MICROCAPITAL.ORG STORY: Developments in International Consumer Protection and Their Relevance to Microfinance Industry

Recent events in the global financial sector have provided the impetus for the launch of the Smart Campaign, a consumer protection campaign focusing on fair lending within the microfinance industry. Although consumer protection practices exist among many microfinance institutions, the Smart Campaign has given these principles an international focus. The architects of Smart Campaign can eventually draw from a dense tapestry of consumer protection laws, regulations, policies already developed in many countries. The challenge will be to adapt existing consumer protection laws, regulations and policies to the specific characteristics of microfinance activities.

Consumer protection laws cover a broad range of business activities of which truth in lending is one subset. For example, in the United States where consumer protection laws are extensive and constantly evolving, the traditional banking sector must comply with a number of consumer protection laws, including, the Truth in Lending Act of 1968 (TILA), Truth in Savings Act of 1991 (TISA), Fair Debt Collections Act of 1978 (FDCA) and Fair Credit Reporting Act of 1970 (FCRA).[1] Perhaps the most often associated consumer protection law is the disclosure rule by TILA which requires the disclosure of key terms and all costs associated with a lending arrangement,e.g., Annual Percentage Rate (APR).[1] In the United States, there are also state agencies and state consumer protection laws that cover specified business activities. Other countries have their own consumer protection laws and mechanisms for enforcement. India has enacted its Consumer Protection Act which covers among other industries, the banking and finance sector.[2] Indonesia has an executive agency that enforces its consumer protection laws.[3] These laws provide a foundation for developing disclosure rules and rules that afford a baseline of protections against potential abuses in the microfinance industry.

On the international stage, international NGO’s, law enforcement agencies and intergovernmental organizations have incorporated consumer protection principles into their mission. Consumers International (CI) is a global consumer rights focused campaign with more than 220 member organization, representing 12 million subscribers across 115 countries.[4] This summer, CI drafted a position paper on the effect of financial crisis on consumers and submitted it to the United Nations General Assembly.[4] Under the subsection titled “Consumer Protection,” the CI position paper notes, “Stronger measures than improved disclosure of information will be necessary to protect consumers. Financial products must be designed with features, pricing and risks understandable to the intended consumers.”[4, pg.2] The International Consumer Protection and Enforcement Agency (ICPEN) consists of “law enforcement authorities of more than three dozen countries,” which holds an annual “Best Practices Workshop” to assist member governments to exchange consumer protection enforcement practices.[5]

Finally, the Organization of Economic Cooperation and Development (OECD) Consumer Policy Committee has drafted recommended guidelines for the development of consumer protection principles, particularly in light of the financial crisis.[6] On July 7, 2009, the OECD Consumer Policy Committee stated that tougher rules needed to be enacted to protect consumers, specifically, “Financial services firms must make sure their customers understand what they are letting themselves in for when they sign up for mortgages, consumer loans and other products, under new OECD guidelines designed to avoid a repeat of the sub-prime mortgage crisis and ensuing credit crunch that sent the world economy into recession.”[6] Among these guidelines, the OECD recommends that, “Lenders should, for instance, be required to display prominently a summary of key terms and conditions of a loan and explain the implications of missing a payment deadline. This should include: the loan amount and interest rate; any fee and charge (including broker fees); the number of installments; the amount of payments and when they are due; the total amount repayable and the total cost of credit.”[6] In addition, the OECD advocates that lenders be required to provide competent financial education of their consumers.[6]

Make your comment at:
http://microfinanceassociation.ning.com/forum/topic/search?q=consumer+protection

By Hio Kyeng Lee, Research Associate

Bibliography:

[1] Description of Truth in Lending Act, located at, http://www.fdic.gov/regulations/laws/rules/6500-1400.html; Description of Truth in Savings Act, located at, http://www.fdic.gov/regulations/laws/rules/6500-3400.html; Description of Fair Debt Collections Act, located at, http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre18.shtm; Description of Fair Credit Reporting Act, located at, http://www.ftc.gov/os/statutes/fcrajump.shtm ;

[2] Indian Consumer Protection Act, copy located at, http://www.advocatekhoj.com/library/lawareas/consumer/consumer.php?Title=Consumer

[3] Indonesian Directorate of Consumer Protection, official website located at, http://pkditjenpdn.depdag.go.id/English/index.php

[4] Consumers International, official website located at, http://www.consumersinternational.org/HomePage.asp?NodeID=89645; CI position paper on financial crisis can be found under the Key Issues Tab/Financial Crisis tab.

[5] International Consumer Protection and Enforcement Agency (ICPEN) located at, www.icpen.org

[6] Organization of Economic Cooperation and Development (OECD) Consumer Policy Committee, located at, http://www.oecd.org/document/59/0,3343,en_2649_33725_43277179_1_1_1_1,00.html

Similar Posts: