Gloria Sithole, a cashier at the Hungry Lion takeaway in Wynberg, Cape Town, and one-time domestic worker for supermarket mogul Christo Wiese, is fuming about how retailer Lewis tried to fool her into buying furniture.
Sitting at a coffee shop in Cape Town, Sithole describes how her problems began when she went into the Lewis store in Wynberg to buy a television set in November 2007. “They said I couldn't get a TV, because I'm in arrears on my TV licence. So I left, thinking that was the end of it,” she says.
“But a few weeks later, I was in a taxi and my phone rang. My brother-in-law told me they'd delivered a Sansui DVD player I'd never asked for.”
Sithole called the store manager, and told him to fetch the R1700 DVD player. But it remained in her house for two months. “When I went to see the manager, he pulled out a docket saying I had supposedly bought a DVD player, a TV stand and plug for R5000. I was meant to pay R440/month over 30 months, but I'd never even discussed these items. It simply wasn't true.”
This R5000 payment dwarfed Sithole's salary. “I couldn't afford it. I have one son, and I'm helping my [unemployed] sister look after her three kids,” she says.
Sithole was hassled for months for repayments but luckily she didn't do what others in her position have done: open the packaging and post-facto sanction a purchase she never made. Instead, she got Lewis to collect the DVD.
This is one example of the dirty tricks in a furniture retail industry that has been preying on the uneducated poor for years. The worst abuse takes place under the banner of “insurance”, which the FM scrutinises in this article.
Now, under pressure from the National Credit Act (NCA) and a new zeitgeist of consumer protection, retailers like Lewis, JD Group and Ellerines are being forced to change their ways. And the regulators are taking a keen interest.
Financial Services Board (FSB) CEO Dube Tshidi confirmed this week that his regulator had already probed “market misconduct” at JD Group this year. This was in response to a case where domestic worker Thuliswe Gumede was misled into buying various insurance products and “add-ons”.
FSB deputy CEO Gerry Anderson says the JD Group probe has been completed, but he won't reveal what sanction was imposed. “We've completed our investigation. We interacted with them, and they've corrected certain things,” he says.
This is a red light to furniture retailers that the powers that be are watching an industry that has an abysmal reputation.
For a sector with turnover of R31bn last year, but whose growth has been slower than SA's GDP in recent years, the stakes are high.
And investors are spooked. Together, the share prices of JD Group, Lewis and African Bank Investments (Abil, which bought Ellerines last year for R9,8bn) surrendered R16,3bn of their value in the last year, equal to half their current market price.
While this is partly due to higher interest rates, which has nailed all lenders, the companies have struggled to set out a compelling long-term vision.
Abil cites “the relatively high cost of both the furniture and high cost of credit” as reasons for the poor growth.
Now, Abil is breaking ranks with rivals to slash prices, on interest rates on credit deals, and on insurance that customers have to take to cover their debt if they die, in a bid to revive an ailing industry.
Ellerines CEO Toni Fourie hopes that by slashing prices, it will inject new vigour into the industry. “This industry needs to take a brutal look at itself in the mirror. It can't keep robbing Peter to pay Paul. You either take a view you're not going to sacrifice [profits], or you risk being swept along with a tide not of your making.”
Three years ago, a report from Investec Securities said: “Traditional business models, which rely strongly on credit, will come under increasing pressure by cash-savvy consumers. Those who reinvent themselves [will] reap rich rewards.” But largely, the furniture retailers have resisted, subsidising unprofitable stores by adding extra finance costs such as insurance, while resorting to increasingly desperate tactics to make sales.
The NCA, which became law in 2006, was meant to keep retailers operating above board, but its grand intentions have yet to take effect on the shop floors.
The FSB's Tshidi did some mystery shopping in Polokwane last week, and was stunned. “The lady said: ‘Sit down, here's a form.' Suddenly, I was being made a member of some club and being forced to agree to various legal fees. They couldn't explain any of the charges, so I asked if there was a lawyer in the shop, and they said there wasn't,” he says.
Despite the rules, dicey practices seem rife. The FM has obtained store records which show some salespeople are not conducting “affordability checks” to ensure customers aren't taking on too much debt.
In one case, a forklift driver, whose net monthly salary was R2201, was assessed as having R2100 to spend on debt, as the shop assistant had entered R99 as his “minimum living expenses”. Lewis agreed to sell him goods worth R3109, which worked out to R8976 over 24 months, at R374/month.
