The Consumer Protection Act - 8 months later

Eight months have passed since the Consumer Protection Act was implemented on 1 April 2011. The Act ushered in many new responsibilities for South African business, not least of which being the introduction of no-fault liability in respect of products.

The knee jerk reaction from the insurance industry was a comforting, “at least most clients already have that type of cover in place”. A study was conducted by Camargue Underwriting Managers at the end of 2010 which produced startlingly, contrary results. Of the 6000 businesses in the study, less than 18% already had product liability insurance. When brokers were canvassed as to why this could be, the answers were generally:

1. The client was not in manufacturing and therefore did not require the cover
2. The client felt that the premium was too high (especially when compared to the public liability premium)
3. The client had very strict trading conditions which meant they either could not be held liable, or some other party had agreed to hold them harmless.

When one considers the statements above in the context of the pre-CPA era, it was not uncommon for retailers to refer injured parties straight to the manufacturer who often resided outside of the country, inevitably leaving the hapless consumer with little or no chance of restitution. Often hold-harmless agreements were in place between members of the supply chain and the consumer would in all probability have dropped the case after a frustrating goose chase.

The new CPA environment makes it difficult for anyone in the supply chain to avoid the issue of product liability due to the following:

1. No-fault liability applies to all members of the supply chain (suppliers, producers, retailers, distributors etc.)Further to this it is extremely difficult to contract out of liability using disclaimers and indemnities.
2. Agreements between members of the chain are of no consequence to the end consumer. A hold harmless agreement being as effective as a band aid over a gunshot wound. Joint and several liability applies to all. Some defences do exist for the supply chain members. These will be dealt with in a later article.
3. Products that have been imported by a member in the chain will invariably land in the lap of the importer as a last resort rather than back in the country of origin

So what does this mean for the Consumer Conscious business owner?

• All businesses should have product liability cover even if the product merely passes through their hands momentarily. Insurers of the various participants in the supply chain should apply a rate commensurate with the level of involvement in getting the product to market.
• Hold-harmless agreements are not totally useless as they may assist the business in seeking recourse (or the insurer in the case of subrogating) against the originator of the product. Such contracts will however not preclude the consumer from taking action against any of the supply chain members as discussed above.
• Importers of products should ensure that their suppliers have adequate global, broad liability covers as well as the possibility of having such policies extending to cover them as distributors

GOOD DECADE FOR SOUTH AFRICAN CONSUMERS

The South African consumer is among the best-protected in the world. Since 2004, financial services consumers have engaged confidently with intermediaries and product providers thanks to safeguards introduced in the Financial Advisory and Intermediary Services (FAIS) Act and its accompanying Codes of Conduct. And with the introduction of the Consumer Protection Act (CPA) Joe Average can take the fight to the supplier of just about every good or service "sold" within our borders. It comes as no surprise, therefore, that insurance companies and other financial services providers identify regulation as their top operational risk! "Every move we make these days has to be checked against upwards of 150 pieces of legislation," observed Jolandi Wassermann, Head of Legal & Policy at PPS Insurance. She was presenting at the group's Insurance Sector media presentation, held 7 February 2012.

Consumers of financial services will soon benefit from additional protections following the Financial Services Board (FSB) decision to implement Treating Customers Fairly (TCF) regulations. This regulation will ensure a higher standard of consumer protection across the financial services space. Its primary objective is to embed the fair treatment of consumers into corporate culture. There are six "fairness" outcomes embedded in the regulation to ensure the consumer gets a "fair" deal from product design to performance! "TCF applies to all FSB regulated entities," says Wassermann. It offers a fuller and more comprehensive set of consumer protections than the FAIS Act because it forces companies to reform their business practices. The regulation demands a proactive approach and encourages companies to identify problems and implement redress as early as possible. Unfortunately banks and medical schemes will fall outside the TCF regulation for now.

