The following submission is made on behalf of the clothing retailers that are members of the Consumer Credit Association and therefore represents the views the majority of the large clothing retailers in South Africa.

We have positively engaged with the Department of Trade and Industry throughout the consultation process on the National Credit Bill (B18-2005) and thank the Department for their openness and willingness to engage with our constituency. During this process we endeavoured to find a sustainable credit framework that balanced the needs of all stake holders and in a large number of instances we believe this objective has been met We strongly support the Department’s objective of ensuring better access to credit for all South Africans, while curbing the unscrupulous practices of some credit providers, in order to offer better protection to, and prevent over indebtedness of the consumer. With this in mind we would like to highlight the following aspects of the Bill that may have missed this objective or that will have unforeseen consequences or unnecessarily high costs of compliance. (All References are to sections of the Bill)

1 Credit Application Processing - Affordability assessment

2 Credit Limit Increases

3 Debt Review

4 Penalties

5. Interest Rates

6 Lost Card insurance

7 Marketing

8 Insurance

9 Credit Bureau Data Retention

10. Regulations

Current practice amongst clothing retailers in respect of new application for credit is to obtain customer information on an application form. The information obtained is run through application scorecards that assess the risk of the application while, simultaneously checking the applicant's details at the Credit Bureau. This validates that the information provided is accurate and also further enhances he process of assessing the credit risk of the applicant.

Once the risk has been assessed, the retailer has a good understanding of the likelihood of the customer's account going into arrears and this is converted into an odds score. If the customer's risk or likelihood of going into arrears is acceptable based on the retailers risk/credit policy, the retailer looks to the customer's disposable income and the repayment term of the proposed credit facility to determine what credit limit will be granted to the applicant. One approach is to take the disposable income rid subtract the applicants’ current monthly repayments on all open lines of credit to; determine the level of discretionary funds the applicant has to service a new facility.

Section 81(2) (a)(ii) requires credit providers to assess the applicant's debt-repayment history as a consumer under credit agreements. This point is fully supported by the retailers and therefore requires that factual information is retained at the Credit Bureau for a reasonable period of time, in order to correctly assess the credit risk However Section 71 permits a process to be followed, which could result in important information relating to debt re-arrangement orders or agreements, applicable to a consumer who has had a sub-optimal history of debt repayment, being expunged from the records maintained by the Credit Bureau.

We recommend therefore that the current retention periods for the Bureau be maintained, so that the information, which reflects consumers repayment patterns for the past 24 months and details of accounts handed over for collection, is maintained for three years from the date of handover. The consumer's payment behaviour over the past 24 months is a highly predictive characteristic and indicates the likelihood of an account going into arrears in the near future, thus serving as a valuable tool to prevent over extending the consumer.

Retailers currently assess consumers for credit limit increases on a regular basis, by evaluating the credit risk on recent payment behaviour and the affordability of such an increase in the limit. Generally these increases are done no more than once in a six-month period however the percentage increase is based on the risk of the customer and the retailer's assessment of the ability of the customer to service the increased monthly payment amount. Customers are advised of those credit limit increases when they are implemented and the percentage increases vary from 10 % to as much as 40 %. The higher credit limit increases generally go to low risk customers who can clearly afford the higher monthly payments and are only made available to customers who are utilising the credit facilities previously granted. When assessing customers for credit limit increases, the retailer checks manner: in which the customer is conducting his/her account as well as the Credit Bureau records, to evaluate the credit risk with reference to the consumer's credit servicing performance in the market place, as well as whether the proposed increase will be affordable to the consumer. Some clothing retailers perform this assessment overnight in batch mode, thus dramatically reducing the costs of each individual assessment.

The credit limit increases on customers' accounts ensure that many thousands of customers are provided with superior service, as they facilities in lace when they need they and hence the risk of embarrassment is reduced at the point of sale in the retail outlets, should their purchase transactions be declined. The cost of doing individual bureau enquiries during the day is at least four times the least of a batch enquiry and in addition to this, team members would have to be hired to manually process each of the requests, thus adding to the cost of managing the account and ultimately the cost of credit to the customer These credit limit increase generated just over R37 billion in turnover for the past 12 months which works out .to approximately R725 000 turnover per employee and due to the robust economy the clothing retailers have successfully been able to create material levels of further employment in the sector. Restricting the ability of retailers to carry out credit limit increases based on sound business principles will put in jeopardy these very jobs that have been created loss of R3.7 billion in turnover would translate into a loss of 5100 jobs.

