1. Competition Issues

1. Banks and mortgage originators, such as MSA, compete directly for the origination of consumer home loans. That competition has led to increased competition between the banks to the benefit of the consumer.
2. It is submitted that the Bill needs to be alive to these competition issues, and to recognise the credit agent as more than just an extension of the credit provider’s business.
3. Accordingly, the provisions of sections 163(1)(b) & (c) in regard to training and registers should be amplified to make it clear that:

1. The bank’s register need only record the corporate credit agent and not its employees;
2. Training should be the responsibility of the corporate credit agents and not the banks. In the absence of allowing in-house training to be the accepted standard, corporate credit agents may be restricted in their ability to staff their business. This would be so as they would be dependent on their staff having completed a competitor’s training course, or, as in the case of MSA, originating as it does for a number of banks, a multiplicity of training courses.

4. In the absence of further detail, credit providers may argue (as it may be in their interests) that the provisions of section 163(1)(b) & (c) require the credit provider to have access to information (which may be confidential) relating to the credit agent’s business, including details of training programmes, names of staff members, new staff appointments and the like.

 

2. Summary

1. For the reasons set out above, it is submitted that the Bill does not provide adequately and/or in a workable manner for credit agents that are corporate entities and/or that are significant employers and/or that conduct their business by way of call centres and/or on-line.
2. It is submitted that section 163(2) requires amendment to deal with:

1. Corporate credit agents being issued with an identification card by the credit provider;
2. The corporate credit agents then issuing (as opposed to the credit provider issuing) the employees of the corporate credit agent with identification cards. The latter identification cards would reference the identification card issued by the credit provider to the corporate credit agent;
3. The showing of identification cards being dispensed with, other than on request, where consumer services are offered other than by way of personal interaction, e.g. by way call centre and/or on-line by way of websites.

3. In addition, it is also submitted that section 163(1) requires amendment in order to be more sensitive to the competition issues that arise. Credit agents, certainly in the case of mortgage originators, are competitors of the credit providers, and importantly not simply extensions of their businesses.

 

 

Yours sincerely

 

 

 

ALAN RUBIN

I:\COMM\GW\LETTERS\AR\Mortgage SA.Com\National Credit Bill (submission 1) 29 July.doc

 

 

National Association of Mortgage Originators

Dear Sirs

SUBMISSION 2

THE NATIONAL CREDIT BILL ("the Bill"): THE ANTI-COMPETITIVE EFFECT OF CREDIT PROVIDERS BEING PERMITTED TO CHARGE ADMINISTRATION FEES IN RELATION TO CREDIT OR PROPERTY INSURANCE PREMIUM PAYMENTS

SECTION 106 (5)

We act for MortgageSA.com (Pty) Ltd ("MSA") which has instructed us to make two separate representations to the Portfolio Committee on its behalf. This is the second of such representations.

3. Background to MSA

1. MSA is South Africa’s leading independent originator of home loans, currently originating around 15% - 20% of the total new residential home loans to South Africa’s major retail banks, including Standard Bank, ABSA, FirstRand, Nedbank and Standard Chartered.
2. MSA’s consumer services include, in addition to home loan origination, the independent broking of a range of short term and long term home related insurance products, including mortgage protection policies.

