Perspective on Debt Collection
A problem or an abuse?
It is wise to first obtain the context of a problem before calling for corrective action in the form of stricter legislation or additional regulation. It is no use putting in place more rules when a problem can be addressed by the existing framework.
In most sectors of the economy, including the attorney’s profession, problems exist. Some of these problems could constitute abuse.
Several articles have been published in the De Rebus in the last years with regards to the subject of debt collection. Most of these articles have approached the matter from a negative perspective, like the May 2015 article called “The debt collection scandal”. Broad brush statements are made against debt collection attorneys and their field agents, which are in my opinion unwarranted.
From the outset I want to clarify that I support that abuses should be sniffed out and dealt with. But it is prudent to obtain the context of a problem prior to finding solutions. Context should not be assumed from popular media articles or following journalists who love a sense of hype.
Background information
Consumers in South Africa are debt-ridden. In December 2014 there were 12.58 million consumers with good standing, being only 42.6% of all credit-active consumers, with 22.28 million credit agreements being in arrears. Although the number of impaired accounts as a percentage has grown substantially since March 2009, the percentage of judgments and administration order taken against debtors’ accounts has declined substantially to 2.4% (inversely to the growth in impaired records) in the same period.
The below figures show the abovementioned trends clearly.
Source: Credit Bureau Monitor – December 2014
Source: Credit Bureau Monitor - March 2014
Media houses started publishing articles stating that:
R3 billion per month is “stolen” through garnishees;
Abuse of Emoluments Attachment Orders (EAOs) is happening - based on 2008 and 2013 UP Law Clinic reports;
Legal collections not as a legal issue, but a moral problem.
This situation worsened by:
The Marikana tragedy, where mineworkers striked due to them not taking money home after salary deductions were made, where EAO’s also featured;
A joint statement made by the Minister of Finance and the Chairperson of the Banking Association of South Africa (BASA statement) after the Marikana tragedy wherein they inter alia declared that their members commit not to use:
EAOs;
Consent to jurisdiction (s45 of the Magistrate’s Court Act) in an EAO context and that only a court who has jurisdiction over the consumer as per s28 of the MCA should be approached for a judgment for the purpose of obtaining an EAO;
Public figures like Bobby Godsell stating publicly that “Court-ordered deductions from South African workers’ wages to repay debt to creditors should be banned”;
Subsequent legislation changes proposed regarding the National Credit Act and the Magistrates’ Court Act in order to address perceived problems with the EAO process.
Stakeholders involved with the legal debt collection market including the LSSA, Association of Debt Recovery Agents, Debt Collectors Council, Micro Finance South Africa, Garnishee Auditors, Credit Bureaux and Credit Ombud subsequently (in 2013) drafted a Code of Conduct to address these perceived abuses of EAOs. The Code contains commitments like:
EAOs should only to be used as last resort in respect of unsecured consumer loans 6 months after default date;
A system should capture EAOs, issue compliance certificates, obtain consents to EAOs, provide the consumer with a consumer friendly document explaining the process and provide contact numbers;
Blank consent to EAO forms may not be used under any circumstances;
Only an attorney or a debt collector may obtain a consent to judgment;
In terms of Fees and Costs; only mora interest and not contractual interest to be added onto a judgment, that only party-and-party fees may be applied for and that different interpretations of the in duplum rule would be allowed for the time being;
In terms of existing EAOs compliance certificates be issued for each, that a R1800 cost cap be effected, that fixed repayment plans be provided to consumer, and that a cap of 40% be put on what % could be taken from a salary through EAOs.
Interestingly enough, (I stand to be corrected) none of the above parties to the above Code of Conduct formally accepted it, although one/two of the bigger debt collection attorneys did implement it at huge costs. It seems that some of the bigger credit providers now require compliance from their collectors when handing out new Service Level Agreements.
Fact finding mission
The various media articles, BASA statement and subsequent actions by various regulatory bodies had a dramatic impact on legal collections in South Africa.
Due to possible reputational risk, major credit providers stopped their instructions to do legal collections against consumer debtors.
Not only made it the process far more difficult to manage, but did it cost more and limited potential income that could be derived from legal collections as a business model. The only way it could still be possible was with extremely small margins through pursuing volumes, through which lower fixed unit costs could be pursued.
In order to rectify perceptions of legal collections, a major service provider in the debt collection industry worked together with the University of Pretoria Law Clinic to publish a fact finding report (UPLC Report 1) and paid for research for two further reports (UPLC 2 & Econometrix).
The UPLC 1 report focused its research on shortcomings and irregularities in the EAO process and to determine the size of the EAO market.
It found inter alia that:
there was uncertainty with stakeholders involved with regards to the interpretation of s45 of the MCA and regarding the interpretation and application of the in duplum rule;
there was lack of uniformity in the handling of EAOs in Magistrate’s Courts;
there were shortcomings in the process, like the difficulty in determining the authenticity of a debtor’s signature on forms and in determining the reasonableness of installment size, blank/incomplete forms, lack of affordability tests being done on debtors, as well as different interpretations on procedure from court personnel, attorneys and other stakeholders;
there were irregularities with regards to legal costs claimed from debtors, in that fees are not capped, amounts of costs did not correlate with the debt, interest was charged on interest, interest was charged on fees;
there was lack of knowledge and fraud by clerks of court;
incorrect apportionment of payments happened.
