Unclaimed benefit funds achieve significant increase in tracing success rates

The Mines 1970 Unclaimed Benefits Preservation Pension and Provident Funds has improved their tracing rate by 36,5% in the past 18 months to see more than R24-million in unclaimed benefits paid to beneficiaries.
Between January 2014 and July this year, the Funds have traced 37% of 69 071 beneficiaries - a marked increase from 2012, when just 0,5% of the beneficiaries were traced and only R5,2-million paid.
The Funds consists of 11 712 pension fund beneficiaries and 57 359 provident fund beneficiaries, located in South Africa and neighbouring countries. “We have traced 57% of the pension fund beneficiaries and 32% of provident fund beneficiaries,” said Chairman of the Mines 1970s Funds, Sue Fritz, who attributed the increased success rate to having “determined and passionate trustees who are morally and ethically driven”.
Almost 13 000 of the beneficiaries traced have been identified as deceased. “We continue with secondary tracing and 28% of the deceased beneficiary’s dependents have been located.”
Fritz said the trustees had brought Alexander Forbes on board, with their excellent systems and together they had implemented an innovative tracing strategy in January 2014. “We realised we needed a professional administrator to assist with systems as our core data was very limited.”
While their hit rate with tracing beneficiaries has increased, Fritz said the Mine 1970s Funds’ efforts were hampered by historical poor record keeping by the mining industry which resulted in a large number of incomplete records of employment during the 1970’s and 1980’s. “This is an industry-wide issue which makes tracing the beneficiaries incredibly difficult. In addition, once we successfully find the beneficiaries and have verified them, the lack of tax numbers is a problem, but we are liaising with the South African Revenue Service on this issue,” Fritz said. The lack of essential documentation such as copies of IDs, and service records, which are needed to finalise the processing of claims also regularly delayed payment.
One way of solving this issue is by collaborating with other funds. “We have close working relationships with the Mineworkers Provident Fund (MPF) and Sentinel and we cross-check each other’s data. People might not have been a member of our funds but they could be a member of one of the others. We have also checked MPF data from their roadshows in various SADC countries and the Eastern Cape.”

New innovations since the appointment of Alexander Forbes, include walk in centres and a help-desk, as well as people who can assist in all official languages. “We also changed our previous tracing initiative from one which was very passive to one which is very active and aggressive,” said Fritz. Tracing agents are only paid for those beneficiaries who are successfully located. The funds do not deal with “middlemen who unscrupulously charge fees to beneficiaries promising to assist them in claiming their benefits”, Fritz said.
Due to on-going issues with the post office, claims can now be lodged by fax or email. This has necessitated the implementation of additional controls to prevent electronic fraud.

Outside South Africa’s borders the Mines 1970s Funds is trying to trace qualifying former members. “Preliminary claim forms were distributed to Malawian District Labour offices and we have had 59 000 forms returned so far, with a success rate which is on par with other tracing endeavours.” The information we receive which does not match with the Mines 1970 Funds is sent to the MPF for cross-checking. “We are also finalising a partnership which would see Mines 1970 set up a desk in the MPF walk-in centres in Welkom, Carltonville, Mthatha, Klerksdorp and the Free State, which will further assist our desktop tracing initiatives.”
Proving the trustees’ commitment to pay is their telephonic outbound campaign, (through Alexander Forbes), whereby more than 7 000 people who have not returned claim forms are contacted weekly until their forms arrive for processing.
While beneficiaries continued to be found, Fritz said preserving the Funds capital was essential. “We changed our investment consultant to Alexander Forbes to ensure maximised returns from the Funds three asset managers for benefit of the beneficiaries. Over the past year the investment yields for the funds have exceeded the Fund’s investment benchmark – which is well over inflation.”


Mines pension funds gain traction on tracing, but shoddy record-keeping hampers progress

JOHANNESBURG (miningweekly.com) – The Mines 1970 Unclaimed Benefits Preservation Pension and Provident Funds this week said it had achieved a double-digit improvement in its own tracing rate of beneficiaries of unclaimed benefits. However, historical poor record-keeping during the 1970s and 1980s by the mining industry had hampered efforts to accelerate tracing even further, fund chairperson Sue Fritz said in a statement. “This is an industrywide issue, which makes tracing the beneficiaries incredibly difficult. In addition, once we successfully find the beneficiaries and have verified them, the lack of tax numbers is a problem, but we are liaising with the South African Revenue Service on this issue,” she added. Payment of the claims was further delayed by a lack of service records and identity documents. This, in addition to the failure by many employers and funds to provide the proper entitlement information to employees and a failure by retirement funds to monitor compliance of administrators, was part of the many reasons more than 3.5-million people were owed around R20-billion in unclaimed benefits. The mining industry owed about R5.2-billion to 200 000 former employees. Despite the challenges, the Mines 1970 fund had traced nearly 37% of 69 071 beneficiaries and paid out unclaimed benefits to the tune of around R24-million between January 2014 and July this year. These comprised 11 712 pension fund beneficiaries and 57 359 provident fund beneficiaries. Nearly 13 000 of the traced beneficiaries were identified as deceased, with around 28% of the deceased beneficiary’s dependents having been located. This compared with 2012, when just 0.5% of the beneficiaries were traced and only R5.2-million paid out. “We changed our previous tracing initiative from one which was very passive to one which is very active and aggressive,” said Fritz, adding that, since partnering with Alexander Forbes to deploy a new innovative tracing strategy in January 2014, a number of walk-in centres were established, along with a multilingual helpdesk. The Financial Services Board pleaded last week for funds to “take all reasonable steps” to trace and pay the millions of rands owed to their members and beneficiaries who remain untraced. 

