Financial Education & Consumer Protection

1. Financial Education & Consumer Protection BilhaMaina Project Manager - FEPP

2. Credit Information Sharing….? • Two sides of a coin: • To increase access to credit for consumers and enable good customers to negotiate better rates with financial service providers • To instill discipline and promote prudent borrowing practices…. Or force bad terms on consumers..?! • There are issues…& not just errors in data submitted to credit bureaus…..

3. Confused consumers…. Innovative and complex financial products Emergence of non-traditional financial institutions Ageing population & increased life expectancy New business models & delivery channels Growing consumer debt & reduced household savings Information asymmetry Low level of financial literacy Financial scams E-money, borderless transactions

4. Market Conduct Concerns…. • Sales and Marketing Practices • Misleading advertisement • Aggressive marketing • Unsolicited products/limit increase • Unsolicited credit advance • Debt Collection • Harassment / intimidation by debt collectors • Debt collection charges passed on to customer • Lack of Transparency • Key terms, relevant charges and penalties not clearly disclosed to the customer • Terms not legible and not in plain language Regulatory Concerns • Data Protection • Sharing of customer info with external parties for marketing purposes • Fees and Charges • High interest charges • Hidden fees • Unreasonable penalty charges • Consumer awareness • Lack of awareness of key terms, relevant charges & penalties • Poor customer responsibility

5. In a nutshell… • Low financial literacy amongst consumers, cannot understand terms and conditions…. • Poor disclosure mechanisms • Hidden & Unclear terms and conditions, lack of transparent in pricing, Jargon in contracts, fine print, cannot shop around – non comparable products • Unfair treatment of customer • No complaint channels, no redress mechanisms • Lack of Knowledge on rights & responsibilities • Poor enforcement of regulations, poor monitoring mechanisms for consumer protection, lack of independent redress and mediation

6. The ideal world …. Significant economic benefits to a financial market that works, helping individuals to exploit economic opportunities & build wealth, and businesses to grow & create jobs Borrower Recognise that it remains the responsibility of the consumerer to: • decide the appropriate financing product that meets his needs and circumstances • ensure that he has the capacity to afford the financial product Financial service provider Important that policy measures are balanced and not impose unreasonable constraints on FSPs that could hamper product availability However, regulatory requirements on conduct of business are necessary to minimise potential consumer detriment from unfair or exploitative practices by FSPs that may exist in an increasingly competitive environment. Goal: Foster a healthy and sustainable financial market where FSPs deal fairly & ethically to ensure the best outcomes for consumers

7. Imbalance of Information and Knowledge Consumers Low financial literacy • Poor financial knowledge & skills • Make poor financial choices • Unable to cope with increasing financial responsibilities Financial Institutions • Resulting: • Consumers make poor & uninformed financial decisions • Lower household savings • Over-indebtedness  financial fragility • Greater susceptibility to fraud and abuse

8. Research study – BAI/FINACLE • “Do you consider yourself to be financially literate?” Only 45% answered in the affirmative, less than half. • Consumer attitudes toward Non-Sufficient Funds (NSF) or Overdraft (OD) fees. Of financially literate consumers in the study, 39% described their bank’s NSF/OD fee rules as fair compared to only 29% of the consumers who consider themselves needing more financial knowledge.

9. Comfortable discussing financial goals with their bank, 57% of consumers who consider themselves financially literate agreed. Likewise, 71% of consumers with good financial literacy said they trusted their bank compared to only 55% of consumers who don’t have confidence in their financial literacy

10. Enhancing Financial Literacy Consumers Empowered consumers who are: Financial Institutions • Resourceful in obtaining info and advice • Proficient in financial knowledge • Competent in making informed financial decisions • Accountable for decisions • Resulting: • Reduce imbalance in information & knowledge between consumers & financial service providers Leads to • Financial inclusion • Greater transparency by FIs • Fair dealings by FIs

11. Benefits • Consumers who understand financial products are more likely to agree with FSP’s policies • Financial literacy provides a foundation of knowledge on the part of consumers that helps banks to be more clearly understood, particularly around the most controversial topics such as fees • Trusting one’s bank and discussing financial goals helps strengthen relationships

12. Appreciate that… • Customers of financial institutions should have the right to receive information that is clear, complete, accurate and comprehensible before they decide to borrow or to invest. • They should have access to recourse mechanisms that are efficient and cost-effective. • They should also be able to obtain sufficient financial education to understand the terms and conditions and other information provided to them as financial consumers.