In another case, a Lewis credit agreement states that a kitchen hand who earned R2450/month at a coffee shop in Cape Town only needed R1 for “minimum living expenses”, so “money available to pay debt” was R2449. She bought a five-piece dinner set (and R139 plug) for R190/month.
Lewis CEO Alan Smart responds that no credit is granted at store level and “our central system will override obviously incorrect information”.
Moreover, he confirms that Lewis's practice is to deduct all debt instalments that a customer owes as well as “priority expenses” (like rent) from their take home pay to get an amount available for credit.
But there are other cases like Sithole's: customers who have found themselves the unexpected owners of furniture they never bought. Blue Alpha fund manager Nick Krige says: “I've come across many similar instances of people getting things they never ordered. This kind of ‘bait and switch' practice is what has given the industry the reputation it has.”
Krige says that this kind of behaviour is a clear business risk — from regulators intervening, and from customers realising what's going on.
But Smart is adamant that anyone found “pre-invoicing” will be dismissed. His firm has an internal audit team ensuring this doesn't happen.
“The frequency of this is low. Last quarter, 185 store audits were conducted. There was one case where a manager was dismissed for pre-invoicing,” says Smart.
He says he will “welcome any market conduct inquiry”, as his company places “huge emphasis on proper procedures”. Pre-invoicing, he declares, is a “hanging offence”.
So why does it happen? Says one former Lewis manager: “Some salesmen need to meet targets, so they look at the names of people who've shown interest, and they just put through a sale without that customer's knowledge.” Though the sale is later cancelled when a signed contract can't be found, short-term sales targets are met.
He adds: “The credit regulator should audit stores. In many cases, salesmen need to make a sale, so they inflate people's salaries. But [their] salary is far less, and they can't really pay.”
The NCA is meant to prevent such abuses, but as author Charles Dickens said: “Accidents will occur in the best regulated families.”
JD Group executive chairman David Sussman experienced such a nightmare last year, after TV programme Carte Blanche exposed how some customers were being charged twice and ripped off.
Speaking to the FM, Sussman says that case is closed. “Make no mistake, we're totally committed to complying with good practice. But there is a big problem when it comes to staff turnover in the retail industry, which makes it difficult to keep trained staff.”
But the most blatant exploitation occurs under the banner of insurance, something that the FSB is particularly concerned about.
In 99% of the cases when a customer buys something on credit from a furniture retailer, insurance is tacked on to the finance charges. This insurance is meant to cover the retailer if the customer dies or loses his job.
The use and abuse of credit insurance was the subject of a probe led by former judge Peet Nienaber earlier this year. The panel said that “without such risk mitigation, access to credit would not be feasible”. But it added that this insurance has become “a most profitable source of revenue for the retailer”.
Desmond Smith, who was part of Nienaber's panel and is the chairman of the Life Offices Association (LOA), says retail insurance “can be up to seven times more profitable than normal insurance”.
While conventional credit life insurance can be bought for about R2 per R1000 insured, some companies charged closer to R20/R1000. “The difference between what a normal insurer charges and the deal you get from a retailer is enormous. The margins are huge,” says Smith.
Nedcor Securities analyst Syd Vianello counters: “These guys take a big risk by lending to people who often literally have no security, so they are entitled to a return. And in bad times, they don't get good returns anyway.”
Some disagree. Consumerwatch slams credit insurance as “a shameful situation [that] mostly serves to fleece unsuspecting poorly educated consumers to immoral degrees”.
Nienaber's report says the poor reputation of credit insurance comes from the “number of add-ons”, which are sometimes not disclosed and are “disproportionate to the basic product price”, and the “perceived low claims ratio compared to insurance generally”.
The FM's research illustrates just how credit retailers have coined it from the insurance they take from customers. When a customer signs up for insurance at a Lewis store, premiums are paid to Lewis's 100%-owned insurer Monarch. At Ellerines, insurance is mostly done through its wholly owned Customer Protection Insurance Company. JD Group does it slightly differently, with premiums paid to RMB Structured Insurance.
Insurers, it seems, don't like to disclose these details. But they are required to file their financials with the FSB, which the FM has obtained. These documents illustrate starkly how much more money a retail insurer can make than a conventional insurer (see table, right).
Of the R282m in net premiums that Monarch collected last year, it made a R153m profit, a margin of 54%. Last year, Ellerines' Customer Protection Company made R208,1m profit, an even higher margin of 64%.
This is far more lucrative than the likes of Mutual & Federal, whose underwriting profit of R366m was equal to 4,6% of net premiums, or Santam's margin of 6,2%.
