If ever there was an issue on which the state and private sector should work together, it is consumer debt regulation.
SA is blessed with a Mercedes-Benz of a debt-regulation framework that is the envy of many other countries, but the model is now a few years old and the wheels could come off if it isn’t brought out of the garage soon for some much-needed maintenance work.
It was to be expected that the regime – National Credit Regulator - created by the National Credit Act would take time to bed down. A world-first piece of legislation, its progressiveness is, unfortunately, matched only by its lack of clarity. As the Supreme Court of Appeal put it in a judgment earlier this year, the law, which came into effect in 2007, “cannot be described as the best drafted act of Parliament which was ever passed”.
That, we suggest, is judge-speak for, “It’s a dog’s breakfast”.
Still, the law is ours to make the most of and to shape into the functional tool many hope it can be. But it is not just about hoping for the best. The debt-review system created by the new law may be one of the best weapons we have to prevent future widespread consumer debt default and to nurse overindebted consumers back to financial health without the traumatic and long-term disruptive consequences of foreclosure.
The rules of engagement in the act are being worked out. A Constitutional Court decision last month had the National Credit Regulator warning that creditors could exploit a slow legal process to act unilaterally against debtors once an initial 60-day period was up.
There are likely to be many more rulings in courts at all levels before a coherent set of procedures is in place. Some people, such as former regulator CEO Gabriel Davel, are calling for the Department of Trade and Industry to step in and rewrite the act to fix its shortcomings.
But there is a better way to bring about certainty quicker, one that is already under way.
Debt Busters: Managing Your Money Through the Recession; by Eddie Hobbs
In 2005 Currach Press published the best-selling personal finance manual. Short Hands, Long Pockets. Since then the global and personal financial climate has changed almost beyond recognition and the cold winds of unmanageable debt, negative equity and redundancy are blowing through many homes. Debt Busters is the only book you will need to survive and emerge in leaner and fitter financial shape.
A standardised set of rules agreed by lenders, debt counsellors and payment distribution agencies already has the support of 80% of lenders by number and 90% by value of loans. Driven by the banking industry, it is perhaps understandable that some types of lender are reluctant to come in. In a system that requires different lenders to submit themselves to a repayment roster in which they, as unsecured creditors, may rank behind secured lenders in repayments, some will inevitably dig in their heels. In addition, the so-called in duplum rule limits the total repayment any creditor receives to twice the capital outstanding as of the date of default. Some creditors are going to do their sums and decide they can get more back by acting unilaterally.
The Debt Counselling Rules System has the potential to benefit the banks, but it is not perfect. Nor is it being upheld fully by all of the members who support it.
Debt counsellors complain that banks are bad at responding to debt- restructuring proposals sent to them in a bid to arrive at a mutually acceptable repayment plan. And there are differences within banks. Industry figures show Standard Bank regularly measures the worst of the big four for response time on repayment proposals as well as for the proportion it accepts.
By the same token, tightening up rules to prevent abuse is clearly necessary. The recent 60-day-rule judgment about which the regulator expresses concern limits the ability for wrongdoing that lenders such as Wesbank cite — of debt counsellors signing up taxi operators to help them exploit the 60-day period, and extend it by court action, to avoid making repayments.
One lender reports that some taxi operators were able to drive their vehicles and generate income for as long as 18 months without having to make a single repayment, merely by milking the debt-review system with the assistance of unscrupulous debt counsellors.
Unless all players in the debt- review game work together, they cannot fault the slow pace of official resolutions. We also hope that the failure to appoint a new regulator CEO this year — a vacancy that has existed since January — will soon be rectified. The country needs a functioning, confident, regulator. More to the point, it needs a regulator in which both the public and lenders have full confidence, and the delay in filling the post mitigates against that.
The debt-review system has facilitated the payment of more than R4,9bn back to lenders since its inception. That figure could be higher. The post-act environment is a triumph for SA and one we should strive to enhance, because it is in all of our interests for it to be so.
SA’s debt-to-household income ratio stood at 76,8% in the first quarter, lower than the 2008 peak of 82% but still uncomfortably high. Speculation in the markets lately has been that the next move in interest rates is likely to be downward if the global economy continues to slow and drags SA down with it.
However, if interest rates start rising — and they will eventually — and unsecured debt keeps rising, as has been the case recently, that could push many more people into debt traps they would not be able to escape from without assistance.
If and when that time comes, the debt-review vehicle will need to be out of the garage with tyres pumped and engine running smoothly.
We also hope that the failure to appoint a new regulator CEO this year — a vacancy that has existed since January — will soon be rectified
Source: Business Day
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