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FSB steps up unclaimed benefits campaign

The Financial Services Board (FSB) is stepping up its campaign aimed at reducing the massive R20 billion owed to 3.5 million retirement fund beneficiaries and at blocking “charlatans” who are seeking to exploit the situation.
Rosemary Hunter, the deputy FSB executive in charge of retirement funds, gave details of improved plans for the regulation and supervision of unclaimed benefits at a round-table discussion held this week at the FSB offices in Pretoria.
There are many reasons why billions of rands are still unclaimed. These include the failure of employers and funds to provide information about benefits, poor administration, the fact that many foreign workers who are owed benefits leave the country soon after their work permits expire, the failure of members to inform their dependants that they can claim benefits on their death, and the failure of funds to trace members. In addition, many funds have had surpluses to distribute, and former members may be unaware that they have been allocated a portion of the surplus.
Hunter says retirement fund administrators and even employers must up their game to ensure that members, former members and dependants of members receive their fair share of the treasure.
Measures being considered or implemented by the FSB include:
* The establishment of a searchable central data base that includes the names of all former retirement fund members who have not claimed their benefits. Hunter says that the database will take about two years to complete.
* Stepping up the FSB’s monitoring of retirement funds and unclaimed benefit administrators to ensure they are taking all reasonable steps to trace and pay former members or beneficiaries.
Hunter says that administrators and retirement fund trustees must be able to show that they are conducting “diligent searches” for beneficiaries.
She says funds should be:
– Contacting employers or former employers of the beneficiaries for up-to-date contact information.
– Using social media to advertise unclaimed benefits or trace beneficiaries.
– Speaking to other employees or fund members who might know the whereabouts of missing members.
“The purpose of a pension fund is to pay benefits. Funds must therefore take all reasonable steps to trace and pay the beneficiaries,” Hunter says.
* Issuing FSB guidance notes to funds on unclaimed benefits. This will include a guidance note on what costs should be paid by the fund.
Hunter says that those beneficiaries who are traced should be paid 100 percent of their due benefit, without any of the tracing costs being deducted. She says it can be assumed that funds will trace, at best, only 80 percent of the beneficiaries. So the costs of tracing members can be offset against the amounts due to those who will never be traced. The estimates of the percentage of members who will never be traced will vary from fund to fund, however, Hunter says.
She also says that the FSB may allow funds to reduce the amounts (reserves) they allocate for unclaimed benefits based on the fact that some beneficiaries may never be found.
Hunter rejected any argument that a timeline should be placed on tracing beneficiaries.
* Ensuring fund administrators and unclaimed benefit fund administrators do not use flimsy excuses to avoid paying out benefits. She says benefits can be reduced by administrators' high costs together with low investment returns.
However, she says, administrators and retirement funds are subject to the new Treating Customers Fairly regulatory environment and they have to be able to show that you were treated fairly when you made a claim.
Hunter acknowledged that funds are facing fraudulent claims for unclaimed benefits, but efforts by funds to counter legitimate claims with flimsy arguments are unacceptable. She says the FSB will refer complaints to the Pension Funds Adjudicator where necessary.
* Protecting beneficiaries against exploitation. This includes action against “charlatans” who are charging, sometimes fraudulently, potential beneficiaries. She says there have even been cases where:
– So-called intermediaries have charged members R50 to tell them that they are entitled to a death benefit, even though the members are still alive.
– Intermediaries getting beneficiaries to agree to pay as much as 25 percent of any benefit recovered.
Hunter says anyone providing advice on claiming a benefit must be registered as a financial services provider with the FSB in the terms of the Financial Advisory and Intermediary Services (FAIS) Act, and any intermediary must also adhere to the advice code of conduct under the FAIS regulations.
* Developing a broad consumer education and empowerment campaign.
Hunter says the campaign should include community organisations, employers and their associations, trade unions, the funds and the FSB.
If you, as a former retirement fund member or dependant of a former member, think benefits may be due to you, you should:
* Contact the member’s (or your) last employer, who will be able to inform you who administers your fund.
* Contact the retirement fund or fund administrator.
* If you cannot establish the name of the fund or its administrator you can contact the call centre of the Financial Services Board (FSB) on 0800 20 20 87 or 0800 110 443, or email info@fsb.co.za. The FSB cannot tell you if you are owed benefits, but it can assist you to trace an administrator or fund. It will assist you free of charge.
* Once you have established the name of the fund or administrator, you will need to provide documents that prove your membership or the membership of the former member, such as an identity number, benefit statement, payslip or correspondence from the fund.
* If a benefit is available, the fund will advise you on the supporting documentation to provide.
* If you are dissatisfied with, for example, the reason for refusal of payment, you can take up the matter with the FSB or the Pension Funds Adjudicator (PFA). To contact the PFA telephone 012 346 1738 or email enquiries@pfa.org.za
Rosemary Hunter, the deputy FSB executive in charge of retirement funds, says you should be cautious when dealing with intermediaries who want to charge you a fee. You should deal only with tracing agents authorised or appointed by a fund, who should not charge a fee.
The National Treasury is opposing a move by the curator and liquidator of several retirement funds, Tony Mostert, to set aside regulations that deal with retirement fund surpluses. Heads of argument have been filed and a court date is likely to be set soon.
Mostert has applied to the Gauteng High Court to declare ultra vires (“outside of the law”) and unenforcable the regulations issued under the Pension Funds Act that require unclaimed retirement fund surplus benefits to be transferred to contingency reserve funds, including unclaimed benefit funds and the Guardian’s Fund, which is administered by the Master of the High Court.
The application brought by Mostert relates to the liquidation of the Picbel Groepvoorsorgfonds, one of a number of funds that were subject to surplus-stripping by employers in the 1990s.
Mostert argues that the regulation governing the handling of unclaimed surplus benefits is inconsistent with and contradicts other provisions of the Pension Funds Act. He says that there is no legal provision for the release of funds from a contingency reserve account or the Guardian’s Fund, even when there is no reasonable possibility of a beneficiary being traced.
The exact numbers are unknown, but it is estimated that there is R1 billion of unclaimed benefits from surpluses.
Mostert wants the unclaimed benefits to revert to the fund to be distributed among members who can be traced.
Rosemary Hunter, the FSB deputy executive in charge of retirement funds, says legislation dealing with unclaimed benefits from retirement fund surpluses is different from that which deals with general unclaimed benefits.



