By Darshana Rajendran, IFMR Finance Foundation

As part of our series of posts on Consumer Protection, this post looks at the ‘Treating Customers Fairly’ (TCF) initiative which is being implemented in South Africa to ensure stronger market conduct regulation.

Issues concerning the fair treatment of customers arise out of the problem of asymmetric information between the financial services providers and the consumers. The ‘Treating Customers Fairly’ programme is a regulatory initiative (first implemented by the FSA in the UK) aimed at helping customers fully understand the features, benefits, risks and costs of the financial products they buy and minimising the sale of unsuitable products by encouraging best practice before, during and after a sale.

South Africa sees the ‘Treating Customers Fairly’ initiative as a framework to ensure tougher market conduct oversight and is on route to implementing it, based on the UK version, for the financial services industry. This will apply to all financial services that fall under the regulatory ambit of the Financial Services Board (FSB), which will soon be the market conduct regulator for both banking and non-banking services in line with the proposed twin peaks regulatory model.

TCF is a regulatory approach that seeks to ensure that specific, clearly articulated fairness outcomes for financial services customers are demonstrably delivered by regulated financial institutions. The TCF fairness outcomes, positioned from the perspective of the customer, are the following:

Outcome 1: Customers are confident that they are dealing with firms where the fair treatment of customers is central to the firm culture.
Outcome 2: Products and services marketed and sold in the retail market are designed to meet the needs of identified customer groups and are targeted accordingly.
Outcome 3: Customers are given clear information and are kept appropriately informed before, during and after the time of contracting.
Outcome 4: Where customers receive advice, the advice is suitable and takes account of their circumstances.
Outcome 5: Customers are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard and what they have been led to expect.
Outcome 6: Customers do not face unreasonable post-sale barriers to change product, switch provider, submit a claim or make a complaint.

These outcomes are to be demonstrably delivered at every organisational level and at every stage of the product life cycle, from product design and promotion, through advice and servicing, to complaints and claims handling. The primary responsibility of firms in implementing TCF will be to demonstrate that the first outcome (fair treatment of customers is central to the firm’s culture) is achieved. The other outcomes are seen as a consequence to achieving the first outcome. The following points are recommended in order to help firms foster a good TCF culture framework:

- Right Leadership
- Right Strategies
- Right Decision Making
- Right Controls
- Right Recruitment, Training & Competence
- Right Rewards and Recognition

Firms will be required to provide evidence that they are treating customers fairly and have embedded TCF in their organisational culture. This will require Management Information (MI) mechanisms designed to monitor and measure the firm’s performance in delivering the six outcomes and the elements of the TCF culture mentioned above. This may require both quantitative as well as qualitative management information. Firms will also be required to use their MI mechanisms to assess their own success and failures in delivering the outcomes. A self-audit checklist is also available which could form part of the firms TCF MI. This checklist helps to identify gaps in the following areas:

• Staff training/awareness of TCF
• Sales and marketing material
• Product understanding
• Advice and sales process
• Fact find and flow of information to the client (including after-sales)
• Complaint handling
• Remuneration/incentives
• Risk assessment of TCF non-compliance
• Record keeping and Management Information

With regard to reporting, The FSB suggests that it would like to have both non-public reporting (e.g. regulatory returns, compliance reports) and public reporting (e.g. claims statistics, complaints volumes and investment performance against benchmarks).In terms of enforcement, The FSB would first negotiate any corrective action by engaging with the firm’s senior management. Where this fails or where the FSB considers that there is a serious risk to consumers or unacceptable conduct on behalf of the firm, it would take formal action against the firm. The FSB’s current enforcement powers include:

• Administrative fines and penalties
• Declaration of business practices to be undesirable, with associated powers to order cessation or amendment of the practices concerned
• Suspension or withdrawal of regulatory licenses
• Termination or withdrawal of the approval of certain individuals to act in certain capacities
• Damages and compensation awards (including punitive damages)
• Referral of certain matters to the High Court
• Referral to the National Prosecuting Authority for criminal prosecution of individual wrongdoers, where a statutory or common law criminal offence is committed

South Africa’s TCF policy is expected to be fully implemented by 2014 and it is hoped that the initiative will lead to more optimal outcomes from the perspective of the regulators, consumers and ultimately, firms.