Banks must treat customers fairly too

The regulators will have to bring banks into the fold due to ongoing complaints about their fee structures and financial product distribution practices. Phil Billingham, a regulatory change specialist at UK-based Threesixty Services, shared the following at a recent FAnews TCF Seminar: "It is clear from UK statistics that the adviser, who accounts for around 80% of financial services product distribution, only contributes to around 1.5% of complaints. Banks meanwhile, with a mere 20% of the distribution load, were responsible for 90% of post-sales disputes." We expect a detailed analysis of post-sales financial services complaints in the domestic market would yield a similar "result".

Local financial services stakeholders can expect many regulatory changes over the next three years. National Treasury recently published their vision for the South African financial services environment in a paper titled A Safer Financial Sector to Serve South Africa Better. The so-called "Red Book" documents a series of legislative changes that South Africa will have to implement to meet undertakings given at the G20. These changes will lead to greater financial stability at an institutional level, extended consumer protection, improved access to financial services products and reductions in financial crime. South Africa will develop a "twin peaks" model under which the Reserve Bank is tasked with prudential regulation and the FSB with market conduct. As National Treasury pushes ahead with these changes, banks will eventually be drawn in.

Future consumer protections

FAIS, the CPA, the various industry ombudsman schemes and TCF are the first steps on the path to holistic consumer protection. "Apart from TCF there are a couple of other consumer protection issues that must be considered," said Wassermann. The insurance industry regulation has to "tie in" with the CPA by October 2012. Further changes to the insurance Acts are likely to be introduced throughout 2012. And all industries will soon have to comply with the Protection of Personal Information Bill too…

New by-law will place legal liability on homeowners for pool accidents

With Summer in full swing it is essential that consumers make sure they are aware of the legal and insurance implications of owning a swimming pool as new legislation will place even more onus on the owner.

This is according to Marike Stals, Legal and Compliance Manager at MUA Insurance Acceptances, who says homeowners should be aware that there are two types of cover under building insurance policies. “The first covers the actual damage of the structure, while the second is legal liability cover, where the homeowner protects themselves legally against something happening to guests, trespassers and / or their tangible property on the insured property.”

“Currently, the owner of the pool is held accountable under South African Law of Delict in the event of a drowning incident. South Africa’s civil liability laws mean a civil claim can be charged against a pool owner for any damage suffered as a result of drowning, whether fatal or not.”

Stals says internationally, pool safety laws are very strict and South Africa is following this trend. A draft ‘By-Laws for the Safe Guarding of Swimming Pools’ has also been proposed to the City of Johannesburg (COJ), which is legislation based purely around the safety-proofing of swimming pools.

“The new By-Law aims to regulate the access to swimming pools and is intended to protect members of the public from drowning. Following the promulgation of the By-Laws, anyone who wants to have a pool installed on their property must apply to the City for approval and all pools must adhere to strict rules according to the By-Law. Those who have pools in their property already will have two years to notify the council about the existence of their pools following the promulgation,” says Stals.

According to the By-Law, all pools will then have to be safe guarded in terms of the regulations. This means that all swimming pools must be maintained and fenced off and children should not be able to climb over the fence. All outdoor pools will be required to have a pool cover or must be fitted with a floating pool alarm when the pool is not in use.

“If homeowners with swimming pools do not comply with the statute in the proposed By-Law they can face criminal charges such as fines or even imprisonment. Additionally, the insurance policy will not cover the homeowner if they have not complied with the new By-Law which could potentially be a huge financial loss if the homeowner is found guilty of negligence,”

Santam calls for consumer caution as e-Commerce platforms enter mainstream

Santam, South Africa’s largest short-term insurance company, urges customers to do their own research before opting for online insurance ‘one-stop’ shops that offer cheap insurance products, such as aggregators.

The company warned today that whilst it understood the attraction to Aggregators, especially in today’s Internet-aware environment, convenience and price alone should not be the only considerations when purchasing insurance.

