Credit life industry remains problematic
On Friday, FAnews Online carried a report titled “FAIS Ombud lambastes credit retailer”. In this article we looked at some of the key findings in the Ombud’s latest determination.
The complainant in this case, Ntiya Thulisiwe Gumede, found she owed a furniture store R6 468.89 after purchasing goods with a cash price of R2 779.88 and a TV Licence for R225.00. In his 89 page ruling the Ombud determines the respondent is in violation of the FAIS Act, FSOS Act and the General Code of Conduct for Financial Services Providers and their Representatives. The respondent in the case was JDG Trading (Pty) Ltd trading as Barnett’s, a member of the JD Group.
Stamping out exploitation
The Ombud investigated how the final total on the loan agreement had ballooned to more than twice the value of the goods purchased. It emerged that the respondent was a member of the Micro Finance Regulatory Council – wherein an exemption allows for a maximum rate of 32.5% per annum to be charged on such transactions. So although the finance charges were excessive, they were not illegal. The Ombud surmised that the respondent charged this excessive rate “just because they can.”
The remaining charges related to a goods insurance policy, a credit life policy and an extended guarantee contract that were sold to Gumede without her knowledge (from the facts presented without being explained). A closer examination of the credit life policy shows that although the document was ‘complete’ there was “no evidence of the acceptance of the policy by the complainant.” Furthermore, “the complainant appears to be compelled to purchase insurance in terms of the Loan Agreement. This is specifically provided for in the ‘Terms and Conditions’ of the loan agreement.” This loan agreement was not given to the complainant at the time of signing the documentation.
Another alarming aspect was that the document did not mention the cost, commission or any other charges relating to the credit life policy. The Ombud expresses concern that the monthly insurance policies were debited up front as a lump sum. This meant the complainant was paying interest on the entire lump sum at the earlier mentioned rate. There was no indication as to whether premiums would be refunded to the policyholder in the event of a claim or early settlement. The insurance premiums charged in the loan agreement amounted to R1 344.47, an amount totally out of proportion with the R2 779.88 worth of goods sold.
Scathing attack on the retail credit industry
The Ombud found for the complainant. The key factor in this case was his determination that the loan agreement was of no force and effect. An award of R1 412.40 was made to the claimant after the entire transaction was recalculated as a cash transaction at date of purchase. Regular monthly payments made by the complainant since date of transaction were considered.
The Ombud flagged this case for consideration by a number of regulatory and industry bodies in the financials service industry. Copies of the determination were forwarded to the National Credit Agency, Competition Commission and Life Offices’ Association. He appealed to the insurance industry in particular:
“The Life Offices Association (‘LOA’) needs to take note of the types of insurance products being sold by furniture retailers and take steps to ensure that the product being sold to the consumer is necessary in the circumstances, affordable, written in plain language and most importantly is in the interests of the consumer.”
LOA responds
Shortly after this determination was published the LOA issued a response indicating they too are “concerned about undesirable practices in the consumer credit insurance industry and agrees with the FAIS Ombudsman that exploitation of vulnerable consumers must be stamped out.” The LOA was quick to point out that the respondent in the above case (JDG Trading) was not a member of the LOA.
Gerhard Joubert, CEO of the LOA says “the ruling has sent out a strong message to all players active in the consumer credit insurance industry that any undesirable practices will not be tolerated.” The LOA is already addressing concerns in the credit life industry and recently appointed a panel to investigate possible contraventions by member companies. The allegations include “contraventions by member companies active in the consumer credit insurance market of the commission and remuneration regulations of the Long-term Insurance Act and the LOA Code of Conduct.”
Life insurance remains a murky area for many consumers. It is clear that some of the misunderstandings between industry and the end-user could be prevented through improvements in consumer education. Joubert believes the life industry is committed to this process. He pointed out that “the LOA, has committed R10-million this year for various financial literacy drives which will also focus on credit life insurance.” Individual life companies also spend large amounts on education through internal programmes. Hopefully this focus on education will prevent recurrences of the above incident.
Editor’s thoughts:
The above determination proves that credit retailers (particularly furniture retailers) continue to flout the consumer protection laws introduced in the financial services industry. We would love to hear your experiences with credit life policies – and your views on how to ensure compliance from companies which are not entirely in the financial services realm. Add your comments below, or send them to [email protected]
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