Quality of data snags SA retirement funds

STORED information on retirement fund members is a major concern for the entire industry and is not limited to a particular type of fund or financial product, a retirement fund solutions provider said on Thursday.
On Wednesday, the Financial Services Board said unclaimed benefits for last year would rise to an estimated R20bn this year, partly because retirement funds or their administrators did not maintain valid or complete records. More than a quarter of this amount was owed to mine workers or their beneficiaries.
"The challenge is not so much the record-keeping but more the quality of the information stored," said Arno Loots, head of umbrella fund solutions at Liberty Corporate.
The mining industry has a number of pension funds, most of which have an umbrella structure, such as the Sentinel Mining Industry Retirement Fund and Mineworkers Provident Fund.
These funds manage retirement and other benefits on behalf of thousands of members from different employers, raising questions about whether the type of fund used contributed to the growing number of unclaimed benefits.
But Alexander Forbes Financial Services’ Francois van Aarde said the company, one of the largest retirement fund administrators in the country, had R1.2bn in unclaimed benefits held in funds specially created for them. These were owed to 189,662 beneficiaries.
"Most of the funds which are administered by Alexander Forbes have unclaimed benefits. We use a variety of tracing agencies and thus far have achieved progress in this regard."
Alexander Forbes continually subjects its data to updated tracing databases and providers, performing tracing exercises to the total portfolio of unclaimed benefits twice a year.
It has also embarked on campaigns for each fund to locate and pay beneficiaries, including community radio campaigns, help desks and walk-in centres.
The frequency of tracing exercises had also been increased and employers of former staff members were advised of unpaid benefits in case these staff members made contact.
Mr Loots said draft default regulations recently introduced by the Treasury would see quality information becoming key and accurate member information would increase.
"The industry has made significant progress to enhance administration and record-keeping over the last decade. In future, technology will play a critical role, both in keeping in touch with the member and updating details on a continuous basis," he said.



Unclaimed benefits in retirement funds set to swell to R20bn

UNCLAIMED benefits sitting in retirement funds have probably swelled to R20bn, the Financial Services Board (FSB) reported on Wednesday.
The R20bn is an estimate and the amount will be confirmed once retirement funds submit their financial statements for last year to the FSB.
By the end of 2013, R15.8bn was owed to at least 3.07-million people. Of this, an estimated R5.2bn is owed to mine workers’ beneficiaries.
Public sector retirement funds have been excluded as they are not regulated by the board.
Rosemary Hunter, the FSB’s deputy executive officer responsible for retirement funds, said pension funds or their administrators did not maintain valid or complete member records, making it difficult for beneficiaries to claim their due.
There was also a communication breakdown and many beneficiaries were often unaware that they were entitled to a lump sum or pension payout when their relatives died.
She said there had been cases where pension funds were not at fault — some employers were reluctant to provide funds with sufficient information; while former members were deliberately not claiming, either believing the benefit too small or seeking to avoid dealings with the taxman.
Desperate beneficiaries have also been taken in by middlemen who have promised to help them claim their benefits in return for a cut of the takings, as well as an upfront payment.
"We have found that these individuals are charging up to 25% of the member’s benefit for their services, but this is based on the instances that we are aware of," said Takalani Lukhaimane, the FSB’s manager for pension surveillance and enforcement.
Some pension funds do employ intermediaries, who are registered and are paid from deductions from a member’s benefit or cash set aside by the pension fund to trace members.
Payment is made only once beneficiaries have been traced and have received their benefits.
In contrast, the unofficial "tracers" ask for payment up-front from beneficiaries.
Then, once payment has been made, they deduct a percentage, getting paid twice, she said.
Ms Lukhaimane also said unofficial tracers often did not have evidence that a potential beneficiary was in line for a payment, whereas those contracted by the funds would have some details, "precisely because there is a benefit payable and the fund wishes to trace and pay the benefit".
To trace beneficiaries, pension funds could try contacting employers of the beneficiaries, and insist that employers supply up-to-date information such as identity numbers and cellphone numbers.
Funds could also use social media to advertise their unclaimed benefits or to trace beneficiaries.
Individuals who believed they should be receiving benefits can also approach the FSB for assistance free of charge.
Ms Lukhaimane said the board would need some kind of information identifying the fund or the employer, such as a payslip. Then the FSB would contact the fund or administrator to check whether there was a benefit available.
"If you’re not on the database, we will try to corroborate your employment history, and based on that, we will calculate the benefit due to you," she said.



