2. The Standard Bank of South Africa Limited ("Standard Bank") welcomes the initiative taken by the Department of Trade and Industry ("DTI") to review the current credit legislation and is fully supportive of and committed to the achievement of the broad objectives and aims of the proposed Bill.

3. Standard Bank has, through the Banking Association, participated In a process of engagement with the DTI since the first publication of the Bill in August 2004. We are appreciative of the efforts of the DTI in terms of addressing some of our concerns,

4 This submission is made in two parts. Part 1 deals with the main areas of concern at a policy level, with more detailed comment on specific provisions that are deemed to be problematic from an interpretive or administrative perspective outlined in Part 2.

5 Standard Bank thanks the Portfolio Committee for inviting comment and input into this very important piece of legislation and looks forward to the opportunity to participate in the public hearings scheduled to take place during August 2005,

Yours faithfully

STANDARD BANK COMMENT ON THE NATIONAL CREDIT BILL

1.Introduction

1.1 Standard Bank is conscious of the need to review the current credit legislation which has created a divided credit market, The Bill will go a long way towards achieving the policy objectives as defined.

1.2 Having had the opportunity to consider the practical and economic implications of the Bill, we are however of the opinion that certain elements ot the proposed legislation may give rise to unintended consequences that could inhibit the achievement of these stated objectives.

1.3 In particular, the collective impact that a number of the provisions will have on consumers is of concern to us. The objective of improving access to credit that is affordable will potentially not be achieved.

1.4 This submission aims to highlight the key areas of concern that we believe should be addressed prior to the Bill being enacted by Parliament

2 Main areas of concern

1.1 Whilst the need certainly exists to offer consumers alternative mechanisms to resolve disputes and to establish processes to facilitate the restructuring of debt and repayment obligations in deserving cases the provisions of the above Sections are likely to result in too lengthy a collection process. This will undoubtedly have serious implications for credit providers in terms of the likely timeframes to collect outstanding debt, with a resultant increase in costs, provisioning for bad debt and write-offs

2.1.2 We are concerned that the volume of cases to be dealt with by debt counsellors and the Magistrates' courts has been underestimated. Whilst the Bill aims to provide guidelines in terms of the registration requirements for debt counsellors, it will be a formidable task to establish and regulate such a process.

2.1.3 The unfettered discretion given to the Magistrates' courts in Section 86(11) is problematic in that, despite due process having been followed by the credit provider, the courts can at any time order that the debt review process be resumed The proposed provisions are furthermore open to abuse by customers who merely wish to frustrate the collection process. An example in this regard would be customers using the provisions merely to delay the legal debt enforcement process with full knowledge that a transaction was not reckless in the first place.

2.1.4 The practical implication of these provisions may well result in less access to credit, particularly for the low-income segment of the market. There is a clear need to balance the need for alternative dispute resolution mechanisms without forcing credit providers to become more risk averse in their lending policies.

2.1.5 Our recommendation is that all the time periods stipulated for debt review and counselling should be amended to reflect "calendar days" rather than "business days", that clear guidelines be developed to govern the debt review process and that appropriate measures should be introduced to prevent consumers abusing these provisions.

2.2 Reckless credit (Sections 80 to 82)

2.2.1 The Bill imposes onerous requirements on all credit providers to assess the affordability of credit before granting such credit. We fully support the need to promote responsible credit granting and are conscious of the need to extend access to lower cost finance to low income consumers. However, we are concerned that this policy intervention may have exactly the opposite effect.

2.2.2 Credit providers, especially the large, formal and regulated organisations, may be forced to err on the side of caution (from a lending policy and operational perspective) in order to mitigate the additional credit risk due to potentially large numbers of challenges being brought against credit providers in terms of the reckless lending provisions.

2.2.3 The penalty in terms of a transaction being deemed reckless is severe for credit providers, as the entire agreement is set aside with no legal recourse for the credit provider. We suggest that there should be a balance between the interests of consumers and credit providers.

2.2.4 It has to be acknowledged that the collective impact of these provisions, together with the increase in the time period to recover outstanding debt, introduces a significant new risk to credit providers. This will need to be mitigated (at least over the short to medium term) through either denying access to credit or increasing the price of credit substantially.

