CREDIT BUREAU ASSOCIATION

Written Submission:
National Credit Bill (The "Act" Or "Bill")
Part B: Comment of Specific Provisions:

Sound Credit Information Systems Take Cognizance of the Following Principles:

The principle that removal of risk predictive data increases the likelihood of reckless lending and over-indebtedness:
If a lender is to extend credit to a person whom he has no, or zero risk predictive credit information about, the potential for reckless lending is at a maximum. Where a lender extends credit to a person that he has comprehensive risk predictive information about, the potential for reckless lending will be at a minimum. Thus, where risk predictive data is removed reckless lending and over-indebtedness is more likely to occur.

The principle of lender confidence in the integrity of credit information:

A sound credit information system is one in which lenders have confidence in the quality and integrity of the information. If lender confidence in the credit information is reduced, lenders may not use the information for risk assessment and resort to more restrictive methods of risk management. This could very possibly result in reduced or even no access to credit for consumers.

c) The principle of competition between private credit bureaux:
Competition between credit bureaux benefits both lenders and consumers by providing incentives to compete on price, quality and accuracy of data, efficiency of service, development of new products and services.

2) Most Critical Issues for Credit Bureaux Arising from the National Credit Bill
(Hereinafter Referred to as the Bill):

The credit bureaux industry is committed to and supportive of a regulatory framework for credit bureaux, as well as the objectives/purposes of the bill. We are however, concerned that certain provisions may significantly restrict the operations of credit bureaux, causing the flow of credit information to slow down, making it difficult for people to access credit.

The "critical" provisions which should be amended if the "free flow" of credit information is to be maintained are dealt with below.

Criminal Liability for Negligently or Knowingly Reporting Inaccurate Information Section70(6) Read with S70(2)( c) and S161:
In terms of the provisions referred to above, if a credit provider supplies information to a credit bureau for example, that consumer X has defaulted and the credit providor warrants that information is correct, and the information turns out to be incorrect, the credit bureau will be liable to a fine and/or imprisonment.
According to the provision the credit bureau would be seen to be negligent and to have failed to take reasonable steps to verify that consumer X defaulted. It is not possible for the credit bureau to verify that consumer X has not paid the credit provider and the credit bureau will be facing a fine and/or imprisonment for failing to do something which is not under their control. It would be difficult, if not impossible for a credit bureau to verify millions of pieces of payment performance information received from credit providers every month and also verify if millions of consumers have paid or not paid monies owed to credit providers.

To prevent credit bureaux facing criminal liability in circumstances that are beyond their control, it is respectfully submitted that Section 70(6) be amended.

AMENDMENT SOUGHT: Section should read " credit bureaux are prohibited from knowingly reporting inaccurate information."

OR, IT MAY READ

" A credit bureau must in terms of section 72(1)( c) investigate every challenge of accuracy of data, if data is found to be inaccurate the credit bureau must remove or correct it, failure to do so is prohibited."

Fixing Standards and Fees for Credit Bureaux will End Competition Between Credit Bureaux:
In terms of SECTION 70(4) , the Minister may prescribe standards and fees for the filing, retention and reporting of consumer credit information. Competition between credit bureaux benefits both consumers and lenders by providing incentives to compete on: price, quality and accuracy of data, efficiency of service, and development of new products and services. Credit providers have substantial bargaining power and it is submitted that a competitive market, subject to the prohibition of the abuses of dominance prescribed by the Competition Act, will best determine the fee payable by commercial users of credit bureaux.

AMENDMENT SOUGHT: Section 70(4) should read as follows: " The Minister may prescribe minimum standards for the filing retention and reporting of consumer credit information by credit bureaux, in addition to requirements set out in this section, and the Minisiter may set reasonable fees for credit reports to be provided to consumers and to the National Credit Regulator in terms of section 70(5)"

Free Credit Reports Once Annually and Once within a Reasonable Period of Challenging Any Information Section 71(1)(b)(i)

The credit bureaux industry is concerned that it may be unable to cope with the millions of requests for free credit reports in the first effective year of the Act. There are approximately 18 million credit active consumers in South Africa. If, in the first month, the credit bureau receives a very modest one million requests, they would have to process 50000 (fifty thousand) per day.

