Principle # 5 – Fair and respectful treatment of clients This presentation is made possible by the Smart Campaign www.smartcampaign.org

Agenda Client protection principles Principle #5 in practice Participant feedback Tools for improving practice Conclusion and call to action

Client Protection Principles 1. Appropriate product design and delivery 2. Prevention of over-indebtedness 3. Transparency 4. Responsible pricing 5. Fair and respectful treatment of clients 6. Privacy of client data 7. Mechanisms for complaint resolution [Each principle is listed, along with how the Smart Campaign defines the principle]. These are the Seven Principles of Client Protection 1. Appropriate product design and delivery Providers will take adequate care to design products and delivery channels in such a way that they do not cause clients harm. Products and delivery channels will be designed with client characteristics taken into account.   2. Prevention of over-indebtedness Providers will take adequate care in all phases of their credit process to determine that clients have the capacity to repay without becoming overindebted. In addition, providers will implement and monitor internal systems that support prevention of overindebtedness and will foster efforts to improve market level credit risk management (such as credit information sharing). 3. Transparency Providers will communicate clear, sufficient and timely information in a manner and language clients can understand so that clients can make informed decisions. The need for transparent information on pricing, terms and conditions of products is highlighted. 4. Responsible pricing Pricing, terms and conditions will be set in a way that is affordable to clients while allowing for financial institutions to be sustainable. Providers will strive to provide positive real returns on deposits. 5. Fair and respectful treatment of clients Financial service providers and their agents will treat their clients fairly and respectfully. They will not discriminate. Providers will ensure adequate safeguards to detect and correct corruption as well as aggressive or abusive treatment by their staff and agents, particularly during the loan sales and debt collection processes. 6. Privacy of client data The privacy of individual client data will be respected in accordance with the laws and regulations of individual jurisdictions. Such data will only be used for the purposes specified at the time the information is collected or as permitted by law, unless otherwise agreed with the client. 7. Mechanisms for complaint resolution Providers will have in place timely and responsive mechanisms for complaints and problem resolution for their clients and will use these mechanisms both to resolve individual problems and to improve their products and services. 3

Agenda Client protection principles Principle #5 in practice Participant feedback Tools for improving practice Conclusion and call to action 4

Fair and respectful treatment of clients The Principle in Practice: Providers and their agents treat clients fairly and respectfully. They do not discriminate. They will ensure safeguards are in place to detect and correct corruption. Consider this: Most abuses happen during the loan sales and debt collection processes—these need special attention by providers. This is the Smart Campaign’s definition for Fair and Respectful Treatment of Clients: Providers and their agents treat clients fairly and respectfully. They do not discriminate. They will ensure safeguards are in place to detect and correct corruption. Special attention should be paid during the loan sales and debt collection processes, as this is when most abuses occur.

The Principle in Practice Set ethical standards Set appropriate debt collection practices Train staff on ethics Spell out organizational values and standards of professional conduct for staff in a Code of Ethics. It should be approved by the Board and signed by staff. Establish the precise steps to take in case of default including actions that should not be taken and behavior that is prohibited. Inform clients of their rights and the highlights of the Code. Recruit and train staff in line with Code of Ethics. Train collections staff on appropriate practices for loan recovery. The Smart Campaign has defined the following as indicators for how a financial service provider puts this principle into practice.

The Principle in Practice Set fair collateral policies Incentivize appropriate behavior Enforce penalties for violations Establish: 1) a policy on acceptable pledges of collateral (don’t accept assets vital to survival) and 2) a policy on rescheduling loans for clients who are willing to repay. Use incentives that encourage ethical behavior and do not put staff in a “conflict of interest” with the clients—particularly during loan collection. Monitor staff compliance with ethical standards and enforce sanctions for non-compliance. The same rules should apply to third-party collections agents. [Continued from first page] The Smart Campaign has defined the following as indicators for how a financial service provider puts this principle into practice.

Training today: Handling delinquent clients The role of management Creating a Code of Ethics for the institution. Communicating the importance of ethics to staff on a regular basis. Training staff to respond to ethical dilemmas tailored for their position. Empowering managers to follow up on ethical complaints. Establishing an Ethics Committee that rewards ethics and sanctions violations. Staff behavior is a direct result of management priorities and imperatives. These are ways that management can encourage ethical staff behavior. Training today: Handling delinquent clients

The code at the center Code of Ethics Management Internal Audit Human Resources 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.

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 place 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.

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. 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?]

