(Note that this is the 5th chapter of a new publication on Responsible Digital Credit and is still under review. It is posted here for the purpose of receiving comments and inputs from others)
As noted in the previous chapters, digital credit providers are playing different roles in different countries around the world. Not all the types of players documented in this report exist in all markets and some are much more prominent than others often due to market conditions, legal and regulatory frameworks and cultural practices. It is also clear that as new digital credit players enter the market, new innovative products are offered and new credit models develop; laws and regulations alone will not be able to address all of the consumer protection issues. It will take a village[i] to protect especially new and emerging digital credit consumers. This requires customized local approaches collaboratively implemented by governments, regulators, industry players, consumer protection advocates and even consumers working together toward more responsible credit in the digital age.
Apart from the industry associations noted in chapter 3 and the various regulatory and policy networks noted in chapter 4, other groups such as the Smart Campaign, GSMA, the Digital Credit Observatory at the Center for Effective Global Action (CEGA), the International Telecommunications Union’s (ITUO Focus Group on Digital Financial Services, the World Bank, the Better Than Cash Alliance (BTCA) and MicroSave have all documented and provided inputs into developing responsible digital credit principles.[ii]
There appears to be more of a move, from a legal and regulatory standpoint, to develop consumer protection that are primarily principle-based rather than rules-based.[iii] Regulators can look toward checklists such as the World Bank’s basic good practices that are broken down in 8 general categories to support consumer protection for financial services and which are adapted here to analyze how they apply to digital credit.[iv]
|Good Practice Checklist for Consumer Protection[v]||Detailed Principles Relevant to Digital Credit|
|Consumer/Investor Protection Institutions||1) Consumer protection laws in place
2) Sector specific codes of conduct
3) Adequate consumer protection supervision
4) Licensing of digital credit providers
5) Access to judicial process
6) Support from consumer protection groups and/or mass media
|Disclosure and Sales Practices||7) Properly suited products with appropriate credit analysis practices
8) Requirement of a summary statement for all loans or digital credit investments
9) Terms and conditions available in easily accessible form for consumers (no longer needing to be in paper form)[vi]
10) Laws/regulations prohibiting false or misleading advertising
11) Cooling off period especially for high push marketing products and services
12) Freedom to choose loans along with rules governing pre-purchase requirements as a condition for loan approvals
13) Providers should advertise the name of the financial regulator they report to on public sites and in advertising materials
14) Ensure that appropriate staff training for consumer protection is in place and practiced by providers
|Customer Account Handling and Maintenance||15) Proper statements of all transactions provided to clients
16) All changes to fees, charges, terms and conditions must be provided to digital credit clients as soon as possible
17) Up-to-date records kept and available digitally to clients either without charge or for a reasonable fee
18) Clearing and settlement of payments is based on regulatory, statutory or approved self-regulatory arrangements
19) Prohibition of abusive collection practices
|Privacy and Data Protection||20) Providers should be required to submit to credit reference sharing bureaus/agencies, and clients should be allowed to view and correct any errors
21) Digital credit providers must provide adequate security and protect customer data
22) Laws or regulations in place to protect consumer information sharing
23) Digital credit providers must inform customers of their policies for the use and sharing of personal, financial or transactional data
24) Credit information bureaus/agencies are subject to oversight by financial regulators
|Dispute Resolution Mechanisms||25) Digital credit providers have a designated contact point with clear procedures for handling customer complaints. The provider must also maintain up-to-date records of all complaints they receive and develop internal dispute resolution policies and practices, including processing time deadlines, complaint response, and customer access
26) Consumers have access to an adequately resourced dispute resolution mechanism as well as access to an independent financial ombudsman or equivalent institution with effective enforcement capacity
27) Statistics of customer complaints, including those related to breaches of codes of conduct, are periodically compiled and published by the ombudsman or financial supervisory authority and reviewed with providers
28) Regulatory agencies are legally obliged to publish aggregate statistics and analyses related to their activities regarding consumer protection—and propose regulatory changes or financial education measures to avoid the sources of systemic consumer complaints. Industry associations also play a role in analyzing the complaint statistics and proposing measures to avoid recurrence of systemic consumer complaints
|Guarantee/Escrow Rules and Insolvency[vii]||29) Regulator empowered to take appropriate measures to protect investors in the event of financial distress of a financial player
30) Escrow account rules are clear, especially in the case of P2P lenders, and ensure proper management and/or timely payout of escrowed funds
|Consumer Empowerment & Financial Literacy||31) An appropriate digital credit financial education and information campaign is developed to increase the financial literacy
32) As much as possible, other governmental as well as non-government consumer protection groups and industry players participate in supporting financial education around digital credit