13. Starting with industry codes of conduct... • Suitability assessment • Affordability – income, debt obligation, • expenditure • Financing decision • Future affordability Affordability and suitability • Suitability assessment • Disclosure requirements • Competence • Remuneration Conduct of Business for Retail Financing Sales and Marketing • Early termination fee • Late payment fee • Shopping around Transparency and Fees • Restructuring / rescheduling • Foreclosure • Default rate Loan Recovery • Terms & Conditions • Allocation of Funds • Shared and open flow of information Financial Education

14. Consumer Information & Protection Bureau Maybe establish a bureau with core mandates: To Educate - An informed consumer is the first line of defence against abusive practices. The bureau could work to promote financial education. To Mediate - Offer independent mediation services to consumers and financial service providers and avail a dispute resolution mechanism that is free of charge to consumers and support by FSP’s through Levy To Enforce - To supervise banks, MFI’s, SACCO, and other financial service providers and enforce consumer protection, participate in the law making process and enforce compliance. To Stay Informed - The bureau could act to gather and analyze available information to better understand consumers, financial services providers, and consumer financial markets and avail knowledge

15. Mediation…? • Mediation is one alternative to the traditional litigation process. • The Mediator facilitates both complainant and the member institution concerned by first investigating the complaint. • The Mediator may meet or liaise with the complainant and/or the financial institution concerned for further information, clarification and/or facilitate a mediation session. • In the event both parties agree to an amicable settlement, the matter then is considered mediated or resolved. The Mediator only facilitates and does not make/or influence any decision.

16. In the event both parties cannot reach an amicable settlement, then the Mediator will make a decision based on the investigation, industry practices, the relevant applicable law and takes into account situations/ circumstances specific to the complaint. • The decision made by the Mediator is binding on the relevant member institution but not on the complainant. • The complainant has a choice of either accepting the Mediator’s decision or proceeding with other avenues which are available.

17. Example: Financial Mediation Bureau • Provide mediation service under one roof for the convenience of the consumers • Is a Company limited by Guarantee • Has potential to be the national ombudsman having comprehensive representation of the sector • Provides an alternate dispute resolution channel which is independent, convenient, efficient and free for the complainant. • do not champion the consumer’s rights nor do we champion the rights of financial institutions. We are completely independent and deal with all the disputes, claims and complaints fairly and impartially.

18. FMB Structure Originally set-up by 94 members. As at to-date we have 106 members (financial institutions that come within the ambit of BNM’ssupervision): • Commercial Banks 22 • Investment Banks 13 • Development Financial Institutions 5 • Islamic Banks 17 • Credit / Charge Card providers 3 • Insurance Companies 37 • Takaful Operators 9 Total 106

19. FMB - organisation • Is a company limited by guarantee • Is a non-profit organization • Is set-up by its members to provide their customers with a channel to resolve any dispute, complaint or claim they may have with the members • Is supported by its members by an annual levy to meet the expenses of the bureau • Is an INDEPENDENT organization • Its services are provided free to the complainants

20. FMB Services… • Free of charge to the complainant. • Available to the all consumers irrespective of their positions, status or locations. • The entire process is confidential to the parties involved. • Mediator is independent in carrying out his or her duties. • Avoids lengthy & costly litigation process. • Complainant is not bound by Mediator’s decision. • Mediator’s decision is binding on the member institution involved. • A fast, convenient & efficient way to resolve complaints.

21. Decision making… • Confirm the financial institutions’ decision • Make an award to the complainant - Revise the financial institutions decision - Make an award favouring the complainant • All the documents received by the Mediator will be destroyed 6 months after the decision has been made. Only the complaint and the decision will be retained for record purposes.

22. Steps followed… • Complainant should first try to resolve the problem with the financial service provider. • Complainant can refer the problem to FMB only when the problem cannot be resolved amicably between both parties or the Complainant is not satisfied with the final decision / response from the financial service provider. • The problem should be referred to FMB within 6 months after the Complainant has received the final decision from the financial service provider. • The Complainant cannot refer complaints, claims or disputes that are outside FMB’s jurisdiction, that have been referred to the Courts, that have been submitted for Arbitration or that which are time barred.

23. Could this be a possibility… • Can we support the law making process to enhance consumer protection and financial education? • Could it be possible to support such organisations by levy? • Do FSP’s deem it necessary to avail this sort of mechanism to consumers? • Can we adequately resource such institutions with the requisite skills and make them available nationally to enhance consumer access?

24. Thank you for listening! Visit us on: www.fepkenya.org or www.fsdkenya.org CE & CP is an industry wide effort….