Debt counselling a good place to start
Financial planners across South Africa are responsible for ensuring that their clients make sensible preparations for future financial requirements.
One of the adviser's major objectives is to ensure that clients take responsible steps to manage their finances. A sensible first step prior to implementing a savings plan is to focus on the eradication of debt.
Unfortunately, many South Africans are drowning in debt and the high interest charged on these debts. Theories abound as to why the problem exists, including financial illiteracy, poor lending practices and poverty. What is important is that individual borrowers acknowledge the part they played in creating the mess and take action to remedy the situation.
Help is finally at hand in the form of the National Credit Act of 2005. Section 34 of the Act relates to over-indebtedness and the restructuring of debt. According to the official website of the National Credit Regulator (NCR) (www.ncr.org.za ) "the Act makes provision for the registration of debt-counsellors to assist over-indebted consumers."
Such counsellors have to undergo training approved by the NCR.
Life Offices' Association gets in on the Act
In a recent press release, Lerato Mametse, Communications Manager for the Life Offices' Association (LOA) provided details of the organisations Financial Wellness Programme which is run by The Careways Group. This programme was implemented a year ago to assist government employees in gaining control of their personal finances.
The programme will ensure that government employees have access to debt councillors who have been accredited to provide services by the National Credit Regulator. These services will be provided free of charge.
Such news is heartening for those government employees who have fallen into financial difficulties. One of the major concerns with regards the debt counselling provisions in the Act was the expense which would be incurred by individuals who were already in precarious financial situations.
The final requirements of the National Credit Act will come into effect on 1 June 2007. The Act requires that all debt councillors register with the National Credit Regulator. Qualified debt councillors will have powers to assist in the restructuring of client debt payments and in identifying irregular lending practices.
Frightening stories from the 'victims' of micro finance
Mametse reported on a number of shocking examples of how the exorbitant interest charges on small and mid-size loans can result in a literal debt explosion. These scenarios emerged from various workshops held with over 540 government employees since March last year.
Mametse observed that "One of the participants in the workshops, for example, owed creditors a total of R13, 591. But with excessive interest charges, this debt spiralled to a whopping R85, 743. And every month the compounding effect of interest pushed the debt higher and higher." According to Mametse, The Careways Group workshops showed that "people with short-term debt are commonly paying finance charges of up to 157% a year. Invariably, this often forces people to take on more debt to finance the older debt."
The result is that many borrowers become trapped in a never-ending debt cycle. One of the purposes of the new Act is to put a stop to the exploitation of lower income earners and the financially illiterate.
Another burden on the financial services sector
Provisions of the Act place another burden on the financial services sector. While the initial administrative obligations fall on lending institutions such as banks, micro-finance providers and various retailers, it makes sense that financial planners and other professionals who assist with matters relating to personal finance will also have to play their part.
Financial advisers are at the front line of dealing with individuals who are looking for assistance in restructuring their financial affairs. As such, financial advisers should ensure that they have a basic knowledge of the Act. This will allow them to give debt ridden clients the correct advice to get their finances back on track.
While this represents another requirement in an already long list of services- it makes sense for the financial provider to recommend debt counselling to individuals who are in serious difficulty. Addressing excess debt is, after all, the first step on the road to financial recovery.
Editor's thoughts:
One of the first things that a financial planner should do when meeting a new prospect is to complete a thorough needs analysis. At this point, they should be able to determine the prospective client's financial position- and of course the extent to which the prospective client is in debt. Do you think that financial planners will have to play a role in ensuring that individuals seek debt counselling? Send your comments to gareth@fanews.co.za
