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Need for consumer protection in the financial sector in zambia
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Need for consumer protection in the financial sector in zambia


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  • 1. THE NEED FOR CONSUMER PROTECTION IN THE FINANCIAL SECTOR IN ZAMBIA Bank Supervision Department Presentation by: Calvin Habasonda 1
  • 2. OUTLINE OF PRESENTATION1. Introduction2. Justification for Consumer Protection3. Bank of Zambia Perspective4. Framework for Consumer Protection5. Consumer Protection vs. Financial Inclusion6. Need for Information by Consumers7. Role of Market Discipline in Expanding Financial Markets8. Consumer Empowerment9. Consumers have rights10. General Consumer Protections11. Conclusion Bank Supervision Department Presentation by: Calvin Habasonda 2
  • 3. Introduction Consumer confidence and trust are necessary elements for a well-functioning financial system . Additional proportional and dedicated policy action to enhance financial consumer protection is needed. There is renewed policy and regulatory focus on consumer protection in the financial sector. Increased transfer of risks to households as well as the increased complexity of financial products and rapid technological changes while basic access to financial services and literacy are still limited. Rapid growth in the number of financial service providers has led to increase the risk that consumers face. Bank Supervision Department Presentation by: Calvin Habasonda 3
  • 4. Cont’d Low income and less experienced consumers are more vulnerable in the market place and need protection. Regulators must promote and integrate consumer protection with other financial inclusion and financial education policies. Deliberate effort required to ensure that consumers also adhere to their responsibilities. Major focus of any regulatory arrangements should be to legal recognition of financial consumer protection. Consumer protection framework objectives: fair treatment of consumers, proper disclosure regimes and transparent pricing, improved financial education, fair market conduct, confidentiality of consumer data and complaints handling procedures and redress mechanisms. Bank Supervision Department Presentation by: Calvin Habasonda 4
  • 5. Justification for ConsumerProtection Assumption that markets will appropriate benefits to participants does not always hold. Therefore, the need for regulatory framework to protect the vulnerable consumers from abusive practices. Appropriate regulation should seek to correct the imbalance and encourage market expansion by apportioning information disclosure at the right time. Relevant information has to be disclosed during the different stages of contractual engagement. The disclosure of information in manageable portions is necessary to avoid overloading the consumers, who can then better understand their rights and obligations. Similarly, regulation should seek to minimize the opportunity for regulatory arbitrage. Bank Supervision Department Presentation by: Calvin Habasonda 5
  • 6. Bank of Zambia Perspective BoZ acknowledges the importance of consumer protection in the financial sector. Consumer protection should be seen in the context of its immense contribution in leveling the playing field. Particularly important when dealing with retail customers who usually have less information and bargaining power . This can result in excessively high interest rates paid, lack of understanding about financial options, and insufficient avenues for redress. Although many financial institutions strive to adopt good consumer protection practices, others have used their information advantage or otherwise to increase profits at the expense of consumers who may find themselves over- indebted, under-insured or without a return on their investment. BoZ continues to pay particular attention to matters of consumer protection in pursuit of its overall mission statement of price and financial system stability. Bank Supervision Department Presentation by: Calvin Habasonda 6
  • 7. Framework for ConsumerProtection Robust legal and institutional arrangements necessary for a reliable and effective consumer protection framework. The law must provide for clear consumer protection rules relating to financial products and services. Similarly, there is need to review institutional arrangements to ensures thorough, objective, timely and fair implementation and enforcement of rules. New provisions in the BFSA to entrench good practices of consumer protection in the financial sector. Appropriate institutional structures needed to implement consumer protection provisions in the law. Bank Supervision Department Presentation by: Calvin Habasonda 7
  • 8. Consumer Protection vs. FinancialInclusion Emergency of financial inclusion as a policy priority calls for a balance between need to open financial markets and ensuring that such initiatives do not harm the consumers. Harm can take many forms: over-indebtedness, loss of savings or pledged assets when unscrupulous actors enter the market for short- term gain. High prices may be justified in hard to serve markets, but where left unchecked, there is a potential that some FSPs may over charge consumers. Predatory lending resulting in over-indebtedness has become prevalent in the financial markets. In extreme instances, some FSPs have abused their privileged positions through overzealous collections that often result in physical and emotional abuse of consumers. Bank Supervision Department Presentation by: Calvin Habasonda 8
