We are grateful to the Portfolio Committee for the opportunity to address it on this extremely important and far-reaching Bill. We would also like to express our appreciation to the Department of Trade and Industry for the very transparent way in which they have dealt with drafting the Bill. We have had sight of numerous drafts, have had the opportunity to comment on them, and have met with departmental officials. As a consequence, many of the concerns that we had originally, have been addressed.

As always, our purpose is to try to assist Government by giving constructive comment. We have divided our comments into four sections.

• Those on which we would like to address the Portfolio Committee;
• Schedule 1 - Those that will have an operational impact, and of which we would like the Portfolio Committee to take note, but which we will not actually address at the meeting of the Portfolio Committee;
• Schedule 2 - Those that can be resolved by making small drafting changes, and which we do not think are contentious;
• Schedule 3 - Those that are more of an administrative nature.

2. Application of the Act (Sections 4 and 83)

2.1 Limitation on the value of credit agreements that are governed by the Act

There is no limitation on the value of a credit agreement that will be governed by the provisions of the Act. It is clearly acknowledged in the Bill that there are some borrowers who are expected to look after themselves, and it would be very dangerous to extend to them the benefits of provisions designed to protect small and mostly commercially naive borrowers.

We therefore urge that the act should not apply to any credit agreement where the principal debt exceeds R2 million.

2.2 Limitation on declaring that a credit agreement is reckless

Section 83(1) is one of the most far-reaching provisions in the Bill. It is very easy to make a judgement that a loan was made recklessly when you are doing so with the benefit of hindsight.

But it would be iniquitous if, twenty years after a mortgage loan was granted, the consumer claimed that it was granted recklessly.

We submit that the normal principles of prescription should apply, and the courts should only enjoy their power to make a declaration of recklessness in respect of an action before them which was commenced within three years of date of the credit agreement.

3. Price Control and Usury (Section 100)

3.1 The Banking Association believes that it is perfectly legitimate for a government to adopt the policy stance that there is a level of pricing of credit beyond which credit should not be extended. It means that the risk and costs are so high that the lender can only do it at a "usurious" level, and the borrower should be protected from himself, and access to credit denied.

That is very different from "price control", which is seeking to influence the price at which credit is extended to all borrowers. Worldwide experience is that price control does not control the price of the credit; it only results in reduced access. It is why the exemption for loans in the sub-ten-thousand rand category was granted in the first place.

It also results in reduced competition, both because it becomes a barrier to entry and because the lending rates tend to migrate to the control price (converge with the ceiling), overcharging individual borrowers whose costs are below the ceiling and denying credit to individual borrowers whose costs are above the ceiling.

What is a "usurious" rate is a straightforward policy decision, which must be made by Government.

3.2 DTI is clearly of the view that it is necessary to limit the "total cost of credit" ("TCOC") by putting caps on the interest rate, the initiation fee, and the service fee, and to set the interest rate cap at a level that could be socially acceptable as a URI, whilst accommodating the fees on the basis of cost recovery.

3.3 After lengthy and careful consideration we have come to the conclusions that -

3.3.1 The DTI approach is fundamentally sound;

3.3.2 A flat monthly administration fee on all loans is appropriate. It would, however, be essential to link any rand based fee to the CPIX to avoid inflationary erosion over time. The administration fee cap should be expressed as a daily rand number, because many short term loans are made for periods of less than a month and fee caps should not drive supply into such shorter terms by allowing higher annualised yields.

3.3.3 A single flat URI is appropriate for all loan terms, except where the loan is secured by a mortgage bond. It is very difficult to argue that the URI for a short-term loan should be higher than the URI for a medium or long-term loan (as bad debt risk increases with term, requiring higher lending margins for risk while the relative costs associated with initiation decline). Clearly the URI is related to prevailing (funding) interest rate levels, and risk is also directly linked to the rate of Interest being charged. For that reason, the URI should be at least partly determined as a multiplier of the prime lending rate. This would avoid lags in adjusting the celling to changed funding costs and risk levels in the market.

However where the loan is secured by a mortgage bond, it would, we think, be legitimate to impose a lower URI because the credit provider has Security for the repayment of the loan, and it would be usurious to charge the same rate of interest that is charged without security. But then a higher initiation fee would have to be allowed to cover the costs of establishing the security.

3.3.4 For small loans and short-term loans, the URI will need to be sufficiently high to facilitate the time value and recovery of initiation fees, within the overall URI limit. Moreover, there was a considerable problem under the old Usury Act in that there was a ceiling on the interest rate and a limit on what other costs could be recovered (precisely as contemplated in the Bill). The consequence was that, even though the credit provider was charging interest at a much lower rate of interest than was permitted at the time, and even though the amount overcharged in terms of the other provisions was trivial, the credit provider was technically in breach of Act, and guilty of a criminal offence.

To overcome this difficulty, and to avoid technical contraventions where there is no breach of the substance or intent of the Bill, we would like to suggest that section 100(1) be introduced by the words

"Subject to the provisions of sub-section (3)"

and that a new section 100(3) be included to the effect that "

If" any amount is charged to a consumer, and there is no provision in the Act permitting that charge, the charge will be treated as additional interest charged in terms of section 101(1)(d) provided that the total interest charged is not in breach of the provisions of that sub-section".

3.3.5 If the URI is a flat rate that applies to all loans, an initiation fee (determined as an amount per rand per day to ensure constant returns even if the loan repayment term is a fraction of a month) would have to be permitted for "short term" loans and for loans which are secured by a mortgage bond (and are therefore subject to a lower URI, but where the valuation costs and costs of securing the mortgage must be recoverable).

