‘Discriminatory’ lending practices based on risk here to stay
Johannesburg, April 2012 - Differentiated rates and ‘discriminatory’ lending within the financial services sector are responsible practices that protect customers and should continue into the future despite the proposed introduction of new ‘Treating Customers Fairly’ regulations, says Deloitte.
“The ‘Treating Customers Fairly’ (TCF) regulations will be similar to the programme being implemented in the UK, which was introduced to compensate for the failure of existing consumer protection legislation. Regulators in the UK decided to focus on outcomes –the culture they wanted to instil in the financial services industry as a whole- rather than attempt to amend existing regulations,” Pravin Burra, Director, Capital Market at Deloitte said.
In South Africa, Burra pointed out, FSB regulations on Treating Customers Fairly would be an addition to the plethora of existing consumer legislation and regulations such as the Consumer Protection Act (CPA), National Credit Act (NCA) and the Protection of Personal Information Act (PPI).
With the TCF regulations, the onus could also be placed on company leadership to prove that they are adopting, promoting and instilling measureable consumer friendly practices throughout their businesses.
But, says Burra, because of the unique circumstances surrounding South African society, it could be argued that some business practices, based on the management and reduction of risk, could contravene the spirit of TCF regulations.
“The proposed South African TCF will be built on the premise that all South Africans are entitled to be treated in a non-discriminatory manner, with no regard being applied to gender or race.
“Our industry, however, is using criteria to differentiate target markets from a pricing and sanctioning perspective that inadvertently result in demographic segmentation taking place.
For example, some loans may only be advanced to customers who qualify on the basis of having tertiary qualifications. Due to the historical issues in South Africa, the vast majority of qualifiers within this segment are still white.
“The question being asked is: ‘Is this a fair lending practice, or are banks and insurance companies being discriminatory by shutting out people who could otherwise be considered for finance or loans?” added Jonathan Sykes, Head of Credit, Capital Markets at Deloitte.
“The financial services industry could argue that the TCF regulations are forcing them to take more risks and price products accordingly. This could then result in advances being undertaken on a portfolio basis with all customers being required to equally carry risk and thus ‘cross-subsidise’ others within a group who are less creditworthy,” said Sykes.
Reality dictates, says Sykes, that differentiated and ‘financially discriminatory’ services will be entrenched features within the financial services sector.
“The emphasis will be where it always has been- separating low risk and high risk individuals and rewarding good risks with lower rates and discriminating against those with bad records with higher rates.
“Responsibly applied, discrimination through application of price differentiation should protect the customer. Given the pressures on banks particularly when it comes to cost of capital, pricing and competition for market share, margins are under pressure,” added Sykes.
“Market forces, rather than social factors and regulation, will continue to drive the market. Ultimately this will be beneficial for South Africans.”
The market will become more aspirational and could even have a positive social impact. Certain sectors of employment could become more attractive than in the past, because of the possibility of people occupying certain categories of employment being regarded as better risks than others and benefitting from differentially priced products.
“Broadly, says Burra,”this pricing practice would accord with the desired outcomes of TCF regulations are that:
“The onus is on government and pressure groups to keep banks accountable. Where it is considered that price differentiation oversteps the mark, the banks must be told so that they can adjust their practices accordingly.
“Sanctions for banks not acting in accord with the TCF regulations could be varied.
They could include being required to lowering penalty fees on dishonoured debit orders, improving the management of the current debit order system, greater transparency regarding ATM fees and charges, the implementation of a standardised switching code to promote ease of switching bank accounts between banks, and improving customer education,” said Burra.