The Department of Trade and Industry (DTI) released the draft credit life insurance regulations on Friday 13 November 2015, for public comment. This comes after several instances this year where credit providers have been accused of charging excessive credit life insurance fees (see below for more information).
Credit life insurance is usually charged when a person purchases an item on credit or takes out a loan, in order to minimise the risk to the company should something happen to the customer and they are unable to pay back the outstanding monthly instalments.
Credit life insurance caps
The draft regulations propose maximum prescribed credit life insurance charges for the various types of credit agreements available. The below table illustrates the proposed maximum limits, which credit providers may charge in relation to any commission, fees or expenses in relation to the insurance.
|Sub-sector||Maximum prescribed cost of credit life insurance (excluding the cost of credit)|
|Mortgage agreements||R2.00 per R1 000 of deferred amount|
|Credit facilities||R4.50 per R1 000 of deferred amount|
|Unsecured credit transaction||R4.50 per R1 000 of deferred amount|
|Short term credit transaction||R4.50 per R1 000 of deferred amount|
|Developmental credit agreements||R2.00 per R1 000 of deferred amount|
|Other credit agreements||R4.50 per R1 000 of deferred amount|
Source: Draft credit life insurance regulations
The draft regulations highlight: “If the credit life insurance provides for the settlement of the consumer’s total obligations under a credit agreement in the event of temporary disability or the consumer being unable to earn an income, the maximum cost of credit life insurance may be increased by R1.00 per R1 000.”
What must be covered?
According to the draft regulations, credit life insurance must provide cover for the settlement of a consumer’s outstanding balance under the credit agreement in the event that the consumer is permanently disabled or dies.
If you are temporarily disabled, the draft regulations propose that all of your obligations that are due and payable during the period of disability are covered for a period of 12 months, during the remaining repayment period of the credit agreement, or until the consumer is no longer disabled, whichever is the shorter period.
If during the term of the credit agreement, you become unemployed or unable to earn an income, other than as a result of a permanent or temporary disability, all repayment obligations that are due or payable are covered for a period of six months, during the repayment period of the credit agreement, or until the consumer finds employment or is able to earn an income, whichever period is shorter.
If you are not employed when the credit agreement is taken out, “no cost relating to the risk of becoming unemployed or being unable to earn an income may be included in the cost of the credit life insurance,” explains the draft regulations.
Furthermore, the draft regulations state: “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 event/s insured against 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.”
For a list of the exemptions from cover, click here. These exemptions must be explained to consumers on the date that the credit agreement is entered into and at regular intervals during the period of the credit agreement.
The lead up to the caps
“In a recent review of credit life charges by mainstream credit providers, DebtBusters uncovered some horrific practices in the marketplace. Findings indicate that although some credit providers, particularly the banks, fall below the DTI’s proposed R4.50 per R1 000 of deferred amount, almost all other credit providers are charging far in excess of this, with the average ‘non-bank’ consumers paying over R12 per R1 000 borrowed.
“Furniture retailers are generally charging the highest rates as multiple insurances are bundled into credit life; in some instances credit life charged exceeds R20 per R1 000 borrowed, resulting in hundreds of Rands per month being shelled out by consumers towards credit life insurance,” notes DebtBusters.
Among the cases that made it into the news recently, was Finbond being referred to the National Consumer Tribunal, by the National Credit Regulator (NCR), for having high credit life insurance charges. Finbond denied the allegation, claiming that it was acting in accordance with the National Credit Act (NCA). The NCR alleged that in one instance, Finbond had charged a customer R136 per R1 000 borrowed in credit life insurance premiums.
In another case, following a secret shopper experience, Lewis stores were accused of charging excessive credit life insurance fees. The Lewis Group, however, insisted at the time that its fees and costs were compliant with the NCA, and opposed its referral to the National Consumer Tribunal. In the secret shopper incident, the shopper bought an item to the value of R9 999.99 (including VAT), and was charged 21% of that value for credit life insurance. When all insurance products were factored in, the customer was paying a total of R6 201 for insurance on an item worth under R10 000.
For more information on the secret shopper experience, click here.
In October, the Lewis Group announced that it would be refunding customers R67.1 million for the wrongful sale of insurance products, following an internal investigation that revealed that loss of employment insurance cover had been sold to customers who were not eligible to claim against this cover.
“Credit Life has been one of the greatest rip offs of our time! DebtBusters welcomes these proposed maximum prescribed credit life insurance charges. They will go a long way to preventing credit providers from making their money by overcharging clients for credit insurance,” said DebtBusters.
Where to submit comment
Comments on the draft regulation may be submitted to the DTI no later than 30 days after the publication of the draft regulations (early to mid-December 2015).
Comment may be mailed to:
Director-General, Department of Trade and Industry
Private Bag X84
Alternatively, it can be hand delivered to:
77 Meintjies Street
Block B 1st Floor
Comments may also be emailed to SKumkani@thedti.gov.za. All comments must be marked for the attention of Siphamandla Kumkani (For Attention: Mr Siphamandla Kumkani).