“Fairness can be a source of competitive advantage…

Interview: Sonali Sewraj-Reetoo — Chief-Legal Services, BOM

… we are asking banks to ‘find profit in fairness’”

* “Customers need to shop around and choose the bank which they consider suits their needs best. They should vote with their wallet”

Following the release by the Bank of Mauritius of its ‘Banking Your Future’ Report in June this year, we have sought the views of Mrs Sonali Sewraj-Reetoo, Head of Legal Services at BoM on several issues related to the banking sector. A major one is the fees and charges for various services offered by banks, which many customers feel are too high or unfair. In its report BoM has made several recommendations in respect of these and other aspects. BoM has put forward this report as public consultation document and is awaiting inputs from all stakeholders before coming up with measures aiming at a more effective regulation of the banking sector…

Mauritius Times: The BoM’s ‘Banking Your Future’ Report aimed at bringing about a ‘fair and inclusive banking sector’ was released in early June 2014, and stakeholders have until 6 October 2014 to submit comments and proposals. In this light, would you say there are already positive signs of commercial banks evolving towards less unbalanced treatment of their customers, at least ‘becoming more attentive’ to their needs as urged by the BOM’s Governor?

Sonali Sewraj-Reetoo: The Report is a public consultation document and the recommendations contained in it aim at restoring the balance between the rights of the customers on the one hand and those of the bank on the other. It is only after the 6th October 2014 that the Bank of Mauritius will decide on which policies to adopt – based on the feedback received from members of the public, non-governmental organisations, consumer associations and the banks.

Having said that, speaking as Chair of the Task Force, I am very pleased that some banks have already started implementing some of the measures. For example, the State Bank of Mauritius and the Bramer Bank have both already launched their version of the ‘GO Account’ which is a free basic bank account and which is one of the main recommendations of our report

* After discussing for long with banks and giving them signals about their unwarranted and exaggerated charges for, among others, so-called “bank services”, the BOM has finally come out with a list of “services” that should no longer be charged to bank customers. After this, are you hoping that the banks will themselves straighten up the matter and refrain voluntarily from charging “fees”, “commissions”, etc., for all-and-sundry?

Banks are profit-making organisations and it is normal that they should be making profits. We don’t have any issue with banks charging fees. However, we do believe that there is a case for the fees to be made “fairer”. We have recommended in the report that fees should be fair to both banks and the customers. It is in this perspective that the Task Force has recommended the abolition of 19 fees and charges and the review of 13 others. Already, I can tell you that some banks, for example, SBM have announced the abolition of some fees. These are all positive signs. Will the 100 recommendations of the Task Force be applied? It is too early to say. The ball is in the court of the Bank of Mauritius which will decide after the consultation period.

* I quote from the Report that “Mr Rundheersing Bheenick, Governor, Bank of Mauritius, urged banks, on a number of occasions, to be more attentive to the needs of customers. Despite his repeated calls, the complaints (from customers) continued.” This would suggest that polite conversation hasn’t made any dent in the commercial banks’ practices. Do local banks, or at the least, those which lead the pack, get to do the right things only when forced to do so?

The Governor has been speaking on a number of occasions on the profits made by banks. This is not to say that the Governor is against banks making profits. Not at all. In fact, no right-minded person would want our banks to be making losses. As Chair of the Task Force, I feel that there is a case to be made for banking to be both fair and profitable. In fact, fairness can be a source of competitive advantage and, in the report, we are asking banks to “find profit in fairness.”

Coming back to your question as to whether banks get to do the right things only when forced to do so, what is the “right” thing? If you are a bank, maybe you could view the “right” thing as maximising profits for shareholders since you are a profit making organisation. If you are a “customer”, maybe you could view the “right” thing as providing many more services free of charge. As regulator, we view the “right” thing as striking a balance – between the needs of the customers and those of the bank. It is our job to hold the scales evenly.

2 of our banks are already offering the Compte GO – which is still a recommendation at this stage and not a measure that the Bank of Mauritius is imposing on any bank.

You will have noted that we have included in the report, direct quotes from customers. We thought it important for banks to see things from the point of view of the customer. The report may have been an eye opener for banks.

* We’ve seen that African Central Banks (See, for example, the Communique published by the Governor of the Central Bank of Côte d’Ivoîre in Fraternel Matin in July this year) have taken the initiative to tell recalcitrant banks to no longer charge customers for certain items. How do we explain that it is taking so long to bring local banks to also serve the best interests of their customers rather than serve themselves first and foremost?

We have to be fair towards our banks. The banks have served the country. In this debate, we should not overlook all the good work that our banks have done and continue doing. The banking sector has contributed significantly to the development of our economy. Banks have helped some sectors that are today the pillars of the Mauritian economy. Banks are not just profit making organisations. They have a role to play in society. As we have stated in the report, the banking licence that is granted to them is a “privilege.”

However, it is important to understand that, internationally, there is now a new paradigm of customer awareness, empowerment, and protection which is a consequence of what happened during the financial crisis. We would like to move towards a banking sector which is more attentive to the needs of customers. And this is what the report is all about.

