Growing financial complexity calls for improved structures

Business Daily Africa, October 08, 2010

By Daniel Asher

Every year the global economy adds an estimated 150 million new consumers of financial services, mainly in developing countries where consumer protection and financial literacy are still in their infancy.

The opening up of markets for transnational corporations to invest and do business freely has increased competition among financial institutions such as commercial banks, insurance companies, SACCOs or mutual funds; combined with improvements in their technology and infrastructure have resulted in highly complex financial products sold to the public.

Of significance are countries progressing from central planning to market economies like Kenya, where protecting the interests of consumers has become a prerequisite for sound and competitive financial markets.

Kenya, like many other emerging economies, lacks the history of using superior financial products.

The growth of financial literacy, thus, significantly lags the growth of available investment resources (or credit options), widening the gulf between the complexity of financial products and consumers’ ability to understand what they are buying.

Technology is also changing the types of protection needed by financial consumers.

Kenya’s new Constitution recognises consumer rights as human rights whereas the consumer protection bill of 2007 which flopped in parliament is yet to be re-introduced.

Kenya’s legal provisions are lacking in terms of financial consumer protection.

Some of the closest provisions in these laws are only related to the rights of depositors and borrowers.

Financial consumers are therefore confronted with unexplained information in regards to transaction charges, interest rates, insurance costs all of which are mainly expressed as percentages.

Banks continue to hide charges from their customers under complex fee structures which even experts cannot easily comprehend, making it difficult for them to compare prices and switch their accounts to alternative banks.

Presently, issues related to consumers in financial services in Kenya are still simple and primarily related to issues such as ATM cards, bank fees and insurance premiums, interest rates, etc, whose complexity and severity is yet to hit the peak.

Recent developments in financial markets highlight the importance of consumer protection and financial literacy for the long-term health of the financial sector.

The ebbing global financial crisis has its origin from the US in relation to a not-too-alien issue such as house mortgages.

In recent years, one has seen the frequent appearance of critics of the fact that, in the US mortgage markets, complex financial products, (such as hybrid adjustable-rate mortgages) were sold to borrowers, including those with weak credit histories, who had difficulty in understanding the risks and obligations that they assumed.

In an effort to reform, the Obama administration has been pushing for the adoption of a Consumer Financial Protection Agency Act (CFPA Act), which is expected to protect US consumers in all types of financial dealings.

The primary objective of having such an agency in place is to protect US consumers and inform/educate them about increasingly complex financial products, which are high above the capability of non-professionals to understand.

According to a World Bank report on Good Practices for Consumer Protection and Financial Literacy (in Europe and Central Asia), a sound financial sector should provide consumers with transparency, choice, redress and privacy.

Transparency by providing full, plain, adequate and comparable information about the prices, terms and conditions (and inherent risks) of financial products and services.

Reasonable practices

Choice by ensuing fair, non-coercive and reasonable practices in the selling of financial products and services and collection of payments; Redress by providing inexpensive and speedy mechanisms to address complaints and resolve disputes; and Privacy by ensuing control over access to personal financial information.

Nevertheless, we cannot down play future possibility of a more complex problems in Kenya in this area since our financial sector is developing very rapidly.

Therefore as a focused nation, it is necessary that we have more research studies in this area, whereas the legal framework need to be completed soon to be in pace with the future.

We need to step up the degree of regulation under the proportionality principle; financial institutions should develop their own codes of conduct, a form of self-regulation to supplement State management in this area.

All financial products, services and marketing should be regulated by an independent national consumer protection body not under the influence of the banking sector.

The management board of this regulator should comprise members who are independent of the industry and include a balance of members with experience of consumer issues and industry expertise.

The board should have the right to develop appropriate regulations, conduct investigations, require changes in policies and practice and require appropriate redress.

Asher is the Programme Officer, Consumer Unity and Trust Society (CUTS ARC, Nairobi)

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