Credit amnesty ‘backfires’

Johannesburg - A background screening company is warning that the credit amnesty, granted to those in over their heads last year, has backfired because adverse listings are piling up.
The state earlier this year allowed heavily indebted consumers the opportunity to wipe the listing slate clean, although this did not expunge the debt. This credit amnesty, which pertains to credit records, came into effect last April.
Under the new, controversial, regulations, all registered credit bureaux were required to remove adverse consumer credit information on their systems until the end of May 2014.
Information that needed to be removed from profiles included the classification of consumer behaviour, such as “delinquent, default, slow paying, or absconded”, and enforcement action like “handed over for collection, legal action or write-off”.
The credit bureau also needed to remove details and results of disputes lodged by consumers, irrespective of the outcome. In addition, information around paid up civil court or default judgments also had to be removed from credit records, although judgements secured by the South African Revenue Service, seen as criminal offenses and not financial defaults, are not removed.
Negative listings
Kirsten Halcrow, CEO of EMPS, the oldest background screening company in South Africa, says - following this amnesty period - there has been a substantial increase in the number of negative listings for job applicants who were screened for potentially sensitive positions.
“Over past 10 years, job applicants with impaired credit records were running at between 20-25 percent before the credit amnesty was introduced. After the amnesty the percentage dropped substantially to around 10.5 percent.”
Yet, 16 months after the amnesty, the percentage of those with impaired records is climbing, and is already at 16%, says Halcrow.
Halcrow says about 2.8 million consumers benefited from the amnesty.
According to Kroll Mie, under the amended National Credit Act, credit records can be accessed when companies:
• Certify the request for consumer credit information relates to a position requiring honesty in the handling of cash and finances;
• There is a job description in place that stipulates the requirement of trust and honesty in the handling of cash or finances;
• Specific and informed consent of the consumer is obtained prior to the request being made.
According to the National Credit Regulator (NCR), credit bureaus hold records for 23.11 million credit-active consumers. Of these, only 12.70 million are considered to be in good standing.
Neil Roets, CEO of debt management company Debt Rescue, says there is clear evidence that consumers had not changed their behaviour and the credit amnesty had largely failed to change consumer behaviour. “More than 50% of all consumers are three months or more in arrears.
“Many South Africans saw the credit amnesty as an opportunity to stack up new debt because their adverse listings had been removed and they were therefore eligible to borrow more money.
“It is my belief that we will be back to the pre-amnesty percentage of adverse listings within the next six to twelve months which will prove that the amnesty was an exercise in futility.”



