Credit act amendments only effective if enforced

Will the NCR rise to the occasion?  

JOHANNESBURG – Amendments to the National Credit Act, gazetted on Friday some ten months after President Jacob Zuma signed them into law, will help to prevent reckless lending only if the National Credit Regulator (NCR) effectively enforces them. 

In the wake of the collapse of failed lender African Bank (Abil) the efficacy of the NCR and its CEO, Nomsa Motshegare, came under intense scrutiny by credit providers, debt counsellors and the media. That Abil buckled beneath a heavy burden of loans-gone-bad, rooted in what appeared to be the kind of reckless lending that has thrown millions of consumers into a debt spiral, begged the question: where was the regulator?

After announcing it was investigating Abil for reckless lending in October 2012, the NCR moved to fine the bank R300 million in February 2013 after the bank notified it of fraudulent activity at one of its branches, which had led to affordability calculations being manipulated.

A few months later, the R300 million fine was reduced to R20 million because of cooperation on the part of Abil, according to a submission made by Motshegare before parliament, the Sunday Times reported last year.

CEO of the Intelligent Debt Management (IDM) Group, Ian Wason, told Moneyweb a few months after the Abil collapse that the fine was more of a settlement and that the NCR didn’t have a case to take African Bank to the National Consumer Tribunal.

“The regulator was slightly hamstrung because they could only enforce what was in the Act. The biggest problem was the Department of Trade and Industry (DTI) not making amendments to the National Credit Act (NCA) sooner. We were crying out for it [amendments] seven years ago, as soon as the NCA came out,” Wason, whose group owns one of the country’s largest debt restructuring firms, DebtBusters, said at the time.

Reiterating this comment, Wikus Olivier, manager of corporate development and strategy at Debtsafe, said around the same time that the Debt Counsellors Association of South Africa were lobbying for changes to the NCA years ago and the amendments were “five years in the making”.

Now that the National Credit Amendment Act (NCAA) has finally been gazetted, will the regulator have more teeth?

‘Regulator must enforce existing regulation’

According to NCR company secretary, Lesiba Mashapa, the NCAA now allows the NCR to apply directly to the National Consumer Tribunal to declare credit agreements reckless, whereas before the NCR could only refer cases to the Tribunal as “prohibited conduct”.

In an emailed response to Moneyweb this week, Mashapa maintains that the NCR “has always been executing its mandate in its endeavour to improve its work”.

“The NCR has pursued enforcement action against credit providers regardless of their size in the credit market. It is not true that it has not done so,” he contends.

Wason says that there has been a dramatic change in the NCR over the last six months, with a lot more action being taken in terms of enforcement and improved communication with the industry.

Olivier confirms this view, saying the NCR has become a lot more involved over the past few years. He says new timelines included in the amendments should have a positive effect on the regulator’s operations. For instance, when a consumer lodges a complaint with the NCR it now has seven days to resolve the complaint, Olivier notes.

Among other changes, the NCAA includes stricter criteria for affordability assessments. Lenders must now request three months pay slips and three months bank statements (or similar credible income and expense verification) before granting a loan.

“Living expense thresholds have been set in the regulations to offset the under-disclosure of consumers’ living expenses in credit applications. These were some of the major weaknesses in credit assessments in the pre-NCAA period,” adds Mashapa.

“My personal view is that the National Credit Act is fine,” adds Clark Gardner, CEO of financial wellness company, Summit. “Some clarity could easily have been provided on some ambiguous statements [in the NCA] by way of declaratory orders or circulars issued by the NCR.”

This could largely have prevented current widespread over-indebtedness of consumers, Gardner says, which “reflects very poorly on enforced laws in the industry”.

“The last court case on the NCR website was in March 2011 and its annual report doesn’t indicate how many of its investigations have reached resolution,” Gardner continues. “The regulator shouldn’t get additional power if they are not enforcing the existing regulation and haven’t shown any capability in protecting the consumer in this industry,” he says.

Cooperation needed

Frans Haupt, director of the University of Pretoria Law Clinic, points out that the NCR is limited to pre-credit agreement detail, such as reckless lending, the costs of the agreement (including interest charges on the debt and credit life insurance) and the agreement itself.

Once a debtor has failed to pay and a legal process to collect on the defaulted debt follows, it is governed by the Department of Justice under the Magistrates’ Court Act. “There is a lack of proper coordination between various regulators,” Haupt notes.

Meanwhile, no caps have been prescribed on credit life insurance, which Wason says is an immense disappointment for consumers. [include link here]

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