Putting Consumer Protection into Action: Options for developing countries

Feb 2010
Washington, United States, February, 18 2010 - The issue of whether offering financial services to the poor can sometimes do more harm than good has been circling the microfinance industry for some time now. The question is, whose job is it to make sure that microfinance is responsible finance? There’s no easy answer, but regulating the business conduct of financial services providers can undoubtedly play a role.

As lawmakers in the US and the EU try to act on the lessons learned from the global financial crisis, the developing world must ask what consumer protection regulation should look like in places where consumers are poor, access to finance is limited, and regulatory capacity is often overstretched. A new CGAP Focus Note examines the options.

Consumer protection: The basics

“There are three main consumer protection goals – regardless of whether the consumer is a fruit vendor in Ghana or a home buyer in the U.S.,” says CGAP expert Kate McKee. “Information given to the customer should be transparent: it should be clear what they are getting. Customers should be treated fairly – and should only be sold products and services they can handle. Last but not least, financial services providers should put easy-to-use systems in place for resolving errors or disputes.”

Transparent pricing of financial products, truth in advertising and fair collections practices are some areas that require particular attention in markets at all levels of development. Making sure clients do not take on more debt than they can handle may also be necessary, especially as markets get more competitive.

Of course, some of the responsibility lies with consumers too – to make sound financial decisions to the best of their ability. However, according to McKee: “Inexperienced or low-income customers, with lower levels of formal education or literacy, can be particularly vulnerable to unscrupulous conduct.”

Promoting financial inclusion and stability

Beyond providers’ considerations of ethics and risk management, regulation to protect customers can help increase financial inclusion by building trust in formal financial services. It can also promote healthy competition, which results in a more level playing field for responsible providers and better products and practices for consumers. Taken together, these improvements can contribute to overall financial stability.

But what’s a country to do when its regulatory capacity is limited, and there are only so many resources to go around? Prioritize, prioritize, prioritize.

Priorities for low access environments

Where to start?

“In the beginning, you do what you can do,” says McKee. “Protecting consumers is not an all-or-nothing endeavor. Small steps can yield big results, while trying to do too much too soon could backfire.” To help regulators get started, the new Focus Note describes a package of basic consumer protection rules to address problems faced by poorer customers. Regulators in developing countries should begin by focusing on the most acute problems in their particular market first, taking into account the country’s level of financial sector development, financial inclusion goals, and consumer level of experience and culture.

For instance, in Cambodia, microfinance serves more customers than commercial banks. The central bank noticed that transparent pricing was the major problem microloan customers faced, so it concentrated its efforts there. The simple rules it put in place to require clear price calculations and disclosure are now credited with helping to reduce the cost of the credit and increase competition, to the benefit of both Cambodian customers and markets.

“After identifying priority problems to tackle, the next step for regulators is to craft rules that work for consumers and where the cost will not be prohibitive for responsible providers. We don’t want to ‘protect the poor out of the market,’” says McKee. Priority areas include how information is provided to customers; basic prohibited practices, such as intimidation, fraud and discrimination; penalties for the various infractions; mechanisms for consumer complaints (recourse); and consumer awareness and education initiatives.

‘Next generation’ initiatives can expand on these and other areas, like tougher rules on aggressive sales and deceptive marketing, or attention to new technology and delivery channels (such as mobile banking). CGAP’s Focus Note includes a tool to help regulators start assessing consumer protection concerns in their own markets and options to address them.

Finally, lawmakers should be sure to have the people, budget and political will to monitor the markets and enforce the rules. Empty promises could erode consumer confidence, rather than build it.

Not just regulation

It’s important to note that regulation is not the only way to protect consumers. Industry standards and financial capability programs also help build responsible financial markets. “But whatever the strategy,” says McKee, “The best way to put consumer protection principles into practice in low access environments is to tailor the solutions to each individual context.”

Source : CGAP

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