Rob Davies (Minister of Trade and Industry Speech 27 February 2014)
I would like to formally announce that I have yesterday, 26 February 2014, published in the Government Gazette Notice No. 37386 regulations for the Removal of Adverse Credit Information and Information Relating to Paid Up Judgments. This Notice follows extensive and robust public consultation, including consultation with Parliament and the relevant provincial authorities. The public consultation process indicated overwhelming support for this process, which is aimed at removing barriers to, amongst other things, employment opportunities, rental accommodation, as well as access to credit to those consumers that can afford it.
This Notice, I must emphasise, is not removing the obligation on consumers to re-pay debt owed by them to credit providers. Instead, it seeks to create the incentive for consumers to re-pay their debt better and timely. Through this process, we also seek to encourage consumers to approach credit bureaus to check their credit records, and to move with speed to settle amounts owed on judgments so their clean credit record can be restored immediately.
Checking credit records held by credit bureaus will also help consumers to also identify in time if there is any fraud committed using their identity, given the increase in identity theft. The report also contains information to help the consumer to keep track of his or her payments on a monthly basis, which will help a consumer to manage their credit better going forward. The consumer is by law entitled to one free credit report per year, and we urge consumers to get that credit report.
When Parliament through the Select Committee on Trade and International Relations requested the Department of Trade and Industry (the dti) to assess the feasibility of relieving consumers from the blacklisting with credit bureaus, some negative statements were made. Some alluded that a credit amnesty will not be in the interest of the economy as credit providers will not be able to assess the risk in extending credit, and that credit will be extended recklessly. Also, it was stated that credit providers will be reluctant to extend credit, or that where they do, they will extend credit at significantly high costs.
It was further indicated that the credit amnesty implemented in 2007 was not effective as about 48% of the 64% of people who were granted such amnesty soon found themselves back on the blacklist held by credit bureaus. Therefore, it is their assertion that this process will also not be effective. In addition to the above, there was also the assertion that this will be a blanket amnesty, which will encourage non-payment of debts and increase the levels of over-indebtedness, and worse, prejudice customers that are good payers.
I want to assure you that all these concerns were taken into account, and I am going to share with you today the essential elements of this well considered process.
Weaknesses of the 2007 Credit Amnesty
It is a fact that in 2007 credit amnesty was granted to allow consumers to start on a clean slate following the passing of the National Credit Act, 2005 (“the Act”). The weaknesses of this amnesty however lie largely in that a consumer had to take certain steps to action and benefit from it. Knowing the extent of the information gap in our society, it is obvious that most consumers could not take advantage of the amnesty as they were either not aware of it, and where they were aware, the processes were not simplified enough to extend this benefit to the affected consumers. This led to this 2007 amnesty benefiting only a handful of the affected consumers.
Global Financial Crisis
I must recognise upfront that this government was far sighted in passing the Act when it did in 2005. Had it not been of the implementation of this Act, the effects of the 2008 global financial crisis would have been worse for South Africa. This Act cushioned the economy, and was hailed by many jurisdictions as the best piece of legislation, and many have visited South Africa to learn more about this Act.
Statistics provided by credit bureaus tell us that of the handful that benefited from this 2007 amnesty, about 48% of the 64% were soon negatively listed again. While this statistics may be true, the reasons why consumers got blacklisted during this period vary. For instance, you will recall that it was during this period that the global financial crisis happened. Despite the cushion provided by the Act, it is an open secret that this global financial crisis did not only affect companies, but individual consumers as well.
While at that time measures were taken by government to intervene and assist companies that were in financial distress as a result of the global financial crisis, such relief and assistance were not necessarily extended to individuals. The lack of knowledge about debt counselling and debt review mechanisms provided by the Act also exacerbated the problem, and we saw most consumers’ homes being repossessed and judgments obtained against consumers from courts by credit providers. Even where credit providers were aware of debt review processes, most did not assist consumers to restructure their debts, but sadly opted for repossessions of property.
