Funders have long been elevating financial consumer protection as a priority, built on the recognition that consumer risks undermine the delivery of financial services to low-income individuals. This commitment was exhibited in the 2020 edition of CGAP’s annual Cross-Border Funder Survey, in which we asked funders to indicate what they considered to be the most important areas for funding policy work in the next five years. Consumer protection received top priority based on response numbers, followed by RegTech and data privacy, as indicated in the figure below. Funders’ commitment to consumer protection is welcome, given how the proliferation of digital financial services (DFS) has exacerbated existing consumer risks and introduced new and rapidly evolving risks, as illustrated in CGAP’s research on DFS consumer risks.
How do funders translate their interest in consumer protection into action?
Effective financial consumer protection relies on consumers understanding their rights and responsibilities, providers effectively implementing consumer protection principles, and a favorable market environment, which involves effective regulation that empowers consumers to take action in case of misconduct. CGAP’s research indicates that funders have been advancing these objectives of “effective consumer protection” in several ways:
- Support to market actors. Funders support financial services providers (FSPs), regulators and other actors in enhancing consumer protection. As per the Funder Survey, funders in 2020 committed around $122 million to 13 projects with a “Consumer Protection or Responsible Finance” theme. Though this is marginal when compared to the total funder commitment of around $58 billion across 2,000 projects, there could be additional projects that had a consumer protection component but have other dominant themes. Funders incorporated consumer protection into projects in 2020 in a variety of ways. Asian Development Bank (ADB) provided technical assistance to help improve fair lending practices and consumer protection principles of microfinance institutions (MFIs) in South Asia as part of its COVID-19 and post-pandemic response. IFAD’s Talent Retention for Rural Transformation Project in Moldova incorporated consumer protection by setting up stabilization and deposit insurance funds for and providing regulatory support to savings and credit associations (SCAs) that provide financial services to smallholder farmers.
- Industry standards on consumer protection. Funders are committing to the integration of consumer protection and responsible finance standards in their own internal processes and operations. For some, this could be by implementing IFC’s Investor Guidelines for Responsible Investing in DFS. Funders are also supporting the development and adoption of consumer protection standards that apply to FSPs. KfW, AFD, ILO and other funders have endorsed SPTF and CERISE’s Universal Standards for Responsible and Inclusive Lending to promote responsible finance practices among investee FSPs. These standards help protect FSP consumers from unfair, deceptive or abusive practices and equip consumers with information and tools to make sound financial decisions.
- Peer learning and research. Funders are engaging in initiatives to advance knowledge on effective financial consumer protection and exchange learnings with peers. The Responsible Finance Forum (RFF), which is now facilitated by CFI, was launched in 2010 by CGAP, IFC and the German Federal Ministry for Economic Cooperation and Development (BMZ). The RFF gathers funders, governments, FSPs, academia and consumer organizations to share emerging practices. Funders like FMO, the World Bank and EIB have developed technical guidance, tools and regional reports on topics like consumer risks, complaints handling and indebtedness for peers to draw on. FMO’s report “Mitigating Consumer Risks in a Digital Age” encourages funders to use their influence to foster a responsible ecosystem and encourage responsible practices by FSPs.
Where do we go from here?
To drive long-term impact, it is critical that funders affect change in a manner that addresses consumer risks in a systemic way. Funders need to diagnose the root causes of consumer risks and identify dynamics in the system that lead to the rise of risks. Funders can provide incentives and support market actors like FSPs, regulators and consumer groups to undertake sustained efforts on consumer protection. To this end, CGAP has been exploring what can be done by funders to promote consumer protection in a sustainable and scalable way. Here are some ways for funders to drive consumer protection:
- Promote customer-centric regulation and supervision. Funders can help develop and pilot innovative regulatory and market-conduct supervision approaches to strengthen the voice of consumers in the regulatory reform processes. These could include supporting consumer groups, promoting regulatory consultative bodies and adopting market monitoring through surveys and social media to enable policy makers to better understand consumer concerns and detect potential crises. CGAP’s market monitoring toolkit offers recommendations like providing foundational support to improve regulatory reporting data quality and making investments in SupTech for consumer complaints handling.
- Make FSPs more customer-centric. CDC Group’s research suggests that providing technical assistance enabling FSPs to adopt customer-centric organizational changes is an effective method for driving long-term impact. Funders could also help FSPs in realizing the business case of becoming more customer-centric and support FSPs in monitoring, measuring and assessing consumer outcomes.
- Enable adaptive standards. Funders are encouraged to support development and implementation of adaptive standards to account for the rapid evolution of business models and risks. However, supporting development of standards and enabling FSPs in getting certified doesn’t ensure consumer protection. Funders need to drive enforcement of standards by supporting regulation, legislation, market conduct and data sharing mechanisms including credit bureaus and open banking frameworks.
- Build the evidence, reflect and adapt. Despite many efforts, there is still little evidence available to establish the link between application of consumer protection principles and prevention of consumer risks. Funders need to carefully monitor market developments as well as gather evidence on what works and doesn’t, using the evidence to then adapt their agendas.
As we move forward in setting an agenda for the funder community in the coming months, we would welcome comments that illustrate examples of what funders have been doing as well as suggestions on what funders can do to further operationalize consumer protection through funding and technical assistance.