Cedric Stephens | Don’t exclude CAC from protection framework for financial consumers

Jamaica’s central bank, the Bank of Jamaica said in an advertisement last week that it was actively working with the Ministry of Finance & Public Service to establish a ‘protection framework’ for consumers of bank and credit union products and services.

The Consumer Affairs Commission, for some reason, was not mentioned. But why not? They know more about consumer protection than the BOJ and the Ministry of Finance combined.

Deposits in the banking system are insured by the Jamaica Deposit Insurance Corporation. So, therefore, the ‘protection framework’ means something other than insurance.

I had always assumed that consumer protection – defined as a system that ensures that consumers make well-informed decisions about their choices and have access to effective redress mechanisms – was one of the BOJ’s functions. I was wrong. The ad did not say ‘a new protection framework’, hence it is reasonable to assume that one does not exist.

The absence of a protection framework partly explains why many persons hate visiting their banks, even more than going to their dentists. Banks are in the business of taking deposits and making loans. The BOJ appears to have placed the longstanding political debate about banking fees in a broader context. How to create a system within the entities that it regulates that ensures that consumers make well-informed decisions about their choices and have access to effective redress mechanisms. Fees for services provided and the fee income of banks should be examined from this angle.

I mused on these things as I reflected on the case of a reader who wrote to me last month. The person’s interactions with the motor insurance compensation system, comprising claims and other officials in two insurance companies, and the Insurance Association of Jamaica’s arbitration panel, loss adjusters, and the regulator, the Financial Services Commission, FSC, have not resulted in the settlement of a two-year-old claim. Liability is not in dispute.

The FSC developed and implemented a consumer protection framework in the form of regulations enacted under the Insurance Act, 2001 and the February 2019 Market Conduct Guidelines. The claims process did not follow the preceding rules. One element of a proposed settlement was based on ‘industry practice’ and not on what is fair and reasonable as the judicial system would dictate or is consistent with the principle of treating customers fairly. This outcome is not markedly different from hundreds of claims that were discussed in this column over the last 20 years.

The Jamaica Observer, in its July 3 editorial dealing with the issue of banking fees, said: “The debate in Parliament last week between Finance Minister Dr Nigel Clarke and the Opposition’s Mr Fitz Jackson and Ms Lisa Hanna on the contentious issue of banking fees, unfortunately, descended into an acrimonious exchange with hackneyed political barbs and an unfounded charge of gender bias.” It recommended, among other things, “more competition … retasking the Consumer Affairs Commission, for example, to review and publish the different fees charged by the banks … combined with a more aggressive promotion of the adoption of the various new fintech technologies”.

These proposals do not go far enough. They ignore the low levels of numeracy and financial literacy locally, the non-existence of a consumer protection framework in the banking industry, a weak protection framework in the insurance industry, and some of the lessons that were learned in the United States during the global financial crisis.

The US government, for example, established the Consumer Financial Protection Bureau in the wake of the US financial crisis. It is dedicated to making sure that consumers are treated fairly by banks, lenders, and other financial institutions. The BOJ, subject to including CAC in the design of the framework, is on the right track.

Banks are increasingly extending their range of services to include insurance. In some cases, financial services holding companies own banks and insurance companies. Both examples exist locally. Are there compelling reasons why one group of customers should be treated fairly, and another group is not?

The figures in the accompanying table were created from an audited income statement of an actual insurance company. Four sets of figures are important namely, claims expense, underwriting profit, interest income and profit before taxes. Underwriting profit is the amount net of premiums an insurer earns or loses, minus losses paid and operating expenses.

According to Warren Buffett, insurers do not pay out all the money they collect right away. Rather, an insurance company will collect money in the form of premiums, invest that money, and then pay out claims as needed at some future date. The difference between premiums collected and claims paid out is called insurance float. Interest income is the earnings on the float.

2021 ($M) 2020 ($M)

Gross premium written 6,136.64 5,151.56

Net insurance premium 2,125.59 2,614.21

Claims expense (2,557.84) (2,550.38)

Reinsurers share of claims 932.73 881.60

Commission expense (313.75) (287.09)

Commission income 1,703.82 1,293.68

Other income 117.34 99.49

Operating expenses (1,748.13) (1,665.16)

Underwriting profit 259.70 386.37

Interest income 243.84 395.14

Miscellaneous income 66.89 283.94

Profit before taxes 570.43 1,065.45

Note that interest income represented 43 per cent and 37 per cent of profit before taxes in 2021 and 2020, respectively. The absence of a robust consumer protection framework plus an incentive structure that rewards executive management on short-term profit instead of long-term creation of value for shareholders can lead to situations where delayed settlement of legitimate claims becomes the norm.

Legislators and regulators should try to kill two birds with one stone. Do not give insurers a bligh. Shining a bright light on the operations of banks and insurance companies will lead to better outcomes for consumers.

Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to: aegis@flowja.com or business@gleanerjm.com