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References:
Discussion paper
Roadmap

By Darshana Rajendran, IFMR Finance Foundation

As we move towards a financial market with increasing product complexity, information disclosures alone will not lead to improved customer outcomes. We believe that the core of consumer protection is the principle of ‘Suitability’ – where the onus of advice or sale of financial services lies with the provider. Continuing on our series of posts on Consumer Protection, in this post we look at how regulators in India have been thinking about client appropriateness and suitability of financial products.

IRDA – Suitability Index for recommending insurance products

IRDA has recently introduced guidelines for the development and implementation of a Suitability Index – Prospect Product Matrix by insurance companies. These guidelines are intended to help direct sales personnel, brokers and agents to recommend products based on the need and suitability of customers. These guidelines are currently applicable to all life insurance policies (Traditional, ULIPs, Pension and Health) sold as individual policies.

According to the draft guidelines, an agent will have to obtain the consumer’s suitability information before recommending a policy through the proposed ‘proposal-cum-need analysis’ form. Suitability information means information that is reasonably appropriate to determine the suitability of a recommendation, including age, Annual Income, Financial resources used for funding the purchase of the life insurance product, Intended use of the life insurance product, Financial objectives with time horizon, Existing assets including investment and life insurance holdings, Liquidity needs, Liquid net worth, Tax status, Risk tolerance etc. At present, basic information is collected after the customer has decided to buy an insurance policy. The proposed ‘Proposal-cum-Needs analysis’ form is more detailed and will need to be filled up before any policy is recommended.

Next section of the form documents the needs of the customer – Life needs (Example: Living expenses, Education) and also Insurance, savings, investment and pension needs. Based on the information collected in the form and with the aid of the Prospect-Product Matrix, the agent will recommend products and a suitable cover.

The Prospect Product Matrix will indicate the “suitable” products for a customer on the basis of Life stage (Single, Married, Married with children, Married with grown-up children or Retirement) Generic need (Protection (Life), Protection (Health), Goal based savings for wealth creation, Investment, Income) and Income segment of the customer (Mass, Mass affluent or HNI).For example: A married person with grown up children will need goal based savings products, investments and health cover more than life protection products. So the matrix will indicate 100% suitability of products intended for goal based savings, investments and health cover. The insurer will then recommend appropriate products from its portfolio for this purpose.

RBI-Suitability and Appropriateness of derivative products

The importance of suitability and appropriateness of policies for market-makers in their offering of derivate products to customers have also been emphasised by Reserve Bank of India. In August 2011, RBI issued revisions to its 2007 Comprehensive Guidelines on Derivatives to address issues of suitability and appropriateness. It encourages market-makers to offer derivative products in general and structured products in particular only to those users who understand the nature of the risk inherent in these transactions. It is imperative that the products being offered are consistent with users’ risk appetite. It requires market makers to carry out proper due diligence to check user appropriateness and suitability of products before offering derivative products.

While undertaking derivative transactions a market-maker should:

• Analyse the expected impact of the proposed derivatives transaction on the user
• Ensure that the terms of the contract are clear and assess whether the user is capable of understanding the terms of the contract and of fulfilling its obligations under the contract
• Inform the customer of its opinion, where the market-maker considers that a proposed derivatives transaction is inappropriate for a customer. If the customer nonetheless wishes to proceed, the market-maker should document its analysis and its discussions with the customer in its files
• Ensure the terms of the contract are properly documented, disclosing the inherent risks in the proposed transaction to the customer in the form of a Risk Disclosure Statement which should include a detailed scenario analysis (both positive and negative) and payouts in quantitative terms under different combination of underlying market variables such as interest rates and currency rates, etc., assumptions made for the scenario analysis and obtaining a written acknowledgement from the counterparty for having read and understood the Risk Disclosure Statement

Responsibility of ‘Customer Appropriateness and Suitability’ review is on the market-maker.

