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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Bank CEO Briefing Paper on Consumer Protection Laws
Presented by the KBA Legal Sub-Committee
Ver. 13 June 2013
Overview
This paper covers the new Consumer Protection Act and Central Bank of Kenya Prudential Guidelines
on Consumer Protection, noting areas which impact bank operations, policies and marketing.
It concludes with the Kenya Bankers Association (KBA) Alternative Dispute Resolution Model and
customer complaint handling timelines which have been approved by the KBA Governing Council for
bank adoption.
CONSUMER PROTECTION LAWS
Since the promulgation of the Constitution of Kenya 2010, there has been increased focus on the area of
consumer protection. Starting with the constitution itself at Article 46, consumer rights are recognized
and 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 14th
March, 2013.
The banking regulator, The Central Bank of Kenya, has also not been left behind. The CBK has issued new
guidelines on Consumer Protection which came into effect on 1st
January, 2013.
The import of this new legal environment relating to consumer protection is that banks, as suppliers of
financial services, are now legally obliged to uphold the rights of the consumers of their services and
failure to do so will attract legal sanction both from the courts and from the regulator. The environment
has 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 Consumer
Protection Act to focus on the financial services sector and the consumer issues that arise therein. This
initiative has however slowed down though not entirely shelved. The existence of this initiative is yet
another 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 on
banks as well as a review of the Prudential Guidelines on Consumer Protection.

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The Consumer Protection Act
The 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 meets
prescribed requirements. The requirements are yet to be prescribed. It may impact on the way
that banks formulate their base rates.
2. Consumers can file a class action in spite of the provisions of the consumer agreement. This
means that banks may face action from a large number of customers in the event of action such
as mis-selling. The courts will not be bound by the individual contracts between the bank and
the 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 advisory
body in the area of consumer rights. This is a new body formed under the Act with a wide policy
and advisory mandate and works closely with the Cabinet Secretary. It has no representation
from KBA, which is worrying because the banking industry, being a sensitive industry may not
have 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. It
is 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 international
laws when interpreting how the Act applies. At the end of the day, what is favorable to the
consumer is what will prevail. This will also be extended where there are conflicting
laws/provisions on a matter.
7. Under unfair practices, S. 16 of the Act allows the consumer to cancel the agreement in the
event of unfair practices. The effect of this is to cancel all related agreements including
guarantees. This may affect banks’ transactions that are guaranteed. Oral evidence is also
admissible 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 give
advice to customers;
d. Having transparent systems and processes to facilitate full disclosure of all relevant facts
about the various products.
2. Proposals on the way forward: Institutions may now need to look into taking insurance for
regulatory 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

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customer-focused. Disclosure is another key consideration. This is a requirement under the Act
and Guidelines.
DETAILED PROVISIONS OF THE ACT
1. Part 3 deals with Unfair practices. Banks should refrain from unfair practices, which include
false, deceptive or misleading representations and unconscionable representations.
2. Under Sec 7, any ambiguity that allows for more than one reasonable interpretation of a
consumer agreement shall be interpreted in favour of the consumer. This goes to indicate how
clear our communication must be.
3. Under Sec 20, the provision in the Hire Purchase Act on repossession is emphasized, and a bank
cannot repossess an asset where a customer has paid 2/3rd
or more without leave of court.
4. Under Sec 54, a consumer who receives a credit card without signing an application form for it
shall only be deemed to have entered into a contract with its supplier on first using the card
5. Under Sec 58 (2), a lender who offers to provide or to arrange for insurance required under a
credit agreement shall at the same time disclose to the borrower in writing that the borrower
may 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 otherwise
be due, the invitation must disclose whether or not interest will accrue on the unpaid amount
and the amount by which it will accrue. In default of such disclosure the lender loses the right to
recover such interest that may have accrued.
7. Under section 61, no default charges may be levied apart from reasonable costs of recovery, e.g.
legal costs, cost of dishonored cheque, cost of security realization, etc. Thus default interest
would appear to be disallowed. This provision appears not to recognize the opportunity cost
to the bank of a loan default by a borrower and the fact that it is usually a contractual
provision 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 charge
or penalty. Upon such payment, the borrower is entitled to refund of the unutilized portion of
the cost of the credit. This section appears to make illegal the levying of the Early Repayment
Fee. Banks need to consider this and change their loan terms and conditions accordingly.
Moreover, seeing that effective March 14th 2013 banks are expressly prohibited from
charging early repayment fees, charges that have been levied following this date would need
to be credited back to the customer.
9. Under Sec 65, a lender shall deliver to a borrower an initial disclosure statement on or before
the time the borrower enters into agreement disclosing the prescribed information and issue
subsequent 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 insurance
provided that the bank has the right to disapprove on reasonable grounds the insurer
selected by the borrower.
c. Borrower can terminate an optional service by giving a 30-day notice.