A flat URI does not reflect the underlying dynamics of cost and risk. Bad debt risk on very short term loans represents a tiny portion (less than 1%) of the overall lending rate required, and the recovery costs represent approximately 90% of the yield. As term extends, recovery costs constitute a rapidly declining portion of the lending rate (as amortization benefit kicks in) but bad debt margin becomes a much more significant component of the overall yield required, up to a point. The relative bad debt margin required then starts to decline as the cumulative portfolio effect of the risk margin (given delayed/ staggered delinquency in any portfolio as not all loans go bad and those that do, do so over a period of time) kicks in. With a flat URI ceiling and service fee, the initiation fee becomes the balancing number reflecting (in relative magnitude) these underlying cost and risk dynamics.

3.4 With the exception of the costs of securing a mortgage, it is again very important that the initiation and service fee are calculated per day, and not per month. If you calculate it per month (as the shortest period that you are willing to consider) the amount per month (which would then also be the amount that you could recover for a 1 day loan) could yield a ridiculously high TCOC and would, in fact, probably encourage such lending terms at the expense of borrowers. All the costs of securing a mortgage should be capitalised into the loan, and recovered as part of the principal debt.

4. Changes to interest, credit fees or charges (Section 104)

Section 104(3) requires the credit provider to give a written notice to the consumer no later than the day on which a change in the variable interest rate takes effect.

It is not always practical to give written notice to the consumer on the day on which a change in variable interest rate takes effect, and in any event the provision of that notice is very costly, and that cost is eventually borne by the public in some form or another. Frequently the South African Reserve Bank announces changes in the bank rate late in the afternoon, and since prime rate is directly linked to the bank rate, the banks and many other lenders do not have any say in the change of many of their lending rates (which are linked to prime).

It has been suggested that the period for giving notice should be extended a few days. The problem is not only the period within which the notice has to be given, but the fact that the notice has to be given in addition to the normal communication with the consumer. In terms of the existing legislation, notice has to be given within three months, and that enables the banks to give the notice byway of a special notice accompanying the normal monthly or quarterly bank statement.

We estimate that there are more than 20 million variable rate contracts in the banking industry alone. Giving additional notice to all those consumers is likely to cost in excess of R400 million, let alone jam the whole postal system.

We submit that the cost of giving the notice is not justified by the very limited benefit to the consumer of knowing that the interest rate has changed (which the consumer would probably know from the media anyway). If the period were set at three months, the consumer could, at no extra cost, be advised of the change in interest rate and instalment with the next statement.

At the very least, we would like to suggest that the rule should only apply when the interest rate has gone up, and that it should not apply when the interest rate has gone down (and it is only to the advantage of the consumer).

5. Credit Insurance (Section 106)

5.1. Limitation of insurance to the customer’s outstanding obligations (sub-section 106(1))

5.1.1 The consequence of this provision is that the credit provider will, in terms of the standard policies used by insurers, almost invariably be exposed to the application of the principle of "average". In terms of that principle, the insurer calculates the ratio of the sum actually insured to the replacement cost, and applies that ratio to the amount of the damage suffered to determine how much will be paid out in terms of the policy. So, for example, if movable or immovable property with a replacement value of R400.000 is only insured by the credit provider for the R100,000 still outstanding (because the consumer has not taken out insurance) and the property is 75% destroyed, the insurer will only pay out 25% (i.e. R100,000 divided by R400.000) of the R300.000 damage, i.e. R75.000, leaving the credit provider in a most unsatisfactory and unsecured position on the balance outstanding.

As long as the credit provider is relying on the asset as security, it should be entitled to insist either on its own insurance up to the full replacement value in terms of section 106(1), or on the consumer taking out his own insurance up to the full replacement value in terms of section 106(4)

5.1.2 Section 106(1) read with section 106(6) also implies the need for two short-term insurance policies as well as two credit life policies, one to cover the balance outstanding under the credit agreement, and the other to cover either the replacement value of the asset less the outstanding balance (in the case of short-term cover) or the original amount borrowed less the outstanding balance (in the case of credit life).

In the light of the experience of the industry over many years, it would not be in the consumer's interests to be left to his own devices to insure the full difference between the outstanding debt and the replacement value of something as valuable as a house or motor vehicle. And yet if the Bill is passed in its current form, the credit provider has no responsibility at all for making sure that the asset is fully insured. It is also very cumbersome, expensive and probably impossible to take out two separate insurance policies on the same asset. Two separate insurance policies could cause confusion as to which insurer covers what portion of risk and which insurer must pay in the event of a claim.

We think that, in trying to ensure that credit providers do not abuse the insurance provisions by taking out excess or costly insurance (presumably to prop up their return in a form other than interest), the legislature will be exposing the consumer to a much greater danger, namely that the asset is not properly insured.

So, even if the proposition in paragraph 11.1.1 is rejected, we propose that the consumer may be offered a single policy in terms of section 106(6) that would cover the consumer and the credit provider for their respective interests up to the full replacement cost in the case of a short-term insurance policy.

The protection of the consumer lies in the fact that the consumer can insist on taking out insurance with his own selected insurer, and the credit provider is most unlikely to insist on excess insurance in terms of section 106(4) if the consequence is that the consumer is paying excess insurance premiums to another financial services group, and thereby undermining his ability to pay the instalments on the credit extended.

5.2 Assets which are not pledged, but are sold on instalment etc. (sub-section 106(1Vb)) Only property, which is "pledged", may be insured in terms of the section. Assets, which are sold under instalment sale or a leasing transaction, are not "pledged" in this sense, as the financier remains the owner. But it is obviously imperative that those assets are insured.

We therefore suggest that the following words be inserted at the end of the sub-section "or any property that is subject to an instalment sale or lease agreement."

