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> Posted by Ros Grady, Senior Financial Sector Expert, the World Bank Group
The following post was originally published on the World Bank Private Sector Development blog.
The Client Protection Principles: Model Law and Commentary for Financial Consumer Protection (the “Model Law”), recently launched by the Microfinance CEO Working Group, has the potential to be a useful resource for the many developing and emerging economies that are seeking to design and implement international best practices in financial consumer protection, having recognized that consumer protection is a critical element in building and maintaining trust in the financial sector and achieving financial inclusion targets.
The Model Law was prepared on a pro-bono basis by the international law firm DLA Piper on the basis of the seven Client Protection Principles of the Smart Campaign. The project, which took place over a 15-month period and was managed by Accion on behalf of the Council of Microfinance Counsels, included consultations with financial inclusion stakeholders and legal experts, who undertook a review of existing legal frameworks in various countries. Reference was also made to international best practices and principles such as the World Bank’s Good Practices on Financial Consumer Protection and the G20 High Level Principles on Financial Consumer Protection.
The Model Law is a high-level, activities-based law that is intended to apply equally to all financial services providers. This includes “banks, credit unions, microfinance institutions, money lenders and digital financial service providers.” The apparent aim is to ensure an equal level of protection for all consumers and a level playing field. The consumers concerned may be an individual or a micro, small or medium-sized business, and so the law will apply equally to consumption and small-business facilities. Many of the provisions are framed in terms of principles, the detail of which would need to be filled out in related legislation.
> Posted by Alex Counts, President and CEO of Grameen Foundation, and Co-Chair of the Microfinance CEO Working Group
The Microfinance CEO Working Group, as part of its commitment to client protection in microfinance and financial inclusion, set out in early 2014 to develop a model law that could be adapted, in whole or in part, into different national contexts. The Working Group’s partners were the global law firm DLA Piper and its “Council of Microfinance Counsels” which is composed of the in-house counsels of all Working Group members. After 15 months of effort, the first version of this law has now been completed and released. The blog below describes this tool and how it can be used.
Those who set policy for consumer protection in financial inclusion have a powerful new tool at their disposal, one that financial inclusion practitioners, legal experts, and regulators have had a hand in creating.
Over recent months, the law firm DLA Piper/New Perimeter has been working with the Microfinance CEO Working Group and a subgroup of the Council of Microfinance Counsels to prepare the Model Law and Commentary for Financial Consumer Protection. This is a framework of suggested legislation on financial consumer protection based on the Client Protection Principles as promoted by the Smart Campaign. The seven Client Protection Principles set standards that clients should expect to receive when doing business with a microfinance institution, and cover such critical areas as transparency, fair and respectful treatment, privacy, and prevention of over-indebtedness. The team that developed this studied multiple countries that had the most progressive and effective laws related to client protection in financial services, and in other areas.
The Model Law can be used in a variety of ways.
> Posted by Center Staff
Big news from the Smart Campaign camp. Today, the Campaign, the global movement you’ve come to know for embedding a set of client protection principles into the fabric of the microfinance industry, is announcing enhancements to its Client Protection Certification Program designed to improve and accelerate the certification process.
The Smart Campaign’s Client Protection Certification Program contains a core set of standards against which institutions are evaluated by independent, third-party raters. Certification publicly recognizes those institutions providing financial services to low-income people whose standards of care uphold the seven Client Protection Principles. The certification process aids institutions in strengthening their practices, and becoming certified helps institutions demonstrate to industry stakeholders – including clients, investors, and other institutions – their commitment to responsibly serving their clients. The Client Protection Principles cover important areas such as transparency, fair and respectful treatment, privacy, and prevention of over-indebtedness.
The Certification changes will enable the program to better meet the growing global demand for certification among microfinance institutions, while ensuring that certified institutions demonstrate high standards and the program maintains strong governance and quality control. Several enhancements will take place immediately:
> Posted by the Platform for Inclusive Finance (NpM)
How has the microfinance industry leveraged regulation and supervision to safeguard client wellbeing? In priority areas like over-indebtedness, acceptable pricing, and transparency, what progress has been made to ensure that institutions are operating responsibly? And in cases where regulatory actions have been taken, how have they been implemented? A recent research project conducted by EY and the Platform for Inclusive Finance (NpM) investigates these questions across 12 country markets and assesses the current state of client protection regulation in microfinance.
The growth of the inclusive finance sector has helped create significant opportunities for low-income people around the world. However, when not done correctly, access to financial products also has the potential to bring harm. Of the increasing importance of client protection and sound regulation, EY Senior Manager and one of the report’s authors, Justina Alders-Sheya remarked: “The sector is growing and to do so responsibly, it is necessary that supervisory authorities perform their role.”
Drawing on questionnaires completed by local stakeholders, the study examined whether laws and regulations on client protection have been implemented in any way in the 12 studied countries: Azerbaijan, Bolivia, Cambodia, Ghana, India, Kenya, Peru, the Philippines, Rwanda, Russia, Tanzania, and Uganda. The study also examined the regulatory and supervisory landscape for client protection in each country. It investigated who is creating the regulations, how they’re being enforced, and the role of industry players like microfinance associations and credit bureaus.
> Posted by Joshua Goldstein, Principal Director for Economic Citizenship & Disability Inclusion, CFI
Last June, in my hotel room in Delhi, I read in the Sunday edition of the Times of India that hiring white girls to work wedding parties is the new status symbol in Bangalore. Though this might sound surprising, alabaster skin as the ideal of beauty (and the status that goes with it) is neither new to nor specific to India. This is not a trivial matter but a deadly serious business.
