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Role of regulatory authorities in consumer protection

Published on 8th Sep, Edition 36, 2014


One of the conditions for initiating process of ‘Liberalization, Deregulation and Privatization’ in early nineties was creation Regulatory Authorities in the respective sectors. The objective behind initiating this process was to confine role of the government to be the facilitators and pull it out of managing business. Creation of regulatory authorities was also one of the requirements of the multilateral lenders for the protection of all the stakeholders, particularly. While banks, utilities, insurance companies and other entities were operating in the public sector, it was assumed that the government was taking all the necessary steps for the protection of consumers. This perception was not correct to a large extend but after the privatization of public sector entities and creation of regulatory authorities exploitation of consumers has become even more evident. It may not be wrong to say that most of these authorities have proved to be ‘Rubber Stamps’ being used to protect the interest of only one stakeholder that is Government of Pakistan (GoP).

Among all the regulatory authorities State Bank of Pakistan (SBP) has emerged to be the best. Having said that still the central bank has not been given ‘complete autonomy’ by the GoP that is often evident. Especially under the elected governments its mandate has remained subservient to Ministry of Finance. Often the GoP decisions are made contrary to the advice of the central bank. The decisions like fixation of borrowing and lending interest rates and exchange rate are influenced by the GoP and International Monetary Fund (IMF). One of the biggest example is that interest rate has been kept high for containing rate of inflation in the country. The wiz kids have completely failed to understand that Pakistan suffers from ‘cost pushed inflation’ and in the prevailing scenario keeping the policy rate high adds to the inflation.

Lately, SBP has issued Circular titled as Financial Consumer Protection. The Circular has details on Financial Consumer Protection, highlights its significance, global developments and bank’s own expected role as regards to the Financial Consumer Protection. It is expected the circular will transform Financial Consumer Protection into a principle based adoption rather than a compliance check for the banks. The Circular requires all Banks/DFIs/MFBs to develop and implement their own Framework on ‘Fair Treatment of Consumers’ duly approved by their respective Board of Directors and implement it fully by July 1, 2015. It is expected that the Banks/DFIs/MFBs will inculcate a conducive culture enduring fair and quality customer service while delivering banking services to their customers.

SBP in its endeavor to foster Financial Consumer Protection across the industry has issued several market conduct instructions for banks. However, it has been noticed that Financial Consumer Protection is perceived to be limited to complaint handling only. In order to disseminate the real connotation of Financial Consumer Protection, the SBP has issued the Circular entailing the meaning of Financial Consumer Protection and the conduct expected from banks and DFIs for the advocacy of Financial Consumer Protection.

It needs to be specifically mentioned that Ms Shamshad Akhtar as Governor of the central bank, came up with a landmark decision of making it mandatory for the commercial banks to pay minimum 5% return on savings accounts. The move faced severe resistance from the banks (in the name of penalizing the shareholders) but she remained committed to protecting the interest of small depositors, who are the biggest source of funds. In fact the rate was subsequently increased to 6% despite opposition from certain quarters.

Another achievement of the central bank is channelizing workers’ remittances through the formal banking system. Now the monthly quantum of inflow exceeds one billion dollars and the growth rate is also significant. In this regard, it is necessary to mention the role being played by National Bank of Pakistan of Pakistan (NBP). Transfer of money through banking system has yielded two benefits: 1) foreign exchange reserves (especially held by banks) have shown gradual and substantial increase and 2) being the second biggest inflow after exports has enabled Pakistan to avoid default even during the worst periods. It may be true that the IMF (lender of last resort) has saved the country from committing default but the credit largely goes to the dedicated, hardworking and patriotic Pakistanis who sent billions of dollars to Pakistan every month. Other sources of inflow, particularly FDI and lending to mega size project by the multilateral lenders have remained conspicuous by their absence.

Following ‘free economy’ jargon the central bank has left fixation of certain fees at the discretion of commercial banks, worst of these is nearly 40% interest being charged by banks on credit carried forward by the credit cardholders. Cardholders are being lured to pay minimum payment and in fact ending up paying interest charges only and credit remains the same of grows further. This is outright exploitation of small borrowers because the average lending to blue chip companies is slightly more than the policy rate. It also looks frustrating because the ‘average spread’ of commercial banks hovers around 7%. Banks insist that even this level is not enough to pay good return to the depositors and the shareholders, which seems far from the reality.

The other fee which must be immediately withdrawn is an amount of Rs15 per transaction charged if an ATM cardholder uses machine of any bank other than the issuing bank. Banks rationalize this on the basis that there is cost for every convenience but in this particular case the biggest beneficiaries are banks themselves as the account holders keep money with them, unlike in the past when huge amounts were withdrawn to avoid long queues in the banks. Use of ATM has reduced customers’ traffic in branches but more importantly account holders leave bulk of the amount with the banks, knowing that they could withdraw any amount any time. Based on the data regarding ATM use and value of transitions undertaken on daily basis it is justified to demand immediate withdrawal of this fee.

