22 October 2015, Kuala Lumpur - The Islamic Financial Services Board (IFSB) is pleased to announce the issuance of a Working Paper on Financial Consumer Protection in Islamic Finance (WP-03) today.
The objective of consumer protection requires that the regulator takes adequate measures to ensure that the claim made by a financial institution to sell its products and services is sufficiently justified.
Financial consumer protection gained prominence on the policy agendas of governments and international standard-setters after the global financial crisis due to the widespread mis-selling practices and unfair treatment of consumers by banks and financial advisers. The issue was taken up by the Organisation for Economic Co-operation and Development and the Group of Twenty (G20), which issued the G20 High-level Principles on Financial Consumer Protection in 2011 focussing on the issues of transparency, impartiality and reliability. The IFSB Working Paper (WP-03) outlines the potential implications of these developments for the Islamic financial services industry and identifies some policy areas where regulatory and supervisory authorities can work to protect the customers of institutors offering Islamic financial services.
The Working Paper lists some important findings from behavioural economics on the relevance of financial consumers' information-processing capabilities and cognitive biases in ensuring the effectiveness of consumer protection measures. It also provides a summary of both traditional and new approaches to financial consumer protection which focus on offering the consumers better-informed choices ranging from disclosure requirements to subsidised consumer advisory services. The Working Paper also delves into the evolving literature and best practices on 'product regulations' and more broader concept of 'conduct regulations' that focuses on ensuring norms of high ethical conduct by the financial institutions and acknowledgement of their responsibility towards the wider public interest. It has also outlined special consumer protection challenges faced by regulators all over the world regarding unregulated financial products, social and community-oriented investments, and financial intermediation through crowdfunding platforms.
The Working Paper also outlines the regulatory implications of Shariah compliance as a defining product feature. It considers different interpretations of the Shariah compliance in more complex consumer products and stresses the importance of robust Shariah governance structures in jurisdictions. However, even an elaborate Shariah governance system does not guarantee identical Shariah interpretations by all financial institutions, or ensure that interpretations are consumer friendly. To explicate, the paper has provided two detailed examples of Shariah -compliant financial products where fairness to customers is contestable in the presence of some market practices. These examples indicate ways in which all regulators can deal with the issue of consumer protection for Shariah -compliant products without the need to take a particular stance on Shariah matters.
"The IFSB has addressed consumer protection earlier in the content of specific issues arising, for example, in relation to investment account holders in IFSB-4 in 2007 as well as in subsequent standards. This Working Paper has the objective of developing a broader appreciation of issues relevant to the policy and operational framework for the better protection of consumers of Islamic finance products", said the Secretary-General of the IFSB, Mr. Jaseem Ahmed. He further added, "In the backdrop of growing significance of Islamic financial services industry in various markets, this Working Paper will help to better understand the implications of global developments on consumer protection for Islamic finance". "More transparency in product offering, the strengthening of Shariah governance frameworks, better dispute resolution schemes, and an overhaul of conduct regulation" he outlined, "are some of the ways in which regulators of Islamic finance jurisdictions can respond to the growing public demand for more transparent products and better consumer protection policies".
The Working Paper includes key findings of an IFSB survey on "Consumer Protection in Islamic Finance" which was conducted in the third quarter of 2014.
© Press Release 2015
