The South African Government figures that you should have the right to choose the insurance company that provides the short-term homeowners insurance on your home loan. Is that great news or what?
A while back, I wrote about some concerns I had, about the banks that hold our mortgage bonds and their relationships with the insurance companies that underwrite the home loans, in the article entitled Homeowner's Insurance Policies. One of those concerns was in regard to banks that own a large part of an insurance company, that impose insurance from that insurer on people that obtain a home loan from the bank.
Conditional Selling
In South Africa, conditional selling (the practice whereby people are forced into taking out insurance if they want a loan) is prohibited. But banks in South Africa have exploited a single clause in the Short Term Insurance Act for years now, to do exactly that.
Section 43 (5) (a) of the Short Term Insurance Act gives lenders the right to choose the insurer when a home loan is granted. But in a landmark 2005 ruling, Charles Pillai, the ombud for Financial Services Providers, ruled against Nedbank and Nedbank Group Insurance Brokers, for falling foul of the FAIS Act.
The FAIS Act
The FAIS Act came into effect in October 2004, and was introduced to protect consumers from poor advice and misselling, and to uphold the integrity of the financial services industry.
The FAIS ombud said that the concept of informed decision-making, which the FAIS Act protects, invariably implies that the client has the right to choose.
In order to make an informed decision on a particular product or service, logically, the client must be able to choose from a range of competitive, quality products and services. And, according to Pillai, Section 43 (5) (a) of the Short Term Insurance Act denies consumers the right to choose.
The Appeal
Nedbank and Nedbank Group Insurance Brokers are appealing the ombud's ruling, as could be expected, and the will be heard by the Appeal Board of the FSB in April 2006.
But, at the time of making the ruling, Pillai was concerned that the banks may be engaging in prohibited practices and/or anti-competitive conduct, and sent a copy of his determination to the Competition Commission.
Fair Competition
The Competition Commission has subsequently engaged with the FSB, regarding the repeal of Section 43 (5) (a) of the Short Term Insurance Act. The practice of imposing short-term insurance cover when properties are financed distorts competition and limits consumer choice, according to the Competition Commission.
The FSB, has now placed the removal of the offending clause in the Short Term Insurance Act on its legislative agenda for this 2006. A lender will not be allowed to impose insurance with a particular insurance company any more.
Future Homeowner's Insurance
The FAIS ombud's office reports that in almost all the complaints of this nature, which they receive against various banks, the banks are currently settling, by allowing the client free choice.
Short-term insurance is renewed on a monthly basis, so instead of imposing a specific insurer, the banks are likely to put procedures in place that will require clients to prove that appropriate homeowner's insurance cover is indeed in place.
Read more about this at Personal Finance