SEBI- Suitability of Mutual Funds based on risk-profiling

A SEBI circular for Mutual Funds also talks of the principle of suitability, stating that distributors of Mutual Fund schemes/funds are required to follow the principle of appropriateness of products sold to its customers.

The circular categorises customer relationship and transactions as:

a. Advisory – where a distributor represents to offer advice while distributing the product, it will be subject to the principle of ‘appropriateness’ of products to a customer.
b. Execution Only – in case of transactions that are not booked as ‘advisory’, it shall still require:

- If the distributor has information to believe that the transaction is not appropriate for the customer, a written communication must be made to the investor regarding the unsuitability of the product.

- A customer confirmation to the effect that the transaction is ‘execution only’ notwithstanding the advice of in-appropriateness from that distributor be obtained prior to the execution of the transaction.

- That on all such ‘execution only’ transactions, the customer is not required to pay the distributor anything other than the standard flat transaction charge.

Mutual Fund distributors must conduct a risk profiling of their clients and advice products that are suitable to their clients’ risk appetite. If an investor wishes to purchase a fund that is not appropriate to his declared risk appetite, the advisor must get a disclaimer signed off by the investor that he is aware that this fund is not recommended for his risk appetite but that he is buying it on his own decision.

By Jayanth Srinivasan, IFMR Mezzanine

In our series of posts on Consumer Protection, this post represents the second part in a two part series that charts out the historical evolution of the various sources of consumers’ rights in India today.

Historical Evolution

As discussed in the first part of this blog entry, it is useful to disaggregate the study of the evolution of the different sources of consumer protection laws into four timeframes:

a. pre – 1950
b. 1950 – 1986
c. 1986
d. 1986 – present

Recent developments occurring in the past twenty five years may now be considered.

1986 – present

Apart from the remedies available through the courts of law and consumer courts, consumer in India of financial products and services may also resort to mechanisms set up by product specific regulators.

Credit

The central bank, the Reserve Bank of India, is also the regulator of the banking system – and consequently oversees the consumer protection regime for credit products in India. The RBI issues guidelines from time to time covering various aspects of consumer protection.

While the RBI was set up in 1934, it has become far more active in protecting the interests of end-consumers primarily in the past two decades – reflecting, in some senses, the creation of the SEBI in 1992 and the IRDA in 1999 to protect the interests of investors and purchasers of insurance products.

The matrix of consumer protection for aggrieved consumers of credit today is as follows:

a. Information dissemination to customers mandated by the Banking Codes and Standards Bureau of India (BCSBI) / Fair Practices Code adopted by banks
b. In-house grievance redressal mechanisms set up by banks
c. Office of the Ombudsman, created by RBI in almost every state of the country, that could enquire into complaints not properly resolved by the concerned bank
Banking Ombudsman Scheme is fully funded and managed by India’s central bank – bank customers can lodge a complaint with any of the 15 offices of the Banking Ombudsman situated across the country, on 27 different grounds of “deficiency in banking services”.
d. Consumer Courts under COPRA
e. Courts of law

The roles and functions of the different institutions overlap at times. Ease of access to these bodies depends on the location and profile of the customer. Further, rules of procedure may stipulate that aggrieved consumers move or consult another forum before approaching that particular body (for ex. the Ombudsman may insist that in-house banking redressal mechanisms be pursued as the forum for first relief).

Securities

Aspects of consumer protection relating to securities in India are regulated by the Securities Exchange Board of India. Set up by an Act of Parliament in 1992, the SEBI was set up “..to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market…”. The SEBI has three functions rolled into one body: quasi-legislative (ie. drafting regulations), quasi-executive (ie. enforcement of applicable rules and regulations to its constituents) and quasi-judicial (conducts hearings and passes orders on various disputes, with in-house appellate forum).

