Financial Health and Consumer Protection: Two Frameworks Converging

In 2019, FSD Kenya discovered something surprising. Over the past three years, usage of formal financial services in Kenya had gone up by eight percentage points, rising from 75 to 83 percent of adults. But during that same time period, financial health had gone down, with the percentage of financially healthy adults declining from 39 to 22 percent. What happened? Around this time, FSD Kenya and CGAP also identified significant consumer protection issues in digital credit, such as lack of transparency and high delinquency and default rates. It turned out that usage of certain formal financial services was actually harmful to some people’s financial health, highlighting the important link between financial consumer protection and financial wellbeing.

While financial health levels vary across countries, the global picture is bleak, according to recent research, including a report from the Financial Health Working Group convened by H.M. Queen Máxima of the Netherlands in her capacity as the United Nations Secretary-General’s Special Advocate for Inclusive Finance for Development (UNSGSA). Action is needed to reverse this trend, and policymakers, including market conduct supervisors who focus on consumer protection risks, are showing an increasing interest in financial health. In this context, it is useful to explore the connections between these two distinct yet overlapping concepts. We will look at what financial health and financial consumer protection have in common, and then we will analyze how they impact each other.

Points of convergence

First, financial health and financial consumer protection go well beyond the traditional notions of access and usage.  Both put a renewed emphasis on the quality of financial services, aiming to ensure that consumers have positive financial lives and benefit from financial services rather than being harmed by them.

Second, both frameworks look at finance with a customer lens and, increasingly, put customers at the center. In the case of consumer protection, new regulatory frameworks are shifting their focus toward customer outcomes. For example, South Africa’s Financial Sector Conduct Authority, along with a dozen other countries, is exploring how to set up consumer protection regulation and supervision that make providers accountable for ensuring customers are satisfied with and value their financial services, as opposed to simply ticking boxes to comply with rules. Similarly, financial health frameworks encourage providers and regulators to put greater attention on how financial and related services contribute to the wellbeing of individuals and societies.

A third interesting convergence point is the use, in both frameworks, of specific measurement tools to assess consumer situations, and the potential for financial health measurement to provide useful information for consumer protection efforts. A key component of a customer-centric financial consumer protection framework is strong market conduct supervision using a range of market monitoring tools (such as phone surveys, mystery shopping and social media analysis) to understand consumers’ risks, experiences and outcomes when using financial services. Financial health measurement could constitute another interesting market monitoring tool for consumer protection supervisors and financial service providers , providing them with valuable information, for example, on consumers’ capacity to borrow or save.

How does financial consumer protection support financial health?

We see two important correlations between these frameworks.

1. As financial consumer protection prevents consumer harm, it can be a necessary condition for good financial health and therefore a crucial aspect for the financial sector to strengthen.  Recent CGAP research shows that the scale of consumer risks from digital finance is growing faster than the adoption of such services. These risks are likely to create financial shocks for consumers that will reduce their resilience and affect their financial health. For example, we are seeing signs of over-indebtedness through digital credit in some markets such as Kenya, Tanzania and, more recently, India. Reducing consumer risks through better consumer protection will likely lead to better financial health.
    
2. When consumer protection takes into account customer outcomes, it also supports improving financial health. Outcomes-based consumer protection frameworks focus on the customer experience and those outcomes which can be traced directly to the influence of financial service providers. These outcomes are important intermediate stages in a customer’s financial journey, and are necessary to reach final goals such as income generation or building resilience. For example, intermediate outcomes include customers’ capacity to make an informed choice among a range of products, to have their complaints resolved effectively, to be safe in their use of services, and most importantly to have financial services that meet their needs. Financial services that help consumers attain such intermediate outcomes put them in a better position to become financially healthy.

There are limits to these correlations though. Financial health goes well beyond financial services and is influenced by several factors such as income levels, external shocks and individual behaviors. Even with strong consumer protection, people may not be financially healthy due to those other factors. Inversely, consumers could appear financially healthy despite facing irresponsible financial practices, because other factors, like economic growth or easy access to consumer credit, may overcompensate inadequate consumer protection in the near term.

Collaboration between both approaches is key

Financial health and consumer protection are increasingly important for the financial sector. With multiple points of convergence and connection between the two frameworks, collaboration and sharing of learnings will be key to ensure we make significant progress in both areas.  Collaboration needs to involve a large breadth of regulators, supervisors and policymakers who influence consumer protection and financial health, as well as financial service providers who can play an essential role in improving both.