Fair and respectful treatment of clients

Objectives Understand the importance of fair and respectful treatment of clients Understand how a FI creates and maintains high standards of ethical behavior towards clients.

Effects on the client and the institution Inappropriate Collections Practices Clients mistrust the institution, and tell others. Staff rely on coercion for repayment, rather than good portfolio management. To avoid humiliation, clients go to extremes to repay their loans. “My younger sister’s husband died. We told [the loan officer] it’s her mourning period, and she can’t come. Then she said if she will not come, then we will not give another loan. It’s inhuman.” Woman, Karachi, Pakistan Clients mistrust the institution, and tell others. Inappropriate collections practices have negative consequences for the institution, as well as the clients. Three such consequences are: The abused client mistrusts the institution, and tells others. The institution gains a bad reputation. When the threat of humiliation looms over the client, they may go to extremes to repay their loan- such as selling productive assets or pulling children out of school. When credit staff know they can use coercion to persuade clients to repay, they have little incentive to learn good portfolio management. [For Discussion: Ask participants what else they could add to this graphic. What are the other affects of inappropriate collections practices?]

13% Clients that have experienced public shaming incidents in Benin and Pakistan. I took the photo because it’s like an incurable wound …[from] my bad experience with [MFP]. I used the photo to be a guarantee for one of my friends who borrowed from the MFP. She finished repaying the loan and without telling me, took a second loan and then ceased repaying. One day, one of my clients came to tell me that my photo was pasted up on the CLCAM notice board in [Cotonou neighborhood], on the side of the street and that many people were looking at it. They went on to say that they were certain that I had borrowed money and had not repaid. This situation took place in 2003, but I’ve never forgotten it. Every time I look at the photo, it upsets me and I remember the degrading remarks that my clients made.” – Female, Cotonou, Benin (former microfinance client) 9%

Example from research findings on client experience Attributes valued by clients in each market Benin -Thoughtful presentation - The opportunity to negotiate - A warm welcome - Reciprocal trust in clients Pakistan - Respect - Humanity (insaaniyat) - Compassion and dignity - Interest in establishing a long-term relationship Clients mistrust the institution, and tell others. Georgia - Clear explanation of information - Long-term cooperation - Recriprocal trust in clients - Warmth Ask what they notice Peru - Extension of a helping hand - Clear explanation of information - Thoughtful presentation - Genuine interest in clients

Principle in Practice Consider this: Providers and their agents treat clients fairly and respectfully, as defined in the institution’s code of conduct. They do not discriminate in both client selection and treatment and will ensure safeguards are in place to detect and correct corruption and aggressive/abusive treatment from staff and agents. Consider this: Most abuses and discrimination happen during the loan sales and debt collection processes—these need special attention by providers. Codes of conduct should define sanctions. Principle in Practice – 5 mins. Financial service providers have a responsibility to exercise good faith in designing products and delivery channels that are suitable for clients and to not take advantage of client inexperience and/or underdeveloped markets. They should take active steps to consider the characteristics of target clients during the design process. Products should function as advertized, provide value for money, and not be deceptive in design. Considerable care should be given to designing products that suit client needs while being simple and flexible. As one example, loan repayment schedules are best structured to correspond with the expected cash flows of borrowers. The point of suitability is not to over-design products for narrowly defined purposes, but to ensure that the products are designed to be useful for clients. In delivering products, providers should gather sufficient information from the customer to ensure that the product is likely to meet the customer’s needs and capacity.   Suitable product delivery. Product design should take into account the process by which products will be sold, as discussed further under Fair and Respectful Treatment. Simplicity. Simple products, including products with simple pricing, are easier for clients to understand and compare. Simple products may be more affordable and flexible for clients. Simplicity implies minimizing the use of bundled products (that is, requiring a client to buy a second product, such as credit life insurance, in order to use a first product, such as a loan).2 We note that simplicity is not an absolute value: it must serve product relevance and usefulness. Minimum changes. Products should be designed in a way that minimizes the possibility that product changes, such as unexpected changes in pricing, terms or fees will become necessary during the course of the product’s life. No waivers of client rights. As a general rule, clients should not be asked to waive their rights, such as the right to sue the provider, receive information, cancel use of the product, maintain privacy, etc. If a financial service provider considers a waiver imperative, for example if a product is not viable without a waiver, then this should be made clear to the client. Waivers requested for the convenience of the provider are generally not appropriate.