2.2.5 In addition, the requirements of Section 81(2) would seem to imply an onus on credit providers to not only assess affordability, but to also verify all details provided by customers in order to avoid a credit transaction being deemed reckless. This will erode all the progress made towards improving operational efficiencies through the use of technology and the deployment of internationally acceptable credit scoring practices and processes. The resultant return to manual" assessment of credit could result in a further increase in the cost of credit to the consumer and thus limit access for lower income consumers.

2.2.6 In light of this, we recommend that these provisions be reconsidered to formally recognise the exclusive use of credit scoring practices for the evaluation of credit extension for those market segments and products (e.g. credit facilities) where such evaluative mechanisms have proven to be the most consistent, predictable and cost effective method of assessing credit risk.

2.27.The provisions of Section 71(5) (requiring the expunging of debt re-arrangement orders or agreements by a credit bureau) are also of concern, since this practice is in conflict with the obligations placed on credit providers to take reasonable steps to assess the proposed consumer's debt repayment history" as outlined in Section 81(2) (ii).

2.2.8 We further suggest that credit providers' liability 3rising from reckless credit agreements should be limited to a defined period, calculated from the commencement date of the agreement itself. We propose That a period of no more than 24 months would be a reasonable period during which a consumer may claim that a credit agreement is reckless. This will also ensure that credit providers are not under an obligation to keep records for an unreasonable period of time, thereby adding unnecessarily to the credit providers' costs. (In the instance of mortgages, reports would have to be kept for 30 years if a limitation is not imposed).

2.3 Credit insurance (Section 106)

The provisions of this Section are problematic from a credit life as well as a short-term asset insurance perspective and will no doubt have a profound impact on the credit risk associated with asset based lending. The current wording of this Section exposes credit providers and consumers to undue risk and we submit that the consequences thereof will be unsatisfactory as outlined below.

2.3.1 Insurance cover against loss of damage of an asset held as security

2.3.1.1 Restricting a credit provider's ability to require short term insurance to cover only the consumer's "outstanding obligation" will, in terms of accepted insurance practice, result in the application of the principle of "average", should the consumer decide not to insure the difference between the outstanding balance and the replacement value. It, for example, a house with a replacement value of R200 000 is only insured by the consumer for R100 000 (being the outstanding balance on the mortgage bond), the insurer wilt only pay an amount of R25 000 to the consumer in the event of R50 000 damage to such property, alternatively R100 000 in the event of the house being totally destroyed.

2.3.1.2 The proposed mechanism that aims to deal with insuring the difference between the outstanding balance and the full replacemer4 value of an asset will be cumbersome and will create opportunity for administrative errors, thus leaving the consumer exposed. We suggest that it would be more appropriate to deal with these issues in the relevant insurance legislation.

2.3.1.3 We suggest that credit providers granting mortgage based credit should be entitled to insist that the full replacement value of the property is insured at all times. Section 43(5) of the Short-Term Insurance Act, 1998 should be the governing legislation in this regard, and the issue should not be dealt with in the Bill.

2.3.2 Credit life assurance on credit facilities

2.3.2.1 In terms of Section 106(4)(b) where a credit facility is fully settled at the end of a preceding month, no credit life assurance can be effected 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.

2.3.2.2 We propose that the words "settlement value" be replaced with the words "credit limit" in Section 106(4)(c)(i)

2.4 Maximum rates of interest, fees and charges (Section 105)

2.4.1 We take note of the comments in paragraph 1 of the "Memorandum on the Objects of the National Credit Bill, 2005", which proposes that the focus should shift from price control to protection against over-indebtedness, and to the regulation of predatory practices.

2.4.2 We further understand the need to protect consumers from the "usurious" pricing of credit, and urge the DTI to take cognisance of the potential structural impact that the proposed interest rate and fee caps could have on the market. A substantial amount of effort has been put into developing proposals at an industry level through the Banking Association for consideration by the DTI in this regard.

2.4.3 Setting interest rate and fee caps at inappropriate levels may limit the extent to which lower cost credit extension can be made available. The pricing of credit should remain a function of risk and return and we believe that the proposals developed by the Banking Association succeed in addressing our concerns in this regard.

2.5 Amendment of the Common Law

We suggest that serious consideration must be given as to whether it is desirable to amend well-established common law principles such as the in duplum rule (Section 103(5)) and set-off (Section 90(2)(n)). Unintended consequences may arise, especially given that the common law will only be partially amended insofar as it relates to agreements governed by the Bill.

