Consumer Protection Act Brief


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Please find the briefing note on the Consumer Protection Act. It includes the KBA Alternative Dispute Resolution Model which was approved by the Governing Council as the industry model and approach on handling longstanding customer complaints and disputes.

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Consumer Protection Act Brief

  1. 1. 1 | P a g eBank CEO Briefing Paper on Consumer Protection LawsPresented by the KBA Legal Sub-CommitteeVer. 13 June 2013OverviewThis paper covers the new Consumer Protection Act and Central Bank of Kenya Prudential Guidelineson Consumer Protection, noting areas which impact bank operations, policies and marketing.It concludes with the Kenya Bankers Association (KBA) Alternative Dispute Resolution Model andcustomer complaint handling timelines which have been approved by the KBA Governing Council forbank adoption.CONSUMER PROTECTION LAWSSince the promulgation of the Constitution of Kenya 2010, there has been increased focus on the area ofconsumer protection. Starting with the constitution itself at Article 46, consumer rights are recognizedand given expression through the written law. In the spirit of the provisions of the Constitution,Parliament enacted the Consumer Protection Act in December, 2012. The Act came into force on 14thMarch, 2013.The banking regulator, The Central Bank of Kenya, has also not been left behind. The CBK has issued newguidelines on Consumer Protection which came into effect on 1stJanuary, 2013.The import of this new legal environment relating to consumer protection is that banks, as suppliers offinancial services, are now legally obliged to uphold the rights of the consumers of their services andfailure to do so will attract legal sanction both from the courts and from the regulator. The environmenthas changed and banks must change with it in order to remain in business.There is also an initiative by the Ministry of Finance to come up with a Financial Services ConsumerProtection Act to focus on the financial services sector and the consumer issues that arise therein. Thisinitiative has however slowed down though not entirely shelved. The existence of this initiative is yetanother testament to the focus that is now being placed on protection of consumer rights.The following is an overview of some of the provisions of the Consumer Protection Act as impacts onbanks as well as a review of the Prudential Guidelines on Consumer Protection.
  2. 2. 2 | P a g eThe Consumer Protection ActThe purpose of this Act is to promote and advance the social and economic welfare of consumers.Some key provisions of the Act:1. Definition of floating rate: it must bear a specified relationship to a public index that meetsprescribed requirements. The requirements are yet to be prescribed. It may impact on the waythat banks formulate their base rates.2. Consumers can file a class action in spite of the provisions of the consumer agreement. Thismeans that banks may face action from a large number of customers in the event of action suchas mis-selling. The courts will not be bound by the individual contracts between the bank andthe respective customers.3. Implied terms in the Act cannot be excluded from contracts.4. Formation of a Kenya Consumer Protection Advisory Committee which is a policy and advisorybody in the area of consumer rights. This is a new body formed under the Act with a wide policyand advisory mandate and works closely with the Cabinet Secretary. It has no representationfrom KBA, which is worrying because the banking industry, being a sensitive industry may nothave its concerns taken into account when formulating policies on consumer protection.5. Consumer representation on all regulatory bodies now mandatory under section 94 of the Act. Itis not clear how this will be implemented with regard to the CBK.6. Interpretation of the Act – the law now allows for considerations of foreign and internationallaws when interpreting how the Act applies. At the end of the day, what is favorable to theconsumer is what will prevail. This will also be extended where there are conflictinglaws/provisions on a matter.7. Under unfair practices, S. 16 of the Act allows the consumer to cancel the agreement in theevent of unfair practices. The effect of this is to cancel all related agreements includingguarantees. This may affect banks’ transactions that are guaranteed. Oral evidence is alsoadmissible in respect of unfair practices and this is an area to watch out for.Implications of the Act:1. Need for simplified documentation: This can be achieved by:a. Engaging a communications editor to review documentation for simplicity;b. Having FAQs, explanatory notes and Fact Sheets for the various products;c. Certification of sales staff and other customer facing staff to empower them to giveadvice to customers;d. Having transparent systems and processes to facilitate full disclosure of all relevant factsabout the various products.2. Proposals on the way forward: Institutions may now need to look into taking insurance forregulatory risks in view of the many regulatory demands. Besides reviewing our terms &conditions, industries will need to review their business practices and ensure that they are
  3. 3. 3 | P a g ecustomer-focused. Disclosure is another key consideration. This is a requirement under the Actand Guidelines.DETAILED PROVISIONS OF THE ACT1. Part 3 deals with Unfair practices. Banks should refrain from unfair practices, which includefalse, deceptive or misleading representations and unconscionable representations.2. Under Sec 7, any ambiguity that allows for more than one reasonable interpretation of aconsumer agreement shall be interpreted in favour of the consumer. This goes to indicate howclear our communication must be.3. Under Sec 20, the provision in the Hire Purchase Act on repossession is emphasized, and a bankcannot repossess an asset where a customer has paid 2/3rdor more without leave of court.4. Under Sec 54, a consumer who receives a credit card without signing an application form for itshall only be deemed to have entered into a contract with its supplier on first using the card5. Under Sec 58 (2), a lender who offers to provide or to arrange for insurance required under acredit agreement shall at the same time disclose to the borrower in writing that the borrowermay purchase the same through an agent or insurer of their choice.6. Under Sec 60 (1), if a lender invites a borrower to defer making payment that would otherwisebe due, the invitation must disclose whether or not interest will accrue on the unpaid amountand the amount by which it will accrue. In default of such disclosure the lender loses the right torecover such interest that may have accrued.7. Under section 61, no