The claims ratio (the amount of claims as a percentage of premiums collected) for Monarch amounted to only 21,4% of net premiums, and 22% at the Customer Protection Insurance Co.
Mutual & Federal has a claims ratio of 65%, and Santam 68%. This illustrates how in-house insurers are creaming it.
The danger of this, says Nienaber, is that “if the price of the [insurance] is exorbitant, the value proposition is destroyed, regardless of other inherent value the insurance may provide”.
While the NCA says insurance must be “reasonable”, this has yet to be defined.
The problem is that furniture retailers usually sell to the uneducated poor. Says Consumerwatch: “They [the poor] don't set out to buy life insurance. They set out to buy a fridge, for example, and acquire it by default without any real understanding of how it happened.”
With little regard for political correctness, Sithole is frank: “Black people always buy furniture on credit, that's how we buy stuff.”
In fact, most people don't even know their instalments include insurance. A FinMark Trust survey found that while 25% of respondents bought furniture on credit, less than 1% said they had bought insurance, too. Yet 99% of them had.
At one chain, FinMark found that for every 100 people who bought a credit life policy in 2004, “only 1,28 claims [on average] were received”. Not only does this illustrate the low claim rate, it also shows that few customers even knew they had insurance.
The previously mentioned case of a customer being ripped off is that of Gumede, a domestic worker earning R300/week who bought a stove and TV from JD Group's Barnetts for R3004.
Ultimately Gumede paid R6468 on credit, including insurance she wasn't aware of. This year, short-term ombudsman Charles Pillai ruled that Gumede's case was “market abuse”, and called for the FSB to use its powers to declare these sort of practices “undesirable”.
Nienaber said Gumede's case was “a classic example of market misconduct”, highlighting the divergence between the rules and what happens in shops.
Finmark provided the example of a 74cm Sansui TV, which would cost R3478 cash, but R5185 on credit over a year. “At R805/year, the insurance charge is almost 25% of the purchase price. this suggests one in four clients is expected to claim on this policy,” it says. Yet, statistics shows there are fewer than two claims per 100 policies.
The FM's shopping trip underlined the disconnect between theory and practice.
The option of using your own insurance is not put to a customer unless he asks. Even then, one salesman said his company will “look for loopholes to get you to use our insurance”.
The salesmen generally have sketchy knowledge of what the various charges entail, or have no idea what the value proposition is for a “club fee”.
While Ellerines' Geen & Richards allows the customer to fetch the product, and avoid the R400 “delivery fee”, Morkels' salesmen say this “isn't possible, we have to deliver it, unfortunately”.
There are other fees: initiation fees (the upfront charge for doing the contract), the service fee (for administering the contract), and maintenance fees.
On a R9000 television paid off over 30 months, Lewis charges R23951 altogether, including insurance of R6652 (R221/month). Insurance at JD Group's Morkels isn't much less at R6141 on a R8398 television and hi-fi. At Ellerines' Geen & Richards store, R9000 credit will cost you R18683 over 30 months, but insurance is less at R4207.
Fourie says his company is keen for this debate to take place. “We're telling people: ‘Stop paying for compulsory insurance. Ask what you get for your instalment',” he says.
Why have retailers been able to get away with these practices? Partly, because the NCA is so new and credit regulator CEO Gabriel Davel has been very busy elsewhere.
Davel says his organisation has “done the first round of inspections at retailers” and will be doing more in the next few months. But he adds the term “reasonable insurance” is fuzzy. “You're insuring an unknown risk, so how do you define what is reasonable?”
This will require delving into what sort of premium is “reasonable” — an unenviable job that will come dangerously close to price-setting. Says the LOA's Smith: “I'm not sure whether the regulator has the desire to get involved in the kind of technical stuff that will come with deciding if premiums are fair”.
But Smith hits the nail on the head: “Having all the rules on how disclosures must be set out in credit agreements is great, but it's a question of enforcing it.”
Three weeks ago, the LOA said it would issue “best practice recommendations” to members on credit insurance.
But while the credit regulator finds its feet, the FSB's probe into JD Group is an indication that other regulators may come knocking. Says Tshidi: “We are responsible for looking at conduct. And from what we've seen, there are some really shocking practices that must be stopped.”
Nienaber says “self-righteous condemnation” doesn't help. But he is also right that unless abuses are eradicated, insurance on furniture credit will remain a blunt instrument of exploitation.
Source: Financial Mail
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