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WE KNOW the problem – it’s time for solutions.
Much has been said of late about over-indebted consumers and the unsecured credit crisis. Very few solutions, however, have been proposed.
Perhaps commentators were right to highlight the problem 12 months ago but at this stage, further emphasis serves little purpose besides exaggerating the wheel spin.
Let’s agree that the problem is significant – we’ve all been shocked by the statistics, saddened by desperate consumer stories and seen lender stock markets crash. Now it is time for regulators, industry players and other stakeholders to start applying our energies to finding and implementing real solutions.
Factors to consider when proposing solutions
In our years of exploring solutions for over-indebted consumers, we have learnt a few things about the environment and consumer behaviours that contribute to a destructive debt spiral:
1. In isolation, financial literacy education is of little value. Over-indebted consumers need more than just information – they need relief.
Most financial literacy courses focus on instilling better financial habits (like budgeting), making consumers aware of their rights, demonstrating the benefits of savings and emphasising the dangers of borrowing. But consider how difficult it would be for an over-indebted consumer –about half of our credit-active population – to implement this advice.
It is very difficult to budget and save up the equivalent of three months’ salary when you’re spending 60% of your income servicing your debt; it is even harder when you take home only a fraction of your salary after paying garnishee orders from your pay slip. Before consumers can change their habits, they need help solving their debt crisis.
2. Consumers need to trust you first. Most debt relief solutions are restrictive in some way and, as necessary as they may be to the recovery process, remain a threatening prospect to many consumers.
You can use as many pictures and different languages as you can find to explain debt relief, but most consumers will only take your advice once they trust you. Gaining trust takes time. Before punting debt counselling, we need consumers who have experienced its value first-hand to become ambassadors to their friends and family.
3. Good financial decisions are based on more than information. We can present as many facts, statistics and strategies as we like – making better financial decisions comes down to discipline and the confidence to resist impulse purchases.
Consumers need enough savvy to reject aggressive salespeople, resist endless media advertising and rebel against social pressures; these are intrinsic values not easily transferred in the course of a short financial literacy workshop.
Consumers need ongoing relationships with financial mentors to gain behavioural insight over time through implementing financial habits and assessing the results of financial decisions.
4. An ignorant society is harder to reach than an irresponsible credit industry. The credit crisis is a result of both reckless borrowers and lenders, and change needs to come from both sides.
Promoting responsible and transparent credit granting, holding credit providers accountable to fair collection practices and enforcing consumer protection laws is a far simpler – and faster – endeavour than attempting to change complex consumer behaviour, especially in times of financial desperation.
Interestingly, many credit providers acknowledge the need to correct past irregularities and are eager to build a more responsible, sustainable and consumer-centric credit industry.
5. Consumer protection laws must be improved and implemented. We have many great laws protecting consumers, but they can only work if they are implemented and currently they are not implemented nearly enough. In some cases, this is because laws are written in a way that makes them difficult to apply, in which case they should be amended as a matter of urgency.
In other cases, laws are simply not being effectively enforced by regulating bodies and they should be held accountable to the consumers they claim to represent. By way of example, if section 80 of the National Credit Act (NCA), which deals with the granting of reckless credit by credit providers, had been written with greater clarity and applied more strictly, we should have seen the end of over-indebted consumers after the act was introduced in 2008.
Sadly, this is not the case. The fact that new consumers are still becoming over-indebted every month shows that credit is still being granted recklessly to people who cannot afford it.
Where we should start
Taking these factors into consideration, we believe the following solutions would facilitate a credit industry that promotes the original intentions of the NCA, including the protection of vulnerable consumers, providing effective debt relief mechanisms and ensuring a fair and transparent credit industry:
1. Keep the focus on consumers. The department of trade and industry is currently considering amendments to the NCA. While a relook at the act is long overdue, the amendments proposed by the National Credit Regulator feel like a tragically missed opportunity.
They largely overlook sections that create ambiguity in enforcing the stated intentions of the act, and focus instead on the operational interests of the National Credit Regulator, creating even greater bottlenecks by increasing reliance on the already inefficient regulator.
