[Column] Woelinam Dogbe: Why Ghana needs a new financial sector regulation architecture
Ghana’s financial sector is in crisis. A crisis occasioned by the collapse of over 300 financial institutions; and which has affected every division of the financial sector. Universal banks, savings and loans companies, microfinance companies, capital market institutions, and insurance companies have been impacted.
While majority of the collapsed institutions were licensed and regulated, a few were unlicensed and ought not to have been in operation. The fact that the unlicensed institutions were allowed a free rein to operate until their eventual collapse, speaks volumes about the existing regulatory regime and the safety of financial consumers.
Experts have identified the causes of the crisis to be: weak regulatory supervision, unethical behaviour by managers of the financial institutions, and poor corporate governance practices. In the specific case of the unlicensed institutions, their illegal activities flourished because of dereliction of duty on the part of regulators.
The devastation caused by the crisis has been severe and widespread. Apart from financial losses, consumer confidence in the financial sector has been significantly weakened. Some consumers have lost their lives as a result of the trauma of having their life savings locked up in collapsed institutions.
Unquestionably, there is the need for a regulatory regime that is fit-for-purpose. One that prioritizes the need to ensure the safety of institutions as well as prioritize the need to protect consumers. Thus, the necessity of regulatory reform is imperative.
Presently, the regulators of Ghana’s financial sector (i.e. Bank of Ghana - BOG, Securities and Exchanges Commission - SEC, National Insurance Commission – NIC and National Pensions Regulatory Authority - NPRA) have through their actions and inactions demonstrated that they prioritize Prudential Regulation (“ensuring financial institutions remain strong”) to the neglect of Conduct Regulation (“ensuring the safety and fair treatment of consumers”).
This lopsided approach to financial sector regulation has resulted in consumers suffering unfair treatment and exploitation at the hands of financial service providers. Examples of the mistreatment of consumers include: unfair pricing practices, unconscionable loan terms, misrepresentation of risks associated with products, mis-selling, product pushing, poor handling of customer complaints, etc.
The reform of financial sector regulation in Ghana must institutionalize conduct regulation and afford it the importance it deserves. This will require strong commitment from government to sponsor the needed legislation. This is the surest way to ensure the financial sector is safe and works well for all.
State of financial consumer protection in Ghana
Financial consumers in Ghana continue to suffer at the hands of financial institutions because of manifestly weak market conduct regulation. The present crisis has further exposed the deep-seated disregard and lack of commitment to financial consumer protection in Ghana.
A careful review of the regulatory interventions and policy prescriptions that have been implemented or mooted following the crisis have centered on “saving the institutions” with very little focus on “protecting consumers”.
While it is important to protect the institutions; because the safety of the institutions has implications for the safety of consumers’ deposits and investments, it is equally important to proactively protect consumers and ensure they are treated fairly and are not exploited.
Financial consumers are vulnerable and need to be protected from elements within the financial sector who would want to take advantage of this vulnerability to cheat consumers to rake in abnormal profits.
There is a widespread practice within Ghana’s financial services industry where providers; particularly banks and SDIs, arbitrarily increase fees on products and services that consumers have already signed on to. For example, it has become an annual ritual for banks and SDIs to upwardly review fees such as account maintenance fees, card maintenance fees, transaction fees etc. The only obligation the central bank has placed on the banks and SDIs is for them to give customers at least a 30-day notice period before implementing the fee reviews.
The point is often made by financial institutions that, if consumers are unhappy with the fees being charged, they are at liberty to switch to another provider. This argument is at best, disingenuous and laced with mischief because, as things stand today, it is very difficult for consumers to switch banks or SDIs. For example; banks and SDIs mirror each other’s pricing; thus, when one bank or SDI introduces a new fee or increases an existing fee, the others follow. Therefore, if a consumer decides to switch, he or she will only be “jumping from frying pan to fire”.
Sadly, the regulators who ought to ensure consumers are treated fairly are themselves the guilty party. For example; the National Insurance Commission (NIC) recently implemented new pricing dynamics for motor insurance. The stated objective was to sanitize pricing practices and mitigate systemic risks resulting from price undercutting. Unfortunately for consumers, the consequence was a steep increase in premiums.
