| CAPETOWN CONFERENCE: Political Success to Overcome Apartheid is threatened by Overindebtedness. International Experts from all Continents discussed with South African Officials and Scholars on Credit and Debt in the ECRC conference. A first Reporst. |
Conference in Capetown: Overindebtedness a world wide problem also in developing countries. Different approaches to responsible credit and lending.
The Conference of the International Association of Consumer Law in cooperation with ECRC in the Republic of South Africa revealed that the problems the developed world faces with credit and debt are already exported and run out of control in the third world. It may even affect the South African economic miracle of cooperation
OVERINDEBTEDNESS IN SOUTH AFRICA
Co-sponsored by the South African Credit Regulator the CEO of this institution as well as the head of competition office together with officials from Namibia and Nigeria showed the enormous efforts South Africa has to undertake to cope with an exploding and uncontrolled credit market. After the soft political revolution the process of integration depends largely on the economic success to provide more chances for the overwhelmingly poor black population. Miles of slums alining along the highway to the airport nearly identical with the experience a previous consumer law conference faced in Sao Paolo (Brazil) as well as the experience the Indian delegate in Capetown gave on rural consumer problems in India made it clear that consumer protection is not the same where a part of society is excluded from normal living standards.
Financial services play a core role in this integration. Most of the South African contributions concerned this area. More than 25% of the population are already indebted without taking into account the uncontrolled grey credit market. Mainly small credit is taken out at high prices which did not hinder a VISA delegate to propose that Credit Cards should overtake the role of facilitating remittances for migrant workers.
THE ENGLISH SYSTEM OF FINANCIAL REGULATION
Despite its recent vast reforms in bankruptcy procedures, credit law and competition law South Africa has stayed with the English system and its regulatory approach wherein information and transparency are the main tools to cope with overindebtedness and fraud while much freedom is given to the industry to design and market their products.
The UK, Canada and Australia as well as the Worldbank were cited as having been consulted in the discussion process while the civil law tradition but also the US-American approach of Community Reinvestment does not seem to have many friends here. Thus the UK Department of Trade and Industry together with DG Market of the EU, the Australian and Canadian regulators, the Worldbank and IMF form a quite homogenous group in the determination of legal structures in financial services around the world. This was also reflected in the number of contributions from which nearly all focussed on consumer credit and financial services while the other participating Nations like Brazil, Finland, Germany, Romania, Italy, Spain and Portugal paid attention more to the traditional areas of consumer protection.
INTEGRATION AS A LEGAL GOAL OF THE ANC
But South Africa supported by the Brazilian participants which informed the conference on the upcoming regulatory process in their country have an additional goal: inclusion of the poorest into the credit system without making them poorer. The ability of credit to increase wealth was generally shared by all participants but especially the American delegates showed empirical data that demonstrated that the existing consumer credit market for the poor especially in the form of credit card credit and other small loans or through subprime mortage loans have more of the opposite effect. This is why regulation to frame credit markets and make them responsive to social aspirations is a crucial issue in all three worlds.
South Africans gave quite mixed informations. On one side it opposes a uni-price system for credit in the form of an integrated APR arguing that consumer transparency needs the disclosure of every price elements (while there is still a consensus among consumer lawyers that Uni-Price is the only way of making different credit offers comparable in order to dry out the subprime and predatory lending market.) On the other hand the SA regulator told the audience that their intensive credit regulation had come at the special request of the banking sector who argued that retail banking with poorer people would first require well regulated and standardised structures.
As inclusion is expressively stated as a goal of the South African Code of Competition F. Sibanda, Chief Director DTI South Africa pointed to the fact that his institution has lately changed its focus from middle class markets to lower class markets (milk and bread). The applied philosophy will have to face a means test on discrimination within the next 10 years. If the dependency of the black Africans has only shifted from the state to the financial sector the support for its present government may fade and a situation like in Simbabwe could be a consequence where impatience is about to overturn democracy.
TOWARDS SOCIAL INCLUSION THROUGH FINANCIAL SERVICES?
While Mr. Levenstein from Werksmen Attorneys in SA started with the citation that „there is a worldwide concern that too much credit is given to too many consumers at too high risk “ this opinion did not characterise the whole of its politics but only the newly introduced „means test“ of reckless lending. Different ways to credit regulation were discussed throughout the conference: liberalizing the market so that the supplier side can define the conditions under which it is able to provide access to credit for poorer consumers or a more trustworthy market with higher standards for predatory lenders and some pressure on the mainstream banking sector as it is still the case in continental Europe and China.
