Draft legislation designed to drastically overhaul the lending practices of banks, retailers and microloan providers is self-defeating and riddled with problems, industry stakeholders have told the Department of Trade and Industry (DTI).
The draft Consumer Credit Bill aims to improve access, equity and competition in the R362-billion credit market, while limiting reckless lending and protecting borrowers. It replaces the Usury Act of 1968 and the Credit Agreements Act of 1980.
Although industry representatives are unanimous that change was urgently needed in an environment characterised by poor price transparency and frequent abuses, many are now arguing that the Bill will restrict access to affordable credit, rather than expanding it.
The deadline for public comment on the legislation expired on Tuesday, and the Banking Council of South Africa said it did not want to comment on its submission until the DTI had released it. But an industry source familiar with contents of the submission said it raised extremely far-reaching and substantive concerns.
High compliance costs — which the financial services sector has routinely complained of when its regulatory burden is increased — appear to be the industry’s most prominent worry. The source added that credit scoring — the technique used by banks and hire-purchase providers to model a customer’s risk profile based on past payment behaviour and income data — would be restricted, eliminating a crucial technique for measuring and pricing exposure.
The DTI’s Lyn Layman confirmed that provisions outlawing discrimination would make credit scoring illegal, and it was not expected that these would change. “We are simply giving effect to the Constitution,” she said, pointing out that the practice is outlawed in some other countries.
Opponents of the Bill counter that freedom of economic activity is also enshrined in the Constitution, and that the cost of managing risk will simply have to be spread over the rest of the market if it cannot be more precisely pinpointed. “You can’t apply the same principles to mortgages and microloans,” the source said.
The banking council is also worried about systemic risk arising from the appointment of a new regulator, who will take over certain responsibilities from the registrar of banks.
There are also concerns about the way different loans are construed and managed, and problems with how a proposed national loan register will function. One clause requiring retailers to credit defaulting customers for the “unused portion” of returned goods is the subject of amusement. “Is Woolies going to credit you when you return half a pie?” a senior executive with a major retail group asked. Layman says the language of this particular clause has now been clarified to prevent arguments at the bakery counter.
Ian Wood, a financial services executive at retail group Edcon, says retailers are meeting with both the DTI, Business Unity South Africa and Nedlac to resolve areas of concern.
Wood says that language designed to prevent “momentum selling” — the practice of offering credit to a consumer and interpreting their failure to respond as acceptance — will make it difficult to flexibly manage the credit limits on store accounts. He argues that provisions that mandate employers to deduct account payments from salaries are likely to prove unworkable.
The legislation is expected to be debated in Parliament during the first quarter of next year.