Expert Opinion

The Credit Ombud and the National Debt Mediation Association (NDMA) held a joint summit in October to address burning issues relating to the state of over-indebtedness in South Africa.

A panel of experts discussed issues related to over-indebtedness in South Africa at the Joint Credit and Over-Indebtedness Summit.  Here are some highlights from the sessions:

Professor Bernadene de Clercq, Head: Personal Finance Research Unit (PFRU) at UNISA

The financial vulnerability of South African consumers during Q2 2012

There has been a sharp deterioration in Consumer Financial Vulnerability (CFV) of consumers from mildly exposed to very exposed.  This is defined as a consumer being financially affected to such extent that it creates an actual experience or sense of being financially insecure or unable to cope financially shows that consumers are spending too much, with insufficient income which has put strain on their ability to save.  While macro-economics could to a large extent predict and explain the vulnerability of consumers, not all South African consumers were equally vulnerable.  She said more needed to be done to ensure that consumers could manage their finance and had entrepreneurial skills. She added that government should implement ways to incentivise saving and discourage dissaving.  De Clercq also said unemployment needed to be addressed head-on through mass re-education, flexible labour markets, demand-supply linkages and ensuring life-long asset growth through compulsory savings schemes.

Dr Sabine Strassburg, Finmark Trust

The use of credit products and other borrowing mechanisms in South Africa

Dr Strassburg discussed the FinScope 2011 survey which indicates that lending is growing in South Africa – with a sharp increase in informal borrowing, while formal borrowing remained stable.  The survey showed that food, electricity, water and clothes were the three largest household expenses and borrowing behaviour is mostly linked to essential purchases such as food, transport, school fees and electricity. She said those who borrow money experienced more financial strain overall compared to the general population; and at times tended to spend more than they had available. Results indicate a general improvement by the banks in explaining key important financial concepts to those taking out a loan.

Dr Penelope Hawkins, Feasibility

The consumer outcomes – what does the data tell us?

Since 2002, consumer credit extension has grown three-fold, said Dr Hawkins, but detailed consumer analysis was currently undermined by a lack of good income data from the NCR and a lack of alignment of StatsSA household data and other estimated data.  She said there was also a reliance on self-disclosure versus “hard” data and a “Gauteng bias” in analysis.  Dr Hawkins recommended that the current process whereby primary mortgages are included under debt restructuring needed to be re-thought. She said aggregated, but detailed information to guide the regulator and policy makers was needed.  This meant NCR returns needed to be redrafted to capture more appropriate information, it needs to be regularly analysed and more consumer information needed to take into account the realities of the lower income groups.

Charlotte Van Sittert, University of Pretoria Law Clinic

Undesirable practices relating to garnishee orders

Van Sittert said there were numerous weaknesses in the garnishee order process including reasonableness of instalments; the authenticity of signatures; circumstances under which consent was obtained; and reports of forgery of signatures, blank consent forms, duress or misrepresentation.  Other problems included financial illiteracy, where the debtor did not fully understand the costs of an order, their obligations in terms of the order, or how fees and interest influence the repayment period. She said debtors were often unaware of the instalment amount being applied for, and the creditor was not obliged to serve consumers with a certificate of balance confirming the debt, legal costs, interest or the proposed instalment. Van Sittert said it was not uncommon for a garnishee order to result in zero or near-zero take-home pay for employees.

Dr Ina Meiring, Werksmans Attorneys

The statutory in duplum rule

Dr Meiring explained the statutory in duplum rule.  She said despite any provision of the common law or a credit agreement to the contrary, the amounts contemplated in section 101(1)(b) to (g) of the National Credit Act that accrue during the time that a consumer is in default under the credit agreement may not, in aggregate, exceed the unpaid balance of the principal debt under that credit agreement as at the time that the default occurs. It was therefore important to determine the moment when a consumer fell into default, because that moment determined the amount of charges that may accrue during the period the consumer is in default; and the moment when the default is cured or purged, because only then would the credit provider again have an enforceable right to the charges.

Patrick Bracher, Director Norton Rose Attorneys

Credit Agreements and the Consumer Protection Act

Bracher urged the credit industry to take consumerism seriously and consider the interaction between the National Credit Act and the Consumer Protection Act.  He said the unequal bargaining power of the consumer has not only been addressed, but had been reversed. While the NCA governs what is required of a credit agreement and deals with credit marketing practices in relation to credit transactions, the CPA deals with consumers’ rights to fair and responsible marketing. Bracher said suppliers needed to consider the nature of the transaction and the interaction with the consumer, with the wording of the agreements needing careful attention. Any ambiguity would go against the supplier and ultimately the consumer would benefit from an overturned deal.

Neil Lightfoot, Genesis Analytics

Know what we wish for: Past and future industry responses to regulatory intervention in the credit market

Lightfoot said debt review applications were levelling off and different performance agendas translated in opposition to the National Credit Act.  While credit providers such as banks were prematurely pursuing their legal rights, there was underinvestment in internal and debt review capabilities and low consent across different products. Meanwhile, debt counsellors were for profit businesses where there was a disincentive to solve.  The quality of the counsellors affected the quality of the proposals and often led to rejection of proposals.  Payment Distribution Agents were also positioned for profit, leading to an increased probability of disputes and increased cost of credit.  Lightfoot said the credit industry needed to learn from the present as more regulation had not necessarily led to a more efficient system.

Adv. Neville Melville, Former Chairperson, NCR Task Team

Self Regulation: Interventions for the Debt Counselling Process

Melville said a system of self-regulation of the credit industry could be quicker and less costly to enforce.  Other advantages included being more responsive to change, a greater sense of ownership from business and the ability to address complex and subjective areas, where values and assumptions were widely shared.  Self regulation could also provide redress more quickly and cheaply than legal remedies through civil proceedings. But he pointed out that self-regulation was voluntary, so did not apply to those businesses that choose not to join in; and where there was partial coverage it was often those that stayed outside the scheme which were the main cause of concern for consumers. Melville said the NCR Task Team, was an example of self-regulation, where players across the credit industry came together to tackle over-indebtedness.