ACCRA, Ghana, November 25, 2020/ -- By Woelinam Dogbe, President of the Alliance for Financial Consumer Protection (AFCOP)
Ghana’s
financial sector is in crisis. A crisis occasioned by the collapse of
over 300 financial
institutions; and which has affected every division
of the financial sector. Universal banks, savings and loans companies,
microfinance companies, capital market institutions, and insurance
companies have been impacted.
While majority of the collapsed
institutions were licensed and regulated, a few were unlicensed and
ought not to have been in operation. The fact that the unlicensed
institutions were allowed a free rein to operate until their eventual
collapse, speaks volumes about the existing regulatory regime and the
safety of financial consumers.
Experts have identified the causes
of the crisis to be: weak regulatory supervision, unethical behaviour
by managers of the financial institutions, and poor corporate governance
practices. In the specific case of the unlicensed institutions, their
illegal activities flourished because of dereliction of duty on the part
of regulators.
The devastation caused by the crisis has been
severe and widespread. Apart from financial losses, consumer confidence
in the financial sector has been significantly weakened. Some consumers
have lost their lives as a result of the trauma of having their life
savings locked up in collapsed institutions.
Unquestionably,
there is the need for a regulatory regime that is fit-for-purpose. One
that prioritizes the need to ensure the safety of institutions as well
as prioritize the need to protect consumers. Thus, the necessity of
regulatory reform is imperative.
Presently, the regulators of
Ghana’s financial sector (i.e. Bank of Ghana - BOG, Securities and
Exchanges Commission - SEC, National Insurance Commission – NIC and
National Pensions Regulatory Authority - NPRA) have through their
actions and inactions demonstrated that they prioritize Prudential
Regulation (“ensuring financial institutions remain strong”) to the
neglect of Conduct Regulation (“ensuring the safety and fair treatment
of consumers”).
This lopsided approach to financial sector
regulation has resulted in consumers suffering unfair treatment and
exploitation at the hands of financial service providers. Examples of
the mistreatment of consumers include: unfair pricing practices,
unconscionable loan terms, misrepresentation of risks associated with
products, mis-selling, product pushing, poor handling of customer
complaints, etc.
The reform of financial sector regulation in
Ghana must institutionalize conduct regulation and afford it the
importance it deserves. This will require strong commitment from
government to sponsor the needed legislation. This is the surest way to
ensure the financial sector is safe and works well for all.
State of financial consumer protection in GhanaFinancial
consumers in Ghana continue to suffer at the hands of financial
institutions because of manifestly weak market conduct regulation. The
present crisis has further exposed the deep-seated disregard and lack of
commitment to financial consumer protection in Ghana.
A careful
review of the regulatory interventions and policy prescriptions that
have been implemented or mooted following the crisis have centered on
“saving the institutions” with very little focus on “protecting
consumers”.
While it is important to protect the institutions;
because the safety of the institutions has implications for the safety
of consumers’ deposits and investments, it is equally important to
proactively protect consumers and ensure they are treated fairly and are
not exploited.
Financial consumers are vulnerable and need to be
protected from elements within the financial sector who would want to
take advantage of this vulnerability to cheat consumers to rake in
abnormal profits.
There is a widespread practice within Ghana’s
financial services industry where providers; particularly banks and
SDIs, arbitrarily increase fees on products and services that consumers
have already signed on to. For example, it has become an annual ritual
for banks and SDIs to upwardly review fees such as account maintenance
fees, card maintenance fees, transaction fees etc. The only obligation
the central bank has placed on the banks and SDIs is for them to give
customers at least a 30-day notice period before implementing the fee
reviews.
The point is often made by financial institutions that,
if consumers are unhappy with the fees being charged, they are at
liberty to switch to another provider. This argument is at best,
disingenuous and laced with mischief because, as things stand today, it
is very difficult for consumers to switch banks or SDIs. For example;
banks and SDIs mirror each other’s pricing; thus, when one bank or SDI
introduces a new fee or increases an existing fee, the others follow.
Therefore, if a consumer decides to switch, he or she will only be
“jumping from frying pan to fire”.
Sadly, the regulators who
ought to ensure consumers are treated fairly are themselves the guilty
party. For example; the National Insurance Commission (NIC) recently
implemented new pricing dynamics for motor insurance. The stated
objective was to sanitize pricing practices and mitigate systemic risks
resulting from price undercutting. Unfortunately for consumers, the
consequence was a steep increase in premiums.
The steep premium
increases priced out millions of consumers from comprehensive motor
insurance cover. Consumers were made worse off and were exposed to
severe loss as a result of being priced out. It took massive public
uproar and resistance from insurance companies for the NIC to roll back
some of the elements that caused the price hike.
It is important
to note that, unfair pricing is only a minutia of the mistreatment
consumers receive. Others include issues such as financial institutions
pushing high risk products to vulnerable consumers. Product pushing and
mis-selling exist but there’s no record of regulators punishing, naming
and shaming institutions that have engaged in such bad behaviour.
