Philippines: Bangko Sentral ng Pilipinas and Consumer Protection
The case from India describes IFC’s early initiative to advance responsible finance across all pillars since it began credit bureau work in 2009. In 2010, a multiyear collaboration began with industry networks and the Smart Campaign on client protection principles, risk-management, and financial awareness.
The Central Bank of the Philippines (Bangko Sentral ng Pilipinas; BSP) pursues many responsible finance initiatives. It has established a framework for consumer protection, enhanced implementation of the Truth in Lending Act (see Box 3.1), adopted market conduct regulation, and set up a Financial Consumer Affairs Group (FCAG) as part of the bank.
The Alliance for Financial Inclusion (AFI) comprises 100 policymaking and regulatory member institutions from more than 80 developing and emerging countries. BSP serves as chair of the AFI steering committee, chairs the AFI Consumer Empowerment and Market Conduct (CEMC)Working Group, and is an active member of Mobile Financial Services, Financial Inclusion Data, and Financial Integrity working groups.
This case study highlights the BSP work in consumer protection and market conduct. It also shows one example of the power of peer-to-peer exchanges promoted by AFI.
BSP believes “financial inclusion is a worthy policy objective that should be pursued alongside the promotion of the stability and efficiency of the financial system.” The general approach promotes an enabling policy and regulatory environment for market-based solutions to address financial access while maintaining proportionate application of sound regulatory and supervisory principles. BSP is guided by the framework of financial inclusion that includes:
- Provision of a wide range of financial services (credit, savings, payments, and insurance) to serve the demands of different market segments;
- Availability of financial products that are appropriately designed, priced, and tailored to market needs and capacities;
Participation of a wide variety of strong, sound, and duly authorized financial institutions that use innovative delivery channels to provide financial services to more Filipinos; and
- Effective interface of bank and nonbank products and delivery channels, technology, and innovation to reach the financially excluded.
With support from AFI, BSP visited Bank Negara Malaysia (BNM) to better understand BNMs practices of credit disclosure reforms. BSP’s aim was to ensure transparency and information standards were met by all credit providers on all credit products offered in the country. During the visit, BSP reviewed the BNM disclosure sheet and discussed BNMs experiences with adoption procedures and practices.
BSP revised its disclosure requirements based on knowledge gained from its visit and market research it conducted to better understand how new disclosure reforms could improve the understanding and decision making of consumers. This research, conducted in collaboration with CGAP, included initial testing of draft disclosure formats with low-income microfinance consumers, which led to revisions to the format to enhance clarity and consumer understanding of the key terms of the credit product. As a follow-up, BSP and CGAP are using mystery shopping methodologies to measure the quality of information provided to consumers during the sale of credit products before and after the Truth in Lending Act takes effect.
A key lesson from BNM was to involve all key players in revising the disclosure information requirements and practices to ensure successful adoption. Development and adoption of the new BSP disclosure system involved a broad consultation process with credit providers, and review by the banking association and the NGO MFIs, who are not under the jurisdiction of the BSP. The different jurisdictions over financial institutions that provide credit also required the development of memorandums of understanding between BSP and the regulators responsible for cooperatives and for NGO MFIs where these regulators committed to issue similar Truth in Lending Act requirements to those that would be issued by the BSP.
Key Elements of the Disclosure Reform
- The Truth in Lending Act is designed to protect consumers from a lack of awareness of the true cost of credit and help them make informed decisions when they borrow. Being able to compare prices combined with effective transparency regulations enables price shopping and stimulates competition, thus lowering prices and improving product quality.
- The BSP and other regulatory agencies issued similar regulations to cover all credit providers, which is an element of an effective disclosure regime because it covers the entire market. These regulations mandate full disclosure of all charges related to the extension of credit.[i] The reform requires all credit providers to charge interest on the outstanding balance of a loan at the beginning of an interest period and consider all charges incident to the loan in computing the effective interest rate.
- All credit providers are required to use a standard, simple disclosure format to ensure that borrowers are provided with the information they need to understand their loan transactions.
- One of the most important elements of BSP’s disclosure reform is its comprehensiveness. Disclosure regulations cover the entire financial sector, regardless of the type of financial service provider. The BSP issued several tailored circulars that covered banks and nonbank financial institutions under BSP supervision, such as quasi-banks, non-stock savings and loan associations, credit card companies, investment houses, and pawnshops. It also issued a circular for other credit providers not covered by BSP issuances, such as NGOs and in-house financiers that include retailers. BSP also harmonized the policy with the Securities and Exchange Commission, the Insurance Commission, and the Cooperative Development Authority.
BSP collected baseline data on the state of transparent lending practices in the market prior to the effective date of the regulation. To gauge the impact of the regulation, another round of evaluation will be conducted one year later. The results of the research will be considered by the BSP to inform future policies.
Success Factors and Challenges
- A main success factor was the previously established relationship between BSP and FSPs in the Philippines. There was a history of frequent consultation and outreach. BSP’s emphasis on coordination and harmonization of supervisory and regulatory methods with the creation of the Financial Sector Forum in 2004 enabled the organization of stakeholders, who were accustomed to working together and harmonizing regulatory reporting requirements.
- AFI’s ability to support targeted exchanges among members allowed BSP to exchange ideas and discuss plans with a peer who had experienced obstacles and accomplishments in the design and implementation of a new disclosure system.
- BSP notes that supervision is one of the most effective functions of consumer and market conduct regulation. BSPs dedicated consumer protection unit, FCAG, is unable to provide supervision based on its mandate. For supervision, FCAG must pass the possible violation to the examination group. The examination group follows a risk-based approach to supervision, and consumer protection concerns are not always addressed because they are considered a lower risk. FCAG sees onsite examination and use of market surveillance tools as key to fulfilling its mandate. BSP is seeking to change the FCAG mandate by reorganizing functions and securing a legislative amendment, if necessary. The proposal for this change has been submitted. Hopes are high that the approval will be granted next year.
- Learn from peers. Even though the process and institutional mandates may be different, practices and policies can be relevant when adapted to the context. Peers are also forthcoming about how they addressed challenges and can provide helpful advice.
- Involve all stakeholders in the process of review and comment when a new regulation will affect their current practices. Stakeholder consultation facilitates adoption. If a mechanism exists to accomplish consultations, the process is expedited.
- Ensure a comprehensive regulatory framework for all FSPs, including banks, NGOs, cooperatives, and pawnshops. To ensure a comprehensive approach, engage with the appropriate regulatory authorities in other sectors of the financial services industry, such as insurance commissions, cooperative development authorities, and industry self-regulatory bodies, including MFI networks.
- Seek ways to revise past mandates that may limit desired new directions. Mandates may need to be revised given advances in technology or policy emphasis on responsible financial inclusion.
- Maintain ideals as a learning institution. BSP stresses the importance of continual learning to respond to innovations in financial services. Field visits for policy makers, seminars and active engagement with FSPs and their associations, and communications campaigns for the public are equally important. These learning experiences keep BSP open to new ideas and prepared to respond.
- Collect baseline data and design systems to measure impact. These efforts can inform future policy directions and reforms.