> Posted by Jeffrey Riecke, Communications Assistant, CFI
To combat high and rising national over-indebtedness levels, last month the South African Minister of Finance and Minister of Trade and Industry announced new steps the government will take to aid those entrapped in over-indebtedness and to prevent more individuals from befalling the same fate.
The actions follow the presidential cabinet the week prior authorizing the ministers to take action on the issue, as over-indebtedness has grown to be an alarming nationwide problem. The government enacted legislation in the last decade, including the Financial Advisory and Intermediary Services Act (2002) and the National Credit Act (2005), to protect clients and control for reckless lending. However, such industry aims have proven to be no easy task. The level of household indebtedness has increased from 50 percent of disposable income in 2003 to 76 percent in June 2013.
A few focus areas of the government’s forthcoming actions are enhancing lending controls, reviewing pricing caps, regulation of credit life insurance policies, regulations on debt-collection firms, relief for distressed borrowers, and improving the emolument attachment and garnishee orders system. Here’s the full list of planned measures shared in the government’s media release.
Preventative steps to minimize the risk of over-indebtedness in the future:
- Setting clear affordability criteria that all retail lenders have to adhere to and clearly defining a “reckless” loan, thus enhancing reckless lending controls under the National Credit Act.
- Ensuring the provision of credit is not only affordable but suitable. For example it is clearly inappropriate to promote a short-term (30 day) loan as being suitable for supporting borrowing over longer periods.
- Reviewing the pricing caps under the National Credit Act to ensure that current levels of caps are appropriate, especially for pay-day loans where rates are excessive.
- Strengthening regulatory monitoring, supervision and enforcement to ensure the shutting down of unregistered credit providers and full compliance of registered credit providers.
- Reviewing the regulatory framework for credit insurance policies that are sold with, or linked to, credit.
- Setting norms and standards for access to the payment system, including for debit orders. Persistent reckless lenders should be denied access to the payments system.
- Setting norms and standards for emolument attachment and garnishee orders issued for credit.
- Extending and strengthening the debt collection law to apply to legal firms.
Regulating credit-linked deductions allowed on employer payroll systems.
- Investigating simpler and lower-cost insolvency arrangements for lower- and middle-income individual persons.
Assistance to households that are already over-indebted:
- Engaging with lenders and their industry associations to provide appropriate relief to qualifying distressed borrowers by reducing their installment burden, without additional cost to the borrower.
- Enabling major lenders to provide voluntary debt relief measures to distressed borrowers without charge, in addition to the current debt counseling process, subject to compliance with the National Credit Act and Financial Advisory and Intermediary Services Act
- Engaging with current lenders to take steps to withdraw certain categories of existing emolument attachment orders for credit, and to use such orders for future credit only as a last resort and according to a robust code of conduct.
- Regulating debt-collection firms, including legal firms, to ensure they do not indulge in unscrupulous debt-collection practices.
- Encouraging employers to investigate the legitimacy of all emolument attachment or garnishee orders they may be enforcing against their employees (for purposes of credit not maintenance) and to write to credit providers to reduce or even remove all onerous orders. Public sector employers will be expected to lead by example and implement the above proposals early next year, as soon as guidelines for the public sector are published.
The Minister of Finance and Minister of Trade and Industry will develop a more detailed implementation framework sometime this year.
To read the government’s full media release, click here.
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