What a code of ethics includes Norms of Conduct Conflict of Interest Privileged Information Client/Staff Relationships Corruption Institutional Philosophy Mission & Values Ethical Expectations Norms of Conduct Enforcement Methods Updating the Code Harassment Use of Company Property Safeguarding the Company Reputation This slide gives more detail on what a “best practice” code of ethics includes. Six important elements are listed on the LEFT side of the slide. One of these elements- Norms of Conduct- is detailed on the RIGHT side of the slide. The “Norms of Conduct” section of a Code of Ethics establishes what the institution expects of its staff in a series of situations (e.g. Policies for addressing conflicts of interest). Respecting the Work Environment Source: Adapted from Compartamos Banco

Keeping a code “alive” Annual Review of Code New employees must sign Tested on Code after 90 days Annual recertification test Refresher campaign each year Ethics workshops Internal polices incorporate the Code of Ethics Training includes examples of real situations Institutions must avoid the situation where the Code of Ethics is just a document. In order to keep the code “alive,” one institution takes the following measures: The Audit Committee and Advisory Council review, update, and approve the code each year. All new employees sign the code and it forms part of the training and orientation process. New employees have 90 days to certify themselves on the code by studying it and taking a test. All employees must re-certify themselves on the code each year via online courses and case studies designed for their particular role/position. An annual refresher campaign makes sure all employees are up to date on the code. Ethics workshops present ethical dilemmas and possible solutions to groups of employees. Internal policies mention the code of ethics and include examples of acceptable and unacceptable behaviors. All trainings on Code of Ethics includes simulations or examples of real ethical dilemmas. Source: Compartamos Banco

Good Practices from Around the World One MFI includes “ethical behavior” in its annual performance reviews in order to give employees feedback on their behavior and find out how successful the organization has been in building an ethical culture. Another MFI designed a training program on ethical behavior that includes specific ethical dilemmas for different job functions. The training modules are based on experiences that employees face at work. These are two examples of MFIs that promote ethical staff behavior through ethics training and performance reviews.

Agenda Client protection principles Principle #5 in practice Participant feedback Tools for improving practice Conclusion and call to action Now we want to hear from you. 15

Feedback from participants Have you received training at your institution that highlights ethical staff behavior? Appropriate collections practices? Can you describe an ethical lapse or ethical success at your institution or elsewhere? [At this point in the presentation, ask participants for their feedback on the information presented so far. Use these questions (or others that have come up during the presentation) to stimulate discussion.] Have you received training at your institution that highlights ethical staff behavior? Appropriate collections practices? Can you describe an ethical lapse or ethical success at their institution or elsewhere? What kinds of collections practices have you seen at your own (or other) MFIs? How do institutions collect on-time payments? How do institutions collect late payments? Do institutions tend to keep the collections function in-house or outsource it? What kinds of collections practices have you seen at your own (or other) MFIs?

Agenda Client protection principles Principle #5 in practice Participant feedback Tools for improving practice Conclusion and call to action Now, let’s look at some of the tools that are available from the Smart Campaign to help practitioners improve on this principle. 17

Tools available from the Smart Campaign Technical Tools Getting Started Questionnaire: Self Assessment for MFIs How to Develop a Code of Ethics & Example Codes Smart Lending Smart Savings Technical Guide for Investors Samples and Case Studies Client Welcome Kit Best Practices in Collections Strategies Code of Conduct for Collections from Swadhaar Smart Note: Collections with Dignity at FinComun Activities for Training Staff on Customers’ Rights Code of Conduct E-Learning Module These, and dozens more tools are available for free on the Smart Campaign website. www.smartcampaign.org.

Conclusion An institution's corporate culture should value and reward high standards of ethical behavior and service. What is considered appropriate/inappropriate behavior should be specified in advance and staff should be trained regularly. Clients must be treated with dignity at all times, and collection efforts should never be abusive or coercive. Good practices are available to help institutions achieve a collections system that is both effective and ethical. [Read the summary on this slide]   [Use the Call to action questions, and any of the questions below, to stimulate discussion among participants]. How could one or more of the “good practice” examples be implemented in your institution? What other solutions have you seen (or would like to see)? Do you feel comfortable proposing that their institution implement one of the practices discussed?  Why or why not? How does an institution keep a Code of Ethics “alive” within the institution? What factors drive institutions toward inappropriate collections practices? How can institutions address these root causes? Who (which staff) bears the greatest responsibility for ensuring appropriate collections practices? Call to Action: What next steps can your institution take to create a corporate culture that values high ethical standards among staff? What next steps can your institution take to improve collections practices?

What’s next? Feedback from Participants Endorse the Smart Campaign. Visit www.smartcampaign.org Sign up to receive news and information. What’s next? Download the Getting Started Questionnaire and conduct a client protection self-assessment. Thank you! Email us! comments@smartcampaign.org