Consumer Protection: Is your Money Safe?
By Joseph Lutwama
Former Policy, Legal and Regulatory Specialist, Current FSD Uganda Director of Programs
Can my money ever be safe? Can I trust the bank to keep my money safe? I am sure at some point in your life you have asked yourself these questions when deciding where to keep your money. Five out of every ten adult Ugandans keep their money at home in a “safe place”. Only 5 out of 100 adult Ugandans actually keep their money in a commercial bank.
One need to ask how safe the “safe place” at home is that many Ugandans trust it more the commercial bank to keep their money. The commercial bank may have more safeguards than one’s home and thus safer to keep one’s money but it comes down to confidence. Many adult Ugandans do not have confidence in the commercial banks. My task in this article is to demonstrate that it is worth trusting the bank or any other regulated financial institution with your money. First and foremost the bank premises are in most cases far much safer than the ordinary Ugandan’s house. The bank premises are usually in a well built environment with the necessary insurance which are in most cases absent with a typical Ugandan house.
Therefore in the event of a fire if one has kept their cash in their house, chances are they will loose all their savings in a flash. In many cases when fires have broken out in downtown Kampala markets we have always heard of stories of lots of money lost in the fires. In many instances the amounts have been estimated in millions of Uganda shillings. These markets are usually made up of makeshift wooden planks and because of their nature, they also do not have insurance. Therefore when there is a fire one’s entire investment is lost together with their money.
If it was a bank that caught fire the story would be different. First of all most money in the bank is digital rather than cash. Cash only accounts for a small proportion of the total money in bank branches. With proper computer back-up systems and the necessary insurance no money will be lost. Even the one that is burnt will be recovered by the insurance company.
Besides the bank premises being in a well built environment and with insurance, the commercial banks are regulated by the Bank of Uganda. Regulation safeguards your money by ensuring that the following are present in the market:
Fair competition: Uncompetitive markets usually place the consumer in a disadvantaged position where they are paying more for a service or product than its actual market value. In such markets the quality of the service or product can also be found wanting. Competition regulation therefore ensures that; no one seller, and no group of sellers acting in concert, has the power to choose its level of profits by giving less and charging more.
Good Market conduct: Market conduct regulation focuses on how the consumer is treated by the financial service provider. It works on the principle that every consumer irrespective of their status in society needs to be accorded fair treatment and that they should get value for their money. Therefore market conduct regulation ensures that participants act with integrity and they are provided with adequate information on which to base informed judgments. The two areas of misconduct that are most common in financial markets are unfair or fraudulent conduct by market participants and inadequate disclosure of information on which to base investment decisions.
Soundness of the Financial Service Providers: In most cases given that financial services are an intangible product, the systems that deliver this product are also in most cases very sophisticated. So however much information is disclosed about the operations of these systems, the average consumer will never make sense out of the information they are provided. Therefore to address this financial markets deficiency, financial markets regulators will always impose prescriptive rules or standards governing the prudential behaviour of financial institutions to ensure that these institutions keep their promises. These rules or standards usually come in the form of licensing and capital adequacy requirements, this being the amount of capital a bank or other financial institution must hold as required by its financial regulator. By imposition of these requirements the consumer will have some level of comfort that even if they do not fully understand the operations of the financial institutions that serve them, the regulatory requirements will reduce their probability of failure. This is what is referred to as prudential regulation in technical terms.
Systemic Stability: Systemic instability arises where the failure of one financial institution will lead to the failure of other financial institutions due to the interconnectedness within the financial system. In this case a consumer can lose their money not because their financial service provider is inefficient or fraudulent or undercapitalised but because another financial service provider with which they transact business has failed. Therefore to prevent such a scenario from happening, the regulator will ensure that the financial service providers are financially sound. Beyond the prudential requirements, the regulator will also have in place “a lender of last resort” facility in the case of banking. This facility is there to provide an external source of liquid funding to the financial system in the event of a systemic crisis.
Consumer protection: The information gathered by the banks on your account is private and the law requires that your data is protected from being shared without consent and within specific limits. Similarly, when you open an account, the bank must declare the requirements and costs of the account to you. This could be done in a more user friendly manner than the fine print currently used at the back of application forms, but in all , these spell out your responsibilities and also serve as a contract of service between you and the bank. Something informal mechanisms cannot provide you.
The four safeguards are always present in any financial market except for fair competition because financial sector regulators rarely handle competition matters. There is usually a regulator responsible for ensuring the fair competition prevails in the market. Unfortunately this is not yet the case in Uganda. However, a competition and consumer protection bill is already under way to address this gap. Nevertheless, the other three safeguard good market conduct, financial soundness and systemic stability are present in the Ugandan market. That is why even with over three bank failures in the last 10 years no Ugandan with their money in the banking sector has lost it because of these failures. It is time you reconsidered keeping your money in your house rather than opening up a bank account. It is far safer than you think.