Good Practices: Banking Sector

Recommendation	There is no need for change in the overall licensing regime at this time. It is important, however, for NBT’s responsibility for consumer protection in the banking sphere and its authorities to take action (including through suspension or withdrawal of a license where appropriate) to be more clearly expressed in the law and instructions.
SECTION B	DISCLOSURE AND SALES PRACTICES
Good Practice B.1	Information on Customers When making a recommendation to a consumer, a bank should request sufficient information from the consumer to enable the bank to render an appropriate product or service to that consumer. If the consumer takes up a product or service, such information should be recorded and filed. The extent of information the bank gathers regarding a consumer should: be commensurate with the nature and complexity of the product or service either being proposed to or sought by the consumer; and enable the bank to provide a professional service to the consumer in accordance with that consumer’s capacity
Description	a. There is no requirement in banking legislation or instruction that banks gather sufficient information from a consumer to determine which products or services are appropriate to that individual, nor are there applicable voluntary standards or codes in the banking sphere. The narrow selection and relative simplicity of the products currently offered to consumers by Tajikistian’s banks may have so far limited attention to this issue by banking regulators. Article 6 of the law “On Protection of Consumers’ Rights” does obligate a seller who has been made aware by a consumer of the concrete purposes for a purchased service to provide the consumer with a service that is suitable for those purposes. It does not, however, obligate the seller to make inquiries to determine either the consumer’s purposes or other information that would affect suitability of banking products for that consumer. b.i. & ii. Test inquiries at several banks concerning available account types and services indicated wide availability of only two types of accounts: (1) payment accounts in which payments may be received and from which cash may be withdrawn or payments made to a limited number of recipients on a direct debit basis, and (2) interest-bearing time deposit accounts. Consumer credit was offered by only one visited bank, and only in the form of a mortgage. Credit was available at all of the banks to individuals for income earning activities. Conditions on payment accounts appeared to be fixed in all of the banks offering them, with only the possibility to purchase additional services related to notifications of activity in accounts. Bank employees were not in a position to make recommendations among differing accounts or services of this type. A number of types of interest-bearing savings accounts are available, and a bank representative could make recommendations in that regard. Differences in the accounts, however, appear to be limited and reasonably simple. In the test visits, bank representatives did not inquire about the intended use of the funds in order to make a recommendation, but rather concentrated on asking when the client might need the funds again and explaining the means for payment of interest and the consequences of early withdrawal of funds. While more information about the client might have allowed the representative to make a more specific suggestion, the simplicity of the products, relatively short deposit periods available, and limited differences between products would limit the use of further inquiry. Thus, the observed practice appeared to be appropriate to the products discussed. In the banks visited in test visits, consumer credit was either completely unavailable, or (in one instance) available only for mortgages. Credit to individuals for use in income-earning activities was available, but would be required to be secured against real estate. Bank representatives described an approval process for such credit involving review of the business activity involved, visit of bank representatives to the place where the income-earning activity would be conducted (farm, trading stall, etc), and other inquiries. While this review was to be undertaken for the security of the bank, it also implies significant knowledge by the bank of the potential customer’s purpose for the loan and financial circumstances and the appropriateness of the loan for that customer.