The steep premium increases priced out millions of consumers from comprehensive motor insurance cover. Consumers were made worse off and were exposed to severe loss as a result of being priced out. It took massive public uproar and resistance from insurance companies for the NIC to roll back some of the elements that caused the price hike.
It is important to note that, unfair pricing is only a minutia of the mistreatment consumers receive. Others include issues such as financial institutions pushing high risk products to vulnerable consumers. Product pushing and mis-selling exist but there’s no record of regulators punishing, naming and shaming institutions that have engaged in such bad behaviour.
Challenges with Ghana’s financial sector regulation architecture
There is ample evidence that the existing financial sector regulation architecture in Ghana is not fit-for-purpose. The recent crisis has badly exposed this fact. Aside the loopholes in prudential regulation that are at the root of the crisis, the neglect of conduct regulation is a major cause for concern. This needs to be addressed, lest we risk another crippling crisis.
The major drawbacks of Ghana’s existing financial sector regulation architecture are:
The financial sector has become entwined; but still operates with siloed regulators
The financial sector regulators are biased towards prudential regulation and have limited capacity for conduct regulation
The financial sector lacks an effective institutional mechanism to set and enforce market conduct standards
Ghana’s financial sector has evolved to the point where banking halls have become distribution points for non-bank financial products. Today, banks are distributing insurance, capital market, and pension products. Even mobile money operators are distributing banking, insurance and pension products. Thus, the financial sector has become vastly entwined. However, regulation has lagged behind the sector’s evolution. The sector still has fragmented regulators (i.e. BOG, SEC, NIC, and NPRA) operating in silos and overseeing both prudential and conduct regulation for their respective industries.
Having an entwined sector with siloed regulators presents peculiar dangers to consumers. It becomes a complicated proposition for consumers when, for example, they buy a non-bank product (i.e. insurance or capital market product) through a bank and are faced with a challenge that needs a regulator’s intervention to resolve. Or; when a consumer buys a pension product through a mobile money operator and is unfairly treated, knowing which regulator to approach can be unsettling and stressful.
Furthermore, when a novel ponzi scheme emerges, the siloed regulators pass the buck and are hesitant to take responsibility to stop harm to consumers. A classic example is the Menzgold scam that swept through the country a few years ago; and left in its wake millions of victims. In the Menzgold case, instead of the BOG and SEC taking decisive measures to shut down the scam, they pussyfooted and took to issuing statements to say Menzgold was not licensed to operate.
Secondly, the fact that the current architecture does not prioritize consumer protection is abundantly evident. Unlike in best practice examples from Zambia, Egypt and Nigeria where the BoZ, CBE and CBN respectively have been proactive in implementing effective measures to protect consumers and ensure they are treated fairly, the opposite is the case in Ghana.
The regulators in Ghana have adopted a laidback attitude towards the subject and have in some cases merely designated units as being responsible for market conduct, in an attempt to window dress the issue.
Thirdly, the financial sector lacks an institutional mechanism to set and enforce market conduct standards across the sector. As a result of the lack of standards, actions and inactions of financial institutions and regulators that are injurious to consumers are not flagged and nipped in the bud. Also, since there are no standards, bad conduct is allowed to fester to the detriment of consumers.
The absence of standards also breeds the consequence of consumers not being aware of their rights and remedies available to them. Thus, they are unable to shield themselves from exploitation and unfair treatment. Consumer education is poor; and mostly non-existent, because the regulators have shunned this duty of care.
The reform of financial sector regulation can only happen with unalloyed commitment from government. The intricacies of Ghana’s political system make it such that, the required legislation to birth the reforms needs government backing and sponsorship.
It is therefore welcome news that Ghana’s main opposition party, the National Democratic Congress, through its leader, H.E. John Mahama, has promised to “establish a Financial Services Authority that will be responsible for ensuring that consumer markets work for consumers, providers and the economy as a whole” if voted into power.