National Credit Act Johan Geldenhuys

National Credit Act
 Johan Geldenhuys

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National Credit Act
                                                       Contents

• The National Credit Act (NCA) overview will focus on the
  following four salient points in relation to Absa

   • Progress on the Absa initiative to ensure compliance

   • Pricing and revenue implications of the NCA

   • Impact on sales

   • The debt counselling processes

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Response to the NCA

• Absa does not regard itself as a reckless lender and as
  such welcomes legislation that will benefit and protect
  consumers
• Through the NCA dedicated project, Absa is amending its
  processes to ensure a reliable and consistent approach to
  maintaining an audit trail of its engagements with
  customers
• Furthermore, the project is addressing mechanisms to cater
  for the new pricing structures as prescribed by the NCA
• The NCA requires servicing its consumers and customers
  in multiple languages – Absa has already undertaken this
  route through its multi-language approach to ATMs, call
  centres and branches
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Opportunities arising from the NCA

• Owing to the changes necessary in pricing structures arising
  from the NCA prescriptions, this is an opportune time to revise
  our approach to pricing to ensure a far more integrated pricing
  structure for our customers – subsequently moving away from
  the silo product approach currently employed
    • Absa is in a position to price comfortably within the regulations
       and maintain the current revenue levels, even in the light of
       certain charges and fees being prohibited in the future
• The NCA provides further impetus for consumer education
  which provides Absa with the opportunity to simultaneously
  educate and sell to consumers thereby creating greater
  awareness and access to credit

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Improvements arising from the NCA

• Absa is undergoing a credit modelling rebuild owing to
  changes emanating from Basel II as well as the NCA – any
  reviews and tuning of the credit models will enhance
  Absa’s ability to provide credit that is of a good quality thus
  mitigating Absa’s risks
• 2 000 Externally utilised documents have to be changed to
  comply with the NCA
   • Documents can at the same time be repositioned to meet
      customers’ current needs
   • Rationalisation of duplicate documents

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Issues arising from the NCA

• Agreements entered into prior to 1 June 2007 are done under the
   auspices of the Usury Act and its ancillary maximum rates
• Post 1 June 2007, the Usury Act maximum rates will be frozen
   resulting in tighter margins if interest rates increase
    • Negotiations are underway with the National Credit Regulator and the
        Minister of Trade and Industry to address mechanisms to allow the
        Usury Act maximum rate to float with interest rate fluctuations post
        1 June 2007
• The more onerous processes required in terms of the NCA will
   undoubtedly lead to increase costs of ownership
• The credit bureaux amnesty of 2007 will lead to an attrition of useful
   information needed to make appropriate risk decisions when
   consumers apply for credit

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Current status

• Absa has applied for registration as a credit provider with the
  National Credit Regulator
• Initiatives are underway to design and develop the necessary
  process enhancements, training requirements and technology
  changes required to be compliant to the NCA
• As a bank, Absa will be complaint with the requirements of the
  Act by 1 June 2007, with the major changes impacting the
  following areas
    •   Pricing
    •   People
    •   Technology
    •   Business processes
    •   Customers and consumer impact

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Project approach

• A project has been initiated to deal with the changes necessary in
   terms of the NCA
• The focus of this project is to
   • Determine if current processes comply to the provisions of the Act
   • Establish processes to close any compliance gaps identified
   • Identify opportunities emanating from the Act
• Governance has been established at a Group level to preside over
   • Project progress
   • Identified risks and issues
   • Funding
   • Decisions to be affected
• The project was formally incepted in April 2005 and spans all
   impacted business units across the Group

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Project status

• The NCA project team comprises 15 dedicated resources and
   approximately 200 resources are allocated to assist with the project
• During the early stages of the project the team was involved in
   • Responding and negotiating with the DTI on NCA related issues
   • Debating the interpretation and implications of the various provisions of
         the Act
     • Providing comments and inputs on draft proposals
• The Absa project team was instrumental in establishing the following
   industry forums
     •   Banking Association National Credit Industry Forum
     •   NCA Mortgage Industry Forum
     •   NCA Vehicle and Asset Finance Industry Forum
     •   Monthly engagements with the National Credit Regulator

