establish a general framework for understanding this credit process, and this framework will prepare you for the remainder of this programme. It allows us to begin to evaluate the business impact of the NCA and the actions we will need to take.

Resources


� An overview of a generic credit process(Resource 4.1)


Resource 4.1

An overview of a generic credit process

When loans are made, there is a general business process that is applied in most cases. The interesting thing is that this process is more or less the same whether the loan is a home loan, a mortgage, a loan for a car purchase or a small consumer loan. The diagram below sets out a general outline of the credit process, showing the necessary main steps. This resource is important because efficiency and effectiveness in this process builds a great credit business. It is vitally important to understand this credit process and how to manage it properly in order to make a success of any credit-based business.

Naturally, failure to execute any step in the process in accord with the provisions of the Act & Regulations renders a business liable to penalties. Compliance risk must be managed through the entire process.

In this table, the diagram is explained.

Step Business Objective

Marketing � To attract and retain the right kind of customers.

Application � To have the prospective clients or customers request their specific financing

requirements. � To generate or produce applications that contain all the correct information,

and to create the basis for a loan contract. � In more complex loans situations, this step may entail working with the

client to determine what financing options are available, which option is most affordable and suitable, as well as what security is required. (In a banking environment, securities can include suretyships, cessions of policies, and a range of other instruments.)

Assessment (Evaluation) & Decision

� To evaluate the information in the application for the purposes of supporting or informing a credit decision – the output of the evaluation process is usually an indication of the risk that would be involved in extending the loan- i.e., the process involves assessing the risk that would be involved in lending the client the required sum.

� The output of the evaluation process is sometimes in the form of a recommendation for a particular decision.

An overview of a generic credit process

Marketing Application

Assessment &

Decision

Agreement &

Disbursement

Repayments &

Book Control

Collections


Step Business Objective

Agreement & Disbursement � At this point the lender determines the amount, the rate, and the terms of the loan that they would be prepared to lend, given the risk of the application.

� In some cases, the lender may decide whether any further security is required against the loan. (In microfinance, naturally, lending is usually unsecured.)

� If the decision is positive, a contract with the client signed, and the sales part of the credit process is successfully concluded.

� If the decision is negative, a decline sub-process is initiated.

Repayments & Book Control � The repayments of interest and capital are collected. The objective at this

point is to maximise the proportion of in-time payments. � The loan portfolio – a collection of loans – is carefully monitored to see who

is paying, who is falling behind and to enable the company to take corrective action where required.

Collections � The process of collecting outstanding payments, including any paralegal and

legal processes. The objective at this stage is to recover as much as possible of the amounts upon which there are defaults or non-payments.

When credit applications are processed using systems, a similar process usually unfolds within the system – the system evaluates the application, determines the risk and may even make the decision. The advantage of systems is that they ensure consistency and objectivity in the granting process, but their drawback is that they are seldom sensitive to particular circumstances. Nonetheless, the research on scoring systems is that on the whole, they outperform person-based decisions in the consumer credit market. That means fewer system-determined credit decisions go bad, provided of course that the system is properly designed. That is why most of the larger institutions are relying more and more on scoring systems.

The impact of the NCA on business in general The NCA imposes requirements on how each step in the process is to be conducted. One of the primary impacts will be the requirement to revise your business’s operational process and procedures, to ensure that you comply. Under certain circumstances, an employer or manager can be help legally accountable for the actions of a staff member. If your employees or agents break the law, you could be held liable. Your job is to be able to show that you have taken all reasonable measurements to ensure that they meet the requirements of the NCA. So a related impact of the NCA will be that you will have to train your staff.


Conclusion

It is evident that the NCA’s impact on business and the way we provide credit is quite substantial. In the final module we will take a detailed look at each step in the credit process, relating the specific sections of the NCA to each step where applicable.

� How will you ensure that you are compliant with the entire Act by the due date? � Analyse each step in the process and determine who is responsible for the process in

your organisation.

� Create a list of people besides yourself who are going to need to understand the NCA and its implications, given their responsibility.

� One of the steps in compliance is communication. Brainstorm ideas for how you will

communicate the new requirements to the staff, and how you will ensure that they do the right thing.

Learning Activity # 4 With reference with the credit process in your particular business:


Module 5

The NCA – Impact on the credit process

Introduction As we well know by now, the NCA will have a considerable impact on every provider of credit in this country, and time is running out before the Act comes into full force. We also know that there are several processes in our businesses that prescribe how things should be done. These processes and procedures vary according to each business, but the overall aim and purpose is the same across the board. In the previous module we familiarised ourselves with the overall/general credit process, the central business process in any credit granting organisation. If you don’t manage how you distribute and collect credit, your business might not survive. In this module we are going to consider each step in the credit process and evaluate the impact of the NCA on how things should be done. The aim is not to provide a comprehensive compliance risk management solution – rather it is to initiate and demonstrate processes which you will have to complete thoroughly and carefully yourself.