To ease the administrative burden on a credit bureau that may have to process millions of requests in the first month of the Act being passed and to ensure that consumers obtain their credit report without unnecessary delays, it is recommended that section 72(1)(b) be amended.

AMENDMENTS SOUGHT:
Free credit reports be rolled out to consumers by date-of-birth in a similar way that the new card driver’s license was introduced.

Accordingly SECTION 72(1) (b) should provide that: "the Minister may prescribe the method by which free credit reports are to be requested in the first effective year of the Act, for example, on a date of birth basis."

Section 72(1)(b)(i)(cc), provides that a further free credit report must be provided within "a reasonable period" after challenging information. The absence of any limitations in this provision may lead to uncertainty and abuse. SECTION 72(1)(b)(i)(cc) should read "once within 30 days of lodging a bona fide challenge regarding accuracy of information contained in the " free annual" credit report."

Criminal Liability for Commercial Contraventions, and the Broad Definition of Prohibited Conduct Giving the Tribunal the Power to Impose 10% of Annual Turnover as a Fine for Any Contravention No Matter How Serious or Trivial:

Prohibited conduct is defined in the Act, as any act or omission in contravention of the Act. Section 150(1)(a)(iii), allows the Tribunal to impose an administrative fine which may not exceed 10% of annual turnover and R1million, where "prohibited conduct" is found. This can be interpreted that no matter how trivial or serious an act or omission is it will still be "prohibited conduct", and a registrant can be faced with the very onerous administrative fine.

The broad definition of "prohibited conduct" will also mean that "criminal offences" in the Act will also fall within it, and this will mean that for any act or omission in contravention of the Act, a registrant could face both a criminal penalty(fine or imprisonment) and the administrative fine.

Recommended that "prohibited conduct" be clearly defined, and the administrative fine be determined and imposed only in respect of serious offences.

The Act also provides that it is a "criminal" offence for a credit bureau to:

knowingly or negligently report inaccurate data
to fail to expunge any information required by section 71 or to report any information that is required to be expunged after receiving a clearance certificate concerning that information;
refuse to permit a person to exercise their right to inspect a credit bureau file.

In terms of SECTION 161(b), any person convicted of an offence is liable to a fine or imprisonment for a period not exceeding 12 months, or both a fine and imprisonment.

The value of consumer credit information lies not only in its accuracy but also in its completeness. The imposition of extensive criminal liability for inaccurate reporting is likely to force credit bureaux to impose such stringent constraints upon the accuracy of information that the completeness of such information, and ultimately its usefulness to credit providers, will be adversely affected.

Recommended that these "contraventions" not be criminal offences but fall under the definition of "prohibited conduct".

3) "Technical" Amendments Sought:

"Technical" amendments refer to the addition of certain words consistent with the understood intention of the lawmakers and, providing greater legal certainty and clarity, without altering the effect of the provision itself. In the following provisions words recommended to be inserted/ added are underlined:

SECTION 72(1) (d): "be compensated by the credit provider who reported incorrect information, for the cost of correcting that information."

SECTION 70(2) (c): "take reasonable steps to verify the accuracy of prescribed consumer credit information reported to it."

SECTION 70(2) (d): Add: "The Minister in prescribing data retention periods must have regard to the predictive power of that information for credit risk assessment."

SECTION 70(2) (e): "maintain its records of consumer credit information in a manner that satisfies prescribed minimum standards."

SECTION 70 (2) (f): Add: "The Minister in prescribing what consumer credit information is not permitted to be kept must have regard to whether or not the information may be used for predicting risk."

SECTION 70(2) (g): " issue a report to any person who requires it for a prescribed purpose or a purpose contemplated in the Act upon payment of the credit bureau’s fee except where the Act explicitly provides that no fee be charged."

4) Important to Take Cognizance of:

SECTION 68: in terms of section 68, consumer credit information which is a type of confidential information may only be used for purposes permitted or required in terms of the Act or other legislation.