  • 9. Need for Information byConsumers Efficient working of markets is premised on availability of information. Consumers of financial services, especially new customers, lack information about the financial system and financial transactions. Increasingly, FSPs serving these customers have a more superior set of information thereby disadvantaging consumers. Information gaps widen as more sophisticated financial products and services are offered. Expectation that competition can result in practices that contribute to a reduction in the information imbalance but only where the market is disciplined and provides sufficient information to customers before, during and after the contract has been agreed. However, where market forces do not result in high level of disclosure, providing information to customers in ways they can use it will help build financial literacy and ease new customers into the market. Bank Supervision Department Presentation by: Calvin Habasonda 9
  • 10. Role of Market Discipline inExpanding Financial Markets Consumers who demand information play an important role in ensuring transparency among financial institutions. Transparency in the market encourages institutions to compete on the basis of better products and services and lower costs. Ultimately the availability of quality retail financial services will draw in new customers and expand the market. Bank Supervision Department Presentation by: Calvin Habasonda 10
  • 11. Consumer Empowerment Given the role of consumers in enhancing market discipline, there is need for improving consumer financial literacy levels. A broad based program of financial education and information needs to be developed to increase the financial capability of consumer of financial services. Consumers should be educated and able to voice their opinions about the quality of financial services they are consuming. Financial institutions should actively participate in providing an environment where consumers are protected and therefore should make every effort to educate their customers to enable them make informed decisions on a wider range of consumer issues. Bank Supervision Department Presentation by: Calvin Habasonda 11
  • 12. Consumers’ Rights Promotion of consumer rights and obligations can lead to financial innovation which results in more suitable and appropriately priced products for customers. As a regulator, the Bank of Zambia seeks to create an environment where consumers’ right to be heard, right to information, right to choice and the right to redress are upheld. Right to confidentiality is particularly important for consumers of financial services. Bank of Zambia acknowledges the need to balance these rights with the need for financial institutions to innovate and grow. Bank Supervision Department Presentation by: Calvin Habasonda 12
  • 13. General Consumer Protections Fair market practices — financial service providers and their intermediaries must be fair in dealing with consumers and not exert undue pressure or influence on them. Equitable treatment — financial service providers must not create barriers of access to financial services. All consumers of financial services including the poor and vulnerable who may not be perceived as ‘income generating’ customers, deserve to be treated with equal respect and dignity. Disclosure — full disclosure of all relevant information to consumers, including interest rates and terms for loan products, and a schedule of other allowable fees and charges. Redress — formal complaints resolution mechanisms are needed for consumers to voice their concerns to their financial service provider and the industry regulator. Financial education — Consumer education is needed to balance information between consumers and providers of financial services. Credit counseling — In the event of over-indebtedness, credit counseling services are helpful in assisting consumers who are unable to meet their financial obligations. Confidentiality — maintaining the secrecy of customer information is very crucial as part of general consumer protection frameworks for financial service providers. Bank Supervision Department Presentation by: Calvin Habasonda 13
  • 14. Conclusion Case for consumer protection is well-founded given the sustained efforts aimed at financial inclusion. Implication is that an increasing number of vulnerable segments of the population will come on board as a result. With limited knowledge and understanding of financial products and services, consumers are more likely to be exploited. Need for legal protections for such categories of consumers. Legal framework needs to be underpinned by a robust institutional framework for implementing consumer protection. Work is currently on-going in these areas to ensure that sound consumer protection practices are entrenched in the financial sector in Zambia. Nonetheless, Bank of Zambia is already implementing some of the aspects aimed at offering consumer protection even in the absence of a comprehensive legal framework. Bank Supervision Department Presentation by: Calvin Habasonda 14