Recommendation	At present, the selection of available banking products and services in Tajikistan is very limited and the amount of information needed to determine whether a product is appropriate is correspondingly small. However, it is not too early to incorporate the principle that only products appropriate to a consumer’s needs and financial capacity should be recommended into banking principles and operations. Banks should train their employees to make sufficient inquiries about customers’ needs and financial situations to make appropriate recommendations for products and services. In addition, banks should avoid the use of compensation schemes that skew employee incentives toward the sale of more complex or costly products regardless of their suitability to the individual customer. If bank employees make specific recommendations to a consumer concerning banking products, a notation of the recommendation and its basis should be made in the record concerning the account that is opened for that consumer. As a part of their review of banking records and employee performance, banks should review these notations – and particularly notations in records concerning non-performing loans and other problematic accounts – to determine whether inappropriate recommendations have been made. A principle reflecting this good practice should be included in any code of conduct developed for banks under point A2. It is important to note that this good practice should not be interpreted too broadly. It is not good practice for bank employees to be instructed or required to collect or record personal identifying information on all individuals who seek information about bank products and services before providing that information to them. Similarly, the information asked for and recorded should not go beyond that necessary to determine which of several available products may be best for the consumer and whether the consumer has the needed financial capacity. There were indications during the diagnostic review that some potential customers of banks do not use banking services due to fears of predatory behavior by those with access to information about bank clients. Overly intrusive practices may discourage use of banking services even further and delay development of an inclusive financial system. With respect to information that it is appropriate for bank employees to record, privacy of consumer information remains a significant concern and may impact the accuracy of information provided. In order for banks to receive accurate information on consumers and for consumers to be secure in releasing such information to banks, the privacy regime will need to be strengthened.
Good Practice B.2	Affordability When a bank makes a recommendation regarding a product or service to a consumer, the product or service it offers to that consumer should be in line with the need of the consumer. The consumer should be given a range of options to choose from to meet his or her requirements. Sufficient information on the product or service should be provided to the consumer to enable him or her to select the most suitable and affordable product or service. When offering a new credit product or service significantly increasing the amount of debt assumed by the consumer, the consumer’s credit worthiness should be properly assessed.
Description	a. – d. in general: Banks offer a relatively narrow range of products and services to consumers in Tajikistan, including remittances, time deposits for savings, and “card accounts” allowing receipt of payments and use of a card to get cash at ATMs and to make payments at a small number of locations. Consumer credit is extremely limited, and is available primarily for mortgages for individuals with a high, regular salary. Small amounts of credit are available to individuals for income earning activities such as trading, livestock raising, and other pursuits, but this credit is also offered only with security against real estate or (for small amounts in some banks) with the deposit at the bank of items of value. In addition to the security interest, banks often require a visit to the premises where the activity is to be conducted, a valuation of the property serving as security, references from neighbors, and proof that the borrower does not owe taxes. A financial guarantee by other persons may also be required. This appears to be the only credit product, other than mortgage credit, available to most non-business customers of banks and in several test visits to banks there was no indication that banks were eager to lend (indeed, rather the opposite). Banks do attempt to assess the credit worthiness of borrowers for these loans, but in the absence of a credit reporting system have significant difficulty in tracing other indebtedness. In this current environment, choice is available to consumers primarily with respect to savings products in the form of varied terms on time deposits, and consumers appear to be given choices among these products and informed about their differences. Several banks did indicate that disputes or complaints about the consequences of early termination of a time deposit had been received, and it is clear that there is competition among banks for such deposits. Some banks also indicated that they employ incentive schemes in relation to the sale of deposit accounts by bank employees. Although this is not sufficient information to determine whether there is a problem developing, it is possible that such incentives may result in recommendations of time deposit accounts that are not suitable for a consumer’s savings purpose or financial means. a. There are no rules specifically in the banking sphere that discuss recommendations to consumers concerning which products and services they should purchase or require that bank employees consider this issue. Existing banking rules focus on the provision of information rather than of advice. Article 6 of the law “On Protection of Consumers’ Rights” requires a seller of services that has been told the consumer’s purpose to provide a service that is suitable for that purpose, but does not obligate sellers to undertake any inquiry. b. Point 15 of NBT Instruction #186 “On the Procedure for the Provision of Credit and the Accrual of Interest in Credit Organizations” requires that a client receive written information on all of the types of credit provided by that organization and their terms (including rates, conditions, types of security accepted and other conditions). This may be provided in the form of an announcement or description, or in the form of an advertising brochure, and the form and content must be approved by the management of the credit organization. The Instruction requires that this information must be provided prior to the signing of a contract for credit, but does not require it to be provided before the client submits an application for a particular credit product. c. With regard to credit, a consumer presented with the information required under point 15 of Instruction #186 would have sufficient information to choose among credit products, provided they received the information in a clear form and prior to any steps in the application and approval process that would commit them to a particular type of loan. In practice, there appears to be little choice for consumers due to the limited selection of available credit products. Although there is no requirement applicable to savings products, advertising materials reviewed generally contained enough information to allow consumers to choose among products. In a small number of test visits, customers were provided with detailed explanations of the differing accounts. d. Chapter 4 of Instruction #186 requires an evaluation of the customer’s financial condition and ability to repay as a part of the process of issuance of credit. In test visits to banks, bank personnel described a substantial amount of review of an individual’s creditworthiness that would be undertaken, including visits to his/her place of business activity, valuation of real estate used as security, and proof that there is no indebtedness to the state budget. The instruction does not distinguish between issuance of an initial amount of credit and any decision to issue additional credit that would increase a customer’s debt.
