Are SA’s credit providers due for their own reckoning?
The payment protection insurance (PPI) scandal engulfing UK banks raises the question whether SA’s lenders are not due their own PPI reckoning.
PPI is what we understand as credit life insurance. It is sold to consumers, usually on a mandatory basis, when they take out a loan to cover repayments in the event that they are unable to do so due to death, disability or unemployment.
The cost to British banks of the PPI scandal hit £50bn last week, rivalling the penalties and
losses faced by the largest US banks after the global financial crisis, according to the Financial Times. That is close to R1-trillion (about the size of Standard Bank or FirstRand’s total loan book) that banks must set aside to compensate customers who were potentially mis-sold PPI in a scandal that dates back to the 1990s. In most cases, the product was sold to consumers who did not know they were buying it or were not eligible for payouts.
Sound familiar? Investigations by SA’s credit ombud a few years back found that lenders were selling retrenchment cover to pensioners and self-employed consumers who quite clearly would not be able to claim for it.
In 2015, Lewis Group and subsidiary Monarch Insurance had to refund customers about R69m for wrongly selling them loss of employment insurance.
The investigation also found the cost of credit was not properly disclosed and consumers were not told they were allowed to shop around for cover. In some instances borrowers did not even know that they had bought the cover, leaving them or their families locked into unnecessary debt collection cycles. All the while, credit providers have fattened their own margins, overcharging for a product that has a low rate of claims.
Thanks to widespread abuse, regulations have since been tightened, with caps imposed on the maximum monthly cost of credit life insurance.
Lewis had been charging nearly double the regulated cost before these caps took effect in August 2017. It was not alone. Lenders were overcharging almost across the board, with premiums in some cases nearly three times more.
So, are SA’s credit providers due their own PPI moment?
According to credit life insurance start-up Yalu, banks continue to flout the regulations, employing all kinds of tactics to resist customer attempts to switch their policies. Banks deny any wrongdoing.
This ranges from not responding to cancellation requests for weeks at a time, to asking for extra documentation not required by law, says Nkazi Sokhulu, Yalu CEO and cofounder. He recently told Sunday Times Money’s Angelique Ardé that one bank has blocked emails from Yalu.
In an obvious reference to FNB, he said that another allows customers to open bank accounts with selfies but insists they come into the branch to cancel a credit life policy.
One wonders how closely the National Credit Regulator (NCR) has been monitoring compliance with the new rules.
British banks resisted criticism over PPI for years, until being defeated in a high court case brought by the UK s then financial services regulator in 2011.
A further appeal was considered until the then Lloyds CEO, António Horta-Osório, broke ranks and agreed to start compensating customers, says the Financial Times.
Last week Lloyds told shareholders that it needed to book an “incremental charge” of a further £1.2bn-£1.8bn for PPI, after it experienced a spike in queries ahead of the August 29 deadline to file a claim. Lloyds has set aside almost £22bn for PPI. While claims management companies have driven some claims, even where these do not convert into compensation, there is still a huge cost to process the requests.
Barclays said it had to increase provisions for PPI redress by a similar margin to Lloyds, adding to cumulative provisions of £9.6bn.
Given that the NCR’s track record doesn’t inspire much confidence, perhaps it is time for the Financial Sector Conduct Authority to start investigating.