Protecting guarantors: MPs approve Bill to regulate bank loans

The National Assembly Finance and National Planning Committee has approved the publication of a Bill that seeks to protect borrowers and loan guarantors through the establishment of the Ombudsman and the Financial Sector Tribunal to oversight lenders.

The Financial Markets Conduct Bill, 2023 provides for full disclosure of information by a lender to a potential borrower and the guarantor before giving the loan.

The Bill provides that a pre-contract statement and quotation be provided with details of the loan advanced such as the dates and number of instalments, the total amount to be repaid including the principal, interest, loan fees and charges.

“The legislative proposal will limit lenders from charging or recovering from the borrower or guarantor’s interest exceeding the maximum rates as prescribed by the Financial Markets Conduct Authority.”

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The Bill provides for the establishment of the Financial Sector Ombudsman to handle complaints and the Financial Services Tribunal to arbitrate disputes in the financial services sector.

The Bill further provides that lenders shall not vary the interest rates charged during the term of the contract. The lender will be required to determine the likelihood that the borrower and the guarantor will be able to comply with the financial obligations under the contract without substantial hardship, and should the lender decline the loan, they will be under obligation to give a specific reason.

The Bill also requires that retail financial customers may claim compensation from the Conduct Compensation Fund in case of loss or damages caused by a financial product/service provider.

The proposed Bill provides for restriction of lenders from providing credit reports that contain information about the customer, as well as recommendations about the credit worthiness of the customer, based on prohibited information.

 “The legislative proposal seeks to promote a fair, non-discriminatory financial market, conducive for credit access by establishing uniform practices and standards for providers of financial services, regulating the cost of credit, and establishing the Financial Markets Conduct Authority whose functions shall be to regulate and supervise the conduct of providers in providing financial products and services to retail financial customers,” the Bill states.

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It establishes the Financial Markets Conduct Authority Board of Directors consisting of a non-executive chairperson appointed by the President, the National Treasury Cabinet Secretary, the Central Bank of Kenya governor, five other persons with relevant experience appointed by the Treasury Cabinet Secretary, and the CEO, who shall be an ex-officio member with no right to vote.

The Bill also provides for financial conduct licences, which will limit the provision of financial products and services as service providers cannot operate without them.

“For instance, a person who does not hold a financial conduct license cannot advertise for the provision of credit services,” a brief on the Bill prepared by the House legal team states.

“The [Bill] proposes that, where an entity already holds a license under a sectoral law – such as the Capital Markets Act, the Banking Act or Microfinance Act – which covers the provision of financial products, that entity will be considered to have satisfied the requirements of the Bill. This is subject to a period of exemption of twenty-four months from when the Bill comes into force. Such entities need not obtain a licence.”

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