COSATU Submission on the Intergovernmental Relations ...



COSATU SUBMISSION ON THE NATIONAL CREDIT BILL B18-2005

PRESENTED TO THE PORTFOLIO COMMITTEE FOR TRADE AND INDUSTRY

31 AUGUST 2005

Table of contents

1. Introduction and context 2

1.1 Previous engagements to transform the consumer credit 3

industry 3

1.2 The response of the consumer credit industry to these initiatives 4

2. Agreements and negotiations finalised at NEDLAC and 6

the Financial Sector Charter 6

2.1 Problematic NEDLAC process 7

3. Specific amendments and shortcomings of the Bill 9

3.1 Debt counsellors 9

3.2 Emergency loans 10

3.2.1 Perspectives from the ground – a reality check 13

3.3 In Duplum rule 15

3.4 Credit information 16

3.5 Amnesty for blacklisted persons 16

3.6 Financial Co-operatives and Savings and Credit Co- 17

operatives (SACCO’s) 17

4. Matters prescribed in regulations 18

5. COSTING 19

6. Synergy and harmonisation with existing and pending 20

legislation 20

7. Key recommendations and conclusion 20

1. Introduction and context

COSATU welcomes the opportunity to comment on the National Credit Bill B18 of 2005 (hereafter referred to as the “Bill”).

It has been an interesting and complex process to finally table legislation to this Portfolio Committee. Given the importance and impact of the proposed legislation, it is not surprising to witness an extraordinarily large number of submissions arguing for or against the proposals contained in it, or proposing substantial amendments prior to its promulgation.

Whilst the Department of Trade and Industry has shaped the draft policy and legislative framework on consumer credit for more than 2 years, attempts to transform the consumer credit industry have been identified long before the current initiatives.

1 Previous engagements to transform the consumer credit

industry

In a previous submission to the Portfolio Committee for Trade and Industry just over 13 months ago[1], COSATU commented extensively on the Consumer Affair Committee's report and proposed regulations of Credit Bureaus.

We are glad to see that several of our recommendations have come to fruition, though there is room for further improvement. Government has finally realised that more than an agreement to a code of conduct is necessary to address the intransigence and unwillingness of credit bureaus and the consumer credit industry as a whole to transform and provide a more equitable service, and simultaneously criminalise practices that for years have gone unchallenged and continued to exploit powerless borrowers.

Claims by credit bureaus and the consumer credit industry representatives that they are merely the messengers in blacklisting, and not decision-makers should be challenged. COSATU believes that attempts to disguise, minimise or deny their pivotal role in selling credit information for profit is a travesty of economic justice.

We are frustrated to note that, in several of their submissions, particularly of some consumer credit linked institutions, there remains an air of pervasive denial, arrogance and failure to take even some responsibility for causing millions of South Africans untold hardship due to these exploitative practices. However, even slow progress must be noted. The comments by some credit grantors that the industry needed more control, is to be welcomed as a step in the right direction.

In our submission in July 2003, we made several recommendations to address these challenges, viz:

•    That future deliberations regarding the regulation of credit bureaus be

located within the framework of its impact on various Constitutional rights

including privacy, just administrative action, access to information and

equality and freedom from unfair discrimination;

• That several of the credit bureaus in South Africa, as subsidiaries of, (or have shareholders that are) American or UK-based companies, align their codes of conduct to international best practice, where appropriate;

• That the same bureaus be open to the establishment of a public/statutory body and that COSATU believes that this public statutory body be established to enforce these codes;

•      That the practice of credit bureaus selling information to employment and

other agencies in order to screen potential employees should be made

illegal and a punishable offence;

• That the practice of some credit bureaus acting as both listing agent and debt collecting agencies be declared illegal and banned;

• That positive information with regards to a borrowers credit management be added to their credit records, in recognition of their attempts to settle their debts, and that this information should be used to re-examine their access to credit;

• That, as a measure to ensure transparency and compliance, Credit Bureaus should report to NEDLAC and Parliament annually to assess compliance, and that these reports should influence the granting of a future business licence to continue practising as a credit bureau.

COSATU is pleased to note that the tabling of the draft Bill by government, indicates a favourable response to some of these recommendations and has moved forward significantly in terms of developing policy and legislation 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.”

With regards to the above recommendations, it is heartening to see that the draft Bill makes provisions for:

• the regulation of credit;

• registration of credit bureaux, credit providers and debt counselling services;

• the establishment of national norms and standards relating to consumer credit;

• promoting a consistent enforcement framework relating to consumer credit;

• the establishment of the National Credit Regulator and the National Tribunal

However, we do believe that some provisions in the Bill should be more rigorously enforced and find some provisions problematic. These concerns are listed and motivated further in this Submission.