2. Amend key sections of the National Credit Act. There are key sections of the NCA that could be far more effectively implemented if clarified. These are the four sections that would have the greatest impact on consumers with the least amount of change:
- Section 80 aims to protect consumers against reckless credit but allows credit providers to determine their own criteria for assessing what the consumer can afford, provided it is ‘reasonable’.
The legislature should specify a formula for assessing a consumer’s affordability together with a black-and-white calculation to determine when a loan is reckless - e g once a consumer’s debt instalments exceed 40% of their net pay, any further credit granted could be considered reckless.
This would make it easier, and more cost effective, to identify and enforce reckless credit and start to turn the tide on over-indebtedness.
- Section 101 limits the costs that can be charged to consumers when granting credit, but fails to specify what default administration charges and collections costs entail.
Unscrupulous collectors naturally exploit this ambiguity by pushing for judgments and garnishee deductions to increase their total cost of credit through excessive post-judgment fees. If Section 101 is not intended to regulate the full scope of legal and collection costs, the limits must be clearly spelled out.
- Section 106 aims to regulate the charging of credit insurance to consumers, but regrettably only limits credit insurance instalments to an amount that is ‘reasonable’ in relation to the benefits.
If the legislature wants to prevent consumers being exploited, the maximum amount chargeable for credit insurance should be quantified with a formula the same way interest, initiation fees and service fees are. Some lenders, such as Lewis Stores, Atlas Finance and Letstatsi Finance, currently make a killing from credit insurance, so much so that it makes up more than 50% of their profits.
- Section 86 defines the debt counselling process. General guidelines are given as to how a consumer’s debt should be restructured, but the section does not expressly provide for the reduction of interest rates, although it is nearly impossible to effectively restructure a consumer’s debt without doing so.
This predictably becomes a point of contention between debt counsellors and credit providers. The industry has, however, formulated a pre-agreed formula for restructuring debt, referred to as the DCRS Rules, which has proven to be quite effective.
If this pre-agreed formula were codified in the act, it would provide greater certainty for both consumers and credit providers and ensure that interest rates are only reduced within reasonable limits on all applicable proposals. It would also reduce the number of cases that need to be referred to court for approval, which means lower costs and quicker turnaround times.
3. Make changes to improve enforcement. The National Credit Regulator recently held a workshop around the need for alternative dispute resolution agents.
But when we already have the Credit Ombudsman, Banking Ombudsman, National Credit Regulator, Council for Debt Collectors, Law Societies and Magistrates Courts aimed at enforcing consumer laws, surely contemplating yet another regulating body is simply admitting the inefficiency of the current entities.
Instead of creating a new dispute resolution body, we should rather take a good look at the skills, capacity and mandates of current regulators and make some drastic changes to keep them relevant. Non-compliant lenders and collectors must be held publicly accountable to stop abuse and warn vulnerable consumers.
Summit has personally lodged a number of complaints to the Law Society, the Credit Ombud and the National Credit Regulator that did not result in any recourse or enforcement of applicable regulations. Whether it is due to unclear mandates, limited capacity or a skills shortage, these bodies seem to be restricted in their ability to hold irregular lenders and collectors accountable.
We suggest that the National Credit Regulator takes the lead in announcing accessible complaints processes in multiple languages with clear time lines, naming and shaming of offending parties and monthly case studies on both successful and failed complaints.
4. Promote financial literacy together with relevant interventions. Financial literacy education is continuously punted through various projects, including the Financial Sector Charter. While financial literacy is an important cause, however, it does not, in isolation, change consumer behaviour.
When 50% of the credit-active market is showing signs of over-indebtedness, we must provide interventions to correct past mistakes and monitor financial decisions together with financial literacy education.
Consumers need interventions, accountability and protection from intimidating, dodgy collectors to help change their financial behaviour more than they need two-day workshops.
5. Create an accessible, national credit database. Each credit agreement legally entered into in South Africa must be registered and stored with the National Credit Regulator. If credit providers had access to an up-to-date record of all accounts held by a consumer, they would have no excuse for providing unaffordable loans.
On the other hand, this database could be used more effectively by the regulator. If, for example, a credit provider’s costs are found to be excessive, they could be corrected across the board for all their clients. As long as the terms on the database always take preference, credit providers and collectors would be forced to ensure that their records are accurate.
- Fin24
* Clark Gardner is CEO of Summit Financial Wellbeing and 6cents.co.za.