At first glance South Africa follows the English way. It does not restrict access to the profession of lenders, has no fixed usury rates and is mainly focussed on payday loans and credit cards.
While three banks occupy 85% of the consumer credit markets in the RSA the other 15% are shared by at least 4500 lenders. A newly introduced licensing system is designed to make these players at least visible as G. Davel, CEO of the National Credit Regulator told the audience. There was some doubt whether such policies could succeed especially as the effect of such slum banking institutions on the rest of society is not adequately mirrored in the relatively low figure of their market share. Overindebtedness often occurs through the „add-on credit“ which is only available through this sector and small market share in Rand may mean high market share in persons because small credits can be big for poor people.
An alarming picture of such a situation was drawn by a debt advisor from a South African grass root organisation who experienced the day to day problems of overcommitted debtors. Some of his cases had as he told the audience terminated by use of a „shotgun“ as he told the audience. Similar as in India rural consumers in developing countries see debt not only as an obligation but as a fault or sin which combined with harsh collection practices and mounting debt has devastating effects on their families and lives.
SOUTH AFRICAN ACTION AGAINST OVERINDEBTEDNESS
While South African credit law as well as bankruptcy law copies to a large extent the English system of credit information system and still lacks a coherent bankruptcy procedure for consumers while using an antiquated form of the English „administration order“ to stop payment on smaller debts it has added a number of interesting functions to substantive consumer protection.
While the English new system of „fair credit“ seems to be focussed on the procedure in which credit is given the concept of „reckless credit“ in South African credit law is broader. It equals the „responsible lending“ principle wherein the assessment of the ability to repay the debt is the core element enriched by strict limits for borrowing like in Switzerland, Belgium or France and as it has been proposed by the EU directive. But the word „recklessness“ goes even beyond and could incorporate also those elements the ECRC principles of „responsible credit“ incorporate.
South Africa has especially introduced a legally acknowledged free debt advice system who at the request of the overcommitted can draw up a redressment plan which can be enforced by the judge. But a discharge is not connected to it. This system resembles the continental personal bankruptcy procedures where in most countries a special help is given to set up such a plan. Whether there is public financing for it to cover all Africans remained an open question.
ANATOCISM
Anatocism as well as the problem of ever default interest is attacked by a so-called „in dublum“ rule which says that the sum of all interest, fees and costs including insurance fees linked to the credit can not be more than doubled by the interest. If so the interest cease to accrue. This effect is in most European countries is achieved by a cap on default interest rates or by the German rule that all payments after default are first accounted to the principal in combination with a 4% p.a. rate ceiling for interest on interest. The in dublum rule resembles the usury principle where the „double of the average is enough.“ (laesio enormis in German and Austrian law).
PAYMENT PROTECTION INSURANCE
The problem of payment protection insurance premium with a hidden transfer of internal provisions to the creditor has in South Africa been attacked by a legal prohibition to demand front up payment of premiums. This means that the creditor has to sell insurance which has to be repaid pro rata monthly. Financing of the premiums are thus excluded. This would show the direct effect of the insurance fee on the consumer's monthly instalment, said Mr. Davel. But is seems not to attack the problem of hidden provisions and of the factual pressure to make tip a box to buy a very expensive insurance. At least the premiums remain distinct from the other fees and interest as it is known from mortgage credit. Thus competition may play a role on its prices if one could assume that highly indebted consumers are able to withstand and exit..
WORLDWIDE SITUATION OF CONSUMER CREDIT LAW
The conference gave also an overlook on discussions in the rest of the world. Especially the scholars from North America showed their rich research on questions of consumer credit which has no true counterpart in Europe where especially government agencies have overtaken the definition of what can and should be researched in this area.
The outgoing IACL president Iain Ramsay from Canada (a leading expert in consumer debt and law who also directed last years workshop on bankruptcy law at the ECRC Brussels conference) gave an overlook on consumer credit reform in the world. He showed that neo-liberal tendencies dominate nearly all pending legislations including the US bankruptcy reform, the Canadian legislation, the new English consumer credit act, the EU-draft of the Credit Directive and the Australian efforts. The issues to be tackled are a) affordable access to credit and financial exclusion (credit as a human right), b) coping with overindebtedness, c) preventing predatory lending practices, d) modernization of credit law for new products and systems and e) finally managing credit market crisis of the future.