The code at the center Code of Ethics Management Human Resource Internal Audit Human Resource Code of Conduct/Ethics at the heart of the organization – 5 mins (Optional) This is a visual representation of good practice. Here, the institution’s Code of Ethics is at the center of a series of interconnected systems and practices that promote ethical staff behavior. The Code of Ethics should: Govern how Management sets priorities and runs the business, including how it treats employees, markets to customers, implements its business strategies. Set clear guidelines for what is acceptable and unacceptable inside an MFI so that the Internal Audit department can judge internal behavior on a set of ethical standards that match the clarity of the institution’s financial standards. Help Human Resources choose candidates for employment based on their ‘fit’ with the MFI’s self-proclaimed standards and practices. The Code of Ethics should also serve as a guide to HR for which behaviors and attitudes should be encouraged within the organization.

Role of Management Create a Code of Ethics for the institution. Communicate the importance of ethics to staff on a regular basis. Train staff to respond to ethical dilemmas tailored for their position. Empower managers to follow up on ethical complaints. Establish an Ethics Committee that rewards ethics and sanctions violations. The role of Management – 3 mins Especially important to have very strong management oversight and systems are particularly important. In V2.0 Smart Campaign has promoted the management oversight at the level of the standard (that’s not consistent across the principles and we’re okay with that). Staff behavior is a direct result of management priorities and imperatives. These are ways that management can encourage ethical staff behavior.

Adequate Standards of Care Promotes and enforces respectful treatment of clients through Code of Conduct. Policy to avoid discrimination against protected categories in client selection Defined apt debt collection practices by staff and 3rd party Effective systems to prevent and detect fraud Insurance claims are processed in a fair/timely manner Adequate Standards of Care – 6 mins Here there are 6 standards including, non-discrimination standard which is expanded to include age, have more details on rescheduling and also includes new standard on insurance claims and management oversight support. There are 14 compliance criteria's and 8 indicators Management and oversight support for fair and respectful treatment of clients.

Policy prevents client discrimination CPP #5: Adequate standards of care Respectful treatment of clients promoted and enforced through Code of Conduct. CoC is wel defined, includes sanctions Staff and clients know about CoC CoC informs and aligns with HR policies (e.g performance evaluations include) Staff and 3rd Party trained on CoC Policy prevents client discrimination Defined Protected Categories Terms and conditions only differ based on Risk Analysis, Target Market, and special needs No age limit biases Standards and Indicators – 10 mins The FI promotes and enforces fair and respectful treatment of clients in line with a code of conduct. 5.1.0.0 The code of conduct (or equivalent) clearly spells out organizational values, standards of professional conduct and treatment of clients that are expected of all FI or third-party provider staff or agents. Policies also spell out what sanctions to apply in case of a breach of the code of conduct. 5.1.1.1 The following behaviors are always prohibited and sanctions are specified in writing and enforced: using abusive language; using physical force; limiting physical freedom; shouting at the client, entering the client’s home uninvited; publicly humiliating the client; violating the client’s right to privacy; mistreating a client based on any Protected Categories; using intimidation or threats; sexual or moral harassment. (Certifier: Protected Categories = Ethnicity, gender, age, disability, political affiliation, sexual orientation, caste, and religion. The list can be extended by the FI. ) 5.1.1.2 Fraud and unethical actions (e.g. corruption, theft, kickbacks) are also prohibited. Sanctions in such cases are clear and strictly enforced. 5.1.1.3 Clients are informed of the FI’s standards of professional conduct and the prohibited behaviors mentioned in the code of conduct. 5.1.2.0 Human resource policies and procedures reinforce the standards identified in the code of conduct. 5.1.2.1 All staff sign a document acknowledging that they will abide by the code of conduct. 5.1.2.2 The FI has an effective training program in place to ensure that staff understand and have the skills to implement policies and procedures related to fair and responsible treatment of clients and aligned with the code of conduct. Unacceptable behavior is highlighted. 5.1.2.3 The FI verifies that third parties (agent network managers, etc.) train their own representatives on fair and responsible treatment of clients. The training is aligned with the FI's code of conduct and spells out unacceptable behavior. 5.1.2.4 Employee and agent performance evaluations include reviews of adherence to the code of conduct, ethical behavior, and the quality of interaction with customers. 5.2.0.0 The FI has policy and documented processes to avoid discriminating against Protected Categories in selecting clients and setting terms and conditions. 5.2.1.0 Protected Categories include: ethnicity, gender, age, disability, political affiliation, sexual orientation, caste, and religion. 5.2.2.0 Terms and conditions for individuals may differ based on 1) risk-based analysis, 2) target markets defined in the FI's mission, 3) accommodations based on special needs. Such differentiation should be consistently applied, stated in advance and made with the goal of benefitting clients. (For example, FIs can have differentiated, risk based pricing based on age, but cannot have an age limit.)