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11. Disclosure of information by supplier must be clear, comprehensible and in accordance with the
standards set under the Standards Act.
12. Customers have right to go to the High Court without any limitations. Any limitation to
arbitration 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 be
binding.
Central Bank Prudential Guidelines on Consumer Protection
The relationship between a bank and its customer should be guided by the following principles:
1. Fairness
2. Reliability
3. Transparency
4. Equity
5. Responsiveness
Institutions 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 with
customers which calls for more knowledgeable, well-trained, empowered, responsible and mature staff
as well as a paradigm shift from making money out of the customer to helping the customer meet his
financial needs. Institutions need to find out and understand the customer’s needs and his appreciation
of 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 complaints
and CBK can audit compliance with these timelines.
KBA Alternative Dispute Resolution (ADR) Model
Following the enactment of the Consumer Protection Act, 2012 and in line with the new CBK Prudential
Guidelines on consumer protection that have introduced regulations on how financial service providers
handle customer complaints and disputes, the Kenya Bankers Association (KBA) developed an Alternative
Dispute Resolution (ADR) Model which will see the industry improve customer relations while operating
within the new laws and regulations.
The KBA Model that was approved by the Governing Council introduces the establishment of internal
tribunals/service councils that are mandated by management to address customer disputes on a regular

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basis. Therefore, these formal internal ADR structures would ensure banks meet expectations of the
regulator and their customers.
KBA recommends that banks revised their customer agreements to include a dispute resolution clause
that promotes alternative dispute resolution methods, including third party mediation as ascribed by
the 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 authority
to assist the business units in settling customer disputes through negotiation techniques. The Terms of
Reference or these units include:
1. Composition: Internal senior managers, certified or trained mediators/arbitrators from
Legal, Operations & Credit
2. Mandate: Have authority/ decision rights to give settlement rulings on behalf of the bank

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3. Consistency: Hold Tribunal/Service Council monthly or bi-monthly [based on volume or
duration 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, and
enable comprehensive returns to CBK Banking Supervision
5. Governance: Report to a bank Executive Director (Retail/CFO/Operations). Generate reports
with accountable Executive Director for submission in conjunction with Customer Service
Quality reports for the Board of Directions
This internal ADR structure would provide the customer with the final bank position so that the customer has
an 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 which
customer complaints and disputes are handled by the bank. Below is the industry standard (orange =
KBA industry standard; black = CBK Guideline):

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Industry Escalation Path:
Cases that the Internal Tribunals are not able to settle can be referred to a Banking Industry Mediation
Centre that will be set up by KBA but managed by third party with independent mediators with expertise in
banking/financial services and certified in CIS regulation. The goal is to set up the Banking Industry Mediation
Centre by the Third Quarter/2013.
Bank ADR Training:
KBA partnered with Strathmore School of Law’s Dispute Resolution Center (SDRC) to hold a training program
for KBA members. The three day course covered the following areas:
- The Changing Environment [Consumer Law, Central Bank Expectations and Regulations under the
Prudential 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 internal
capability in the area of negotiations and mediations so as to mitigate litigation risk associated with
consumer protection.
[End of Document]