2.6 Transitional Provisions

2.6.1. It is of concern that certain provisions of the Bill will apply to pre-existing credit agreements:

2.6.1.1 Sections 122 and 125 allow a borrower to terminate a credit agreement early, without penalty (except as applicable to a large agreement), which will conflict with the terms of existing credit agreements specifically allowing for the recovery of an early termination fee as calculated in terms of 'Section SA of the Usury Act, 1968;

2.6.1.2 Section 123, and Chapters 6 through 9, have the effect of applying the new debt enforcement procedures to pre-existing agreements. As credit providers will, in all likelihood, price for the delays expected by the new debt enforcement procedures, the result would be to apply these new debt enforcement procedures to credit agreements that have not been priced accordingly.

2.7 Regulations

2.7.1 We believe that the transparent manner in which the Bill has been drafted has been beneficial to all stakeholders, and ultimately the consumer as well, with the industry having had sight of numerous versions of the Bill and having had the opportunity to provide extensive input on those drafts.

2.7.2 Similarly, we believe it would be beneficial, and accordingly request the committee, to involve the industry in the drafting of the regulations to the Bill. Our intention is to proactively assist with this process in a constructive manner, ultimately resulting in new legislation that is beneficial to all.

2.7.3 Further to this, and given the extensive system and process changes necessary to comply with the provisions of the Bill we strongly recommend that the regulations, once published, should afford credit providers a sufficient period of time3 probably at least 24 months, to implement the provisions of both the Bill and the regulations.

3 Conclusion

Whilst the issues highlighted in this document give rise to some serious concerns, it should be possible to resolve these through further engagement and discussion between policy makers and industry representatives. In this regard, Standard Bank will continue to support the efforts of the DTI to reform the credit market in South Africa and is fully committed to assisting Government in this process.

PART 2

1.Definitions (Section 1)

1.1 Definition of "credit guarantee": We suggest that this definition be changed to "suretyship". 12 Definition of 'juristic person": It is not clear why there is a requirement for at least three trustees.

2 Application of Act (Section 4(1)(a)(1))

Guidelines need to be published on how to determine the "asset value/annual turnover" figures. The concern still exists that this definition means that smaller subsidiaries of large corporates will by default fall within the ambit of the Bill. The Competition Act makes provision for this and allows for the incorporation of shareholders' loans as part of the asset value.

3. Credit agreements (Section 8(5))

It is unclear whether this Section would include guarantees by bank and suretyships.

4 Categories of credit agreements (Section 9)

It is unclear whether an overdraft facility (being a "credit facility" in terms of the definition of same) secured by a mortgage bond (being a "mortgage" in terms of the definition of same) would be an intermediate agreement (which includes credit facilities in terms of Section 9(3)(a)) or a large agreement (which Includes mortgages in terms of Section 9(4)(a)).

5.Right to receive documents (Section 65(2)(a))

This Section should include ATM machines as an option for delivery of documents.

6. Right to confidential treatment (Section 68)

6.1 For the sake of clarity, this Section should incorporate a provision that a credit provider shall be entitled to release the consumer's confidential information to a surety or guarantor of the consumer.

6.2 Further to this, bank reports are common, and are currently based upon the consumer's implied consent. This Section no longer allows for this established banking practice to continue, as written consent (for both the disclosing bank and the receiving bank) is now required.

7.Application for debt review (Section 86)

This Section should exclude circumstances in which the credit provider is entitled to apply for an urgent court order (i.e. where the consumer is planning to leave the country etc.).

7.2 We suggest that this Section be reviewed in the light of our comment in this regard in Part 1 hereof. This Section is an example where a 60 calendar day review period would be more appropriate than a 60 business day review period for a debt counsellor to finalise a review.

8 Effect of debt review or re-arrangement order or agreement (Section 88)

The words "must not incur any further charges under a credit facility" in Section 38(1) are problematic in respect of charges incurred arising from a transactional account being an account where, for example, a salary may be deposited. We suggest that, in these instances, a limit must be placed on further extension of credit instead of further charges being incurred.

9. Unlawful provisions of credit agreement (Section 90(2)(k)(iv))

This Section seems to prohibit the "additional sum" ordinarily registered on mortgage bonds (i.e. the 25% additional sum registered as further security for purposes of the preservation of property, rates and taxes, legal charges, advertising etc.).