Lawyers in debt collection loophole

Government is tightening up on reckless and unscrupulous lending, but a recent judgment in the high court shone the spotlight on law firms that collect debt yet are not subject to debt collection law or regulation.
When a creditor has exhausted all formal avenues to collect debt, their last resort is often to turn to the courts for an emolument attachment order (often erroneously referred to as a garnishee order) to deduct debt repayments from the debtor’s salary.
It is considered by the industry to be an effective tool for debt collection, but chronic abuse of the system has been a prominent cause of concern for some time.
The role law firms play in debt collection was highlighted in a case brought by Stellenbosch University’s legal aid clinic on behalf of 15 debtors who claimed attachment orders against their salaries had been unfairly obtained.
Many legal firms offer a debt collection service, but just a handful specialise in it. One such firm is Flemix & Associates, the 17th respondent in the Western Cape High Court matter and one of the biggest legal firms in the debt collection industry in South Africa.
Misused clauses
In his judgment handed down in the high court in Cape Town last month, Judge Siraj Desai found Flemix, and 13 other respondents it represented, had misused clauses in the Magistrates’ Court Act to obtain emolument attachment orders against these debtors. Debt collection agents working for the law firm were also found to have not followed procedure in getting debtors to sign consent to judgment.
The judge determined the loans had been extended recklessly by their originators because there was no evidence that affordability assessments had been done.
“These were quite obviously reckless loans and, unsurprisingly, the applicants defaulted on their repayments,” Desai said in his judgment.
As a result of the judgment, the National Credit Regulator has said it will investigate the 150 000 active cases on Flemix’s books.
Flemix says it has applied to appeal the high court matter.
Last resort
Emolument attachment orders are meant to be used as a last resort to force repayment from customers who ostensibly can pay their debt, but don’t.
“If a person makes a commitment and loses their sources of income, there is recourse in the form of formal remedies,” said Hennie Ferreira, chief executive of MicroFinance South Africa. “There is debt counselling, and you can put yourself into debt review, or legitimate credit providers will assist you before you even get into debt counselling.”
Thereafter a debtor may be handed over for so-called soft-collection by registered members of the Council for Debt Collectors, who are subject to rigorous regulation.
Soft collections refers to debt collection that does not go through the courts, but rather involves written requests or persistent communication from call-centre agents.
So clear are the regulations and limitations the council has a saying: “If you feel a debt collector has treated you unfairly, then what they have done is probably illegal,” said Andries Cornelius, the council’s chief executive.
Criminal offence
The council is a regulator created by statute that came into being in 2003 and has 17 900 registered members. To collect debt without being registered with the council, which falls under the department of justice, is a criminal offence. The council enforces compliance with regulations or debt collection and has the power to fine up to R100 000 per account, it can mete out suspended sentences, and it can even withdraw a member’s registration which makes it illegal for them to practise debt collection at all.
The Debt Collectors Act limits the fees a debt collector can charge to no more than the capital amount of debt or R814, depending on which is lower. Added to that, the debtor can be charged 10% on each instalment paid, although this, too, is capped at R407 per instalment.
By law, the council has to investigate each complaint it receives and can receive up to 7 000 queries a year.
“But of those we maybe find there are 100 a year we actually charge,” said Cornelius, who noted the issues tended to be largely administrative.
“In general there is a high rate of self-regulation in this industry,” Cornelius said. “It collects about R9-billion a year. [With those kinds of numbers involved] you can’t afford to have the council withdraw your registration.”
Soft collection services
Cornelius said some law firms are registered with the council and are subject to the Act’s limitations, but only insofar as soft collection services are concerned.
But when law firms collect debt through litigation, they are not compelled to be registered with the council. Instead, they are regulated by relevant law societies. There is also a lack of clarity about how legal fees and their limits are regulated.
The problem with collecting the debt through an attorney is the cost, said Jan van Rensburg, president of the Law Society of the Northern Province, which has been ordered by the Western Cape High Court to investigate the conduct of Flemix.
“The legal costs are basically the same, regardless of the amount owed,” he said.
For example, the legal cost may be R6 000 on a debt of R1-million, or R6 000 on a debt of R600.
“The problem is the work you do is the same,” he said. “There is no different scale applicable just because it is a small claim.”
Popular route
Obtaining an emolument attachment order is a popular route because it is obtained against the debtor for debt “plus costs”. Fees are prescribed by the law societies. For the Northern Province society, for example, a letter for demand cannot cost more than R50 and consultation with a debtor cannot be charged at more than R90 per 10 minutes. These can, however, quickly amount to significantly more than the fees prescribed by the Debt Collectors Act.
Further, there is some debate about whether the limits prescribed by the National Credit Act apply to fees charged by attorneys who collect debt through the courts.
In dispute is the in duplum rule. In common law it means interest stops running when the unpaid interest equals the outstanding capital. But the National Credit Act goes beyond this and states that accrued interest and fees, including collection costs, during the time a consumer is in default may not exceed the unpaid balance of the principal debt under that credit agreement.
The company secretary at the National Credit Regulator, Lesiba Mashapa, said: “The NCR’s view is that legal fees are part of collection costs and are covered by the NCA’s Section 103(5) in duplum.”
The Association of Debt Recovery Agents, of which membership is voluntary, was the 18th respondent in the high court matter. Marius Jonker, the association’s vice-president, said there is no straight answer about whether law firms doing debt collection adhered to the in duplum rule. There are two reasons for this.
Ongoing debate
First, there is an ongoing debate over whether legal costs should be included in the rule. 
“It is unconstitutional to add legal costs because if the interest has mounted up to match the outstanding capital amount, usually because the consumer has not paid, the credit provider is prevented from collecting what is owed to them,” he said.
Second, there isn’t clarity on how the in duplum rule should be interpreted. While the NCR had issued a white paper on their own interpretation, Jonker described it as “totally impractical”, and noted it had been referred to Credit Industry Forum to work on a practical interpretation and circulate it. Even so, it would act as a guideline and not as law, he said.
So once facing debt collection through litigation and mounting legal fees, how do consumers get out of debt?
“That’s the problem,” said Van Rensburg. “They don’t really get out.”
Bad books
The law society has also been concerned by a practice by some law firms who buy bad books for the purpose of collection, essentially creating their own business.
“Debt is an asset, and in law there is nothing stopping an attorney from buying it. It is frowned upon, but from the legal opinions we got from council there is no legal reason they can’t do it. So we sit with the problem,” Van Rensburg said.
The director of Flemix, Alanza Flemix-Jordaan said her firm did not buy debt books and only collected bad debt on behalf of clients.
As stated in the judgment, debt collection agents working for Flemix, would, through questionable means, get debtors to sign documents that allowed for emolument attachment orders to be obtained in different jurisdictions. In his judgment, Desai said these agents are paid on completion of signature, and are therefore not independent parties, as was argued. They are, however, independent in that they do not fall under law society or debt collection council, said Van Rensburg.
In an opinion piece published in Business Day this week, Deputy Minister of Justice and Constitutional Development John Jeffery suggested legislation could be changed to force debt collecting attorneys to register with the Council for Debt Collectors to protect debtors from dishonest or unethical actions.
But Cornelius said attorneys had resisted being registered with the council because they did not want to be subject to capped fees outlined in the Debt Collectors Act.

The human rights view

Advocate Mohamed Ameermia, the commissioner of the South African Human Rights Commission, said it would approach the government to urgently close all legislative loopholes in the Magistrate’s Court Act, and to act on the immediate needs for judicial oversight as well as to strictly cap and regulate the interest rates on loans advanced to the poor and vulnerable.
The commission joined the Western Cape case as a friend of the court.
Ameermia said South Africa’s unsecured lending market was valued at R41-billion in 2007, but had grown to R159-billion in 2012.
“All this was done in a space where the poor and vulnerable had no access to justice, and whose dignity was compromised and totally disregarded,” he said.
“Of equal cause for concern to the commission was the questionable business practices of the micro-lending industry in effecting loans to the vulnerable and the poor under such circumstances, such as engaging in questionable business practices, in abusing the legal system, to overreach the poor and vulnerable, who have either no access to legal representation and/or to court.”
Jan van Rensburg, the president of the Law Society of the Northern Province, said discussions about the issues raised in the judgment had been ongoing for some time and, although progress had been slow, already there was a draft amendment Bill pertaining to the Magistrate’s Court Act that addressed most of the issues raised.
He said the constitutional issue was that there needed to be oversight by magistrates instead of rubber-stamping by clerks of the court.
Hennie Ferreira, the chief executive of MicroFinance South Africa, said: “For the credit world to work, debt collection must also work fairly. And a big part of the issue is that the department of justice, national treasury, the department of trade and industry, the national credit regulator, the Financial Services Board, law societies and credit societies need to harmonise their efforts. There are too many silos across various parts of the chain.”

