CR227 Loans – Loan on security of policy – complainant alleges interest rate not disclosed

by with No Comment Case ReportsLoansPolicyholder Protection RulesTopics & Cases

CR227

Loans – Loan on security of policy – complainant alleges interest rate not disclosed

Background

1. On 6 April 2001 the complainant made an off-shore investment in a policy in the amount of R400 000. The sale was done through a broker.

2. In the policy it is stated that interest bearing loans were available, not from the insurer but from an associated company of the insurer, against cession of the policy. The policy also further on stated that no nil interest bearing loans were allowed during the term of the policy.

3. R160 000 was advanced by the insurer to the policyholder and the policy was ceded to the company making the loan. On maturity the loan amount, which at that stage had reached R291 562,20, was paid to the lender and the balance was paid to the complainant.

4. The complainant was most unhappy about the reduced amount that he received. He claimed that he had never been told that interest was payable on the loan and he was unhappy because he received only R108 743 on maturity.

5. At first the insurer raised the fact that the issue of the loan should be taken up with the lender, not with them, but they then went on to actually deal with the complaint.

6. The insurer could, unfortunately, not locate a copy of a signed loan agreement but the loan application was found and that stated that the borrower agreed to be bound by the terms and conditions of the loan agreement, that the loan application has accepted, which it was in the circumstances.

7. The complainant made the further point that he had never been advised of the interest rate which applied during the term of the loan. In his view he was taking an advance on his own money. He alleged that had he known about the interest rate he would have obtained money from other sources.

8. We believed the complainant when he said that he did not think that the agreement in respect of the withdrawal of the R160 000 was subject to the payment of the interest.

9. He saw it, rightly or wrongly, as it was put in the summary statement of the policy, that he had elected to make a 100% penalty free withdrawal from the fund. That was the reason why in correspondence he kept harking back to the point that he was simply withdrawing part of his own funds.

10. His view was fortified by the fact that there was no document in the file signed by him in which the rate of interest was disclosed. In fact, the interest rate was prime plus 1,5 or 2% and that rate would endure for the whole of the loan.

11. Although we realised that the insurer was a separate entity from the lender it was also significant that the lender was a wholly owned subsidiary of the insurer. By interposing this separate entity as the lender, the lender did not have to comply with the Policyholder Protection Rules (PPR) which requires disclosure of the interest rate and the amount of the loan on an annual basis to the policyholder borrowing against his own policy.

12. We wrote to the insurer advancing these reasons as well as our unease about the fact that none of the documentation was on file and suggested that it would be an appropriate case to explore the possibility of a settlement that would be fair to both sides. It had become clear during the complaint that the adviser had not advised the complainant about the implications of the loan.

13. The insurer very graciously, albeit after some argument, agreed to not charge interest on the loan for the duration of the loan and offered to pay the complainant a further R131 258,20, which the complainant accepted and the matter was then regarded as resolved.

JP
May 2007

CR223 Interest – complainant cancelled during the cooling-off

by with No Comment Case ReportsInsurable InterestInterest on Late PaymentsPolicyholder Protection RulesTopics & Cases

CR223

Interest – complainant cancelled during the cooling-off

Background

1. The complainant had signed an application form on 6 April 2005 for a “Sinking Fund” policy. It later transpired that someone other than the complainant or his adviser had completed the investment portfolio detail as “Money Market Fund”.

2. What in effect had happened was that the complainant had transferred money from a Money Market Unit Trust into a Sinking Fund policy on 26 May 2005 but only to be invested in the same unit trust again and that he paid a hefty price for the privilege to do so. In fact a commission of R30 000 on an investment of R900 000.

3. A meeting was held between the complainant and the insurer on 6 June 2005 at which the complainant declared that he withdrew from the investment. At that meeting, according to the complainant, the insurer agreed to refund the capital without costs plus interest until the capital was reinvested in his Money Market Unit Trust account. Unfortunately the rate of interest was not at the same time settled.

4. The complainant claimed interest from 6 June (the date of the meeting when he decided to withdraw from the investment) until 28 June 2005 when the capital sum of R900 000 was paid back into his unit trust account.

5. The complainant wanted interest at the ruling rate applicable at the time. After our intervention the insurer paid interest from the period 27 May 2005 to 27 June 2005. They paid interest at the rate that actually applied to the policy. This amounted to R4 265 and after the four fund taxation rate of 30% was applied to it, it amounted to R2 986,19.

6. The complainant argued that the insurer was not allowed to take tax into account, they should have allocated the gross amount of growth to his account. The insurer countered that the interest was calculated as the actual growth of the units as earned under the policy, which had been the factual situation until the complainant cancelled the policy. They had to pay income tax under the four fund taxation basis and therefore felt that the complainant should bear this item of cost.

7. The Policyholder Protection Rules (PPR) do not provide for interest to be paid where a policy is cancelled because of the cooling-off provision, unless the time requirement of the PPR are breached. In this case the insurer agreed to pay interest but the basis of the interest for payment was not actually negotiated.

8. The insurer’s basis seemed reasonable to this office in the absence of an agreed rate, as this was the interest that the insurer would actually have earned on the money. It was, therefore, the amount of growth or “enrichment” in the insurer’s hands and seemed fair in the circumstances.

9. We, therefore, were of the opinion that we could not uphold the complainant’s complaint for additional interest.

JP
May 2007

CR35 Jurisdiction – if an investment product is “wrapped”

by with No Comment Case ReportsJurisdictionPolicyholder Protection RulesTopics & Cases
[vc_row][vc_column][vc_column_text]CR35

Jurisdiction – if an investment product is “wrapped” in a life assurance policy any complaint would fall within the Ombudsman’s terms of reference

Background

Most major life assurance companies have associate organisations which are “in house” linked investment companies. This is an area where the Ombudsman’s jurisdiction is questionable but if a life assurance contract forms part of the financial package, if the linked investment product is “wrapped” in a life assurance policy, then the complaint would usually fall within the Ombudsman’s terms of reference. This can lead to complications because the two financial organisations, the life assurance company and the associated LISP do not always speak with the same voice.

In the case under review the complaint was governed by the Policyholder Protection Rules and the complaint revolved around the cancellation of the contract within the thirty-day cooling off period.

Assessment

The LISP who was responsible for the packaging and marketing of the product incorrectly took the view that the Policyholder Protection Rules did not apply. The Ombudsman stated that this was a matter which the life assurance company and its associate had to resolve between themselves but the Ombudsman’s position was quite clear. The rules which catered for policy cancellations did apply.

Result

As a life assurance product was involved the Ombudsman adjudicated the complaint from this perspective. The outcome was a decision in favour of the complainant and as the request to cancel the contract was made within the thirty day period the complaint was upheld. This resulted in a refund of premiums paid together with interest. This decision in favour of the complainant was accepted by the insurance company. The difference of view with the LISP was up to them to resolve.[/vc_column_text][/vc_column][/vc_row]