It is also during this global financial crisis where we saw our economy shedding a significant number of jobs, thus compounding the financial difficulties most consumers were faced with. We have also seen over this period an increase in the cost of credit to consumers, which was also evidenced by the apparent abuse of credit life insurance, and the sharp increase by 50% in unsecured lending, which attracts high interest rates for consumers. Also, the collection methods employed by credit providers, including the sale of loan books to debt collectors, have added to the capital amounts owed by consumers under credit agreements, thus making it difficult for consumers to settle their debt on time.
It is against this background that the National Credit Amendment Bill (“NCAB”) that will be considered by the National Assembly today introduces provisions to prevent costs of credit from spiralling in this manner to the detriment of vulnerable consumers. Within six (6) months, I will also be reviewing the regulations to ensure that the caps currently applicable are still appropriate, and where they are not, I will introduce further caps, after consulting stakeholders.
Gaps in Affordability Assessment Tests
As you are aware, one of the key pillars of the Act is the requirement for credit providers to conduct affordability tests before extending credit to consumers. The research we commissioned for the purposes of assessing the feasibility of removing adverse consumer credit information has revealed glaring gaps in how these tests are conducted by credit providers. In some instances these affordability tests are not conducted at all. The NCR investigations and recent actions against credit providers show this worrying tendency.
Failure to conduct these affordability tests has results in reckless loans being extended to consumers that are already over-indebted, thus impacting on their ability to repay such loans. In Marikana alone, the NCR investigated eleven (11) credit providers, and all were found by the NCR to have contravened the Act and referred for prosecution. Of primary concern also is the trend among credit providers to lazily use blacklisting at the credit bureau as the substitute for affordability test. It is not uncommon for a consumer to be declined credit purely on the credit bureau blacklisting without even conducting the affordability test. But what we find strange is where a consumer is declined for a home loan, but accepted for a personal unsecured loan of the same amount as in the declined home loan application. This shows that to some credit providers profits at times prevail over affordability to repay credit. This gap in affordability tests has led to an increase in blacklistings at the credit bureaus, with almost 50% of the about 21 million credit active consumers having impaired records. Moreover, this contributes to increased household over-indebtedness.
The NCAB provides for the Minister to issue regulations to ensure uniformity and consistency in conducting affordability tests. These regulations will include the direction on discretionary income and provide the buffer in respect of income that should not be considered when conducting affordability assessments. These regulations will be binding on the credit providers as it is clear that the self regulatory method has not yielded positive results.
The NCAB also empowers the National Consumer Tribunal (“NCT”) to consider and adjudicate on reckless agreements. The NCR is also empowered to vigorously investigate matters of reckless lending and refer them to the NCT for prosecution.
Credit Information becoming another Impediment to Employment
Further, we have been inundated with correspondence from the public showing clearly that the blacklisting at the credit bureaus has now become a new impediment to employment opportunities. With the unemployment rate of 24%, it is our priority to create a conducive environment for employment opportunities to be created, and thus government has taken a decision to address this challenge. We caution companies to refrain from using the blacklisting information held by credit bureaus incorrectly to deny people employment. We accept that in some financial positions, such as those in the banking sector, the credit bureau information can be used as a reference in considering persons for employment in that sector. However, we will not allow the continued abuse of consumer credit information held by credit bureaus for dubious reasons. We have impressed on the NCR to monitor the use of consumer credit information held by the credit bureaus very closely.
While others can turn a blind eye to the predicament of many South Africans, it is difficult to ignore instances such as the one contained in the email that the dti received yesterday from a 54-year-old father with four sons, who is currently unemployed and cannot get employment due to his negative credit record. In his email he desperately says “Bottom line is, I (listed in red with credit bureau) need to earn money in order to achieve and maintain a positive credit record, but if I am refused any work, how on earth can I repay my debt and clear my name? I am certain that your department will come up with a solution for this national problem in the near future.” This is one of the many emails received, including from graduates that cannot find jobs due to blacklisting arising from student loans. The purpose of this process is to assist people who are in the same situation as this 54-year old father and those graduates that wish to be employed so they can be able to repay their student loans.
Change in financial Position
Having alluded to circumstances that led to consumers being blacklisted, it is a fact that adverse consumer credit information has been used incorrectly by some credit providers to deny consumers access to credit to secure home loans, even where their financial position has changed. In terms of the regulations, a judgment would be reflected on the record of a consumer for five (5) years at the credit bureau, irrespective of the consumer having paid up. The process to remove such negative listing involves the court, which adds another cost to the consumer unnecessarily.