Consequence: Unless governed in the regulations consumer credit information would thus not be used for fraud prevention, monitoring of identity theft and money laundering, insurance risk, and other purposes which are in the broad public interest. The use of credit information for these purposes is consistent with international trends, and have proven effective in a number of countries worldwide where a practice or permissible purpose exists.

b) SECTION 71: A debt counsellor may issue a clearance certificate if a consumer has satisfied all obligations under every credit agreement that was subject to debt re-arrangement. On receipt of a clearance certificate the credit bureau must expunge from its records: the fact that consumer was subject to debt re-arrangement; any default information that may have precipitated or have been considered in making the debt re-arrangement; and any record of that particular agreement subject to a debt-rearrangement.

Unintended Consequence: this may result in the removal of risk predictive behaviour data and an increase in the likelihood of reckless lending and over-indebtedness. Simply stated , credit providers will not have the consumer’s full credit history when assessing the consumer’s debt repayment behaviour and there will be no way for a credit provider to establish if a consumer has a pattern of non payment and of having his/her debts restructured.

Lender confidence in the information held by credit bureax will be low, resulting in lenders devising other means of protecting themselves against the risk of bad debt.

5) The National Credit Register:

SECTION 69: The Register will be filing, retaining and reporting consumer credit information, and is therefore a public credit registry.

Consequence: The establishment of the Register will incur high costs and occur over a substantial time period.

General Recommendation: South Africa has a mature and sophisticated private credit information system comparable to the best in the world. Government does not currently incur any costs for the credit bureaux services to credit providers. The infrastructure and experience exists within the private credit bureau industry to provide the regulator with a record of outstanding credit agreements, and information to determine trends in the credit market. It is not necessary for the high costs be incurred to establish and maintain a public registry.

6) Enforcement and Compliance

a) Institutions created for enforcement and compliance:

The Act makes provision for the National Credit Regulator and the Tribunal for purposes of enforcement.

The Regulator (sections 12 to 22): Many powers will be vested in this body including, registration of operators, enforcement of the Act, conducting research and raising public awareness, engaging with other regulatory authorities, proposing policies to the Minister, reporting to the Minister on consumer credit matters, reviewing legislation and regulations, dispute resolution, and possibly establishing the national register of credit agreements.

The concentration of various powers in one body means little or no "checks and balances". This may question the exercise of power in an independent and impartial manner.

The Tribunal (s23 to 31): Courts are independent because they need to be trusted not to make politically required judgments. Members of the Tribunal will be removed from office on the recommendation of the Minister, the powers/functions of the Tribunal will be audited by the Minister, and it will report to the Minister. One cannot say that the Tribunal will be independent, as it will be subject to the executive arm of government.

A tribunal whose independence will be compromised by being located within the executive and who will have no obligation to follow the rules of due process applicable in a court, will be able to impose an administrative fine for prohibited conduct.

Recommendation: A special consumer court could be created within the judiciary, which will be independent and observe the rules of due process necessary to give effect to the rules of natural justice.

Issue of Compliance Costs:

The credit bureaus are concerned about the possible compliance cost implications arising from the bill, particularly should the Minister set fees/prices for the filing, retention and reporting of credit information. It makes sense to regulate where the quantifiable benefits to society exceed compliance and enforcement costs.

The concerns about high compliance costs arising from provisions in the bill which require:

a) a registration fee;

possible additional training for employees (employees who represent credit bureaux in terms of the Act must meet qualifications at least equivalent to those prescribed for debt counsellors);
filing of an extensive annual compliance report;
extensive system changes which may be required if new standards are prescribed for the filing, retention, maintenance and reporting of information;
providing synoptic periodic reports to the Regulator free of charge;
providing 15 to 18 million free credit reports once a year;
dealing with challenges arising from credit reports, and providing further free reports after dealing with challenges;
compensating persons for cost of correcting information;
being liable for a fine which does not exceed the greater of 10% of its annual turnover and R1million for any act or omission in contravention of the Act;

costs of increased litigation.

It is important to safeguard consumer rights however current provisions place excessive compliance costs. The solution would be the "gradual phasing in of "free" credit reports", and fees/prices which credit bureaux charge their commercial customers e.g banks for their services not be fixed by law.

Conclusion:

Because a credit information system is vitally important for a well functioning credit market and economy, it is essential that the regulatory framework facilitates the effective operations of credit bureaux.