Best practices in financial consumer protection in Africa There
are pockets of great examples of proactive financial consumer
protection across Africa. Some regulators on the continent are living up
to expectation and doing what is required to ensure consumers are
protected and treated fairly.
One of the shining lights is the
Bank of Zambia (BoZ). The BoZ in September 2018 issued a notice titled
“Bank of Zambia notice to the public on the prohibition of unwarranted
charges and fees directives of 2018”. In the said notice, the BoZ
detailed a list of twenty-six (26) charges and fees that it had
prohibited.
The charges and fees prohibited by the BoZ included:
initial debit card issuance fees, debit card maintenance and renewal
fees (annual, quarterly or monthly), commission on turnover activities
on account, automated teller machine (ATM) surcharges, point of sale
(POS) transaction charges (own bank customer and other bank customer),
charge for balance and other account inquiries by a customer
over-the-counter or any electronic platform, among others.
The
Central Bank of Nigeria (CBN) is also worthy of applause. The CBN has
taken some steps to ensure banks in Nigeria handle customer complaints
in a timely and effective manner. It has instituted and published a fine
grid for improper handling of customer complaints and delays in
resolving customer complaints. The CBN’s policy of naming and shaming is
commendable. When consumers see and feel that the regulator is acting
and sanctioning errant institutions, their confidence in the financial
system grows. The CBN recently sanctioned some errant banks and fined
them as much as 2 million Naira (circa USD5,200) for breaching various
consumer protection mechanisms.
Another regulator leading the way
is the Central Bank of Egypt (CBE). When the coronavirus pandemic hit,
the CBE championed several initiatives that not only focused on keeping
the institutions afloat, but also rolled out deliberate interventions to
bring tangible relief to consumers.
The CBE instructed banks to
cancel ATM withdrawal fees and points of sale (POS) fees for six months.
It also instructed banks to give 6 months repayment holiday to
individuals and businesses impacted by COVID-19. Also, the CBE
instructed the suspension of late fees (penalty interest). Furthermore,
in an effort to reduce cash handling, all bank transfers within Egypt
were exempted from fees and charges.
Challenges with Ghana’s financial sector regulation architecture There
is ample evidence that the existing financial sector regulation
architecture in Ghana is not fit-for-purpose. The recent crisis has
badly exposed this fact. Aside the loopholes in prudential regulation
that are at the root of the crisis, the neglect of conduct regulation is
a major cause for concern. This needs to be addressed, lest we risk
another crippling crisis.
The major drawbacks of Ghana’s existing financial sector regulation architecture are:
- The financial sector has become entwined; but still operates with siloed regulators
- The financial sector regulators are biased towards prudential regulation and have limited capacity for conduct regulation
- The financial sector lacks an effective institutional mechanism to set and enforce market conduct standards
Ghana’s
financial sector has evolved to the point where banking halls have
become distribution points for non-bank financial products. Today, banks
are distributing insurance, capital market, and pension products. Even
mobile money operators are distributing banking, insurance and pension
products. Thus, the financial sector has become vastly entwined.
However, regulation has lagged behind the sector’s evolution. The sector
still has fragmented regulators (i.e. BOG, SEC, NIC, and NPRA)
operating in silos and overseeing both prudential and conduct regulation
for their respective industries.
Having an entwined sector with
siloed regulators presents peculiar dangers to consumers. It becomes a
complicated proposition for consumers when, for example, they buy a
non-bank product (i.e. insurance or capital market product) through a
bank and are faced with a challenge that needs a regulator’s
intervention to resolve. Or; when a consumer buys a pension product
through a mobile money operator and is unfairly treated, knowing which
regulator to approach can be unsettling and stressful.
Furthermore,
when a novel ponzi scheme emerges, the siloed regulators pass the buck
and are hesitant to take responsibility to stop harm to consumers. A
classic example is the Menzgold scam that swept through the country a
few years ago; and left in its wake millions of victims. In the Menzgold
case, instead of the BOG and SEC taking decisive measures to shut down
the scam, they pussyfooted and took to issuing statements to say
Menzgold was not licensed to operate.
Secondly, the fact that the
current architecture does not prioritize consumer protection is
abundantly evident. Unlike in best practice examples from Zambia, Egypt
and Nigeria where the BoZ, CBE and CBN respectively have been proactive
in implementing effective measures to protect consumers and ensure they
are treated fairly, the opposite is the case in Ghana.
The
regulators in Ghana have adopted a laidback attitude towards the subject
and have in some cases merely designated units as being responsible for
market conduct, in an attempt to window dress the issue.
Thirdly,
the financial sector lacks an institutional mechanism to set and
enforce market conduct standards across the sector. As a result of the
lack of standards, actions and inactions of financial institutions and
regulators that are injurious to consumers are not flagged and nipped in
the bud. Also, since there are no standards, bad conduct is allowed to
fester to the detriment of consumers.
The absence of standards
also breeds the consequence of consumers not being aware of their rights
and remedies available to them. Thus, they are unable to shield
themselves from exploitation and unfair treatment. Consumer education is
poor; and mostly non-existent, because the regulators have shunned this
duty of care.