3 The response of the consumer credit industry to these initiatives

The responses to this Bill by the consumer credit industry have been mixed at best. They range from claims and assertions that credit providers’ contractual freedom will be constrained, concerns around the assumed cost implications of the Bill on consumers; that more rights are accorded to consumers than credit providers; that reckless lending provisions appear to allow lenders the right to claim long after the credit agreement was made; that proposed price controls on the cost of credit would “drive borrowers underground to the ‘loan sharks’ and reduced competition”[2].

One submission by a magistrate even claimed that the “National Credit Regulator, the Consumer Tribunal and other institutions were unconstitutional,” likening these to “a kangaroo court” and “draconian” in nature, and feared for the loss of “experience and legal certainty secured by legislation of long standing such as the Usury Act.”

Other perspectives strongly opposed to the promulgation and/or implementation of the Bill, or parts thereof, included views that “credit bureaux restrained irresponsible credit use”; that “changes to interest, credit fees or charges created a cost problem for banks”; that “credit insurance should be the sole choice of the consumer”; that the problem of uncontrolled, abusive practices were only the fault of ‘loan sharks’ lending money over a short term at very high interest; that the proposals in the Bill would lead to a backlash from the industry resulting in “ultra-conservative risk management [that] would …reduce the granting of credit”. Other perspectives were that there should be no capping of the interest rate, “but rather a full disclosure on the costs of credit so that consumers can make informed decisions”.[3]

Yet, civil society submissions were, in general far more supportive of the Bill. Many saw the tabling of this Bill as the “first attempt by government to draft comprehensive legislation to regulate the credit industry in a fair and just manner”. COSATU agrees with this perspective, and would add that the fragmented and inadequate amendments to credit legislation in the past, linked to government’s failure to implement consumer protection provisions of existing credit laws, in particular the Usury Act, have resulted in the crippling exploitation of the majority of our people.

Thus the National Credit Bill has the potential to achieve:

• first and foremost, the long-standing demands of consumers of credit, particularly those of low-income earners; persons who were unfairly “blacklisted” by credit grantors; and relief to households negatively affected by their practices, and

• as a secondary objective, to balance the business interest of credit grantors, within the framework of an equitable, sustainable legislative regime.

This order of prioritisation is critical we maintain, since it will balance the need to transform the consumer credit industry, rather than merely reforming it. Already there have been several amendments to an earlier draft Bill that highlight this concern.

COSATU is aware that the Committee is critically aware that the Bill is more than a mere technical intervention, but profoundly affects the quality of life of many poor households and not merely the borrower. By way of example, some municipalities are increasingly introducing pre-payment meters as a means of credit control, with some even planning to have outside companies, as part of their debt management and credit control policy, jointly screen applicants who apply for indigency.

Furthermore, access to credit (i.e. paying after consumption rather than before) is an important way for poor households to ensure their continued access to free basic services such as water.[4]

The extent of the impoverishment and hardship of households is so severe, that at COSATU’s recent 3rd Central Committee meeting in August 2005, a draft resolution was passed to “demand access for all, to financial services, including an amnesty for those listed by credit bureaux and the development of affordable financial services for poor households.”

Arguments by those opposed to the Bill, have largely failed to take this reality into consideration. Passing the blame, denying responsibility and claims of costliness to implement the legislation have not been honest in acknowledging, let alone quantifying the social costs of existing practices.

Agreements and negotiations finalised at NEDLAC and

the Financial Sector Charter

Several recommendations in the Bill favourably address the demands on credit agreed by the social partners at the Financial Sector Summit in 2002. COSATU now participates in the Financial Sector Charter [FSC] process, after labour representation concerns have been addressed.

We are pleased to that note several demands of labour and civil society were considered favourably. In a submission to the PC of Finance last year, we highlighted the ongoing institutional discrimination and disadvantages that our members face within the financial sector. Ongoing challenges include the “failure of the financial institutions adequately to fund low-income housing and micro enterprise…systematic red-lining by banks of targeted communities; and the high costs of loans which contributes to perpetuating inequalities throughout the economy”[5]. Therefore we note and affirm the progress made on these demands, as contained in the Bill. Briefly these include the following:

• limits to total costs of credit and interest rates,

• access to credit information,

• contracts in simple language with full disclosure of charges, terms and conditions,

• effective regulation of credit information and credit bureaus

The final reports on the National Credit Bill and the Consumer Credit Policy framework were tabled recently at NEDLAC. The report listed several agreements between NEDLAC partners, in this case, the Task Team consisted of representatives from government, business and labour. Briefly these agreements were the following:

• notification of the debt process should take cognizance of issues like actual delivery and receipt of the summons/notifications, the manner of delivery, areas of residence, regular changes of address in the case of many lower income consumers, and other related constitutional rights;

• when determining the notification period for debt enforcement some accommodation should be made to take into consideration lower income consumers;

• the mode of notification should take the informal housing situation of some debtors into account;

• there was a need to streamline legislation in order to enhance efficiency and avoid cumbersome processes;

• debt counsellors were generally seen as a good intervention to advise vulnerable groups, and agreed further that the proposed education campaign to raise awareness and sensitivity around credit and its providers was important.