The second and most important frontline regulator is Securities and Exchange Commission of Pakistan (SECP). One of its prime mandates is to facilitate creation of public limited companies. It is known to all that the stock exchanges play key role in capital formation but if the interest of shareholders is not protected, people would abstain from investing in the shares of listed companies. The Commission has not only remained subservient to Ministry of Finance but also failed in protecting the interest of small investors. Despite repeated requests of stock exchanges the rate of corporate tax on public limited companies still hover around 35%.


In various stock market crises, the SECP has failed in protecting the interest of small shareholders. In 2008 crisis imposition of floor, delay in taking timely action against erring brokers has caused billions of rupees losses to investors. Sponsors of some of the erring brokerage houses ran away from country after plundering billions of rupees. The worst-ever crime these brokers committed was selling of shares kept in investors’ accounts. Many of the investors have not received claims submitted to the Commission.
The loss of confidence of investors in SECP is evident from persistent decline in number of listed companies (sponsors are opting for voluntary liquidation after squandering billions of rupees). For ages interest free lending to associate companies remained a norm and when SECP tried to stop this, the sponsors started investing in the shares of associate companies to enjoy cost free funds. While payment of interest on borrowing from banks is mandatory, hardly any action is taken against companies not paying dividend, despite making handsome profit. Two of the sectors textiles and clothing and cement are known for not paying any dividend to shareholders, baring a few companies. These companies even don’t release their accounts or hold annual general meetings in time. If any one wishes to find the details the names could be picked up from list of ‘defaulters’ counter’. There are not adequate laws that can facilitate ‘takeover’ in case the sponsors continue to fleece the shareholders. The sponsors are hardly afraid of any takeover because they hardly have any investment as these companies are surviving on banks’ money, which are also not interested in initiating liquidation proceedings against any borrower.
The lack of seriousness of any government, including the incumbent one, is evident from the fact that that SECP remains without full-time chairman for months. Even at present it has two commissioners whereas the statute requires minimum five commissioners. Insurance sector plays two key roles: 1) capital mobilization and 2) risk mitigation. However, for years SECP was without a commissioner who could prudently oversee insurance sector and it also without a commissioner to oversee insurance companies.

Ironically regulating insurance companies is also the mandate of Ministry of Commerce for the reasons best known to the policy makers. The lowest priority assigned to insurance sector by the Ministry is that three of the largest public sector corporations have been working without chairmen for years. These are State Life Insurance Corporation (SLIC), National Insurance Company (NIC) and Pakistan Reinsurance Company (PRC) – country’s only reinsurance company. Financial scams in NIC often become headlines in newspapers and SLIC and PRC are also likely to meet the same fate if proper Board of Directors and competent Chairmen of these entities are not appointed immediately. It will also be prudent that only one regulator regulates insurance sector. Given it under the control of SECP would still be better than letting it operate under Ministry of Commerce.

Two of the worst regulators are National Electric Regulatory Authority (NEPRA) and Oil and Gas Regulatory Authority (ORGA). Both of these authorities can be accused for helping the government in fleecing the consumers. Over the years, NEPRA has been persistently approving hike in electricity tariff without binding state-owned distribution companies to contain theft, hovering around 35% and improve recovery of outstanding dues. It also endorses two absurd rationalizations of the ruling junta that 1) government is paying billions of rupees in subsidy and 2) full cost is not being recovered from the consumers. In fact one set of consumers is paying the discounted tariff charges from other set of consumers. The point that full cost is not being recovered is also totally incorrect. Electricity produced at hydel and nuclear power plants (around 7,500MW) cost less than Rs2 per unit. No one else except Ministry of Water and Power could be blamed for high tariff being offered to IPPs. It has failed in finding ways to reduce cost of generation and on top of all paying billion of rupees as penal charges for delayed payment to the IPPs. Worst of all power plants operating in the public sector has an installed capacity of about 5,000 but actual output of these units remained below 1,200MW due to non-availability of fuel and improper maintenance.

Like NEPRA, ORGA has also been facilitating the government in ripping off consumers. It facilitates the government in charging huge tax/cess on oil and gas as well as earn huge dividend from exploration and production companies, condoning out of proportion UFG to enable the government to earn huge dividend from Sui Twins and failing in penalizing gas distribution companies for not containing gas theft and improving recovery of outstanding dues.

The role of Pakistan Electronic Media Regulatory Authority (PEMRA) is also deplorable. It has been facilitating the rulers in suspending transmission of television channels criticizing the government or exposing financial scams, inefficiencies and massive corruption in the public sector. On top of all it has failed in curbing airing of obscene and anti Pakistan content by some of channels and cable operators. Is it not an irony that while India does not allow airing many of the Pakistani channels, many Indian channels showing trash could be seen throughout the country.

To conclude it suffices to say that top hierarchy of the regulatory authorities is appointed by the governments to help it in achieving its political agenda. Since inefficient or those enjoying low credibility becomes the favorite, exploitation of masses will continue. Often the apex courts have also failed in proving relief to the masses.


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