5.3 What are "unreasonable insurance cover" and "unreasonable cost"

Section 106(1) states:

"A credit provider may require a consumer to maintain sufficient

1. credit life insurance; or

(b) insurance cover against any damage to or loss of any property that is pledged as security for their credit agreement,

to cover the consumer's outstanding obligations to the credit provider at any time during the term of their credit agreement"

Section 106(3) states:

"Despite subsection (1), a credit provider must not offer or demand that the consumer purchase or maintain insurance that is –

(a) unreasonable; or (b) at a cost to the consumer that is unreasonable, having regard to the actual risk and liabilities involved in the credit agreement."

This section will create serious uncertainty for credit providers since there is no benchmark in the credit industry or the insurance industry as to when insurance cover and costs, and profits will be reasonable or unreasonable.

Case law will only determine this in the course of time, and by then the exposure on all the policies issued in the interim will be very considerable.

The insurance cover offered by a particular insurance company will depend on a number of factors, some of which are subjective. The concept of "actual risk" is not an exact science but depends on the actuarial assumptions made by the actuary in respect of the risk profile of the market that a particular credit provider is operating in. The provisions of the Long-Term and Short-Term Insurance Act govern that actuarial determination, and the pricing takes into account the sensitivities of that evaluation, and the actual cover afforded by the policy.

We therefore propose that section 106(3)(b) should be deleted as it would cause untenable risk and uncertainty in the market.

5.4 Section 106(4)(c)(i) has the implication that, where a credit facility is fully settled at the end of a preceding month, no insurance can be charged for the following month, although the consumer may again draw down the full facility amount, leaving an uninsured exposure for both the credit provider and consumer.

Furthermore, in the case of credit facilities such as overdrafts and credit cards, the consumer's exposure tends to be higher in the middle of the month. The required monthly payment is normally made at the month-end, and so the outstanding balance is lower at that time. Consequently, determining the amount of the insurance cover at the beginning of the month is likely to result in the cover being inadequate. We therefore propose that the words "settlement value" be deleted and replaced with the words "credit limit" in 106(4)(c)(i).

5.5 Financial Advisory and Intermediary Services Act 37 of 2002 (FAIS) Section 106(6)(b) requires the credit provider to give the consumer a written proposal in the prescribed manner and form, setting out certain information about the cover proposed. FAIS also prescribes the content of such proposals. The provisions of the Bill should therefore be reconciled with the provisions of FAIS.

5.6 Annual insurance premiums (sub-section 106(7)) The Bill does not allow for insurance premiums to be collected annually. Monthly premiums are very expensive, as has been pointed out by the South African Insurance Association in their submission, and we submit that the proposed provision is certainly not in the interests of consumers.

We therefore recommend that sub-section 106(7) be amended to cater for the payment of annual premiums.

6. Cancellation fees on fixed rate business (Section 125)

6.1 There is no allowance in the draft bill for a fee to be charged should a customer exit a fixed rate arrangement before its expiry date. Fixed rates are often used to protect customers, who have limited discretionary income, from sudden rises in interest rates. Fixed rates are a feature of the Sizwe housing initiative for this very reason. Generally it is believed that a market in fixed rate products, especially for housing, can be developed, provided Banks are not exposed to undue interest rate risk.

6.2 It should be expected that customers will naturally exit deals, and this natural attrition can be predicted and priced for in the interest rate.

6.3 However, if interest rates fall dramatically, customers will exit their fixed rate arrangements prior to expiry en-masse, since better rates will be available in the market. Interest rate movements are not predictable over the long term and as such the costs associated with customers exiting fixed deals en-masse cannot be predicted and priced.

6.4 The inability to pass the cost of exiting a fixed rate arrangement to customers will prohibit the offering of long-term fixed rate products because it exposes banks substantially to interest rate risk.

6.5 Alternatively, fixed arrangement will have to be hedged (at cost) and will make long-term fixed rate arrangements relatively expensive.

6.6 We suggest that cancellation fees should be allowed in fixed rate contracts. This fee and its basis for calculation should be disclosed upfront. The current draft allows for 3 months interest to be chargeable (if no notice is given) on large transactions but this would be inadequate to cover most fixed rate scenarios

7. We also suggest that customers exiting their fixed rate contract when it has value (when market rates have increased) should also benefit from the transaction, with proceeds passed to them.
8. Example: Consider a R100,000 loan, fixed at 10% for 5 years. Scenario 1 shows the cost of exiting the fixed option should market rates fall by 2 % after year 1. Scenario 2 shows the value of exiting the fixed option should market rates increase by 2 % after year 1.

Table 1. Example of the cost/ value of breaking a fixed rate contract

Cas Coovadia: Managing Director

Schedule 1

Important Issues on which we will not address the Portfolio Committee

7. Payment processing provisions (Section 90(2)(m))

Our understanding is that Section 90(2)(m) is intended to prohibit a provision in a credit agreement that would purport to direct or authorise an employer to give priority to payments in favour of the credit provider over payments to any other person. That turns on whether "any person engaged in processing payments" includes an employer. We understand that the South African Reserve Bank believes that it does, and that it should.

That would put all credit providers at a severe disadvantage relative to all other creditors, such as insurers, since the credit providers would be prohibited from being prioritised at employer level, where the insurers would not. It is imperative that the uncertainty is cleared up.

8. Set-off (Section 90(2)(n))

We are in agreement with other stakeholders that the national payment system should be "neutral" in the sense that it does not favour any party in securing payment from the regular income stream of the consumer. We are also in agreement that the banks should also be subject to this neutrality.

However, it seems that section 90(2)(n) read together with section 124 is intended to apply not only to the account to which debits are posted, but to all other amounts which would normally be subject to the common law principle of "set-off". So, if the consumer has defaulted on his mortgage loan of R500.000, and there is a matured fixed deposit of R50.000 in the name of the same consumer, the bank will be obliged to repay the R50.000 and do what it can to recover the R500.000. That invasion of a fundamental principle of our law is entirely unnecessary to establish neutrality in the payment system.

