Cap on Maximum Credit Insurance Premiums
On Friday, 13 November 2015, the Department of Trade and Industry (dti) released draft legislation, proposing the maximum premium chargeable on credit insurance be capped at a much lower rate. Credit life insurance writes off a consumer’s debt, in the event of death, unemployment or other circumstances that leave them unable to repay loans. A cap of R4.50 for every R1000 worth of credit lent has been proposed – not far off from the R4 declared as reasonable by the National Credit Regulator (NCR) in the 2013 guidelines.
Retailers Selling Unreasonable Credit Insurance
Currently, lenders charge maximum premiums that are more than 10 times higher than R4 per R1 000. For instance, Lewis released a credit ratings agency review in August, showing it charges a maximum premium of R8 per R1 000. JD Group sold credit insurance for R22.30 per R1 000, while Bridge Loans charged R35.80 per R1 000, according to a report by the Treasury and FinScope. FinBond was referred to the tribunal earlier this year, after City Press exposed it for charging premiums as high as R57.60 per R1 000 – that’s 40% of the loan
As a result of these new regulations, lenders can expect their insurance profits to plummet, even if they charge the proposed maximum of R4.50. Despite facing stricter regulation of maximum interest rates and service fees, after the recent review, lenders continue to abuse consumers’ rights by charging excessive premiums on unreasonable credit insurance coverage.
Major retailers, Shoprite, Lewis and JD Group made headlines of late for selling unemployment and disability insurance to consumers without jobs in the first place – pensioners, the disabled and the self-employed. The regulator referred all three of the retailers to the National Consumer Tribunal (NCT), insisting they be fined, put an immediate stop to such practices and reimburse affected consumers. The draft regulations overtly prohibit lenders from charging consumers for credit insurance that they cannot benefit from.
The Regulator Clamps Down on Lenders
Until now, this practice did not technically contravene any specific regulation under the National Credit Act. As such, the regulator simply referred to it as “unreasonable” credit insurance. The draft regulations state that “Where a consumer is not employed on the date that the credit agreement is entered into, no cost relating to the risk of becoming unemployed may be included in the cost of the credit life insurance.”
Consequently, if the regulator asks lenders whether they engage in such practices, they are now compelled to provide the NCR with proof that they do not. Furthermore, lenders are prohibited from charging consumers a standardised insurance fee. The insurance premium charged on top of repayments must now take real risks into account, such as “the consumer’s individual risk profile or the risk profile of a group of people that the consumer is a part of.”
Moreover, the regulator may now ask lenders to prove that they have distinguished between borrowers’ risk profiles, as soon as they charge the maximum premium. Overall, the aim of reducing the maximum premium that lenders are allowed to charge for credit insurance is to protect consumers from being exploited and falling into debt as a result.