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

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.