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Project achievements

• To date the project team has been active in determining and establishing
   the following
    • IT and process changes required to comply with the Act
    • Establishment of a curriculum to ensure staff are au fait with the NCA
    • Registering Absa Bank Limited and its subsidiaries, alliances and joint
        ventures as credit providers
    • Defining marketing practices that comply to the Act
    • Creating customer forms, documents, correspondence and terms and
        conditions that meet NCA prescriptions; approximately 2 000 documents
        will be impacted through this intervention
• Immersion training has been conducted with over 2 000 staff members
• Business cases have been drafted and approved for funding ¨
   anticipated that the project will cost approximately R90 million

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Pricing and revenue implications

• Pricing implications of NCA pricing regulations
    • Improved customer centricity
           • The NCA provides financial institutions with a chance to consider pricing
             holistically at a customer level
           • Absa is considering the full customer relationship in engineering NCA compliant
             pricing
   • Opportunity to access new markets
        • Pricing caps provided for under NCA now afford institutions with the opportunity
             to gain access to markets that could previously not be served profitably owing
             to high credit risk
   • Improved pricing transparency
         • The NCA provides for a standardised set of pricing regulations and
             standardised pricing disclosure (pre-agreements) to simplify pricing
             comparisons for customers
   • Increased competitiveness
          • Improved pricing disclosure and cooling off periods will enable customers to
             make more informed decisions as to the institution from which to borrow money

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Pricing and revenue implications

• Absa considers the following objectives in designing NCA
   compliant pricing
    • Reward customers for increased relationships/cross selling
    • Minimise impact on projected medium term revenue
    • Ensure price alignment on substitute and complementary
       products
    • Consider product specific price competitiveness
• Financial impact
   • Pricing caps provided for under NCA are sufficient to replace
       revenue affected
    • No significant impact is estimated on the Group’s retail banking
       operations in the medium term

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Impact of the NCA on inbound sales

• The sales process will be impacted by the NCA
• Disclosure requirements in terms of documentation will
  lengthen the sales process
• Information requirements will be more onerous for
  customers (existing relationships) and consumers
  (potential relationships)
• Credit providers will not be able to provide agreements “in
  principal"
• Existing sales channels can be maintained although minor
  adjustments will have to be effected
• Assessment processes are being reviewed to ensure
  continued sound lending practices
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Impact of the NCA on outbound sales

• Outbound sales of credit products are not prohibited by the
  Act, however strict protocols must be maintained to ensure
  these activities are compliant
• The promotion of pre-approved limits and solicitation of
  business where customer consent is not evidenced is
  prohibited
• Increases in overdraft and credit card limits may only be
  effected once per annum and only with the prior consent of
  the customer
• It will be difficult to encourage consumers to take-up higher
  offers than requested or required
• 3rd Party database marketing and sales can only be
  undertaken by means of prior consent
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Debt counselling

• The Act provides for a process whereby consumers that
  find themselves in financial distress can apply for debt
  counselling through a registered Debt Counsellor who
  will
   • Assess the credit granted to a consumer to determine if it
      was indeed granted recklessly
   • If the consumer is over-indebted as a result of the credit
      granted to him
   • Make a case for restructuring, rescheduling or even
      setting aside the interest, fees or total credit granted in
      extreme cases

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Debt counselling

• In order for the debt counselling process to be efficient,
  the following industry issues are being addressed
    • The establishment of the debt counselling infrastructure
    • Determining and raising the necessary funds to establish
      the debt counselling infrastructure
    • The determination of the governing board and “rules of
      the game” relating to the debt counselling industry
    • Defining the ongoing operational funding requirements for
      debt counselling and the sourcing of these funds

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Debt counselling
                                Approaches to debt counselling
• There is a notion at industry level that two types of
  counselling will be evidenced, namely formal (legislative)
  and informal (voluntary) debt counselling

• It is anticipated that the volumes of consumers seeking
  debt counselling will initially be very high

• Absa is taking a leading role in influencing the
  establishment and management of the industry’s approach
  to debt counselling

• Subsequently the approach suggested by the National
  Credit Regulator is to encourage informal debt counselling,
  thereby only having to deal with extreme cases through
  formal debt counselling
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Future intent

• Ongoing refinement of processes and technology solutions
  to bring about greater efficiencies emanating from the NCA

• Identification of opportunities for product development and
  customer engagement channels that arise from the
  provisions of the Act

• Continuous compliance to the requirements of the Act and
  the support of the intent of the Act

• Customer education will remain a key driver in combating
  over-indebtedness

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