by Rob Hosking
The guidelines come after some confusion over what the rules in the new Credit Contracts and Consumer Finance Act actually mean for insurance in such contracts.
The law, which came into force early this year, includes in section 45 a provision which limits the amount a creditor can recover from a borrower where there has been a payment to a third party.
Most commonly, this will apply in cases where the supplier of a mortgage has also signed up the borrower to insurance.
The commission now says that, “in the absence of any statutory guidance or court decision determining the appropriate interpretation relating to what a “reasonable” commission on credit related insurance might be” it will adopt the approach used by the Australian Uniform Consumer Credit Code.
That is, any commission on credit related insurance which is “20% or less of the gross premium paid by the debtor will be unlikely to meet the Commission’s enforcement criteria.”
Note that, “unlikely” The commission’s senior advisor of fair trading policy, Dot Benson, says the question will be decided on a case-by-case basis. And in any case, the guidelines issued by the commission are not binding.
“An insurer or creditor that acts in accordance with the Commission’s approach will not necessarily be immune form private third party proceedings.”
The guidelines have been issued because of “noises from the industry” about the lack of clarity in the new law. “People have taken different approaches to section 45 – broadly over what insurance commissions are ‘reasonable’,” she told Good Returns.
“There are numerous possible interpretations of the section. And there is a need for a bit more certainty.”
“We’ve spoken to a various insurance providers before issuing the guidelines, but we do expect some more feedback on them.” The guidelines apply only to insurance relating to credit contracts, she says, and in any case are not a policy precedent for possible changes to rules governing the insurance market, she says.
Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.
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