National Credit Regulator bares its teeth

Posted 01 May 2013 Written by Ciaran Ryan
Category Banking

The National Credit Regulator (NCR) announced last December that it was withdrawing support for various industry codes that had been formulated to prevent over-indebtedness.

The reason? Reckless lending, lack of accountability, and excessive powers granted to the Credit Ombud, according to a statement issued by the NCR. Some aspects of the Codes are also deemed to be in violation of the Constitution. The Regulator said it would follow this up with further action, which the debt counselling industry hopes will put credit providers' feet to the fire for what many regard as rampant abuse of the National Credit Act by those who lend money.

The NCR was set up under the National Credit Act of 2005 to regulate credit provision and provide a measure of protection for borrowers. Clearly, it is unable to do its job when unsecured lending rose 21% to R381 billion in the year to June 2012. Unsecured debt includes personal loans, credit card debt and credit from retailers.

Something is wrong when 9,3 million out of 19 million credit-worthy South Africans are behind on their bills by three or more months. That’s about half the credit-worthy population.

South Africans are being tossed out of their homes in their thousands, yet no-one in the banks is being asked to account for how half the credit-worthy population ended up in this position.

"Millions are swamped in debt," says Deborah Solomon, a registered debt counsellor and founder of the Debt Counselling Industry portal (, according to Insurance Times and Investment News. "But our courts are not swamped by lenders being charged with reckless lending."

"Yet officials air their concerns about possible lending 'abuses' and debt counsellors have regularly raised concerns with the NCR."

"The mismatch between sky-high debt and these codes speaks to the credit provider's lack of enforcement of their code and the NCA. The banks have refused to accept the law such as the in duplum rule (which broadly states that the outstanding interest payable on debt which is in default should not exceed the capital amount borrowed*)."

"Under new management, the NCR is seen to be reclaiming its statutory responsibilities, which needs to be sustained to ensure all parties are kept in line. Furthermore, this industry has been manipulated by certain associations and bodies who have only looked after their own personal interests," according to Solomon.

The NCR announced that it had reviewed various industry codes, notably:
·         the Code of Conduct of Credit Providers to Combat Over-Indebtedness;
·         the Debt Counsellors' Code of Conduct for Debt Review; and
·         the Payment Distribution Agencies’ Code of Conduct for Debt Review.
The NCR's review determined that the Debt Counsellors’ Code of Conduct for Debt Review, among other things, lacked accountability with regards to implementation, monitoring and reporting. It was deemed unconstitutional and conferred excessive jurisdiction on the Credit Ombud.

In relation to the Code of Conduct of Credit Providers to Combat Over-Indebtedness, NCR investigations “uncovered evidence of significant reckless lending by credit providers, which was contrary to their commitments as enshrined in the Code and the National Credit Act.”

The Notice furthermore states that the NCR has determined that the National Debt Mediation Association has failed to report annually to the NCR as required by the Code of Conduct of Credit Providers to Combat Over-Indebtedness; and that the Payment Distribution Agencies Code of Conduct for Debt Review contains similar provisions to those set out above, which are contrary to the NCA.

“In light of the above, the NCR intends to withdraw its approval of the Codes as well as its recognition of the National Debt Mediation Association, Debt Counsellors Association of South Africa, Association of Payment Distribution Agencies and the Credit Ombud, in terms of any role they perform under the relevant Codes,” said the NCR statement.

CEO of the NCR, Ms Nomsa Motshegare, said the reason for the withdrawl of approval was that larger credit providers have caused over-indebtedness among consumers. She has also commented that despite a sustained increase in defaults, unsecured lending continues to grow rapidly in South Africa.

“The notification by the NCR that it intends to withdraw its support and recognition of the Codes is widely regarded by the credit industry as a precursor of further action by the NCR against industry players,” said the NCR.

Said Solomon: "The debt counselling industry works hard to assist debtors, but prevention is better than cure. We must combat reckless lending and credit extension abuses and there are many."

"We see cases where credit consultants don't check application forms for obvious misstatements and lies. They focus solely on obtaining new business."

In Duplum

*The in duplum rule is a common law principle that was given statutory force in the National Credit Act. The rule was tested in the case of Nedbank v National Credit Regulator (662/2009 & 500/2010) [2011] ZASCA 35), and ended up in the Supreme Court of Appeal (SCA).

In a review of the case by Bowman Gilfillan:

It is trite that the common law in duplum rule limits the amount of interest that may be charged on an outstanding debt and provides that such interest amount cannot exceed the capital amount outstanding.

The issue to be considered by the SCA was the issue of whether or not section 103(5) of the NCA codifies the common law position of the in duplum rule or in effect alters and extends the rule. Section 103(5) of the NCA states that despite any common law or credit agreement to the contrary, any interest which accrues while the debtor is in default may not in aggregate exceed the unpaid balance of the principal debt.

The SCA held that section 103(5) of the NCA was no more than an application of a rule to specific situations, being credit agreements regulated by the NCA, and that the rule was no more than a statutory provision with limited operation. The SCA further outlined the difference between the common law rule and the statutory rule. The common law rule as already stated above provides that interest ceases to accrue once the interest reaches or is equal to the outstanding capital sum. The statutory rule created by the NCA alters and extends the common law rule through including not only default and contractual interest but also charges such as initiation fees, service fees, credit insurance costs, administration charges on interest and collection costs. This extension offers better protection to the consumer, albeit to the detriment of the credit provider.

The result was that the SCA confirmed the declaratory order of the court a quo (court of appeal) and in so doing extended the ambit of the common law meaning of the in duplum rule in the context of credit agreements regulated by the NCA.
Relevant Legislation:
National Credit Act
Constitution of the Republic of South Africa

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