Much has been said of late about over-indebted consumers and the unsecured credit crisis. Very few solutions, however, have been proposed.
Perhaps commentators were right to highlight the problem 12 months ago but at this stage, further emphasis serves little purpose besides exaggerating the wheel spin.
Let’s agree that the problem is significant – we’ve all been shocked by the statistics, saddened by desperate consumer stories and seen lender stock markets crash. Now it is time for regulators, industry players and other stakeholders to start applying our energies to finding and implementing real solutions.
Factors to consider when proposing solutions
In our years of exploring solutions for over-indebted consumers, we have learnt a few things about the environment and consumer behaviours that contribute to a destructive debt spiral:
1. In isolation, financial literacy education is of little value. Over-indebted consumers need more than just information – they need relief.
Most financial literacy courses focus on instilling better financial habits (like budgeting), making consumers aware of their rights, demonstrating the benefits of savings and emphasising the dangers of borrowing. But consider how difficult it would be for an over-indebted consumer –about half of our credit-active population – to implement this advice.
It is very difficult to budget and save up the equivalent of three months’ salary when you’re spending 60% of your income servicing your debt; it is even harder when you take home only a fraction of your salary after paying garnishee orders from your pay slip. Before consumers can change their habits, they need help solving their debt crisis.
2. Consumers need to trust you first. Most debt relief solutions are restrictive in some way and, as necessary as they may be to the recovery process, remain a threatening prospect to many consumers.
You can use as many pictures and different languages as you can find to explain debt relief, but most consumers will only take your advice once they trust you. Gaining trust takes time. Before punting debt counselling, we need consumers who have experienced its value first-hand to become ambassadors to their friends and family.
3. Good financial decisions are based on more than information. We can present as many facts, statistics and strategies as we like – making better financial decisions comes down to discipline and the confidence to resist impulse purchases.
Consumers need enough savvy to reject aggressive salespeople, resist endless media advertising and rebel against social pressures; these are intrinsic values not easily transferred in the course of a short financial literacy workshop.
Consumers need ongoing relationships with financial mentors to gain behavioural insight over time through implementing financial habits and assessing the results of financial decisions.
4. An ignorant society is harder to reach than an irresponsible credit industry. The credit crisis is a result of both reckless borrowers and lenders, and change needs to come from both sides.
Promoting responsible and transparent credit granting, holding credit providers accountable to fair collection practices and enforcing consumer protection laws is a far simpler – and faster – endeavour than attempting to change complex consumer behaviour, especially in times of financial desperation.
Interestingly, many credit providers acknowledge the need to correct past irregularities and are eager to build a more responsible, sustainable and consumer-centric credit industry.
5. Consumer protection laws must be improved and implemented. We have many great laws protecting consumers, but they can only work if they are implemented and currently they are not implemented nearly enough. In some cases, this is because laws are written in a way that makes them difficult to apply, in which case they should be amended as a matter of urgency.
In other cases, laws are simply not being effectively enforced by regulating bodies and they should be held accountable to the consumers they claim to represent. By way of example, if section 80 of the National Credit Act (NCA), which deals with the granting of reckless credit by credit providers, had been written with greater clarity and applied more strictly, we should have seen the end of over-indebted consumers after the act was introduced in 2008.
Sadly, this is not the case. The fact that new consumers are still becoming over-indebted every month shows that credit is still being granted recklessly to people who cannot afford it.
Where we should start
Taking these factors into consideration, we believe the following solutions would facilitate a credit industry that promotes the original intentions of the NCA, including the protection of vulnerable consumers, providing effective debt relief mechanisms and ensuring a fair and transparent credit industry:
1. Keep the focus on consumers. The department of trade and industry is currently considering amendments to the NCA. While a relook at the act is long overdue, the amendments proposed by the National Credit Regulator feel like a tragically missed opportunity.
They largely overlook sections that create ambiguity in enforcing the stated intentions of the act, and focus instead on the operational interests of the National Credit Regulator, creating even greater bottlenecks by increasing reliance on the already inefficient regulator.
2. Amend key sections of the National Credit Act. There are key sections of the NCA that could be far more effectively implemented if clarified. These are the four sections that would have the greatest impact on consumers with the least amount of change:
- Section 80 aims to protect consumers against reckless credit but allows credit providers to determine their own criteria for assessing what the consumer can afford, provided it is ‘reasonable’.