Resources


� Marketing & Advertising (Resource 5.1) Please see Appendix A for an extract from the NCA

� Application (Resource 5.2)

� Assessment & Decision (Resource 5.3)

� Agreement & Disbursement (Resource 5.4)

� Repayments & Book Control (Resource 5.5)

� Collections (Resource 5.6)


WHAT INFORMATION SHOULD BE INCLUDED

IN ALL ADVERTISING?

All Adverts should include the following:

� The name, business address and registration

number, if any, of the credit provider;

� The nature of the proposed credit agreement;

� The credit provider’s current annual interest

rate and other costs of credit;

� Whether any deposit or security is required;

� Whether any residual payment will be required;

� If a credit agent is making the solicitation, the

name and address of that agent, and the amount

or basis for calculating any commission payable

to that agent.

Resource 5.1

Process Step #1: Marketing & Advertising

The National Credit Act prescribes the way that credit providers can market and advertise their services. This includes all marketing and advertising in cinemas, through SMS’s, on the internet, in newspapers and on television.

Please see Appendix A of this manual for an extract of this section from the NCA 1. Aim of the NCA with respect to Marketing Practices (Chapter 4, Part C)

The aim of the regulations regarding marketing is to: “Curb undesirable marketing and sales practices (including door-to-door solicitation) and regulation of credit intermediaries.” Sections 74-76; 89(1)b; 119(4)

2. General provisions

Advertising must not be misleading, fraudulent, or deceptive, not promote a form of unlawful credit, must contain any prescribed information and may contain a statement of comparative credit costs only to the extent permitted by law or relevant codes of conduct (this includes showing all costs, interest rates and prescribed warnings and cautions);

3. Specific Provisions

3.1 Advertising & Personal Sales

1. Unregistered providers are prohibited from advertising: � A credit provider who is required to be registered, but fails to do so, must not advertise credit;

2. Personal solicitations must include prescribed

information: � Any written solicitation of credit must contain prescribed information (see information box alongside).

3. Prescribed cost of credit disclosure where

goods sold on credit: � All costs relating to the credit agreement must be disclosed to the consumer. This includes service fees, interest, etc.

4. If an advertisement refers only to the availability of credit, and no reference is made to costs, interest

rate or monthly installment, no further disclosure of cost of credit, interest rate or monthly repayment is required.

5. If an advertisement discloses only the interest rate or the maximum and minimum rates where a range

is applicable and no reference is made to other costs of credit, no further information has to be


disclosed, but the advertisement must indicate that an initiation fee and service fee will be charged, if applicable.

The following statements or phrases, or any wording that has substantially the same meaning, may not form part of any advertisement or direct solicitation for credit: 'no credit checks required', 'blacklisted consumers welcome', or 'free credit'. Detailed information relating to all fees and rate must be disclosed if reference is made to 'cheap credit', affordable credit', or 'low cost credit'. A direct solicitation may not contain the expressions 'loan guaranteed', 'pre-approved' or similar statements except when the credit

granted is not subject to any credit assessment after acceptance by the consumer.

6. If an advertisement discloses a monthly installment, or any other cost of credit, the advertisement must

also disclose the installment amount; number of installments; total amount of all installments, including interest, fees and compulsory insurance; interest rate; and residual or final amount payable (if any).

7. Comparative advertising must contain all such information for each alternative being compared. 8. The information to be disclosed must be of no smaller font size than the average font size used in the

advertisement and must be displayed together.

3.2 Sales prohibitions

1. “Negative option marketing” is prohibited � Negative option marketing (telling someone that they have agreed to buy credit unless they

specifically deny it in writing) is to be prohibited. However, this rule is modified in respect of credit card limits, which are subject to an alternative scheme of regulation;

2. Sale of client information is prohibited (unless with consent) 3. Automatic increases in credit facility limits are prohibited, except for annual increases subject to

consideration of monthly cash advances / credits. � The credit supplier may not increase the credit limit or induce a person to accept such an increase,

on the basis that the limit will automatically be increased unless the consumer declines the offer 4. A credit provider may not enter into a credit agreement at the customer’s home, only if:

� He/she is invited, � He/she incidentally offered to provide or arrange credit � If the credit agreement is of a prescribed category that is permitted to be entered into during a

visit to a private dwelling.

5. A credit provider must not visit a person’s place of employment for the purpose of inducing the person to apply for or obtain credit, or enter into a credit agreement at such a place, except: � to finance the purchase of those goods or services; � to enter into a credit agreement with the employer; or � If the visit results from a formal arrangement between the credit provider and the employer and

any representative trade union or employee or a non-prompted invitation by the person being visited.


� Assess their compliance with regulations (please see Appendix A)

� What might you need to do to change your marketing campaign?

� How can you put quality control measure in place to ensure that your marketing, advertising and sales process remains compliant?

