The government this week set the wheels in motion to amend the National Credit Act (NCA) to allow for the criminal prosecution of the directors of credit-provider companies that contravene the Act. The aim is to put an end to reckless lending. The amendments are designed to provide for “simpler and more rigorous enforcement of the Act”, according to a statement issued by the Portfolio Committee on Trade and Industry this week.

Adrian Williams, the chairperson of the committee’s sub-committee on debt relief, said the changes will “further limit the widespread abuse of consumers by unscrupulous lenders”.

The announcement follows public hearings on debt relief convened by the sub-committee, and engagement with various stakeholders about the extent of over-indebtedness and its socio-economic impact, in search of measures that could provide relief to consumers.

During the hearings, the committee heard that, at the end of June, about 24million consumers were credit active: 14.41million of them were in good standing with their creditors, while 9.67million (or 40percent of credit-active consumers) had impaired credit records. An “impaired record” refers to an account that is in arrears by three months or more, as reflected on the consumer’s credit report. It is usually an indication that the consumer is in financial trouble, if not over-indebted.

The changes to the Act will also seek to provide “an effective debt-counselling framework for low-income workers” and debt relief for specific categories of debtors to promote a change in the borrowing and spending habits of an over-indebted society, the statement said.

‘Failed’ system

Statutory debt counselling, as provided for by the NCA, has “failed” and over-indebted consumers lack options, Clark Gardner, the chief executive of Summit Financial Partners, said in his submission to the sub-committee.

According to the latest available statistics, which Gardner said the National Credit Regulator (NCR) would neither confirm nor correct:

Only 700000 consumers have applied for debt counselling;

About 255000 consumers are in debt counselling (indicating a high drop-out rate); and

Since 2007, less than 15000 consumers who underwent debt counselling have been issued with “clearance certificates”, which are issued once a consumer is no longer over-indebted.

Summit is of the view that debt counselling doesn’t work because:

Over-indebted consumers find it difficult to afford the debt counselling and legal fees;

There is a perverse incentive for debt counsellors to overlook reckless lending, because a debt counsellor’s fee is a percentage of the total amount the consumer pays his or her creditors each month; and

The fact that all creditors in debt counselling get treated the same, when the last lenders should be the ones paying the penalty [for pushing the consumer into a state of over-indebtedness].

In his submission to Parliament, Gardner said that over-indebtedness occurs either when a consumer’s circumstances change for the worse (for example, he or she is retrenched) or when there is reckless lending.

“If there has been no change in the consumer’s circumstances challenge the reckless loan or loans, and the consumer will be able to afford all his or her remaining credit obligations”.

If seven million of the 10million consumers with impaired credit reports are over-indebted because they were granted credit they could not afford, then seven million consumers could easily challenge credit providers for reckless lending and access the remedies available in the Act, he said. “If credit providers are held accountable for reckless lending, less of it will occur and the cost of credit will come down.”

Gardner pulled no punches in his assessment of the NCR, stating that it was defending its “own poor behaviour by blaming [deficiencies in] the Act”.

“How is it possible that a new loan agreement provided by Capitec via an ATM, or by Capfin over the phone, does not breach the terms defining reckless lending? These are two of the biggest players in the industry, and the regulator has failed to protect consumers from these practices.”

This week, Gardner said he welcomed any amendments to the Act that will ensure that unsecured credit was made available “in a more responsible manner and that consumers are provided with redress and rehabilitation in a simple, cost-effective and accessible form”.

With finance charges of 200percent or more a year, as in the case of payday loans, the use of such credit must be limited and borrowers must be protected from themselves, in the same way that drug users are protected from dealers, Gardner said.

“It must also be emphasised that the law will be as good as it can be enforced. It therefore requires consumers to be empowered to enforce the law in court, to ensure they have access to justice. As soon as the law requires clarity in the High Court in order to enforce it, we remove access to justice for the person in the street.”

Gardner said he would like the government to use all of its powers to protect consumers. He said the Public Investment Corporation, the investment management company that is wholly owned by the government and that owns a substantial stake in various credit providers, should put pressure on the directors of companies such as Capitec and Lewis to ensure that their business practices do not harm consumers who are financially illiterate and desperate.