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Credit providers – including banks, micro lenders and clothing and furniture retailers – are testing an alternative process to debt counselling. During the pilot programme, credit providers will appoint the debt counsellors you may use and subsidise your debt counselling fee. But some debt counsellors feel that being appointed by credit providers will result in a conflict of interest.
Credit providers say that debt counselling isn’t working – not for you or them. The debt counselling process is set down in law, which, credit providers say, is confrontational, lengthy and bound to land up in court, making it costly for both the consumer and the credit provider. Furthermore – and sometimes for these reasons – too few over-indebted consumers are opting to undergo debt counselling.
The credit industry says that in order to get more consumers to deal with their debt, a new voluntary debt mediation process is required. In terms of the process they are proposing, credit providers undertake not to take legal action against consumers who make a commitment to stick to their restructured debt repayments. If the voluntary process fails, the consumer can then choose to go the route of statutory debt counselling.
The credit provider’s process, known as voluntary debt mediation service (VDMS), will be piloted over the next six to 12 months. It is being driven by the National Debt Mediation Association (NDMA), an organisation funded by the credit industry and tasked with mediating between over-indebted consumers and credit providers. Participants in the pilot include all of the major banks, micro lenders, as well as clothing and furniture retailers.
Magauta Mphahlele, chief executive officer of the NDMA, says the project has the support of the National Credit Regulator (NCR) and the Department of Trade and Industry (DTI) on condition that it does not undermine, but rather enhances, the rights that you, the consumer, have under the statutory process.
These include your right to debt counsellors who are independent. The National Credit Act (NCA) says counsellors cannot be employed by credit providers, debt collection agencies or credit bureaus.
In terms of the pilot, debt counsellors in VDMS will be appointed by the credit industry to a panel. But can such counsellors provide an independent service? Will they be inclined to report reckless lending, for example, if they are working for – and being paid by – the credit provider?
Posing these questions are debt counsellors who don’t want to be named for fear of being denied referral work from the NDMA. They say this is an obvious conflict of interest.
“VDMS will operate within the ambit of the NCA,” Mphahlele says. “Both the NCA and the Consumer Protection Act are very clear that no agreement can be used to opt out of the provisions of these Acts.”
Mphahlele says VDMS will be a transparent process subject to oversight by the regulator. “We consider the NCR the party responsible to ensure that consumer rights are not undermined.”
In response to questions on VDMS and potential conflicts of interest, Nomsa Motshegare, chief executive of the NCR, sent a one-sentence answer stating that the regulator is aware of “the establishment of this mechanism” and will assess it for possible contraventions of the Act.
Attempts to get comment from the DTI were unsuccessful.
When you are in statutory debt counselling, your credit record is “flagged” at the credit bureaus. This effectively locks you out of the credit market. You are allowed to access more credit only once you have paid off all your debts and have been issued with a clearance certificate.
Mphahlele says consumers who opt for VDMS will still be flagged, but the conditions for removing the flag may be different. “In VDMS, if the consumer’s circumstances change and they are able to show a sustained repayment record ... the industry is considering removing the flag.”
She says experience shows that consumers who enter debt counselling due to an economic setback, such as retrenchment, a drop in income or divorce, are able to pay their normal instalments when their circumstances change.
“The industry is of the view that such ‘good faith’ consumers should be removed from the bureau when their circumstances change and not when they have paid all their debts,” she says.
Mphahlele says this does not give credit providers a licence to engage in reckless lending. “Reckless lending will not be allowed in VDMS, as this would be a contravention of the NCA. Debt counsellors will still be expected to act according to their conditions of registration. Part of their duty would be to identify reckless lending and report it.”
How it will work
Magauta Mphahlele, the chief executive officer of the National Debt Mediation Association (NDMA), explains how the pilot project for the credit industry-led voluntary debt mediation service (VDMS) will work:
* Participating credit providers will identify consumers who have been notified that they are in default of a credit agreement – in other words, consumers who are in serious arrears, are in the process of being handed over for legal action or who have been issued with a section 129 notice. The section 129 notice is a prerequisite for legal action. It advises you, the consumer, that you may refer the credit agreement to a debt counsellor, an alternative dispute resolution agent, a consumer court or an ombud, in an attempt to resolve any dispute or agree to a plan to bring your payments up to date before the expiry of 10 business days from the day you received the notice.
* If you fit into one of the above categories, you may be invited to participate in the VDMS pilot.
* If you agree, your credit provider will refer you to a registered debt counsellor who has been selected by the NDMA to take part in the pilot.
* The debt counsellor will assess your eligibility for VDMS.
* If you are eligible, the debt counsellor will apply the debt counselling rules system (DCRS), a central standardised system that calculates a proposal to restructure your debt. Normally, the only way you can access DCRS is if you are in statutory debt counselling. DCRS carries automatic consent from NDMA-affiliated credit providers. But, even though it carries automatic consent, in the statutory process the debt counsellor still has to file the proposal with either a court or the National Consumer Tribunal as a consent order. Since the DCRS reduces fees and interest rates, some magistrates have refused to accept such proposals because, according to their interpretation of the National Credit Act, the only remedies they may extend to consumers are a term extension, reduced payments and a payment holiday.
* Participating credit providers commit to accept and implement the proposal without the debt counsellor having to confirm it in court.
* Consumers who take part in the pilot will not pay for the service. The credit industry will fund it.
Counsellors on debt counselling
Debt counselling is working, but the court process “can improve”, Paul Slot, president of the Debt Counsellors’ Association of South Africa, says.