33) Mass media should also be encouraged by regulators to understand consumer protection issues and help to disseminate best practices
34) The impact of consumer education and empowerment should be measured through broad-based household surveys that are repeated from time to time to see if the current policies are having the desired impact on the digital credit marketplace
|Competition, Regulatory Coordination and Consumer Protection||35) Financial regulators and other relevant regulatory agencies (Securities and Exchange Commission and/or Telecommunication Regulators) as well as competition authorities should consult and coordinate with one another in order to avoid regulatory arbitrage as well as ensure the development of an appropriate competitive marketplace
36) Competition policy in digital financial services should also consider the impact of competition issues on consumer welfare, and especially planned or actual limits on choice
37) Competition authorities and/or regulators should conduct and publish periodic assessments of competition among emerging financial players, as well as engage with the industry to make recommendations on how competition among digital credit providers can be optimized
It should be noted that not all digital credit players will fall under financial regulations. As much as possible though, financial regulations should be amended to ensure proper regulatory oversight of new players especially when they begin to reach large numbers of customers.[viii] In addition, since new digital credit products and models develop rapidly, principles-based regulations[ix] rather than rules-based regulations allow providers with space for innovation while at the same time provide regulators with the room to address emerging consumer protection issues specifically as they relate to digital credit and other digital financial services. JoAnn Barefoot, during her presentation at the ITU-Focus Group on Digital Financial Services meeting in Washington DC in April 2017, promoted the idea of supporting an innovative “online app store” approach to issues like consumer protection using new concepts around regulatory technologies (RegTech). The concept, while simple, is an innovative one, in which regulators could promote and allow new approaches to compliance including issues around consumer protection by developing “App Store” like platforms for providers to upload new proposed approaches to deal with compliance on matters such as consumer protection. The idea is that regulators could use machine learning tools that would be self-executing and would allow digital credit providers to upload their disclosure statements, fees, charges, terms and conditions so that supervisors could more rapidly review and approve new approaches to compliance, which others could then download and use or build on to allow the industry to support innovative open-sourced approaches to such compliance issues such as consumer protection.[x]
Regulators alone cannot provide all the oversight needed for emerging digital credit players and models, so the industry and their associations as well as consumer protection advocates also need to play a role. As noted in chapter 3, it is clear that the digital credit industry is advocating for various standards and best practice principles in different markets around the world.
The best approaches witnessed so far by the industry have been specific principle-based voluntary codes on consumer protection rather than general broad-based principles or standards of conduct. These principles or codes of conduct need to be in plain language and provide commitments that are clear to digital credit clients and detailed enough for the industry to follow and put in practice. To be effective, these codes need to be endorsed and widely disseminated by the industry associations but also published as clear commitments on the websites of the providers.[xi]
Source: Online Lenders Alliance
Associations supporting the industry should also provide, where feasible, additional support to address consumer complaints as well as play the role of an interim ombudsman similar to the way the Online Lenders Alliance maintains a consumer hotline for complaints for customers of their member institutions.
Source: Online Lenders Alliance
Overall, emerging industry digital credit principles and standards can benefit and learn from the practices developed by other groups with a focus on themes discussed in chapter 3 on industry responses.
In summary, industry principles and standards are based on the following:
|Industry Digital Credit Practices and Standards||Detailed Practices|
|Appropriate product design & delivery principles||1) Matching product design and usage
2) Use mobile technology expertise for mobile channel delivery
3) Advertising and marketing best practices
|Prevention of over-indebtedness principles||4) Avoidance of debt traps
5) Responsible underwriting
6) Responsible credit reporting/sharing
7) Pressure-free loan principles
|Transparency standards||8) Borrower disclosure standards
9) Investor disclosure standards (P2P platforms)
|Responsible pricing standards||10) Pricing terms and standards that are reasonable and affordable|
|Fair and respectful treatment of client principles||11) Clear collection policy and procedures
12) Fair collection practices
|Data privacy & usage standards||13) Responsible data usage
14) Consistent review of data privacy standards
15) Consent to communicate electronically
16) Informed consent & opt-in/opt-out policies
17) Management of third-party providers to protect client data
|Complaint resolution principles||18) Timely, clear and responsive complaint resolution practices|
|Security & risk management principles||19) Authentication practices
20) Industry standards on security compliance
In addition, consumers must also understand their rights and responsibilities as well. To better support customers, consumer empowerment and financial education efforts are important. These efforts not only need the support of industry but governments as well.[xii]
Some of the best practices used by others in addressing consumer education are also applicable to issues around educating consumers on digital credit products as well.
