PhD Candidate, Lee Kuan Yew School of Public Policy, NUS
Visiting Researcher, GLODEM, Koc University
Financial Consumer Protection in Türkiye
The global financial crisis has triggered many fault lines on certain areas in banking regulation. Besides the default of too-big-to-fail institutions, which were commonly referred to in the media, the regulators, the sector, and consumers have become aware of particular areas that had been neglected in the past. Although we can name many areas ranging from politically manipulated rating scores, accounting and disclosure standards, low capital buffers, non-existence of prudent regulation, lack of credible consumer protection regimes, among other areas.
Financial consumer protection has come to the regulators’ and politicians’ attention with the global financial crisis of 2007-08.[i] The global trend reflects the increasing awareness among policymakers. To give a few examples, the United States established the Financial Consumer Protection Agency based on Warren’s (2007) proposal.[ii] The United Kingdom merged the Prudential Regulation Authority with the Bank of England and have a separate agency, Financial Conduct Authority that is specialised on supervision and regulation of the conduct in the banking and financial sector. The G-20 leaders came up with the High Principles in 2011,[iii] and the World Bank produced Good Practices in financial consumer protection.[iv]
In Türkiye, the concept of financial consumer protection was noticed and spelled out in the 2003 Annual Report of the Banking Regulation and Supervision Agency (BRSA). Then, the policymakers neglected the consumer protection aspect of banking services until 2012 when the BRSA has undergone an internal restructuring process that led to the establishment of a specialised department within the regulatory agency on relations with financial consumers. As the Table 1 indicates, complaints used to be around 1,000 in 2004, which has risen to more than 27,000 in 2014. While consumers have been consistently appealing to the BRSA, the banking sector has become more dependent on fees and commissions as its share has reached 15 percent of total income by December 2014 (see Table 1).[v]
Source: *: BRSA; **: BRSA Annual Reports
Interest rates, charges and commissions and the ratio of banking services and commissions to total income are in percentages.
While the consumers have been complaining and the banking sector has generated more income from fees and commissions, there was no regulation standardising fees and commissions the banks used to charge. As the data gathered during my field research, the Banks’ Association of Türkiye did not work as required to standardise at least the chargeable items. Second, the banks used to charge the same item under different names, so the consumers were not able to compare price of a fee or commission. Third, the consumer groups, as a pressure group, consider that the contact had to be the Ministry of Customs and Trade rather than the BRSA, they had their voice heard by the Ministry which acted upon the issue by amending the Consumer Protection Law in 2013. The fourth clause of the new law gave a mandate to the BRSA to regulate fees and commissions.
The next year the BRSA followed up with the regulation which is not successful in addressing the problem because none of the actors (i.e. the Ministry, the BRSA, consumers, and the sector) are happy with the regulation. The BRSA is enlarging its mandate which does not involve consumer protection, and the agency has to grapple with thousands of consumer complaints while it has to supervise the health of the banking sector. The Ministry seems much happier because with a populist approach, they think they achieved their mandate to protect consumers’ welfare. Consumers are not content with the BRSA’s regulation because they think many items that were not legally written in a regulation are now chargeable. The sector is hit so badly that they have to pay back hundreds of millions of Turkish liras for which they paid income tax many years ago as the consumers have the right to request the fee or commission they paid 10 years ago. The bankers note that when the environment is changing with a slower economic growth rate that impedes asset growth and profitability, which in return reduce capital accumulation, paying back the income they generated 10 years ago is not a friendly solution.
The regulation on fees and commission seems to me an example of politically capable but technically incapable policy design. First of all, the realities in the banking sector are not well considered as the regulation was dictated by the Ministry. It serves political objectives to satisfy consumers’/voters’ needs. However, it cannot achieve a technically viable status because it is eroding the capital the banks have especially in a fragile and volatile local and international environment. The fees and commissions had to be regulated, but rather than paying back hundreds of millions back, the sector would be forbidden to charge certain items.
Second, the consumer arbitration system seems abused in a way that consumers are appealing fees that are chargeable in the regulation. Third, which is also linked to the consumer arbitration system is the design of the governance structure. The BRSA is the banking regulatory agency, however, it cannot fully lead in this area because the political actor, the Ministry, grabbed the scene with the new consumer protection law. As the bankers and the regulators note, the sector has to be regulated by a single authority that has sufficient knowledge about the realities and technicalities in the sector.
The fragmented governance structure what makes the regulation and its supervision more difficult. The “experts” working in the consumer arbitration panel operating under the auspices of the Ministry do not have sufficient knowledge because the individuals taking decision in these panels do not have banking practice or education as anecdotal information confirms. The decisions taken in these panels have a mandatory nature as opposed for instance the decisions of the Banks’ Association’s own arbitration panel. The consumers can submit their complaints to the Ministry and the BRSA. As a result, there are many channels for consumers to have their voice, but this makes governance of financial consumer protection more difficult. What is more important to note is that the new consumer protection law gave a mandate to the regulator for the regulation but it keeps the power for sanction with itself. As a result, the banking regulatory agency makes the regulation but cannot supervise. This fragmented governance structure is what I call politically capable but technically incapable governance design.
Finally, from my understanding, the governance model in the United Kingdom seems more appropriate in the Turkish case because if I am not misinterpreting the autonomy of the BRSA has eroded if compared to the years of its establishment, and the agency is adding an ad hoc item to its mandate which has the potential to overwhelm the agency. The banking regulation departments could be moved under the Central bank provided the Central bank can preserve its own autonomy, and the conduct part might be a separate body.
[i] The regulators around the world have established an information-sharing forum similar to the Basel Committee in 2013. The website is available at: http://www.finconet.org/, accessed on March 8, 2016.
[ii] Warren, Elizabeth. 2007. “Unsafe at Any Rate.” Democracy 5:8-19.
[iii] The text is available at: http://www.oecd.org/daf/fin/financial-markets/48892010.pdf, accessed on March 8, 2016.
[iv] You can access the document at: http://siteresources.worldbank.org/EXTFINANCIALSECTOR/Resources/Good_Practices_for_Financial_CP.pdf, accessed on March 8, 2016.
[v] We should note here that fees and commissions do not only reflect individual consumers’ payments for services. The accounting system does not fully allow income from fees and commissions charged for services individual consumers purchase. The data, for instance, include commissions from POS machines. Since the credit card market is deepening in recent years, banks are receiving more commissions from firms. As a result, the data should not be misinterpreted. And more transparent accounting system is required for all actors to have a clearer picture of the current situation for better policies.