* One would have thought that a central bank’s demonstrable and determined action, if persuasion fails, would have been sufficient to ensure fairer banking practices especially given that/as the Bank of Mauritius Act 2004 (Section 6) empowers it, inter alia, to “regulate the fees or charges in respect of the services provided by financial institutions and impose such limitation on the quantum of those fees and charges as it may deem appropriate”. Why hasn’t the BOM cracked the whip more firmly before this to ensure fairer banking?

It is only in 2012 that our law was amended to give us the power to impose a limit on the quantum of fees and charges. Yet, the ideal solution is not always to dive in and start regulating left and right. Regulatory intervention is not always the answer. The regulator should let the market operate and intervene only when things are not working quite as it believes they should. Even then, intervention is not a simple solution. In India in 2006, a working group had been set up to determine the reasonableness of fees and charges. I can assure you that they found it very difficult to come up with definite solutions.

* Could it be that the Bank of Mauritius Act, even if it empowers the central bank to regulate and limit bank charges and fees, does not provide for sanctions to be taken in case of continuing failure by operators to abide by the Central Bank’s requirements – and that it is this want of sanction that would explain why unfair banking practices would have carried on nevertheless to the detriment of bank customers?

Any instruction given by the Bank of Mauritius would be subject to sanctions. Yet, we also have to appreciate that the power to regulate fees and charges is not matched with the power to regulate interest rate spreads. Speaking as Chair of the Task Force, I feel that the power to regulate fees and charges is an inefficient power since there is cause for concern that income foregone through regulated fees and charges gets translated into higher borrowing costs and lower deposit remuneration. And it is for this reason that the report has recommended that the Bank be given the power to regulate interest rates spread.

Financial Education, or rather the lack of financial education also has a big role to play in unfair banking practices. An informed customer will not allow himself to be the victim of unfair banking practices. He will know how to ask the right questions and get the right answers. This explains why customer empowerment is an important pillar in the report.

* Despite what the public and the Central Bank think about it, certain bankers may argue that the fees they charge to customers for different banking “services” are a fair reflection of their costs. Whose job is it to determine that commercial banks have been over-charging indiscriminately or with reference to their actual cost of providing the “service”?

It is too early to comment on the response of commercial banks. They have been given till the 6th Oct 2014. At the end of the day, the Bank of Mauritius will listen to members of the public but also to banks whose business it is to manage their costs and their funds. As I stated above, the Bank of Mauritius will have to do the balancing exercise.

We should not forget the responsibility of customers. They need to shop around and choose the bank which they consider suits their needs best. They should vote with their wallet. This is where financial education becomes important. This is also where transparency of fees and charges becomes important.

* As regards bank charges in the UK’s banking sector, the Office of Fair Trading, acting on behalf of consumers, challenged these fees under the Unfair Terms in Consumer Contracts Regulations 1999, claiming the sizeable fees charged were not a fair reflection of the banks’ costs but were instead a penalty upon the consumer or bank account holder, hence unlawful (Office of Fair Trading v Abbey National plc and Others [2009] UKSC 6)… Do we have an official consensus in Mauritius whereby the BoM and other authorities can act together to stop abusive bank charges in the manner it is done in the UK?

It is important to point out that in the UK, the OFT lost its case and the court found that the OFT could not challenge the fairness of the bank charges. The UK has its own context, its own laws, its own institutions and we cannot simply import from there. In Mauritius, we do not have institutions which are empowered like the OFT. Here the power to control fees and charges is vested in the Bank of Mauritius and to some extent, and in some circumstances, the Commissioner for the Protection of Borrowers. I believe that as our law is presently drafted, the power to regulate fees and charges is ineffective and we should be careful before jumping in the ring for fear of unintended consequences on the interest rates spreads – this is also the stand taken by the Governor of the Bank of Mauritius.

* As regards the recommendation made in the ‘Banking Your Future’ Report with respect to the need to empower the Bank of Mauritius to regulate interest rate spreads, it could be argued, on the other hand, that competition among banks would be a better proposition for promoting narrower interest rate and other margins and for efficiency and financial inclusion, as that would keep loan rates and fees lower, without necessarily undermining financial stability. Do you see the alternative working itself out in practice in Mauritius?

Whilst the report has recommended that the Bank be given the power to regulate interest rates spreads, the report has also made a case for promoting competition. We have proposed a number of measures which we believe will improve transparency and stimulate competition. We have thus proposed what we call the “BankSmart Window” which will be a comparative table setting out all the fees and charges of all the banks to ease comparison. We have also, to name just a few of the 100 recommendations, recommended that alternative market players be equipped to compete with our banks, that anti-competitive fees and charges be eliminated, that a study on achieving customer mobility be set up. At the end of the day, we are proposing a package of reforms. I believe that meaningful changes can only be brought if changes are brought at many different levels. Tinkering with a few knobs, making one or two cosmetic changes will not take our banking sector where we want it to be.

 

* Published in print edition on 26 September 2014