default charges may be levied apart from reasonable costs of recovery, costs, cost of dishonored cheque, cost of security realization, etc. Thus default interestwould appear to be disallowed. This provision appears not to recognize the opportunity costto the bank of a loan default by a borrower and the fact that it is usually a contractualprovision agreed to by the borrower. It is likely to impact on banks’ income.8. Under section 62 (1), a borrower is entitled to pre-pay his loan at any time without any chargeor penalty. Upon such payment, the borrower is entitled to refund of the unutilized portion ofthe cost of the credit. This section appears to make illegal the levying of the Early RepaymentFee. Banks need to consider this and change their loan terms and conditions accordingly.Moreover, seeing that effective March 14th 2013 banks are expressly prohibited fromcharging early repayment fees, charges that have been levied following this date would needto be credited back to the customer.9. Under Sec 65, a lender shall deliver to a borrower an initial disclosure statement on or beforethe time the borrower enters into agreement disclosing the prescribed information and issuesubsequent disclosure statements annually for fixed credit (Sec 66) and monthly for open credit(Sec 67).10. Other provisions relating to Credit Agreements in Part 7 include the following:a. Cost of borrowing not payable if lender fails to provide statements;b. Credit insurance may now be obtained from any insurer who provides such insuranceprovided that the bank has the right to disapprove on reasonable grounds the insurerselected by the borrower.c. Borrower can terminate an optional service by giving a 30-day notice.
  4. 4. 4 | P a g e11. Disclosure of information by supplier must be clear, comprehensible and in accordance with thestandards set under the Standards Act.12. Customers have right to go to the High Court without any limitations. Any limitation toarbitration is invalid in so far as it prevents the consumer from going to the High Court.However, parties may agree on other dispute resolution mechanisms whose decision would bebinding.Central Bank Prudential Guidelines on Consumer ProtectionThe relationship between a bank and its customer should be guided by the following principles:1. Fairness2. Reliability3. Transparency4. Equity5. ResponsivenessInstitutions should act fairly and reasonably in all dealings with customers.The prohibitions in the guidelines point towards a new way of doing business and dealing withcustomers which calls for more knowledgeable, well-trained, empowered, responsible and mature staffas well as a paradigm shift from making money out of the customer to helping the customer meet hisfinancial needs. Institutions need to find out and understand the customer’s needs and his appreciationof a product risks before entering into a contract with the customer.The customer must be allowed a cooling off period.Resolution of customer complaints is given prominence. Timelines are given for resolving complaintsand CBK can audit compliance with these timelines.KBA Alternative Dispute Resolution (ADR) ModelFollowing the enactment of the Consumer Protection Act, 2012 and in line with the new CBK PrudentialGuidelines on consumer protection that have introduced regulations on how financial service providershandle customer complaints and disputes, the Kenya Bankers Association (KBA) developed an AlternativeDispute Resolution (ADR) Model which will see the industry improve customer relations while operatingwithin the new laws and regulations.The KBA Model that was approved by the Governing Council introduces the establishment of internaltribunals/service councils that are mandated by management to address customer disputes on a regular
  5. 5. 5 | P a g ebasis. Therefore, these formal internal ADR structures would ensure banks meet expectations of theregulator and their customers.KBA recommends that banks revised their customer agreements to include a dispute resolution clausethat promotes alternative dispute resolution methods, including third party mediation as ascribed bythe KBA ADR model which seeks to uphold the bank-customer relationship.Bank Internal Tribunals:KBA recommends that the internal ADR structures are composed of senior managers who have the authorityto assist the business units in settling customer disputes through negotiation techniques. The Terms ofReference or these units include:1. Composition: Internal senior managers, certified or trained mediators/arbitrators fromLegal, Operations & Credit2. Mandate: Have authority/ decision rights to give settlement rulings on behalf of the bank
  6. 6. 6 | P a g e3. Consistency: Hold Tribunal/Service Council monthly or bi-monthly [based on volume orduration of outstanding cases i.e. dispute cases open for more than 20 days]4. Use of Technology: To monitor, track and settle outstanding complaints and disputes, andenable comprehensive returns to CBK Banking Supervision5. Governance: Report to a bank Executive Director (Retail/CFO/Operations). Generate reportswith accountable Executive Director for submission in conjunction with Customer ServiceQuality reports for the Board of DirectionsThis internal ADR structure would provide the customer with the final bank position so that the customer hasan option to resolve/settle the case or seek third party intervention (mediation, arbitration or the courts).KBA timelines on Customer Complaint Handling:The CBK Prudential Guidelines directs banks to document and disclose the process through whichcustomer complaints and disputes are handled by the bank. Below is the industry standard (orange =KBA industry standard; black = CBK Guideline):
  7. 7. 7 | P a g eIndustry Escalation Path:Cases that the Internal Tribunals are not able to settle can be referred to a Banking Industry MediationCentre that will be set up by KBA but managed by third party with independent mediators with expertise inbanking/financial services and certified in CIS regulation. The goal is to set up the Banking Industry MediationCentre by the Third Quarter/2013.Bank ADR Training:KBA partnered with Strathmore School of Law’s Dispute Resolution Center (SDRC) to hold a training programfor KBA members. The three day course covered the following areas:- The Changing Environment [Consumer Law, Central Bank Expectations and Regulations under thePrudential Guidelines; and Credit Information Sharing/CIS]- Negotiation Theory and Refining Mediation Skills- Innovative Ways to Negotiate with Defaulting Customers [Housing Finance Case Study]A total of 68 bank employees participated in the training. Banks are encouraged to continue building internalcapability in the area of negotiations and mediations so as to mitigate litigation risk associated withconsumer protection.[End of Document]