The matrix of consumer protection for aggrieved consumers of securities in order of access is as follows:

a. SCORES
SEBI Complaints Redress System – an online portal for investors to register their complaints against listed companies and intermediaries.
b. SEBI Tribunal
SEBI Tribunal has exclusive jurisdiction in matters falling under the scope of the SEBI Act to the exclusion of courts of law and by extension, consumer courts
c. Securities Appellate Tribunal (SAT)
Forum for first appeal from decisions of the SEBI Tribunal
d. Supreme Court
Second appeal lies directly to the Supreme Court but only on “questions of law”

Various details – primarily procedural but also substantive – as regards the functioning of the SEBI Tribunal as well as the Securities Appellate Tribunal are dealt with by the SEBI Act referred to earlier as well as rules framed thereunder.

Insurance

The insurance sector in India (both life insurance and general) is governed by the Insurance Regulatory and Development Authority, set up by an Act of Parliament in 1999 “…to protect the interests of the holders of insurance policies, to regulate, promote, and ensure orderly growth of the insurance industry…”.

Quasi-legislative powers, in the form of regulation and rule-making authority, are conferred upon the regulator, subject to Parliamentary oversight. The IRDA also passes regulations from time to time regulating both substantive as well as procedural aspects of the above consumer protection structure.

The matrix of consumer protection for aggrieved consumers of insurance in order of access is as follows:

a. Grievance redressal cell within each of the life and non-life companies
Mandated by IRDA (Protection of Policyholders’ Regulations), 2002.
b. IRDA Grievance Cell / Director of Public Grievances (only for public sector insurance companies)
These remain the second port of call, coming into play in practice only after the consumer has sought redress through the in-house grievance cells. The latter, the Director of Public Grievances entertains complaints against the public sector insurance companies (including LIC, GIC, United India, National, New India, Oriental) and is based within the Cabinet Secretariat of the Government of India.
c. Insurance Ombudsman
First created by Government of India notification in 1998. There are 12 such ombudsman in India. Insured is necessarily required to first approach the concerned insurer, failing which he may approach these ombudsman.
d. Consumer courts under COPRA
e. Civil courts

Pensions

The pension sub-sector of the financial products and services sector falls under the regulatory ambit of the Pension Fund Regulatory and Development Authority (PFRDA), established “to promote old age income security by establishing, developing and regulating pension funds, to protect the interests of subscribers to schemes of pension funds and for matters connected therewith or incidental thereto”.

However, from the point of view of consumer protection, uncertainty still pervades this sub-sector as even though the PFRDA was first established through an executive Government of India order dated 10th October, 2003, the PFRDA Bill providing statutory legitimacy to the same has yet to be passed by Parliament. Till date, no consumer grievance redressal mechanism in the pension sphere analogous to those existing in the insurance, credit and securities’ spheres has been set up by the PFRDA, on account of its lack of statutory legitimacy.

Future Outlook

The overall architecture as detailed above stands at a critical juncture. The government of India has recently up set up the Financial Sector Legislative Reforms Commission (FSLRC) to examine, amongst other things, the architecture of the regulatory system governing the financial sector in India. Considering that consumer protection constitutes an integral facet of the laws governing the sector, structural changes to this regime may be expected.

By Jayanth Srinivasan, IFMR Mezzanine

Continuing our series of posts on Consumer Protection, this post represents the first part in a two part series that charts out the historical evolution of the various sources of consumers’ rights in India today.

Overview

The consumer protection regime in India may be said to rest on four individual “pillars” – namely, (a) the common law; (b) assorted statutes; (c) the Consumer Protection Act, 1986; and (d) financial product specific regulations; each of whose means of enforcement ultimately tie together in the formal courts of law.

An overview of all applicable categories is depicted below, with timelines indicating their development:

Jurisprudence

Before delving into the concrete pillars of the consumer protection legal regime, it is worth noting that certain principles underlie all aspects of consumer protection by virtue of India’s legal system having its historical basis in the “common law” – an organically built up body of legal rules and principles in England from the 12th century onwards. Specifically these are:

a. Caveat emptor

Age-old principle of law where buyers in commercial transactions are “to beware” ie. the onus lies upon them to ascertain the sanctity of the product. This rule has, over the years, become subject to disclosure requirements imposed on sellers, as well as to any other warranties / guarantees the seller may provide

b. “Justice, equity and good conscience”

In the words of one legal commentator, “its meaning is obscure and is as variable as the colour of a chameleon. It is the convenient phrase to put into a statute to fill the gaps in the law. Thus, if, in deciding cases, the courts can obtain no help or guidance from legislative enactments or religious law books or other authorities, the Judges are expected to act in accordance with justice, equity and good conscience. This usually means what each judge thinks best to do in the particular case.”