One need only look at skin whitening products, like Unilever’s “Fair and Lovely”, which are great sellers in the beauty product category in India, Bangladesh, and Thailand—indeed, in 30 countries around the world. The Unilever Sri Lanka website reads: “Today, 250 million consumers across the globe strongly connect with Fair and Lovely as a brand that stands for the belief that beauty empowers a woman to change her destiny.”
> Posted by the Smart Campaign
It’s been an exciting few months for client protection in the microfinance industry. FINCA Kyrgyzstan, MBK Ventura in Indonesia, SKS Microfinance in India, and a number of other MFIs around the world demonstrated that they successfully integrate the client protection principles into their practices and joined the rapidly growing list of institutions that are Smart Certified. Today, we’re pleased to share that the number of clients across all the Smart Certified institutions surpassed the 15-million-client benchmark.
To date, 28 microfinance institutions, from Latin America to Eastern Europe and South Asia, have achieved Smart Certification, including some of the world’s largest and best-known MFIs. These institutions are not only ensuring that their clients are equipped and best positioned to effectively use financial services, they’re also demonstrating to their respective markets and the global industry the good business that is responsible microfinance.
“Momentum to improve client protection is accelerating, with scores of MFIs across the globe improving their client protection practices, and being recognized for it through certification,” stated Isabelle Barrès, director of the Smart Campaign, in a press release. In Eastern Europe, there are certified institutions in Azerbaijan, Tajikistan, Bosnia, Serbia, and Kyrgyzstan. In Kyrgyzstan, with the certification of the nation’s network of FINCA MFIs, the country’s market crossed an important threshold. “As measured by MixMarket data, more than 50 percent of all microfinance clients in Kyrgyzstan do business with certified MFIs,” noted Barrès. The certified MFIs in Kyrgyzstan include the first formal financial institution serving low-income entrepreneurs in the region, as well as a relatively young institution, and encompass a range of service offerings like individual, group, and agricultural loans. Elsewhere in the region, the proportion of clients in certified institutions by country market is about 45 percent in Bosnia, and 40 percent in Tajikistan.
> Posted by Alexandra Rizzi, Deputy Director of the Smart Campaign, and Jami Solli, Independent Consultant and Founder of the Global Alliance for Legal Aid
When clients are facing loan default, they’re often in the most precarious financial position of their lives. As we detailed on this blog last week, navigating the default process can be exceedingly complex for clients. It can be complex for providers, too. No doubt, on both ends the stakes are high. In a new Smart Campaign research report released last week, What Happens to Microfinance Clients who Default?, we examined how providers behave at this juncture and the factors informing these practices.
The research team selected three very different markets to compare – Peru, India, and Uganda.¹ An analysis of three markets does not represent the entire sector. However these three countries represented great diversity in legal and regulatory systems, market infrastructure, in particular credit reporting, and use of group versus individual loans, among other factors. These three countries are also locations where the Smart Campaign has cultivated supporters and partners, which persuaded providers to share information on sensitive debt collection practices.
In total, we conducted interviews with 44 providers. In addition to MFIs, the most helpful interviews were with credit bureaus. Fonts of information, they helped us understand the topography of market debt as well as the information MFIs have when making decisions. And, as we came to understand, information was a critical determinant to what actions MFIs took when a client defaulted.
> Posted by Nadia van de Walle, Senior Africa Specialist, the Smart Campaign
The risks associated with the recent U.S. boom in subprime auto loans for the working poor are compounding, a series of articles recently published by The New York Times indicates. The articles report on the Times’ extensive investigation on the subject, which included the examination of over 100 bankruptcy cases, dozens of civil lawsuits against lenders, and hundreds of loan documents. The series draws attention to companies lending to those on the financial margins who often have questionable or missing credit histories and who are purchasing typically pretty old, low-quality cars. Lenders have lowered credit standards to widen their pool of borrowers, a risky practice incentivized by an influx of money from investors looking for a hot market and keen to securitize. Subprime auto loans have increased by 130 percent in recent years, and in 2014 they accounted for one in four auto loans.
In addition to viewing this through our did-we-learn-nothing-from-the-subprime-mortgage-crisis?! glasses and seeing potential systemic repercussions, one can take the consumer rights vantage point and see the scary picture of a world in which the underbanked or financially excluded are given two kinds of options: bad and really bad. We decided to score the features of this market against the seven Client Protection Principles of the Smart Campaign. Since the Client Protection Principles are a do-no-harm standard, we expect markets to meet seven out of seven principles to earn our endorsement. Let’s see how subprime auto loans stack up.
> Posted by Juan Blanco, Associate, Financial Inclusion 2020, CFI
In the client protection section of the FI2020 Roadmap to Financial Inclusion, a specific recommendation was made for financial providers to embrace consumer protection as part of their professional identity, and applying a “financial consumer bill of rights” was identified as a key action point.
Looking into the state of this industry area for our upcoming FI2020 Progress Report on Financial Inclusion, I came to realize that the subject of consumers’ bills of rights is not as straightforward as it seems. Although the recommendation from the roadmap was aimed specifically at providers, the truth is that this is an area where a diversity of players is getting involved. I found a range of approaches: codes of conduct, codes of ethics, charters of rights, and bills of rights, coming from a wide spread of stakeholders, from MFIs to global associations to governments. At the heart of each of these initiatives was the same objective: for service providers to operate ethically and responsibly.