DTI’s pro­pos­als wel­comed by credit reg­u­la­tor as way to stem abuse

Weekend Argus (Saturday Edition) - - PERSONALFINANCE -

Con­sumer-in­ter­est groups in and out­side govern­ment are sup­port­ive of the De­part­ment of Trade and In­dus­try’s draft reg­u­la­tions on credit life cover.

The Na­tional Credit Reg­u­la­tor has wel­comed them. “We are very con­cerned about credit life in­sur­ance, and some providers are charg­ing ex­ces­sive amounts. We need to cap what can be charged and de­fine the ben­e­fits. We have had abuses,” Le­siba Mashapa, the com­pany sec­re­tary at the NCR, says. “The pro­posed reg­u­la­tions are to be wel­comed as they will al­low credit providers to be com­pet­i­tive in their pric­ing. If you al­low con­sumers to change their poli­cies, it will al­low them to shop around for bet­ter poli­cies and prices.

“The draft reg­u­la­tions [also] make it very clear that if a con­sumer is un­em­ployed, a credit provider can­not sell them cover for re­trench­ment.”

Stephen Logan, the founder of Fair Credit NPC, which helps the govern­ment to curb preda­tory con­sumer credit prac­tices, points out that there is now co-or­di­na­tion be­tween the reg­u­la­tors of in­sur­ers and credit providers, which was not the case in the past.

Credit providers must com­ply with guide­lines is­sued by the Na­tional Credit Reg­u­la­tor and in­sur­ers must com­ply with those is­sued by the Reg­is­trar un­der the Long-term In­sur­ance Act 52 of 1998 or the Short-term In­sur­ance Act 53 of 1998 from time to time.

“The govern­ment should be com­mended on hav­ing re­solved the po­lit­i­cal im­passe be­tween the De­part­ment of Trade and In­dus­try and the Trea­sury on this is­sue,” Logan says. “It has made pro­vi­sion for the in­sur­ance reg­is­trars and the NCR to work to­gether.”

It is dif­fi­cult to gauge the re­sponse of the big lenders to the pro­pos­als. They are pre­fer­ring to wait un­til they have com­mented of­fi­cially.

The Bank­ing As­so­ci­a­tion of South Africa, which rep­re­sents all the coun­try’s banks, is “re­view­ing the draft reg­u­la­tions and will, in due course, pro­ceed to es­tab­lish the im­pact on the credit in­dus­try and its con­sumers,” Cas Coova­dia, the man­ag­ing di­rec­tor of the as­so­ci­a­tion, says.

The As­so­ci­a­tion for Sav­ings & In­vest­ment South Africa (Asisa), which rep­re­sents the ma­jor­ity of the coun­try’s as­set man­agers and life in­sur­ance com­pa­nies “will be col­lat­ing mem­ber in­put and will com­pile a re­sponse to the draft reg­u­la­tions. There­fore, Asisa can­not com­ment at this stage,” Peter Dempsey, Asisa’s deputy chief ex­ec­u­tive, says.

The lim­its should not have too sig­nif­i­cant an ef­fect on the prof­its of the big lenders, such as the banks and in­sur­ers, which al­ready are be­lieved to charge less, on av­er­age, than the pro­posed limit, some­times as low as R4 per R1 000.

Credit life in­sur­ance is also not al­ways ex­plic­itly stated in credit agree­ments, and the con­sumer is not al­ways cov­ered for death or re­trench­ment. For ex­am­ple, a short-term loan of R8 000 over 37 days from First Na­tional Bank car­ries an ini­ti­a­tion fee of R960, but it car­ries no credit life cover and no pro­vi­sion is made for death, dis­abil­ity or re­trench­ment.

“The lim­its pro­posed are sig­nif­i­cantly lower than the cur­rent charg­ing prac­tices of some providers. It will be ben­e­fi­cial if stake­hold­ers com­ment on the im­pact of the cap on their re­spec­tive busi­ness mod­els,” Reshma She­o­raj, the di­rec­tor of in­sur­ance in the Fi­nan­cial Sec­tor Pol­icy Unit in the Na­tional Trea­sury, says.

