Financial Markets Bill good but needs some fine-tuning

The draft Financial Markets Conduct Bill, 2018 by the National Treasury, in my considered view, is a step in the right direction-for two reasons.

First, the financial sector has never been more ripe for conduct oversight, something which has over the years, appeared to be a function overload on the core sector regulators (Insurance Regulatory Authority, Sacco Societies Regulatory Authority, and Central Bank of Kenya). 

It is a global best practice to separate prudential oversight from market conduct oversight. In the United Kingdom (UK) for instance, Prudential Regulation Authority (PRA) oversees regulation of commercial banks while Financial Conduct Authority (FCA) oversees market conduct.

Second, there is need to check predatory activities, which are mostly prominent among credit-only players. Indeed, the Bill’s proposal to have every credit/service provider to obtain a conduct licence from the proposed Financial Markets Conduct Authority (FMCA) will, for the first time, bring non-deposit taking (credit-only) microfinance institutions, who neither fall under Banking Act nor Microfinance Act, under regulation.

Further, it hands the FMCA sweeping discretionary powers to vary contractual terms between lenders and borrowers. The Bill also robustly institutionalises complaint handling, resolution as well as compensation through creation of three institutions: (i) a Financial Sector Ombudsman, with a mandate to receive and resolve complaint(s) by retail financial customers and financial sector providers in relation to the provision of financial products and services. (ii) The Financial Services Tribunal, which will be tasked with reviewing contested decisions arising out of the implementation of the Act. And (iii) a Conduct Compensation Fund Board (CCFB) whose objective will be to oversee a Conduct Compensation Fund.

CCF will be used to compensate a retail financial customer who suffers loss at the hands of a licensed service provider by way of contravention of the Act or failure to comply with a determination of the Ombudsman, an order or judgment of the tribunal or a court. However, while the spirit of the Bill, in my assessments, is quite noble, it also introduces three key ambiguities.

READ: Proposed finance law will cripple CBK, says governor

First, in as far as the setting of maximum chargeable interest rates is concerned, it creates an overlap with the Banking (Amendment) Act, 2016 (or interest rate caps law). Remember that the interest rate caps law already vests the Central Bank of Kenya (CBK) with the power to set maximum chargeable interest rates.

To address the overlap, the bill should explicitly declare itself as superior to the Banking (Amendment) Act, 2016. Well, you could also argue that the bill’s other subtle objective is to circumvent the Act; but again, that needs to be explicit.

Second, it doesn’t mention the issue of fintech lenders. In section 649(a), the Bill states each regulated credit contract shall be in writing. That clause, parsed in strict sense, effectively excludes fintechs, since contractual engagements with their customers aren’t typically expressed in written format.

I believe fintech lenders shouldn’t operate outside the regulatory curve. Certain aspects of their businesses, such as credit scoring, pricing, availment costs, late-payment penalties, rollover costs and credit information sharing require some form of policing.

Finally, the Bill is not explicit on how the proposed FMCA will set maximum chargeable interest rates. The current law is quite clear on this. Indeed, on the loan side, it states that a bank shall not charge interest exceeding 400 basis points above the base rate as set by CBK.

On the deposit side, it states that a bank shall not remunerate less than 70 per cent of the base rate as set by CBK.