The debt counselling rules system is enabling debt counsellors to solve 70 percent of cases, Slot says. The rules system allows counsellors to give their clients relief by granting interest rate concessions and extending the terms of credit agreements.
The statutory process will continue to work and protect consumers, but if the voluntary debt mediation service (VDMS) can provide an additional solution, it will be good for the consumer, he says. “It has worked elsewhere in the world, and we see no reason why it cannot succeed here.”
Philippa Davis, debt counsellor at DT Debt Counselling, says there is nothing wrong with the statutory debt counselling process “that a little co-operation and less hostility cannot resolve”.
By far the biggest blockages originate with credit providers, Davis says, citing a “lack ofco-operation, open hostility towards debt review and the litigious stance” taken by credit providers over the past five years.
“If a new spirit of co-operation is imminent, this can only be good news, whether one follows the regulated statutory route or the informal route, because the primary motivation for all of us is the development of a fair, sustainable and healthy credit market – and we cannot do that in isolation,” Davis says.
But it does no good to throw the baby out with the bathwater, she says. “VDMS cannot replace the law and the lawful rights of the consumer. The National Debt Mediation Association cannot replace the regulator. The law is the law, and the consumer has the right to the statutory process, whether the credit provider community likes it or not.”
She says it is encouraging to see an initiative such as VDMS, which relies on credit providerco-operation for success. “If the credit provider can co-operate within VDMS, then there is no logical reason why that same co-operation cannot exist in the statutory process, too.
“Once there is co-operation, there is a framework in place for us to apply our minds to the blockages that remain and to work through these to the benefit of all.”
Debt counsellors must take their share of the blame for the blockages, Davis says. “Unethical practice, lack of knowledge and a generalised lack of regard for the arena in which they were entrusted to perform has created its own monsters. But we are enthusiastic about those of us who remain and the ability of the regulator to deal with miscreants.”
Debt review is not a one-size-fits-all solution, and the more options there are available to a debt-stressed consumer, the better, Davis says.
“We welcome VDMS provided it doesn’t exclude the lawful rights of any party, and results in a faster, fairer and more humane way of dealing with over-indebtedness. Fairness is key, lawfulness is paramount,” she says.
Creditors on debt counselling
While the statutory debt review process has worked in some instances, it is “a flawed process both legally and procedurally”, Magauta Mphahlele, chief executive officer of the National Debt Mediation Association, says. “Even if debt counsellors and credit providers were implementing it with the best of intentions, it would still be a problematic process.”
Mphahlele says the problems with the debt review process are:
* A proposal to restructure your debt must go to a magistrate’s court or the National Consumer Tribunal, whether or not all of your credit providers consent to the proposal.
* The National Credit Act (NCA) does not specify how credit agreements should be restructured by a debt counsellor, so proposals that are unreasonable or do not make economic sense are often presented to credit providers, who then oppose them.
* Debt review has to follow formal court procedures, which makes it inevitable that the legal representatives of both credit providers and debt counsellors will raise technical issues, and this frustrates the process. Debt review is therefore by design a litigious process, which is why there is a need for a standardised, consensual process – such as the voluntary debt mediation service (VDMS) – before matters enter the statutory process.
* Under the NCA, a credit provider must issue a section 129 notice before it can take legal action against a consumer. Once this notice has been issued for a particular credit agreement, that agreement can be excluded from any debt review process that a consumer subsequently enters. This reduces the chance that a consumer will be rehabilitated, because his or her debt cannot be holistically restructured, Mphahlele says. Furthermore, the notification allows a credit provider to opt out of a debt review process at a later stage if, in the provider’s view, it will delay obtaining a debt judgment, or result in a less favourable recommendation in terms of debt recovery.
* Besides the opt-outs that result from a section 129 notice, debt review faces other challenges that prevent it from being more effective. These include:
- Ambiguity in the definition of over-indebtedness, leading to a failure to identify and exclude non-solvable cases;
- The debt counselling fee model, where the consumer pays for the service;
- Difficulty in complying with the prescribed timelines;
- The lack of standardisation in the process; and
- The lack of capacity and capability among the judiciary in administering debt review cases.
In addition, there is an absence of alignment among credit providers as to how to resolve some of the problems identified in the debt review process. The lack of knowledge, efficient communication and standardised processes to prevent circular negotiations have also frustrated the process, Mphahlele says.
Too few over-indebted consumers are in counselling
Almost nine million consumers have impaired credit records, but only about two percent of them are in debt counselling. Although not all nine million are over-indebted, the fact that so few are in debt counselling indicates that consumers need to be “pushed” out of their apathy, Magauta Mphahlele, chief executive officer of the National Debt Mediation Association (NDMA), says.
Paul Slot, president of the Debt Counsellors Association of South Africa (DCASA), says that since debt counselling was introduced to South Africa in 2007, about 300 000 consumers have applied for the service, and 120 000 to 150 000 consumers are in debt counselling.
The average over-indebted consumer has nine or 10 credit agreements and only R2 250 to disburse on their debt each month.
Slot says up to 6 000 consumers apply for debt counselling every month. But not all of them are eligible and, of those who are, not all stay the course.
The NDMA says half of those who apply for debt counselling will be rejected, terminated from the process or will withdraw.
But Slot says the percentage of consumers sticking with the process has jumped to between 80 and 90 percent since the introduction of the debt counselling rules system in August last year.
Debt counselling has done much to reduce bad debts and improve collection. Slot says payment distribution agencies pay about R250 million a month to credit providers on behalf of consumers in debt counselling.
Since 2007, they have paid in excess of R3 billion to credit providers. But it is not enough. Mphahlele says there is between R20 billion and R30 billion worth of outstanding debt tied up in debt counselling.