Chick­ens are com­ing home to roost in the in­dus­try, writes Maya Fisher-French

CityPress - - Business - Ef­fec­tive gross rate 92.9% sum­mitfin.co.za/blog/sum­mit-mys­tery-shop­ping-shows-up-clear-lewis- nca-breaches

This month, the Na­tional Credit Reg­u­la­tor (NCR) re­ferred the fi­nan­cial ser­vices arm of JD Group to the Na­tional Con­sumer Tri­bunal for the mis-selling of credit life poli­cies, high­light­ing the type of un­eth­i­cal prac­tices that have long plagued the con­sumer credit in­sur­ance in­dus­try.

Last month, the NCR de­cided to re­fer Lewis Group and Monarch In­sur­ance Com­pany to the tri­bunal for sim­i­lar prac­tices, in­clud­ing selling re­trench­ment and dis­abil­ity cover to pen­sion­ers and self-em­ployed clients – ba­si­cally cover that these in­di­vid­u­als could not claim for.

In June, mi­crolen­der Fin­bond was re­ferred by the NCR to the tri­bunal for ex­ces­sive credit in­sur­ance premi­ums af­ter an in­ves­ti­ga­tion by City Press.

In is­su­ing the state­ment re­gard­ing JDG Trad­ing, the NCR stated that “the NCR will con­tinue to con­duct in­dus­try­wide in­ves­ti­ga­tions on credit in­sur­ance prac­tices to pro­tect vul­ner­a­ble con­sumers such as pen­sion­ers and the dis­abled”.

Lewis has al­ready strongly de­fended its prac­tices in an af­fi­davit is­sued to the Na­tional Con­sumer Tri­bunal, as has Fin­bond.

The re­al­ity, how­ever, is that un­eth­i­cal prac­tices within the con­sumer credit in­sur­ance in­dus­try, which is worth about R16 bil­lion a year in premi­ums, have been in the spotlight for many years.

Be­fore the Na­tional Credit Act came into force in 2006, it was com­mon prac­tice for car deal­er­ships to sell sin­gle, up­front pre­mium credit in­sur­ance poli­cies for the term of the ve­hi­cle­fi­nanc­ing pe­riod. These sin­gle premi­ums ran into the tens of thou­sands of rands and were in­cluded in the prin­ci­pal debt, in ef­fect in­cur­ring in­ter­est charges. The in­surer re­ceived the money up­front, the dealer re­ceived its com­mis­sion and the con­sumer was left pay­ing in­ter­est on their pol­icy.

In­ves­ti­ga­tions at the time found ir­reg­u­lar selling prac­tices, where deal­er­ships would claim that the credit in­sur­ance pol­icy was a con­di­tion of fi­nance ap­proval.

Once the Na­tional Credit Act came into ef­fect, credit in­sur­ance premi­ums could no longer be in­cluded in the prin­ci­pal loan. How­ever, by in­tro­duc­ing a cap on the in­ter­est charged by mi­crolen­ders, the act in­ad­ver­tently opened the door for credit in­sur­ance poli­cies to be used to cir­cum­vent the in­ter­est lim­its.

An in­ves­ti­ga­tion in 2008 into credit in­sur­ance poli­cies by the then Life Of­fices’ As­so­ci­a­tion and the SA In­sur­ance As­so­ci­a­tion found that, in many cases, the re­tailer or deal­er­ship made their money not from the goods they were selling, but from the in­sur­ance premi­ums and in­ter­est earned by fi­nanc­ing these premi­ums.

They also found that re­mu­ner­a­tion by some in­sur­ers to mo­tor deal­er­ships and fur­ni­ture re­tail­ers was in ex­cess of the capped com­mis­sions stip­u­lated in both the short-term and long-term in­sur­ance acts.

At the heart of the al­le­ga­tions was that Re­gent In­sur­ance was pay­ing ex­ces­sive com­mis­sions to deal­er­ships within the Im­pe­rial Group, which also owns Re­gent Life. How­ever, the prac­tice of ex­ces­sive re­mu­ner­a­tion and un­de­sir­able selling tac­tics was found to be wide­spread in the in­dus­try.

The re­port con­cluded that while credit in­sur­ance is nec­es­sary to main­tain a vi­able credit in­dus­try and is in many ways an ap­pro­pri­ate prod­uct in meet­ing spe­cific needs, some of the prac­tices in selling the prod­ucts and re­mu­ner­a­tion struc­tures had to be chal­lenged.

Un­for­tu­nately, not much has changed since then and, in Septem­ber 2014, the Trea­sury is­sued its tech­ni­cal re­view of the con­sumer credit in­sur­ance mar­ket in South Africa, where it found that, in gen­eral, the rates charged for credit in­sur­ance were about 10 times higher than for stand-alone life cov­ers such as fu­neral cover, with com­mis­sions paid to sales con­sul­tants as high as 40% of the to­tal pre­mium paid.