Learning Activity # 5.1 In small groups, review two of the sample adverts (please see Appendix B)


Resource 5.2

Process Step #2: Application

The point at which the application is made is the point at which full disclosure of all fees and terms and conditions must be spelt out, and the demonstrable understanding of the consumer must be obtained.

1. Aim of the NCA with respect to application is to: Protect customers by ensuring that

customers truly understand what they are applying for and that their information is protected.

2. General Provisions:

� The rights of consumers with respect to privacy and confidentiality of information, as well as with respect to full disclosure of fees, terms and conditions.

� Chapter 5, particularly sections 92 ff, seeks to encourage improved disclosure through binding quotes, pre-agreement disclosure and standardised disclosure. Standardised disclosure on the structured cap will be an improvement on ad hoc, partial and sometimes obscure disclosure that is currently practiced.

3. Specific Provisions:

3.1 Pre-agreement statement, quotes and contracts (Chapter 5, Part B)

The Credit Act requires that credit providers provide a pre-agreement statement (which includes the main features of the proposed agreement) and quotation prior to signing a contract with a borrower. However, in the case of small loans, there will probably be a prescribed format for this and it is likely to be in one document which can be used as a contract with borrowers if agreement is reached.

� Pre-agreement statement must cover terms and conditions � The quote is binding for 5 business days � The is a form and content prescribed for small agreements and is more flexible for intermediate

and large agreements (content and form prescribed for the category or type of credit agreement concerned or may be in any form that is determined by the credit provider and complies with any prescribed requirements for the category or type of credit agreement concerned.)

� Small agreements are pawn and small transactions � Intermediate agreements are credit facilities (such as credit card) and mid-size transactions � Large agreements are mortgages and large transactions

The quote is valid for a period of 5 days. During this period the credit provider cannot change the conditions of the quote except for the following two reasons:

� If interest is linked to the prime rate and this goes up; � If the client becomes over-indebted within the 5 days

A detailed description of the pre-agreement requirements can be found in section 29 of the regulations.\ The borrower may choose to accept the quote and sign the agreement before the 5 days have passed. This is legal as long as they have been offered the 5 days to consider the quote and to obtain quotes from other credit providers.


3.2 Interest rates, fees and insurance Chapter 5 Part C

Legal Charges and Credit Statements

Under a credit agreement a credit provider can charge: � An initiation fee for the loan (only if the client receives the loan) � A service fee (either monthly, annually or per transaction) � Interest (which must be calculated annually) � Limited additional default charges � Cost of credit insurance – this is required to be paid in monthly instalments (except for large

agreements) on the outstanding balance only

Credit Providers are also obliged to provide the client with monthly statements (for mortgage loans this would apply every 6 months). Once the Act comes in to effect, credit providers will need to provide statements for all loans, even those granted prior to the act being promulgated.

Interest rate regulation

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).

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

Calculation of interest rate

A short term credit transaction is defined as a loan not exceeding R8000 and repayable within 6 months. The interest is calculated on a monthly rate and can be based on the actual number of days or 30 days. Presumably, once a choice has been made, it needs to be applied consistently.

The rate may not exceed 5% per month and is calculated on the deferred amount. The deferred amount is any amount payable in terms of a credit agreement the payment of which is deferred and and includes the loan amount, initiation fee, service fees as they fall due, default administration charge or collection cost, as they fall due. The deferred amount on a day is the average for that day or the amount at a particular time that day, as set out in the agreement.

Interest may be calculated daily and added monthly. Interest may be added earlier than the last day of the month, but that must not be earlier than the due date upon which the repayment is due as per the agreement, the interest must be calculated from the previous date when interest was added to the deferred amount, until this earlier day, and interest must not be added to the deferred amount more than once in every month. In the final month of a credit agreement, interest due may be added to the deferred amount on the final day of the agreement.

Rate tables may be used but the amount calculated for any year may not differ by more than 0.1% from the amount that would have resulted if calculated as set out in the regulations.


If a person defaults, the interest rate may not be increased and there is no penalty interest. Interest will be calculated on the amount deferred and outstanding at that time. A default administration charge can be charged for each letter necessarily written to enforce payment in accordance with the Magistrate Court tariffs (R50) in addition to any reasonable and necessary expenses incurred to deliver such letter.

Fees

� Initiation fee

� The initiation fee is prescribed and limited - Capped, depending on the nature of the credit and the size of the transaction

� This fee may be charged at a date set out in the contract but not earlier than the date of approval of the application - the agreement must have been concluded.

� The initiation fee for a short term credit transaction is R150 per credit agreement, plus 10% of the amount of the agreement in excess of R1 000, but not to exceed R1000 and in any event not to exceed 15% of principal debt.

� It may not be charged where a further loan replaces in whole or part an earlier loan. However, if a second loan is concluded, a further initiation fee can be charged.

