Good Practices: Banking Sector


Consumer Protection in the Banking Sector



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Consumer Protection in the Banking Sector

Overview

1.Tajikistan’s banking sector shows a low rate of use of banking services by the population. A large percentage of the population lives in rural areas in which access to banking services may be difficult and consumer choice limited or absent. Most daily transactions are conducted in cash, and there are still few opportunities for most consumers to use any other means of payment. For this reason, immediate access to money in the form of cash is especially important to consumers. Most banks currently offer a narrow range of simple banking services to consumers, including money transfers (remittances), time deposits for savings, and “plastic card” accounts that allow consumers to receive payments, obtain cash from cash machines, and to make a limited number of payments. Small loans are also available to individuals to fund income-earning activities. Consumer credit is very limited and consists mostly of mortgage loans.

2.A very large amount of money circulates in the form of cash held outside of the banking system. If a greater share of this money were to be held in banks, it could provide greater safety and additional incomes to account holders as well as liquidity and available lending funds to banks. But consumer confidence in banks remains low, retarding growth of deposits. While there are many factors that affect a consumer’s decision to deposit funds in a bank, several important concerns were repeated during the review:


  1. consumers rely on immediate access to their money in cash and believe that they will encounter problems in getting it from ATMs or banks that cannot be resolved quickly;

  2. consumers fear that banking information will not be kept private and will subject them to unwanted attention from tax bodies, officials, or others in their communities who may have predatory intentions; and

  3. consumers have a poor understanding of banking services, resulting in fear that they may misunderstand or be cheated and will have no effective recourse.

3.With respect to the first concern, there are several broader matters not usually addressed as “consumer protection” that are of great importance. Lack of sufficient banking infrastructure is clearly a primary consideration. The availability of bank branches and other sources of service, the availability of ATMs and their states of repair, and other similar issues clearly play a significant role in whether consumers are able to quickly and reliably obtain the cash needed to conduct daily transactions. As long as these facilities are not sufficient to meet demand, some consumers will continue to be unwilling to leave money in banks outside sums earmarked for longer term savings. Rules concerning bank liquidity and requirements for the availability of currency at bank branches are important in insuring consumers’ access to their funds, although these certainly are not purely consumer protection measures. As ATMs become more important in providing consumers access to cash, factors such as the condition of the stock of circulating currency and the ease with which banks can obtain bills in appropriate condition for machine use can also play a role in assisting or hindering smooth functioning of the system for both banks and consumers.

4.Consumer protection rules, however, can also be important both in ensuring that consumers have ready access to their money in cash and in setting clear expectations that build trust in the system and allow consumers to plan appropriately. Rules of this kind might include requirements concerning the treatment of consumer withdrawals of cash, requirements concerning the service of customers at cashier windows, and clarity concerning the circumstances in which a bank may require prior notice for a withdrawal due to the type of account, size of withdrawal, or other factors.

5.In addition to measures that may be taken to address consumer concerns about the immediate availability of their funds in cash, there are a variety of other measures that may be taken to improve consumer protection in the banking sphere and to address concerns about privacy of information, concerns about consumer understanding and information, and other important issues. These are addressed in the attached review of the legal framework and practices of Tajikistan against a list of good practices in the banking area.

6.The review of Tajikistan’s law and practices presented here is based on interviews and conversations with banks, government officials and other counterparts, as well as with a small number of consumers of banking services. A few test visits to bank offices were made to determine what information might be provided by those offices to an ordinary citizen of Tajikistan inquiring about banking services. It should be noted, however, that although they were requested, no examples of the packages of documents usually provided by banks to their customers could be obtained for review, either from the banks during discussion or by the visitors to bank offices. Thus, there remains some question about precisely what banks are doing in practice in terms of the information content of these materials.



Comparison with Good Practices for the Banking Sector



SECTION A


CONSUMER PROTECTION INSTITUTIONS


Good Practice A.1.