The re­port also found that lenders would of­ten place re­stric­tions on the type of cover they would ac­cept, thereby lim­it­ing the cus­tomer’s op­tions, forc­ing them to take the in­sur­ance through the credit provider.

Over the years, City Press has fre­quently re­ported on the abuse within the sys­tem, which has in­cluded ex­ces­sive premi­ums, the sale of in­ap­pro­pri­ate risk prod­ucts and, in some cases, out­right fraud where mi­crolen­ders is­sued fake poli­cies and col­lected the premi­ums.

An ex­am­ple of the type of loan un­der in­ves­ti­ga­tion by the NCR in­cludes a R5 000 loan is­sued by a mi­crolen­der that was re­payable over four months.

Tak­ing into ac­count in­ter­est, credit life in­sur­ance and ser­vice fees, the client would pay R2 840 in costs – more than half of what was bor­rowed – in just four months.

Of those costs, the high­est by far was the credit life in­sur­ance at a mas­sive R1 155 – payable as a R288-a-month pre­mium. That rep­re­sented about 40% of the cost of the loan.

A study con­ducted by FinMark Trust, which con­ducts re­search on ac­cess to fi­nan­cial prod­ucts, found that credit in­sur­ance costs typ­i­cally made up 50% of the ini­tial credit value and 20% of to­tal re­payable amount.

Credit in­sur­ance is where the real money is be­ing made, and there is no doubt that com­pa­nies will de­fend their busi­ness mod­els vig­or­ously.

They will point to the fact that these are “iso­lated cases” and that cus­tomers are “free to choose”.

The re­al­ity is that the mar­ket in which these com­pa­nies op­er­ate al­lows un­scrupu­lous lenders to take ad­van­tage of both a lack of fi­nan­cial ed­u­ca­tion as well as sim­ple des­per­a­tion.

The Trea­sury’s re­search found that claims made on credit in­sur­ance poli­cies were less than half that ex­pe­ri­enced in stand­alone life in­sur­ance prod­ucts, which sug­gests that few peo­ple ei­ther un­der­stand that they have taken out credit in­sur­ance, or know how to claim.

When in­ter­view­ing peo­ple who had just taken out loans, FinMark Trust re­searchers found that the cus­tomer had lit­tle aware­ness around credit in­sur­ance and saw it sim­ply as “just another fi­nance charge”.

Re­searchers found that most con­sumers were more fo­cused on buy­ing the item they wanted, and whether their loan would be ap­proved, than on ask­ing ques­tions about the to­tal cost.

The fact that more than 200 000 peo­ple fell vic­tim to the Wonga.com loan scam, where fraud­sters con­vinced them to pay over thou­sands of rands to se­cure a loan, is ev­i­dence enough that the lev­els of des­per­a­tion cre­ate a per­fect en­vi­ron­ment to make money out of ex­ces­sive fees. The Na­tional Credit Reg­u­la­tor an­nounced it had re­ferred Fin­bond Mu­tual Bank to the Na­tional Con­sumer Tri­bunal for charg­ing ex­ces­sive credit life premi­ums. The reg­u­la­tor is re­quest­ing the tri­bunal to,

among other things, or­der Fin­bond to re­fund all af­fected con­sumers and pay an ad­min­is­tra­tive fine.

Fin­bond has de­nied the al­le­ga­tions. The reg­u­la­tor re­ferred JDG Trad­ing and JDG Mi­cro Life to the Na­tional Con­sumer Tri­bunal for selling re­trench­ment and oc­cu­pa­tional dis­abil­ity cover to pen­sion­ers and con­sumers re­ceiv­ing gov­ern­ment so­cial grants – in­clud­ing as old-age, dis­abil­ity, foster care and child sup­port grants – and charged most of

these con­sumers a club fee. The reg­u­la­tor also found that some con­sumers re­ceiv­ing dis­abil­ity grants from the gov­ern­ment on ac­count of their per­ma­nent dis­abil­ity were sold oc­cu­pa­tional dis­abil­ity cover at a time when they were al­ready cer­ti­fied as per­ma­nently dis­abled. The reg­u­la­tor is ask­ing the tri­bunal to or­der JDG Trad­ing and JDG Mi­cro Life to re­fund the af­fected

con­sumers the re­trench­ment and oc­cu­pa­tional dis­abil­ity pre­mium and club fees charged from 2007, to is­sue an in­ter­dict to dis­con­tinue the un­law­ful

con­duct and to im­pose a fine. In rands and cents, this is the money Lewis makes on the prod­uct In­ter­est on the loan Money for ad­min­is­tra­tion, de­liv­ery, ex­tended war­ranty In­sur­ance in­come

To­tal in­come

Source: Sum­mit

R4 485.90 R5 310 R6 201

R15 996.90

Sum­mit, the fi­nan­cial well­be­ing web­site, con­ducted mys­tery taped shop­ping ex­pe­ri­ences at Lewis Stores lately and con­sis­tently dis­cov­ered the fol­low­ing:

Read the Sum­mit in­ves­ti­ga­tion in full at

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