Flemix responds

Applicants have taken the matter to the Constitutional Court, a moves required when legislation needs to be changed, but Flemix & Associates and respondents have taken the high court judgment on appeal.
Alanza Flemix-Jordaan, Flemix’s principal, says Flemix and 13 of the respondents respectfully believe the judgment is wrong and they are confident it will be overturned by a higher court.
Should the judgment be upheld, it will effectively end the process of the granting of emolument attachment orders by consent.
“Debtors will be forced to appear in court and, apart from the additional costs for debtors, our courts also do not have the capacity to deal with this,” Flemix-Jordaan says. She notes that the only other alternative for legal collections will then to be in warrants of execution against the movable property of debtors – “an inhumane and very expensive process for debtors”, she said.
“The result of this will have a devastating effect on the unsecured lending industry as creditors will not extend credit if there is not an efficient way to collect bad debts, resulting in poor people effectively being denied the right to credit.”
Although Flemix and its clients argue the judgment is wrong, Flemix-Jordaan says the firm hasn’t used Section 45 for consent to foreign jurisdictions since 2014; “should the Constitutional Court agree with [Judge Siraj] Desai’s interpretation of the relevant legislation, it will have no effect on our current business model”.
But Hennie Ferreira, chief executive of MicroFinance South Africa, says there are two discussions about what happens if and when the law changes.
“If you, as a consumer, don’t service your debt, the worst that can happen to you is some form of legal collection. You don’t go to jail. The punishment is just that you have to pay. If this mechanism [the emolument attachment order] becomes inaccessible to the industry, the consumer loses the threat to have to pay back.”
This, Ferreira says, raises the risk for lenders who will, in turn, become selective about who they lend to.

South Africa does not cap deductions

There is no statutory limit on the amount that can be deducted from the earnings of a debtor, or the number of orders that can be granted against a debtor.
In the case of an applicant brought to the high court in Cape Town by Stellenbosch University’s Legal Aid Clinic, this meant that when a clerk of the court issued three attachment orders on the same day, it attached almost her entire salary. Orders, the judgment found, had been issued without assessing whether the applicant could afford the deductions.
South Africa may have no cap on how much can be attached from a debtor’s income, but other countries have instituted regulation in this regard.
Judge Siraj Desai’s judgment on the case notes that limits have been imposed in a numbers of countries including the United States, Germany, Australia, England, Wales and Rwanda.
US law allows no more than 25% of a debtor’s after-income tax be attached per week.
In Australia, the debtor must be left with $447.70 or more after earnings are attached.
In Rwanda, only a third of a debtor’s salary can be attached.
In Germany, a limit to what can be attached is imposed according to income bands, and the number of dependents the debtor has. A higher proportion of income is attached when individuals earn more, said Desai.
Additionally, some forms of income, such as annual bonuses and certain security payments, cannot be attached. Other special circumstances, such as disability, are taken into account.
In England and Wales, the law prescribes a protected earning rate – the amount of money the debtor requires to support themselves and their family and includes expenses such as food, rent, mortgage, electricity and gas.

Judge accuses creditors of ‘forum shopping’

The judgment, handed down by the high court in Cape Town last month, said debt collection used by micro-lenders gave rise to “significant disquiet” that creditors had driven the process of obtaining the emolument attachment orders with no judicial oversight.
A central issue was obtaining attachment orders from courts far from where the debtors lived and worked.
This compromised their ability to access the courts.
Judge Siraj Desai accused Flemix & Associates of “forum shopping”, a practice by litigants to have their legal cases heard in the court thought most likely to provide favourable judgment.
Pivotal to Flemix’s debt collection procedure was to have the debtors’ written consent to judgment, to pay debt instalments, to have an emolument attachment order issued against him or her and to consent that the court’s jurisdiction be located far from their home. The judgment found the consents obtained were not given either voluntarily or on an informed basis.
Desai ordered the emolument attachment orders against the applicants be declared unlawful and invalid.
He further declared a clause where a debtor consents to judgment in the Magistrates’ Court Act inconsistent with the Constitution, as it fails to provide judicial oversight.
He also ordered that the loophole used for forum shopping, section 45 of the Magistrates’ Court Act, no longer permits a debtor to consent to the jurisdiction of a magistrate’s court other than that where they live or work.



SAHRC to announce steps in garnishee order battle

Johannesburg – The SA Human Rights Commission (SAHRC) is on Wednesday expected to announce efforts to stop "unconstitutional" garnishee orders.
The Commission was a friend of the court in a class action case brought by the Stellenbosch University Legal Aid Clinic, on behalf of 12 farm workers, against law firm Flemix and Associates. The firm was acting on behalf of various micro-lenders.
In his judgment in the case on July 8, Western Cape High Court Judge Siraj Desai ordered that Flemix’s conduct be reviewed by the Law Society for ethical breaches. He criticised lenders for their “perfunctory or non-existent” affordability checks on borrowers.
Desai said the debt collecting procedure used by micro-lenders was unconstitutional and “an assault on human dignity”.
“The judgment must result in timely legislative reform to correct this situation,” SAHRC spokesperson Isaac Mangena said at the time.
The SAHRC has expressed concern about the effect these orders, also called emolument attachment orders, have on the poor and vulnerable.
The Magistrate’s Court Act sets out how these orders may be granted. They allow for a person’s salary to be attached should they be in arrears in paying a debt.
“These attachment orders can be done by a clerk of the magistrate’s court without the judicial oversight of a magistrate,” the commission said in a statement last year.
It has found that micro-lenders do not explain the implications of such orders to debtors and wants legislative reforms to close loopholes in the act to protect workers from abuse.



