Adv Kate Thambiran @ Lucid Living
Reserve Bank governor Gill Marcus’s office is preparing to apply for an exemption for SA’s banks from certain sections of the Consumer Protection Act (CPA).
According to Cas Coovadia, MD of the Banking Association of South Africa (BASA), the CPA conflicts with global regulations (Basel 3) and has the potential to “cause havoc for all sorts of capital and liquidity issues”.
The bank’s motivation for exemption, from the Consumer Protection Act, is underpinned by the following arguments:
1. Section 14 of the CPA allows consumers to cancel fixed-term and deposit contracts with a bank, at any time by giving 20 business days’ notice.
- According to BASA, banks rely on the stability of their deposit base, provided by fixed maturity deposits, to manage their net cash flow. This in turn is used to satisfy customer demands for funds as they fall due.
- Allowing customers to rescind these agreements before they expire could adversely impact on liquidity risks and place institutions in precarious positions.
2. Another consequence of Section 14 of the CPA is that consumers can re-price investments at any time during the contract period, especially when interest rates are rising.
3. There are also consequences with regard to the adoption of the global Basel 3 framework by banks. Under Basel 3 banks are required to hold certain proportions of their deposits in medium-term and long-term contracts.
- If customers are allowed to opt out, it throws the long-term liquidity projections into flux.
- In order to discourage clients from doing this, Basel 3 advocates that in the case of early repayments, a “significant penalty that is materially greater than the loss of interest” be imposed. This is in direct conflict with the Consumer Protection Act, which requires suppliers to impose a “reasonable” cancellation penalty.
4. Banks have objected to the maximum contract term of 24 months for fixed term contracts, imposed by the CPA.
- Banks fear this would restrict their prudential requirement to raise deposits for longer than this, as well as for lease agreements.
5. Banks have opposed the obligation to offer consumers a reinvestment rate that is “binding” 40 business days before the contract expires.
- Banks contend, the prudent market practice is to quote indicative rates to customers which are agreed on the day that the reinvestment occurs.
- Banks are worried that to quote firm forward rates on deposits would require the bank to hedge that risk, which would involve cost and administrative challenges because of the volumes.
From a bank’s perspective these arguments appear logical and valid.
But does that justify depriving consumers of their legal rights?
Judging from their track record, banks are not the ethical and responsible corporate citizens we expect them to be.
Government has battled for years to bring bank charges and pricing structures under greater scrutiny. Though banks say they have done much to implement a number of recommendations in the 2008 Jali commission report into bank fees, a treasury report released in February said the SA financial sector was still characterised by high and opaque fees and “in some cases, the unfair treatment of customers”.
What do you think – should banks be granted exemption from the Consumer Protection Act?