JOHANNESBURG - Chronic indebtedness, exacerbated by alleged legal malpractice, is being linked to the recent labour unrest to have swept through SA’s mining sector.
A debt consultant, employed by the miners operating on the platinum belt to review the debt position of employees, has described a situation of irrecoverable and unsustainable indebtedness amongst miners.
The consultant, who spoke on condition of anonymity, has pointed to systemic abuse of the “financially illiterate” by lenders and collection attorneys which he believes have created the problem.
“It’s a mess … most of [the miners] can’t read or write, they don’t know what they are signing for (when entering into debt agreements and authorising garnishee orders) … automatically the system is exploiting them,” he said.
Garnishee orders are granted by the courts at the request of collection attorneys and compel employers to deduct amounts from employees’ salaries to be directed towards the repayment of outstanding debt.
While reviewing employee debt positions the consultant claims to have come across instances where the entire paycheck of workers is being directed, through garnishees, to pay-off debt.
In other cases miners subsequently take home between R500 and R1 000 a month.
“I am absolutely sure that is why they strike, it’s not a political issue, it’s financial,” he said.
Major platinum miner, Lonmin (JSE:LON), has admitted to there being “irregularities” in the way its employees are being charged by collection attorneys for the recovery of debt. The miner said it has been aware of the problem for some time and in 2008 appointed Summit to help protect the rights of its miners. Since then it said R2m has been recovered from collection entities. It is also offering workers training in financial literacy, Lonmin said.
Fraud and exploitation
A deeper Moneyweb investigation has uncovered widespread abuse of the garnishee system extending to allegations of fraud and to alleged instances of prohibited reckless lending.
The problem was initially flagged by Summit Garnishee Solutions, which Lonmin now says it has employed to “protect the rights of its employees.”
An independent garnishee auditor, who spoke to Moneyweb on condition of anonymity, claims to have investigated 2 000 instances of garnishee order abuse, extending beyond Rustenburg through SA at large.
This abuse was “related to books being sold by financial institutions (such as banks and micro-lenders) to debt collectors and collection attorneys” who “then start collecting on their own behalf”.
He has described a “massive” abuse of the garnishee system involving cases where between R40 000 and R50 000 “has been take over the years for a small debt.”
In a recent example, a defaulter had been charged in excess of R20 000 for the repayment of a R1 000 loan.
Corrupt legal system
The auditor has also described instances of abuse, currently being investigated, whereby debt collection attorneys secure fraudulent garnishee orders from SA courts which are then imposed on the payrolls of employees. This implies the involvement of court officials in this type of activity, as alluded to by several industry insiders.
A particular Gauteng-based Magistrates Court has been identified during Moneyweb’s investigations as a potential “hub” of such activity.
Further, allegations of excessive legal charges, fraud and reckless lending are supported by several independent entities, including Summit, a third debt auditing professional and an NGO involved in investigating debt abuse.
Moneyweb’s investigation has found instances of excessive legal charges, in excess of up to ten times the amount of outstanding debt, imposed by five separate legal firms.
According to the National Credit Regulator (NCR) under the in duplum rule, expanded in the National Credit Act (NCA), it is illegal for a defaulters to be charged amounts in interest and collection costs that exceed their outstanding debt balance.
However lawyers, including the Law Society of the Northern Society, have disputed the NCR’s interpretation of in duplum, saying that it does not include legal fees.
Moneyweb is also in possession of credit checks and affordability assessments, provided by a range of entities, which appears to point to instances of reckless lending.
In cases, borrowers - who have a history of default and who are currently defaulting on existing debt - have been provided with new unsecured credit facilities, some in excess of R100 000.
A Western Cape-based NGO has since furnished Moneyweb with copies of credit checks which appear to point to abuse on behalf of one SA’s largest collections firms.
The NGO, which has been investigating credit agreements, court judgments and emoluments attachments (garnishees), has described a situation of systemic abuse in the collections industry.
It told Moneyweb that it is “especially concerned with the increases in the advancement of reckless credit,” to the lower income markets.
The NGO has echoed the claims of the auditor stating that defaulters are having garnishees issued against them at courts which don’t have jurisdiction to issue the orders.
The third auditor, Meyer de Waal states that lenders are fast-tracking credit checks to gain market share. De Waal is an attorney and director of My Budget Fitness which conducts debt and affordability assessments and has been brought in by platinum belt miners to assess employee indebtedness.
He believes that lenders are now primarily concerned with borrowers’ employment status saying that lenders “know they can get a garnishee” if the potential borrower is employed by a reputable entity. He states garnishees are effectively being used as a form of security in the unsecured lending space.
Kem Westdyk at Summit, De Waal and the debt counsellor have all expressed concern regarding the sustainability of the unsecured lending market.
Major unsecured lenders have admitted to using garnishees to recover bad debt but claim they make use of legally and ethically-operating collection attorneys.
African Bank told Moneyweb that collection attorneys contribute "a very small percentage towards our overall collections." It states it does not sell debt to third parties but uses debt collectors who are "carefully screened and managed on an ongoing basis to ensure that all their activities fall within our policies and guidelines."
Ubank said it is governed and strictly abides to the provisions of the National Credit Regulator (NCR) Act. “This includes, but is not limited, to debt collection and garnishee fees, whereby Ubank predominantly works with external service providers … also bound by legislation and industry codes and practices.”
Capitec told Moneyweb it provides its attorneys with strict guidelines on the recovery fees they can charge.
Nedbank (JSE:NED) has "put into place a number of measures to ensure that it complies with the reckless lending requirements of the NCA. Our recoveries model is focused on the recovery of the debt with limited legal fees. It’s our view that our legal costs are already in line with the view expressed by the NCR,” it said.
Nedbank says that it is aware of instances of borrowing to repay debt, a situation which is symptomatic of spiralling indebtedness according to the Banking Association of South Africa. Nedbank has put in measures to address this and believes that the “current growth in unsecured lending is unsustainable.”
It is understood that anywhere between 10% and 15% of SA’s workforce has active garnishees effected against their salaries. Moneyweb reports indicate that at least 40% of the monthly income of SA workers is being directed to the repayment of debt.