4. Section 106 (4) & (5) – Anti-competitive effect of Administration Charges

1. Under Section 106 (4) of the Bill, a credit provider that requires a consumer to maintain a credit life insurance policy, or an insurance policy over damage to property, is required to give and inform the consumer of the consumers right to waive any policy proposed by the credit provider and to substitute a policy of the consumers own choice.
2. Where the consumer has elected to exercise his/her choice to take a policy from an insurer other than the insurer proposed by the credit provider, section 106(5) contemplates that the credit provider may insist on being directed by the consumer to pay the premiums to the consumers chosen insurer. The credit provider can then charge the consumer for the premium paid as well as an administration fee not exceeding a prescribed amount.
3. The concern is that, if credit providers are able to charge the consumer an administration fee for policies not taken through the credit providers proposed insurer, they will be able to ensure that the premium (including the administration fee) offered by competing external insurers is less competitive than the credit providers own (or their associated insurers) premium (without the administration fee). The draft legislation does not require the credit provider to charge any administration fees to the consumers that take the credit providers proposed in-house policy.
4. The particular insurance policy of most concern to MortgageSA is the homeowner insurance policy (being cover over the bricks and mortar of the building), which all home loan credit providers require as a condition of the granting of a home loan. Section 43 (5) (a) of the Short Term Insurance Act has allowed credit providers to bypass the normal "free choice" provisions contained in that Act in specific regard to homeowner insurance. Credit providers, relying on this exception to the free choice provisions, have for many years been able to conditionally sell their own in-house insurance policy. The significance of this concern needs to be considered from the perspective that the average premium payable on this type of policy is approximately R100 per month, and for affordable housing consumers would be even less. As such, as a proportion of premium, the administration fee, even if relatively nominal, may constitute a significant additional cost in percentage terms.

5. The underlying principle of section 106 (5) (a) and recommendation

1. Arguably, the principle underlying section 106 (5) (a) is to allow credit providers to have control over the credit and property insurance premiums, such that they can ensure that the insurance policies do not lapse as a result of non-payment of premiums, thus protecting their security over the loan.
2. Of course, where banks elect this option, they gain the benefit of the reduced risk. This is a choice that the credit provider will be permitted to make in terms of the draft legislation. However, allowing the credit provider to charge an administration fee for this, places the cost of this benefit to the credit provider, on the consumer.
3. The passing of the administration fee cost to the consumer, where the consumer chooses an external insurer, could defeat the purpose of the "free choice" provisions of the draft legislation. This is so, as the administration charge would have the effect of making the premiums of the external insurer uncompetitive in relation to the credit provider’s own premium. As stated above, given the Rand value of the premiums concerned, on a percentage basis, the administration fee could be significant;
4. In order to ensure that the bank administration fees do not frustrate insurance premium competition to the detriment of consumers, we would strongly advocate that credit providers are prevented in terms of the legislation from charging any administration fee.
5. Alternatively, if an administration fee is to be allowed, that the credit providers, are also required to charge an administration fee on their own in-house (or associated company) premiums, and that the administration fee charged for the payment of premiums to external insurers is no greater than the administration fee charged for the payment of premiums to the credit providers own in-house insurers.
6. Further, if the administration fee is to be allowed, it is tightly regulated to ensure that the potential for abuse and anti-competitive behaviour is minimized to the greatest extent possible. Certainly, the administration fee should be capped at a maximum fixed charge, not percentage related, and be no greater than a standard debit order fee that the consumer would ordinarily have to pay to a bank for his own chosen insurer to deduct the premium from his bank account. Under no circumstances, where the consumer is forced by law to permit the payment and control of the insurance premium by the credit provider, can the administration fee be allowed to be a profit centre for the credit providers, or to be used to increase the competitiveness of the credit provider’s in-house policy relative to the external insurers policy.

6. Summary

1. It is clear from the wording of the Bill that the purpose of the inclusion of the free choice provisions of section 106 in regard to credit and property insurance is to allow for competition in this market to the benefit of the consumer.
2. However, allowing the credit providers to charge administration fees, where the consumer exercises this free choice, negates that purpose, as it will allow banks (and their associated or internal insurers) once again to compete unfairly in the provision of these products.
3. The credit provider will have the benefit of having the right to choose to pay the premiums to the consumers chosen insurer and thus control the payment of premiums. It is submitted that the credit provider should not also have the ability to levy administration fees when the client exercises this right, the result of which will be to allow the credit provider to increase the competitiveness of their in-house policy relative to the consumers chosen policy, by increasing the total cost of the policy the client wishes to purchase external to the credit provider.

I:\COMM\GW\LETTERS\AR\Mortgage SA.Com\National Credit Bill (submission 2) 29 July.doc