Enforcement of regulations crucial to cleaning up credit life industry

Warren Collocott, the Chief Operating Officer of Switch2, a division of Clientèle Life

After years of perceived consumer abuse by credit providers, Treasury introduced regulatory oversight of the credit life industry in August last year. It’s a substantial industry that provides cover against the chance that a consumer owing money to a credit provider cannot pay because of scenarios like retrenchment, disability, death, and so on.

People most negatively affected by the abusive practices have been those who can least afford it: people living off small incomes and struggling to put food on the table. Stories abound about male clients being sold policies to cover maternity leave, retired individuals paying premiums for policies to cover retrenchment, and many other such tales – all of which confirm the need for some type of control of the industry.

According to Warren Collocott, the Chief Operating Officer of Switch2, a division of Clientèle Life, “South Africa does not stand alone among countries facing significant problems with the credit life industry.  In both Australia and the United Kingdom, many similar situations were identified, and regulators in those countries have expressed equal concern about the industry and its negative impact on consumers.  In the UK, the High Court ruled against the banking industry in a landmark decision in 2011 which meant banks had to repay a significant sum – over £30 billion – to policyholders as a result of the incorrect selling of products.”

Perhaps the most telling sign of problems in the roll out of the sales of this type of product is that the claims ratio is very low.  The Australian Securities and Investments Commission, for instance, identified that only 34% of potential claims were actually lodged. In South Africa, the figure is even lower at 23%.

The South African situation is made worse, however, in that the country’s demographics mean that the bulk of our consumers have limited financial education and are desperately in need of the credit because of the levels of poverty in the country.

The abuse of consumers is why Collocott welcomes the regulation. “This regulation means that the South African consumer will get a better deal,” he says.  “The introduction of a ceiling on the premium charged for a loan is particularly good.  Gone are the days when a provider could charge a huge amount as a premium on a loan.  Now, the consumer can purchase an appropriate amount of cover at a reasonable price.”

A further benefit which Collocott is happy to see is that the introduction will place new focus on the consumer’s right to choose the credit life provider. The credit provider must allow for the substitution of a credit life provider should the customer want to take the cover with another firm.

The industry has seen new providers entering the market in recent months, those not linked to the particular product that a credit provider offers, such as furniture, clothing or a bank loan.  Independent credit life providers, such as Switch2, are able to offer the credit policy within the realms of what the regulation allows for.