A new set of credit regulations will protect consumers from abusive practices by credit providers when they come into effect this week. The new regulations primarily deals with credit life insurance.

When a consumer applies for credit, credit life insurance is often added to their finance agreement, as the credit provider wants the assurance that their money will be repaid in the event of a client’s death, disability or unemployment.

While credit interest and fees are strictly regulated by the National Credit Act (NCA), bundled credit life insurance products were not, and some credit providers have been using this loophole to overcharge vulnerable consumers who were desperate for credit.

“Up until now, consumers were often offered credit life insurance that was unsuitable or did not appropriately meet their needs. In some cases, credit providers charged exorbitant fees or premiums for credit life insurance,” said life insurer African Unity Life CEO Sonja Visser .

“However, under the new regulations, these practices will not be allowed for any credit life agreement signed from 10 August 2017,”

The regulations set a monthly credit life insurance limit of R4.50 for every R1,000 owed on all credit agreements other than mortgages.

Ordinary mortgage agreements have a R2.00 limit for every R1,000 owed.

Practically this means that a R1 million mortgage should carry a maximum monthly credit life premium of R2,000, while a R10,000 loan would have a maximum monthly credit life premium of R45.

The new regulations also require credit life insurance policies to now cover death, permanent disability, and, in certain circumstances, disability and unemployment. Although a credit provider can compel a consumer to take out credit life insurance, they cannot prescribe a specific policy.

“The consumer now has far greater freedom of choice,” said Visser.

“They can also use an already active policy that they might have in place to cover the new credit. All of this contributes to making it a very positive change for consumers – who will also find that any new credit life insurance policies taken out are generally more affordable.”

Unfortunately, the regulations cannot be backdated, and the same restrictions will not apply to existing policies which were taken out before 10 August 2017.

Visser also noted that there is likely to be some fall out for companies who use a business model that is dependent on the higher premiums charged.

In some cases, it might not be viable for some of these credit providers to continue to sell credit life insurance, depending on the cost structure of their business.

“This could in some cases be negative for the consumers who need the protection and who may not be advised to contact alternative providers to assist them,” she said.