CPP #5: Adequate standards of care Policy clearly defines appropriate debt collection practices Define appropriate and inapproriate in policy Clients know polices and options Allow time to determine reasons for default. Staff/Client trained. Verify 3rd party training. Rescheduling can be case by case basis Policy & management cover collateral Proportional, reasonable, secured seizures Clients not forced to sell collateral to pay debt Systems are in place to prevent and detect fraud Standards and Indicators – 12 mins 5.3.0.0 Loans are collected by staff and collection agents in an appropriate manner. 5.3.1.0 A policy is in force that clearly defines appropriate and inappropriate debt collection practices by staff and third parties. 5.3.1.1 The FI defines what actions should be taken in case of collections. The schedule of collections actions allows time for the FI or contractor to determine the reasons for a client’s default. 5.3.1.2 The FI trains staff and/or group members (if applicable) on the FI's debt collections practices and loan recovery procedures (including actions they are expected to take and those they are prohibited from taking in case of default). (Certifier: In addition to spelling out processes and identifying prohibited treatment, the training should include skills such as negotiating techniques, understanding customers, managing tensions, and reaching amicable agreements.) 5.3.1.3 The FI verifies that third parties (agent network managers, etc.) train their own representatives on the FI's debt collections practices and loan recovery procedures. 5.3.2.0 The FI has a policy for rescheduling loans/ refinancing/writing off on an exceptional basis. 5.3.2.1 The policy lists cases of specific distress under which clients can be granted rescheduling or refinancing (e.g., natural or man-made disaster; major hospitalization, etc.) or under which loans can exceptionally be written off. 5.3.1.2 The FI reschedules, refinances or writes off loans on an exceptional basis for late clients who have the willingness to repay but not capacity to repay, prior to seizing assets. These are authorized by a higher ranked individual than the one proposing the rescheduling, refinancing or write off. 5.3.3.0 Policy, documented processes and management oversight are in place to ensure that collateral seizing is respectful of clients' rights. 5.3.3.1 Clients are informed on collateral seizure processes before they take the loan. The FI follows local regulations to the extent possible. However, if court orders are not feasible for FI to obtain, FIs may follow local best practice guidelines. Seizure must be preceded by informing the client and allowing the client to attempt to remedy the default. This applies to group and individual loans. (Certifier: For PWD clients, loans are collected directly from the clients (e.g. collecting directly from the client at their home vs. asking a family member to come to a group meeting or collection center).) 5.3.3.2 If the collateral is seized and the value of the collateral exceeds the outstanding principal, accrued interest up to 180 day, any penalty fees and legal costs, the difference is returned to the client. 5.3.3.3 The FI staff may not force clients to sell their own collateral to pay off their debt. 5.3.3.4 Collateral cannot be sold to the FI, the staff of the FI, to their relatives, or to third parties involved in the seizing process. 5.3.3.5 The FI has an internal control process to verify uniform application of policies and procedure related to collateral seizing. The FI can produce evidence of corrective measures taken in case of partial or incorrect implementation of the policies and procedures to ensure an adequate compliance in the practice. 5.3.3.6 In case collateral is kept in the FI premises, it is kept in a locked room or secure premises, and noted in the contract. 5.4.0.0 The FI has effective systems to prevent and detect fraud. 5.4.1.0 A documented process is in place to avoid fraud related to client savings, and is in line with international best practice. 5.4.2.0 A documented process is in place to manage appropriately transactions that are not completed or are incorrectly completed. 5.4.2.1 In cases where the receiver cannot cash out money after a period of time, funds are returned to sender with a notification. 5.4.2.2 If a funds transfer or similar electronic transaction is made to the incorrect account, mechanisms are in place to correct the error by either the agent, branch or provider. Process for incorrectly completed transactions Payments: if not cashing out, funds returned w/ notification Savings secured