Consumer Protection Regime

The law should provide clear consumer protection rules regarding banking products and services, and all institutional arrangements should be in place to ensure the thorough, objective, timely and fair implementation and enforcement of all such rules.

  1. Specific statutory provisions should create an effective regime for the protection of a consumer of any banking product or service.

  2. A general consumer agency, a financial supervisory agency or a specialized financial consumer agency should be responsible for implementing, overseeing and enforcing consumer protection regarding banking products and services, as well as for collecting and analyzing data (including inquiries, complaints and disputes).

  3. The designated agency should be funded adequately to enable it to carry out its mandates efficiently and effectively.

  4. The work of the designated agency should be carried out with transparency, accountability and integrity.

  5. There should be co-ordination and co-operation between the various institutions mandated to implement, oversee and enforce consumer protection and financial system regulation and supervision.

  6. The law should also provide for, or at least not prohibit, a role for the private sector, including voluntary consumer organizations and self-regulatory organizations, in respect of consumer protection regarding banking products and services.

Description

a. Tajikistan’s legal framework contains some important basic provisions concerning the rights of consumers of banking products and services. These include requirements for confidentiality of banking information, rules on the content and truth of advertising, and other matters. Some more detailed rules exist in regulatory instructions issued by the National Bank of Tajikistan (NBT), such as rules concerning the kinds of records that banks must keep in relation to credit agreements with a customer. In addition, banks interviewed for the diagnostic review indicated that in at least some areas of consumer protection they follow internal policies and practices that exceed the more limited requirements imposed by legal provisions. Markets for some banking services appear to be reasonably competitive, and bank attention to consumer protection issues suggests that banks are increasingly aware of the importance of consumer satisfaction to individual bank performance and to stability of the larger banking system.
Some of the existing legal provisions, however, are general in nature and not designed for application to banking services, such as those in the law “On the Protection of Consumers’ Rights” and in the law “On Advertising.” Others, although contained in banking legislation or regulatory instructions, lack clarity and detail and/or an effective enforcement mechanism. There are gaps in some important areas that need to be addressed and some existing rules should be changed or strengthened. This situation is not surprising, as the overall legislative framework for banking in Tajikistan is quite new. It makes sense for initial provisions to be drafted to include basic provisions covering some of the most important areas of consumer protection, and for more detailed regulation of specific areas to follow.
b. A more important and fundamental problem at present is the lack of institutional structures that are responsible for regulating for consumer protection or for receiving and responding to consumer complaints in the banking sphere. Although the NBT is responsible for supervising the banking system, including observance of those legislative rules that protect consumers, it does not have clear and specific responsibility to ensure protection of the consumers of banking products and services. Nor does the NBT have structures in place that would respond to individual consumer complaints. There is no independent body or office, such as a financial ombudsman or consumer financial protection office, that is responsible for receiving and responding to individual consumer complaints concerning banking issues.
Responsibility for the enforcement of general consumer protection rules on the basis of specific complaints and own-initiative investigations currently rests with the antimonopoly body, which is tasked with enforcement of the competition law, consumer protection law, and advertising law. That body is itself very new. It does not yet have basic legal provisions in place governing procedures for investigations and decisions on cases and it has as yet only very limited experience in addressing consumer complaints of any kind. It lacks any expertise at all in relation to banking matters. The antimonopoly body already faces significant resource constraints in meeting its higher profile obligation to deal with natural monopoly regulation and competition concerns across the economy as a whole, and it does not appear that it would be able to address banking or broader financial consumer protection issues without both a significant increase its resources and strong support in developing the necessary expertise. At present, the antimonopoly body lacks public recognition as a consumer protection body, making it highly unlikely that it will receive consumer complaints.
c.- e. As there is no organization or entity that is directly responsible for consumer protection in banking, and there are no specific procedures in place for this purpose, no assessment is made here of the adequacy of financing, transparency of procedures, or cooperation among bodies.
f. The laws contain some general provisions envisioning the existence of industry associations and social bodies or consumers’ organizations. They do not, however, assign these bodies any specific role or mandate consultation with them on issues of consumer protection in the banking sphere. They likewise do not prohibit such organizations from participating in consumer protection activities. There is a single existing consumer protection organization, which on the basis of general principles of law could pursue a consumer complaint in relation to banking matters. That organization reports that it receives almost no complaints related to banking or financial matters. That organization would have to either assist the consumer to resolve the problem on an informal basis, or pursue the matter in court (or through the public prosecutor’s office) through the general provisions of the consumer protection law and the provisions of the civil code, civil procedure code, and other general legislation. This is a time consuming process.

