Credit life insurance remains uncapped in latest credit act amendments

Small credit providers not required to register with regulator either.

JOHANNESBURG – Credit life insurance charges have not been capped as part of amendments made to the National Credit Act (NCA) that finally came into effect on Friday – almost ten months after President Jacob Zuma signed them into law.

Credit life insurance is generally a mandatory extra charged to a loan so that lenders can recover money owed to them by borrowers if the borrower dies before repaying the full loan.

Unscrupulous credit providers add excessive credit life insurance charges to loans, as a means of ramping up their fees in order to boost margins.

When amendments to the NCA were first published, it was proposed that the Minister of the Department of Trade and Industry (dti) may, in consultation with the Minister of Finance, prescribe a cap on the cost of credit insurance that a credit provider may charge a consumer.

That this is nowhere to be found in the now gazetted National Credit Amendment Act (NCAA) is cause for “incredible disappointment for the consumer,” according to Ian Wason, CEO of the Intelligent Debt Management Group, which owns debt-counselling firm, DebtBusters.

“A cap is a pretty blunt instrument, but at least it would have been a start, and then the FSB [Financial Services Board] could have done some more intuitive regulatory work on fleshing this out. Until then unscrupulous credit providers will continue to charge R56 [for credit life insurance] per R1 000 [borrowed],” Wason tells Moneyweb.

According to Wason, the proposed amendments stated that anything above R4 per R1 000 was unreasonable. “I am staggered that they are content with credit providers continuing to charge over ten times more than this,” he says.

Clark Gardner, CEO of financial wellness firm, Summit, says the NCR and/or the FSB could’ve long ago applied to the High Court to secure a declaratory order stipulating a reasonable charge for credit life insurance or even challenged the appropriateness of this insurance, given the low claims ratio and alleged profiteering.

“In the meantime, hundreds of millions of rand is being taken from consumers who don’t have that money,” Gardner says. “It would appear that more than a third of Lewis Stores’ profits comes from credit life insurance. Surely this is excessive?”

Wikus Olivier, manager of corporate development and strategy at Debtsafe, explains that if a consumer is under debt review they can elect to cancel the credit life insurance policy with a bank and take out a much cheaper policy with an insurance company instead. “The banks we’ve seen charge up to R27 per R1 000 borrowed for credit life insurance. Through a private insurance company this comes down to R3.25 per R1 000 borrowed,” he notes.

Wason says that the dti can still put in a cap without going through the parliamentary process, but that it would need to be gazetted. “Why they didn’t put it in now is beyond me,” he says.

Regulators flying under the radar

Meanwhile, there also seems to be nothing new in the amendments on which credit providers must register with the regulator. Currently, only lenders that have issued more than 100 loans at a total exceeding R500 000 per year must be registered with the National Credit Regulator (NCR).

MicroFinance South Africa (MFSA) has in the past called for all lenders to be registered with the regulator, irrespective of the threshold, in order to ensure compliance with the NCA.

It was widely anticipated that the NCAA would include such a provision.

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Reason? Simple – they forgot. Like most laws and regulations these days – carelessly drafted.

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