NATIONAL CREDIT BILL.
SUBMISSION BY THE ASSOCIATION OF DEBT RECOVERY AGENTS

August 2005

The Chairperson, Honourable Members of the Portfolio Committee and Ladies and Gentlemen thank you for the opportunity to make a presentation in respect of this very important proposed legislation on behalf of the Association of Debt Recovery Agents.

The Association of Debt Recovery Agents (hereafter referred to as ADRA) wishes to comment as follows on the proposed National Credit Bill (Hereafter referred to as the Bill).

ADRA was formed during 1988. Today, 226 debt recovery enterprises are members of ADRA. The total number of employees represented by ADRA, (as employees of ADRA members), is approximately 9000 people. ADRA was a promoter of and instrumental in the shaping of the Debt Collectors Act (Act 114 of 1998), particularly the sections of the act that provide for national standards for the fair treatment of consumers by third party collectors.

 

The ADRA mission statement is that: -

We serve our members within the credit recovery industry in Southern Africa by:

Our presentation will firstly deal with general issues where after we wish to address specific issues as contained in the Bill.

The debt recovery industry has had various discussions with DTI prior to today’s presentation through different industry organisations. As mentioned earlier by the Chairman Mr Ben Martins our approach is to make a contribution by focussing on practical issues that could affect the recovery industry. We also see our organisation playing an ongoing roll as the Bill further develops with reference to the regulations and the practical implementation of the Act.

Today debt recovery agents are regulated in terms of the Debt Collectors Act, which came into effect on the 7th of February 2003. A Council for debt collectors was established to regulate the industry, which Council is situated in Pretoria.

At the outset we wish to point out that the debt recovery industry has seen an increase in Black Economic Empowerment in the recent years. Of the 226 enterprises that are members of ADRA approximately 40 businesses are either 100% black owed or have a 50% black ownership component. Over and above being a vehicle for BEE the business of debt recovery also creates and promotes entrepreneurs. In other words great opportunities exist for more debt recovery businesses to be started which may in turn contribute to job creation.

Most of our member enterprises have 10 staff members or less with a basic office infrastructure. It is quite evident that many of our members do not have access to Information Technology. In other words computers and technological systems are not used by many of our members. This means that most debt recovery agents will not have the software or systems to assist in calculating outstanding balances due by debtors.

The statutory code of conduct for debt collectors, in terms of Section 19 (4), reads as follows:

"A debt collector shall deliver to a debtor, upon request and against payment of a prescribed fee, a settlement account containing a complete exposition of all debits and credits in connection with a specific collection: Provided that a debtor shall be entitled to request a settlement account free of charge once in every six months."

This section indicates that a debtor, on request, must be provided with a detailed balance calculation, once every six months, free of charge.

The calculation of the outstanding balances are extremely complicated by new issues introduced in the Bill such as: Suspension of the force and effect of a credit agreement, new formula to calculate interest which replaces the common law in duplum, suspension of raising charges, the "on" and "off" switching of interest etc. The problem is that the debt recovery agent has an agency relationship with the credit provider in most instances, save for where the debt is ceded or sold to the debt recovery agent. Now this means that should the debt recovery agent contravene the provisions of the Bill that the Credit provider will be liable for the conduct of the debt recovery agent. With this additional exposure credit providers may decide to refrain from appointing debt recovery agents and rather do their own collections in-house or start their own debt recovery agent managed by the credit provider. These debt recovery agents would not fall under the jurisdiction of the Debt Collectors Act. This situation may result in bringing the debt recovery industry to an end.

 

The other situation that may arise is that debt recovery agents not having advanced systems to calculate outstanding balances indicating what a debtor owes will simply close down their businesses. This again may result in only a few national debt recovery agents staying in business and creating a monopoly. This issue of the complexity of implementation should not be under estimated or seen as a knee jerk reaction to the Bill. To our association and its members this is of grave concern.

Another consequence is the possible increase in the costs of credit for the credit provider. This increase will then be rolled over to the consumer who will see an increase in the selling price of products. This situation may again see an increase in inflation which may result in interest rates maintaining a much higher rate which again has an effect on people that wish to purchase houses. One can see that when an aspect in the credit cycle is tampered with, be it at the credit initiation phase i.e. the lending side, the management portion or at the recovery side that a ripple effect will occur.

After listening to some of the other delegates last week it seems that the operation of the credit industry and the sharing of the information is mainly between the role players within the credit industry. This is understandable. ADRA is prepared to form closer working relationships with Government and Consumer bodies in order to create an environment of information sharing, relationship building and to better understand the concerns of the South African Consumer.

The Bill introduces Debt Counsellors with their primary task to educate and assist debtors with managing credit better or where required to have a credit agreement declared a reckless credit agreement. The concept of a Debt Counsellor is supported and encouraged. However the remuneration of Debt Counsellors should be thought through carefully. One does not want to have a situation where debt counsellor fees are so high that only a small amount of money is available to go towards the payment of debt. The question is whom should be debt counsellors and how should they be remunerated.

One option would be that debt counsellors are employed by the government. In order to fund the debt counsellors a levy of some sort may be considered which works on the basis of a % of the credit provider’s turnover. Together with this, private individuals should all be able to become debt counsellors with the remuneration being administered by the Credit regulator.