• reckless credit provision and the resultant over-indebtedness needed to be addressed

It is critical for the Committee to note therefore, that any submission by any stakeholder that has agreed to the above, but opposes the Bill on any of the above agreements, is actually violating NEDLAC protocol.

The Protocol for tabling and considering issues at NEDLAC is very clear that, with regards to raising reservations about an issue in Parliament , “parties are bound not to re-open discussion in Parliament on any area where agreement was reached in Nedlac. Parties have the right to raise issues in parliament on which there has been no agreement, or on which a Nedlac agreement was silent….”[6]

2.1 Problematic NEDLAC process

However, engagements in NEDLAC on the consumer credit policy were far from ideal, and at times completely unacceptable. COSATU is deeply concerned that on several occasions the policy and legislative processes followed by the DTI were not only illogical, but at times compromised the spirit and process of NEDLAC, where genuine consensus and agreements are supposed to be reached with the social partners.

Our most serious concerns are that, whilst DTI officials were negotiating the new credit policy in Nedlac, as required by law, there were negotiations occurring outside of Nedlac in bilateral forums between government and business groups on the already drafted Consumer Credit Bill (renamed to the National Credit Bill). Labour and Community maintains that some of the provisions contained in the current Bill, such as consumer protection measures in the policy and first draft bill (August 2004), were removed by the second draft, the National Credit Bill (April 2005), which is now being considered by the portfolio committee.

Evidence of these extra-NEDLAC bilaterals between government and business is a perhaps inadvertent admission in Parliament by the dti that “the DTI had made a compromise with the industry regarding the raising of consumers’ credit limits.”[7] This is a process that was not negotiated through NEDLAC and completely excluded the community and labour, the constituencies who were most directly affected by these developments.

More specifically, if one compares the objects of the current Bill with the August version, we note the following additions and deletions. The phrasing of the objects of the Bill does not necessarily mean that the issues are deleted in the Bill, but indicates the shift in emphasis of the drafters and the direction taken in bilateral agreements between government and business, which labour and community constituents of NEDLAC find unacceptable.

A significant addition to the objects of the current Bill has been to promote black economic empowerment and ownership within the consumer credit industry. Significant by its deletion, is the removal of the object of the Bill “to provide for financing for debt counselling services and consumer credit education programmes”. Whilst the older version of the Bill did not specify details of this financing objective (but merely listed it as one of the objects), the current version neither includes it as an object, norspecifies these details either, and it remains a shortcoming of the Bill.

Furthermore, despite repeated requests for the final draft of the Bill to be formally tabled in Nedlac, this was not done in a consultative manner. The reasons for this refusal, is that senior officials interpreted the NEDLAC Act to mean that only policy, and not legislation, should be tabled in Nedlac - contrary to precedent and practice in Nedlac. At the last minute, the Bill was indeed tabled, but engagements with this Committee had already begun and the substantial changes subsequently made were unable to be negotiated at NEDLAC.

Since several civil society organisations worked closely with COSATU at NEDLAC on the consumer credit policy and Bill, COSATU wishes to broadly endorse the submissions made by the FSCC, the Savings and Credit Co-operative League (SACCOL).

3. Specific amendments and shortcomings of the Bill

3.1 Debt counsellors

COSATU welcomes the requirement for debt counsellors to be registered by the National Credit Regulator and the disqualification of a juristic person, credit provider or association of persons. However, the definition of a debt counsellor is glaringly absent in the Bill.

It is envisaged that debt counsellors (as described in the Bill) will play a critical role in terms of assessing a consumer’s financial circumstances, and making recommendations to courts and the Consumer Tribunal concerning debt re-structuring and suspension of apparently reckless credit agreements.

Whilst we agree that the National Credit Regulator is responsible for the establishment, amongst other, of a national network of debt counsellors[8], and that the Minister “is to prescribe standards for their experience and training requirements to qualify for registration”[9]; it would be best to have the minimum qualifications and requirements to register as a debt counsellor more explicitly defined in the Bill, with at least the prescribed education, experience or competency requirements listed.

The absence of a definition and minimum qualifications and eligibility for registration, in our view, will fuel the harmful and unacceptable practice of debt collectors and debt administrators defining themselves as debt administrators, mediators, advisors, investigators and recoverists, thereby creating the impression that they are the same service providers as the officially envisaged “debt counsellors” as defined in the Bill.

There are abundant examples of how desperate people have been duped by the above-mentioned persons, since the motive of engaging indebted persons has mainly been for profit and exploitation, leading to further indebtedness.

The Bill also misses the opportunity of engaging key civil society organisations in public-CBO/NGO partnerships specifically to address the challenges of debt counselling services and general consumer credit education. These organisations have for years offered valuable financial advice and debt counselling services to communities who are often not easily reached by government services, including rural communities.

