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Protection for Lower Income Sector

The lower income sector of the financial services industry regularly makes the headlines, for all the wrong reasons.

A funeral parlour, who conducted business from November 2008 to August 2013 without being duly registered with the FSB, was recently fined R2 million. One of the “disturbing incidences” cited in the Enforcement Committee (EC) order describes how a claim was declined because the deceased’s body was not kept at the respondent’s mortuary. After complaining, the claimant was paid R1 500, which was substantially less than the premiums paid, or the amount of cover.

In arriving at the amount of the administrative penalty, the EC pointed out that the purpose of the applicable legislation is to protect the public from unscrupulous persons. In this instance, the offences had the potential to harm numerous people.

Another recent example of problems in this sector of the industry concerns the sale of funeral cover to recipients of child grants. The government placed a moratorium on the further sale of such products, but the media coverage of the events did not exactly contribute to enhancing faith in the integrity of the industry.

Minister for Social Development, Bathabile Dlamini, said in a speech to parliament last week that the government will replace private funeral schemes with a state-run funeral plan for recipients of social grants.

“The absence of a funeral benefit has opened our social grant beneficiaries to exploitation by private-insurance companies,” Dlamini said. “The lack of government action to protect them has led to a very loud outcry by our beneficiaries and various civil-society organizations.”

The question is, of course, whether government has the resources to add further to the cost of social grants which is already spiralling out of control. The doldrums the economy finds itself in, coupled with an education system that does not equip school leavers to be employable, is not something that can be rectified in a short space of time.

Amendments to the Social Assistance Act, 2004, discussed below, will address some of the issues, and show the importance of cooperation between various government departments to address problems effectively.

Further abuses concern the sale of useless insurance products to people who made use of credit facilities, including cover against retrenchment for pensioners.

In all the instances listed above, reaction followed after the damage was done.

The new Market Conduct Regulator aims to act in a “forward-looking” manner by being pre-emptive, proactive, outcomes-focused, comprehensive, consistent, intensive and intrusive.

This may be relatively easy to achieve in the higher income sector, which already operates in a far more structured manner. For those at the other end of the market, it may prove to be far more challenging.

The recently proposed fit and proper requirements provides an indication of how the Regulator views these challenges. At this stage, representatives serving the low income sector only, are exempt from passing the regulatory exams. The so-called “bespoke” exam for them is yet to materialise, although qualifying criteria were published in the proposed fit and proper requirements published late last year.

Interventions to ensure fair treatment of clients in this market segment will include product prescription, conduct standards and consumer education.

Whilst the first two may appear to be relatively easy to effect, the single biggest challenge is to detect those who operate outside of the regulations, like the funeral parlour referred to above. Uncovering unlicensed operators is a massive challenge.

Consumer education, particularly in outlying areas, and specifically where illiteracy is often rife, is another daunting task.

Regulation of the lower income sector possibly contains more challenges for the authorities in terms of fair consumer outcomes than the rest of the industry, yet in terms of priorities, it should be number one.

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