“The online utilities promise to find multiple insurance quotes for individual consumers based on a risk profile generated on the site in less than five minutes. Unfortunately, in many instances, quotes that consumers are given offer a very rudimentary insurance cover,” says Shehnaz Somers, Head of Personal Lines Underwriting at Santam.

“This would be a very effective way to compare quotes if the aggregators are sourcing and comparing like-for-like products offered by various insurers. This is, of course impossible to do and disregards the differences in cover, which are often tailored to meet specific circumstances, location or lifestyle, or which include additional benefits. Often, the policies offered are extremely stripped down to be able to return a quote on minimal risk information so that price alone can be compared,” warns Somers. Proper upfront underwriting cannot be done by aggregators hence the final premium charged may sometimes differ from that quoted.

Santam also says that the trend to calculate risk scientifically through telematics, meaning on actual risk posed by an individual as opposed to a general assumption, will also be a test for aggregators whose quotes are premised on generalisations.

South Africans are becoming more comfortable and familiar with e-Commerce. A survey conducted by MasterCard Worldwide, in which 8,500 consumers participated, revealed that 89% of South African online shoppers are satisfied with their overall online shopping experience. Fears about online safety and security are subsiding as more simple transactions are concluded with relative ease and convenience. This has lead to an increase in online financial product purchases; a trend that has already benefitted some in the short-term insurance market such as Direct insurers.

Spurred by consumer confidence in e-Commerce, the industry has also witnessed a sharp increase in insurance aggregators, also known as short-term insurance price-comparison service providers.

Santam says consumers leaning towards online insurance purchases should exercise caution and do research before soliciting the services of ‘insurance-one-stop-shops’.

“There have been significant increases in the amount of insurance contracts concluded via the internet globally, a trend that has undeniably hit South Africa,” says Somers.

“Aggregators are developed with the growing online insurance market in mind and are marketed as ‘ultimate online one-stop insurance shops’ that find fast, affordable and multiple insurance quotes.”

Somers continues that the proof of these marketing offers is in the type of insurance policy consumers end up with once the transaction is concluded: “Sometimes, the type of cover the consumer ends up with is not tailored to suit the consumer’s specific risk needs and falls remarkably short of the marketing offer.” As aggregators compare insurance policies on premium or price, most of the products being compared have been stripped down so that they can compete on price alone. The insurance quote, based on limited consumer information, may not be sufficient cover to suit specific or even complex risk needs.

The potential online insurance policyholder may also be unaware that with over 40 known short-term insurance providers in South Africa, it is impossible for an aggregator to source and compare all possible quotes on their behalf. “Aggregators cannot provide quotes from every insurer, they can only offer quotes from insurers they have agreements with. The aggregator is paid a referral fee for policy contracts concluded based on the client information provided to the insurers by the aggregator.

The insurance giant says that it recognizes the growth of e-Commerce and the preference of certain consumers to go online for their financial needs. “We are currently developing an e-Commerce channel that will cater for these consumers but our online offering will not compromise on our single minded focus of delivering insurance thoroughly, with due diligence and properly,” says Somers.

The MasterCard survey also shows that the majority (89%) of those shopping online conduct research about their purchases on the Internet before buying, that 69% use the respective company's website for their research and that 57% speak to family or friends beforehand. “It is vital and commendable to do research especially when purchasing financial products. We strongly recommend speaking to a broker or advisor who has the expertise to inform consumers on a wide range of issues specific to their risk profile and not just offer them the cheapest quote,” says Somers.

Somers concedes that it would be myopic for insurers to deny the benefits of a web based insurance offering, especially with South Africa’s emerging ICT sector and consumer’s growing familiarity with eCommerce. “We understand that a lot of people are finding it easier to do their transactions online especially younger people who are digital natives. We advise consumers to double click on all the terms and conditions and exercise more caution when making online decisions about who will ultimately insure their hard-earned assets,”