We would therefore recommend that the National Credit Regulator be tasked to establish such partnerships, in consultation with key civil society organisations (several of whom have made Submissions – such as the Black Sash, You and Your Money and the NCBPA), over and above the current limited requirement to engage with other regulatory authorities or provincial credit regulators, at the request of the relevant MEC of a province[10].

The Bill provides for the debt counsellor to require the consumer seeking a debt review or assistance to pay an application fee (s86(3)a), but limited to a prescribed amount yet to be determined. COSATU believes that this provision continues to allow the exploitative practices described above to persist.

Echoing the calls of other civil society based organisations, we believe that debt counselling should be a free service to consumers, with some qualifications. Failure to address the costing issue of debt counsellors will allow those who have no source of income to remain marginalised.

We support the proposals of the FSCC and the Black Sash that the funding of debt counsellors should be detailed in the legislation and not the regulations, or alternatively, that all proposed regulations be tabled in parliament to allow for adequate public comment.

Provisions can be made to allow debt counsellors to be reimbursed through a standard fee through a national or provincially managed fund, with contributions to this fund accruing from the consumer credit industry and government. Debt counselling services could have a minimum charge levied only at subsequent applications of previously counselled consumers, to ensure access to the maximum number of people. This provision would also recognise and affirm the work done by civil society organisations.

Insert (p.9) ‘debt counsellor’ – “an appropriately qualified, registered, natural person offering a free service, acting in the best interests of debtors to improve their financial situation, and subject to the terms and conditions of practice as determined by the National Credit Regulator.”

3.2 Emergency loans

One of the most problematic and unacceptable provisions in the Bill is the definition of, and exclusion with regards to reckless credit-granting and over-indebtedness, of an “emergency loan,” a term introduced into the current version of the Bill tabled 26 April 2005, but completely absent from the version that was used in broader consultation, dated August 2004. We strongly call for its removal for the reasons described below:

The detailed definition is defined as a credit agreement entered into by a consumer to finance costs arising from or associated with—

• a death, illness or medical condition;

• unexpected loss or interruption of income;

• catastrophic loss of or damage to home or property due to fire, theft, or natural disaster; or

• any other similar unanticipated life event affecting the consumer, a person who is dependent upon the consumer or a person for whom the consumer is financially responsible;

We argue that similarly, these exemptions should also be refused for a school loan or a student loan; or a public interest credit agreement (the latter vaguely defined as Ministerially-determined credit agreements entered into in specified circumstances, or for specified purposes, during a specific period or until the declaration or regulation is repealed).

Furthermore, the only section in which an emergency loan is listed in the Bill, is under the section, “over-indebtedness and reckless credit,” stating specifically that this kind of loan is to be exempted from the conditions under which reckless credit applies, and for which a credit grantor can be prosecuted.

Whilst this type of loan might be considered in a society where there is a strong middle class, low unemployment and a vast choice of low-interest loan options, its provision within the South African context is highly inappropriate. In practice, this provision will effectively allow an unscrupulous lender to advance a desperate person a loan to meet the costs arising from any of the above events, without running the risk of prosecution. The fact that this provision was included in the later version of the Bill; does not prescribe a maximum interest rate applicable; and basically describes most of the reasons why the majority of poor people seek loans in the first place, makes it a convenient loophole for current exploitative lending practices to persist.

In short we view this as a self-induced Achilles heel. The “unanticipated life events” described as qualifying to apply for an emergency loan, are in reality the daily challenges of ordinary poor people in South Africa. Whilst this could be construed as an emergency for higher income earners, who made no provision as a result of non- or lapsed insurance, COSATU does not believe that the most basic of needs of the poor are to be addressed by exacerbating poverty as a result of turning to micro-lenders for help, who on average, lend money to poor people at a standard interest rate of 360% per annum! [11] This exemption may be cleverly phrased and crafted, as if credit lending agencies have been concerned about the plight of the poor, but in reality they have been shown to do the exact opposite.

Instead of allowing this exemption to take hold in legislation, and result in untold further impoverishment not only of applicants, but also their dependents, there are several Constitutionally-enshrined rights, provisions and requirements that are and should remain the responsibility and domain of the State. Where these provisions are lacking or poorly implemented by the State, it is incumbent on policy makers, public officials and civil society to ensure that these become a reality.

COSATU believes that funerals for indigent persons are provided by the State the Social Relief of Distress Grants provide for cases where the breadwinner is deceased and insufficient means are available. With regards to illness or a medical condition, medical care is provided free of charge at State Hospitals for individuals who cannot afford to pay. Ongoing plans by the State aims to extend comprehensive health care cover for more people. There are also dedicated funds for disability grants, and The Compensation for Occupational Injuries and Disease Fund provides for persons injured or who have become sick as a result of their work.