Recommendation__a.'>Recommendation	a. Given the low level of financial literacy in Tajikistan, it is important that customers not only be presented with information, but also advice that is designed to help them make good choices. A provision should be added to Article 55 of the law “On Banking Activity” requiring that advice given to customers be designed to meet their needs and to ensure that options chosen are affordable, and to require the banking officers to undertake sufficient inquiry to be able to do this. It would be appropriate for the NBT to insert such a requirement also in instructions concerning the procedures for conduct of some kinds of banking activities, and particularly in Instruction #186 on the issuance of credit. b. – c. Point 15 of NBT Instruction #186 should be amended to require that customers receive the information described in that point early in the process when they are inquiring about credit products and before their submission of an application for credit, rather than before the signing of the credit contract. The information should be provided in plain language, in the form of a “key facts” statement or other format that makes it easy for consumers to understand and compare products. This information should also be available to any potential customer who requests it at a bank office. d. The requirement to undertake a review of the creditworthiness of a borrower that is contained in Instruction #186 is sufficient, provided it is applied not only at the time of an initial extension of credit, but also at the time of any substantial increase in credit to a consumer. An addition or amendment to that Instruction could be made to clarify this requirement. In practice, this requirement will be difficult for banks to apply until they have access to reliable information on borrowers’ indebtedness.
Good Practice B.3	Cooling-off Period Unless explicitly waived in advance by a consumer in writing, a bank should provide the consumer a cooling-off period of a reasonable number of days (at least 3-5 business days) immediately following the signing of any agreement between the bank and the consumer. On his or her written notice to the bank during the cooling-off period, the consumer should be permitted to cancel or treat the agreement as null and void without penalty to the consumer of any kind.
Description	a. There is no cooling off period specifically required by banking laws or regulations for any type of account or agreement. Penalty-free cancellation of contracts may, however, be allowed in practice in some cases. At least some banks indicated that their policies would allow a consumer to cancel the contract at any time before money is disbursed on a loan without any penalty. Most time deposit accounts described by banks in interviews and in informational materials appear to allow closure of the account prior to its term without a payment of penalty other than the loss of accrued interest – which would have an effect close to that of a cooling off period at the beginning of the contract. A limited number of test visits to banks indicated that banks would not provide a copy of a form contract to a consumer who requested one to examine before submitting an application to open a time deposit account or to take out a loan. This indicates that it may be difficult or impossible for a customer to examine and consider the full text of the contract before signing it. Under these circumstances, a requirement of a cooling-off period is an important guarantee that the customer will be able to reject the agreement if, on full consideration, its terms are not acceptable. b. As there is no cooling-off period, there are no specific terms for length of period or its effect or use.
Recommendation	a. & b. NBT should consider the insertion into Instruction 186 of a requirement that a contract for credit provided to an individual envision the customer’s right of unilateral cancelation within a period of 3 to 5 business days after its conclusion. In order to protect banks from customer fraud and undue complication, this right of cancellation should be limited for loan contracts to a period prior to disbursement of funds to the consumer or prior to any withdrawal of those funds if they are disbursed into a consumer’s account in the same bank. If banks are permitted to offer to consumers immediate disbursement loans or “quick turnaround” loans, special rules may need to apply restricting cancelation to customers who return any funds disbursed simultaneously with the notice that they are exercising their cancelation right. There are no detailed instructions of the NBT regulating time deposit savings accounts and it is recommended that such instructions be developed and adopted. In those instructions, the NBT should include a requirement that a cooling-off period be provided for any savings product where the early termination of the contract results in a fee or penalty to the customer. The creation of rules concerning a cooling off period should not be considered a substitute for the requirements that banks provide a copy of standard form contracts to customers that specifically request them and that banks provide a “key facts” statement or other document in plain language explaining all of the significant terms of products and account types. All three of these requirements are important in protecting consumer rights.
