Credit compliance to cost billions

South African financial institutions are expected to spend billions as they implement new systems to comply with the National Credit Act (NCA).

The Act, which will be in force from 1 June, aims to protect consumers from unscrupulous lending practices and requires lenders to ensure consumers are financially fit before advancing loans.

Mint MD Grant Hodgkinson says financial institutions have to ensure consumers receive information pertaining to the Act, and manage information collected from customers, an exercise that could run into billions of rands. "The Act will require a records management system of note."

He says companies will be required to integrate solutions and existing applications for all types of accounts, as well as make this information available simultaneously. The NCA also has governance requirements in that banks will have to show compliance with record keeping, each step of the way.

Consumers, Hodgkinson says, will have to provide details on their financial responsibilities when applying for credit, as well as give permission for companies to check this information.

But, he asks, if the liability for ensuring customers' financial fitness lies with the institution through which they request credit, who is responsible for incorrectly kept records?

Moreover, the exact type and quantity of information required does not seem to have been prescribed by law. This could prove problematic if companies retain differing types of information, says Hodgkinson.

Implementation of the Act also raises questions around which types of private information banks will be able to request permission to access. "This is 1984 all over again."

To date, Hodgkinson says, Mint has not been approached by any of the big four banks to install systems to manage the amount of content they will be required to process.

However, the Nedbank Group indicates it will spend in the region of R250 million to comply with the Act. Nedbank Retail's head of credit risk monitoring, Basel 2 and NCA risk, Pragnesh Desai, says project teams have been set up across every lending business impacted by the NCA to effect changes to the lending systems.

The bank is "right in the middle of specifying and coding the changes required", Desai says. "Essentially, every system across the credit lifecycle - from assessment to recoveries - needs to have some changes made to it."

First National Bank (FNB) head of corporate communications Xolisa Vapi says the bank is almost 70% complete with re-engineering its credit initiation process. "The new system will be ready for roll-out in March 2007. The new credit initiation process will require the bank to obtain detailed credit information from applicants, as well as to meet new credit reporting requirements."

In addition, FNB is upgrading its risk and credit management processes, which involve in-depth examination of customers' credit profiles, he says. "It's too early in the process to determine the overall cost implications of this exercise to FNB."

The JD Group, which offers in-store credit, indicates the Act has "contributed to the challenge of new compliance and its associated costs".

"A multidisciplinary programme has been launched to prepare the JD Group to comply with the National Credit Act before 1 June 2007 and to identify and explore new business opportunities," it says.

Woolworths has established a dedicated project to focus on implementing the Act into its business. "The project team concluded an impact assessment of the Act - this resulted in the creation of various work streams to tackle specific sections of the Act as they apply to those work streams."

Absa previously said it has a project team working on the required systems changes as a matter of priority. Its minimum expected spend is R100 million.

The legislation could extend beyond banks to include companies offering in-store accounts and municipalities and all forms of credit grantors, which need to be registered - or face contracts being declared void.

Rian Geldenhuys, a director at the commercial law firm Floor Incorporated, points out that even some aspects of the insurance industry fall under the Act's scope.

"In practical terms, this means any insurance contract which intends to pay a benefit to the consumer under a credit agreement upon the happening of a certain specified event will be subject to the National Credit Act," he writes.

However, this sector is not affected to the same extent as other credit providers, which are expected to incur additional costs over and above improving business systems.

"Lenders should not wait... before they address their compliance in terms of the Act. The Act has far-reaching provisions which, in some cases, could necessitate a whole system overhaul in terms of credit which will not be attainable within a short period of time," says Geldenhuys.