Despite the high level of unemployment, the unexpected loss or interruption of income is provided for through the Unemployment Insurance Fund and the CCMA further provides an important service for people who have been unfairly dismissed. When a catastrophic loss of or damage to a home or property due to fire or natural disaster has occurred, the indigent are given recourse through the Social Relief of Distress Grant through temporary relief where there is a delay in acquiring a State-funded social benefit. The State is also obliged to provide financial and material assistance when a natural disaster occurs, in terms of the Disaster Relief Fund.

Therefore COSATU strongly objects to any recommendation which would attempt to usurp the Constitutional role of the State and view the proposed exemptions as a ploy by business to encroach and challenge the role of the State.

These proposed exemptions reflect a perspective informed by the experiences of persons living in an environment far removed from the daily challenges facing most people in South Africa. For example, whilst it might be "unanticipated" that a house would burn down in minutes in a middle class suburb, or a planned, serviced residential development in a developed country, the reality for the estimated 6 million South Africans living in informal settlements, is that the possibility of their homes being razed by fires that sweep through entire communities is hardly unanticipated - it is a constant fear, and a real possibility.

Similarly, it might be "unanticipated" in the affluent sector of our society where access to treatment for HIV/AIDS is free or affordable, that several members of one family or community might die. But in South Africa, with an HIVIAIDS infection rate of over 5 million out of a population of 43 million, this is a highly likely event.

COSATU therefore proposes that all credit transactions be subject to a “reckless credit" assessment and that Section 78(2)(a)(b) and (c) be deleted from the legislation (i.e. exemptions to emergency- ; school- or student loans, or public interest credit agreements). Our motivations for these exclusions are further motivated by evidence outlined below.

3.2.1 Perspectives from the ground – a reality check

The Financial Diaries Project run by the Centre for Social Science Research (a unit of SALDRU, University of Cape Town) conducted a year-long household survey to examine financial management in poor households. Whilst their sample population was low and a pilot study, their methodology was thorough. This Project appears to be one of the few recent surveys to address this important challenge. In surveys conducted in Langa (Cape Town), Diepsloot in Johannesburg, and Lugangeni (a rural village in the Eastern Cape). With regards to the level of indebtedness of households that participated in the surveys, key findings were that:

▪ There is a wide divide between minimal and highly indebted [12]

▪ Nearly all (95%) of households pay some form of debt every month.

▪ The majority of households are not highly indebted (76%), but many of them (24%) are.

▪ Highly indebted households are very highly indebted, with average monthly debt payments of 31% of monthly income.

▪ Highly indebted urban households pay more to formal financial credit (80% of payments), while rural indebted households pay more to informal credit (71% of payments).

Moreover, the most frequent financial event recorded in the surveyed households is an unexpected request to contribute to an out-of-household funeral; 81% of households had at least one during a 28 month period, while 47% had two or more.

In the rural area, contributions to out-of-household funerals were lower (a median of R40) but more frequent, on average 5 times during the last 28 months. Insurance instruments were rarely used (only 6% of the time) to fund contributions for an out-of-household funeral. Of the in-household funerals observed (12 in total over the study year), these were funded by several different sources such as insurance payouts, contributions from relatives, savings and borrowing.

The above example underscores the inherent problem of exempting credit grantors from being held liable for reckless credit granting, particularly when relatives of the deceased, ill or vulnerable are experiencing emotional trauma and are more likely to make uninformed and unsound financial decisions. If indeed emergency loans are meant to provide recourse and support to the destitute, desperate and vulnerable, it should offer qualified lower rates than the average lending rate, instead of wanting to be exempted. The levels of indebtedness observed in this study are graphically displayed in the graph below.

[pic]

Source: Financial Diaries – Indebtedness Synopsis 08 06 05 –

Furthermore, in a seminal study[13] commissioned by the Department of Trade and Industry, itself, possible reasons why registered micro-lenders were charging annual interest rates of between 80-140% per annum included the acknowledgement that they had a “captive audience and no competition; were pricing interest rates “to what the market will bear”; and practiced “poor disclosure to a vulnerable consumer segment”. If indeed “emergency loans” are to be exempted and implemented as it is currently drafted, it will allow these registered microlenders and other credit grantors to “capture” the market of unregistered microlenders. Given the track record of these micro-lenders, the envisaged change in practice will be that they can charge “mashonisa rates”, increase their interest rate on loans, and further exploit the vulnerable and poor, but legally so!

For the reasons and motivations demonstrated above, COSATU therefore calls this category of loan to be disallowed, thereby disallowing any exemption for credit grantors from prosecuting as grantors of ‘reckless credit’ and further leading to the increase of indebtedness. We believe that failure to do so will lead to several problematic consequences, including:

▪ Exacerbating the economic plight of people in the so-called ‘second-economy’ who take out loans, often for the very criteria considered an “unanticipated life event”, though the poor regularly experience these events in their lives;

▪ Allowing unscrupulous credit providers to lend credit recklessly, without fear of prosecution, as well as setting the precedent that lower income earners can be granted credit without first assessing whether they are able to repay these loans

▪ Encroaches on the role of the State in providing relief to the indigent. The current state of affairs, requiring the poor to resort to micro-lenders points to the need of government to ensure proper administration and just distribution of social security/assistance, requiring even larger allocations to beneficiaries that need to be appropriated from the national fiscus.

