Are banks falling short in treating customers fairly?
Under the new “Twin Peaks” legislation, the market conduct of banks falls under the Financial Sector Conduct Authority (FSCA), and the FSCA has lost little time in commissioning a report on the banking industry with a view to aligning banking practices with its Treating Customers Fairly (TCF) approach.
The Financial Sector Regulation Act introduced two new regulators on April 1 this year: the Prudential Authority (within the South African Reserve Bank), and the FSCA, which replaced the Financial Services Board. The FSCA is dedicated to regulating market conduct across all financial institutions in South Africa.
This means that the market conduct of banks in South Africa is directly regulated for the first time.
National Treasury and the FSCA have published for public comment a diagnostic study prepared by the World Bank aimed at ensuring fairer retail bank practices in South Africa, titled “South Africa Retail Banking Diagnostic: Treating Customers Fairly in relation to Transactional Accounts and Fixed Deposits”.
The study’s analysis and recommendations, the FSCA says, as well as public comments on the study, will help shape the FSCA’s approach to regulating the banks.
Fair treatment refers to, among others:
- the appropriate design of products and services that meet customers’ needs;
- the provision of clear information to customers at the point of sale;
- ensuring that products perform as customers have been led to believe; and
- ensuring customers are able to submit complaints and disputes, and have these resolved.
The study identifies “potential shortcomings” in bank conduct, and makes recommendations. They are termed “potential shortcomings”, the FSCA says, “because while the banks are not necessarily in breach of legislation or regulations, they may fall short of fair treatment principles and international best practice (or experience)”.
The study made the following findings, among others:
Transactional accounts. The report says there appears to be little difference between the features of accounts for low earners and those for higher-income customers, and pricing favours those who transact via electronic channels. However, the report says, at the lower level of the market there remains "a great propensity to transact in cash", and clients using branch or ATM services pay disproportionately high fees for doing so. These banking costs can represent up to 10% of income for low earners, the report says.
The pricing structures of middle-income accounts are complex, the report says, making it difficult for consumers to compare offerings among banks. Bundle pricing is intended to encourage the use of digital channels and discourage the use of traditional channels.
Fixed deposits. The report says there is a wide range of interest rates offered on fixed deposit offerings. This is not a bad thing, because it increases choice. However, complexity in comparing individual aspects of products makes it difficult for consumers to make an informed choice.
Marketing and sales
The report says there has been uncertainty and inconsistency in the application of the Financial Advisory and Intermediary Services (FAIS) Act and general consumer protection legislation to transactional banking. There is also "wide variation in what, when and how information about product features and pricing is disclosed to retail customers", with a lack of standardisation in terminology.
Despite some progress, the report says, "the language used to articulate terms and conditions in customer agreements remains dense and laden with legal terms and jargon". There is also variation in how banks describe interest rates on fixed deposits.
Administration and operation
- Potentially unfair fees. While there has been some improvements in fee-charging practices, the report says, some fees could nevertheless be viewed as unfair or unreasonable. The report quoted the Competition Commission's Banking Enquiry (2008), which identified "clear signs of abuse" by banks in charging high penalty fees for dishonoured transactions – when you don't have enough money in your account to cover, for example, a debit order. Not only were these fees out of proportion to the costs incurred by the banks in handling such transactions, but they were inconsistent with TFC outcomes.
- Dormant transactional accounts. There currently doesn't appear to be uniformity among banks in the handling of dormant accounts and the fees charged on them, the report says.
- Changes to terms and conditions and fees. The report says that banks retain “extensive unilateral rights” to make changes to terms and conditions and to fees. It recommends mandated minimum notice periods for such changes.
- Account closure and switching: Again, there appears to be inconsistency across the banking industry, with some banks providing more information and helping their customers more than others when it comes to closing or opening an account or switching from one bank to another.
- Early termination and roll-over of fixed deposits: Customers may not understand fully the implications of restrictions on fixed-deposit withdrawals, the report says. "Automatic roll-overs of fixed-term deposits may sometimes also occur without customer understanding."
The report recommends that, in some instances, legislative reforms may be needed to enforce TCF objectives, but the existing Code of Banking Practice to which all banks adhere "remains a key document governing and influencing bank practices". It says several banks suggested that the code should be reviewed and updated in the light of TCF outcomes
Specific recommendations include:
- Introducing obligations on banks to ensure that their processes for developing and making changes to transactional accounts and fixed deposits focus on product suitability for customers;
- Considering new measures to promote transactional accounts that meet the needs of low-income customers, including in terms of value;
- Having an effective regime prohibiting unfair terms and fees; and
- Implementing improved, standardised disclosure practices to ensure that customers are provided with timely and clear information enabling them easily to make comparisons.
The study is available on the FSCA website under News/Latest News. Comments are invited until October 16, 2018. They can be sent to [email protected]