The legislature should specify a formula for assessing a consumer’s affordability together with a black-and-white calculation to determine when a loan is reckless - e g once a consumer’s debt instalments exceed 40% of their net pay, any further credit granted could be considered reckless.
This would make it easier, and more cost effective, to identify and enforce reckless credit and start to turn the tide on over-indebtedness.
- Section 101 limits the costs that can be charged to consumers when granting credit, but fails to specify what default administration charges and collections costs entail.
Unscrupulous collectors naturally exploit this ambiguity by pushing for judgments and garnishee deductions to increase their total cost of credit through excessive post-judgment fees. If Section 101 is not intended to regulate the full scope of legal and collection costs, the limits must be clearly spelled out.
- Section 106 aims to regulate the charging of credit insurance to consumers, but regrettably only limits credit insurance instalments to an amount that is ‘reasonable’ in relation to the benefits.
If the legislature wants to prevent consumers being exploited, the maximum amount chargeable for credit insurance should be quantified with a formula the same way interest, initiation fees and service fees are. Some lenders, such as Lewis Stores, Atlas Finance and Letstatsi Finance, currently make a killing from credit insurance, so much so that it makes up more than 50% of their profits.
- Section 86 defines the debt counselling process. General guidelines are given as to how a consumer’s debt should be restructured, but the section does not expressly provide for the reduction of interest rates, although it is nearly impossible to effectively restructure a consumer’s debt without doing so.
This predictably becomes a point of contention between debt counsellors and credit providers. The industry has, however, formulated a pre-agreed formula for restructuring debt, referred to as the DCRS Rules, which has proven to be quite effective.
If this pre-agreed formula were codified in the act, it would provide greater certainty for both consumers and credit providers and ensure that interest rates are only reduced within reasonable limits on all applicable proposals. It would also reduce the number of cases that need to be referred to court for approval, which means lower costs and quicker turnaround times.
3. Make changes to improve enforcement. The National Credit Regulator recently held a workshop around the need for alternative dispute resolution agents.
But when we already have the Credit Ombudsman, Banking Ombudsman, National Credit Regulator, Council for Debt Collectors, Law Societies and Magistrates Courts aimed at enforcing consumer laws, surely contemplating yet another regulating body is simply admitting the inefficiency of the current entities.
Instead of creating a new dispute resolution body, we should rather take a good look at the skills, capacity and mandates of current regulators and make some drastic changes to keep them relevant. Non-compliant lenders and collectors must be held publicly accountable to stop abuse and warn vulnerable consumers.
Summit has personally lodged a number of complaints to the Law Society, the Credit Ombud and the National Credit Regulator that did not result in any recourse or enforcement of applicable regulations. Whether it is due to unclear mandates, limited capacity or a skills shortage, these bodies seem to be restricted in their ability to hold irregular lenders and collectors accountable.
We suggest that the National Credit Regulator takes the lead in announcing accessible complaints processes in multiple languages with clear time lines, naming and shaming of offending parties and monthly case studies on both successful and failed complaints.
4. Promote financial literacy together with relevant interventions. Financial literacy education is continuously punted through various projects, including the Financial Sector Charter. While financial literacy is an important cause, however, it does not, in isolation, change consumer behaviour.
When 50% of the credit-active market is showing signs of over-indebtedness, we must provide interventions to correct past mistakes and monitor financial decisions together with financial literacy education.
Consumers need interventions, accountability and protection from intimidating, dodgy collectors to help change their financial behaviour more than they need two-day workshops.
5. Create an accessible, national credit database. Each credit agreement legally entered into in South Africa must be registered and stored with the National Credit Regulator. If credit providers had access to an up-to-date record of all accounts held by a consumer, they would have no excuse for providing unaffordable loans.
On the other hand, this database could be used more effectively by the regulator. If, for example, a credit provider’s costs are found to be excessive, they could be corrected across the board for all their clients. As long as the terms on the database always take preference, credit providers and collectors would be forced to ensure that their records are accurate.
- Fin24
* Clark Gardner is CEO of Summit Financial Wellbeing and 6cents.co.za.
