Consumer Protection, the Law & the Provision of Financial Services to the Poor

1. Consumer Protection, the Law & the Provision of Financial Services to the Poor

2. Consumer protection, the Law and the Provision of Financial Services to the Poor Today’stopics: • Why consumer protectioniscurrently far from whatitshould be in the MF industry. • Difficulty in determiningwhatthe law is. • International Development Law Org.’songoingresearch in fivecountries. • Recommendations for how to bring MF industrypractices more in line with the law.

3. « Les dettes aujourd'hui, quelque soin qu'on emploie sont comme les enfants, que l'on conçoit en joie, et dont avec peine on fait l'accouchement. L'argent dans une bourse entre agréablement ; Mais le terme venu que nous devons le rendre,C'est lors que les douleurs commencent à nous prendre. » « L'Étourdi » (1653), Molière

4. Why Should MFIs be concerned with Consumer Protection? • a) To provide de facto compliance with domestic law • b) Better customer service; satisfied clients should be your raison d’etre. • c) Specific to MF industry: the consumer is semi literate and has a weaker (if any) bargaining position compared to the MFI. • d)Specific to clients in most developing countries, neither the regulator, nor the courts are an avenue of redress for the consumer.

5. Impact of the consumer protection law on actual industry behaviour? • At present: influenceisnegligible for a variety of reasons. • Historicorginsof consumer protection law: In US, in 1800’s itwasjournalistslikeUpton Sinclair reporting on unsanitaryconditions in the meatpackingindustryimpacting consumers. • Problemswith consumer protectionlawawareness: scatteredprinciplesthroughout commercial law (trade, advertising, competitionlaw, contracts etc.) Notviewedasapplicableto non food, beverages or non “consumables” likefinancialservices. • No realresponsiblegovernmentregulator; no forum and poor consumers are unlikely to press for theirrights.

6. Who has done a thorough legal analysis of applicable law on consumer protection? • Is there a general consumer protection law in effect in the country? Are CP principles contained in various commercial legislation? • What are MFIs obligations regarding advertising? Information which must be disclosed in contracts? Is there a cooling off period? • Any laws with regard to data privacy? Is there an insolvency/bankruptcy law in place? • Does executive level at MFI know the law, and are they informing loan officers? • Do clients know their legal rights in addition to financial literacy? Is there a dispute resolution policy clearly posted?

7. Five Country Analysis: Research Methodology • In country partners in dev. countries (universities; jurists) • Assessment of what the domestic law dictates vis-à-vis consumer protection in financialservices • Interviewsw/ MF industryexecs., loanofficers, clients (defaulting and current) & magistrates/judgeswho deal with debtdefaults. MFIsselectedbased on market share (assumption of beingexamples of betterbehavior) • Fivecountries; country selected on basis of a confirmedinstance of badpractices in a neighboring country

8. Abuses of the MF consumer: IDLO research in five developing countries • In loancontracts: notgiving client a copy & changingterms of agreement (4/5 countries) • In guarantees and collaterals: hypercollateralization, improperhandling of titles to property and requiring multiple guarantees; failure to informguarantor of implications of guarantee (Cameroon & Egypt). • In dispute resolution: no internal DR procedure, no loanofficerdiscretion or interest in reschedulingdebt (allfive) • In paymentdifficulty or default: inflexibility to rescheduleloans; threatsincludingincarceration; bankruptcy/insolvency law outdated; and borrowerprotection non existent (all 5) • In collectionspractices: misuse of police/judiciary to “send a message.” (Cameroon; Egypt)

9. Country by country results: from okay to not okay to v. bad • Colombia: Why would you need a contract when it is much more simple if I just write the numbers down on a payment schedule? • India: One defaults; the whole group goes down together. Rescheduling? Why would we want to offer that? • Kenya: Pay late; pay double (you won’t see that in your contract because I did not give you a copy). • Cameroon: You give me the title to your home; I’ll give you a loan worth 25% of its value. • Egypt : Microfinance default may induce prison time for you or your guarantor(s)); MF executives state this rarely if ever happens, but refuse to provide stats. Courts are not automated, but one judge estimated he saw 100-150 debt default cases per week.

10. Recommendations for a Better Business Methodology?: • Industry self regulationmaynothave the required “teeth” to stop badbehavior (ex. From private security contractors in Afghanistan): With Smart Campaign, isitpossible to have some neg. Consequences for thosewhosign up but do notcomply? • Empower MF networks to produce somethingwhichit can sell to the market; likemediation of defaults (and/or insurance for defaults) • Anyexisting ombudsman or complaintwindowat the CB? Ifnot, set one up maybeat MF network. • Legal Aid & Clinics: find a law faculty and involve law students • Standard formcontractscould be useful for the industry; again a role for MF network?

11. Parting thoughts? -Biggest problem with consumer protection is that it is lowest on every law maker’s agenda. -And,the poor consumer (by definition) is both poor and socially marginalized. -Without legal aid, who will speak for the poor? - Rule of law in a society means all are protected; even the weakest members. -IDLO has a network of jurists around the globe; please let us know if you need assistance in a particular country. (We are happy to provide pro bono introductions  and our 2 centsworth of advice.) Thanks, and happy conferencing! Jhubbard@IDLO.int