Overall, consumers lack any direct channels to quickly and effectively resolve disputes with banks that are not resolved by the banks’ own initial complaint procedures. Processes that involve escalating a dispute through the higher ranks of bank management, waiting for an investigation and ruling by the antimonopoly body, or filing a complaint in court are likely to be unattractive in terms of both cost and delay. This may be especially problematic in relation to issues affecting the ability of consumers to access money in their accounts and for rural consumers who are not located near any of these sources of redress. In order to raise consumer confidence and willingness to deposit funds, it may be necessary for special mechanisms to be created for the quick resolution of particular types of disputes or for particular categories of consumers.




Recommendation

NBT’s responsibility and authority as the banking regulator to address consumer protection concerns in regulating banking activities should be clarified in law, and a department or office in NBT should be created or designated to carry out this function. This department (office) should be responsible for ensuring that consumer protection issues are addressed in NBT instructions and other regulatory acts and proposing changes or additions where necessary, reviewing bank observance of consumer protection norms as a part of NBT bank supervision, receiving and reviewing information on consumer complaints collected by banks and other bodies to determine whether further regulation by NBT or other action is needed, and coordinating with (providing expertise to) other bodies involved in the enforcement of consumer protection norms. NBT eventually should develop a risk-based conduct-of-business supervision methodology.

If responsibility for investigation of individual consumer complaints in the banking sphere remains with the antimonopoly body, substantial additional resources and support will need to be provided and corresponding amendments made in its statute and provisions included in rules governing its procedures (when those are adopted) to ensure appropriate involvement of banking experts and the banking regulator in its decisions. At a minimum, the rules should require that the antimonopoly body specifically assign responsibility in cases concerning banking and finance to a department, sub-department or official (to encourage the development of expertise) and should also require that decisions on such cases involve consultation with the regulatory authority. If desired, the procedure for decisions on these categories of cases could require the participation of representatives of the regulatory body along with officials of the antimonopoly body.


In the alternative, a special office of the NBT or a financial ombudsman’s office could be created to accept and pursue individual consumer complaints concerning banking and financial issues. Whatever body is defined as the proper recipient of consumer complaints, it is important that this body be clearly identified to consumers and its role in this area publicized so that information about the kinds of problems that consumers are encountering can begin to flow to NBT as the banking regulator and to other authorities. In the absence of both clear institutional structures and authority and of information on what bodies might respond to a complaint, it is not surprising that there are few such complaints recorded outside of bank structures. The regulator and other bodies cannot receive the information necessary for the development of appropriate rules and their efficient enforcement until channels are opened for communication by bank customers.
On the basis of information received by the regulator concerning complaints and concerns of consumers, the regulator should consider whether special mechanisms for resolution of consumer problems are needed in relation to particular categories of problems or groups of consumers. The regulator should have the authority to convene a working group together with consumer protection authorities and representatives of the banking industry to consider workable solutions for these situations. Such solutions could be imposed by the regulator (if within its authority), voluntarily implemented by the industry alone or with the participation of consumer protection bodies, or created in another way.