We say "seems .... to be intended" because the prohibition is against having a provision to that effect in a credit agreement. But set-off does not operate by virtue of contract, but in terms of our common law.

Set-off is a recognised principle of our common law that when two parties are mutually indebted to each other, both debts being liquidated and due, set-off of the amount owing against the amount owed will occur. If all the requirements of set-off are met, and the same client maintains both credit and debit balances with one bank, albeit in two different accounts, set-off will occur.

The overwhelming weight of authority supports the view that set-off is automatic, and only has to be pleaded and proved to inform the court that it has occurred.' Once claimed, it operates retrospectively with effect from the time the compensating debts came into existence. Furthermore, set-off does not require agreement between the parties in order to be effective.

So, it seems to us that if a credit provider does not insert a set-off provision in the credit agreement, that does not mean that set-off would not occur in terms of our law.

However, to assist the Portfolio Committee to address the concern about "neutrality" of the payment system, we suggest that the provision should only relate to the account to which the debit orders are posted, and not to any other accounts. Accordingly the following words should be inserted after the words "third party" in the second last line of section 90(2)(n)

"in the account referred to in section 124(1)(a)(ii)"

But then it would also be necessary to insert a substantive provision to the effect that

"No amount in an account referred to in section 124(1)(a)(ii)" may be set off against any liability of the consumer to the institution in which the account is held, or to any other person".

9. The "in duplum" rule (Section 103(5))

Section 103(5) is not an accurate reflection of the "in duplum" rule. The in duplum rule only applies to accumulated unpaid arrear interest. It has never included fees, insurance, administration charges, collection costs etc., all of which are included in the proposed provision by the cross-reference to 101(1)(b) to (g). Only section 101(1)(d) should be included.

The inclusion of all the items referred to in section 101(1)(b) to (g) means that all the costs plus the interest on the outstanding balance from the time the consumer goes into default may not exceed the unpaid portion of the principal debt.

It is likely to create the anomaly that consumers refuse to pay the last small portion of any debt, in the knowledge that the legal costs will probably exceed the small outstanding balance, and consequently, in terms of the in duplum rule, the credit provider will not be able to recover all those costs.

10. Early repayment (Section 125(2)(c)) Section 125(2)(c) allows the credit provider to recover additional interest if there is early repayment of a "large agreement". We do not believe there is any rationale for limiting this right to large agreements. The same future income relative to the amount of the loan is lost, and it is quite possible that the origination and administrative costs will not have been recouped.

We therefore request that the section be amended to refer to intermediate agreements as well large agreements.

11.Schedule 2 to the Act The proposed amendments to the National Payment Systems Act in Schedule 2 to the National Credit Bill do not provide for any powers for the Minister to allow for transitional arrangements. The amendment has significant system and business implications for both issuing banks as well as the wide range of users of the payments system, requiring substantial phase-in provisions.

It seems that the earliest that the Authenticated Debit Order Systems (ADOS) and Non- Authenticated Debit Order Systems (NADOS) could be in place in all the banks would be 31 December 2006. If that is the case, it would take the credit providers another six months to convert all new loans to those two systems, and then they would have to allow existing loan contracts to run off over the next two to three years (from June 2007).

We know this seems like an exhaustingly long period, but the changes are very substantial, and the banks cannot offer anything better.

In the interest of legal certainty it is further proposed that the Bill should provide for the NPS Act to prevail in the event of any conflict between the provisions of the Bill and the NPS Act and that section 124(3) should be deleted.

12 Other costs that can be recovered (Section 101)

12.1 Section 101 specifically allows the recovery of

• The principal debt;
• An initiation fee',
• A service fee;
• Interest;
• Premiums paid in respect of credit insurance complying with the provisions of the Bill;
• Default administration charges; and
• Collection costs.

12.2 The default administration charges provided for in section 101(1)(f) stipulate that they may "only be imposed ..... to the extent permitted by Part C of Chapter 6".

Those provisions relate to "debt enforcement by repossession or judgement". There are many circumstances of default that result in additional costs to the credit provider, but which do not result in enforcement by repossession or judgement, e.g. late instalment payments, paying less than the full amount of the instalment due, exceeding the credit limits, and re-scheduling the payments.

It is essential that the credit providers are able to recover those costs as they cannot be predicted and thus factored into the product pricing structure, and we suggest that Part C of Chapter 6 should be broadened to cover other costs and charges related to default or breach by the consumer or rescheduling the debt. These costs certainly cannot fall within the service fee category, which in any event will be set at a low level.

The same comment applies to section 101(1)(g), and we request that a similar amendment be made to accommodate collection costs where there is no "enforcement by repossession or judgement".

12.3 In addition, if the credit facility is attached to a financial services account, any fee that would have been levied "if there were no credit facility attached to the account" may also be recovered, (section 101(3)).

However, a credit card account could have a credit balance, not utilising the credit facility, and still attract fees in the form of an annual card charge. The card can also be used for a range of transactions, such as the withdrawal of cash from an ATM (and in the future, withdrawal of cash at the point of sale). We do not think that the transaction fees for those strictly transactional fees would fall within the ambit of section 101 (3) as it is currently drafted.

We therefore propose that section 101(3) be amended by the addition of the words

"or which is strictly related to a transaction or transaction facility on the account, and not to the extension of credit."

13. Expunging credit records (Section 71(5))

In effect Section 71(5) obliges a credit bureau and the National Credit Register to expunge from their records the fact of a consumer's default, and that the consumer was subject to a debt re- arrangement.

This sub-section is in conflict with the obligation set out in section 81(2)(a), which compels a credit provider, prior to entering into a credit agreement, to take reasonable steps to assess the proposed consumer's "debt re-payment history as a consumer under credit agreements".