Political Commitment
The
reform of financial sector regulation can only happen with unalloyed
commitment from government. The intricacies of Ghana’s political system
make it such that, the required legislation to birth the reforms needs
government backing and sponsorship.
It is therefore welcome news
that Ghana’s main opposition party, the National Democratic Congress,
through its leader, H.E. John Mahama, has promised to “establish a
Financial Services Authority that will be responsible for ensuring that
consumer markets work for consumers, providers and the economy as a
whole” if voted into power.
It is hoped that the proposals made
in this article will be adopted and incorporated in the reform of
Ghana’s financial sector regulation architecture.
A proposed fit-for-purpose financial sector regulation architecture for Ghana
To
forestall future crisis in the financial services sector and advance
consumer protection, an effective and fit-for-purpose regulation
architecture is critical. It should be a regulation architecture that
proactively identifies problems and nips them in the bud, one that
severely punishes wrong doing, names and shames, and one that resolves
the imbalances between prudential regulation and conduct regulation.
It is against the foregoing background that the following proposals are made:
- Decouple
prudential regulation and conduct regulation. This calls for discarding
the current model that warehouses prudential regulation and conduct
regulation in the same institutions. An effective and efficient
decoupling of prudential regulation and conduct regulation will resolve
the challenges enumerated.
- Task
the existing industry regulators (i.e. BOG, SEC, NIC and NPRA)
exclusively with responsibility for prudential regulation. Thus, the
responsibility for conduct regulation must be taken away from them.
- Establish
a single independent conduct regulator. The new entity will be the sole
regulator of market conduct across the entire financial services
sector; i.e. banking, insurance, securities and pensions.
The
proposed architecture is a unique adaptation of the Twin Peaks Model.
In the typical twin peaks model that exists in counties such as the
United Kingdom, Netherlands, New Zealand, Australia, and South Africa
among others, there are two regulators – one focused on prudential
regulation of the entire financial services sector and the other
regulator focused on conduct regulation of the entire financial services
sector.
In the United Kingdom, for example, the Prudential
Regulation Authority (PRA) and the Financial Conduct Authority (FCA) are
responsible for prudential regulation and conduct regulation
respectively. The two entities (PRA and FCA) were formed in 2013 in a
wave of regulation reforms following the 2007 financial crisis.
Hitherto, a single entity was responsible for both prudential and
conduct regulation until the split in 2013.
In the proposed model
for Ghana, each of the industries (banking, insurance, capital markets
and pensions) within the sector will have independent prudential
regulators. There may be too much disruption if an attempt is made to
have a single prudential regulator for the entire sector at this point.
Perhaps, in the next phase of reforms, having a single prudential
regulator for the sector may be considered. For now, the focus must
firmly be on a single conduct regulator.
The benefits of the
proposed model – having a single independent conduct regulator and
industry-specific prudential regulators – are evident.
The
industry prudential regulators will focus on keeping the institutions
sound. They will have the mandate to set prudential requirements and to
ensure compliance. In addition, they will be clothed with the power to
license institutions for their respective industries.
The single
independent conduct regulator will ensure that consumers are protected
across the entire financial services sector. It will ensure institutions
conduct themselves properly in the market. It’s core focus will be on
areas such as: product suitability and safety, fair pricing practices,
resolution of customer complaints, among others.
No new product
can be introduced onto the market without the prior approval of the
conduct regulator. Neither can an approved product be modified without
the express approval of the regulator. Before the conduct regulator
approves a product, it must ascertain that the institution submitting
the product for approval has been duly licensed by the appropriate
prudential regulator. Such a regime will prevent scams like Menzgold,
DKM, and the others from taking root.
The independent conduct
regulator will have the power to stop an institution from operating in
the market if it deems its products or practices to be harmful to
consumers or other market players. More importantly, it will have the
power to prosecute institutions and/or individuals if their activities
pose a danger to consumers or if they are found to be behaving badly or
to have behaved badly.
With the proposed single independent
conduct regulator, consumers will have a single point of contact for all
complaints or challenges they have with any financial institution.
Thus, the challenge of having to contend with many regulators in an
entwined financial sector will be eliminated.
The proposed
regulator will set market conduct standards, proactively police the
market to ensure it is safe for all participants, punish, name and shame
offenders, and educate consumers on their rights as well as on how to
protect themselves in the market.
Operationalizing the proposed
architecture will be easy to do. Marshalling the needed human capital to
staff the proposed independent conduct regulator should not be
difficult. The various industry regulators currently have some staff who
ostensibly are tasked with monitoring market conduct. These staff can
be pulled out to form the nucleus staff of the new institution. The
nucleus staff would need to be augmented with professionals with the
requisite technical expertise.
If there’s a silver lining in the
crisis that has hit Ghana’s financial sector, it is that it presents a
golden opportunity to reform Ghana’s financial sector regulation
architecture. The time to act is now!
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