New act will rein in finance companies

Chiranuwat Tanyacharoen

 This benefit is in addition to the core objective of enhancing "prudential supervision" to ensure the safety and soundness of the financial system.

Today, financial institutions adopt business models that have already changed significantly, shifting the focus from wholesale more to retail customers. As retail customers are now able to access the supply of financial services more easily, consumer loans have increased sharply. These include housing, personal and credit-card loans together with sales credit such as hire-purchase or leasing.

In the meantime, retail consumers have complained more about unfair practices linked to their lower bargaining power with financial institutions.

Complaints regarding these have ranged from unfair contracts to unreasonable fees and expenses imposed by financial institutions and non-banks.

New legal provisions aimed at protecting the consumer from financial institutions have been added in the new FIBA. According to the new act, the provisions concerning fairness and consumer protection have two dimensions: (1) the transparency of information regarding fees, interest and other expenses and (2) the power of the Bank of Thailand (BOT) to enforce consumer protection measures on financial institutions.

Under the FIBA, financial institutions are required to disclose information to customers that is essential for them in comparing and deciding between the effective costs to be paid for using financial services provided by different institutions.

Information to be disclosed includes interest rates, fees and methods used for calculating the annual percentage rate (APR). As for efforts to prevent unfair treatment, the BOT is now empowered to implement consumer-protection measures.

One key example is the limitation on the amount of principal guarantee. In the past, the liability of the guarantor was mostly unlimited, with guarantee obligations increasing with the debtor's outstanding borrowings. The guarantor's risk, as a result, cannot be contained and is open-ended. The new FIBA will limit the guarantor's liability on the principal debt guaranteed.

 Other important consumer-protection measures that could be prescribed by the BOT include setting procedures for operating financial transactions, such as deposit, loan or additional financial services, standard agreements between the customer and financial institutions, safeguards to prevent unilateral amendments by financial institutions of existing agreements with their customers, and requirements for financial institutions to disclose information regarding certain consumer transactions.

As for non-banks that have an economic impact on their customers but have not been regulated by any legislation, the BOT may propose a Royal decree to regulate such non-banks. In this regard, the aforementioned consumer-protection measures applying to financial institutions may also be imposed on non-banks as well.

Looking forward, unfair practices should decline and the customers of financial services offered by financial institutions and non-banks should benefit directly from greater transparency and sufficiency of information especially regarding fees, interest rates and other expenses before customers decide to undertake financial transactions.

Chiranuwat Tanyacharoen is senior analyst of Financial Institutions Strategy Department, Bank of Thailand. Views expressed are the author's own.