SOUTH AFRICA: CREDIT ACT PROTECTS CONSUMERS

UNCLAS SECTION 01 OF 03 PRETORIA 002831 SIPDIS SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EFIN EINV PGOV SF SUBJECT: SOUTH AFRICA: CREDIT ACT PROTECTS CONSUMERS PRETORIA 00002831 001.2 OF 003 (U) This cable is Sensitive But Unclassified. Not for Internet Distribution. ¶1. (SBU) Summary. South Africa's National Credit Act came into effect on June 1, replacing weak and outdated legislation. This Act seeks to protect primarily poor South Africans, who have endured exorbitant interest rates, lender exploitation, and rising personal debt. The previously-named Micro Finance Regulatory Council (MFRC) now serves as the National Credit Regulator (NCR) and is charged with creating a national register of all loans and overseeing all credit issued. The Act improves lending transparency, prohibits unfair contracts, bans anti-competitive practices, and provides means to assist over-indebted consumers. Significantly, the Act stipulates limits on interest rates and fees lenders can charge. The lending industry and opposition parties have grumbled a bit about the Act's increased bureaucracy and costs, but most also applaud the protection of consumers. The upcoming year will reveal if the NCR can implement the Act effectively and if the Act produces the desired effects. End Summary. Legislation Long Overdue -------------- ¶2. (U) After years of review and debate, Parliament passed the National Credit Bill on December 13, 2005. President Mbeki promulgated the National Credit Act in March and it became effective June 1. The Act's purview covers all loans, credit cards, leases, and retail credit, but does not extend to "stokvels" and other community savings groups. The Act established the National Credit Regulator (NCR),which is charged with creating a national register of all loans and overseeing all credit issued. The former Micro Finance Regulatory Council (MFRC) is transforming to fulfill its new role as the NCR. Prior to June 1, the MFRC regulated South Africa's micro lending R18 billion ($2.6 billion) market (i.e., loans of less than R10,000 or $1,400) that served about three million clients. Its role increased substantially as the NCR, as the former MFRC now has to regulate a R500 billion ($71 billion) credit market with 20 million customers. The MFRC has been preparing for this transition for some time, hiring new staff, and will phase in compliance through June 2007, when all sections of the Act come into full effect. ¶3. (U) South Africa has long recognized the need for revision of its consumer credit legislation. The historical legislation, including the Usury Act of 1968, Credit Agreements Act of 1980, and Exemption Notices of 1992 and 1999, was weak and could not keep up with an ever changing South Africa. As a result, primarily poor South Africans have suffered in the wake of exorbitant interest rates, lender exploitation of consumers, rising levels of over-indebtedness, and lack of access to proper credit. Therefore, in 2002, the Department of Trade and Industry (DTI) called for a review of consumer credit legislation. The review team undertook the monumental task of developing new legislation based on an analysis of consumer views and behavior as well as credit industry practices. Lenders Beware -------------- ¶4. (U) The National Credit Act seeks to whip reckless lenders into shape while protecting consumers from credit woes. The Act improves transparency, prohibits unfair contracts, bans anti-competitive practices, and offers means to assist over-indebted consumers. The Act empowers the NCR and the National Credit Tribunal to enforce all of these stipulations. The Tribunal can impose administrative fines up to R1 million ($143,000) or 10% of a lender's annual revenue, but not criminal sanctions. One goal of this Act was to move away from "apartheid-era" segregation and create comprehensive legislation for all types of lenders. Microlenders were not the only ones to abuse its customers, as the banks were accused of charging high fees and "blacklisting" customers while accounting for over 80% of lending. ¶5. (U) One of the Act's main feats was to cap microlending interest rates. Under the old Usury Act, a 20% interest rate was the cap for normal bank loans less than R10,000 ($1,400), but was 17% for larger loans. However, most microlenders operated under the Usury Act Exemption Notice, which meant they could charge any rate they chose. Many microlenders PRETORIA 00002831 002.2 OF 003 charged over 100% interest per annum or even 25% to 30% interest per month. The new Act capped rates and fees for all types of credit, ranging from 21.5% to 48% at the current repo (repurchase) rate of 7.5%: Credit Type Interest Limit Initial Fee -------------- -------------- -------------- Mortgages (Repo x 2.2) 5% R1,000-R5,000 Credit Facilities (Repo x 2.2) 10% R150-R500 Unsecured Credit (Repo x 2.2) 20% R150-R500 New Business (Repo x 2.2) 20% R250-R2,500 Low-Income Home (Repo x 2.2) 20% R500-R2,500 Other Credit (Repo x 2.2) 10% R150-R500 Short Term Loan 48%/yr or 4%/mo R150-R350 Note: The initial fee may never exceed 15% of loan amount. The maximum monthly service fee is R50 ($7). ¶6. (U) The Act tasked the NCR to conduct inspections, monitor compliance, and investigate problems with a number of additional regulations designed to protect consumers. Additional highlights from the Act include: -- Lenders must report new lending within 30 days and file annual reports. -- Any contracts should use plain language and disclose all fees up front. -- Quotations from a lender must be valid for five business days and lenders must allow for "cooling off" periods before certain contracts can be signed. -- Lenders' advertising must disclose all offer details in the same size font or larger and cannot be misleading. -- If a lender lends money to an over-indebted consumer, the National Credit Tribunal could fine the lender for not running proper credit checks. -- The NCR will monitor credit bureaus to ensure they are using consumer information appropriately. Consumers can request a credit report for free once a year, and will not have to pay more than R20 ($3) to check it again. -- When a consumer has run into trouble, a qualified debt counselor will be assigned to help them pay of their debts. The Act also speeds up the process for consumers to regain a good credit standing. Unfortunate Consequences -------------- ¶7. (SBU) Parliament's Trade and Industry Committee admitted that this "bill will not please everybody but reform is necessary." Democratic Alliance opposition party members complained of the increased costs and excessive bureaucracy contained within the Act. The Banking Association is pleased that consumers will be protected, but noted that the Act's demands will have a major impact on lending. Lender institutions will endure one time costs, ongoing costs, and time consuming procedures in order to comply with Act. It will be most difficult for microlenders to adapt to the Act, as they have limited staff and tight budgets. For example, USAID partner Kuyasa Fund, a home loan microlender in Cape Town, worried about having the human resources to report to the NCR on its lending every 30 days. Additionally, Kuyasa Fund will have to look for alternative sources of financing, as the Act forbids its historical practice of taking cash deposits up front. Comment -------------- ¶8. (SBU) The National Credit Act is one of the many pieces of legislation the South Africa Government (SAG) is applying to protect its citizens from powerful or predatory businesses. National Treasury is working on drafts of the Dedicated Banks Bill and the Co-operative Banks Bill, which both seek to create more competition and offer reliable lower-cost banking options. In March, the DTI also released the Consumer Protection Bill for comment that should provide consumers protection against faulty products and unfulfilled service obligations. The SAG's real challenge is to balance the need to protect consumers and promote competition with providing the poor access to affordable products and services. For this reason, the SAG has taken years to draft the aforementioned pieces of legislation. In due time, we will see if the SAG has gotten the balance right with the National Credit Act and if the MFRC/NCR is up to the implementation challenge. PRETORIA 00002831 003.2 OF 003 ¶9. (U) Complete text of the National Credit Act can be found online at http://www.dti.gov.za/ccrdlawreview/nationalc reditact2006.htm TEITELBAUM