Straight Talk on Client Protection – The Proper Handling of Contracts

> Posted by Juan Carlos Izaguirre, Financial Sector Specialist, World Bank

In preparation for the launch of its Certification Program, the Smart Campaign’s Straight Talk blog series highlights standards that may be overlooked by microfinance institutions but that are an important part of client protection. This sixth post in the series by guest blogger Juan Carlos Izaguirre highlights a very specific practice at the heart of the client protection principle on transparency—and essential for certification: client contracts.

Can you imagine renting an apartment, an office, or a farm, based on a purely verbal agreement? Centuries ago codes of honor and verbal agreements may have been the norm, but not anymore. People want to avoid misunderstandings and forgetfulness by having written contract agreements, especially for long-term transactions. Now, can you imagine signing a rental agreement but then not receiving a copy of that agreement? In practice, not having a copy is almost like trusting in a verbal agreement. To be honest, I would not feel comfortable signing a document without receiving a copy. I would be suspicious of that transaction. Why would the owner not want me to have a copy of the contract? What is there to hide? I have a sense that you would feel similarly uneasy.

If this is well understood in rentals, then why does the financial industry not follow suit? In more than five years working in different countries across the globe, I keep discovering that many financial institutions do not give a copy of the financial contract to their customers. I have heard several reasons/excuses for this behavior: “The client would not like me to charge him/her for an extra copy of the contract.” “The lawyer charges a lot for a signature, so we cannot afford another copy.” Perhaps, but if there is not enough money to afford paper sheets and ink cartridges, then I would be afraid of the financial situation of the institution!

Other institutions say that “clients do not care about the full contract, they only ask for the payment schedule,” or “clients will not understand the contract, they just need the payment schedule.” Maybe clients are not aware that they can have a contract, maybe they have never seen one in their lifetime, or maybe they don’t think they will need the contract later. However, consumers really do need the full contract terms and conditions, as a matter of principle. Contracts contain the legal basis of a transaction and as such consumers have the right to receive a copy.

Contracts are like the user’s manuals for financial products. They contain detailed information that may not seem quite useful when the financial product is acquired, but will become useful when questions arise. Now that many of us are in the pre-Christmas shopping mood, can you imagine buying a new TV and not receiving any type of manual? Surely there are several paragraphs in that manual that have technical information and are not easy to understand, but there is also information that can be quite handy when we have a problem—and we can check the manual first before calling a store or manufacturer.

Contracts are a symbol of transparency, a mechanism to instill trust and reduce fears, especially with clients that are not savvy on financial transactions. Having a copy of the contract would also contribute to the efficiency of the system. If clients have any doubt about their financial product or service, they can first read the contract on their own or with the help of friends, relatives, or community leaders. If clients have a problem, their dialogue with an MFI officer would be easier if they have read the contract, which might in turn reduce the time spent to solve problems.

It is true that contracts are often hard to understand. It is a great idea to work toward more streamlined and simple documents. It is also a good idea to provide a “key facts” statement that summarizes the contract terms and conditions. That step has been implemented in other countries. However, the contract is the basis of a financial transaction, so however difficult it may be, the client still needs to have it.

Sharing a copy of the contract with the consumer should be a basic, obvious, common practice for financial institutions, which would help them to build a more trustful and transparent relation with their customers. There is nothing more valuable in business than earning the trust and loyalty of a client. Regulators should not even have to intervene to make it a requirement – it should be common sense! And, for sure, clients should not have to ask Santa for copies of their contracts this Christmas.

Juan Carlos Izaguirre works as a Financial Sector Specialist with the World Bank’s Global Program on Consumer Protection and Financial Literacy.

Image Credit: Villages Connected

Have you read?

Can Providers Take More Responsibility for Client Protection? The Smart Campaign Says Yes.

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Client Protection in Honduras: Basic Infrastructure in Place