Financial Consumer Protections in Unprecedented Times
By Dave Grace and Elisabeth Rhyne
This piece also appears on the Financial Access Initiative site here
During the economic slowdown in response to the novel coronavirus, the position of financial institutions is in some ways analogous to that of medical workers fighting the virus—without the health risk. Financial institutions have a duty to help their clients, even though doing so exposes them to increased risk. This is especially true for microfinance institutions, financial cooperatives and other bankers who serve lower income and vulnerable people. For these providers, taking steps to help customers like forgiving loans or offering payment holidays potentially threatens their own survival. Financial institutions are asked to support their small business and household customers through this unprecedented situation, even while their own solvency is challenged.
Facing dire trade-offs, many financial institution leaders are unsure how to proceed. The Client Protection Principles have guided institutions on their responsibility to clients for over a decade. The Principles have provided a north star for the sector, and, especially through the Smart Campaign, a global movement to protect consumers, they have been translated into specific practices that hundreds of financial institutions around the world strive to implement. Today, with the larger and unfamiliar risks posed by the current situation, we believe it is more important than ever to turn to these core principles to help guide good practices. In this post, we survey the seven principles and describe how they apply in the unusual circumstances of the coronavirus slowdown.
One thing becomes abundantly clear in this review. In order to follow good practices, financial institutions must have the backing of regulators to allow them to extend support to others without endangering their own survival. Financial institutions are being asked to show forbearance to borrowers at the same time as depositors are withdrawing their savings to meet daily needs. They can best fulfill these critical needs if their regulators and investors shore up their liquidity and ultimately even allow them to reduce their capital. Financial institutions can best help others if they first put on their own oxygen masks before assisting other passengers on this bumpy ride.
The Client Protection Principles for Coronavirus Response:
Appropriate Product Design and Delivery. The most urgent need today is access to the everyday services people count on. Above all, people need to be able to access and move their money. That is why financial institutions serving the poor must be designated as essential businesses that are allowed to continue to offer services, with health and social distancing precautions in place and relying on digital services whenever possible. To make access to deposits feasible, policymakers should ensure that lender of last resort facilities are available to all licensed deposit-taking financial institutions – even if they aren’t supervised by a central bank. Most microfinance lenders have halted new loans, which while unfortunate, is probably necessary, unless governments can provide emergency loan assistance.
Prevention of Over-indebtedness. With the sharpest increases in global unemployment ever seen, some form of forbearance on loan collections and/or reporting to credit bureaus is necessary and ultimately in the best interests of both customers and bankers. The key here is for financial institutions to share the burden with customers, by rescheduling loans and foregoing accumulation of interest during any moratorium on collections. Governments must also share this burden if they want institutions to remain viable, by advancing sums equivalent to missed interest payments so that lenders can stay afloat.
Transparency. In times of confusion, proactive communication with clients is especially important. Using whatever media they can, lenders need to inform customers about their services during the slowdown: how, when, and where to access their money (and any limitations), what safety practices are in place, and the like. In negotiating loan forbearance, financial institutions should be clear and transparent about the increases in interest or fees they will be charged and should limit these to the extent feasible.
Responsible Pricing. This is not a time for price gouging. Instead, price increases should be held to a minimum. In some cases policymakers are requiring that transaction fees be waived, especially on digital transactions. This is not necessarily an appropriate move when banking or mobile money agents are involved, as it can result in agents withdrawing and the service becoming less available. In the case of adjustable rate loans, as authorities have reduced interest rates to make credit more affordable, such loan rate should also be adjusted downward for clients, too, based on local circumstances and support programs that are available to lenders.
Fair and Respectful Treatment of Clients (and staff). First off, staff and clients need to feel that branch offices provide a safe environment, with virus safety and hygiene precautions in effect. Social distancing, masks and sanitizing surfaces are among the new protocols that must be implemented. A more complex issue comes with increased pressure to collect loans. As financial institutions are desperate to keep repayments flowing in, staff, especially loan officers paid on commission, may be tempted to resort to high-pressure tactics, such as threats, harassment, and public shaming—even if they refrain from such practices in more normal times. Staff involved in lending operations must be trained and incentivized on correct collections behavior. To allow lenders to reduce the pressure on their clients, funders and supervisors must brace for much higher non-performing loans and expect capital buffers to do their job of absorbing losses. Regulatory forbearance will be needed for otherwise healthy institutions.
Privacy of client data. The data and health status of clients should be kept confidential. Most especially, it must not be used as a point of shaming. As necessary and required, the health status of employees and clients may be reported to public health officials, but not beyond. Financial providers should not ostracize clients with COVID-19. Clients using digital channels—especially new users—should also be given tips on how to protect their data in a time when fraud may be escalating.
Mechanisms for Complaint Resolution. In the current environment customers, staff and even senior managers are experiencing fear and anxiety. At the same time, they are implementing new processes that have not been fully tested but are needed rapidly. Errors, omissions and potentially harmful actions are likely to occur. This requires proactive communication with clients to inform them about current procedures. It also requires the maintenance and possibly even expansion of complaints handling functions (which might otherwise be deemed as less essential), especially by telephonic and digital means.
Our hats are off to the financial inclusion providers who are working hard to assist their communities. Staying true to the Client Protection Principles at this time can help the financial institutions and their clients come through this crisis with integrity and ready to rebound when the time is right.
Dave Grace is Executive Director of the International Credit Union Regulators’ Network and member of the Steering Committee of the Smart Campaign.
Elisabeth Rhyne is the former managing director of the Center for Financial Inclusion and a co-founder of the Smart Campaign.