However, as of this writing, there is no “white paper” or “state of the sector position paper” or any such analogous document authored by any of the wings of government in India summarising the existing legal position on the applicability of these generic legal principles to specific questions of consumer protection.

Historical Evolution

It is useful to disaggregate the study of the evolution of the different sources of consumer protection laws into four timeframes:

a. pre – 1950
b. 1950 – 1986
c. 1986
d. 1986 – present

Pre-1950

Prior to 1950, issues of consumer protection (albeit not dealt with as “consumer protection” but under the relevant legal heads) were dealt with under the technical rules built up in the English common law. The common law evolved at least three distinct heads of law that are relevant to consumer protection in India even today: (a) tort; (b) contract; and (c) fiduciary laws. Enforcement takes place through suits filed in courts of law.

Torts are “civil wrongs”. There exists several types of torts, each with a “test” laid down and refined by courts of law in England (and subsequently in India) over the years. Torts typically open to aggrieved customers include “deceit”, “fraud”, “misrepresentation” and “negligence”, depending upon the facts of the matter. Any individual may sue a provider under these heads in trial court, with relief granted usually in the form of restitution or monetary damages. A customer may also potentially sue the manufacturer or main service provider himself under the vicarious liability rule (“master servant” rule).

Contracts are agreements between two or more parties, setting out their respective rights and obligations in exchange for “consideration” (ie. payment or such). Contracts may be written or verbal, and include express as well as “implied” terms (including the commercial principle of caveat emptor). Consumers aggrieved during the purchase of any goods or services may seek redress in trial court, with relief granted usually in the form of monetary damages. A customer may also potentially sue the manufacturer or main service provider himself under the vicarious liability rule (“principal agent” rule).

Fiduciary responsibilities arise in specific situations where sellers are deemed to be in a position of trust with respect to consumers (for instance, wealth management advisors and consumers), consequently becoming answerable to a higher set of responsibilities. Consumers may sue sellers who owe them a fiduciary responsibility in trial court.

The structure of the system of courts is as follows:

1950 – 1986

In the years since its creation in 1950 by the Constitution of India, the Union Parliament has passed several legislations that include consumer protection provisions in their body. The ambit of these provisions is restricted to the subject matter of these statutes, and they are enforceable through the trial courts. Failure on the part of any customer to show the statute was applicable meant that he had to then resort to tort / contract / fiduciary law for relief.

An illustrative list of product specific legislations with consumer protection components is as below:

a. Drugs Control Act, 1950
b. Prevention of Food Adulteration Act, 1954
c. Essential Commodities Act, 1955

1986

In 1986, the Union Parliament passed the landmark Consumer Protection Act [“COPRA”] which not only was the first generic customer protection law enacted in India covering goods and services falling under all categories (as opposed to the earlier set of individual statutes covering specific products) but also set up a separate chain of courts specifically for their enforcement.

The structure of the system of consumer courts is as follows:

The proceedings at these courts are summary in nature and statutorily applicable penalties includes punitive damages. Further, they decide the case within 3 months from the date of receipt of notice by opposite party. Amendments made to the COPRA in 1991, 1993 and most importantly in 2002 have strengthened the powers of these courts – under the last amendment, provision now exists for attachment and sale of property of a person not complying with the order.

Recent developments in the historical evolution of India’s consumer protection regime, specifically the creation of product-specific regimes for regulation of financial products and services, and the attendant consequences for consumers falling in those categories, as well as on going regulatory overhauls shall be considered in the second part of this two-part blog entry.

By Deepti George & Darshana Rajendran, IFMR Finance Foundation

This post is a continuation of our Consumer Protection blog series. The next two posts would look at the Evolution of Consumer Protection Laws in India.

