Despite repeated requests by debt counsellors and payment distribution agencies for the department of trade and industry and the National Credit Regulator to intervene, the entire debt counselling industry could collapse, which would destroy more than 5 000 jobs and leave about 238 000 people under debt review with no legal protection.
At present, debt counselling, or debt review, remains the only court ordered protection for overindebted individuals against legal action by credit providers.
As consumers face increasing financial pressure, the demand for debt counselling services has increased, with debt counsellors processing about 17 000 new applications a month.
The three national payment distribution agencies collect and distribute about R820 million from debt review customers each month on behalf of debt councillors and credit providers.
Yet these payment distribution agencies claim that tens of millions of rands is owed to them by the banks due to disputed debit orders, and that the banks are profiting from the debt review process at the expense of other providers in the value chain.
These claims were made in a submission in October to the department of trade and industry by two of the three payment distribution agencies, DC Partner and the National Payment Distribution Agency, which argue that amendments made to the National Credit Act in April 2016 will destroy the industry unless urgent action is taken.
The amendments to the act reduced the number of days by which a payment distribution agency has to distribute funds to the creditors from 15 to five.
This was to ensure that the consumer’s debt was settled sooner, however, a consumer has 40 days to dispute the debit order, creating a situation where a consumer can reverse a debit order after the funds have been paid out by the payment distribution agency.
The payment distribution agency is required to refund the amounts to the consumer, yet the banks, which make up 80% of all debt review payments, are not refunding the agencies.
The submission states that although most credit providers are prepared to refund the payment distribution agency, members of the Banking Association of SA, with the exception of African Bank, are refusing to do so, and are using the money to offset consumer debt – leading to tens of millions rands in losses.
Herman Joubert, general manager of DC Partner, says:
“There is a perverse and frankly immoral situation where consumer’s debt is being paid by the payment distribution agency with little or no prospect of recovering these funds as the banks are not willing to refund those payments.
Many consumers are abusing this process with no intention of honouring their payments, and that will have a negative effect on the industry in its entirety.”
The payment distribution agencies claim that 95% of disputed debit orders occur after consumers are informed by them that payments have been distributed, and that this has more than doubled since the new regulations came into effect.
In its response to City Press, the Banking Association of SA contends that its members are not liable for these amounts as “the payment distribution agencies act as agents of the consumers. The contractual relationship therefore resides between the agencies and their consumers, and not between the agencies and the credit providers, in this case, the banks.”
Joubert disagrees and says that payment distribution agencies are merely a third party that facilitates payment between two parties who have reached an agreement, and that Banking Association of SA members are the only credit providers that are not refunding the agencies.
Currently, there is no mechanism under the National Credit Act on which the payment distribution agencies can recover these funds, either from the consumer or the credit provider.
Paul Slot, head of the Debt Counsellors’ Association of SA, says it warned the department of trade and industry and the National Credit Regulator in August last year that the new amendments would have serious implications for the reversal of debit orders.
At the time, the Debt Counsellors’ Association contended that “no payment distribution agency can be required to pay over funds that have not cleared, or funds where the consumer’s right to dispute it has not passed. If implemented as proposed, this will make agencies financially unviable due to the fact that consumers can abuse the payment process.”
Slot says these warnings were ignored.
Chris van der Straaten, head of the third payment distribution agency Hyphen, says that the losses due to disputed debit orders have increased by 120% since the amendments came into effect and amount to 15% of income.
“In short, we have an absurd situation that the agencies are paying credit providers without any assurance of having the money in hand – something that no sane businessperson would ever consider.”
The National Credit Regulator told City Press that it was “amending the conditions of registration to include a process between credit providers and payment distribution agencies when debit orders are reversed to have redress for the agencies”.
This does not, however, address the millions of rands currently owed to payment distribution agencies.
In response to queries from City Press, the department of trade and industry said it “will be meeting with the National Credit Regulator with the view to engage with the banks to have the matter resolved amicably”.