� It is likely to vary by type of loan e.g. micro loan vs. mortgage

� It must be disclosed as a % per annum

� The level of the initiation fee is slightly higher than usury, but there are no exemptions

� In the case of the initiation fee, the “in duplum rule” applies, which means that the default interest limited depends on the settlement value at the time of default and that the outstanding interest and costs can never exceed the outstanding capital.

� Service fee

� The service fee is prescribed and limited

� In most cases a monthly or annual fee will apply, and in the case of credit facility (like a credit card), it may be per transaction

� Allowance is made for the cost recovery of:

� Default administration charge

� Collection costs

� Extended warranty

� Delivery installation and fuelling

� Taxes

� Charges unrelated to credit provision

Insurance

� Only credit life insurance and insurance cover against loss or damages of property pledged as security housing insurance is compulsory. Other insurance is optional.

� The interest rate is interest rate only and does not include insurance premiums or any other charges or fees. Insurance is disclosed distinctly and may not be added and capitalised upfront. The premium must be based on the outstanding obligations of the borrower and must be deducted monthly.

� Insurance may be taken out to cover outstanding debt.


� The customer is allowed to approach an insurer of his/her choice, or may decide the use that of the credit provider’s.

� Insurance is charged monthly, except for large agreements where an annual charge may be imported.

3.3 Protection and use of consumer information

“… weaknesses in relation to credit bureau activities … a key inefficiency in the consumer credit market”

Consumer information � The aim of improved customer information is to curb unlimited ‘trade’ in private information � Improved efforts for better protection of customer confidentiality are also high on the agenda.

Credit register � A non-competitive register, the National Credit Register, has been established for this purpose

and will not be competing with bureaux � Prescribed information will have to be submitted � Note: that reckless lending provisions are not dependent on the Register

Credit Bureaux � The Act has as one of its main objectives to provide consumers with protection from deception,

and from unfair or fraudulent conduct by credit bureaux and improving consumer credit information and reporting and regulation of credit bureaux.

� Credit bureaux are now comprehensively regulated for the first time to ensure the registration of credit bureaux, the accuracy of information, the right to challenge and rectify information, the storing and safekeeping of appropriate data.

� Credit bureaux will be obliged to pass information on the national credit register and only certain information may be kept. Information may be kept only for certain periods depending on the nature of the information and information may only be used or sold for certain purposes.

Cost of Credit

Principal debt + Initiation fee + Service fee + Interest + Credit Insurance + Collections costs

Total

All Regulated…


Learning Activity # 5.2 Given the price regulation, work out the maximum allowable charge for a loan of R2000, 00 granted over a period of 4 months. Assume RR = 10%


Resource 5.3

Process Step #3: Assessment and Decision The decision to grant a loan is a product of the assessment, in good credit practice.

1. The aim of the NCA with regard to assessment and decision making is to:

� Prevent reckless lending � Ensure fairness, consistency and transparency

2. General Provisions

Credit assessment is seen as an internal matter, provided that an assessment takes the important factors and information into account. These factors include financial status, credit history and understanding of the agreement. The Act entitles the prospective borrower feedback on the reason for a declined loan application.

Credit Assessment

Credit Assessment

Guidelines supplied by NCR

Internal Matter

Repeated Failure

Compliance Notice



3.1 Rejection of credit applications � The Act prohibits the refusing of credit based on discriminatory grounds, such as race or gender. � The customer has a right to the reason for his/her credit application being refused.

3.2 Reckless lending

Focus: “To shift from price control to protection against over-indebtedness and regulation of predatory

lending practices” Section 78-88; S130

� Chapter 4, sections 78-88, aims to reduce reckless lending by bringing about change in lender behavior so that riskiest consumer cohorts will be excluded.

� The exclusion of high risk clientele will improve levels of default, and 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.

� The Act encourages reputable lenders to enter the short-term, small loan market. � The removal of restrictions on product type may lead to innovations where lower priced

products to the lower-income consumers are offered.

3.3 Reckless credit (Chapter 4 Part D, Section 80)

� 'Reckless credit' is defined as credit granted to a consumer under a credit agreement concluded in circumstances described in section.

� According to that section, a credit agreement is reckless if, at the time that the agreement was made, or at the time when the amount approved in terms of the agreement is increased the credit provider failed to conduct an assessment or the credit provider, having conducted an assessment entered into the credit agreement with the consumer despite the fact that the preponderance of information available to the credit provider indicated that the consumer did not generally understand or appreciate the consumer's risks, costs or obligations under the proposed credit agreement; or entering into that credit agreement would make the consumer over-indebted.

� The test for recklessness is the time of entering into the agreement, not after the fact. � The assessment must be an assessment of the proposed consumer's general understanding and

appreciation of the risks and costs of the proposed credit, and of the rights and obligations of a consumer under a credit agreement; his or her debt re-payment history as a consumer under credit agreements and his or her existing financial means, prospects and obligations.