CPP #5: Adequate standards of care Insurance claims are processed fairly and quickly Claims settled w/in 30 days or less Claimants notified when changes If claim denied, also notified w/in 30 days of filing Management prioritizes fair and respectful client treatment Part of audit and management reviews of key results Evidence and records Standards and Indicators – 8 mins 5.5.0.0 Insurance claims are processed in a fair and timely manner. 5.5.1.0 Almost all claims are settled within one month or such shorter period as may be required by local law (some exceptions may be permitted due to complexity). (Certifier: This applies to all insurance, not only life insurance. ) 5.5.2.0 Claimants are notified when claims are received and when they are settled. 5.5.3.0 When a claim is denied, claimants are provided notice, the reason for rejection, and a reasonable time period during which to correct any deficiency; in almost all cases, such notice is received within one month of the filing of the claim (some exceptions may be permitted due to complexity). 5.6.0.0. The FI management and oversight support fair and respectful treatment of clients. 5.6.1.0 The FI has an internal control process to verify uniform application of policies and procedure related to fair and respectful treatment of clients. The FI can produce evidence/records of monitoring/reporting of corrective measures taken in case of partial or incorrect implementation of the policies and procedures to ensure an adequate compliance in the practice. 5.6.2.0 Management reviews key results (e.g., client satisfaction survey, complaints handling summary) related to fair and respectful treatment of clients. Measures for improvement are discussed, implemented, and monitored, and records of these actions exist. 

Offensive language and threats Examples of inappropriate practices Offensive language and threats Credit staff uses offensive or abusive language. Collections agents threaten clients or harass them at work, home, or their places of worship. Collections agents enter a client’s home and/or seize property without a judicial order. The institution accepts collateral that may deprive borrowers of their basic survival capacity. Unethical seizure of property The institution subcontracts collections to businesses that are not subject to the same ethical standards as the institution. Subcontracting to unethical businesses To understand “appropriate collections practices,” it is useful to define inappropriate practices. Good practice institutions should avoid these types of practices. [Read the examples] Careless debt extension The institution issues automatic debt extensions.

Examples of correct practices Policy that clearly defines examples of inappropriate debt collection practices is enforced Management reviews key results related to fair and respectful treatment of clients such as customer surveys and conducting their own client visits When an insurance claim is denied, claimants are provided reason for rejection and receiv within 1 month of claim Summarize by showing the slide to summarize all messages.

Examples of correct practices Independent internal audit team checks for fraud related to client savings. Collateral seizing is respectful of clients' rights:. does anyone have an example from their instiution?

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Key Messages App prod design is relevant in CP because FIs often deal with inexperienced clients that do not necessarily have the knowledge/experience to determine if the product provides good value for the money. Product suitability must be incorporated at all levels of an FI from board policies to staff training MFIs that listens and learns from their client are more likely to succeed than who imitates others product/services in the market. Moderate sales techniques should be used to deliver products/services. Aggressive sales must be defined. Third parties must be vetted with client in mind