Consumer Protection Regulation in Low-Access Environments:

Issues for Microfinance

Kate McKee, CGAP Senior AdvisorEuropean Microfinance Platform

November 15, 2012

Month 2012

Defining responsible finance . . .For all retail providers: Delivering financial services in a way that

is fair and respectful to clients and avoids harming them (client protection)

In addition, for providers with a double bottom line or social mission: measuring and managing performance to achieve those client benefits (social performance)

The seven core Client Protection Principles (CPPs)

1. Appropriate product design and delivery

2. Prevention of over-indebtedness

3. Transparency

4. Responsible pricing

5. Fair and respectful treatment of clients

6. Privacy of client data

7. Mechanisms for complaint resolution

Financial Consumer Protection Package for Low-Access Environments

Three core objectives

TRANSPARENCY

Disclosure requirements:

• product pricing, terms and conditions

• plain language, local language

• simple (and possibly standardized) formats

• test with consumers to find what works

FAIR TREATMENT• marketing and selling practices

• fair collections

• basic governance/staff ethics

• data privacy

• product regulation? Try disclosure 1st

EFFECTIVE RECOURSE

• require FSPs to offer internal dispute resolution – regulation sets standards

• workable for low-income and inexperienced consumers: accessibility, cost, literacy, intimidation factors

• complaints/resolution data valuable to regulators for market monitoring

Global CP trends in lower-access countries

Shift in thinking: do consumer protection measures threaten or advance financial inclusion/innovation? big national-level increase in financial CP intentions, rules and entities•Networking at global level (AFI, FinCoNet)•G-20 attention and 10 High-Level Principles (but not very tailored for lower-access countries)•Global standard-setting bodies (Basel crowd) slow to react but gradual progress (e.g., Intl Association of Insurance Supervisors)

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Emerging experience

1. Transparency: disclosure is the foundation but hard to make it effective for BOP consumers (or the rest of us !) good disclosure is necessary but not sufficient

2. Complaints handling and redress: ditto

3. Financial education/capability – not sure what works & is cost-effective. Probably useful if well-designed and –delivered but . . .

More realistic to fix the consumers or the providers?

So we see a trend towards . . . Fair treatment/fair dealing as overarching framework Product suitability Business conduct rules Responsible lending rules Provider liability (for suitability, for outsourcing)

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What is self-regulation in consumer protection?

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Consumer protection rules and frameworkConsumer protection rules and framework

Provider policies and actions

Provider policies and actions

Industry standards and codes of conduct

Industry standards and codes of conduct

Market monitoring and inspection

ReportingCapacity building

Which of these are most appropriate for regulation? Self-regulation? Shared roles?

1. Appropriate product design and delivery

2. Prevention of over-indebtedness

3. Transparency

4. Responsible pricing

5. Fair and respectful treatment of clients

6. Privacy of client data

7. Mechanisms for complaint resolution

Who should lead on what?

Regulatory and supervisory authorities

Regulatory and supervisory authorities

Shared primary responsibility

Shared primary responsibility

Industry associationsIndustry associations

Recourse and dispute resolution

Credit reporting and data privacy

Collections practices and ethical behavior

Transparency

Responsible lending (competition has its limits in clearing markets)

Market monitoring and “hot spotting”

Responsible market development

Self-regulation has its limits and challenges (e.g. enforcement, universal application, and the “race to the bottom” of minimum standards). Even if not at first, eventually there needs to be a strong legal framework in place as well.

The Philippines: A middle-ground regulatory approach

Strong efforts in responsible finance. Development of social performance management program, mainstreamed into members overall performance management approaches.

Improving pricing transparency in the credit market: Central Bank modifications to Truth in Lending Act (2011). MCP provided input and helped with compliance by members—including those outside the Central Bank’s authority.

Broad range of programmatic focuses: Advocacy, capacity building, social performance management, performance benchmarking, financial reporting, knowledge products

Membership includes NGO MFIs, rural banks, and cooperatives.

Members covered by a range of regulatory authorities (and in some cases only lightly-regulated)

India: A tightly designed self-regulatory approach

2010: Political and financial crisis in microfinance sector, restrictive regulations, deteriorating portfolios (PAR in one state rose from 5% to 30% in 1 year!)

MFIN and Sa-Dhan (other MFI association) launch code of conduct for all MFIs with limits on multiple lending, collection practices, transparency requirements, and staff training/behavior rules.

Code of Conduct Enforcement Committee: Authority to fine members (authorized by regulator), and escalate to expulsion and suspension for repeated violations. Scorecard to measure member compliance under development.

All members under regulatory authority of Reserve Bank of India

Who: Microfinance Institutions Network of India. Created in 2009 out of response to fast-growing industry (100%+ annual growth in some regions) and warning signs about provider practices.

The long-run business case – M-Pesa in Kenya and the trust/uptake connection

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Bank account

Joint liability loan

Insurance Moneylenderloan

More Money at Risk

Less Money at Risk

More Opportunities to Check Functionality

Less Opportunities to Check Functionality

M-Pesa in Kenya made 24-hour resolution of problems and a free hotline a core element of their business, to drive trust and uptake in a new product and channel.

Efficient, point-of-sale, recourse channels can increase trust and help drive uptake of products—in particular new or innovative channels like mobile banking

Implications for MF

• The right CP rules, well-enforced, help protect responsible providers

• Urgent in the short term (reputation and political risk) and smart in the long run (customer retention, cross-sale of services)

• Role of investors – are you creating the right incentives?

• It’s coming – why not embrace it and engage?

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Closing reflections and suggestions

Advancing financial access for the world’s poor

www.cgap.org

www.microfinancegateway.org

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