If a loan is deemed to be reckless: � The most important consequence of an agreement being reckless is that if a court determines that

reckless credit was granted, the lender’s loan may be suspended until the borrower is in a position to repay it. The Act allows the court to set aside the whole of the agreement but presumably that will only be where there is no hope of the borrower being able to repay the debt.

� Secondly, a lender may be forced to use assessment guidelines published by the Regulator. Where the tribunal finds that a credit provider has repeatedly failed to meet its obligations or customarily uses evaluative mechanisms, models or procedures that do not result in a fair and objective assessment.

� Thirdly, the registration of the lender may be cancelled by the tribunal on application by the regulator in case of repeated contraventions. Contravention would not seem to constitute an offence. The final determination is made by a court and the lender will be entitled to put his or her case before court.

� Magistrates may not issue court orders for debt recovery – but will refer to debt counsellor for debt restructuring (and may then approve them)

Reckless Credit

No Assessment Assessment

But no understanding But over indebted as a result

• Presume full disclosure

Credit: Full

disclosure

Understanding of risks & costs

Credit history

Financial means

Prevention of reckless lending

Provider: Assess


DEFINITION OF INCOME

Income is defined as all sources of income, even if the borrower

does not earn a monthly or regular salary (for example if the

borrower is a hawker). It also includes income from family

members, whether or not they live in the same household. If the

borrower wants to use the loan for business purposes, the

expected income of the business can also be included as

income.

� Agreement may be suspended or obligation reduced by Court or Tribunal (e.g. in extreme cases all fees and interest written –off)

� The provider may be prosecuted by National Credit Regulator Regulated debt counselors to assist consumers � The debt councillor will assess the consumer’s financial position, recommend restructuring and

may contribute to the suspension of reckless loans (within defined rules). � A debt counsellor cannot be approached if debt recovery has already been instigated, or enforced

through consent orders by the Tribunal or debt restructuring orders by the court. � The debt counsellor can assist in ‘cleaning’ the consumer’s credit record, if the consumer meets

the required commitments.

3.4 Over-Indebtedness (Chapter 4, Part B, section 79)

A major objective of the Credit Act is to ensure lower levels of indebtedness and curtail reckless lending by credit providers.

A borrower is considered ove- indebted if the credit provider determines that he/she will not be able to service the proposed loan in the required period. The credit provider can consider the following issues: � The borrower’s income � The borrower’s current loans � The borrower’s payment history � Any other financial obligations

All this evidence must be on paper and if the borrower must provide information that can not be verified any other way – this must be signed off by the borrower and filed by the credit provider as proof.

3.5 Assessment mechanisms and procedures (Chapter 4, part D, section 82)

A credit provider may determine for itself the evaluative mechanisms or models and procedures to be used in meeting its assessment obligations, provided that any such mechanism, model or procedure results in a fair and objective assessment.

The National Credit Regulator may pre-approve the evaluative mechanisms, models and procedures to be used in respect of proposed developmental credit agreements; and publish guidelines proposing evaluative mechanisms, models and procedures applicable to other credit agreements. A guideline published by the National Credit Regulator is not binding on a credit provider.

If the Tribunal finds that a credit provider has repeatedly failed to meet its obligations or customarily uses evaluative mechanisms, models or procedures that do not result in a fair and objective assessment, the Tribunal, on application by the National Credit Regulator, may require that credit provider to apply any guidelines published by the National Credit Regulator or apply any alternative guidelines consistent with prevailing industry practice, as determined by the Tribunal.


� What documentation will you need to produce as evidence that she did indeed understand?

� What should the specific content of the documentation cover?

� What quality control measures do you require to ensure that you are able to demonstrate this at all times, for every loan granted?

Activity 5.3 A consumer complains to the tribunal that she did not understand the loan agreement she was entering into. You have to defend your decision.


Resource 5.4

Process Step #4: Agreement and Disbursement Once appositive decision has been made, the provider enters into a credit agreement with the customer. It is imperative that this agreement be made in accordance with the Act, as if it is not, the agreement may be invalid and the loan capital and income may be at risk.

1. Aim of the NCA with respect to Agreements and Disbursement is to: define what

constitute a lawful agreement and an unlawful agreement, and the conditions under which an agreement can be changed.


The Act stipulates the content as well as the procedures that create lawful credit agreements.


3.1 Unlawful agreements (Chapter 5, Part A)

There are two different types of illegal agreements: � Where the entire agreement is prohibited � Where one or more of the provisions are prohibited

An agreement is unlawful if: � It is signed with an under aged person, � It is signed with a mentally unfit person � It is signed with someone under administration orders if the administrator has not provided

consent � If the agreement results from negative option marketing � If the credit provider was unregistered and should have been registered � The agreement is documented in “split documentation” in which the unlawful requirements are

contained in an additional document referred to in the agreement

Claims of an unlawful agreement can be dismissed if the credit provider was “induced” or “mislead” into entering into agreement.

