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Consumer protection bill rides roughshod over insurance legislation

05 March 2010 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

Financial services companies have to comply with reams of legislation. The latest, the Consumer Protection Act 68 of 2008, was signed into law on 28 April 2009. Certain provisions of the Act come into effect on 24 April 2010 with the balance in force from

After a lengthy introduction to the CPA and some of its general implications, Danny Joffe, Senior Legal Advisor at The Hollard Insurance Company, took to the podium. His talk was titled: The potential impact of the Consumer Protection Act on the Insurance Industry. At the outset Joffe raised concerns over the CPA’s interpretation in an environment governed by 200-years of Roman contract law. In the past consumers were bound by the terms and conditions contained in the contract regardless of how unfair they seemed. When the CPA comes into effect it overrides legal history and has the power to set aside unfair contract terms in favour of consumers. Before we dwell on technical points of law we must determine whether the Act is relevant to the insurance industry.

Will the insurance industry be exempt?

The definition of Service in the CPA reads:

“… The undertaking, underwriting or assumption of any risk by one person on behalf of another, except to the extent such service –

(i) Constitutes advice or intermediary services that is subject to regulation in terms of the Financial Advisor and Intermediary Services (FAIS) Act;

(ii) Is regulated in terms of the Long-term Insurance Act… or the Short-term Insurance Act…”

It is clear the CPA considers the various consumer protections built in to existing legislation. The implication is that the insurance industry won’t be governed by the Act. Joffe believes the short-term insurance industry has taken numerous steps to promote consumer rights, including the establishment of Policy Protection Rules (PPR) and a voluntary Ombudsman scheme. Joffe noted that the Ombudsman for Short-term Insurance (OSTI) was cognisant of the CPA and would use its provisions to guide future rulings. Financial services consumers who feel their rights have been infringed have a comprehensive list of Ombudsmen with sympathetic ears. They can approach the FAIS Ombud, the Ombudsmen for Long or Short-term Insurance and the Banking Ombudsman among others. In this environment financial intermediaries who follow their FAIS obligations to the letter shouldn’t run foul of the CPA.

It seems almost certain the Financial Services Board (FSB) will make an application to exempt the insurance industry from the Act’s provisions. The uncertainty lies around whether this exemption will be granted – and whether the exemption applies to all aspects of insurance stakeholder interaction. Joffe said there were a number of provisions in the CPA that might apply to insurers whether exempt from the bill or not...

Plenty of duplication

The first area where insurance companies may run foul of the CPA is the requirement for plain and simple language in all contracts. For the most part policy documents are already presented in simple language, but it makes sense for insurers to reconsider policy wordings in light of the language proficiencies of their target markets. The industry will also have to come to grips with the ‘aligned’ requirement contained in Schedule 2 of the CPA. Point 10 of this schedule reads:

“The exclusion of the Short-term Insurance Act… and the Long-term Insurance Act, is subject to those sector laws being aligned with the consumer protection measures provided for in this Act within a period of 18 months from the commencement of this Act, failing which, the provisions of this Act will apply.”

Any gray areas in the respective insurance industry legislations will be overridden by provisions in the new CPA. “There is a strong chance that the Act will apply to the insurance industry unless the legislation affecting the industry completely reflects the position of the CPA,” said Joffe.

Fine-tuning the PPR

There could, for example, be serious clashes between underwriting practices and the CPA’s ‘fairness’ provisions. Joffe mentioned the fact that 99% (probably more) of short-term motor policies specifically excluded damage to tyres. While this was acceptable practice in terms of the short-term insurance industry legislation, it was not necessarily a ‘fair’ under the CPA. Consumers purchasing full comprehensive insurance may expect their tyres to be covered against all damage.

The Financial Services Board (FSB) is acutely aware of misalignment between the CPA and short-term insurance legislation. They recently issued draft amendments to the PPR to address specific concerns, particularly around the time barring clause. The FSB proposes that insurers make prompt decisions on claims, that policyholders are afforded 90 days to make representation with respect to rejected claims and that policyholders then have an additional six months after the expiry of this period to make further representations. Insurers will no longer be able to take the ‘you have six months to sue us or your claim expires’ stance.

Disclaimers could cause major headaches

Disclaimers are a liability issue rather than an insurance issue and it’s possible the CPA will hold sway when these issues are questioned. Insurers will have to spell out all major exclusions to their policyholders to comply with the Act. Section 49 (1) of the CPA provides:

“Any provision or consumer agreement that purports to limit in any way the risk or liability of a supplier, must be drawn to the attention of the consumer in writing and plain language, and the fact, nature and effect of the provision must be drawn to the attention of the customer.”

There are a number of other provisions in the CPA that will affect insurance industry stakeholders. These include, but are not limited to, product liability and the ability to contract out of gross negligence. Insurance companies and underwriters will have to start making changes to their business processes. Financial intermediaries should stick with the FAIS Act until CPA codes and regulations are finalised.

Editor’s thoughts: Financial services intermediaries have a lot on their plates. Just as the FAIS Act and its provisions become part of daily life, another raft of legislation looms. Will you take the time to read the Consumer Protection Act, or rely on summaries published by industry experts? Add your comments below, or send them to gareth@fanews.co.za

Comments

Added by Yamkela, 10 Jul 2012
Intresting stuff. got me thinking
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Added by bella, 10 Feb 2011
well quite satisfying
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Added by Quinten Knox, 08 Mar 2010
Hi Gareth. - Should your heading not be "Consumer protection ACT rides roughshod over insurance legislation"? - Regards, Quinten.
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