Good Practice A.2

Code of Conduct for Banks

  1. There should be a principles-based code of conduct for banks that is devised by all banks or the banking association in consultation with the financial supervisory agency and consumer associations, if possible. Monitored by a statutory agency or an effective self-regulatory agency, this code should be formally adhered to by all sector-specific institutions.

  2. If a principles-based code of conduct exists, it should be publicized and disseminated to the general public.

  3. The principles-based code should be augmented by voluntary codes of conduct for banks on such matters as facilitating the easy switching of consumers’ current accounts and establishing a common terminology in the banking industry for the description of banks’ charges, services and products.

  4. Every such voluntary code should likewise be publicized and disseminated.

Description

a. – d. There are not currently any voluntary codes of conduct, whether principles-based or otherwise, for banks in Tajikistan. Some banks reported that they had their own codes of conduct in the form of detailed rules about how bank employees are to deal with customers in relation to specific types of products and accounts. At least one bank reported that it had and enforced a code of ethical conduct for employees. These are, however, internal governing documents of the banks. They were not available for review. None of such documents can serve the purpose of setting broadly agreed principles for bank behavior, although it is possible that they might serve as the basis for work on codes that could be developed through the Association of Banks of Tajikistan.


Recommendation

The NBT and/or the Association of Banks of Tajikistan should raise the question of development of a basic voluntary code of conduct or code of ethical principles with member banks and facilitate the beginning of work on such a code to be applied to banks’ dealings with consumers. Work done in developing such a voluntary code of conduct could also facilitate consideration by NBT of consumer protection issues and its consideration of which minimum rules and standards should be included in mandatory instructions or legal amendments. The existing consumer protection association, the antimonopoly body, and any other interested bodies should, at a minimum, be encouraged to make suggestions and to comment on the draft of the code. When a code has been developed, banks observing the voluntary code may wish to reflect its provisions in appropriate parts of their contracts. They could also distribute the code as an attachment to contracts, in order to give consumers information on what to expect of the bank. The voluntary code itself could include such a requirement or suggestion if desired.


Good Practice A.3


Appropriate Allocation between Prudential Supervision and Consumer Protection

Whether prudential supervision of banks and consumer protection regarding banking products and services are the responsibility of one or two organizations, the allocation of resources to these functions should be adequate to enable their effective implementation.

Description

No single body or organization is assigned responsibility for consumer protection specifically in the banking and financial services sector and there are, correspondingly, no resources specifically directed to this purpose.

The antimonopoly body is responsible for the application of the general laws on consumer protection, on competition, and on advertising, where many of the general legal rules protecting consumers are located. The antimonopoly body has very limited general funding. Knowledge of its existence and its role in consumer protection appears to be limited, and it has not yet received any complaints, conducted any cases, or performed any industry reviews related to the banking and financial services sectors. If it is to play an effective role in consumer protection in those areas, it will need additional funding and also assistance in developing staff expertise on relevant issues.




Recommendation

Responsibilities and authorities related to consumer protection in the banking and financial services sector still need to be clearly defined in laws and regulations, as discussed in A.1 above. Adequate funding will need to be allocated to the office or division of the NBT that is assigned responsibility for consumer protection issues, including for the collection and/or review of data on consumer complaints and the maintenance of effective coordination with the other bodies involved.

If the antimonopoly body is entrusted with the primary authority for the case-by-case response to consumer problems and complaints, additional resources will be critical in allowing it to fulfill this role.



Good Practice A.4

Other Institutional Arrangements

  1. The judicial system should ensure that the ultimate resolution of any dispute regarding a consumer protection matter in respect of a banking product or service is affordable, timely and professionally delivered.

  2. The media and consumer associations should play an active role in promoting banking consumer protection.

Description

a. Judicial decisions are not routinely published in Tajikistan, and it is not possible to determine with certainty whether any cases have been brought specifically to challenge a bank’s violation of an individual consumer’s legal rights. Banks, the antimonopoly body, and the single existing consumer protection association, as well as a law firm consulted on the issue, all reported no knowledge of any such cases.

