Recent media attention has highlighted that reckless lending may still be rife in South Africa, despite stricter credit regulations being imposed on credit lenders.
The Debt Counselling Fee Guidelines were amended earlier this year by the National Credit Regulator (“NCR”) to encourage debt counsellors to conduct reckless lending investigations for new applications under the debt review or counselling process. This has led to a number of investigations being conducted over the last few months and in turn has increased public awareness on this topic.
A recent survey, which has raised quite a large degree of publicity around reckless lending, found that about 40% of credit provided appears to be reckless.
What is reckless lending?
The purpose of the National Credit Act 34 of 2005 (“NCA”) is to place responsibility on credit providers to grant credit in a responsible manner to avoid both over-indebtedness and reckless lending. Lending is considered reckless if:
- the credit provider did not conduct an affordability assessment;
- the consumer did not understand the risks of the credit; or
- the credit caused the consumer to become over indebted.
What are the consequences of reckless lending?
If lending is deemed reckless, a court has the power to suspend the agreement and may order that:
- the consumer will not be required to make payment under the agreement;
- the credit provider will not be able to claim interest fees or related charges; or
- the credit provider may not enforce the terms of the agreement.
This could lead to substantial financial and reputational loss for the credit provider.
What does the increase in reckless lending investigations mean for credit providers?
- Potential financial and reputational implications for credit providers;
- Increased focus by the regulator; and
- Increase in conduct risk (as a result of twin peaks).
It is therefore a critical time for credit providers to conduct a review, before the regulator does, of their ‘reckless lending’ controls to mitigate any potential risk that a formal review from the regulator may have to their organisations.
Deloitte’s Governance, Risk and Regulatory team has deep subject matter expertise of the NCA and is well equipped to assist clients with conducting a swift review of their ‘reckless lending’ controls, conducting hotspot reviews of their credit agreements and executing remediation processes. With advanced analytics capabilities, we are able to provide feedback which is value-driven with deep customer insights and trends analyses.
For further information, please contact Candice Holland