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Consumer Protection Regulation in Low-Access Environments: Issues for Microfinance Kate McKee, CGAP Senior Advisor European Microfinance Platform November 15, 2012 Month 2012. Defining responsible finance.
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Consumer Protection Regulationin Low-Access Environments: Issues for Microfinance Kate McKee, CGAP Senior AdvisorEuropean Microfinance PlatformNovember 15, 2012Month 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) • Appropriate product design and delivery • Prevention of over-indebtedness • Transparency • Responsible pricing • Fair and respectful treatment of clients • Privacy of client data • 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)
Emerging experience • 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 • Complaints handling and redress: ditto • 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)
What is self-regulation in consumer protection? Consumer protection rules and framework Market monitoring and inspection Industry standards and codes of conduct Capacity building Reporting Provider policies and actions
Which of these are most appropriate for regulation? Self-regulation? Shared roles? • Appropriate product design and delivery • Prevention of over-indebtedness • Transparency • Responsible pricing • Fair and respectful treatment of clients • Privacy of client data • Mechanisms for complaint resolution
Who should lead on what? Industry associations Regulatory and supervisory authorities Shared primary responsibility Market monitoring and “hot spotting” Transparency Recourse and dispute resolution Responsible market development Responsible lending (competition has its limits in clearing markets) Credit reporting and data privacy Collections practices and ethical behavior 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 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) 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.
India: A tightly designed self-regulatory approach 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. 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
The long-run business case – M-Pesa in Kenya and the trust/uptake connection Efficient, point-of-sale, recourse channels can increase trust and help drive uptake of products—in particular new or innovative channels like mobile banking More Opportunities to Check Functionality More Money at Risk Joint liability loan Moneylenderloan Bank account Insurance Less Opportunities to Check Functionality Less Money at Risk 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. 12
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?
