Perspective on EAOs – A problem or an abuse?
By Arnoud van den Bout
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 De Rebus on the subject of debt collection. Most of these articles have approached the matter from a negative perspective, such as the article titled ‘The debt collection scandal’ (2015 (May) DR 32). Broad statements are made against debt collection attorneys and their field agents, which are in my opinion unwarranted.
From the outset I want to make it clear that I support that abusers should be sniffed out and dealt with. But it is prudent to understand the context of a problem prior to finding solutions. Context should not be assumed from popular media articles or following journalists who love to sensationalise events.
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.
Media houses started publishing articles stating that:
- R 3 billion per month is ‘stolen’ through garnishees.
- Abuse of emoluments attachment orders (EAOs) is happening – based on 2008 and 2013 Univeristy of Pretoria (UP) Law Clinic reports.
- Legal collections are not a legal issue, but a moral problem.
This debt situation worsened in:
- The Marikana tragedy where mineworkers striked, due to not taking money home after salary deductions were made, where EAOs 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:
– consent to jurisdiction (s 45 of the Magistrate’s Courts Act 32 of 1944 (MCA)) in an EAO context and that only a court who has jurisdiction over the consumer as per s 28 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’ (Rene Vollgraff ‘Don’t let employer collect debts, says Godsell’ 4-11-2013 Mail & Guardian (www.mg.co.za/article/2013-11-04-ex-anglogold-ceo-godsell-wants-ban-on-garnishee-orders/, accessed 14-8-2015)).
- Subsequent legislation changes proposed regarding the National Credit Act 34 of 2005 and the MCA in order to address perceived problems with the EAO process.
Stakeholders involved with the legal debt collection market including the Law Society of South Africa, 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 be used as last resort in respect of unsecured loans six months after default.
- A system should capture EAOs, issue compliance certificates, obtain consents to EAOs, provide the consumer with a consumer friendly document 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 R 1800 cost cap be effected, that fixed repayment plans be provided to consumer, and that a cap of 40% be put on what can 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 or two of the bigger debt collection attorneys did implement it at huge cost. 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 regulators 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 the process far more difficult to manage, but 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.
The UP Law Clinic published two reports on the matter at the end of 2013, namely The incidence of and undesirable practices relating to ‘garnishee orders’ – a follow up report(http://archivedpublicwebsite.up.ac.za) (UPLC 1) and Considering debt collection mechanisms in South Africa: An evaluation of selected contentious issues (http://issuu.com/onelaw/docs/onelaw_-_1) (UPLC 2).
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 s 45 of the MCA and regarding the interpretation and application of the in duplum
- 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 regard 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 occured.
The report also investigated sources such as StatsSA, databases of garnishee administrators and Persal and Persol to determine the size of the EAO market.
It concluded that statistically 6,6% of formal private sector employees and 12,2% of public sector employees had at least one EAO against their salaries. The total amount of EAOs in the country was estimated to be about 435 084 EAOs for the private sector and 240 034 for the public sector. These numbers of EAOs included those issued in relation to maintenance orders, administration orders, 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.
It seems that there was no baby to throw out with the bath water so to speak (2013 (March) DR 22). 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 such as court jurisdiction, court practice uniformity, oversight and handling of interests, fees, costs and 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.
Econometrix published a report on the matter in 2013 (Economic impact and implications of abolishing or limiting the use of emolument attachment orders as a form of legal collection by credit providers in South Africa (http://issuu.com/onelaw/docs/onelaw_-_3/1)). It determined the economic impact of limiting/discontinuing the use of EAOs.
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 R 9,7 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.
The conclusion of the report was that –
- a comprehensive ban/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; and
- 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 (s 45 MCA) was abused.
All above ‘so-called’ bases for abuse were disproved in the abovementioned reports. Notwithstanding the publishing of these reports media agencies persisted in the original message that there was ‘widespread abuse’, quoting numbers such as R 3 billion per month that were being taken through EAOs from consumers.
None of the constraints implemented by regulatory powers were alleviated. Instead, courts made it consistently more difficult to obtain consent judgments and issue EAOs.
The constraints have caused legal collections to become ineffective, putting the whole credit life cycle at risk. I presume that this is one of the contributing factors to the problems that African Bank currently experiences.
Market forces currently at play in the legal collections market are:
- The pendulum against a lending bubble and collectors –
– different interpretations of legislation;
– emotional media reporting; and
– 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; and
– legal costs that can only be collected by legal debt collectors at the end of the collection process.
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. Broad statements should be avoided 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 will provide some clarity to some current court procedure problems and help the debt collection industry to recover (University of Stellenbosch Legal Aid Clinic and Others v Minister of Justice and Correctional Services and Others (WCC) (unreported case no 16703/14, 8-7-2015) (Desai J)).
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.
- In University of Stellenbosch Legal Aid Clinic and Others v Minister of Justice and Correctional Services and Others (WCC) (unreported case no 16703/14, 8-7-2015) (Desai J) the court held that the current system of EAOs is unlawful, invalid and inconsistent with the Constitution as it does not provide for judicial oversight. The judgment will now go to the Constitutional Court for confirmation. The respondents have applied for leave to appeal the judgment and have approached the Constitutional Court with a separate application.
Arnoud van den Bout BCom LLB BCom Hons (UP) LLM (UNISA) MBA (Henley) is an attorney at Arnoud van den Bout Inc in Pretoria.