The report also investigated sources like StatsSA, databases of Garnishee Administrators and Persal/Persol to determine the size of the EAO market in South Africa.
It concluded that statistically 6.6% of formal private sector employees had at least one EAO against his salary, and 12.2% of public sector employees. The total amount of EAOs in the country was estimated to be about 435084 EAOs for the private sector, and 240034 for the public sector.
These numbers of EAOs included those issued in relation to Maintenance Orders, Administration Order, and for the repayment of debt. The number of EAOs was accordingly found to be vastly smaller than those mentioned by the media and various regulatory or controlling bodies.
There was no baby to throw out with the bath water, so as to say. It begs the question whether this knowledge would have changed the regulators initial approach towards the problem.
The UPLC 2 report focused its attention on issues like court jurisdiction, court practice uniformity, oversight and handling of interests, fees, costs & charges in relation to legal collections. It dealt more with technical difficulties experienced between stakeholders in the EAO process and recommended that:
A cost cap be introduced, which should relate to the outstanding debt amount;
The format of the EAO be amended to include more information;
Institutional court capacity constraints should be addressed;
Training, Uniform Rules on supporting documents was needed as well as clarity on the scope of discretion of courts;
An overall regulatory body for debt collection be instituted;
Judicial oversight is not recommended;
Jurisdiction rules should be clarified;
Law Societies should provide guidelines in respect of allowable fees.
The Econometrix report determined what the economic impact was of limiting/discontinuing the use of EAOs on the country.
It found regarding the economic costs of non-collection of debt that:
The cost of slow and non-collection of debt is passed on as a cost to other borrowers and causes a burden to the banking system and to other citizens in good standing;
Ultimately it slows economic growth and creates unemployment;
The effect on the economy is that there will be an increase in real rate of interest. The estimated cost for the current level of slow and non-payments is R9.7 billion (0.29% of GDP) and loss of 72 800 jobs annually;
Regulation in recent years has steadily moved responsibility for debts from borrowers to credit providers.
A more detailed breakdown of the findings of the report is found in the table below:
The conclusion of the report was that:
A comprehensive ban or limiting the use of EAOs is not an effective way of addressing the real or alleged problems associated with EAOs, reckless or unscrupulous lending and/or excessive, unscrupulous, ignorant or misinformed borrowing;
There is a substantial economic imperative to foster an environment where responsible lending and borrowing is the order of the day and that borrowers are incentivised to honour their debt obligations. EAOs play an important role in this process.
Effect on the legal collections market
The arguments of abuse of EAOs were centred on:
perceived volumes of EAOs in the country;
that it only seemed to protect the micro lending industry;
that the in duplum rule was unclear and being abused; and
that consent to jurisdiction (s45 MCA) was abused.
Each of the above so-called bases for abuse were disproved in the abovementioned reports. Notwithstanding the publishing of these reports most media agencies persisted in the original message that there was “widespread abuse”, quoting numbers like R3 billion per month that were being taken through EAOs from consumers.
None of the constraints implemented by regulatory powers were alleviated. Instead, courts rather made it consistently more difficult to obtain Consent Judgements and issue EAOs.
The constraints have caused legal collections to become ineffective, putting the whole credit life cycle at risk. I am sure that this is one of the contributing factors to the problems that African Bank currently experiences.
In conclusion, market forces at play in the legal collections market are:
the pendulum against a lending bubble & collectors;
different interpretations of legislation;
emotional media reporting;
different stakeholders expectations;
the pendulum against collectors by credit providers;
enormous input costs before return, where legal debt collectors can only operate if they offer a “no success, no fee” arrangement;
time duration of legal process;
legal costs that can only be collected by legal debt collectors at the end of the collection process.
Conclusion
When taking all the above facts into account one can conclude that there are problems in the debt collection industry. However, these problems do not seem to constitute an abuse.
The voices who call for corrective action in the form of stricter legislation or additional regulations should take heed of the context. Broad brush statements should be avoided against debt collection attorneys and their field agents when the context is not understood. There is no use in putting in place more rules when a problem can be addressed by the existing framework.
Hopefully the Western Cape High Court (The University of Stellenbosch Legal Aid Clinic and 15 Others v The Minister of Justice and Correctional Services and 17 Others - 16703/14) will provide some clarity to some current court procedure problems and help the debt collection industry to recover.
Even though debt collection might not be a favoured subject, it is and still remains a necessity in an economy that relies on the availability of debt.
Arnoud van den Bout (BCom (UP), LLB (UP), BCom Hons (UP), LLM (UNISA), MBA (Henley)) is an attorney at Arnoud van den Bout Inc. in Pretoria