We therefore propose that section 71(5) be deleted and that section 71(4) be amended to the effect that upon a consumer filing a clearance certificate, the record of such clearance certificate must be maintained on both the National Credit Register and all credit bureaux for a maximum period of 36 months.

It has been suggested that the problem might be overcome by inserting a new sub-section 71(5)(b) requiring the credit bureau or the National Credit Register to keep a record of the clearance certificate for a prescribed period of time. Unless the clearance certificate contains information relating to the default that precipitated the debt re-arrangement, the conflict with the obligation established in section 81(2) (a) will remain.

Schedule 2

Issues which can be resolved by drafting changes

14. Required Marketing Information (Section 76) and Agents (Section 163)

It is implicit in both sections that every person "soliciting for the purpose of inducing a person to apply for or obtain credit" must be doing so on behalf of a credit provider.

That is not so, because bond originators, car salesmen and other "white goods" salesmen are frequently soliciting for a consumer to employ them as agents to find the "best" credit for the consumer. The credit provider, which wins the contract, might pay the consumer's agent a commission, but that does not make the bond originator or car salesman an agent for the credit provider.

We therefore suggest that

• the use of the word 'solicitation' in section 76 causes confusion and that the words "by or on behalf of a credit provider should be inserted after the word 'solicitation' so as to clarify the meaning; and

• the provisions of section 163 would, if the wording is retained, make it impossible for a credit provider to deal with the consumer's agent (such as a bond originator). The section should not apply if the consumer's agent has solicited and completed the credit agreement. Accordingly the words "or the consumer's agent" should be inserted after the words "credit provider directly" in the second line of section 163(1)(a).

15. Reckless lending provisions (Sections 80 and 83)

In terms of section 80(1) the lender is required to make an assessment of the borrower's borrowing capacity relative to the value of the loan "at the time that the agreement was entered into".

In terms of section 80(3) the "value" of a credit facility is the credit limit at the time the assessment is made. There seems to be no difference between that situation and the situation where a "facility" has been granted in respect of an "access bond", where the consumer can draw down on that facility without any consideration by the credit provider.

But where the consumer does not have "free access" to the unutilised security conferred by the mortgage bond, and may only take a "re-advance" with the approval of the credit provider, we are of the view that it is legitimate to insist that the credit provider must re-assess the borrowing capacity of the consumer at the time of considering the re-advance. If the credit provider fails to do so, it should be governed by the provisions of section 83.

Moreover, if the consumer does not have "free access" to the unutilised security, other credit providers making an assessment in terms of section 81 (2) should not have to take the "potential" for further extensions of credit in terms of that mortgage into consideration. But these provisions should not affect the continuing covering security afforded by the registered mortgage bond. They should only have an impact on whether the lending was reckless in terms of the National Credit Bill.

We therefore propose that a new section 80(3)(d) should be inserted to read as follows –

(d) any access facility in terms of which the consumer may draw down on a loan secured by a mortgage without reference to the credit provider is the limit of that facility at that time.

16. Change of interest rate (Section 104)

16.1 The term "reference rate" is not defined, although it is used a number of times in sections 103 and 104. We suggest that the term should be defined as "a reference rate as contemplated in section 103(4)".

17. Interest (Sections 103(1) and 104)

17.1 Tierinq of interest

In terms of the section the interest rate must be applicable to all parts of the unpaid principal debt. It is sometimes in the interests of the debtor that the higher risk portion of the debt bears interest at a higher rate, thus facilitating a lower rate on the lower risk portions.

Page 12 Section 103(1 ) would prohibit the credit provider from catering for the consumer in this way.

We are not sure what evil the provision is intended to prevent, and without that understanding, have no alternative but to suggest that the sub-section should be amended appropriately.

17.2 Changing the interest rate of a variable rate loan

Notwithstanding the fact that a credit agreement is concluded on the basis that the interest rate is variable, and in terms of section 103(4) that variable rate has to be linked to a reference rate, and is subject to the interest rate cap in terms of section 101(1)(d)(ii), section 104(4) gives the consumer the right to freeze the rate on the existing debt if the credit provider does precisely what it was agreed it could do.

We submit that that is grossly unreasonable. In the case of something like a mortgage loan, which might run for 30 years that would mean that the consumer could effectively have a fixed rate loan at the lowest possible rate for the full 30 years. We therefore propose that section 104(4) should be deleted.

18. Debt enforcement by repossession or judgment (Sections 12910133)

18.1 Notice to the consumer Section 129(1)(b)(i) stipulates that the credit provider may not commence any legal proceedings until it has provided notice to the consumer as contemplated in section 129(1)(a).

In order to conform to that requirement, does that notice have to offer all the alternative dispute resolution bodies mentioned in section 129(1 )(a), or can the credit provider select any one of them in order to comply?

We suggest that the credit provider should be entitled to select the alternative dispute resolution process, and that should be clarified in the Bill.

18.2 Debt Procedure in Magistrates Court

The provisions of Section 130(1 )(a) (right to approach a court after 20 business days if notice has been given in terms of section 129(1) or 60 business days after the date of a debt review application in terms of Section 86(10)) do not assist in regard to the repossession of movable goods such as motor vehicles.

The movables constitute the security on which the credit provider relies, and experience has shown that time is of the essence in getting those movables under control. All too frequently vehicles and other movables have been disposed of across the borders of our country or severe damage has been done to the movables during that period.

We suggest that the 'Debt procedures in the Magistrate Court' provisions in Section 130 should relate to applying for judgement on the debt, but should not relate to an application to court to take an asset into custody.

Furthermore the reference to "business days" in Sections 130(1) and 86(10) is onerous in that it creates further delays and we propose that that reference should be to "calendar days".

