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

Weekend Argus (Saturday Edition) - - PERSONALFINANCE -

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.


“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.

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