3.2 Unlawful provisions (Chapter 5, Part A, Section 90)

Unlawful provisions are when: � The terms of the agreement are deceitful, fraudulent or defeats the Act; � They waive prescribed “common law rights”; � Automatic increases in credit limit are made � Alterations to the terms are made without consent; � Identity book, card and pin retention � Allow for a representative from the credit provider to sign an agreement on behalf of the

borrower � Pre-authorisation to enter premises for repossession; � Grants power of attorney to the credit provider � Preferential repayment e.g. if a bank ensures that they have the right to first repayment � A variable interest rate unless it is linked to “a fixed reference rate” like the prime rate


If a provision is declared illegal by the tribunal or a court, the clause will be struck out unless it affects the whole contract – then the whole contract will be illegal.

If a court decides that the agreement was unlawful, the credit provider will be ordered to repay all repayments received so far. The court can also order that the credit provider does not receive any more payments (i.e. the borrower keeps the loan and is not required to pay it back), or that the borrower pays the loan back to the government (the regulator) and not the credit provider.

3.3 Changes to an agreement

A borrower may terminate an agreement by settlement by repayments. Penalties for early repayment may no be levied.

Termination by Provider

Default

• Suspend

• Close

Changes to Credit Agreement

Rule of Thumb:

• Effectively, treat as if a new agreement

• No unilateral changes

• Exceptions: change in a reference rate results in a change in interest rate

• Communication is essential


� Under the NCA, what might he find to be non-compliant?

Activity 5.4 An auditor makes a surprise visit to one of your branches tomorrow. He scrutinises 10% of your loan files.


Resource 5.5

Process Step #5: Repayments and Book Control

The borrower honors the agreement by repaying as stipulated. The provider in turn has specified obligations during this phase of the loan life-cycle.

1. Aim of the NCA with respect to Repayments and Book Control is to: Ensure that

repayments are managed in a fair, transparent and consistent manner, in accordance with the sprit of the Act.


� It sets out principled behaviour, nature and extent of payroll deductions and prioritisation of payment processing.

� It imposes an obligation on the provider to make statements available.


3.1 Statements

The exact content of the statement are prescribed in the regulations.

Statement

Settlement Disputes

Must resolve

- Within in 10 days - Opening & closing balance

- Credit payments - Arrears balances - Current due balance - Up to 3 years

Monthly


� How would you calculate the cost of your poor service? (show all the factors that will

impact the final cost – you don’t need to do the actual calculations)

Activity 5.5 A consumer queries a statement entry. Your organisation delays and the person approaches the regulator. The loan is suspended while an enquiry is conducted. The enquiry finds in favour of the complainant and the incorrect debt is reversed. The process takes 6 months, during which time the customer tells 10 people about the problem.


Resource 5.6

Process Step #6 Collections – getting your money back in situations of default

1. Aim of the NCA in respect of Collection is to: provide clarity in respect of the available avenues

for the resolution of default situations. These include legal processes and debt counselling.

The collections provisions should improve commitment to risk assessment as the financier won’t be able to use preferential access or garnishee orders as collection mechanisms and substitutes for assessment processes. The Act further specifies that no method that is not generally allowed for repayment is allowable for collection – once again specifically excluding candid pin retention and preferential payment mechanisms.

2. General provisions:

The Act specifies procedures and powers and institutions in the collection process. 3. Specific provision:

3.1 Debt counselling (Sections: 86 – S88, S129, S130, S134, S136)

Debt counseling scheme

� Provides a mechanism for prevention of over-indebtedness, but also for the over-indebted to improve their position over time.

High Court

Magistrate Court

Consumer Credit

Tribunal

NCR

Debt Counselor

Dispute

Rearrange, Postpone and Rescind, or

Cancel

Ombud


� The borrower must pay the debt counsellor a fee of R50 and the debt counsellor will make an assessment of whether the borrower is over-indebted or not and whether any of the loans were reckless. If the borrower is not over indebted, legal proceedings can proceed. If the borrower is over indebted, and certain agreements were reckless, the court can then determine that certain obligations are terminated, and/or suspend agreements or parts thereof and restructure loans.

� During suspension, no further fees or interest may be charged, but note that this is only as from the time that a court, not the debt counsellor, suspends payment.

