National Treasury and the Financial Services Board (FSB) published a document titled “Technical Report on the Consumer Credit Insurance Market in South Africa”. It called for comment by 30 September 2014 on proposals to address abuses in the consumer credit insurance (CCI) industry.
The report identifies some of the abuses in market conduct or business practices in the Consumer Credit Insurance (“CCI”) industry and provides a review of the market structure as well as the current policy and regulatory framework applying to the industry.
The report outlines a set of proposed initiatives to strengthen the existing regulatory framework 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 CCI providers.
The findings of the review point to the following poor market practices:
- A lack of transparency in the total cost of credit: The full cost of credit, including the cost of CCI is not fully disclosed. The fact that CCI is bundled together with the credit offering and the inclusion of add-on products such as warranties and “club” membership fees make price comparisons difficult. In addition, disclosure of commission and fees is opaque.
- High premiums and different pricing. Premiums tend to be higher when a risk is insured under a CCI policy.
- Product differentiation limits comparison: Variance between CCI product features limits product comparability and substitutability, with questionable competition benefits. Examples include different forms of cover for employment related events.
- CCI cover does not meet the needs of the target market: Some business models offer policy benefits that many in the target market might not actually be eligible for and by implication can never claim against. An example is retrenchment cover benefits offered to customers who are social grant beneficiaries.
Key focus areas for public comment
The report proposes three areas of focus that require further exploration:
Focus area 1: Regulating the pricing of CCI
This approach allows 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 further sub-options are considered under this approach, namely:
- Regulating the CCI premium rate. Prescribe a “band” of recommended reasonable risk premium rates for different CCI cover types, or place a regulated cap on premium rates for different CCI cover types.
- Regulating the interest rate. Introduce a maximum interest cap set at a lower level than the “unsecured loan” interest rate cap, for loans where the credit provider insists on mandatory CCI.
- Placing a regulated cap on the total cost of credit, including interest, CCI premiums and other charges.
Focus area 2: Regulating market conduct non-pricing practices:
The report recognises that in addition to the possibility of price limits, there is a need to also deal with market conduct failings through sixteen potential regulatory measures which are set out in the report.
Focus area 3: Protecting consumers through insurance cover for credit providers: It is recognised that for reasons related to both protecting the consumer, and to lower the risk to credit providers, an appropriate mechanism for insuring against credit risk is necessary, especially for relatively large credit transactions. The initial report notes the need to encourage or require credit providers to consider how to “self-insure” against loan default risks through purchasing insurance cover from insurers in their own names.
None of the above focus areas are mutually exclusive, and could all be considered in parallel, or to complement one another. In the interim, while consultation is ongoing, the NT and FSB are already considering the extent to which certain of the measures described under focus area 2 could be used to mitigate risk to consumers in the shorter term.
We recently published a report on a UK “payday lender” who was fined £2.6 million for unfair business practices. Consultation with the authorities by CCI providers, rather than confrontation, can prevent similar fines in future.