In general, consumer cases would be heard by the courts of general jurisdiction (rather than the specialized economic courts). Filing costs may not be prohibitive for small claims and consumers may represent themselves or ask any trusted party (not only a lawyer) to represent them. But case decisions are reported to be subject to delays of six months or more and the process for filing and consideration would be burdensome for an individual. A number of the counterparts interviewed for this diagnostic study reported a perception that individual use of the courts to make complaints could involve social stigma, business difficulties, or negative consequences for the plaintiff.

Cases concerning the violation of consumers’ rights can be brought by state bodies, local government bodies, and consumers’ associations, in addition to individual consumers. Such bodies are relieved of the payment of filing fees and have the right to bring a case on behalf of a specific individual consumer or group of consumers, or on behalf of an undefined group of consumers whose rights have been violated by illegal behavior (Article 15 of the law “On Protection of Consumers’ Rights”). Some of the state bodies (such as the antimonopoly body) have investigative powers that could help a consumer to obtain information necessary for a court case. To the extent that consumers wish to pursue a complaint through official channels, including the courts, the use of these bodies is likely to be the best option currently available. However, it is doubtful that these bodies currently have the resources or expertise to pursue a complaint.

Banks did report that there were cases in which banks sought repayment of debt or execution against property serving as security for a loan through the courts. Although most of these cases concern loans made to individual entrepreneurs for small business purposes, treatment of the banks’ claims in these cases would shed some light on judicial interpretation of general legal provisions that are also important to consumers. Decisions in these cases, however, are likewise unpublished and no general guidance appears to have been issued by the highest court on any relevant questions.

It would appear that the judicial system has little experience in the resolution of consumer disputes in general, and the resolution of consumer disputes in financial services in particular. A timely and professional resolution of an individual dispute may not be available to individuals at an affordable price. Alternatives such as mediation or quick, informal arbitration for an individual complaint do not appear to be available through the judicial system at all.

b. Consumer issues in financial markets have not been a focus for either the media or the work of the existing consumer association. There have been few complaints to focus the attention of the consumer association, and no significant developments or public events reported in the media.

Note: A full evaluation of the treatment of individual civil disputes by Tajikistan’s courts of general jurisdiction is well beyond the scope of this diagnostic review. The discussion here is based on information easily available from counterparts in the banking and consumer protection spheres and from public sources. It is reasonable to assume that those counterparts would be aware of significant developments in this area or a large practice of cases, as they must follow developments and abide by the relevant legal rules. However, no meetings were held with representatives of the judicial system during the diagnostic review and no court statistics were available for review.



Recommendation

On the basis of a further inquiry into the handling of civil cases concerning individuals by the courts, consideration should be given to whether changes are needed in civil procedure arrangements to allow individual consumers to use the courts effectively for the redress of their rights. This could include a “small claims procedure” allowing for a simplified process and rapid hearing and decision on the matter. A procedure for simple arbitration or mediation of small disputes could also be considered, but care should be taken that such procedures do not have the undesirable result of producing pressure on individual consumers to accept compromise resolutions. Where the law protecting consumers is not well developed and the ability of consumers to fully vindicate their rights is not established, it may be appropriate to focus any special procedures on a formal application of the law.


Good Practice A.5

Licensing

All banking institutions that provide financial services to consumers should be subject to a licensing and regulatory regime to ensure their financial safety and soundness and effective delivery of financial services.

Description

Banks and other institutions that conduct banking activity are subject to licensing under Chapter 2 of the Law on Banking Activity. Licenses are issued by the NBT, which is authorized to regulate banks to ensure the soundness of individual banks and of the financial system as a whole. Responsibility of NBT to ensure the effective delivery of financial services from the point of view of consumers of those services is considerably less clear, as is its responsibility for consumer protection issues. In practice, however, NBT does include some provisions intended to protect the rights of bank customers in its regulatory instructions and other documents.


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