Cedric E. Stephens | Financial service regulators must do better – Part II
Today’s article is the outcome of a discussion between a reader and me. He was about to transact business with a local financial institution but decided not to at the last minute. The proposed contract terms, he said, were unacceptable. As a result, he deposited the funds elsewhere.
He sent me a copy of the 500-word authorisation blank he refused to sign after he read last week’s piece. That feedback and comments in ‘Banks: A work-in-progress’ written three months ago by the Jamaica Bankers Association (JBA) president spurred me into action.
The reader was required to give the institution written authority to act in relation to the money that was to be deposited as a condition of doing business with it. The scope of the authority to be delegated to the company was challenging to understand. The print size could not be smaller. The document was written in legalese. Paragraph two was 253 words long. It consisted of two sentences – one was 127 words and the other 126.
Paragraphs numbers three and four comprised two sentences. Each sentence was 72 words long. The authorisation appeared to have been designed to make the content incomprehensible to the average person, like the typical insurance contract.
The following words summarise the authorisation letter: heads, the institution wins; tails, the consumer loses.
Here are some examples:
– ‘The company is requested and authorised but is not obliged to rely upon and act in accordance with any notice, demand, other communication which may from time to time be, or purport to be, given by telephone, e-mail, or fax by me/us or on our behalf by anyone on the signatories without enquiry on the company’s part as to the authority of the identity of the person making or purporting to such notice or demand … .’
– ‘The Company shall be entitled to treat such notice, demand, or other communication as fully authorised by and binding, and the company shall be entitled (but not bound) to take such steps … .’
By signing the authorisation blank, the customer agrees to pay (or hold harmless) the institution for ‘losses it may suffer’.
A hold harmless agreement is a clause in a legal contract absolving one party of legal liability for any injuries or damages another party suffers. It ensures that one party (in this case, the customer) cannot hold the other party (the institution) legally responsible for any risks incurred from services provided.
A business may add a hold harmless agreement to a contract when the service being retained involves risks that the company does not want to be held responsible for legally or financially.
The JBA president would explain the rationale for the ‘hold harmless agreement’ thus: “By accepting deposits that can be withdrawn within a short period of time by the depositors and extending longer tenor loans, the bank absorbs interest rate risk and liquidity risk. Failure to manage these risks can lead to insolvency.”
This is true. But doesn’t the institution have a duty to craft its letter of authorisation in a way that is understandable to the average person?
And if the institution fails to honour its obligation, shouldn’t the regulator intervene on behalf of consumers?
The preceding questions led me to deeply dive into the ‘Code of Conduct on Customer Related Matters’, issued under Section 132(4)(b) of the Banking Services Act.
Were there specific provisions that govern how deposit-taking institutions communicate with customers and prospective consumers?
Non-deposit-taking institutions like insurance companies and intermediaries, for example, are required under Sections 142A and 142D of subsections (3) (g) and paragraphs (1) and (2), respectively, of the Insurance (Amendment) Regulations, 2022, to “inform and explain the terms, conditions, and effect of every insurance business-related transactions affecting or involving policyholders, beneficiaries, claimants, customers, and the public”.
Sub-section 8 (2) of Part II of the code of conduct, General Disclosures, issued under section 132 of BSA, imposes a duty on the institution to “(a) provide the customer with the terms and conditions relating to the opening of an account … (c) subject to (d) below, ensure the terms and conditions about the matters at (a), are disclosed- (i) in clear language; (ii) where the use of technical jargon is unavoidable, be accompanied by an explanation in simple language, and in a manner that is not false or misleading; (d) … ensure that key terms for deposit and loan products are identified or highlighted for the customer’s attention …”
The authorisation blank letter that the reader sent me does not meet the standards set out in the code.
Sections 12 to 14 of the code deal expansively with how deposit-taking institutions must manage customer complaints.
The JBA head used a nice-sounding phrase to describe the association’s mission – the provision of “innovative and customer-centric banking services to empower every Jamaican to thrive”.
Yet he omitted to provide a historical analysis of what the JBA and its members learned from studying customer complaints and how these lessons were informing their strategies.
The financial service regulators need to start cracking the whip in 2024!
If you require assistance managing risks or solving insurance problems, Cedric E. Stephens offers free counsel and advice. To obtain information and counsel, please write to The Business Editor at business@gleanerjm.com or contact Mr Stephens directly at aegis@flowja.com. Letters and e-mails will be edited for clarity and length.