Does the National Credit Bill do the trick?

From 1 June 2007, all compliance sections of the National Credit Act will be in force, replacing the countrys existing legislation on credit agreements. This is the final stage in the phased introduction of the new legislation which began when the Act was

Agreements entered into before the cut off dates will still be subject to the provisions in the old legislation.

The new legislation has been put in place to plug the gaps and loopholes which existed in an industry which enjoyed a less than admirable reputation. The Act is another in a raft of regulations designed to protect consumers of financial products. It aims to provide a fair, transparent, efficient and accessible credit market to promote social advancement and economic welfare in South Africa.

Educating consumers about their rights

South African consumers increasingly rely on credit to meet their financial requirements. Despite the high levels of credit extension, most consumers are unaware of the rights provided in the National Credit Act. To this end, a National Credit Regulator (NCR) has been established as a regulatory body to oversee the National Credit Act and ensure that customer rights are protected.

The NCR is currently focusing on consumer education prior to the 1 June cut off date.

They will be rolling out education programmes to educate consumers about their rights under the new Act. The programme will involve workshops and seminars for non-government and community based organisations in all the provinces.

Banks, retailers and micro-lenders must tow the line

A number of financial service providers and products are regulated by the Act. Banks will come under close scrutiny and will have to apply the Act to loans, home loans, overdrafts, credit cards, vehicle finance and any other form of personal finance. Retailers who provide furniture finance, clothing accounts or other types of retail credit will also be regulated under the Act. A final category encompasses micro-loans and pawn shop transactions.

A number of products are specifically excluded from the Act. These include insurance policies, leases on immovable property and transactions between a stokvel and members of a stokvel. Ordinary sales and credit sales where no interest or late payments are levied are also excluded.

One of the key objectives of the new legislation is to ensure that credit agreements are issued in clear, understandable language and include accurate quotes.

The Act also stipulates the information that should be included in advertising and marketing material for credit products. Product providers have to include specific information on the cost of the credit supplied.

An important section of the Act deals with reckless credit agreements and over-indebtedness. In terms of the legislation, courts which determine that a credit agreement is reckless can set aside the consumer's obligations in terms of the contract. This means that lenders will have to properly assess each new loan application (or extension) to determine the borrowers financial situation - and ensure that the new agreement does not leave the consumer over-indebted.

Debt counselling will also be introduced to assist those individuals who are struggling to repay their debts.

Low income earners are still at risk

Despite the fanfare and consultation that has accompanied the new National Credit Act the press is full of stories of companies with poor lending policies. The most recent stories centre on furniture retailers and gyms. A great deal of effort will be required to ensure that these companies comply with the Act, particularly where marketing and advertising is concerned.

Consumers should not put all their faith in regulation and still have to take responsibility for their own finances. The truth is that the maximum allowed interest charges on short-term credit agreements have not been substantially lessened by this legislation, and repayments can quickly eat away at disposable income.

Low income earners who make use of micro-lenders are just as likely to suffocate in debt as before.

Editor's thoughts:
The National Credit Act regulates the lending environment and was never intended as a measure to reduce credit extension to South African consumers. Do you think the Act goes far enough - or should more drastic steps be taken to prevent the exploitation of the poor or uneducated by micro-loan companies and retailers? Send your comments to gareth@fanews.co.za.