Government wants to limit what you pay for credit life cover

The Department of Trade and Industry is calling for comment on its newly released draft regulations on credit life insurance that limit its cost and ensure guaranteed minimum benefits for consumers. Lorraine Kearney reports Latest on Finbond case

The dust had barely settled following the gazetting by the Minister of Trade and Industry of caps on interest rates on credit before he called for comment on draft regulations for credit life insurance, which propose a limit on the premiums lenders can charge and specify the benefits it has to cover.

The limits on interest rates will bring relief to consumers. Should they be passed, the draft regulations on credit life insurance will give consumers even more protection from unscrupulous lenders, and will prevent the mis-selling of the cover.

But the developments do spell a double whammy for credit lenders. Those in the short-term, unsecured space are expected to feel the squeeze the most.

Minister Rob Davies published the call for comment on the draft regulations in the Government Gazette on November 13. The window for comment closes on December 13.

Among other things, the minister proposes that the “cost that a credit provider may charge a consumer in relation to credit life insurance … including the cost of any commission, fees or expenses in relation to that insurance, may not exceed [certain] maximum limits, which are calculated on the total of the consumers outstanding obligations under the credit agreement” (see “Proposed maximum premiums for credit insurance”).

Should the draft regulations be passed, a personal loan of R8 000 over six months will cost a maximum of R216 in credit life cover.

The regulations are needed to stem abuse in the industry. Stories are rife of lenders charging far higher amounts for the cover, as well as mis-selling it.

To give you an idea of the relief Mortgage agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .R2.00 per R1 000* Credit facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .R4.50 per R1 000* Unsecured credit transaction . . . . . . . . . . . . . . . . . . . . . . . .R4.50 per R1 000* Short-term credit transaction . . . . . . . . . . . . . . . . . . . . . . . .R4.50 per R1 000* Developmental credit agreements . . . . . . . . . . . . . . . . . . . .R2.00 per R1 000* Other credit agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . .R4.50 per R1 000* *Of the deferred credit amount (excluding the cost of credit) this would bring to consumers who take out short-term loans, Personal Finance reported in June on the “excessive” and “unreasonable” amounts Finbond Mutual Bank charged consumers.

“The average industry premium for the sector in which Finbond operates is less than R10 per R1 000 of credit, whereas Finbond charges R128 for a three-month loan with a capital value of R700,” Lesiba Mashapa, the company secretary at the National Credit Regulator (NCR), said at the time. “On a R1 000 loan over two months, Finbond charges R136 for credit life insurance – in other words, R68 a month.”

The regulator took the case to the National Consumer Tribunal, and asked the tribunal to fine the bank and order it to refund consumers’ premiums charged above the average industry premium (see “Latest on Finbond case”).

In the draft regulations, the minister proposes that the cost of credit life insurance be disclosed to the consumer.

He also specified compulsory minimum benefits. The cover must provide for at least the settlement of:

◆ The outstanding balance of your total obligations under the credit agreement if you die or become permanently disabled;

◆ All your obligations that become due and payable for a period of 12 months, or during the remaining repayment period of the credit agreement, or until you are no longer disabled, whichever is the shortest period, if you become temporarily disabled; and

◆ All your obligations that become due and payable for a period of six months, or during the remaining repayment period of the credit agreement, or until you find employment or are able to earn an income, whichever is the shortest period, if you lose your job or are unable to earn an income other than as a result of permanent or temporary disability.

If you are not employed when you sign up for a loan, the lender may not charge for unemployment or retrenchment cover.

ACTUAL RISK

“The cost of credit life insurance must be determined having regard to the actual risk and liabilities associated with the credit agreement, including the risk of the insured events occurring, with reference to the consumer’s individual risk profile or the risk profile of a group of people that the consumer is a part of,” the minister proposes.

A credit provider or insurer that increases its credit life insurance premiums to the maximum after the date on which the regulations come into operation must, at the request of the NCR or the registrars under the Long-term Insurance Act or Short-term Insurance Act, demonstrate that the increase is justified. In other words, if you are paying below R4.50 for your cover now and your credit provider raises this to R4.50 when the regulations are passed, the provider has to prove that this is necessary based on your individual risk profile. The credit provider cannot jump on the bandwagon and charge the maximum without good reason.

There are certain exclusions and conditions to the cover that must be explained to you when you sign the credit agreement, and at regular intervals after that. For example, you won’t be covered if you are a soldier and you are injured or killed on duty, or if you are injured during an unprotected strike. And you won’t be covered if you are fired from your job.

The draft regulations also propose that if the cover provides for the settlement of your credit obligations in the event of temporary disability or inability to earn an income, the cost of the insurance may subsequently be increased by a maximum of R1.00 per R1 000. So if you are unable to work for a short period and your cover kicks in, when you return to work you can expect to be charged R5.50 per R1 000.

And, crucially, it is proposed that you will be able to change your insurance policy “at any time after the credit agreement is entered into if the premium and benefits under a new policy are the same as or better than those under the current policy”. In effect, you will be able to shop around for a better deal.

◆ In October, the NCR referred Shoprite Investments and Shoprite Insurance Company to the consumer tribunal for selling retrenchment cover to pensioners In the case of Finbond Mutual Bank, which is accused of overcharging for credit life insurance, the National Credit Regulator has filed its papers and the National Consumer Tribunal has issued a notice of complete filing, but it is waiting for Finbond to file an answering affidavit. The lender has asked for an extension. and consumers receiving state oldage grants.

◆ In July, it referred Lewis Stores and Monarch Insurance Company for selling loss-of-employment cover as part of credit insurance to pensioners and self- employed consumers. At the end of last month, Lewis said it would refund R44.1 million plus R23 million in interest to a group of customers for the cost of loss- of- employment insurance that the company said was mistakenly sold to them.

◆ In August, the NCR referred JDG Trading and JDG Micro Life to the Tribunal for selling retrenchment cover to pensioners and consumers receiving government social grants such as the old age grant.