This Notice provides a simple and quick process to remove such negative information without approaching the court once the consumer has paid up. It also provides relief to a consumer, whose financial position has changed to start on a clean slate and maintain a clean credit record going forward. While there is a chance that a few consumers that should not benefit from this Notice due to their repeat dishonest behaviour in regard to credit repayment, it would be easy to identify these consumers. Most consumers have however welcomed this second opportunity, and have committed to keep their credit record clean going forward. This Notice must benefit these most deserving consumers.
The NCAB also amends the Act to allow for early rehabilitation of a consumer who has demonstrated financial ability to repay his or her debts, and has settled all his or her short term debts, with only a mortgage agreement remaining. A debt counsellor is empowered to issue a clearance certificate to such a consumer, provided that the consumer does not have any arrears on the outstanding mortgage debt as rearranged during the debt review process. This amendment will complement this Notice to facilitate early rehabilitation, otherwise a consumer could be barred from accessing further credit for the term of the mortgage agreement, which could be up to thirty (30) years.
Education and Awareness/Information Disclosure
Our research and consultation processes have highlighted a need to enhance consumer awareness both on the part of the NCR and the credit providers. There is also a need to demystify the role of credit bureaus as consumers currently perceive them as a barrier to accessing credit, or even obtaining employment. Credit bureau information is critical for the consumer, and for effective management of extension of credit in the industry.
Credit providers must enhance the manner in which they offer products to consumers, and ensure that consumers clearly understand the products, and costs associated with such products. Consumer agreements must be explained in a simple and understandable language to consumers. Credit providers must also communicate the available mechanisms under the Act, such as debt counselling and debt review, to assist consumers that may be having financial problems. The first price however is for a credit provider to voluntarily re-arrange payment terms with the consumer where it is clear that a consumer has financial difficulties. This means the consumer must also be open upfront to the credit providers about financial problems he or she is experiencing.
The Essential Elements of this Notice
As indicated, the process leading to this Notice was well considered. Extensive research was conducted, and further engagement with stakeholders was allowed at all times. The impact assessment based on information that could be accessed was conducted. Therefore, this Notice will be implemented as part of a package of solutions to help affected consumers. It will be complemented by, amongst other things, a communication plan that aims to educate consumers on financial literacy and saving, amendments to the Act to introduce affordability regulations, as well as guidelines to deal with discretionary income and listing requirements.
This Notice includes regulations to remove adverse consumer credit information (such as adverse classifications of ‘handed over’ or ‘written off’) and information relating to paid-up judgments (such as default judgments where the consumer has settled the capital amount under the judgments). The payment profile of a consumer will remain available for credit providers to help assess the risk in extending credit to consumers. This obviously being one of the many factors considered by the credit provider before extending credit.
This Notice comes into effect on 1 April 2014 and credit bureaus must remove all such information within two (2) months, i.e. April and May 2014. Therefore effective from 1 April 2014 credit bureaus are prohibited from displaying or providing information that ought to be removed in terms of this Notice to anyone. The credit bureaus must within thirty (30) days after May 2014 submit a report by an independent auditor confirming that all such information has been removed.
This Notice is applicable automatically to all affected consumers, unlike the 2007 amnesty whereby a consumer was required to follow a particular process to benefit from the amnesty. This means a consumer who may not even be aware of this Notice will nevertheless benefit.
Once the relevant information is removed in terms of this Notice, no credit provider may use that information again in respect of a consumer applying for credit. This goes for prospective companies that use this information incorrectly to deny South Africans employment. Credit bureaus must not provide such information to anyone for any reason.
This Notice makes it clear that the consumer remains liable to meet his or her obligations in respect of any credit agreement that is not settled with the creditor. This Notice does not take that obligation away.
The dti and the NCR will implement a communication plan that will ensure that this Notice is understood by the people that should benefit from it. This plan also aims to encourage consumers to use credit responsibly, provide honest and true information when applying for credit and practice a culture of saving.
I thank you all for attending this media briefing.