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 7 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.
The framework of the Model Law follows the Smart Campaign’s 7 Client Protection Principles, and so it covers the topics of appropriate product design and delivery; prevention of overindebtedness; transparency; responsible pricing; fair and respectful treatment of clients; privacy of client data; and mechanisms for complaint resolution. There is also a section covering the establishment of a dedicated supervisory authority with broad functions relating to the regulation, supervision and registration of financial-services providers, market monitoring and enforcement.
Why do we care about consumer protection in the financial sector? Consumer protection (and financial capability) are considered to be key to increasing responsible access to financial services while ensuring that expanded access will benefit the economy and consumers. A strong financial consumer protection framework helps protect consumers from possible market abuse and helps consumers benefit from well-informed decisions about how best to manage and use financial services. Consumer protection is especially important in an environment where financial products are increasingly complex; are being delivered through new distribution channels (such as mobile phones); and where there is an increasing range of new non-bank service providers (such as telecommunication companies).
Is there a linkage between consumer protection and meeting financial inclusion targets? Examples of such targets include the World Bank’s Universal Financial Access Goal for 2020 and the financial inclusion Maya Declaration targets made by members of the Alliance of Financial Inclusion. Financial consumer protection frameworks, properly designed, implemented and supervised, instill trust in consumer products and services of the financial sector. Such frameworks can thus be important enablers for the uptake of financial products and services.
But how useful will the Model Law really be? There is no doubt that any attempt at implementation of the Model Law will require adjustments to reflect the country context, including supervisory resources, the state of financial markets, constant innovations in products, delivery channels and providers, and existing institutions and legal frameworks. Moreover, even wholesale adoption of the Model Law will still require careful consideration of the subordinate legislation to deal with such details as the specific features of different types of financial products and services. Nonetheless, the Model Law could be a valuable resource on individual issues for policymakers who are working on new consumer-protection frameworks. As a high-level diagnostic tool, it could the basis for industry codes of conduct. And its commentary section is likely to be useful background to the issues addressed in the Model Law.
In summary: I think the Model Law is a potentially useful resource for all those who recognize the importance of financial consumer protection and who are seeking to meet related financial-inclusion targets. Congratulations to the authors!