Another issue of concern for ADRA as well as most credit providers is the potential increase in debtors using delaying tactics when it comes to repayment of their debt. A solution here would be that a credit provider must be able, if suspected, to approach the Court or the Tribunal for an order compelling a debtor, where a credit agreement has been suspended, to do something by a certain date, failing which the suspension of the credit agreement will be lifted.

The last general issue is that of consumer education. We see credit education as the responsibility of the credit industry role players, Government and NGO’s. It is suggested that education in credit is commenced as soon as at primary school level. ADRA is taking education of its members seriously. To this extent ADRA, together with the FASSET SETA assisted in having the first qualification for debt collectors being registered with SAQUA during December 2004.

 

We wish to comment in respect of Specific issues as follows.

  1. Tracing consent

Due to the fact that a debtor’s information may only be used, in the event that he has consented thereto, for tracing purposes, large quantities of information hosted by Credit Bureaux will be rendered useless. It is crucial for the debt recovery agents to be able to trace an absconded debtor. The ability to be able to trace an absconded debtor by using data hosted by the Credit Bureaux is a key component for successful credit recovery.

 

Proposed Solution

Suggested that a phase-in period of three years be allowed for this issue.

  1. In Duplum -Section 103(5)

The inclusion of all amounts contemplated in Section 101 (1) (b) to (G) as well as interest, results in a situation where the interest is diminished proportionally to the necessary expenses. In an in Duplum scenario this is an untenable situation as the cost of credit is converted into interest, therefore a creditor will with the latest construction of this paragraph not only have his interest capped by the outstanding capital but also by the outstanding costs as set out in Section 101 (1) (b) to (G).

 

Proposed Solution

It is respectfully suggested that the Bill re-employs the In Duplum construction as published in the previous version of the Bill.

  1. Credit History Section 71(5) and Section 79(1) (b)

Section 71(5) calls upon the National Credit Register as well as any credit bureau to expunge from their records any information relating to any default by the consumer of credit as well as any record of debt rearrangement that such a consumer may have been subject to.

Section 79 (1) (b) in turn calls upon the credit provider to determine the probable propensity to satisfy in a timely manner or the obligations under all the credit agreements to which the consumer is a party, as indicated by the consumers history of debt repayment. These two sections seem to be in conflict with each other.

 

Proposed Solution

It is suggested that the credit history should not been expunged from the records of the national credit register or credit bureaux so that that a proper assessment may be made of a consumers credit position.

  1. Over indebted Section 79 – Reckless credit Section 80
  2. Section 79 (3)(a) states that in making a determination in terms of this section, the value of any credit facilities is the settlement value at that time under the credit facility. Section 80 on the other hand determines that the value of any credit facility is the credit limit at that time under that credit facility. These two sections clearly set different standards for the determination of over indebtedness and reckless credit.

    It is our submission that as over indebtedness is determined at the time of granting the loan, the standard for determining reckless lending at a later stage should be done on at least the same basis as over indebtedness.

     

    Proposed Solution

    It is suggested that when making a determination both in terms of over indebtedness and reckless credit the value of any credit facility should be the settlement value at the time of the granting of that facility.

  3. Collection costs (Definition)
  4. The collection cost as defined in the definition section of the Bill seem to exclude costs charged by debt collectors and attorneys.

     

    Proposed Solution

    It is suggested that for the purposes of clarity this definition is expanded to include the term registered debt collectors and attorneys. Further that a credit provider will only be entitled to collection charges if such a credit provider is registered as a debt collector in terms of the Debt Collectors Act (Act 114 of 1998).

  5. Suspension of interest on suspension of agreement Section 84(1) (b)
  6. It has been determined by this section that no interest fee or other charge under the agreement may be charged to the consumer during the period that the force and the affect of the credit agreement is suspended in terms of the act. The practical implementation of this is a very costly and difficult exercise. It is further suggested that this exercise may be impossible for smaller credit providers due to the cost and time implications.

     

    Proposed Solution

    It is suggested that the cost and interest not be suspended but that provision is made for a credit to be recorded against the debtor’s account at the relevant point in time

  7. Prescription

In many instances the collection process is stayed when a consumer makes a referral to a debt counsellor or tribunal. A calculation of the total possible time delay indicated a 6-month period during which collection actions are stayed. This means that prescription would run during this period. In essence the opportunity to recover the debt is shortened by 6 months should a tribunal or court not make an order in favour of the consumer.

 

Proposed Solution

The running of prescription should be interrupted as soon as the collection process is suspended.

 

Finally, ADRA believes that it is of crucial importance to record that there are many mischiefs that are rife in the broad spectrum of the credit industry and that these need to be addressed and corrected. We appreciate the necessity of providing protection to those many individuals who have been and continue to be exploited.

It appears to ADRA, however, that there will be unintended consequences from the implementation of several aspects of the Bill should it become Law in its present form.

In the view of ADRA, the consequences and practicality of implementation of some portions of the bill have not been completely thought through, and we have a real fear if they are brought into law, they will have stultifying effects on the entire credit industry, and consequently, on the economy as a whole.

We wish to thank you for the opportunity to provide our input at this hearing in respect of this important proposed legislation.

 

The Association of Debt Recovery Agents