Legal framework of bancassurance

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By Daniel Benson Kaaya

Bancassurance is an arrangement in which a bank and an insurance company form a partnership so that the insurance company can sell its products to the bank’s client base. In this instance, a bank is the distribution channel for the insurance products. This arrangement finds its footing in the principle of incidental business that banks are allowed to engage in other than banking business.

A cursory definition of incidental business would be activities functionally adjacent to the business of banking that enhance the quality and efficiency of its content and delivery, and activities that optimise the use and value of a bank’s facilities and competencies. An essential characteristic of incidental business is that it stimulates and supports the banking franchise. Thus, it provides for an environment that facilitate the aspects of operating a bank as a business enterprise.

The legal framework of bancassurance in Kenya is devised to address concerns of consumer protection, bancassurance products, relationship between institutions (banks and insurance companies), licenses and approval requirements (for example a bank seeking to engage in permitted incidental business shall seek the prior approval of the Central Bank before engaging in such business activity), among other matters. The Constitution of Kenya is the ultimate guardian of consumer rights.

The “Insurance Regulatory Authority: Guideline to the Insurance Industry on Bancassurance”, “Guidelines on Incidental Business Activities” and “Guidelines on Consumer Protection” regulate bancassurance in Kenya. These derive their authority from both Insurance Act and Banking Act, and form the basis of establishment and regulation of Bancassurance in Kenya.

CBK guidelines on incidental business activities

This guideline applies to all banks intending to provide a distribution channel through their branch network and other banking channels for the provision of incidental financial services or products. The provisions of this guideline also apply to the bank where the bank seeks to provide a distribution channel for financial services or products offered by its subsidiaries. Consequently, the purpose of this guideline is to prescribe the business activities a bank may undertake in addition to its core banking and financial business.

Bancassurance is one of the incidental businesses permitted under this guideline. The guideline permits banks to form and enter into partnerships for the purposes of cross selling authorised financial services and products through their branch network, and marketing authorised financial services and products. The partnership contemplated herein is that of a bank and an insurance company. The formation of a partnership arises where an agreement is entered into with one or more entities on whose behalf the bank will act as a distribution channel in the marketing or cross selling of financial services or products in line with the provisions of this guideline.

This guideline further, provides for restricted activities, which the bank ought not to undertake in the bancassurance arrangement. The bank in this partnership shall not undertake or engage in the actual business of insurance underwriting and securities brokerage or any other financial business, which it is not, authorised to undertake by the Central Bank. The involvement of banks will be limited to acting as a distribution channel in the provision of these financial services.  A bank may also not give the impression to its customers or imply in any way as to being the actual service provider of these financial services or products other than selling or marketing on behalf of or in partnership with other financial service providers. Lastly, it may not provide the financial services or products in a manner that contravenes any law that applies to or affects those services or products.

The reason for this prohibition is that, engagement in any of the above will be in contravention of the cardinal objective of banks—to carry out banking business.

IRA guideline to insurers on bancassurance

This guideline aims to increase insurance penetration by allowing financial institutions to distribute and cross-sell insurance products using their wide network and customer base, provide one stop shop for integrated financial services and enhance financial inclusion. Notably, it provides for approval and licensing requirement for a bancassurance arrangement. In addition, bancassurance agents are required to make reports to the Authority on a quarterly basis on the performance of the Bancassurance business activities in the prescribed format. Further, it provides for bancassurance products.

It recognises only two bancassurance models namely; specialist and integrated bancassurance models. Specialist model refers to a model that product experts, who are generally employees or representatives of the insurance company itself, distribute the products. The bankers utilize their database to identify prospective customers who are then contacted by the insurance professional. This may require less training but higher compensation to support the referral process.

Both models can be used in conducting bancassurance business by establishing a bancassurance agency, which shall be a subsidiary wholly owned by the financial institution. The insurance agency shall be a corporate entity and shall represent insurance companies licensed under the Insurance Act. The insurance agency shall apply for a license in accordance with provisions of the Insurance Act, or directly applying as an entity to be an insurance agency to sell insurance products to its customers through its staff.

An example of specialist or referral arrangement in Kenya is the recent partnership between Diamond Trust Bank and Jubilee Insurance to sell life insurance products. On the other hand, an example of an integrated model is when Stanbic Life Assurance Company Limited became part of the Stanbic Holdings Group, and the I&M Insurance Agency that is a wholly owned subsidiary of I&M Bank.

This guideline commendably provides for enforcement mechanisms. This is immensely estimable because a law that does not have an enforcement mechanism is not an effective law. It provides for two modes of enforcement: remedial measures and administrative sanctions.

Consumer protection framework

To maintain a stable and efficient banking and financial system, an effective consumer protection framework has to be established. The protection of consumer in the bancassurance arrangement is enshrined in both the Constitution of Kenya 2010, and the Guideline on Consumer Protection.

A bank that provides a distribution channel is required not to engage in unfair, deceptive, oppressive or aggressive practices such as threatening, intimidating, being violent towards, abusing, being non-responsive or humiliating a consumer, or offering, accepting or asking for bribes or other ‘gifts’ as an inducement to serve a consumer; or discriminate a consumer in any way.

The Constitution

Protection of consumer rights is a constitutional entitlement in Kenya. Generally, consumer means any entity or person who uses, has used, or is or may be contemplating using, directly or indirectly, any of the products or services provided by an institution; the term consumer may be used interchangeably with customer. A consumer in bancassurance is a natural or juristic person who requires insurance services through a bank that provides a distribution channel.

The Constitution provides that consumers have the right (a) to goods and services of reasonable quality; (b) to the information necessary for them to gain full benefit from goods and services; (c) to the protection of their health, safety, and economic interests; and (d) to compensation for loss or injury arising from defects in goods or services. This applies to both public entities and private persons that offer services and goods.

Further, the Constitution requires parliament to enact legislation that provide for consumer protection and for fair, honest and decent advertising. Consequently, two legislations have been enacted forthwith to attend to this constitutional directive—the Consumer Protection Act and the Competition Act. The latter legislation protects the interests of the consumer by regulating the conduct of proprietors in the market while the former protects the rights of the consumer from the immediate exploitations either in goods or in services from the provider.

CBK Guideline on consumer protection

The scope of this guideline is to provide a specific framework for protecting customers against risks of fraud, loss of privacy, unfair practices and lack of full disclosure. This is educated by the fact that service providers often prefer deceitful tactics in order to sell their products. Engagement in unfair practices leads to unfair and unjust enrichment to the bank while the customer writhes. The scope of this guideline aims at protecting consumers from such unscrupulous tendencies.

The purpose of this guideline is to promote fair and equitable financial services practices by setting minimum standards for institutions in dealing with consumers; increase transparency in order to inform and empower consumers of financial products and services; foster confidence in the banking sector; and provide efficient, effective mechanisms for handling consumer complaints relating to the provision of financial products and services.

An objective analysis of this purpose demonstrates that protection of consumer interests leads to a better and reputable banking sector hence success in the financial sector. This guideline further provides for key principles that should guide banks in dealing with customers—fairness, reliability, transparency, equity and responsiveness. ^

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