Administration order abuses exposed

By Angelique Arde
A “significant” court case has brought to light serious abuses of the administration order system, which is one way that debt-ridden consumers can address their debt problems without having to go under sequestration.
Debtors who opted to go under administration between 11 and 15 years ago are still in debt – some having acquired more debt in the process. Administrators have sold debtors’ “files” as if they were the assets of a company, relinquishing their responsibilities and placing people not appointed by a court in charge of the debtors’ estates. And debtors have been charged fees that the person collecting them was not entitled to.
This dismal reality was revealed in a judgment by a magistrate in Atlantis, an economically depressed town 50 kilometres outside Cape Town. The judgment, which dismissed an application by attorney Norman Wolf Shargey to be appointed as an administrator, was handed down by Magistrate Matthew Albertus last year. Shargey took the judgment on appeal, but last month, two weeks before the appeal was due to be heard, it was withdrawn.
The judgment is “significant” to magistrates countrywide, a magistrate who asked not to be named, says. “There’s abuse in the system, and this judgment is useful, because it helps to identify some of the abuses,” he says.
The abuses include:
* The sale of debtor’s files (effectively transferring the management of their estates to another party) without their knowledge or consent;
* Overcharging of prescribed fees; and
* Acquisition of more debt – some of which debtors claim to have no knowledge.
The aim of an administration order (see “What is an administration order?”, below) is “to assist a debtor over a period of financial embarrassment without the need for sequestration”, Albertus says in his judgment, quoting from a High Court judgment.
The latter judgment states that “it was never the intention of the legislature that a debtor should be bound up in an administration order indefinitely, where there is no reasonable prospect of such order being discharged within a reasonable time … It was intended to provide a debtor with a relatively short moratorium to assist in the payment of his or her debts in full and to ward off legal action and execution proceedings during such period.”
One debtor whose file was sold to Shargey had debts of R38 000 when her administration order was granted in January 1999. None of her original creditors appears on the latest distribution account, which suggests that she must have paid off her original debt. However, over the years, more creditors have appeared on her file.
The last debt added was for R18 000, in 2012, 13 years after the administration order was issued. The woman currently owes R21 500. Among her debts is a hospital account of R24.42 and one for arrear TV licence fees. Amounts of R2.04, R1.11, 75c and 68c are being distributed to her creditors each quarter. At this rate, she will never pay off her debt.
Another debtor went under administration in 2003, when he owed R2 388. Now, 12 years later, he owes R5 000, after more claims were added.
In terms of the National Credit Act, it is unlawful for a credit provider to give credit to a consumer who is under administration, without the administrator’s consent.
The case before Albertus was an application by Shargey, of Goodwood in Cape Town, asking the court to relieve administrators Clifford Marmetschke, Nicolaas Smit and Melvyn Weiner of their appointment as administrators and to appoint him instead. Shargey made numerous applications to the Atlantis court, affecting 23 consumers with administration orders. Albertus turned down all the applications in one judgment.
The court heard that Marmetschke had died, so it was not necessary to terminate his appointment; it had fallen away. In the case of Smit and Weiner, the court decided that they should be relieved of their appointments as administrators because they had abandoned their duties.
The court established that Mar-metschke and Smit had a company called M&S Financial Administrators. It changed its name to Amalgamated Debt Management Services, which later became ADMS Business Solutions. This was sold to Shargey.
The magistrate found that, after the death of Marmetschke, the involvement of Smit, Weiner, of Weiner & Associates, Amalgamated Debt Management Solutions, ADMS Business Solutions and Shargey’s law firm in the debtors’ estates was unlawful, because they should not have carried on the duties of an administrator without being appointed by the court.
Albertus dismissed Shargey’s application to be appointed administrator for the following reasons:
* The distribution accounts filed with the court show that Shargey had collected legal fees and other expenses as if he were the court-appointed administrator. The collecting of these fees was irregular. He also claimed costs that he did not have taxed by the taxing master, which is irregular.
* As an attorney, Shargey must have known that he could act as an administrator only if he was appointed by a court. Weiner (an attorney, too) should also have known the debtors’ files could not be transferred or sold like a company’s assets.
* An administrator is not appointed in place of another merely because he applies to replace the other administrator, or because the previous administrator has consented to his application, or because no one has opposed his application, and definitely not because he has bought the files of another administrator, the judgment said.
* The debtors were not given the opportunity to be heard. There’s no indication that they were even notified that someone else was applying to administrate their estates. The debtor has an interest in who is appointed to manage his or her estate, the judgment said.
* The purpose of an administration order is to provide a short-term moratorium to help the debtor, but the distribution accounts show that some consumers have been paying for 11, 13, and 15 years without paying off their debts. In some cases, they were granted more debt. “Surely this is not what the legislature intended, because it is not to the benefit of the debtors or creditors,” the judgment said.
There was no indication that the debtors’ financial affairs had improved or that they were in a position to conduct their own affairs. The magistrate said he would have expected evidence of the debtors’ current situations, to evaluate their position and ascertain whether or it was necessary for them to stay under administration.
These cases indicated that there was no prospect of the debts being discharged in a reasonable time, the judgment said.
Albertus ruled that the clerk of the court must inform, by registered post, all the debtors affected by his judgment. The effect of the judgment is that the debtors have an administration order but no administrator. In other words, no one can lawfully collect their money and pay it over to their creditors.
Most people pay their administrator via an emoluments attachment order (EAO), a court order compelling your employer to deduct money from your salary.
The administration order and the EAO are legally in force until the administration order is rescinded or the debts have been paid in full. Once the administration order is rescinded, the rescission of the EAO follows.
You have to apply to the court to have an administration order set aside, usually with the help of a lawyer. You can do it yourself, in which case you will have to serve notice of the application (for the rescission order) on all interested parties. If there is no administrator, you need only notify all your creditors – via registered mail – that you are applying to have the order set aside.
