Glaring gaps in the proposed debt intervention Bill
South African Institute of Professional Accountants
27 February 2018
Author: Faith Ngwenya, Technical Executive at the South African Institute of Professional Accountants (SAIPA)
For a long time, South Africans have been warned about the out-of-control debt of our citizens. A lot of this responsibility has fairly been pushed back to credit providers, who in the past have allowed consumers to use up to 70% and 80% of their monthly income to repay debt. This practice is reckless and immoral, which is why the National Credit Act has been established.
Last year, a draft bill giving the National Consumer Tribunal the power to extinguish debt in certain circumstances was published for public comment by Parliament’s Trade and Industry committee, which formulated it. The South African Institute of Professional Accountants was one of many entities that made submissions on the draft National Credit Amendment Bill.
The current debt intervention Bill that is being proposed sets out a process that both credit providers and credit bureaus must follow when they are lending money, but SAIPA’s submission highlighted certain parts of the proposal that require further thinking and discussion.
Some people are wondering if the intervention is even needed at all?
Treasury is supporting the proposal of the permanent extinguishing of the unsecured debt of overindebted people by saying that it should be a once-off intervention. The group of people who would be eligible for this are individuals with gross monthly income of not more than R7,500, who have no readily realizable assets (excluding exempted items), are not subject to debt review and have unsecured debt that is less than R50,000.
In other words, a debt intervention applicant may apply once to the National Credit Regulator in the prescribed manner and form for a debt intervention, if that debt intervention applicant has at 24 November 2017, a total unsecured debt owing to credit providers of no more than R50,000.
During the parliamentary hearings, certain stakeholders argued that the debt intervention bill wouldn’t even be necessary, as this targeted group of people could well be candidates eligible for poor man’s sequestration. So instead of extinguishing debt, it is also crucial to consider the impact of rather putting the responsibility on overindebted individuals to be sequestrated.
Risks related to unsecured debt will rise
The debt intervention that is proposed targets relief from unsecured debt, specifically lower value loans to lower-income consumers. This has a potential of increasing the risk associated with this unsecured debt because the debt intervention process is focused exclusively on the circumstances of the debtor. If credit providers are denied input into the process, then the inevitable imbalance of risk and return will lead people who have historically been unable to access credit to continue to be unable to access credit. Instead of developing a credit market that is accessible to all South Africans, certain consumers will remain excluded.
Problematic consequences of the proposed bill: a stagnating industry
According to the current proposal, credit providers will be tasked with reviewing all the credit agreements of the consumer from other credit providers. This would require the consumer to request these documents from all their current providers.
This process alone may stagnate the industry as it will be very time consuming, for both borrowers and lenders. Once the consumer is in possession of these agreements, the prospective credit provider would then need to review each agreement and determine whether they were granted recklessly at the time when the credit was granted.
Consider how long this process would take. This additional obligation will burden the credit industry with an array of unforeseen consequences. One unexpected ripple effect could be that competing credit providers could use this opportunity to report their competitors’ agreements to the NCR and competing credit providers could prevent other credit providers from efficiently granting credit. In addition, there could be unwarranted impairment of reputation by allegations that are, in fact, false. As a business in the credit industry, SAIPA views these scenarios as very problematic consequences of the Bill.
While some credit providers see the bill as negatively impacting the industry, it has the potential to bring the needed relief to financially stressed individuals that have no source of income. SAIPA supports the debt intervention proposed in the Bill, but wants to highlight these crucial aspects so that a fair and just Bill is passed.