She­o­raj is driv­ing the Con­sumer Credit In­sur­ance (CCI) Roadmap, which is ex­pected to be re­leased by Trea­sury and the Fi­nan­cial Ser­vices Board be­fore the end of the year. It will come out of the Trea­sury’s tech­ni­cal pa­per on the sec­tor.

“The De­part­ment of Trade and In­dus­try (DTI) price cap is an in­terim mea­sure to curb the cur­rent abuse,” She­o­raj says. “These mea­sures are part of a pack­age of re­forms (for ex­am­ple, caps on in­ter­est rates and a re­view of emol­u­ments at­tach­ment or­ders) to ad­dress house­hold overindebt­ed­ness. The DTI [draft] reg­u­la­tions ad­dress only the CCI pric­ing is­sues. There are a range of mar­ket con­duct is­sues that also need to be ad­dressed holis­ti­cally and these will be set out in the roadmap.”

MIN­I­MUM BEN­E­FITS

The draft reg­u­la­tions stip­u­late min­i­mum re­quired ben­e­fits for com­pul­sory credit life in­sur­ance, Logan says, which opens up the space for greater in­no­va­tion by the credit providers for non-com­pul­sory credit life in­sur­ance. (At the mo­ment there are no pre­scribed min­i­mum ben­e­fits; the draft reg­u­la­tions en­sure that the risk of death or re­trench­ment is in­cluded in all com­pul­sory cover.)

This means the credit provider can in­no­vate and say, “If you’re pre­pared to pay, say, R6, we’ll give you ad­di­tional ben­e­fits be­yond the min­i­mum pre­scribed cover.”

“With the draft reg­u­la­tions, con­sumers would know ex­actly what they were go­ing to get, and they could com­pare like for like,” Logan says. “But the credit providers would be in­cen­tivised to cre­ate ad­di­tional ben­e­fits. [In that case] con­sumers would have to be very care­ful not to pay sig­nif­i­cantly more for ben­e­fits that have lit­tle real value. If they were suck­ered into pay­ing far more than the capped amount, this would dras­ti­cally un­der­mine the pro­tec­tion af­forded by the draft reg­u­la­tions.”

He also ques­tions the lack of pro­vi­sion for the his­toric mis-sell­ing of credit life in­sur­ance. The pro­pos­als make no men­tion of re­fund­ing con­sumers who were mis-sold cover.

The NCR’s Mashapa says: “Re­gard­ing re­dress for his­tor­i­cal mis­selling, at the mo­ment con­sumers can lodge com­plaints with the NCR, which we can deal with. If a cred­i­tor re­fuses to re­fund the con­sumer, then we can re­fer the mat­ter to the Na­tional Con­sumer Tri­bunal.”

Of the pro­posed R4.50 pre­mium limit, Logan says it is the ab­so­lute max­i­mum that can and should be charged. On the other hand, Hen­nie Fer­reira, the chief ex­ec­u­tive of Mi­cro­Fi­nance South Africa, be­lieves it is too low for smaller lenders to re­main in busi­ness. His group rep­re­sents mi­cro­fi­nance lenders who work in the short-term un­se­cured space, which pro­vide loans up to R8 000 with a max­i­mum loan pe­riod of six months.

All his mem­bers, he says, are regis­tered with the NCR and are com­pli­ant with the law.

“For in­stance, R4.50 on a R700 loan doesn’t cut it. It is too low. R4.50 on a small loan is not vi­able … I am not sure if the im­pact this would have on the econ­omy has been thought through,” Fer­reira says.

“The smaller credit line will dis­ap­pear. To make it vi­able you need to have a mas­sive scale.

“The DTI … has pub­lished prices based on the av­er­age in the mar­ket. But what will hap­pen to those [who charged more for their credit life cover]? They will no longer be in the mar­ket.”

A man who works in an of­fice, for ex­am­ple, is a much lower risk than a miner who has to take a taxi a long dis­tance to work. “As a lender,” Fer­reira says, “you have to look at the price and the risk. If you set a limit on the credit life cover, it will take the high-risk con­sumer out of the equa­tion. And that miner prob­a­bly won’t be able to raise credit.

“For us to keep the smaller guy in the loop, we [will] need some form of ini­ti­a­tion fee to cover the cost of the loan,” Fer­reira says.

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