We therefore recommend that retailers should be allowed to continue with this global best practice of periodically increasing credit limits, provided they check credit risk and affordability prior to any such increase. In addition to these provisos we suggest that when the credit limit increases are implemented, customers are correctly informed about the increase and what the increased monthly payment would if the facility were fully utilised.

Currently only about 37.3 % of the clothing retailers' credit facilities a being utilized, clearly showing that consumers are being responsible in how they manage their debt in order to not become over expended.

In further support of this recommendation, please see Appendix 1

, which is an independent report from PlC Solutions. It highlights the impact sound credit management has on the macro economic environment, employment in retail sector and the limiting of the consumers’ access to credit. Consumers should also have the facility to request that their credit limits are only increased on their request

There appears to be no firm period during which a consumers application to a debt counsellor for debt review has to be resolved and this could result in repeated referrals between the debt counsellor and the magistrate for numerous 60-days periods. This business risk will reduce credit providers' propensity for risk and could well result in less credit being extended to consumers and thus may be unforeseen consequence which conflicts with one of the purposes of the Bill as recorded in Section 3.

We recommend that the debt review process should apply only to transactions entered into after the effective date of the Bill and that there should be a define a maximum time period stipulated for the Magistrate to make a determination under section 86(11). This debt review process should also only relate to the rescheduling of the debt based on affordability and not the setting aside of the debt, as the customer would have the use, benefit of the products/services purchased.

The maximum possible fine of 10 % of annual turnover that, might be imposed in terms of the Act, could put many retailers out of business and seems to be disproportionately severe relative to the offences that could take place. This punitive provision could result in an ultra conservative risk management approach that would reduce the granting of credit to the very customers the Bill is aiming to assist.

We recommend that the maximum penalty should be a specified amount it based on the severity of the breach and if a percentage is used, that this should be a percentage of profit after tax with a maximum Rand value.

Currently the clothing retailers are governed by the usury rate; which is capped at 20 % for loans below R10 000 and 17 % for loans above RI0 000 This capping of the rate, restricts our ability to take on more risk by offsetting the additional losses with the improved interest income.

We therefore welcome the levelling of the playing field and recommend I that all credit providers should have the same maximum interest rate restrictions, as it is will open up the market place to more competition, which will be good for the consumer Currently, various retailers are offering personal loans to customers. However the interest rate cap is restricting the number of consumers that are being offered these facilities. International rates are far higher than our levels and for example in the UK today the interest rate on a Harrods card is 28.9 % pa relative to the UK's repo rate of 4.75% which compares to our repo rate of 7%, although we have a capped rate and there is no cap in the UK.

The capping of interest rates will always restrict the number of customers who would qualify for credit facilities and we therefore recommend that there are no caps but rather a lull and clear disclosure on the costs of credit so that consumers can make informed decisions in order for them to shop around for the best available deal. With this approach a customer who was not happy with the interest rate from one provider could obtain funding from another provider to settle the debt with the original provider and in so doing lower the cost of credit. This approach will stimulate competition in the market place and will reduce the cost of credit to the consumer. If a cap on the interest rate is deemed necessary then we suggest this is set sufficiently light in order to stimulate competition between the various credit providers as it has been. shown that the clothing retailers are interested in entering into the small loan market ',lace and when taking into account their long operating hours and vast distribution channels, this should all assist in lowering the cost of distribution and ultimately the cost of credit to the consumer while increasing much needed competition Consumer education will be key in improving competition, as we need to ensure that all consumers are more discerning when applying for credit.

The Bill states that the premiums in respect of this form of credit insurance should be led monthly as a percentage of the balance on the account. The concern with this approach is that the customers card is at risk to the full credit facility and that by restricting the cover to the outstanding balance which may at times be zero, the customer would find that they had no or insufficient cover for third party fraud that has en committed using their details.

We recommend that hat Lost Card Insurance be billed on a flat Rand amount, providing cover for periods up to twelve months, in advance.

The current approach in the promotion of pre-approved credit is to make an offer to prospective customers. Those customers who wish to take up the offer 'are provided with written copies of the benefits and conditions of the account, together with an information booklet containing all the information as set out Iii subsection (1).

We recommend that the wording in this section be changed to state that, credit providers must provide to those persons accepting the offer, a written statement containing all the id information prior to concluding the credit agreement.

