Illustration: Colin Daniel

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”.

The proposed premium limits, which apply to the deferred credit amount (excluding the cost of credit), are as follows:

* 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

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 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”, below).

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 and consumers receiving state old- age 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.

PROPOSALS WELCOMED BY CONSUMER BODIES

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 over-indebtedness. 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.”

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 mis-selling, 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.

LATEST ON THE FINBOND CASE

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.

COMMENT ON THE PROPOSALS

Comments on the draft credit life insurance regulations must be marked for the attention of Siphamandla Kumkani, and must be addressed to:

Director-general, Department of Trade and Industry, Private Bag X84, Pretoria, 0001.

They can be hand delivered to:

77 Meintjies Street, Block B, First Floor, Sunnyside, Pretoria.

Otherwise, you can fax comments to 012 394 2804 or email them to [email protected]