The National Treasury believes it may have found the remedy to the financial sector’s woes that compelled legislators to controversially cap interest rates on loans and savings.
The ministry is set to submit to the National Assembly the Financial Markets Conduct Bill, 2018, a lengthy consumer protection law which spells out harsh punishment for rogue financial service providers.
Treasury, which together with Central Bank of Kenya (CBK), was opposed to the idea of putting a ceiling on the interest rate charged on loans, hopes that this will persuade lawmakers to drop their hardline stance against the abolition of interest rate controls.
Treasury had promised the International Monetary Fund (IMF) that it would either abolish or significantly modify the law capping interest rates.
The new proposed law, according to Treasury, will help small and medium-sized enterprises (SMEs) and individual borrowers to easily access credit.
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“The issues of consumer protection will be addressed in some sort of a law to address the concerns that were there before - that the SMEs are not getting loans at reasonable rates and the issues in the financial system will also be addressed in a fundamental way to bring the rates down in a sustainable way,” said National Treasury Principal Secretary Kamau Thugge in March.
Fraudulent conduct
The proposed law creates three authorities - Financial Markets Conduct Authority, Financial Sector Ombudsman and Financial Sector Tribunal - which will be responsible for policing the length and breadth of the crowded retail financial industry.
No financial sector player will be spared, from the currently unregulated credit-only microfinance institutions to digital credit providers, Saccos and commercial banks.
The three watchdogs will be expected to ensure lenders do not “misbehave” as they did prior to the enactment of the Banking Amendment Act, 2016.
“The Government recognises that a competitive and well-functioning retail and financial sector is vital to the economy. In this regard, the National Treasury has reviewed the challenges in the consumer credit and market conduct and has developed a draft Financial Markets Conduct Bill, 2018,” said Dr Thugge in a public notice.
The Financial Markets Conduct Authority will play the biggest role in Treasury’s latest attempt to streamline the financial sector.
It will be responsible for ensuring that retail financial customers are treated fairly by lenders or any other financial player.
It will be charged with protecting individuals and SMEs from “misleading, deceptive, unfair and fraudulent conduct.”
It will also promote fair, equitable and sustainable access to financial products and financial services besides helping consumers make informed choices by giving useful information about financial products and services.
It will also promote financial literacy.
The proposed authority will at the same time regulate the cost of credit, protect consumers from inappropriate lending practices and regulate the accuracy, availability and protection of financial information through credit sharing mechanisms.
With a board comprising representatives from both CBK and National Treasury, the authority will have sweeping powers, issuing directives and stern warnings, with those who disobey its directives set to be fined heavily or sent to prison.
The Ombudsman will handle complaints by retail financial customers against financial product and service providers.
If one of the parties is aggrieved by the decision of the authority, they may apply to the Financial Services Tribunal for a review.
Currently, Treasury is getting input from the public on the proposals. There is, however, no clear date as to when the bill will be presented to Parliament.
Treasury hopes to bring into the regulatory fold as many credit players as possible in what is aimed at breaking the cartel-like behaviour of banks.
The only lenders that are excluded are shopkeepers whose credit comes in the form of a good.
Criminal offence
Otherwise, it will be a criminal offence for you to offer any financial product or service without a licence. Offenders will be fined up to Sh5 million or risk being jailed for two years.
The proposed law is an attempt to regulate the mushrooming digital credit providers. Currently, it is not very clear who regulates popular digital credit providers such as Tala and Branch.
Any financial service provider who, by the time the law becomes operational, will have at least 50 credit contracts will have to seek a financial conduct licence from the Financial Markets Conduct Authority.
“A person shall not provide, as a business or part of a business, a financial product or a financial service to a retail financial customer unless that person has a financial conduct licence,” says the proposed law.
Operating such a business without a licence will see the offender slapped with a fine of Sh5 million or spend two years in prison.
Those without a licence will also not be allowed to advertise for the provision of credit or mortgage services.
Failure to comply with this requirement will see the offender slapped with a fine of Sh5 million. This will double to Sh10 million for repeat offenders.
Although Treasury would like to remove the interest rate cap, lenders will not have a blank cheque as far as charging of interest rate, fees and insurance is concerned.
“A lender shall not have a provision in a credit contract that permits the lender to charge any interest, fee, charge or cost, however, described,” reads part of the bill.
Moreover, a lender cannot come up with a new method of calculating interest, fee or charge if that was not clearly disclosed in the pre-contract statement given to a borrower when the latter signed up for credit.
Should a lender publish an advertisement that is false, misleading or deceptive, for example by saying that the provision of the credit has an approval, benefits or qualities that it does not have, they will be fined Sh5 million.
The law itself is silent on the removal of the interest rate cap. However, the Treasury CS will once in a while come up with regulations, some of which might see capping of interest rate charged, depending on the amount borrowed, the purpose for which the credit is taken and the duration for which it is provided.
“A lender shall not charge or recover, or attempt to charge or recover from the borrower or a guarantor any amount on account of interest under the contract that exceeds the maximum rates as may be prescribed by the authority from time to time,” reads part of the proposed law.
Those who contravene this section of the law will be fined Sh5 million for the first time and Sh10 million should they repeat the offence.
Dr Thugge noted that the draft bill aims at creating an effective financial consumer protection, making credit more accessible and at the same time supporting financial innovation and competition.
“The bill provides for uniform practices and standards in relation to the supervision and conduct of providers of retail financial services based on international best practice,” said Mr Thugge.
Before the capping of interest rates, borrowers not only had to contend with the high interest banks charged but also with the manner in which they varied it with impunity.
If the bill is passed into law, lenders will be prohibited from having clauses in loan contracts that purport to increase the credit limit without the consent of the borrower.
Predatory lending
And in cases where it is there and agreed by the customer, lenders will have to determine that it will not result in substantial hardship to the borrower.
In addition, financial institutions may no longer market their loan products to customers without express permission from the clients.
“A lender shall not, unless otherwise permitted by the regulations or any other law, communicate with a borrower who is a retail financial customer as part of marketing activity unless the borrower’s application for the provision of credit has expressly agreed,” says the bill in part.
It frowns upon predatory lending, hitting lenders who knowingly push borrowers into financial distress with a fine of Sh20 million or a five-year jail term.
Lenders will also not be allowed to sell loans outside prescribed hours and variation of interest rate is also prohibited, with offenders facing Sh5 million for the first offence and Sh10 million for a repeat one.
Those who enter into a credit contract without a written statement will be fined Sh5 million.
If the bill becomes law, lenders will also have to be very careful about how they approach potential borrowers.
dakure@standardmedia.co.ke