- Digital credit consumer education efforts should be included in national financial education programs that involve all stakeholders including the government, regulators, the industry and mass media.
- Like other financial education efforts, digital credit consumer education should be focused on “teachable moments.”. This includes providing financial education on digital credit at the time the consumer wants it and in a form that he/she wants it. Given the digital channels used such as online or via a mobile device for most digital credit, experiences like Australia[xiii] and ongoing research being conducted with companies like Jumo and First Access[xiv] demonstrate that interactive interfaces may be used to better educate clients about the product and services they receive as well as to encourage more responsible usage of credit.
- Financial education for digital credit products and services need to be customized and tailored to the consumer’s level of digital and financial literacy. What would work for a low-income mobile borrower in Africa would be quite different for the needs of an online borrower in China.
- Financial education for digital credit products should be thoroughly tested. Digital channels actually permit useful testing that can more precisely measure client’s behavior as well as comprehension in ways that traditional financial education tools cannot.[xv]
[ii] Smart Campaign (Sept 2017) Tiny Loans, Big Questions: Client Protection in Mobile Consumer Credit http://www.centerforfinancialinclusion.org/storage/documents/Smart_Brief_Tiny_Loans_Big_Questions_Final_092617.pdf
[iii] Discussion with Ros Grady during the Responsible Finance Forum VIII May 2017. See also King, Arnold The American (May 2012) Why We Need Principles-Based Regulation http://www.aei.org/publication/why-we-need-principles-based-regulation/
[iv] World Bank (2012) Good Practices for Financial Consumer Protection http://siteresources.worldbank.org/EXTFINANCIALSECTOR/Resources/Good_Practices_for_Financial_CP.pdf
[v] For the purposes of this report 37 of the 39 detailed principles that are applicable to digital credit have been adapted from the World Bank (2012) Good Practices for Financial Consumer Protection http://siteresources.worldbank.org/EXTFINANCIALSECTOR/Resources/Good_Practices_for_Financial_CP.pdf and listed in this table.
[vi] See example from the Australian Securities & Investment Corporation ((July 2015) Facilitating digital financial services disclosures http://download.asic.gov.au/media/3309666/ris-facilitating-digital-financial-services-disclosures-published-28-july-2015.pdf
[vii] Rules to protect investors of P2P lenders are relevant to this category of consumer protection for digital credit with examples now in place in China and India.
[viii] As P2P lending models grew rapidly in markets like China and India, regulators issued new regulations to ensure coverage of this group. As this particular trend grows in other markets, regulators should carefully study options to ensure that these players fall under financial regulations and can be properly supervised. In the Philippines, the central bank regulations on the Truth and Lending Act were amended to ensure coverage of all financial providers including pawnshops, traditional microfinance institutions as well as peer-to-peer lending platforms.
[ix] Grovelands (June 2013) What are the benefits of principles-based regulations? https://www.grovelands.co.uk/news/financial-services-news/why-we-need-principles-based-regulation/
[x] Presentation and discussion with JoAnn Barefoot in April 2017. See also Barefoot, JoAnn Hotwire (October 2017) Cracking the RegTech market will take more than great tech http://insights.hotwireglobal.com/post/102ehc5/cracking-the-regtech-market-will-take-more-than-great-tech
[xi] See the example of the Online Lenders Alliance seal http://onlinelendersalliance.org/wp-content/uploads/2016/03/Best-Practices-2016-1.pdf
[xiii] Australian Securities & Investment Corporation ((July 2015) Facilitating digital financial services disclosures http://download.asic.gov.au/media/3309666/ris-facilitating-digital-financial-services-disclosures-published-28-july-2015.pdf
[xiv] CGAP (Aug 2017) Consumer Protection in Digital Credit http://www.cgap.org/sites/default/files/Focus-Note-Consumer-Protection-in-digital-Credit-Aug-2017.pdf