Good Practice B.4	Bundling and Tying Clauses As much as possible, banks should avoid tying or bundling services and products in ways that restrict competition or consumer choice. In particular, whenever a borrower is obliged by a bank to purchase any product, including an insurance policy, as a pre-condition for receiving a loan from the bank, the borrower should be free to choose the provider of the product and this information should be made known to the borrower.
Description	a. Tying refers to the sale of two or more products or services together as a single product and refusal of the seller to separate the products and sell each of them separately. Bundling refers to the sale of two or more products or services together as a package when the products can also be purchased separately. Tying is usually considered a problem where the seller has dominance or significant market power in relation to one of the products, making it difficult for customers to obtain it from another source that does not require the purchase of the tied product. For important goods and services, however – including basic banking services – specialized regulations may prohibit tying by all sellers in order to protect consumers and ensure that such goods and services are available at an affordable price. In considering a tying case, the relevant question is often the relationship between the items that are “tied” and when they should be considered sufficiently unrelated that they should be sold separately. Bundling of products together – that is, the offer of a combination of products, often at a discount compared to the price of separate purchase. – may be a problem if it misleads customers about the real prices of the products or retards the development of competition in the market for one of the bundled items. In a competitive market, however, offers of bundled products or services can provide significant benefits to consumers in the form of discounts. Article 55(9) of the Law on Banking Activity specifically prohibits credit organizations from requiring obligatory purchase of additional services from the credit organization itself as a condition of the issuance of credit or the use of other services. Tying of unrelated products and/or services is also prohibited generally by Article 4, paragraph 3 of the Law on Competition.^1 There does not appear to have been any further legal or regulatory definition of when specific banking services must be considered separate for the purposes of application of these rules. All banks interviewed for the diagnostic review stated that they do not require the purchase of insurance or of any other products in connection with their loan activities or other services. In a limited number of test visits made to banks to inquire about available credit and savings products, no bank representative indicated that products were tied or that insurance of any kind would be required in relation to a loan. Some counterparts indicated that the current practice of requirement of security in property (real estate or valuables deposited with the bank) for loans gives banks recourse for loan repayment even in the event of death or disability of the borrower.^2 Others indicated that available insurance on property (such as real estate) is beyond the means of most individual borrowers. The spectrum of current bank offerings to consumers is narrow and products are relatively simple. There appears to be little packaging of multiple products and services or use of discounts on additional services. Many banks did report, however, that use of an existing deposit account as security for a loan was the most preferred arrangement for security on loans to individual entrepreneurs. As the law allows banks to set the rates for lending for each customer individually, it is possible that loans to those with deposit accounts might be found to have lower rates than others, but banks gave no indication that this is generally the case.^3 Some banks serve clients through accounts accessed by electronic means through the use of a card. In some cases, the descriptions of savings products offered by banks or of remittance services referred to the use of such accounts (e.g. for the receipt of periodic interest payments or of the remittances), and it was not always clear that the savings account could be opened in the absence of the card account. Although banks do not generally charge fees for the maintenance and use of card accounts, the withdrawal of money using ATMs is usually subject to a fee. There was some indication that banks may not always allow card account holders to access their money through means other than the use of the machines, such as the cashier’s window in a bank office. To the extent that this is true, a rule requiring a card account for the receipt of periodic interest payments or remittances (or for the receipt of pensions or other state payments) effectively imposes that service and those additional fees on the account holder. There was no indication that such fees are excessive or a cause of concern to consumers.