March 13, 2017

More changes to the credit industry

Arno Bosch

The Final Credit Life Insurance Regulations, which were published at the end of January, will come into effect 6 months after the date of publication.

These Regulations place a severe cap on what may be charged in respect of credit life insurance. Previously, credit providers basically had carte blanche on charges in respect of credit life insurance through various insurers. Credit providers would earn commission or a fee from the insurer from these credit life policies.

The situation has now changed significantly with various caps being brought in for the various types of credit extended by credit providers. The net effect of the Regulations would be a further cut in the cost of credit to the consumer and may place severe strain on the Micro Lending Industry.

Maximum prescribed cost of credit life insurance that a credit provider may charge a consumer is as follows:

  • Mortgage Agreements – R2 per R1000 of the deferred (financed) amount;
  • Credit Facilities – R4,50 per R1000 of the average utilisation of the credit limit in a billing cycle;
  • Unsecured and short terms credit transaction – R4,50 per R1000 of the deferred amount
  • Other credit agreements – R4,50 per R1000 of the deferred amount

Credit life insurance cover must provide for at least the settlement of credit

  1. in the event of the consumer’s death or permanent disability, the outstanding balance of the consumer’s total obligations under the credit agreement;
  2. in the event of the consumer’s temporary disability, all the consumer obligations under the credit agreement that become due and payable for a period of 12 months;
    1. during the remaining payment period of the credit agreement; or
    2. until the consumer is no longer disabled, whichever period is the shorter; and
  3. in the event of the consumer’s becoming unemployed or unable to earn an income, other as a result of permanent or temporary disability, all the consumer’s obligations under the credit agreement that become due and payable
    1. for a period of 12 months;
    2. during the remaining repayment period of the credit agreement; 0r
    3. until the consumer finds employment or is able to earn an income, whichever period is the shortest.

The consumer has the right to substitute a credit life insurance policy of his or her choice at any time after the credit agreement is entered into, and the credit provider must accept such substitution, provided that the new policy provides at least the benefits referred to in the new Regulations.

Government’s intention to dramatically reduce the cost of credit, especially as far as small and unsecured loans are concerned, is clear. This is good news for the consumer but whether the Micro Industry will survive a further reduction in turnover remains to be seen.

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