The Financial Consumer Protection Act Lesotho

The Financial Consumer Protection Act, 200 was enacted in Lesotho to establish the rights of consumers of financial products or services and the manner of exercising and protecting those rights.  The Act applies to all market participants that offer financial services and products in Lesotho.

The aim of this particular piece of legislation is to develop an appropriate policy and legal framework on consumer protection concerns, stemming from inadequate market conduct during the sales process. One of the critical aspects highlighted in the Act is the provision of clear product information. There is also needed to improve on simplicity in product information. Information on fees and charges can be incomplete, or terms and conditions can be difficult for the average consumer to comprehend. These may lead to poor financial decisions. In such situations, consumers are unable to make the best financial decisions for themselves. This can foster a sense of mistrust in the financial system hence the legislation provides that every critical aspect of terms and conditions of a financial product ought to be disclosed when advertising and/or promoting the product and/or prior to contractual obligations.

In a nutshell the Act aims to address the following:

  • Increasing outreach;
  • Quality of financial services and products;
  • Increasing financial and investment capacity;
  • Creating and capacitating inclusive financial service providers;
  • Ensuring an enabling regulatory environment; and
  • Consumer education.

The rights of consumers of financial products and services are succinctly addressed. It also outlines the manner in which such rights may be exercised and protected. The unfair and vague manner of delivering information that may be misleading and/or confusing to the consumer has also been done away with.

Advertising and promotional material, along with low levels of financial literacy, can lead to poor financial decisions which is why it is a requirement in the Act that every critical aspect of the terms and conditions of a product or service are clearly outlined and addressed in an unambiguous manner. Key fact statements for a financial product and service offered to a consumer shall summarise the terms and conditions of such, allowing the consumer easier comprehension. A well-designed key facts statement (KFS) is an important tool to improve transparency and disclosure of information for financial products. It uses a standardized format that is designed to convey information in a simple and easy-to-understand manner. These formats make it easier for customers to compare financial products from different providers.

Lack of education and awareness of the benefits of financial services products and access also brought about this legislation. Hence, the Act provides that the Regulator being the Central Bank of Lesotho, may require a financial services provider to offer a program to improve financial literacy. It is a requirement and/or obligation for the financial service provider to explain every minute detail of a contract to the consumer as well.

In addition, the weak regulation of financial services provided by cooperatives and moneylenders have led to concerns over consumer protection and uncertainty regarding the ability to enforce future regulations. The Act nonetheless makes provision for an affordability and suitability assessment, credit reporting, unfair contract terms and unfair practices which include, excessive fees on defaulting consumers, terms of a contract that bar the consumer from exercising his/her right. This will come as a major shield to consumers of microfinance or commonly known as loan sharks. Financial service providers are obligated to disclose their pricing procedure and are barred from charging any interest, fees and charges unless previously disclosed to the consumer.

In 2012 when the Financial Institutions Act, Data Protection Act and Credit Reporting Act were enacted there was still a lack of regulations needed to give effect to this new legislation. Especially when it came to consumer protection and financial literacy of consumers. The high level of financial inclusion also did not unpack the quality of financial overall that consumers were receiving hence Government saw it fit to bring about this new piece of legislation.

The Act also aims at supporting the Government’s initiative to promote financial inclusion, by addressing, among other things, the absence of a system for consumer protection, particularly for the microfinance industry that lags far behind in terms of a policy, supervisory and regulatory framework. The Act makes it a responsibility of a financial service provider to identify consumers who may be going through some financial constraints and supports financial service providers to establish consumer protection mechanisms. It is important to note that the Act supports the promotion and implementation of consumer protection principles among microfinance networks and other financial service providers.

In conclusion, consumers will now be kept in the loop pertaining to pricing procedures and financial services providers ought to maintain a standardized calculation method and product risk management all in an effort to mitigate any loss on the consumer. There is also a mandatory confirmation that must be sent to consumers alerting them on any transaction on their product or service all in an effort to curb fraudulent activities.

The debt collection practices, consumer undergoing financial difficulty complaint handling and policy and procedure mechanisms are also outlined in the Act. The financial service provider ought to furnish a consumer with a pre-enforcement notice and allow the said consumer reasonable time prior in taking action against a defaulting consumer. The consumer will also be entitled to cancel any contract with a financial service provider.  

Disclaimer: The information provided herein should not be used or relied on as professional advice.  No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein.  Always contact your professional advisor for specific and detailed advice.