By Matthew Magare, Anita Otieno

The Financial Markets Conduct Bill aims to promote a fair, non-discriminatory financial market, conducive for credit access by:

• Establishing uniform practices and standards for providers of financial products and services;
• Regulating the cost of credit; and,
• Establishing the Financial Markets Conduct Authority (the “Authority”), the Financial Sector Ombudsman and the Financial Sector Tribunal for effective supervision of providers’ dealing with retail financial customers. A retail financial customer is defined as a person who is the final user of the financial product or financial service.

The main highlights of the Bill are discussed below.

1. The establishment of the Financial Markets Conduct Authority.
The Bill proposes the establishment of the Authority as the main body in the implementation of the provisions of the Bill. The key objectives of the Authority are outlined as follows:

• To protect retail financial customers from misleading, unfair or fraudulent conduct by financial product and service providers;
• To promote fair and sustainable access to financial products and services while ensuring information about these products and services are readily available to retail customers, to enable them make informed financial decisions and promote financial literacy;
• To ensure the accuracy, availability and protection of financial information through credit sharing mechanisms and public advertisements; and,
• To protect retail financial customers from inappropriate lending practices by regulating the cost of credit.
• The Authority shall cooperate and collaborate with the other financial services regulators when performing its functions to minimize the duplication of effort and expense.

2. The introduction of a Financial Conduct License.
The license limits 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. Further, license holders must ensure that their advertisements are not deceptive or misleading.

It is important to note that the Bill provides 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 license.

3. Right of Customer to be informed.
The Bill provides for full disclosure of information by a lender to a potential borrower and the guarantor before issuance of a loan. It provides that a pre-contract statement and quotation be provided, 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.

4. Access to credit by retail customer
The Bill aims to control the cost of credit through its provision on interest rates. The Bill limits lenders from charging or recovering from the borrower or guarantor’s interest exceeding the maximum rates as prescribed by the Authority from time to time. Further, it provides that lenders shall not vary the interest rates charged during the term of the contract.

The lender is 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.

The Bill 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.

Further, retail financial customers may claim compensation from Conduct Compensation Fund if the customer suffers loss or damages caused by a financial product/service provider.

5. Safeguarding of financial customer information.
The Bill provides for restriction of lenders from providing credit reports that contain information about the customer, as well as recommendations about the credit worthiness of the customer, based on prohibited information.

6. Establishment of the Financial Sector Ombudsman.
The Bill proposes the formation of the office of the Ombudsman whose key objectives will be to resolve complaints by retail financial customers and financial product/service providers.

In addition, the Bill proposes the establishment of the Financial Services Tribunal, which will be responsible for resolving disputes between financial customers and providers of financial products and services. The members of the tribunal will be appointed by the Judicial Service Commission and will be guided by the common applied principles of dispute resolution in the discharge of their functions.

EMERGING ISSUES

When the Bill was first introduced, the Central Bank of Kenya (CBK) was of the view that the proposed Bill was a deliberate attempt to strip it of its key mandate, and that it was not consulted by the National Treasury in the drafting of the Bill. In addition, the CBK noted that the Bill did not address the capping of interests, which was a controversial issue at the time. The Bill also subordinates the Banking Act by giving directives on the conduct of commercial banks. The Treasury defended the Bill, stating that there was dire need to regulate lenders to ensure proper lending practices.

Discussions on the Bill have since been halted. However, the CBK recently announced the banning of unregulated lenders from submitting customer information to the Credit Reference Bureau. This move has crippled the operations of most lenders, especially digital lenders. Unregulated lenders were cited as exploiting borrowers and having poor customer relations.

Digital lenders have since sought for some form of regulation, through the Digital Lenders Association. It will therefore be pertinent to re-introduce talks on this Bill so that it may be passed into law. In addition to consumer protection, the Bill provides for financial inclusion and improved access to financial services, as it does not limit the definition of a lender.

This Bill is the perfect remedy for regulation of lenders as in addition to the above mentioned advantages, it provides a legal avenue solely dedicated to resolving any complaints and disputes that may arise as a result of a breach of contract issued in accordance with provisions of the Bill.