In our last Blog; we looked at Unfair Credit practices and the NCR’s attempts to address these issues.
One of these issues we saw was credit insurance and it’s unacceptably high cost to the consumer.
There are three types of credit insurance:
- Consumer credit insurance which can be issued as a long term or short term policy and is designed to cover the outstanding balance you owe the credit provider should you die, become disabled, develop a critical illness or be retrenched.
- An extended warranty marketed by motor dealerships and retailers covers you for mechanical breakdown of a vehicle or goods such as electronic equipment after the manufacturer’s warranty has expired.
- Top Up or shortfall cover covers any shortfall between the amount still owed and the insurance payout in the event of loss or damage to the vehicle, furniture or appliance.
The NCR is on record and holds the view that the there is continued and ongoing abuse of consumers by credit providers in many aspects of credit insurance. The NCR is also of the view that a premium of no more than R 4 for every R 1000 for minimum cover is fair and reasonable.
The NCR is further of the view that the average loss ratio for credit providers in credit insurance is no more than 20%; whereas in other areas of insurance; the loss ratio is closer to 60%. A loss ratio is the difference between premiums received; and payments made out on claims; and this clearly shows that consumers are being excessively overcharged in all areas of credit insurance. It translates to a gross profit of 80% to insurers of credit insurance and this is unacceptably high. In some areas of credit insurance the service provider is making a gross profit of closer to 90%; and this issue clearly needs to be addressed as we, as consumers, are clearly being ripped off.
The problem is that there is currently no legislation enabling the NCR from preventing this abuse. The National Credit Act only has a provision that stipulates that the NCR can monitor and give direction to the industry and the market; but this is clearly not enough.
Cabinet has however now approved the National Credit Amendment Bill and this Bill has now been introduced to Parliament. A significant step forward contained in this Bill is that the NCR may now be able to issue binding affordability assessment guidelines. Should this Bill become law in the months to come then the aim is to establish minimum standards for credit providers when assessing whether a consumer can afford and how much a consumer can afford in an application for credit. Before extending credit to you a credit provider will be obliged to verify your ability to make minimum repayments. The Bill falls short however in that although it intends that credit providers should and must carry out affordability assessments; it does not provide any framework, formula or guidelines for doing so.
The affordability assessment guidelines which were drawn up by the NCR and announced in May 2013 will, inter alia, require that:
- You, as an applicant for credit, provide proof of your discretionary income (the amount you have left over after deductions and essential living expenses) when it is above the norm for a person at your level of income. In other words; if you earn R 9000.00 per month and claim to have discretionary income of a nett R 4000.00; you will have to prove this to get the credit you require or want.
- Credit providers will also be obliged to have a small buffer; and will not be allowed to lend a consumer to the maximum of what that consumer’s discretionary income may be and could cover.
- Credit providers will also be obliged to consider all your income and all your expenses and also other debt repayments when doing any such affordability assessment; and will have to prove that they have done so.
It is however important to note that this is not, as yet, law and all of these proposed changes are still the subject of consultation and discussion with the credit industry and its credit providers. Only once this consultative process is complete are we likely to have this type of protection from the current abuse.
As sated n our last blog this aspect of our law is however slowly changing and adapting so as to protect consumers.
If yu have had an issue with a credit provider then consider referring it to us for resolution.
Please visit our website at www.legaladviceoffice.co.za or send us an email to firstname.lastname@example.org and we will reply within 48
The Legal Advice Office Team.