A holistic approach: Establishing a more stable lending environment through the introduction of new consumer protection regulations

Banks in Saudi Arabia, like their counterparts elsewhere in the region, have benefitted from an increased appetite for loans from retail customers as the economy has shrugged off the effects of the 2008 global financial crisis. Retail lending, according to Aljazira Capital, increased as a share of total loans from around 21% in 2008 to 29.3% in 2014. For this reason, recent interventions by the Saudi Arabian Monetary Agency (SAMA) in the area of consumer protection are widely seen as being timely. Its most visible effort in this regard came in late 2014, when the regulator introduced new consumer lending regulations which gave it the power to cap retail lending at individual banks and limited fees.

CAPS & LIMITS: While the lending limit represents a useful tool by which to cool the market if necessary, it is the cap on fees that advances SAMA’s consumer protection agenda. Under the new regime, all fees, costs and administrative charges collected by banks must not exceed either 1% of the financing amount or SR5000 ($1333), whichever is lower. The new rules also reduce costs for early repayment and compel banks to provide borrowers with a month’s notice should there be any change in fees. Furthermore, a new requirement for banks to give clear, annual interest rate schedules addresses a previous issue that arose when lenders provided sometimes misleading flat rates that did not accurately represent the true rate a borrower paid.

The new regulation, although having a marginally negative effect on banks’ net non-interest income, has been greeted by most analysts as a useful step towards sector stability. However, as far as SAMA’s consumer protection drive is concerned, it is only one element of a much wider strategy. The question of consumer protection is understood to be of particular interest to the current governor, and during his tenure a dedicated department has been established to oversee it.

PROTECTIONS & PRINCIPLES: From the perspective of the nation’s lenders, the most significant outcome of the department’s creation is the new consumer protection framework. Since September 1, 2013, banks have been required by the regulator to comply with an array of consumer protection principles derived from the G20 High-Level Principles on Financial Consumer Protection which were first formulated by the OECD in 2011. The Saudi Arabian iteration of this initiative established a number of key principles that are now binding on market participants.

These include requirements relating to: the equitable and fair treatment of customers; clear and easily accessible data, such as fees, pricing and possible penalties; financial education and awareness for existing and future customers; behaviour and work ethic, whereby banks are primarily responsible for the interest of the client; protection against fraud, including the development of control systems to combat fraud, embezzlement and misuse; protection of privacy, including the establishments of clear definitions of the purposes for data collection; complaints handling, where consumers should have access to mechanisms that are fair, affordable and accountable, based on SAMA rules; competition, by which consumers should be able to research, compare and switch to products and services by other providers; third parties, so that banks are now responsible for the actions of their authorised agents; and conflict of interest, by which banks are required to formulate a written policy on the issue and disclose potential conflicts of interest to the consumer.

IT TAKES TWO: Turning to the other side of the equation, SAMA has established a range of consumer responsibilities it aims to instil in the retail market. These enjoin borrowers to be honest with the information they provide, use the products and services within the stated terms and conditions, avoid risk and disclose any financial difficulties to the lender. The consumer lending fees caps introduced by SAMA may have a modest effect on the profitability of Saudi Arabia’s banks, but as part of the regulator’s holistic approach to consumer protection they promise to establish a more stable lending environment from which the country’s financial firms stand to benefit as much as anyone else.