18.3 Section 129(3)(a) states:

"Subject to subsection (4) a consumer may –

(a) at any time re-instate a credit agreement that is in default by paying to the credit provider all amounts that are overdue, together with the credit provider's permitted default charges and reasonable costs of enforcing the agreement up to the time of re-instatement; and... "

We are concerned that there is no time limit on the exercise of this right, and this could lead to a great deal of uncertainty. We propose that such payment must be made before the credit provider formally cancels the agreement, and accordingly that the words "before the credit provider has cancelled the agreement" should be inserted after the words "at any time".

Schedule 3

19. Definitions (Section 1)

19.1 The definition of 'credit guarantee' means an agreement that meets all of the criteria set out in section 8(5). Those criteria equate to a suretyship. It is recommended that the term 'credit guarantee' be changed to 'suretyship' as suretyship has a much clearer legal meaning.

19.2 The definition of 'credit union' should be clarified. A "credit union" would not be able to provide services comparable to those offered by a bank unless it is exempted in terms of the Banks Act, 94 of 1990, or unless it acquires registration under legislation such as the intended Co-operatives Banks Bill, which envisages registration of co-operative banks. The danger here is that a legal entity may be recognised by statute, although it is not known whether such entities exist and how they will function in the national payment system.

19.3 "Civil court": The civil court is defined by reference to the Constitution. The reference to the Constitution is inadequate. In the text the terms "court, Magistrate's court, consumer court and High court" are used without proper appreciation of the different monetary jurisdictions of the various courts and sometimes the impression is created that only the Magistrate's Court has jurisdiction (sections 86, 87 and 130 compared to section 83, 85 and 89). Greater consistency is required.

19.4 "Instalment agreement": This term is defined in section 1 but in the text of the Bill, "instalment agreement" is referred to as an "instalment account". Consistency is required.

19.5 The definitions of "instalment agreement" and "lease" are not consistent with these product types as they are currently known. The definition of the new lease agreement is really an instalment sale agreement and the" instalment sale agreement is deficient in that it provides in one instance for ownership to pass immediately (it is not clear if this is on signing the agreement or on delivery). In addition the instalment sale definition does not provide for the levying of interest whilst the lease agreement does. This has a serous impact as a result of restrictive interpretation and may well see the instalment sale type product disappearing from the market.

19.6 The definition of "juristic person" reads as follows:

"juristic person" includes a partnership, association or other body of persons corporate or unincorporated, and a trust if—

(a) there are three or more individual trustees; or

(b) the trustee is itself a juristic person;... "

The definition is not clear. Presumably (b) refers to one of the trustees being a juristic person, otherwise one could argue that if there are two trustees, one being a juristic person, the definition would not apply. Furthermore, this definition is important in view of the sections (sections 4 and 78) dealing with the application of the Act, in terms of which the limitations on application of the Act would not apply to a trust, which has two individual trustees. It is not clear why trusts with two trustees would be included, whilst in the case of trusts with three trustees, or where a trustee is a juristic person, certain limitations would apply.

Furthermore, use of the phrase "juristic person" in section 2(6) does not carry the same meaning intended in the definition of "juristic person". This needs to be tidied up.

19.7 The current Usury Act contains extensive definitions of 'principal debt', 'annual finance charge rate', 'finance charges', etc. In themselves these have been the subjects of judicial interpretation.

The Bill contains a rudimentary definition of 'principal debt', but no definition of 'interest', "interest rate', 'interest charge', 'annual interest rate', 'rate of interest', even though these terms are all used, sometimes, it seems, interchangeably. There is a real risk that unless these are clearly expressed in the regulations, they will constantly be subject to judicial interpretation.

19.8 Application of Act - section 4(1)(a)(iii) excludes an organ of state but 4(3)(b)(i) includes an organ of state in the Bill. Clarification is required.

20. Application of the Act (Section 4)

Guidelines need to be published on how to determine the "asset value/annual turnover figures" as contemplated in subsection 4(1)(a)(i). The concern exists that this definition could mean that smaller subsidiaries of large corporates will, by default, fall within the ambit of the Bill.

21. Electronic agreements (Section 2(3))

In terms of the section, if a provision of the Act requires a document to be signed or initialled by a party to a credit agreement, such initialling or signing may be effected by use of an electronic signature, other than an advanced electronic signature as contemplated in the Electronic Communications and Transactions Act 25 of 2002 ("the ECT Act") provided that the electronic signature is applied by each party in the physical presence of the other party or an agent of the other party.

Furthermore section 116 provides that any change to a document recording a credit agreement, or an amended credit agreement, after it is signed by the consumer or delivered to the consumer, is void unless after the change is made, the consumer signs or initials in the margin opposite the change.

One of the great advantages of modem communication methods is the improvement in efficiency in transacting business. The section frustrates us in using this opportunity, to the ultimate disadvantage of the consumer.

Moreover, the provisions of sections 2(3) and 116 are in conflict with the objectives of the ECT Act and are regressive. An example of this would be in the case of an Internet banking agreement. The terms and conditions of that agreement are normally accepted via a "click wrap", accepting the terms and conditions, failing which no agreement is concluded.

Any amendments and modifications are also accepted via a " click wrap". Section 116 would require a signature and initials in the margin opposite the change. This is contrary to the requirement in section 2(3)

We therefore propose that the provisions of the ECT Act should apply to transactions and agreements that are concluded electronically, and that consequential amendments are made throughout the Bill.

22. Conflicting interests (Section 21)

Proceedings of the Board should not be valid despite the fact that a member of the Board failed to disclose an interest in terms of section 21(3) and influenced the decisions of the Board (see Section 21(5)). Such decisions should, in the interests of good governance, either be revoked or reviewed by the Board without the presence of the Board member.

