A CONSEQUENCE, hopefully an important one, of the 2007/8 collapse of parts of the world's banking systems, is the creation, in the United States, of a new financial regulation law. One of the components of this law is the formation of a Consumer Financial Protection Bureau (CFPB). Although the Philippines largely avoided the direct impact of the 2008 collapse, we believe that the creation of a similar body is also necessary here.
The purpose of this article, therefore, is to propose the formation of the CFPB and to outline some characteristics of its operation.
We do not see Bangko Sentral ng Pilipinas (BSP), the Insurance Commission (IC), or the Stock Exchange Commission (SEC) as being appropriate bodies for dealing with the consumer-related issues of the CFPB. This is because BSP, IC and SEC generally operate at the macro level; verifying the underlying soundness of the institutions concerned and setting rules for operations, but not dealing with individual cases.
The emphasis of the CFPB would, by definition, be consumer protection. Hence its preferred position in the government would be within the Department of Trade and Industry (DTI). The DTI already has an undersecretary for consumer welfare, Zenaida C Maglaya and her domain may be a suitable home for the CFPB. There is however a substantial conceptual leap between DTI's consumer welfare department which currently addresses important but prosaic issues such as the price of pan de sal, to the complex, murky and sometimes intractable world of sophisticated financial shenanigans. If DTI were to be responsible for consumer protection in the financial sector, it would need to acquire expertise necessary to effectively combat the obfuscations of wicked financiers.
The recent case at Citibank's Binondo branch involving the disappearance of Francis Bryan Ang, Assistant Vice President of Citibank's Citigold wealth management unit, together with allegedly at least P300 million in deposits of mostly Chinese-Filipino clients, has opened the curtain of activity in the rarefied world of banks' wealth management departments.
Since I comfortably fail to meet banks' liquidity requirements to enter this wealth management arena, I have no first hand knowledge of what goes on. But fraud is fraud whether it involves wealthy clients or the average customer whose deposit/withdrawal slips are falsified. My auditor friends tell me that fraud is detectable from relatively few tests such as: where and when did the money go (
("follow the money"); when and where did the associated documents go; were the documents authentic or falsified. It's that simple. Or not. It takes time to acquire P 300 million and it takes ingenuity and creativity to conceal, for a long time, that the money is not where it is supposed to be.
Citibank has promised to reimburse its scammed clients. We hope this can be done without delay and without the clients having to go through too many hoops. But there could be difficulties. Did all the funds entrusted by Ang's clients to Ang go into the Citibank system or were some funds directed elsewhere? Although Ang was a Citibank employee, the bank may resist refunding duped clients for funds that never reached Citibank. Also, if some of the funds never reached Citibank, were the clients completely unaware of what was going on? The Filipino-Chinese community in Binondo is not noted for its naïveté.
The Bangko Sentral ng Pilipinas (BSP) is uttering bland observations about the case, saying that Citibank was "on top of the situation." We wonder whether BSP is serving any useful purpose or whether its role is merely spectatorial.
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Nearly all disagreements between customers and financial institutions are resolved quickly and amicably. For example, a malfunction may occur during a customer's ATM transaction. It is possible in this instance for the customer's account to be debited but for the money not to have been disbursed from the machine. It used to be that if the customer wanted his own money back, that he would have to make an "appeal" to the bank's Head Office which, if it deemed appropriate, would credit the disputed amount to the customer's account. This used to take up to several weeks. Nowadays, there are so many ATM transactions that the "appeal" system would be unwieldy and the local branch deals with any disputes associated with ATM failure. Also, hopefully, customers are beginning to see any "appeal" system as reflective of banks' high-handedness and indeed arrogance. There are too many situations in both public and private sector transactions where the Filipino is unnecessarily and inappropriately put into the position of being a supplicant. Financial institutions should realize that there are cases where a more even-handed relationship with customers would be appropriate.
For example, in the Citibank/Ang case, was the problem discovered by the bank's intrepid auditors who with painstaking attention to detail found that all was not well? Or was it that a wronged customer realized that there was a discrepancy between his records and the bank's? If the latter, did the bank accept its fault with alacrity or did it, at first, refuse to recognize there was a problem?
Therefore, the need for the CFPB is partly due to the financial institutions' unwillingness to accept a level playing-field relationship with its customer in a disagreement and insists on retaining the upper hand. It is this feature of financial institutions' behavior that causes defalcations, when they occur, to be undetected for longer than is necessary.
In fact, financial institutions are often anxious, if possible, to cover-up its staff's defalcations so as to avoid disagreeable publicity. It is partly because of this characteristic that causes the CFPB to be necessary.
The government's recent mediations in PAL's dispute with its employees displayed a PAL management culture which was deemed unacceptable by many. We believe that CFPB mediations will identify analogous problems with the corporate culture of certain financial institutions.
For example, in the Citibank/Ang case, there are related questions of bonuses and quotas. Although Ang has disappeared, he has many articulate acquaintances, including Xavier classmates and others in the Binondo community. Ang's father, Manila Councilor Bernie Ang is providing hints, which though lacking specifics, may not reflect well on Citibank.
We believe that the quota system is playing an increasingly important role in determining the overall compensation of bank employees engaged in sales and marketing. This creates tensions which can, as perhaps in Ang's case, lead to undue pressure on customers or even to malpractice. It is in the public interest that there is full disclosure about what goes on in financial institutions which may affect customer relationships.
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How would the CFPB operate?
The first step is publicity. Its existence and contact points would be publicized. The mechanism would be for a customer who believes that he has been treated unfairly by a financial institution to make his case known to CFPB. The CFPB would then contact the financial institution to verify that there was, in fact, an unresolved disagreement with its customer. If the disagreement were still unresolved, then the CFPB would hear both sides - firstly in writing and secondly by oral discussions.
The CFPB would be primarily a mediating body which assuredly would resolve a high proportion of disputes which were bought to its attention. The CFPB would, however, have limited legal powers and if a dispute were still unresolved, it would be up to the customer to file civil and/or criminal charges as appropriate. The CFPB would nevertheless have the power to subpoena people and documents.
There would also be cases where there are issues for which the CFPB would have the authority to make comments. For example, if a dispute arose due to a bank's electronic systems being "hacked," then the CFPB can assert that this happened and recommend that the bank addresses the issue.
There are cases where the financial institutions' systems can engender an avoidable dispute. Early acceptance of customers' funds without proper recognition that these funds have been submitted is one systems weakness which may result in problems later on.
We look forward to the early formation of the CFPB in the Philippines.
It is strongly compatible with this administration's philosophy of creating a fairer society. It would provide substantial benefits to all.