Banks face tough rules for insurance and bonds sales

The Central Bank of Kenya. The regulator has issued new guidelines on third party or incidental business. File 

By GEOFFREY IRUNGU

In Summary

• The sale of third party products will be done within a restricted framework according to new guidelines issued by the Central Bank of Kenya.
• Banks will be expected to differentiate own products and the incidental business so that customers do not get the wrong impression about proprietorship.
• Kenya Bankers Association CEO Habil Olaka said the new guidelines had been discussed between the institutions and the CBK.

Commercial banks will be allowed to sell insurance, shares and broker bonds beginning May 2 this year but must make clear distinction between their products and third party ones.

The sale of third party products will be done within a restricted framework according to new guidelines issued by the Central Bank of Kenya (CBK).

The regulator calls the service “incidental business” and has directed banks to inform customers of the actual source of the products they are distributing.

Banks will be expected to differentiate own products and the incidental business so that customers do not get the wrong impression about proprietorship.

Some financial institutions have been distributing insurance products without a legal framework requiring consumer protection, regular reporting and avoidance of risks.

It means that even commercial banks which have subsidiaries registered for other business must clearly specify that the seller is not the bank itself but another legal entity. The investing or insurance sides are taken to have different risks to the customer, hence the need for disclosure.

Though the CBK did not state whether it had noticed violations by the financial institutions on the incidental business, some bank customers may have assumed commercial banks are also responsible for the investment banking and insurance services for which they act only as agents.

“An institution acting as a distribution channel shall not undertake or engage in the actual business of insurance, underwriting, securities and investments services.

‘‘The involvement of institutions will be limited to acting as a distribution channel in the provision of these financial services,” said the CBK draft guidelines.

It further warns commercial banks not to “give the impression to its customers or imply they are the actual service providers of these financial services other than selling or marketing on behalf or in partnership with other regulated financial service providers.”

Kenya Bankers Association CEO Habil Olaka said the new guidelines had been discussed between the institutions and the CBK.

“Banks are ready to follow the guidelines. It is something that has been under discussion for some time,” said Mr Olaka.

Isaac Ngaru, an insurance expert, said the CBK was introducing the framework to avoid risks posed by taking up extra incidental business.

“For insurance, some banks have been providing bancassurance services, but these guidelines bring a legal framework.

‘‘The CBK wants to ensure that commercial banks are only seen as distributors but are not the originators of the incidental business. That will reduce risks even for those who are already providing the services,” said Mr Ngaru.

The guidelines said commercial banks can form partnerships with regulated financial service providers for cross-selling the authorised and regulated financial services and products through their branch network.

Where a bank wants to engage in permitted incidental business it should make an application accompanied by all contracts between the institutions and other service providers, the necessary board approvals to introduce the authorised business activities and approval from the appropriate financial sector regulator.

The guidelines say a bank must have “well-defined risk management policies on both financial and non-financial exposures and risk concentrations, and staff with the expertise to manage the businesses”.

An institution shall also be expected to conduct regular stress tests on the incidental businesses.

“The institution should identify potential stress scenarios or events that could adversely impact the bank arising from these new businesses,” said CBK rules.

The institution should not only consider financial risk to measures like asset value, exposure and revenue but also nonfinancial risk such as operational and reputational , CBK said.

The institution is also expected to put in place mitigating techniques and contingency plans against material risks identified from these stress tests.