23. Qualifications of members of Tribunal (Section 25)

It is recommended that the National Consumer Tribunal must also consist of people who have expertise in the granting of credit.

24. Standard conditions of registration (Section 50)

24.1 In terms of sub-section 50(2)(b)(iii), a credit provider will be obliged to comply with applicable provincial legislation. That might be impossible, not least because the different provinces might well have legislation in conflict with the national legislation and with each other.

We therefore propose that the words "unless it is nationally registered" be included at the end of subsection 50(2)(b)(iii)

24.2 Section 50(2)(a) of the Bill provides that:

"It is a condition of every registration issued in terms of this Act that the registrant must- (a) permit the National Credit Regulator or any person authorised by the National Credit Regulator to enter any premises at or from which the registrant conducts the registered activities during normal business hours, and to conduct reasonable inquiries for compliance purposes, including any act contemplated in section 154(1)(d) to (h) "

In effect, section 50(2)(a) prescribes, as a condition for registration as a credit provider under the Bill, that a credit provider pre-authorise entry to any premises from which it conducts its business for purposes of enforcement of the provisions of the Act.

The consequence of this is that the National Credit Regulator (or any person authorised by it) is not obliged to approach a judicial officer in terms of section 153 to obtain authorisation to enter upon and search any premises from which a credit provider conducts its business. As a result, the procedural safeguards encountered in section 153 are rendered inoperative by section 50(2)(a).

There seems to be no reasonable justification for making it a condition of every registration under the Act that a credit provider pre-authorise entry to any premises from which it conducts its business for purposes of enforcement of the provisions of the Bill. Section 50(2)(a) should be deleted, because it authorises conduct which unjustifiably violates a credit provider's constitutional rights.

25. Compliance notice (Section 55)

Section 54(1 ) enables the National Credit Regulator to issue a notice to a person requiring that such person stop engaging in an activity that, in terms of the Act, can only be engaged in by a person who is registered under the Act.

Section 55(1 ) enables the National Credit Regulator to issue a compliance notice to:

i) a credit provider whom the National Credit Regulator on reasonable grounds believes:

• has failed to comply with the provisions of the Act; or
• is engaging in an activity in a manner that is inconsistent with the Act.

ii) a credit provider whom the National Credit Regulator believes has failed to comply with a condition of its registration.

A notice issued in terms of section 54(1 ) or 55(1 ) remains in force until a registration certificate or compliance certificate, as the case may be, is issued to the person to whom the notice was issued, or it is set aside by the Tribunal, or a court upon an appeal from, or review of, the decision of the Tribunal.

If the person, who has been issued with a notice in terms of section 54(1) or 55(1), wishes to suspend the effect of that notice, pending the decision of the Tribunal, or a court upon appeal from, or review of, the decision of the Tribunal, he will have to proceed to court to obtain interim interdictory relief.

In order to avoid the necessity of the recipient of the notice having to proceed to court to obtain interim interdictory relief in respect of the notice in the first instance, it is proposed that a discretion be conferred on the National Credit Regulator to suspend the effect of a notice issued in terms of section 54(1) or 55(1) on such conditions as* the National Credit Regulator may direct, pending a review of the notice by the Tribunal or pending the decision of a Court upon an appeal from, or review of, the decision of the Tribunal concerning the notice. This should avoid unnecessary approaches to the Courts where the National Credit Regulator is willing to suspend the effect of the notice.

26. Right to Receive Documents (Section 65)

Clarity is required as to what is meant by the word "document".

Would it include a "statement" and if it does, then section 65(2)(a) should also include other delivery mechanisms such as ATMs or any electronic medium that complies with the Electronic Communications and Transactions Act.

27. Right to Confidential Treatment (Section 68)

This section does not take into account the common law position of banks regarding the confidentiality of their clients' affairs. The Code of Banking Practice provides as follows:

"We will treat all your information as private and confidential (even when you are no longer a client). Except as set out in 4.7.1 below, we will not disclose any information about your accounts or your personal details to anyone, including other companies in our group, other than in four exceptional cases permitted by law. These are:

• where we are legally compelled to do so;

• where it is in the public interest to disclose;

• where our interests require disclosure (This will not be used as a reason for disclosing information about you or your accounts [including your name and address] to anyone else including other companies in our group for marketing purposes);

• where disclosure is made at your request or with your consent."

The duty of secrecy on the part of a banker and the above mentioned grounds of justification for disclosure have also been recognised by our courts in Abrahams v Bums 1914 CPD 452; Cambanis Buildings (Pty) Ltd v Gal 1983 (2) SA 128 (N) and in GS George Consultants and Investments (Pty) Ltd v Datasys (Pty) Ltd 1988 (3) SA 726 (W).

We are concerned that the recognised practice of giving status opinions (banker's references/reports) would be prohibited by these provisions. As a service to customers, a bank often obtains status opinions on the creditworthiness of third parties by addressing a request to the bank of the third party. Third parties (such as life assurance companies or other credit providers) may also approach banks to obtain confirmation of the fact that a customer, who has signed a debit order with the third party, has an account with the bank with the account number supplied by the customer to the third party. The concern is that the provision of such information, would fall foul of the Act.

We therefore propose that sub-section 68(1 )(b) be amended so as to include a reference to the common law. If this is not done, the sub-section will in effect change the law and limit the grounds of justification to those enumerated in sub-section 68(1 )(b).

28. Opting out requirements (Section 73(6)(b)(iii)) For the sake of clarity we propose that the word "marketing" be inserted before the word "messages" in order to prevent the elimination of the necessary use of such communications in the ongoing management of debtor accounts.

