Consumer credit insurance revisited
In line with the general legislative trend to tighten up the credit market, as well as the associated cost, the National Treasury (NT) and Financial Services Board (FSB) have issued a Technical Report on the Consumer Credit Insurance Market in South Africa for public comment.
The Report identifies some of the abuses in market conduct or business practices in the Consumer Credit Insurance (CCI) industry.
As part of the wider initiative taken by government to address the problem of household over-indebtedness and to ensure that consumers are treated fairly by financial service providers, the Report outlines a set of policy responses intended to improve the existing regulatory framework.
The Report identifies the following key issues:
- Lack of full disclosure of cost of credit, including the cost of CCI. It was found that:
- the bundling of CCI together with the credit offering and the inclusion of "add on" products make price comparisons difficult for the consumer.
- there is not transparent disclosure of commission and fees.
- Inconsistency in premium changes, which tend to be higher when a risk is insured under a CCI policy.
- Limitations in ability to compare and/or substitute products due to variance between CCI product features. Examples were found to include forms of cover for employment related events.
- Failure to meet the needs of the target market. The example given is that some business models offer policy benefits for which those in the target market might not actually be eligible and against which, therefore, they would never be able to claim. For example, retrenchment cover benefits offered to customers who are social grant beneficiaries.
- Deficiencies in the structure and operation of the CCI market, including:
- lack of effective competition in the market;
- the inability of consumers to exercise an informed choice due to the nature of the product offering; and
- the inter-connective structure of the CCI value chain.
The Report proposes three areas of focus to form the basis for public comment.
Focus Area 1 - Regulating the pricing of CCI
It is anticipated that this approach will allow credit providers to continue to require CCI cover as a condition of granting credit, but within a framework where there is explicit regulation of credit and/or CCI pricing.Three options in this regard are listed in the Report:
- Regulating the CCI premium rate
- Regulating the interest rate
- Placing a regulated cap on the total cost of credit
Focus Area 2 - Regulation of market conduct non-pricing practices
This is identified as a means of dealing with the shortcomings of CCI from a market practice point of view.
Focus Area 3 - Insurance cover for credit providers
This proposal acknowledges the importance of insurance to protect both consumers and credit providers but suggests that credit providers should consider how to self-insure against loan default risks through purchasing cover from insurers in their own names.
The Report makes it clear that none of the focus areas are mutually exclusive and that they should be considered together.
The public comments and further information will form the basis of final policy proposals after which draft legislation will be published for public comment and adoption. It is the intention that once public comment has been taken into account, the process to finalise the policy proposals will be undertaken in consultation with the Department of Trade and Industry and the National Credit Regulator.
Comments to the Report are invited until 30 September 2014.