New CGAP report ponders opportunities for protecting poor consumers

Microfinance Focus, Feb 23, 2010: Close on the heels of borrower defaults in several microfinance markets and the debate over whether financial services for the poor are meaningful or not, several lawmakers in the United States and Europe are busy to put in place meaningful new protections for financial consumers. To explore the opportunities for protecting poor consumers, CGAP has come out with a report.

The report, “Consumer Protection Regulation in Low-Access Environments: Opportunities to Promote Responsible Finance”, explores whether consumer protection regulation is relevant in less developed markets, and if so, how it should be designed and implemented. It offers examples from countries around the world to illustrate what consumer protection regulation could look like in places where consumers are poor, access to finance is more limited, and regulatory capacity is overstretched.

“At its core, responsible finance means fair treatment of clients and ethical delivery of financial services in ways that protect their interests and enhance their welfare,” said Kate McKee, senior policy advisor at CGAP and co-author of a new report on consumer protection in developing countries.

“Regardless of whether the consumer is a fruit vendor in Ghana or a home buyer in the U.S. there are three main consumer protection goals,” said 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.”

According to the report, 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.

Some of the responsibility lies with consumers as well – 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.”

“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 start, the new CGAP report provides examples of basic consumer protection rules that 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 credit and increase competition, to the benefit of both Cambodian customers and markets.

‘Next generation’ initiatives can expand on areas like tougher rules on aggressive sales and deceptive marketing, or attention to new technology and delivery channels (like mobile banking).

“Ultimately,” said McKee,  “Regulation is not the only way to protect consumers. Industry standards and consumer awareness and financial capability programs also help build responsible financial markets.”

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