• Section 106 (1)

We recommend the wording as follows;

A credit provider may require a consumer to maintain sufficient compulsory cover for -

· Credit life insurance, or

• Section 106(3)(a)

We recommend that reasonableness be clearly defined and stipulate who will be called upon to make that decision. Reasonableness may in fact; be difficult to quantify due to the subjective nature of the issue. We also need to further highlight the various distribution channels that are used by the credit providers as these have various costs attached to the channel that may make the insurance premium higher or lower from one provider to another add .ion to this, the volume of insurance products sold by the credit provider will having an effect on the premium billed, with large credit provider having a distinct advantage because of their economies of scale. This may well result in insurance with exactly the same cover having differing premiums from one credit provider to the next, yet will still be fairly priced based on the cost structure e of the credit provider.

This section does not provide for the possibility that some credit providers may want to cap the premium irrespective of the value at risk. Thus would be of benefit to the consumer.

We recommend the section be amended as follows:

Any policy proposed by the credit provider with respect to a credit facility must provide for premiums, which may, at the option of the credit provider, be capped, subject to the provisions of section 106(4)(b), to be charged to the Consumer on a monthly basis, in a fixed amount, or alternatively at a fixed percentage of -

• Section (106(8)(a)

It appears that the purpose of the clause is to ensure that consumers are fully aware of charges incurred. As it stands, the section could parties other than the insurance company from earning commission. This 5 would be a disadvantage to intermediaries who might be incurring some costs and need to recover these costs in some way.

Subsection (b)(ii) refers to "credit agreement". Surely the issuer: is specifically around the true cost of insurance, thus "Credit Agreement" should be replaced by the word "insurance"

We recommend that the section be amended as follows:

"(8) With respect to any policy of insurance arranged by a credit provider as contemplated in subsection (4) or (6), the credit provider

(a) must not add any undisclosed surcharge, fee or additional premium above the actual cost of insurance arranged by that credit provider; and

(b) must disclose to the consumer in the prescribed manner and form -

(i) the cost to the credit provider of any insurance supplied; and

Erasing or expunging the fact that a consumer had difficulty in serving a debt will impact the ability of credit providers to determine the potential credit worthiness of a prospective customer. It undermines the ability to determine the consumer's ability to service future debts and obligations. The erasing or expunging of consumers' payment details from the bureau and the National Credit Register will prohibit credit providers from complying with Section 81 (2)(ii) which states a credit provider must not enter into a credit agreement without first taking reasonable steps to assess the debt repayment history of the consumer under credit agreements.

We recommend that factual information is retained by the Credit Bureau and the National Credit Register for the same retention periods as currently displayed at the credit bureau. This practice is to reflect the payment pattern on all accounts for the past 24 months clearly showing the customers ability to service the debt. If the consumer has defaulted on his/her legal obligation to repay the debt and the account has been handed over to a recovery agent then an adverse listing is recorded at. the bureau and this stays on the bureau for a period of 3 years from the date of initial listing. If this debt is subsequently settled in full, then this record is updated to state that the debt has been fully repaid. The three-year period acts as a rehabilitation period or consumers to go back on their feet again and prevents them from taking on more debt than they can afford. This would also prevent them from continuing to go in and out of arrears and thus incurring debt collection fees and legal costs, which would further take funds out of the consumers' hands. The credit provider would also provide the consumer with a letter stating that the debt had been fully settled and any such repayment of a debt would have a positive impact on the consumers bureau score. M such debt rearrangement should also be reflected on the National Credit Register: as well as the bureau as this will identify that the consumer is currently struggling meet his/her obligations and that it would be unwise and reckless to further extend J credit to this consumer. Expunging or removing this detail would in fact be promoting

reckless lending, refer section 72(3)(a).

We would like to recommend that we are consulted on the formulation; of regulations and any caps oil interest rates and fees, so that a sustained and viable credit industry is maintained that balances the needs of all stake holders while affording protection for consumers.

We offer our services to the Department of Trade and Industry so that we can achieve the objectives of the policy framework, Without knowing the basis and extent of interest rate capping, the credit providers are unable conduct, a full and comprehensive regulatory impact analysis of the proposed legislation and regulation However, we offer our assistance in this regard to the Department.

We have requested this opportunity to present our case at the public hearings and look forward to participating therein and answering any questions your learned committee night have

Yours faithfully,

Ian Wood

For and on behalf of the Clothing Retailer members of the Consumer Credit Association

29 July 2005