Deborah Solomon, the founder of the DCI, an online portal for the debt counselling industry and a company that offers debt counselling services, says consumers under administration should enlist the help of someone who has the expertise to do a thorough audit of the administration order and the underlying debt.
If you have been under administration for more than five years and still haven’t paid off your debts, ask your administrator for a copy of your distribution account. This must show all the payments you’ve made, all charges by the administrator and all the payments that the administrator has made to your creditors. Among other things:
* Check that the amounts on your distribution account correspond with the amounts you pay your administrator monthly.
* Check for new credit. The administrator must give permission before new credit can be granted. According to Deborah Solomon, the founder of the debt counselling industry portal DCI, any new credit added while you are under administration is reckless. If you are eligible for more credit, you shouldn’t still be under administration, she says. It is also an offence to take on more debt while under administration.
* Ascertain what you are paying in legal fees.
If your administrator refuses to give you a copy of your distribution account, go to the magistrate’s court where the administration order was issued and ask the clerk of the court for a copy. Your administrator should file a distribution account with the clerk of the court every quarter. If this has been done, the clerk of the court will give you a copy free of charge.
If your administrator has not been filing distribution accounts regularly with the court, or if you find that the administrator has charged you excessive collection or legal fees, you can apply to the court for your administration order to be reviewed by the magistrate. If the magistrate finds irregularities, he or she may rescind the order. This would leave you without an administrator. You would then need to find a new one, or take charge of your debt.
If you are in position to manage your debt yourself, you can apply to the court to rescind the order and place you in control of your finances again.
An administration order is a debt-relief mechanism governed by the Magistrates’ Courts Act (MCA), for people with debts of less than R50 000. It protects you from your creditors.
* A magistrate issues an administration order in response to your application to the court for an administrator to be appointed to manage your estate.
* The role of the administrator is to collect an affordable amount from you each month and distribute it to all of your creditors.
* The administrator must deposit all the money received from you (it might come via your employer) in a trust account. Administration is typically done by attorneys, although anyone can be appointed as an administrator if he or she can satisfy the court that there is sufficient security to protect you in the event that they vanish with your money. An administrator who is not an attorney must also have a trust account.
* An administration order stays in place you can afford to settle the total debt amount on the order, or until you are in a position to take control of your debts and pay them yourself, in which case you must apply to the court for the order to be set aside. When you’ve paid off all your debts, the administrator must notify your creditors and the court that issued the order. The order then falls away.
* The fact that you have an administration order is recorded on your credit report for five years, or until the order is set aside. The consequences of this are significant. In terms of the National Credit Act, credit providers may not lend you money or give you any form of credit while you are under administration, unless your administrator consents to it.
* While under administration, you will be liable to pay the administrator an initial fee as well as a fee of up to 12.5 percent (excluding VAT) of the money collected per quarter. The fees are prescribed by the MCA and cover the administrator’s remuneration and expenses and provide for legal fees.
* The administrator will typically collect money from you via an emoluments attachment order (EAO, also known as a “garnishee order”), which is also a court order. In terms of this order, your employer is compelled to deduct from your salary money that you owe to a creditor. In the case of a consumer under administration, the EAO is in favour of the administrator (and not a creditor).
* Each quarter, the administrator must file a distribution account with the magistrate’s court where the order was issued. This is subject to the “taxation of costs” (the quantification of legal costs) by the taxing master of the court.
There has been a significant decline in the number of people applying for administration orders since the advent of debt counselling, according to magistrates interviewed by Personal Finance.
Administration orders fall under the Magistrates’ Courts Act and have been in use for decades, whereas debt counselling is a relatively new debt-relief mechanism. It falls under the National Credit Act (NCA), which became fully effective in June 2007.
The National Credit Regulator (NCR) is not able to say how many people have administration orders, Lesiba Mashapa, the company secretary at the NCR, says. The regulator can state only how many consumers’ credit reports reflect that they have administration orders. This information is supplied by credit bureaus to the regulator every quarter. On average, 175 900 consumers had administration orders per quarter in 2013. This number dropped to an average of 163 000 consumers per quarter in 2014.
“Magistrates are reluctant to place people under administration because of the abuses,” one magistrate, who asked not to be named, said. “Some of my colleagues in Johannesburg won’t grant those orders.”
Not all magistrates scrutinise the administration order applications, so lawyers shop around for courts that grant them readily.
Administration orders have a place, “where you have ethical administrators”, magistrates say. But they concede that no one is regulating the administrators. The best you can do is to ensure that applications for administration comply fully with the Magistrates’ Courts Act.
Deborah Solomon, the founder of the DCI, a debt counselling industry portal and a company that offers debt counselling services, says that administration orders do not have a place since the advent of debt review.
She says the rights of consumers under administration are prejudiced, because an administrator has neither the duty nor the jurisdiction to interrogate the debt for reckless lending, prescription or the overcharging of interest and fees by the creditor. This, she says, is the responsibility of a debt counsellor, although not all debt counsellors do it.
“From what I’ve seen, administrators are grossly overcharging consumers, which makes administration more expensive than debt counselling. I know of a consumer who went under administration with debt of R20 000, which he paid. But when he retired, R60 000 of his pension payout was attached by the administrator.
“I’ve found administrators charging interest where credit providers haven’t claimed interest. They claim this money but don’t necessarily pay it over to the creditor. They also do ‘swop-outs’: they say to the creditor, ‘The debtor owes you R20 000; we’ll pay you R5 000 for the debt and you write it off.’ In other words, the administrator buys the debt and then charges the debtor interest,” Solomon says.
The “catalyst” for consumers to apply to go under administration is numerous emoluments attachment orders (EAOs), Solomon says. In other words, debtors go this route when they can’t cope with all of the EAOs issued against them. Going under administration has the effect of debt consolidation – you pay your administrator via a single EAO, and he or she distributes money to your creditors.