Economy
MPs plan new entity to regulate bank loans
Tuesday October 24 2023
Money being counted at a bank’s teller point. FILE PHOTO | POOL
A new financial markets watchdog will be set up to regulate the cost of credit and protect borrowers and their guarantors from rogue banks, if proposals under a new Bill are approved.
The proposed Financial Markets Conduct Authority will regulate and supervise the conduct of entities providing financial products and services to retail customers, handing it some functions currently performed by the Central Bank of Kenya (CBK) and other financial sector regulators.
It is one of the three new entities proposed under the Financial Markets Conduct Bill, 2023, which has been approved for publication by the National Assembly’s Finance and National Planning Committee.
Others are the Financial Sector Ombudsman and the Financial Sector Tribunal.
The Bill seeks to promote a fair, non-discriminatory financial market, conducive for credit access by establishing uniform practices and standards for providers of financial services and regulating the cost of credit.
“The legislative proposal seeks to promote a fair, non-discriminatory financial market, conducive for credit access by establishing uniform practices and standards for providers of financial services, regulating the cost of credit, and establishing the Financial Markets Conduct Authority whose functions shall be to regulate and supervise the conduct of providers in providing financial products and services to retail financial customers,” the Bill states.
The Bill also provides for full disclosure of information by a lender to a potential borrower and the guarantor before issuance of a loan.
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“The legislative proposal will limit lenders from charging or recovering from the borrower or guarantor’s interest exceeding the maximum rates as prescribed by the Financial Markets Conduct Authority from time to time,” a brief explaining the new law says.
Banks will be required to provide a pre-contract statement and quotation, with details of the loan advanced such as the dates and number of instalments for the loans, the total amount to be paid in principal, interest, loan fees and charges at the end of the loan period.
“The legislative proposal provides protection to guarantors, with a requirement that they are made aware of all the clauses in a loan contract before signing, and allowed to vary to terms after the agreement is signed,” the Bill states.
Financial obligations
The proposed Financial Sector Ombudsman shall resolve complaints by retail financial customers, financial product providers and financial service products and financial services to the retail financial customers.
The Financial Services Tribunal shall arbitrate disputes in the financial services sector.
The Bill further provides that lenders shall not vary the interest rates charged during the term of the contract.
The lenders will be required to determine the likelihood that the borrower and the guarantor will be able to comply with the financial obligations under the contract without substantial hardship. And should the lender decline to lend, they will be under obligation to give a specific reason.
Retail financial customers may claim compensation from the Conduct Compensation Fund if the customer suffers loss or damages caused by a financial product or service provider.
The Bill provides for the restriction of lenders from providing credit reports that contain information about the customer, as well as recommendations about the creditworthiness of the customer, based on prohibited information.
“The Financial Markets Conduct Authority shall regulate and supervise the conduct of credit providers and credit service providers, promote financial inclusion by ensuring that all retail financial customers have timely and fair access to appropriate, fair and affordable financial products and financial services and collaborate with the Competition Authority of Kenya in promoting, to the extent consistent with achieving the objective of the Authority, sustainable competition in the provision of financial products and financial services to retail financial customers,” it says.
The Bill establishes a board of directors of the Authority which shall consist of a non-executive chairperson appointed by the President, the Cabinet Secretary for Finance, the Governor of the Central Bank of Kenya, five other persons with relevant experience appointed by the Cabinet Secretary and the chief executive officer who shall be an ex-officio member with no right to vote.
The legislative proposal also provides for a financial conduct licence. The licence will limit the provision of financial products and services to retail customers in that the service providers cannot operate without them.
“For instance, a person who does not hold a financial conduct license cannot advertise for the provision of credit services,” the brief on the Bill prepared by the House legal team states.
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“The legislative proposal proposes that where an entity already holds a license under a sectoral law – such as the Capital Markets Act, the Banking Act or Microfinance Act – which covers the provision of financial products, that entity will be considered to have satisfied the requirements of the Bill. This is subject to a period of exemption of twenty-four months from when the Bill comes into force. Such entities need not obtain a licence,” it says.
