The Three-Legged Stool of Client Protection

blogseries> Posted by Adriana Magdas, Senior Associate, CFI

The Financial Inclusion 2020 campaign at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. Accordingly, this blog series will spotlight financial inclusion efforts around the globe, share insights coming out of the creation of a roadmap to full financial inclusion, and highlight findings from research on the “invisible market.”

As more and more people gain access to financial services, it is important to ensure that this expansion of access is accompanied by protections that enable them to use services safely. That’s why the Financial Inclusion 2020 project’s Working Group on Client Protection is so important.

The Working Group believes that financial inclusion with client protection will occur when all clients can affirm the following statements:

  • I have a range of quality financial services and providers to choose from.
  • I can get the information I need to make a good decision.
  • The choices I have are affordable.
  • I have trust and confidence that using these products and services will not cause harm.
  • I am treated with respect.
  • I have rights and know the paths to resolve problems.

What has to be in place for this to happen?

Kate McKee of CGAP often refers to client protection as a three-legged stool in which each leg of the stool must be steady enough to produce a reliable platform for clients. The legs of the stool are: the clients, who must understand their rights and responsibilities, the providers, who must implement client protection principles, and the market environment, which involves effective regulation.

1. Clients Have Rights and a Capacity to Protect Themselves

Effective client protection requires that clients be financially capable. They should understand enough about the use of financial products and services to be able to make informed choices. They should know where to get the information they need and they should understand their rights and responsibilities as consumers. They need to know where to turn if they encounter problems.

2. Providers Act Responsibly

The decisive point of client protection is the behavior of providers in their interaction with clients. Under full inclusion with client protection all providers of financial services to the poor (both mainstream and alternative) implement a widely-agreed upon set of financial client protection principles.

3. A Competitive Market is Backed by Effective Regulation

Competition brings benefits to clients in the form of continuous improvement of products and services at lower prices, and therefore client protection regulation should be set in a general regulatory framework that promotes competition. However, heavy competition can also lead to problems like aggressive sales tactics, overindebtedness, and lack of transparency. In the past it was feared that consumer protection regulation would stifle market development, but it is increasingly recognized that when regulators seek a balance that allows orderly competition among credible firms, the existence of client protections is healthy for both clients and the market. Client protection regulation will never completely eliminate the tendencies and incentives that can lead to client abuses, but policies that strengthen each leg of the stool will provide a sturdy basis for the future.

The FI2020 Roadmap to Inclusion starts with an articulation of a basic vision and then moves on to address the barriers to that vision and the priority actions that will advance inclusion. To review the Roadmap as it is drafted, please sign up at the link below.

For more information on Financial Inclusion 2020, sign up for campaign updates.

Image Credit: Philip Mader / Siliconeer

Have you read?

Straight Talk on Client Protection – Standards of Professional Conduct

Four Ways Big Data Will Impact Financial Inclusion

Seven Trends to Watch in the March to Achieve Full Financial Inclusion for All

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