SACOB

National Credit Bill – Submission

 

‘It is only by not paying one’s bills that one can hope to live in the memory of the commercial classes’ – Oscar Wilde

 

  1. Introduction
  2. 1.1             SACOB (South African Chamber of Business) is a national body representing some forty chambers of commerce/business throughout South Africa, fifty trade associations and over one hundred large corporates. As such it is the largest employer body in the country representing both large and small business interests.

    1.2             Chapter 1 Part B section 3 sets out the purpose of the Act, the substance of which is to promote a sustainable and responsible credit market with particular emphasis on providing access to that market to historically disadvantaged persons. These objectives are to be secured through intervention measures set out in the nine chapters of the Act. With a few misgivings that will be outlined, SACOB supports the objectives of the legislation. These include the point made in section 3 (d) ‘promoting equity in the credit market by balancing the respective rights and responsibilities of credit providers and consumers.’ The section goes on in 3 (e) (i) to state ‘providing consumers with education about credit and consumer rights’ SACOB fully endorses the intention that this legislation intends to achieve.

     

  3. General Comment
  4. 2.1             The consumer credit industry is not so much a new industry as a transformed industry. For centuries retailers have provided credit as an adjunct to selling their goods. Credit bureaux or reference agencies have grown out of associations of retailers who pooled their knowledge of poor payers. SACOB believes that these agencies perform a useful function in restraining irresponsible credit use and believes that they should be encouraged. Hopefully, it is a view that is shared by the Bill’s originators. Information on the payment habits of borrowers and their outstanding indebtedness is an essential aid to an efficient market.

     

    2.2             Throughout the Bill, the thrust of the proposed legislation is weighed towards the interests of credit users with limited regard to the interests of credit providers. Perhaps the solitary obligation imposed on the consumer is specified in sections 95 (Address) and 96 (Location of goods) of the Bill.

    2.3             In fairness to the credit provider side of the industry, it deserves to be recognized that the credit industry has to a great extent succeeded in depersonalizing the process of granting credit. This has come about by the use of technology, credit scoring processes based on objective criteria (taken from a written application form), and the use of appropriate statistical methods. Together, these measures allow credit providers to calculate the chances that a potential borrower will fulfill his/her repayment obligations. Into this process is to be injected various requirements set by a regulatory mechanism that will supposedly minimize the imperfections that exist in the credit market.

    2.4             SACOB does not claim to be expert in the practice of credit granting and the required safeguards associated with the risk management of credit. These are to be articulated by those experienced in that field. However, there is hopefully a consensus that access to credit is not a right in itself. Credit has been and will remain a market instrument, access to which must be earned. From a credit providers perspective such access must be based on certain fundamentals. In simplistic terms these include:-

     

    ·                    Lenders require a return on their money at least as high as that which they could get using the funds in an alternative use.

    ·                    That return will depend on the costs of administration, the level of bad debts, and the rate of interest.

    ·                    Lending practice will be conditioned according to the extent to which there is certainty of repayment (i.e. the greater the security the lower the risk).

     

  5. Regulation and regulators
  6. 3.1             Chapter 2 sets out the details of the nature and functions of the National Regulator and the Consumer Tribunal. SACOB remains to be convinced that a regulator will overcome the alleged imperfections in the credit market and that its establishment will bring about lower costs for credit. Regulators require financial resources to operate. These are usually provided by way of licensing those activities they regulate. The licensing of credit providers together with the administrative obligations that the regulator is empowered to require must surely increase their costs. Such costs are invariably passed on to consumers of credit. The suggestion of a regulatory impact assessment (RIA) to be undertaken on this proposed legislation has to date fallen on deaf ears.

    3.2             Obviously, from the industry’s point of view, the credibility of any regulator is important and though appointed by government it should be seen to be independent and impartial (that is free from political interference). SACOB notes that this is provided for in the Bill (section 12). However, for a regulator to secure its credibility, enhance its autonomy and achieve technical capacity (e.g. straightforward and prompt decision making), it must be seen to be more than a quasi government body subject to public sector conditions. There will be a need to engage well paid, professional staff with a sound understanding and experience in the credit industry.

     

  7. Potential Hazards
  8. 4.1             It will require no discourse from SACOB to accept that there have been and that there remain abuses in the credit market. The legislation as set out in the Bill intends to eliminate such abuses. Where that is applicable, SACOB will apply its resources to ensure that the legislation and associated regulations (if introduced) is understood and implemented.

     

    4.2             As with all legislative enactments, there will be downsides. Not all these can be envisaged at present. Those that come to mind are summarized below:-

    4.2.1       Cost implications for credit providers and its impact on the cost of credit.

    4.2.2       The imposition of ‘price control’ (Chapter 5 Part C). Such a practice frequently results in a reduction in the supply of the product (in this case credit).

    4.2.3       The question of a non-discriminatory approach to the application and granting of credit pervades the proposed legislation. However, provisions exist for credit providers to be required to provide the regulator with data to permit demographic patterns to be researched [section 16 (1) (d)}.

    4.2.4       Concern must be expressed that the seemingly complex provisions of the proposed Bill will require credit providers to act with caution in order to ensure compliance. The question to be answered is whether there is a danger that such compliance measures might impact adversely on small business and their credit needs. Consider that the credit needs of a small business invariably requires a timeous resolution. Adherence to regulated credit diktats may well delay such timeous decisions. In view of the importance attached to small business development, it is a question that deserves some serious consideration.

     

  9. Conclusion

For SACOB, the most important role for government in association with the providers of credit is to educate people on the use of credit. In the words of the original credit policy document, ‘the credit market is not a risk-free arena’. Starting in the classroom, people must be taught that consumer credit can at times be dangerous. It is a lesson consumers will go on learning all their lives.

 

 

 

Johannesburg July 2005