Disclosure of terms and conditions

General pre-contract disclosure rules based on traditional lending models usually apply to all regulated financial institutions or to all loans of a certain type such as small-scale or consumer loans. However, given the new delivery channels and interfaces, merely extending traditional disclosure rules to digital lenders is not always sufficient.

A number of special disclosure-related risks arise in digital credit and may need to be addressed through regulation. The content of disclosures may be incomplete or not transparent. For example, a range of different methods may be used to convey pricing, finance charges may not be disclosed separately from principal, and fees for third-party charges may not be disclosed. While this type of risk also arises in traditional credit, there are hazards specific to digital lending. For instance, there may be inadequate access to complete information about terms and conditions (T&C) because it is provided at a subsequent page or a separate link – which may not always be easy to access.

Recommendation: Regulation could address disclosure content issues by, e.g.:

• Requiring prominent disclosure of total cost metrics and a clear breakdown of costs – in language that is simple and comprehensible to all consumers.. Research has shown generally that separating financing fees from loan principal repayments improves consumer borrowing decisions as evidenced by a decrease in default rates.
• Requiring easy access to the full T&C, including after the transaction is completed.
• Requiring providers to explain the key terms and conditions orally to the consumer on request or where deemed necessary based on a customer’s circumstances.
• Requiring providers to assist customers to obtain further information by making available tools such as a hotline or live chat, chatbot, or other interactive tools.
  Disclosures should also make clear:
• How and when the terms and conditions may be altered unilaterally by the financial service provider
• If, when, and how the consumer will be notified about changes to the agreement
• The penalties and any other remedies the financial service provider may seek to impose in the event of a perceived breach of the agreement by the consumer

• Whether provision of advice or the sale of a product or service will result in a commission to a staff member or an agent – and the amount of the commission.

  Sources: https://www.worldbank.org/en/topic/financialinclusion/brief/2017-good-practices-for-financial-consumer-protection; https://documents1.worldbank.org/curated/en/515771621921739154/pdf/Consumer-Risks-in-Fintech-New-Manifestations-of-Consumer-Risks-and-Emerging-Regulatory-Approaches-Policy-Research-Paper.pdf

Problems may also arise with the format of disclosures. These may be non-standardized or conveyed via mobile phones in a form or phrasing that does not facilitate comprehension. Consumers may not be able to retain or regain access to the information. Formats and user interfaces on mobile phones pose challenges. Often there is inadequate access to complete information about T&C because it is provided at a subsequent page or a separate link – which may not always be easy to access. Complicated presentation of T&C and “dark patterns” (user interfaces designed to deceive or nudge users into making unintended, potentially harmful choices) may inhibit understanding or steer consumers to unsuitable products. Low levels of digital and financial literacy among the most vulnerable mean that improving disclosure has limited impact absent consumer education.

Recommendation: Regulation of disclosure format might include:

• Encouraging or requiring greater standardization in presentation of fees/pricing
• Mandating the use of plain language without technical jargon or graphical elements affecting readability
• Requiring disclosure of key T&C in the same channel being used for the transaction
• Providing for standardized presentation of information adapted for digital channels (for example, digestible “bite-sized” chunks of information presented in a consistent manner
• “Layering” requirements: provide secondary layers of information for further details as well as offline channels for future reference to the T&C and for further information and assistance.

Source: https://documents1.worldbank.org/curated/en/515771621921739154/pdf/Consumer-Risks-in-Fintech-New-Manifestations-of-Consumer-Risks-and-Emerging-Regulatory-Approaches-Policy-Research-Paper.pdf

The timing and flow of information may present problems. Key information such as pricing may be provided only after completion of a transaction, or less appealing (but no less important) information may be de-emphasized. User interfaces may not be user-friendly, with complex menus that are difficult to navigate. 

Recommendation: Regulators can address timing and flow by:

• Requiring an order and flow of information to enhance transparency and comprehension, and to provide an intuitive “digital journey” through a transaction process.
• Requiring disclosure of pricing and key T&C at the start of the transaction – before a loan is contracted.
• Requiring that T&C remain consistent, and any changes are clearly noted and explained.
• Mandating the use of behavioral insights to encourage consumers to engage with information (for example, requiring confirmation to move to next stage of transaction).
• Requiring user interfaces to be easy to navigate, including on low-end mobile devices.
• Encouraging consumer testing of user interfaces.
• Requiring providers to provide guidance to consumers on user interfaces.

Source: https://documents1.worldbank.org/curated/en/515771621921739154/pdf/Consumer-Risks-in-Fintech-New-Manifestations-of-Consumer-Risks-and-Emerging-Regulatory-Approaches-Policy-Research-Paper.pdf