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Fines galore as Treasury go after reckless lenders

NAIROBI, KENYA: Reckless lenders will be slapped with hefty fines, according to a proposed law that seeks to regulate all providers of financial products and services.

The financial markets conduct bill, 2018, which Treasury hopes will inject discipline into the financial sector is also deliberately tailored to convince lawmakers to drop their hard-stance on the controversial interest rate cap.

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The key selling point of the Bill is the introduction of the Financial Markets Conduct Authority, a new body that will be responsible for policing the behavior of lenders.

Other bodies that have been established to ensure lenders are well-behaved include the Financial Sector Ombudsman and the Financial Sector Tribunal.

The bill which is likely to rope in previously unregulated financial providers such as non-deposit taking microfinance, also frowns against predatory lending, hitting lenders who knowingly push borrowers into financial distress with a fine of Sh20 million or spend five years in jail.

To offer their service to retail financial customers, lenders will be required to have a financial conduct license, which will be their version of certificate of good conduct.

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“A person shall not provide, as a business or part of a business, a financial product or a financial service to a retail financial customer unless that person has a financial conduct licence,” reads the new Bill.

Lenders will not sell loans outside of prescribed hours, and variation of interest rate is also prohibited, with offenders being hit with a fine of Sh5 million for the first time and Sh10 million for a repeat.

If you enter into a credit contract without a written statement you will be hit with a fine of Sh5 million.

If the proposal becomes law, lenders will also be very careful on how they approach potential borrowers. According to the proposal, a financial service provider shall not solicit an application from a retail financial customer who they get in contact by chance.

The Authority will also establish specific hours within which financial service firms will be allowed to trade loans. Looking for customers outside this period could prove costly.

Contravening any of this will attract a fine of Sh5 million or two-year imprisonment for first offence. A repeat offence will attract Sh10 million or five years in jail.

The bill is also going to guard against reckless lending. Lenders will be barred from entering into a regulated credit contract with a borrower if that credit is likely to expose the borrower to a “substantial hardship.” Doing so could attract a penalty of Sh10 million for first offence and Sh20 million in subsequent case.

Additionally, lenders will be prohibited from having clauses in the loan contract that purports to increase the credit limit under a contract without the consent of the borrower. And in cases where it is there and agreed by the customer, lenders will have to determine that it will not result in substantial hardship to the borrower.

In addition, financial institutions may no longer be able to market their loan products to customers without express permission from the customers.

“A lender shall not, unless otherwise permitted by the regulations or any other law, communicate with a borrower who is a retail financial customer as part of marketing activity unless the borrower’s application for the provision of credit has expressly agreed,” says the proposal.

This could limit the promotional messages that many institutions use to convince customers to apply for new loans or top up existing facilities. Contravention will also lead to Sh5 million or Sh10 million respectively for first and subsequent offence.

Lenders will also be required to make full disclosure of all the details of the loans in terms of the interest any fees or penalty and the period of repayment. In the course of repayment, customers will have a right to know the outstanding balance at any time.

The authority will be given powers to investigate cases of contravention of the Act and take action. Anybody found destroying evidence will also be fined heavily.

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