� During debt counseling, interest and fees can still be raised. � If debt counselling is not completed after 60 business days, a lender can intervene and terminate

debt counselling procedures by giving the required notice. � The debt counsellor may also under certain circumstances approach affected lenders for a

voluntary settlement, and that settlement may then be made a consent order by a court. Debt Counselors

Debt Counsellors are registered individuals who are required to:

� Assisting over-indebted consumers & facilitating debt restructuring � Conduct independent inquiries into a consumers financial circumstances � Potential interventions:

o Education & guidance o Voluntary debt restructuring, with consent order o Legal debt restructuring

� They are registered & overseen by Regulator and function independent from providers � Debt restructuring must be “stamped” by Magistrates court � Consumer notified before adverse information to credit bureaux; before debt enforcement

procedures � Debt Counselors, ‘Alternative dispute resolution agents’, consumer courts and ombuds all play a

role

Magistrate/ Consumer

Court

High Court

Debt counselor

@!!*%&@ Regulator

Consumer Credit

Tribunal


� If over indebted, the consumer receives debt counselling. If he/she is found over-indebted after a debt review, a re-arrangement may be made in terms of the court order.

� Complaints are all forwarded to the regulator, who then makes recommendations to the courts and tribunals regarding debt restructuring and the suspension of reckless credit agreements. The regulator can also issue clearance certificates to consumers who have paid off restructured loans.

3.2 Debt enforcement (Chap 6 Part C, Section 129)

� Legal proceedings cannot be instituted unless a notice of default (which needs to indicate that the borrower may go for debt counseling or alternative dispute resolution) has been sent to the consumer and 10 business days have lapsed since the notice was sent and the consumer has been in default for a period of 20 business days. The 10 days and 20 business days may run concurrently.

� Legal action can also be taken if the consumer has responded to a notice of default by rejecting the proposals made in it.

� Legal action cannot be taken if the matter is still pending at a tribunal or before a debt counsellor or alternative dispute resolution agent or consumer court or ombudsman. If debt counseling has not been completed within 60 business days, the credit provider can give notice to terminate the debt review.

3.3 The process for defaulting borrowers

The diagram below provides an overview of the process of managing defaults.

Dispute settlement (Chapter 7, Part A)

� A dispute can be settled internally, i.e. between the provider and the consumer, but if the credit provider’s offer is rejected, then the court process will be opened again.

� If the consumer is not over-indebted the dispute process falls outside the jurisdiction of debt counselors.

All consumer and credit provider disputes may be referred to alternative dispute resolution.

NOTE: If a dispute is referred to an alternative dispute agent and a respondent to the dispute objects within 10 days,

this can be referred to either the Credit Regulator or the Tribunal depending on the issue. However, the tribunal may impose costs on the respondent if it is found that the dispute could have been resolved through

arbitration, mediation or conciliation.

The following can be referred by credit providers and consumers to the Tribunal

� Disputes over the registration of Credit Providers (within 20 days or longer if the Tribunal identifies “good cause”)

� Disputes that have not been successfully resolved directly with the other party or through alternative dispute mechanisms (within 20 days or longer if the Tribunal identifies “good cause”)

The diagram below illustrates the process for resolving complaints and disputes.


ORDERS THAT CAN BE IMPOSED BY THE TRIBUNAL

Referred to Tribunal if: 1. The dispute concerns information held by credit bureau 2. To compel the delivery of an account statement 3. To review the conduct of the sale of goods 4. For leave to bring the complaint directly to the Tribunal 5. For an order condoning late filing

NATIONAL REGULATOR

Notice of Non-Referral to

complainant

Referral

INVESTIGATION

Consumer Court Tribunal

Complainant may choose to refer complaint directly to Tribunal or Consumer Court anyway

Declaring conduct prohibited

Suspend or cancel registration

Condoning non compliance on good cause

Order the repayment to the consumer of excess amount with interest

Impose of fine of not more than 10% of turnover or R1 000 000

Complaints regarding consumer rights, confidentiality, collection of personal

information, marketing and advertising of credit and credit agreements and processes


� What do you think the business impact will be? (Time, cost, opportunity cost) � With reference to the Credit Process, what are the key processes you can control

to diminish risk? � What is beyond your control?

Activity 5.6

� If 1% of your clients engage in debt counselling, how many will you be dealing with in any month?


Conclusion

That concludes our introduction to the business impact of the National Credit Act. As you can see, it is substantial. If you are serious about your business, you will: 1. Study the Act 2. Audit your business compliance 3. Take the steps necessary to comply. 4. Keep all the records you need to, and submit the required reports.

A good relationship with the Regulator is built upon doing the right thing, and will save your time, money and possibly keep you out of prison. And in complying, you can be sure that your organisation is a responsible corporate citizen of the New South Africa. Over to you.

This programme does not include assessment for Unit Standard Credit purposes.