3.3 In Duplum rule

The policy framework for consumer credit clearly proposes that legislation should be introduced to clarify and codify the In Duplum Rule. This provision was specifically called for by COSATU, and was subsequently agreed to by all parties when the policy framework was negotiated at NEDLAC. The In Duplum Rule is a common law rule that limits the interest, which a creditor can charge on an account/owed amount that is in arrears or where the payments made do not reduce the amount owed due to the high interest rate charged.

Specifically, it provides protection against the exploitation of the poor who cannot service their debt commitments by preventing the interest from exceeding the unpaid balance of the principal debt under the credit agreement as at the time that the default occurs.

COSATU is therefore pleased to see the inclusion of this provision in this Bill clarified in section 103 (5). However, we note that the current Bill refers to the in duplum rule within the Memorandum on the Objects of the National Credit Bill, as regulating the cost of credit through modification of the in duplum rule, as set out in clause 103(5) 2.11 (d), as opposed to the “codification of the in duplum rule, limiting the aggregate interest to not more than the principal sum borrowed”, as drafted in the 17 August 2005 version of the Bill. We trust that this is merely a misprint and should read codification.

In a previous submission[14] to Parliament, we objected to the special exemption afforded to the insurance sector on the application of this rule, and warned of its adverse consequences and the precedent it set. Similarly, the consumer credit industry has benefited from exorbitant charges that impoverished the poor. COSATU calls for the in duplum rule to be applied to all credit agreements in order to provide some relief to indebted persons, and in fact enable them to, in conjunction with other initiatives of this Bill, be freed from the debt spiral they find themselves in. Anecdotal evidence, case studies and formal research all point to the deep sense of helplessness experienced by indebted persons. The application of the in duplum rule may in fact incentivise indebted persons to settle debts, rather than continue ignoring or delaying their outstanding payments.

3.4 Credit information

Section 68-70 of the Bill deals with the receiving, compiling and reporting of consumer credit information. Whilst we agree that a registered credit bureau must—

(a) accept the filing of consumer credit information from any credit provider on

payment of the credit bureau’s filing fee, if any;

(b) accept without charge the filing of consumer credit information from the

consumer concerned for the purpose of correcting or challenging information otherwise held by that credit bureau concerning that consumer;

it is important to refer to the agreement that the Bill should include the commitment made by government at the Financial Sector and Presidential Growth and Development Summits to regulating credit bureaus so that they could supply "only information relevant to a person's creditworthiness"

This agreement was reached after lengthy deliberations on the purposes for which credit information should be sold or supplied. The partners agreed the practice of credit bureaus selling information to agencies to screen potential employees was unacceptable and unconstitutional.

If this practice continues, it would relegate jobseekers to further economic hardship and increase unemployment. In terms of these provisions of the Bill, credit information could be traded for purposes other than for assessing creditworthiness. We propose that the Bill should provide for credit information to be sold only for the purposes of assessing creditworthiness and that sale or use of credit information for other purposes should be an offence.

3.5 Amnesty for blacklisted persons

Regrettably, the Bill does not contain an amnesty for those blacklisted by credit bureaus. We call on the committee to amend the Bill to include an amnesty to all South Africans who are blacklisted by credit bureaus. It is imperative that a once-off amnesty must be granted to all those on credit bureau blacklists at the same time.

The National Treasury estimates that in May 2005, the value of foreign assets disclosed under the latest amnesty for persons who illegally transferred undeclared income offshore, to be worth R50.7 billion, with 8 000 of the 43 000 applications still to be finalised. In the same vein, a similar amnesty should be afforded to the poor.

We concur with the FSCC perspective that “apartheid credit practices and massive exploitation of the poor did not end with the fall of the apartheid regime - they flourished after 1994 and so did credit blacklistings…..what could be more destabilising to the financial sector than to have millions of citizens excluded from access to credit, many for trivial amounts and because of exploitative interest rates, lack of affordable credit, discrimination or joblessness?”

We would argue that the extent to which credit blacklisting is being implemented has led to a serious national problem. Not only does the blacklisting of two million blacklisted adults affect these individuals, it also impacts on households, by extension, to approximately 10 million people, a quarter of our population. In our view, this Committee has an important role to play in deciding the way forward. We call on the committee to intervene on the side of the poor.

6 Financial Co-operatives and Savings and Credit Co-

operatives (SACCO’s)

COSATU believes that co-operatives play a key role in addressing the social and economic challenges in South Africa, and considers the co-operative movement central in promoting an effective industrial strategy. At its recent 3rd Central Committee meeting in August 2005, COSATU resolved to “focus on financial co-operatives (savings and credit co-operatives, co-op bank and co-op funeral insurance), consumer co-operatives and workers co-ops as key intervention areas”.

