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Ten common ‘misconducts’ in credit life industry – Part I

25 April 2008 Gareth Stokes

Earlier this week an independent panel established by the Life Offices’ Association (LOA) and the South African Insurance Association (SAIA) released its long awaited report on Consumer Credit Insurance in South Africa. The report is a detailed analysis o

Product providers and sales agents share the blame

The panel went to great lengths to emphasise the wide variety of insurers and sectors covered in the report. They noted that the chapter contains a list of the “manifestations of misconduct within the field”. The panel uses the well publicised 29 January 2008 FAIS Ombud determination in the case of Gumede versus JDG Trading (Pty) Ltd as the cornerstone for its discussion on market misconduct. They note that “the case serves as a classic example of market misconduct in the furniture retail business and demonstrates the wide divergence that sometimes occur between market conduct regulation, on the one hand, and actual compliance, on the other…”

One of the first observations FAnews Online made when reading the market misconduct section was that product providers and sales agents share the blame for the misconducts outlined by the panel. We’ll look at some of the common transgressions as outlined in the report and provide comment with each as appropriate.

1. Lack of proper disclosure

“Disclosure is the cornerstone of consumer protection” says the panel. This is a fundamental truth that can apply to almost every area of the financial services landscape. If a customer is fully apprised of the product, fees and cover (and understands the information) there should be no room for disputes at a later stage. The panel believes shortcomings in this area include blatant “misinformation, the failure to disclose relevant information or the failure to explain what has been disclosed.”

The panel sent a series of questions relating to disclosure to a group of 20 insurers to determine the industry’s view of acceptable procedures. These insurers were 100% in favour of disclosing “the permitted remuneration to the intermediary/retailer/dealer/credit provider, any payments made to this group in addition to the permitted remuneration, and any charges on the insured for services rendered by the intermediary…” In other words they were happy for the consumer to know how much money the policy sellers made… The same insurers were strongly opposed to disclosing all the components of the premium, the insurers claim ratios per product line or the insurers’ ratio of rejection of claims per number of claims made per product line.” This is not too surprising when we consider the 48% claim rejection rate on some categories of credit insurance claims mentioned elsewhere in the report.

2. Pre-sale miss-selling by intermediaries

“Miss-selling is a form of misrepresentation giving rise to the ordinary common law remedies of recession,” says the panel. They note the practice is particularly rife in the motor industry where consumers are totally focused on one thing – the size of their monthly instalment – rather than what that the components of this payment are. The result is additional motor warranties sold under the premise “it is an extension of the manufacturer’s warranty and covers everything” when neither assertion is true. Consumers end up signing document blissfully unaware that they’ve also purchased credit insurance policies of various descriptions.

3. Lack of awareness of consumer of the existence of a credit insurance policy

The third aspect of market misconduct is a continuation of the previous paragraph. Because consumer credit insurance policies are so often packaged with “the sale of an asset, the credit agreement and the product insurance” the consumer remains unaware of the credit insurance component unless it is specifically drawn to the consumer’s attention. This non-awareness causes further complications when the consumer falls behind on payments. The consumer has to be advised of the dual impact of his non-payment, on the instalment sale agreement and the credit insurance policy.

4. Failure to explain the terms of the policy, including limitations and exclusions

Since many credit insurance consumers aren’t even aware they’ve purchased said product it’s hardly surprising that this aspect of misconduct is raised. However, even where the consumer is aware of the purchase the industry has some work to do in making sure the terms of the credit policy are communicated. The panel appealed to the LOA and SAIA to “annex a special page or box in the policy in which the consumer’s attention is specifically directed to the core provisions of the policy…”

5. Foisting policies on consumer

We’ve all encountered the hard-sell salesman who convinces you to purchase something whether you want it or not. The panel identified two unsavoury ‘pressure’ sales practices in the consumer credit environment. Some agents are guilty of issuing secondary products “contrary to the free choice rule” while there’s also evidence of consumers being “wrongly pressurised into signing up for a policy…” Such practices fall into the miss-selling category mentioned earlier.

When releasing there findings to the media the panel stated that they wouldn’t recommend any action be taken against individual insurers. They felt that most of the practices mentioned in the report were receiving attention and that insurers were variously ‘towing the line’ in getting their proverbial house in order. We hope this observation proves correct – because the litany of activities mentioned here indicate deep rooted behaviours which are unlikely to change without some form of intervention. Look out for the next instalment on market misconduct in the consumer credit industry next week.

Editors’ thoughts:
If you’ve ever purchased furniture or a motor vehicle on credit you’ve not doubt had first hand experience of how credit insurance products are sold. We’d love to hear from you if you’ve recently purchased any ‘big-ticket’ item on credit. Do you think the agent who sold you your credit insurance policy acted in good faith? Add your comments below, or send them to gareth@fanews.co.za.  You can find our previous article here.

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