• CBSL releases Financial Consumer Protection for Financial Service Providers draft
• Draft set to protect public from unsolicited loan offers, illegal debt recovery
• Institutions cannot contact friends, relatives unless for verification purposes

Draft regulations on Financial Consumer Protection for Financial Service Providers (FSPs) have been issued by the Central Bank of Sri Lanka (CBSL), prohibiting unsolicited loan offers, abusive debt recovery practices, and the requirement of early settlements, while giving the Monetary Board the authority to remove senior management of FSPs and compensate consumers for violations.

Last Friday (20), the CBSL released the draft regulations seeking public consultation, as it is looking to introduce the regulations covering Licensed Commercial Banks (LCBs), Licensed Specialised Banks (LSBs), Licensed Finance Companies (LFCs), Specialised Leasing Companies (SLCs), Authorised Primary Dealers (APDs), Authorised Money Brokers (AMBs), Licensed Microfinance Institutions (LMIs), Participants of Payments and Settlement Systems, any other type of FSPs approved by the Monetary Board, financial consumers, and agents of FSPs.

These regulations are being issued to protect consumers as more and more financial institutions have failed since 2015. Former CBSL Governor Ajith Nivard Cabraal informed Parliament in 2021 that 256,306 customers had deposited money totalling Rs. 61.79 billion, between 2015 and August 2020, in six failed finance companies.

These companies are Central Investment and Finance Ltd. (previously Central Investment and Finance PLC), The Standard Credit Finance Ltd., TKS Finance Ltd., The Finance Company PLC, ETI Finance Ltd., and Swarnamahal Financial Services PLC.

The proposed regulations will also prohibit “unfair business practices”, which will prevent unsolicited loan offers, abusive debt recovery practices, requiring payment of un-accrued (future) interest/early settlement fees on credit facilities exceeding the levels permitted by the CBSL, automatic increase of credit limits without prior consent by the consumer, and charging maintenance fees on dormant accounts.

Moreover, FSPs are required to include credit rating (if available) and state that the respective FSP is supervised by the CBSL in all advertisements and marketing material along with the contact details.

In order to avoid the more unethical practices followed by FSPs to recover debt, the regulations propose to initiate foreclosures only when other recovery steps have been unsuccessful, subject to the provisions of applicable laws, while the relevant FSP shall ensure that sales proceeds from foreclosure assets are immediately applied on recovery of the credit facility, and that the financial consumers shall be informed and refunded with the balance, if any, subject to other provisions in applicable laws. 

Further, the regulations propose that the FSPs shall not contact friends, employers, relatives, or neighbours of a consumer for any information other than information or verification of employment status, telephone numbers, or address, except for the person who has guaranteed the loan or the person who has been nominated by the financial consumer to be contacted.

In regard to violations, the Monetary Board of CBSL has been given the authority to impose a penalty not exceeding Rs. 500,000 payable within such period as may be specified by the Monetary Board, direct such FSPs to cease any such practice, to take necessary action to correct the conditions resulting from such practice or contravention, to remove a product from the market, to remove advertising from the market, compensate or refund consumers, and remove any director, manager, or employee of an FSP.