In South Africa, SACCOs are playing an increasingly important role in providing financial services to millions of citizens outside the formal banking and financial services system and contributes toward implementing mass based economic empowerment through democratically owned and controlled enterprises.

We therefore are disappointed that the current version of the Bill neglects to take the unique role and needs of SACCOs into consideration. In fact, the drafters refer inappropriately to "credit unions". This may indicate the bias of its North American drafters, and does not mention or define these institutions as SACCOs. Yet this term is known throughout Africa, and is formally recognized by this term by the SA Reserve Bank. The role of SACCOs are furthermore supported in all spheres of government, as reflected in recent legislation, namely the Co-operatives Act (assented 19 August 2005) and the draft Cooperative Banks Bill.

Largely as a result of this lack of understanding of the unique role of SACCO’s, the Bill requires each individual SACCO to apply for registration as a lender as well as for "developmental lender" status. The Bill plainly fails therefore to show any consideration for:

• the co-operative tiered structure of primary co-operatives,

• secondary or apex co-operatives

• does not recognise the co-operative tiered structure or the anticipated co-operative banks provisions, that will be contained in the National Treasury's Co-operative Banks Bill.

The Bill's also fails to see SACCO’s as an instrument to promote real broad-based black economic empowerment, or provide support for it, despite its provision for "promoting black economic empowerment and ownership within the consumer credit industry." The Bill only addresses BEE in terms of criteria to be considered by the National Credit Regulator for registration as a credit provider, indicating a bias towards a narrow-based interpretation of BEE.

As a result of the above flawed approach and understanding, if passed in its current configuration, the Bill will place a huge regulatory burden on the savings and credit co-operatives movement, to the extent that, according to SACCOL[15], it would either be “rendered non-compliant or collapse”.

It is therefore imperative to harmonise these two legislative processes and critical for the units within the dti to communicate with each other and the National Treasury to this end. COSATU therefore demands that the Bill be amended appropriately amended to:

• recognise and draft legislative provisions to support the unique structure of the Savings and Credit Co-operatives (SACCO) movement in South Africa.

• Harmonise this Bill with existing legislation that has already recognised the co-operative tiered structure of primary cooperatives, secondary and apex co-operatives

4. Matters prescribed in regulations

Several important aspects of the Bill, in order to render it effective are prescribed in regulations, requiring Ministerial oversight.

We affirm the need for reform of the debit order system (and regulation of the

National Payments System), the Magistrates’ Courts Act, 1944, in the

Insolvency Act, 1936, and in the legislation and regulations that impact upon

the township property market (and access to finance for such properties),as contained in the Memorandum on the Objects of the Bill. However, we further recommend that these reform proposals be tabled in NEDLAC.

Also, given the importance of this Bill, COSATU proposes that draft regulations be tabled in parliament to ensure adequate consultation. These regulations, still to be tabled, include the calculation of the interest rate, fees and charges, and the functions of the National Credit Regulator.

There is also a need for relevant government departments and spheres of government to have close consultation with regards to the range of proposed amendments to existing legislation (no less than 23 Acts or regulations, as tabled in the Schedule 1 of the Bill).

5. COSTING

Contrary to objections from consumer credit providers that the cost of the Bill will be prohibitive, COSATU would motivate that the exact opposite logic applies.

In its 2005 Annual Review, the Life Offices’ Association (LOA) argues that the implementation of the National Credit Bill should, as a primary consideration, note the cost of implementing the Bill. However, they correctly point out that one needs to balance the cost versus the benefits of regulation.

According to LOA, the new Credit Tribunal and Regulator could cost up to R60 million per annum. However, if one considers that South Africans paid R95 billion a year in interest and fees on the R360 billion credit they owe credit providers, these costs would constitute less than 0.02 percent of the industry’s turnover.

Whilst government should exercise financial prudence, this amount is negligible if one considers the potential social benefits the implementation of this legislation will cost. In all likelihood, given the need to capacitate provinces and engage in consumer education, ensure compliance and effectively regulate the industry, the cost could be much more. However, these increased costs need to be secured and correctly calculated in order to give effect to the Bill.

The Constitution enshrines consumer protection as a Schedule 4 competence at both national and provincial levels. Therefore adequate funding should be available in both spheres of government to carry out the regulatory functions effectively. We demand that these funds be appropriated from national tax revenue.

COSATU is concerned that existing resources remain inadequate and request clarity and the assurance that the above funds would indeed become available in a sustainable manner. Equally important is the need for dti staff and other public officials to be recruited and appropriately trained to carry out the functions described in this Bill.

It is imperative to ensure that these funds are made available from the fiscus, since it is futile to design costly and sophisticated regulatory regimes without the concomitant funds.