10 Interest (Section 103)

10.1.Subsection (1) effectively rules out the possibility of tiering interest rates. This is problematic, as it has become accepted practice (linking the cost of credit to aspects such as reserving requirements and employment arrangements e.g. preferential rates for staff of defined entities which revert to prevailing customer rates upon termination of the employment contract) Should it not be possible to tier interest rates in line with the associated risk., credit providers will apply averages, which will prejudice customers and reduce access to credit.

10.2.Subsection (5) is still problematic in that it still does not accurately reflect the in duplum rule. The in duplum rule applies only to accumulated, unpaid (i.e. due and payable), arrear interest, and it has never extended to include fees, insurance, administration charges, collection costs etc. We recommend that in an attempt to correctly codify the in duplum rule, the Section should be reworded to read as follows:

"Despite any provision of the common law or a credit agreement to the contrary, the interest amount contemplated in Section 101(1)(d) that accrues during the time that a consumer is in default under the credit agreement may not, in aggregate, exceed the unpaid balance of the principal debt under that credit agreement as at the time the default occurs".

10.3 We stress that, if this change is not effected, it will amend the long established principle of in duplum’.

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

11.1 We interpret Sections 104(1) and (3) to refer to variable interest rates, and Sections 1 04(2) and (4) to refer to fixed interest rates. As we understand it, other credit providers interpret this section differently and as such we believe there is a need to clarity the wording of this Section.

11.2. We suggest that, in the overall context of this Section, care should be taken that the Bill does not stifle the development of alternative interest rate products (e.g. fixed rates), which may benefit consumers by reducing their exposure to interest rate volatility.

11.3 We suggest, given the practice of the South African Reserve Bank to only announce bank rate changes in the late afternoon, and the wide publication of these rate changes, that it would be reasonable to amend Section 104(3) to require a formal notification to be sent to consumers by credit providers within a period of 3 months.

12 Credit insurance (Section 106)

12.1 Whilst provision has now been made for credit providers to insure assets, the manner in which the Bill proposes credit providers deal with it is extremely onerous. The approach outlined in Subsection (6) is cumbersome and will lead to more costly insurance arrangements for consumers, i.e. two policies with two debit orders.

12.2. The Bill does still not allow for insurance premiums -to be collected annually and this remains problematic, especially in terms of short term insurance cover as well as life cover.

12.3. Subsection (1) should be expanded to include a provision that credit providers may require consumers to maintain sufficient insurance cover in the case of goods purchased under instalment sale or lease transactions. In such cases the credit provider is the "owner" of the assets, i.e. assets not 'pledged as security".

12.4 Please note that the Bill advocates that the monthly insurance premium must be levied on a reducing balance basis. We have two concerns in this regard:

1. this could have the result that the administration fee in Section 106(5)(a)(ii) exceeds the actual premium recovered;

12.4.2 Section 106(7) (a) provides for premiums to be paid as equal monthly premiums, which contradicts the reducing balance basis provided for in the Bill

13 Increases in credit limit (Section 119)

14 Consumer's or guarantor's right to settle agreement (Section 125(2)(c))

We suggest that the ambit of this Section should be expanded to include intermediate agreements, as early settlement may have the same impact on these types of agreements as it would have on large agreements.

15 Debt enforcement (Sections 129- 133)

1 5.1 We propose that Section 129 should also provide for processes that may be implemented -in instances where consumers are in breach of their obligations in terms of credit agreements (as opposed to only dealing with instances of default).

15.2 The requirement that a credit provider may only approach the court it a consumer has been in default for at least 20 business days is onerous and we propose that the number of days referred to should rather be calendar days (Section 130(1)).

15.3 It is not clear what the requirements are for consumers to apply for debt review in response to a notice issued by a credit provider as required in terms of Section 130(1). Section 86(10) makes reference to the fact that a credit provider may give notice to terminate the review provided 60 business days have elapsed since the consumer applied for debt review When does this period commence?

15.4 Section I130 should provide guidelines in terms of the maximum time period within which a consumer has to apply for debt review after receiving notice from a credit provider as contemplated in Section 729(1)(a). We are further concerned with the inclusion of the word "propose" in this Subsection and recommend that it be replaced with "advise".

16. Agents (Section 163)

We remain concerned with the very onerous nature of the requirement to identify all agents and suggest that this Section be amended by the inclusion of the words "or the consumer's agent" after the words "credit provider directly in the second line of Section 163(1)(a). We also suggest that there should be a specific exclusion in Section 1 63(3) in respect of the application of the whole of Subsection (1) insofar as it relates to a consumer's agent.