Innovation vs. Consumer Protection: Striking the Right Regulatory Balance
Technological innovations have radically transformed the financial services sector in Kenya, generating significant benefits for both consumers and the economy. As a result of this digital transformation, customers - many of whom were financially excluded or underserved - can now make payments, take out loans, transfer money, purchase insurance and access their bank statements easily using their computer or mobile phone. This trend towards digitalization of the financial sector is expected to continue as advances in computing and telecommunications ensure more and more Kenyans rely on technology to access financial services.
However, the benefits from increased financial inclusion and broad-based economic growth through digital financial services (DFS) are tempered by the potential risks to less financially sophisticated segments of the population by increasingly complex fintech products and services. As usage of these DFS and related delivery channels becomes more widespread and commonplace, questions are being raised about whether the sector is well-regulated enough to ensure consumers are adequately protected.
Media reports of deceptive, fraudulent, and unfair practices coupled with undignified treatment to indebted consumers lend credence to the perception that the current client protection framework does not adequately shield DFS customers from harm. Some of the ways in which DFS users’ rights have been injured include failure to disclose prices and key terms, inadequate dispute resolution mechanisms, loss of funds through fraud, misuse of personal information, aggressive marketing tactics, questionable lending and abusive debt collection methods.
Consequently, one of the biggest challenges for Kenyan regulators is how to strike a balance between enabling the financial institutions they oversee to offer these innovative fintech services without undue limitations, while at the same time protecting consumers from potential harm. Another challenge is posed by Kenya’s fragmented financial regulatory framework, which consists of several sector-specific laws and related supervisory institutions as well as other cross-market oversight bodies with DFS-related mandates, including telecommunications, competition, and consumer protection agencies.
In the absence of a specialized financial consumer protection agency or a single regulatory entity that has market-wide jurisdiction, we are starting to see policymakers adopt principles-based approaches to regulation in a bid to ensure financial service providers (FSPs) comply with consumer protection provisions. In this context, the DFS Consumer Protection themes and principles developed by the International Telecommunications Union Focus Group on DFS serve as suitable guidelines for the development of principle-based regulation in Kenya’s digital financial ecosystem. Each of the following five principles is crucial for gaining and maintaining client trust in, and therefore usage of, DFS:
- Principle 1: Provision of information and transparency. To enable consumers to make informed decisions, financial institutions must provide complete, accurate and transparent information regarding their DFS products and services, including terms, conditions, applicable fees and final costs.
- Principle 2: Dispute resolution. DFS providers must establish an expeditious, fair, transparent and accessible process to resolve issues between DFS users and providers.
- Principle 3: Prevention of fraud. A robust fraud prevention system is crucial for all DFS providers, as DFS fraud can be perpetrated by customers, agents, business partners, system administration or the FSP itself.
- Principle 4: Data protection and privacy. DFS providers must put in place strong measures to prevent unauthorized access to and misuse of user data which can result in various cyber risks and harm.
- Principle 5: Protection of funds. In order to ensure that funds are available to users when they seek to cash-out of the system, DFS providers must maintain - in special accounts with licensed deposit-taking institutions - unencumbered liquid assets equal in value to the amount of issued electronic money.
Institutionalizing and entrenching these principles through balanced regulation will create the necessary conditions for innovation to thrive, while also enhancing consumer protection and promoting financial market stability. To get started, the following key actions need to be taken:
- Harmonize existing rules and regulations to bring all DFS under the same regulatory domain and apply consistent treatment for all types of services.
- Through collaboration among regulators and other oversight bodies, develop an enabling regulatory environment for DFS to thrive while enhancing the regulators’ ability to detect, prevent and correct risky practices that could harm consumers.
- Train and support FSPs on how to develop consumer protection policies, codes of conduct and redress mechanisms, in compliance with financial consumer laws and regulations.
- Build capacity to oversee existing and new providers and to effectively enforce financial laws and regulations.
- Support digital financial literacy, particularly among excluded and underserved groups regarding issues such as benefits, risks and costs of using various DFS.
, thereby helping to build trust and confidence in Kenya’s evolving digital finance ecosystem. By so doing, they will ensure that the full benefits of financial inclusion are extended to everyone.