Appendix A

Extract from the National Credit Act - Chapter 4, Part C: Credit marketing practices Negative option marketing and opting out requirements 74. (1) A credit provider must not make an offer to enter into a credit agreement, or induce a person to enter into a credit agreement, on the basis that the agreement will automatically come into existence unless the consumer declines the offer. (2) Subject to section 119(4), a credit provider must not make an offer to increase the credit limit under a credit facility, or induce a person to accept such an increase, on the basis that the limit will automatically be increased unless the consumer declines the offer. (3) A credit provider must not make a proposal to alter or amend a credit agreement, or induce a person to accept such an alteration or amendment, on the basis that the alteration or amendment will automatically take effect unless the consumer rejects the proposal, except to the extent contemplated in section 104, 116(a), 118(3) or 119(4). (4) A credit agreement purportedly entered into as a result of an offer or proposal contemplated in subsection (l), is an unlawful agreement and void to the extent provided for in section 89. (5) A provision of a credit agreement purportedly entered into as a result of an offer or proposal contemplated in subsection (2) or (3) is an unlawful provision and void to the extent provided for in section 90. (6) When entering into a credit agreement, the credit provider must present to the consumer a statement of the following options and afford the consumer an opportunity to select any of those options: (a) To decline the option of pre-approved annual credit limit increases as provided for in section 119(4), if the agreement is a credit facility; and (b) to be excluded from any- (i) telemarketing campaign that may be conducted by or on behalf of the credit provider; (ii) marketing or customer list that may be sold or distributed by the credit provider, -other than as required by this Act; or (iii) any mass distribution of email or sms messages. (7) A credit provider- (a) must maintain a register in the prescribed manner and form of all options selected by consumers in terms of subsection (6); and (b) must not act in a manner contrary to an option selected by a consumer in terms of subsection (6). Marketing and sales of credit at home or work 75. (1) A credit provider must not harass a person in attempting to persuade that person to apply for credit or to enter into a credit agreement or related transaction. (2) A credit provider must not enter into a credit agreement at a private dwelling except- (a) during a visit pre-arranged by the consumer for that purpose; (b) if a credit provider visited the private dwelling for the purpose of offering goods or services for sale, and incidentally offered to provide or arrange credit to finance the purchase of those goods or services; or (c) if the credit agreement is of a prescribed category that is permitted to be entered into during a visit to a private dwelling. (3) A credit provider must not visit a person’s place of employment for the purpose of inducing the person to apply for or obtain credit, or enter into a credit agreement at such a place, except- (a) to enter into a credit agreement with the employer; or (b) if the visit results from- (i) a formal arrangement between the credit provider, on the one hand, and the employer and any representative trade union or employee, on the other; or (ii) a non-prompted invitation by the person being visited.


(4) An employer who, or representative trade union that, enters into an arrangement with a credit provider as contemplated in subsection (3)(b)(i) must not receive any fee, commission, payment, consideration or other monetary benefit in exchange for making that arrangement, or as a consequence of a credit agreement entered into during or as a result of that arrangement. (5) Subsections (2) to (4) do not apply in respect of developmental credit agreements. Advertising practices 76. (1) This section does not apply to an advertisement- (a) that does not make reference to a specific credit product or credit provider, and of which the dominant purpose is to promote- (i) responsible credit practices; or (ii) the use of credit generally; (b) that generally promotes a specific credit provider, brand or type of credit agreement, but does not make specific reference to product price, cost or availability of credit; or (c) by the seller of goods or services, or on the premises of such a person, if that notice or advertisement indicates only that the person is prepared to accept payment through a credit facility in respect of which another person is the credit provider. (2) This section applies to the provider of credit that is being advertised, or the seller of any goods or services that are being advertised for purchase on credit. (3) A person who is required to be registered as a credit provider, but who is not so registered, must not advertise the availability of credit, or of goods or services to be purchased on credit. (4) An advertisement of the availability of credit, or of goods or services to be purchased on credit- (a) must comply with this section; (b) must contain any statement required by regulation; (c) must not- (i) advertise a form of credit that is unlawful; (ii) be misleading, fraudulent or deceptive; or (iii) contain any statement prohibited by regulation; and (d) may contain a statement of comparative credit costs to the extent permitted by any applicable law or industry code of conduct, but any such statement must- (i) show costs for each alternative being compared; (ii) show rates of interest and all other costs of credit for each alternative; (gi) be set out in the prescribed manner and form; and (iv) be accompanied by the prescribed cautions or warnings concerning the use of such comparative statements. . (5) In any advertisement concerning the granting of credit, a credit provider must state or set out the interest rate and other credit costs in the prescribed manner and form. (6) This section does not apply to developmental credit agreements if - (a) the National Credit Regulator has pre-approved a form of advertising to be used by the credit provider concerned; and (b) the credit provider has used only that pre-approved form of advertising in advertising or promoting goods, services or credit to the particular consumer. (7) When pre-approving any form of advertising as contemplated in subsection (6),the National Credit Regulator must balance the need for efficiency of the credit provider with the principles of this section Required marketing information 77. Any solicitation by or on behalf of a credit provider for the purpose of inducing a person to apply for or obtain credit must include a statement with the prescribed information for the particular type of solicitation.


Appendix B – Random adverts recently appearing in the press Example 1

466664 C

redit L

oans


Example 2

XYZ Loans


Example3

Crazy Bonds

the national credit act - bankseta · is for use in the client organisation alone. ... the national...

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