The phantom of a rational consumer is now also attacked within economic theory by behavioural finance (as it will be the focus of the Italian ECRC conference).The criteria for credit vary: suitability, irresponsible lending and reckless credit as well as a duty of care compete with a concept of „treating customers fairly“ as in the fining of GE Money in the UK Payment Protection Insurance case.
This speech was continued by an assessment of the EU Financial Services Action Plan 2005 -2010 by Manfred Westphal from the German consumer unions. He denounced this plan as a fierce attack of DG Market on the national consumer acquis in credit and debt. He regretted that the new EU-Commissioner for Consumer Affairs has like her predecessor left financial services more to others and not yet taken a stand in consumer credit so that this area has shifted towards DG Market during the last 7 years. A similar critical assessment of the UK policies of fairness in consumer credit was given by Toni Williams from Toronto. Udo Reifner developed a theory of an integrated approach between labour and consumer credit law for the future trying to integrate remedies and forces to cope with the three evils of modern society alike: unemployment, homelessness and overindebtedness.
BANKRUPTCY REFORM
American researchers reported about the empirical effects of the latest reform of American bankruptcy law which in the intention to reduce the number of individual bankruptcy filings introduced harsh conditions for an immediate discharge, required undefined “debt advice” (which attorney now give in a standardised form) and even ordered compulsory debtors’ education. American scholars assumed that this reform had basically only a rhetorical impact helping to blame the private debt crisis to the debtors itself but no effect on the number of bankruptcies in the future. It ideological impact helped the industry and the unregulated credit card credit to escape regulatory efforts (with the exemption of credit to soldiers). Credit card credit and payment loans are seen as the major reasons for most cases of overindebtedness.
CREDIT CARD CREDIT AND OVERINDEBTEDNESS
Credit card credit seems to become the centre of the discussion on overindebtedness in America. The small credit which the EU wants to free from many legal restrictions („light regime“) has developed into the biggest offender against responsible credit standards in Anglo Saxon countries. That many small credits make up to one big should be a general insight. In America at least this insight has got momentum. Sensible with their soldiers Congress has introduced a rate cap on credit to military personnel but as high as 36% p.A. compared with the usual 18% in Europe. It has also limited the number of roll overs which can be done with a credit card or a small credit. Trying thus to keep small credit small the measures will have little impact since many American have credit cards from different companies.
Another big problem are Credit Repair Services which offer to repair one's credit history. Predatory credit card lending creating the ideology of the rational and autonomously deciding consumer was the content of Professor Dyal-Chand's presentation who compared the law regarding traditional mortgage contracts with modern credit card credit. It showed that consumer protection had virtually been abandoned to develop an untamed credit card credit industry with no limits on prices, roll over, no restrictions in purposes so that the neo-liberal ideology of consumer choice as the reason for overindebtedness becomes a mere function of existing market forces. These issues were also discussed in a presentation from Australia.
FINANCIAL EDUCATION
One workshop was dedicated to financial education. While the Australian presenter gave a thorough overlook over the existing multitude of Australian efforts to educate the consumer financially its American counterparts argued that financial education had no practical sense at all. Citing existing examples the American scientist showed that especially the famous Jump$tart Coalition approach where nearly all major industries had joined to further financial education had primarily only ideological results. Surveys showed that consumers who had followed one of their courses were less knowledgeable after than before. With all these efforts the number of consumers that have passed a financial literacy test dropped from 57.3% in 1997 to 52.4% in 2006. Financial education would primarily satisfy politicians, advertising departments, mollify consumer groups, satisfy regulators who require banks to show corporate social responsibility, help to evade strict regulations at low cost and favour even predatory education or counselling.
The involvement of consumer advocates was seen mostly as a result of generated own income streams, their professional satisfaction and their ideological commitments to choice. This harsh critique was shared by Professor Alderman who instead favoured to replace financial education by an education in consumer rights as his faculty would offer to the financial citizen. Others instead proposed to continue with a different form of financial education because as the Australian report shows it has an enormous impact at least on society and social discussions. The consumers should be taught by independent personnel to ask questions to the bankers which go beyond product information and self blaming and demystify many of the ideas that consumer rights could help them.
The next consumer law conference was announced for India in 2009 while members of the association demanded that at least one day should be totally dedicated to the question of consumer rights, poverty and inclusion. (UR) |
| ID: |
39641 |
| Author(s): |
Udo Reifner |
| Publication date: |
18/04/07 |
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Created: 18/04/07. Last changed: 13/06/07.
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