Australia and South Africa have introduced separate regulatory regimes for consumer credit, which has consumer protection aspects at the heart of it. These form examples of function-based regulation, which is fundamentally different from institution-based regulation prevalent in India.

Consumer Credit Protection in Australia

The Council of Australian governments (COAG) agreed on 3rd July 2008 that the Australian Government would assume responsibility for regulating consumer credit. The National Consumer Credit Reform Package marks Phase-one of Australia’s attempt to regulate consumer credit and comprises the National Consumer Credit Protection Act 2009 (NCCP Act) as the central piece of legislation. While the legislations for Phase-two are being put in place, phase one comprises of the following:

• Licensing regime for all consumer credit providers and credit assistance providers
• Responsible lending conduct obligations and disclosure obligations
• Enhanced enforcement powers to ASIC to administer the NCCP Act
• Expanded redressal mechanisms
• National Credit Code to replace the state-wise Uniform Consumer Credit Codes

Licensing regime

The goal of this is to promote consumer confidence in using credit, and to promote the undertaking of efficient, honest and fair credit activities by all licensees and their representatives. The National Credit Code applies to only credit¹ that is provided to a person or a strata corporation, and for personal, domestic or household purposes, and for refinancing of such credit. It can also be for the purchase, renovation or improvement of residential property for investment purposes. This definition encompasses² all credit providers such as banks, credit unions, finance companies and other lenders; and all credit assistance providers, such as credit advisers and mortgage and credit brokers.

Responsible lending conduct obligations³

These are intended for the following⁴ and are meant for both credit providers and credit assistance providers.

(a) Introduce standards of conduct to encourage prudent lending and leasing and impose sanctions in relation to irresponsible lending and leasing, and
(b) Curtail undesirable market practices, particularly where intermediaries are involved in lending.

The licensee is obligated to conduct an assessment⁵ that the credit contract or lease is not ‘unsuitable’ for the consumer. In doing so, the licensee must make reasonable enquiries about the consumer’s requirements, objectives, and financial situation and take reasonable steps to verify the consumer’s financial situation. The contract is considered unsuitable if it does not meet the consumer’s requirements and objectives or if the consumer will be unable to meet the repayments, either at all, or only with substantial hardship. In such a case, the licensee must not suggest, assist or enter into a credit contract with the customer.

Reasonable inquiries about customer’s financial situation

These could include the following, depending on the circumstances:
1. The consumer’s current amount and source of income or benefits, and assets, including their nature (such as whether they produce income) and value
2. The extent of the consumer’s fixed expenses (such as rent, repayment of existing debts, child support and insurance)
3. The consumer’s variable expenses (and drivers of variable expenses such as dependents and any particular or unusual circumstances)
4. The extent to which any existing debts are to be repaid from the credit advanced
5. The consumer’s credit history
6. Any significant changes to the consumer’s financial circumstances that are reasonably foreseeable
7. Geographical factors, such as remoteness, which may require consideration of specific issues
8. Indirect income sources (such as income from a spouse) where that income is reasonably available to the consumer

Reasonable inquiries about customer’s requirements and objectives

These could include the following, depending on the circumstances:
1. Amount of credit needed or the maximum amount of credit sought
2. Timeframe for which the credit is required
3. Purpose for which the credit is sought and the benefit to the consumer
4. Whether the consumer seeks particular product features or flexibility, and understands the costs of these features and any additional risks

Verifying customer’s financial situation

This obligation differs between credit providers and credit assistance providers. ASIC acknowledges that the latter would not have access to information that the credit provider has, such as credit reports, bank account and credit card information, reports from other lenders (subject to Privacy Act 1988) and so on. However, credit assistance providers are expected to gather information from payslips, income tax returns, statements from the customer’s accountant, business activity statements and so on. This is applicable to credit providers too.

