Consumer protection diagnostic study - FSD Kenya

4 • CONSUMER PROTECTION DIAGNOSTIC STUDY: KENYA
Chapter 3
HIGHLIGHTS FROM DIaGnOSTIC FInDInGS anD
ReCOMMenDaTIOnS
Mass market financial services are growing at an impressive rate in Kenya,
generating significant benefits for lower income consumers. Driving this
expansion is a broad array of financial service providers. The financial sector
regulators provide some consumer protections to the clients of regulated
institutions, but such provisions vary by financial institution type and
are incomplete and inconsistent across the market as a whole. There is
no general or marketwide consumer protection law or authority, and
therefore users of informal financial service providers – 65% of the population
-- lack legal protection entirely. As a result of the absence of an entity with
market-wide jurisdiction, a comprehensive Kenyan approach to financial
consumer protection and recourse has yet to find footing in policy or practice.
A growing body of evidence from consumer research in Kenya suggests
that the welfare of consumers is compromised by the lack of effective
price disclosure and dispute resolution mechanisms, and by abusive
practices.
The findings of this diagnostic confirm a wide range of practice around
disclosure of the prices and conditions of different financial services. For
example, loan prices are quoted using a bewildering array of pricing formulas.
The large number and type of added fees and commissions adds to the
confusion for consumers, especially those new to formal finance. The report
addresses these variations in practice in detail, by financial service sector (e.g.,
mobile payment service providers, banks, SACCOs, etc.). The findings draw
attention to the particular importance of improved transparency in
mass market financial services.
Financial services are inherently more complex than most goods or other, more
tangible services. On the supply side, providers do not always provide clear
information about their products through from the initial marketing and sales
process to actual delivery of the service. On the demand side, many consumers
that are new to formal finance and are challenged to learn a very different
set of rules and structures from those used by the informal arrangements
with which they are familiar. They find it difficult to comprehend the prices,
key terms and conditions, and all the other details of formal contracts. This
demand-side challenge is exacerbated when more than half of mass market
consumers have limited numeracy skills.
In these circumstances, consistent and effective disclosure is a necessary
preventive measure. It can reduce up-front the types of confusion that
can easily lead to problems – problems such as misunderstandings
about prices, consequences of late payments, or conditions for payment
of insurance claims. Standardisation of wording and formats also merits
further investigation. When financial access is growing rapidly, as in Kenya,
consumers should be able to learn a single set of rules of the game, rather
than having to wrestle with different disclosure formats for different providers
and products.
The importance of readily accessible recourse and dispute resolution
mechanisms emerged as a second priority from the diagnostic findings.
Given the growth in access to finance and the number and diversity of providers
and products, it is inevitable that some consumers will experience confusion or
problems in the normal course of business. Consider that M-PESA customers
conduct a total of 650,000 transactions per day, on their handsets and/or
interacting with an agent. This suggests that in the mass market in particular,
dispute resolution mechanisms need to be built into daily operations so
that providers can address consumers’ questions and complaints quickly
and efficiently.
The diagnostic research reveals two aspects of fair treatment that raise
concerns. First, consumers relate some specific experiences with abusive
practices that result from incidents of fraud or carelessness on the part
of provider staff. Second and equally important, consumers express
anxiety about their experience with some industry practices such as
that merit closer oversight than they now receive.
Consider, for example, the outsourcing of credit collections in banking and
other sub-sectors. Outsourced collections itself is not inherently abusive,
but the collections process offers ample opportunity for abuse, and
those opportunities increase when the behaviour of third-party debt
collectors and auctioneers is not adequately supervised by the service
provider or the sector regulator. This is where consumer experience research
can be particularly useful. Focus Group Discussions consistently revealed
abusive collections practices and cases where those involved had no idea of
their rights and whether what they were experiencing was appropriate or not.
After seeing these FGD results, the team was particularly interested in seeing
quantifiable figures from the consumer survey about how many respondents
experienced these practices and concerns. However, the survey results showed
very low incidence of abusive collections, in contradiction to the FGD evidence.
Given the breadth of the FGDs across regions and communities, the team
suspects that the discrepancy could be due to a disinclination of respondents
to share their experiences in a short, impersonal survey but more willing to
discuss these experiences and concerns in a supportive group setting. This
would suggest that the FGD results could have more validity than those of the
consumer survey. Closer investigation of actual practices by third-party debt
collectors is also advisable.
This document presents the components of an incremental path to a
comprehensive financial consumer protection regime in Kenya. The first
phase consists of practical and pragmatic solutions that address the
most immediate priorities and can be implemented under the existing
mandate and oversight of the financial sector regulators. The rationale
for this approach is based largely on practical considerations. The financial
regulators currently have the strongest legal authority and technical capacity
to introduce basic directives for providers in their respective sectors. And