29. Effect of suspension of credit agreements (Section 84)

Section 84(1 )(c) will, during the period of the suspension, prevent a credit provider from protecting its interest in the asset provided as security for the debt, leaving the consumer free to dispose of or encumber the asset and apply the proceeds as the debtor deems fit. In terms of the section the rights of the credit provider under the agreement or under any other law in respect of the credit agreement are unenforceable for the duration of the suspension.

We suggest that it is the right to recover the debt and debit interest that should be suspended, not all the other rights of the credit provider related to the protection of the security. We therefore propose that this section be amended to the effect that during the period of the suspension the credit provider may not take any action to recover the loan, nor debit any interest or costs to the account.

30. Termination of debt review by credit provider (Section 86)

If the consumer is in default, section 86(10) allows a credit provider to terminate the review process if it is not completed within 60 days from date of application, presumably on the basis that there has been adequate time to complete the investigation. Section 86(11) however defeats the object of this section, as magistrates can simply re-instate the process on any conditions they deem fit, and this process may be repeated any number of times.

We therefore propose that section 86(11) be amended to the effect that magistrates are required to make a determination without the option of re-instating the review process.

Furthermore, section 86 affords all consumers to which the Bill applies, the opportunity to apply for a debt review. We submit that not all consumers require such protection, and the unscrupulous consumer might abuse the debt review process. The current administration order provisions of the Magistrate Court Act prescribe that an administration order may not be granted if total debt exceeds R50,000. We recommend that a similar provision be included in this section.

31. Definition of "consolidation agreement" (Section 88)

The term "consolidation agreement" is used in section 88, but has not been defined in the Bill. By not defining this term, unscrupulous credit providers might use the opportunity to increase a consumer's indebtedness under the guise of an undefined "consolidation agreement".

We therefore propose that the term "consolidation agreement" be defined to mean an agreement in terms of which a credit provider settles a consumer's indebtedness with one or other credit providers and enters into a credit agreement with such consumer in respect of the amount paid to such other credit providers.

32. Disputing an entry (Section 111)

In terms of the section a consumer may dispute an entry at any time within 20 days of receiving the statement in which that entry occurs. The credit provider may not commence proceedings until 20 days after explaining that entry to the consumer. That unduly delays the recovery process, and the provision could be seriously abused by consumers wanting to "buy time".

We suggest that there should be no compulsory delay in the implementation of proceedings. The consumer always has the right to query the debit during the court process, and we suggest that if the credit provider has commenced action before the expiration of the periods contemplated in sections 111(1) and (2) and the credit provider is found by the court to have been at fault in doing so, the court should have the right to make an order for costs against the credit provider.

We therefore propose that subsection 111(2)(a) should be amended to provide that the credit provider must give the required written notice within 10 working days, and subsection 111(2)(b) should be amended to provide that if the credit provider begins enforcement proceedings and does not comply with the provisions of subsection 111(2)(a), the court should take that into account in awarding costs.

33. Alteration of original or amended agreement document (Section 116)

33.1 This section stipulates that any change to a document recording a credit agreement, or an amended credit agreement, after it is signed by the consumer, if applicable, or delivered to the consumer, is void unless -

a) the change reduces the consumer's liabilities under the agreement; or

(b) after the change is made, the consumer signs or initials in the margin opposite the change.

33.2 The credit card industry has a practice of giving advice of changes to the terms and conditions by sending cardholders a completely revised agreement. They do this because of the very large number of cardholders involved. It would be completely impractical and administratively costly to require each consumer to sign or initial the margins and return the document. We therefore suggest that the current practice should be allowed to continue. The consumer is not prejudiced in that there is still the opportunity to withdraw from the agreement, within a specified period, if the changes to the agreement are considered to be unacceptable. The same effect would apply to all other standard form product types e.g. overdrafts.

33.3 This section would also impose difficulties in cases where the document was not in hard copy - e.g. an electronic or voice-recorded version, which is legal and binding in terms of the ECT Act. Loans can be concluded verbally and the consumer has the opportunity to telephone a call centre and apply for a loan. The loan application is considered and if approved, the consumer is advised within a matter of hours and the loan is paid out to the consumer. The process is extremely efficient and is beneficial to those consumers who may not have access to transport to call in and apply for a loan. The loan is then followed up with standard terms and conditions being sent to the consumer which are a written recordal of the terms and conditions of the voice-logged contract. There is no need for the loan to be signed by the consumer, as it is merely a summary of the voice-logged contract. Any alteration or amendment should be dealt with on the basis of being voice-logged and agreed, and thereafter followed up with the amended terms and conditions being sent to the consumer.

34. Increases in credit limit under a credit facility (Section 119)

The requirement in sub-section 4 that the customer's request for a limit increase must be in writing is not practical, in conflict with the provisions and objectives of the ECT Act and will only create more administrative difficulties for the banks as well as barriers to credit and inconvenience and cost for the customer. It is recommended that consumer requests to increase a credit limit be allowed at any time and by any legal means of contracting.

35. Consumers Right to Rescind Credit agreements (Section 121)

The definition of 'non-returnable goods' does not include motor vehicles. The consumer is therefore entitled to return a motor vehicle (as an example) bought in terms of a credit agreement within 5 business days after the date on which the consumer signed the agreement.

Although the credit provider would be entitled to require the consumer to pay the 'reasonable cost' of having the motor vehicle restored to saleable condition and a 'reasonable rent' for the use of the motor vehicle, the fact of the matter is that the motor vehicle would now be second-hand and that the credit provider would have to sell it as a second-hand vehicle. In any event, 'reasonable cost' and 'reasonable rent' will always be a cause for dispute unless objective standards have been set against which it could be measured.

We therefore anticipate that to overcome this problem, financiers of such assets will prohibit registration or delivery of new vehicles (or similar assets which depreciate very rapidly) in terms of their agreements until the 5-day period has lapsed.