COSATU therefore suggests that the Committee acquire full details of funding for all provisions of the Bill in the medium term.

6. Synergy and harmonisation with existing and pending

legislation

During the drafting of the Consumer Credit Policy and the draft National Credit Bill, several related processes and linked developments occurred.

Important to note, was the promulgation of the Intergovernmental Relations Framework Act (enacted 12 August 2005). A provision in an earlier version of the Bill, viz. the establishment of an “intergovernmental forum comprising the Minister and the several provincial MECs, who will manage the development of policy and co-ordinate legislation (including credit legislation) in matters of concurrent jurisdiction” was removed at the request of government and is now addressed in the Intergovernmental Relations Framework Act. COSATU affirms this development, but remains concerned that community participation through these forums have not been accommodated.

As a NEDLAC partner, we note that the DTI's policy research concluded that many of the weaknesses in the present regime stem from factors outside the DTI's direct mandate, such as problems related to the application of debit orders by banks and problems related to the Magistrates' Courts Act, 1944 (Act No.32 of 1944), and that these also have to be addressed in order to improve access to credit.

COSATU would recommend that ongoing credit policy discussions with both the DTI and the Department of Justice, particularly the review of comprehensive debt law be expedited. COSATU has furthermore insisted that policy process around privacy, debt, magistrate's courts and other laws be dealt with in a commonly negotiated process, but specifically that the Department of Justice be critically involved in moving forward in matters of insolvency. It is imperative that the Bill not be rendered ineffective by existing laws.

7. Key recommendations and conclusion

COSATU welcomes in principle the long-overdue legislation that would finally address the problematic practices of credit bureaus and credit grantors that has contributed to the extensive and immoral economic exploitation of the poor.

We note the very controversial and unacceptable practices at NEDLAC of the Department of Trade and Industry regarding policy and legislative processes and recommends that the Committee demand that a more consultative and equitable process is ensured at NEDLAC before the dti tables draft legislation in Parliament.

Key specific amendments and recommendations include:

• An appropriate definition of a debt counsellor to be developed.

• Debt counsellors must render their services free to the consumer, and that payment is effected through a national public fund with mandatory contributions from credit grantors.

• Exemptions of “emergency - , school – ; student loans and public interest credit agreements from reckless credit granting criteria should be rejected;

• that the Bill should provide for credit information to be sold only for the purposes of assessing creditworthiness and that sale or use of credit information for other purposes should be an offence;

• that the Bill should provide for a once-off amnesty to all those on credit bureau blacklists at the same time;

• recognise and draft legislation to support the unique structure of the Savings and Credit Co-operatives (SACCO) movement in South Africa.

• That in terms of implementation costs of the legislation, that the Committee acquire full details of funding for all provisions of the Bill in the medium term, in order to ensure that the economic and social benefits accrue to the poor and blacklisted in an equitable manner; and

• harmonise this Bill with existing legislation that has already recognised the co-operative tiered structure of primary cooperatives, secondary and apex co-operatives.[pic][pic]

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[1] Cosatu submission on the Consumer Affair Committee's report and proposed regulations of Credit Bureaus - Submitted to the Department of Trade and Industry on 15 July 2003

[2] Submission by the Banking Council of South Africa

[3] Various submissions downloadable from .za

[4] COSATU 8th National Congress Resolutions

[5] Labour input to Finance Portfolio Committee on the Financial Sector Charter -Bheki Ntshalintshali, COSATU Deputy General Secretary – 17 September 2004

[6] 5.2.1-5.2.3 – Protocol for tabling and considering issues at NEDLAC

[7] Quoted response of the dti to submissions, NATIONAL CREDIT BILL: PUBLIC HEARINGS TRADE AND INDUSTRY PORTFOLIO COMMITTEE, 8 August 2005

[8] Section 1 (f) – Memorandum on the Objects of the National Credit Bill p.101

[9] Section 2.6 – Memorandum on the Objects of the National Credit Bill p.104

[10] Chapter 2, s 17 (1)

[11] “The Cost, Volume & Allocation of Consumer Credit in SA March 2003 - para 4.7.2 – Dr. P. Hawkins – “An industry standard of 30% per month appears to be widespread. This amounts to a total cost of credit of 360% per year. “

[12] Highly indebted is defined here as having an average monthly actual (as opposed to scheduled) debt payments across ALL debt instruments of more than 20% of total income.

[13] The Cost, Volume and Allocation of Credit in South Africa – Dr. P. Hawkins, March 2003

[14] COSATU Submission on the Insurance Amendment Bill 2002, presented to the Portfolio on Finance on 07 February 2003

[15] Savings and Credit Co-operatives League of South Africa, see separate submission to PC Trade and Industry,

.za

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Average monthly payments towards debt, percent of monthly household income

Diepsloot

Lugangeni

Langa

> 20%

10%-20%

0%-10%

70%

60%

50%

40%

30%

20%

10%

0%

Percent of households in each indebtedness bracket

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