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 a 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.

Best practices in financial consumer protection in Africa
There are pockets of great examples of proactive financial consumer protection across Africa. Some regulators on the continent are living up to expectation and doing what is required to ensure consumers are protected and treated fairly.

One of the shining lights is the Bank of Zambia (BoZ). The BoZ in September 2018 issued a notice titled “Bank of Zambia notice to the public on the prohibition of unwarranted charges and fees directives of 2018”. In the said notice, the BoZ detailed a list of twenty-six (26) charges and fees that it had prohibited.

The charges and fees prohibited by the BoZ included: initial debit card issuance fees, debit card maintenance and renewal fees (annual, quarterly or monthly), commission on turnover activities on account, automated teller machine (ATM) surcharges, point of sale (POS) transaction charges (own bank customer and other bank customer), charge for balance and other account inquiries by a customer over-the-counter or any electronic platform, among others.

The Central Bank of Nigeria (CBN) is also worthy of applause. The CBN has taken some steps to ensure banks in Nigeria handle customer complaints in a timely and effective manner. It has instituted and published a fine grid for improper handling of customer complaints and delays in resolving customer complaints. The CBN’s policy of naming and shaming is commendable. When consumers see and feel that the regulator is acting and sanctioning errant institutions, their confidence in the financial system grows. The CBN recently sanctioned some errant banks and fined them as much as 2 million Naira (circa USD5,200) for breaching various consumer protection mechanisms.

Another regulator leading the way is the Central Bank of Egypt (CBE). When the coronavirus pandemic hit, the CBE championed several initiatives that not only focused on keeping the institutions afloat, but also rolled out deliberate interventions to bring tangible relief to consumers.

The CBE instructed banks to cancel ATM withdrawal fees and points of sale (POS) fees for six months. It also instructed banks to give 6 months repayment holiday to individuals and businesses impacted by COVID-19. Also, the CBE instructed the suspension of late fees (penalty interest). Furthermore, in an effort to reduce cash handling, all bank transfers within Egypt were exempted from fees and charges.

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:

1. The financial sector has become entwined; but still operates with siloed regulators

2. The financial sector regulators are biased towards prudential regulation and have limited capacity for conduct regulation

3. 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.

Political Commitment
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.

It is hoped that the proposals made in this article will be adopted and incorporated in the reform of Ghana’s financial sector regulation architecture.

A proposed fit-for-purpose financial sector regulation architecture for Ghana
To forestall future crisis in the financial services sector and advance consumer protection, an effective and fit-for-purpose regulation architecture is critical. It should be a regulation architecture that proactively identifies problems and nips them in the bud, one that severely punishes wrong doing, names and shames, and one that resolves the imbalances between prudential regulation and conduct regulation.

It is against the foregoing background that the following proposals are made:

1. Decouple prudential regulation and conduct regulation. This calls for discarding the current model that warehouses prudential regulation and conduct regulation in the same institutions. An effective and efficient decoupling of prudential regulation and conduct regulation will resolve the challenges enumerated.

2. Task the existing industry regulators (i.e. BOG, SEC, NIC and NPRA) exclusively with responsibility for prudential regulation. Thus, the responsibility for conduct regulation must be taken away from them.

3. Establish a single independent conduct regulator. The new entity will be the sole regulator of market conduct across the entire financial services sector; i.e. banking, insurance, securities and pensions.

The proposed architecture is a unique adaptation of the Twin Peaks Model. In the typical twin peaks model that exists in counties such as the United Kingdom, Netherlands, New Zealand, Australia, and South Africa among others, there are two regulators – one focused on prudential regulation of the entire financial services sector and the other regulator focused on conduct regulation of the entire financial services sector.

In the United Kingdom, for example, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) are responsible for prudential regulation and conduct regulation respectively. The two entities (PRA and FCA) were formed in 2013 in a wave of regulation reforms following the 2007 financial crisis. Hitherto, a single entity was responsible for both prudential and conduct regulation until the split in 2013.

In the proposed model for Ghana, each of the industries (banking, insurance, capital markets and pensions) within the sector will have independent prudential regulators. There may be too much disruption if an attempt is made to have a single prudential regulator for the entire sector at this point. Perhaps, in the next phase of reforms, having a single prudential regulator for the sector may be considered. For now, the focus must firmly be on a single conduct regulator.

The benefits of the proposed model – having a single independent conduct regulator and industry-specific prudential regulators – are evident.

The industry prudential regulators will focus on keeping the institutions sound. They will have the mandate to set prudential requirements and to ensure compliance. In addition, they will be clothed with the power to license institutions for their respective industries.

The single independent conduct regulator will ensure that consumers are protected across the entire financial services sector. It will ensure institutions conduct themselves properly in the market. It’s core focus will be on areas such as: product suitability and safety, fair pricing practices, resolution of customer complaints, among others.

No new product can be introduced onto the market without the prior approval of the conduct regulator. Neither can an approved product be modified without the express approval of the regulator. Before the conduct regulator approves a product, it must ascertain that the institution submitting the product for approval has been duly licensed by the appropriate prudential regulator. Such a regime will prevent scams like Menzgold, DKM, and the others from taking root.

The independent conduct regulator will have the power to stop an institution from operating in the market if it deems its products or practices to be harmful to consumers or other market players. More importantly, it will have the power to prosecute institutions and/or individuals if their activities pose a danger to consumers or if they are found to be behaving badly or to have behaved badly.

With the proposed single independent conduct regulator, consumers will have a single point of contact for all complaints or challenges they have with any financial institution. Thus, the challenge of having to contend with many regulators in an entwined financial sector will be eliminated.

The proposed regulator will set market conduct standards, proactively police the market to ensure it is safe for all participants, punish, name and shame offenders, and educate consumers on their rights as well as on how to protect themselves in the market.

Operationalizing the proposed architecture will be easy to do. Marshalling the needed human capital to staff the proposed independent conduct regulator should not be difficult. The various industry regulators currently have some staff who ostensibly are tasked with monitoring market conduct. These staff can be pulled out to form the nucleus staff of the new institution. The nucleus staff would need to be augmented with professionals with the requisite technical expertise.

If there’s a silver lining in the crisis that has hit Ghana’s financial sector, it is that it presents a golden opportunity to reform Ghana’s financial sector regulation architecture. The time to act is now!

The author, Woelinam Dogbe, is the President of the Alliance for Financial Consumer Protection (AFCOP). He is a Chartered Banker, a Financial Sector Specialist, and a Management Consultant.