Regulators are in the final stages of implementing measures to curb exploitation of consumers through excessive insurance fees, which tend to be sold alongside retail credit agreements.
Two-thirds of Lewis' roughly R1bn in annual insurance revenue comes from these ''insurance" products, and Lewis' chief executive Johan Enslin confirmed that the new rules could see the furniture retailer lose between 10% and 12% of annual earnings, or just over R100m.
However, an investigation by Business Times reveals that the furniture retailer might be under-estimating the hit it will take, which could work out to be hundreds of millions of rands.
The National Credit Regulator (NCR) has proposed a ''fee cap" curbing the amount that retailers will be able to charge for 'credit life insurance to R4 for every R1,000 in credit covered. A credit agreement to fund a lounge suite costing R3,000, for example, will cost customers an initial R12 in credit life per month. This covers the retailer should the customer die, get retrenched or be disabled before paying off the debt.
NCR company secretary Lesiba Mashapa said the new fee proposals could come into effect early next year, after a consultation phase.
Lewis currently charges nearly double that for credit life insurance - R8.75 for every R1,000 spent - for its "premium" product, according to Enslin.
By contrast, Business Times has calculated Lewis' insurance charges to be closer to an effective R15 per R1,000 spent, which is significantly higher than charges imposed by other providers of credit insurance and also above the already "excessive" market average of about R6.50 per R1,000.
This places Lewis at a far greater loss risk as a result of potential regulatory action. Critics say that Lewis has been unethically profiting from the poor financial illiteracy of its customers.
Now, a financial company, Summit Financial Partners, says it plans to launch a lawsuit against Lewis to force the retailer to refund customers who have allegedly been ripped-off by Lewis' credit insurance policies.
Should it succeed, Lewis may be forced to repay between R1bn and R2bn - a hefty knock considering the business made a profit of R907m in the financial year to March.
''The furniture credit industry is a dinosaur, fed on a diet of extremely high credit revenues and countless additional 'compulsory' charges and burdened by the weight of a bloated distribution network and inefficient cost base," says Dave Woollam, a director of Summit and a former financial director of African Bank.
''I would have thought that the National Credit Act would have brought greater competition and value to this sector, but it appears not to be the case.
"It is a tragedy that ordinary South Africans are induced into paying three times the ticket price of furniture in total debt instalments over 36 months," Woollam says.
Summit argues that Lewis has operated "in direct breach of the NCA", which requires that insurance costs remain ''reasonable", calculating that Lewis' insurance fees, including product insurance, exceed R20 per R1,000 - far higher than its competitors.
Summit's chief executive Clark Gardner says Lewis customers need to be refunded, as happened in the United Kingdom, when the regulators intervened.
"This is not only about changing their future practices, this is about addressing past indiscretions. We are going to fight for the refunding of these consumers ourselves as we cannot wait for regulators to respond to our complaints any longer," says Gardner.
Lewis' insurance charges contribute to massive costs incurred by its mostly low-income customers when purchasing its merchandise
When credit insurance charges are combined with a range of additional costs - including a standard 21% interest charge and mandatory product insurance - customers acquiring Lewis products on instalment could find themselves incurring an all-in cost of credit in excess of 80% a year.
Not only is this expensive, it seems Lewis' insurance products offer very little value to customers, considering how few actually make claims based on this ''insurance".
The premiums are paid to Monarch, Lewis' wholly owned insurance arm. For the year to March, Monarch collected gross insurance premiums of R992.7m, yet paid out only R193.1m in ''claims" - a ratio of 19%. This implies that customers are likely to receive between R1.50 and R2.00 in benefit for every R10 they pay in insurance.
By comparison, the industry insurance claims average is above 60%.
Enslin's argument is that Lewis credit insurance is charged at R8.75 per R1,000 credit, whch would bring the retailer roughly into line - although still more pricey - with the already expensive insurance products offered by major competitors including African Bank and the JD Group.
Yet a report by brokerage UBS this year casts doubt on that figure.
In March, UBS placed the cost of Lewis' insurance at R16.60 per R1,000, while Business Times' own calculations suggest that the company's credit life insurance is costing customers R14.96 per R1,000 spent.
The difference appears to be the result of Lewis' practice of charging for credit insurance on a ''straight- line basis", which means it charges fixed monthly premiums without reducing the insurance charge as the customer pays off the balance.
Woollam describes this as a rip-off and says: "It would appear that this method of charging premiums is not in accordance with the NCA."
Lewis, however, maintains that "to the best of our knowledge it is common practice in the credit retail industry to have a constant premium over the life of the contract".
Source: Business Times via I-Net Bridge
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