THROUGH a circular issued on August 29, the State Bank of Pakistan asked all banks and financial institutions to self-assess, develop and implement their own framework on ‘fair treatment of consumers’ from July 1, 2015.

The central bank expects that these institutions will inculcate a conducive culture and ensure fair and quality service, while delivering banking services to their customers.

Banks’ treating their customers fairly is not something entirely new. However, the subject has received more attention after the damage caused by the financial crisis that started unfolding in 2007.

Witnessing an unprecedented growth in consumer banking, along with a manifold increase in consumers’ grievances against banking products and services, the SBP’s Customer Protection Department put in place a policy and regulatory mechanism for their redress in 2008.

The central bank is urged to link the minimum rate of profit with the inflation rate so that depositors receive a positive rate of return in real terms

The banks were free for a long time to pay meagre returns to the saving depositors. To protect them, the SBP introduced a rate of minimum profit at 5pc per year on all categories of savings and PLS saving deposits to all existing and new depositors, effective June, 1, 2008. This was raised to 6pc per year in 2012.

However, the SBP modified the payment of minimum rate of return on deposits from October 1, 2013, to 50 basis points below the prevailing SBP repo rate. These days, banks are making huge profits and inflation is high. To protect the customers, the SBP is urged to link the minimum rate of profit with the inflation rate so that depositors receive a positive rate of return in real terms.

The SBP, in November 2008, issued fair debt collection guidelines to set minimum standards to be complied with by banks in order to address grievances of customers and borrowers of consumer financing facilities. The guidelines introduced a 14-day notice to be given to borrowers before the start of recovery proceedings, in addition to providing information to borrowers regarding due payments etc.

Earlier in 2004, the SBP had asked banks to immediately identify and entrust the responsibility for dealing with all sorts of complaints in a fair and prompt manner to an appropriate senior person in the bank. The head of the complaint section was designated as the contact person for the SBP.

However, it can be argued that the central bank allowing banks to implement a self-regulated framework for fair treatment of financial customers is inadequate. The SBP is urged to consider more potent legal and regulatory measures which perhaps may be in its regulatory pipeline. Reasons for this submission would be clear from the following:

A report of the US Financial Crisis Inquiry Commission, which described the events and the system that propelled the American nation towards the crisis, had concluded: “There were widespread failures in financial regulation and supervision; dramatic failures of corporate governance and risk management at many systemically important financial institutions etc”.

The inadequacy of the existing framework for financial consumer protection (FCP) was identified as one of the contributing factors for the onset of the 2008 financial crisis in the US. The result was a sweeping reform of financial regulation with the passage of the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act in 2010.

The Anti-Predatory Lending Act consolidated the responsibility for financial consumer protection to a single agency, the Bureau of Consumer Financial Protection, to ensure that in financial product markets are fair, transparent and competitive.

The World Bank, in conjunction with Fin-CoNet, conducted a Global Survey on Consumer Protection and Financial Literacy, which noted: “The function of financial consumer protection supervision is far behind prudential supervision in terms of available methodologies for compliance monitoring, range and nature of enforcement actions, and supervisory skills”.

The central bank and the Sec­urities and Exchange Commission of Pakistan are the two financial regulators in the country. As such, financial customers need protection in areas regulated by both these regulators, and there is an urgent need that they together tackle the challenges in FCP areas. This would be more effective and ensure a larger coverage.

Published in Dawn, Economic & Business, October 13th, 2014