Substantial hardship as a reason for ‘unsuitability’

The NCCP Act 2009 does not define what ‘substantial hardship’ is. ASIC will however take the following factors⁶ into account when considering whether a transaction is likely to result in financial hardship:

1. The money the consumer is likely to have remaining after their living expenses have been deducted from their after-tax income
2. How consistent and reliable the consumer’s income is and the size of the loan relative to their income level
3. Whether the consumer’s expenses are likely to be significantly higher than average
4. The consumer’s other debt repayment obligations and similar commitments
5. How much of a buffer there is between the consumer’s disposable income and the repayments, and how vulnerable they are to an increase in interest rates, and other product features
6. Whether the consumer is likely to have to sell their assets, such as a car, to repay the loan

ASIC expects the licensees to develop appropriate systems, processes and benchmarks to assess whether the credit contract would cause financial hardship to the customer.

Compensation and insurance arrangements

All credit licensees must have in place arrangements for compensating customers for loss or damage suffered due to breaches of the NCCP Act 2009 by the licensee or its credit representatives. These arrangements are to be in the form of professional indemnity (PI) insurance that meets the requirements in the Act⁷ . This is aimed at reducing the risk that losses sustained by customers cannot be compensated by a credit licensee due to a lack of available financial resources.

Credit Regulation in South Africa

Similar to the case of Australia above, the National Credit Act 2005 of South Africa regulates the granting of consumer credit by all credit providers. It applies to credit agreements with all consumers and to entities such as companies, partnerships and trusts whose asset value or annual turnover is below a prescribed threshold⁸. It applies to most credit products where payment is deferred and a charge, interest or fee is payable on the outstanding balance. The National Credit Act also establishes the National Credit Regulator (NCR) to promote the development of an accessible credit market, particularly, to address the needs of historically disadvantaged persons, low income persons, and remote, isolated or low density communities. It is tasked with carrying out registration of credit providers, credit bureaus and debt counsellors, investigation of complaints, education, research, policy development, and ensuring enforcement of the Act. Some of the key consumer protection features of the Act are given below:

Fundamental Consumer Rights

These include:

• Right to be given dominant reason for credit being refused or discontinued (reason/s to be given in writing on request of the consumer)
• Right to information in plain and understandable language in terms of which guidelines may be published
• Right to have access to and to challenge credit records and information held by credit bureaux, to have incorrect records of debt adjustments expunged and, to be given notification before negative information is reported to the credit bureaux

Protection from Over-Indebtedness

The credit provider must conduct a proper assessment of each consumer’s ability to meet obligations, taking reasonable steps to investigate and evaluate the consumer’s:

• Understanding and appreciation of the risks, costs and obligations of the proposed agreement
• Ability to meet those obligations in a timely manner in terms of the consumer’s existing financial means and debt repayment history

A credit agreement will be reckless if the credit provider fails to conduct the required assessment, or having conducted it, enters into an agreement with a consumer despite the fact that the consumer did not appreciate the nature of the risks, costs and obligations, or could not afford them.

The Act allows for over-indebted customers to apply for assistance from a debt counsellor. Debt counsellors then conduct independent enquiries into consumers’ financial circumstances and make recommendations to the courts concerning debt restructuring and suspension of reckless credit agreements.

Protection from Aggressive Advertising

• Prohibition of negative option marketing. (This occurs when goods or services are offered to you with the assertion that if you do not return the products or refuse the service within a certain time period, you have ‘purchased’ them)
• Marketing of credit at the consumer’s home or workplace is prohibited unless the visit is prearranged or the consumer invites the credit provider to visit for that purpose
• The credit provider must give the consumer the option (and must not act contrary to the option selected), to:

a) Decline the option of pre-approved annual credit limit increases,
b) Be excluded from any telemarketing campaign, marketing or customer list that may be sold or distributed, or any mass distribution of email or SMS messages (The credit provider must maintain a register of options selected).

The Act also sets up The National Consumer Tribunal that hears cases on non-compliance with the Act, issues fines and provides redress to consumers.

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1 – ASIC Regulatory Guide 203, Appendix 1,2
2 – Debt collectors, pawn brokers and margin lenders are exempt from Phase 1
3 – ASIC Regulatory Guide 209
4 – According to the Explanatory memorandum of the NCCP Bill 2009
5 – Consumer can obtain copy of preliminary assessment upon request
6 – ASIC Regulatory Guide 209
7 – ASIC Regulatory Guide 210
8 – Currently R1 million