Connecting the Pillars of Client Protection

> Posted by Alexandra Rizzi, Deputy Director, the Smart Campaign

In London pedestrian walks past a payday lending shop that featuring potentially aggressive or misleading advertising.

The Smart Campaign’s just wrapped up its Steering Committee meeting in Switzerland this week. This twice-a-year event is a wonderful opportunity to take stock of the Campaign’s accomplishments, goals, and challenges, and receive feedback from stakeholders who represent the global microfinance market. One of the issues that came up often during this meeting was the opportunity for interaction between the standard-setting work of the Smart Campaign and the policymakers and regulators involved in setting regulatory frameworks for client protection. The need for such interaction is particularly important in countries where client protection regulation for financial services is not yet well developed.

I was also reminded of the importance of a regulatory framework for client protection by news coming out of the U.K. today. The U.K.’s Office of Fair Trading has cracked down on 50 of the biggest providers in the £2 billion pay-day lending market, giving them approximately 12 weeks to improve their practices or be closed. The Office of Fair Trade had been monitoring the payday lending market and found many problems, including:

  • Failure to adequately assess the affordability of the loan for customers (see the Client Protection Principle, Avoiding Over-Indebtedness)
  • Aggressive debt collections practices and lack of transparency in how repayments are collected (Client Protection Principle on Fair and Respectful Treatment of Clients)
  • Advertising that lured customers into loans they could not afford (Client Protection Principle on Transparency)

The Smart Campaign has been developing guidance on good practices in each of these three areas. The Smart Campaign’s perspective is that providers can and should take affirmative responsibility to install responsible practices, and it assists in this process through capacity building, tools, and development of standards of practice. We are proud of our reach to date, resulting in thousands of organizations that are now aware of and actively improving their practices. However we realize that financial markets are complex, that microfinance providers are not the only financial organizations interacting with the poor, and that capacity building and standard setting needs to be complemented by a regulatory framework that creates an orderly marketplace that is safe for clients. The Campaign hopes to explore ways in 2013 that it can interact with regulators to exchange knowledge and viewpoints.

Back in the U.K., the Office of Fair Trade has proposed referring the pay-day lenders case to the Competition Commission, which can conduct a full investigation and potentially take more drastic actions to make the pay-day market function better and protect its customers. We’ll be sure to continue to follow this story as it develops.

Image Credit: REUTERS/Suzanne Plunkett

Have you read?

How Client Protection Certifications and Ratings Work Together

Can Self-Regulation Protect Microfinance Clients?

Our Woman in Milan: Observations on the Intersection of Mobile Money and Regulation