The new Client Protection-Pathway:
Interview with Elisabetta Bertotti from MFR
Elisabetta Bertotti completed a master’s degree in International Development and Cooperation and has been working for MFR for 11 years. She is Senior Analyst and Regional Manager for South and Southeast Asia.
Protecting clients from abuse and over-indebtedness is essential to the success and sustainability of microfinance. For this reason, the Smart Campaign, a platform of leading microfinance providers worldwide founded in 2008, has developed principles for client protection in microfinance - the Client Protection Principles.
After Smart Campaign expired at the end of 2020, the Client Protection Principles and their implementation were transferred to the long-standing partners Social Performance Taskforce (SPTF) and CERISE. In September 2021, SPTF and CERISE launched the Client Protection Pathway, a succession initiative to improve client protection.
The independent rating agency for the Client Protection certification of microfinance institutions (the results can be found on the MFR homepage). We talked about the new pathway and the process of certification with Elisabetta Bertotti, Regional Manager for South and Southeast Asia.
Dear Mrs. Bertotti,
Could you briefly explain the difference between the Smart Campaign and the new Client Protection Pathway?
After the Smart Campaign ended its activities in 2020, CERISE and the Social Performance Task Force (SPTF) – two key stakeholders in promoting responsible and fair practices in the inclusive finance sector – became the owners of the client protection certification methodology and tools and launched the Client Protection Pathway in response to the demand of social investors and financial service providers (FSPs) to demonstrate progress and not only the “ultimate achievement” of certification.
The Pathway describes the three steps that an FSP can take to improve its client protection practices and communicate this progress to investors: i) commit to implement client protection, ii) assess and improve practices, iii) demonstrate progress and achievement through the client protection certification. CERISE and SPTF are in the process of updating and finetuning the certification standards to reflect changes in the sector (certification 3.0), however certifications until September 2022 will be conducted assessing a company performance against the standards elaborated under the Smart Campaign (certification 2.0). Two main changes have been implemented already. In line with the intention to demonstrate progress, the new certification has shifted from a pass/no-pass approach to a tiered approach. The output of the new certification depends in fact on the company’s compliance with a set of entry, progress, and advanced-level indicators and overall compliance with three different levels of recognition (bronze, silver, gold). The gold level, the highest, requires full compliance with at least 95% indicators including entry, progress, and advanced-level indicators and is comparable with the previous Smart Campaign Certificate.
The certification validity has also been changed to three years compared to a four-year validity with a mandatory surveillance audit after the two-year mid-point under the Smart Campaign methodology. During the certification validity, the Certificate can however be withdrawn in case of material changes.
How does the process of Client Protection Certification work? How thorough is it? Skeptics say that only policies and the existence of processes are checked, not the actual practice of lending and loan / interest collection.
The Client Protection Certification process is very thorough and involves different steps. After a desk review of the financial service provider’s policies, procedures, and other key documents, an onsite visit is organized. During the onsite visit, the certification team interviews all key head office functions including top management, heads of departments and other relevant personnel such as for example the staff in charge of collecting and analyzing client feedback or complaints. To verify how the policies, procedures and processes are implemented in practice, visits are also conducted in two branches that are selected by the certification team. During the visit, the certification team interviews all the branch staff, audit a sample of loan files, and directly observe practices with clients.
Direct feedback from clients is also collected by the certification team through four focus group discussions with approximately 40 to 50 clients. Clients are selected by the certification team using the branches’ database based on a set of criteria that ensure clients are representative of the population. Clients with arrears are also invited to join the focus group discussions to investigate adherence to responsible practices in late loan management. The staff of the FSP that have a direct relationship with the interviewed clients or might be known by them cannot attend the focus group discussions to avoid bias in responses.
All interviews with staff and clients are complemented by documented evidence so that the information can be triangulated and verified. While onsite visits have not been always possible due to COVID-19, the strictness of the process has been maintained following formalized ad hoc guidelines for remote certifications. For example, branches are still visited virtually via videocalls, and client feedback is still gathered through phone interviews with clients selected by the certification team.
Could you please explain a little more in detail how you conduct interviews with staff and clients to verify compliance, especially with a view to the principles regarding fair treatment of clients and prevention of over indebtedness?
Our main approach during the interviews is to systematically verify and triangulate all information with different sources to understand the level of dissemination of client protection policies and procedures and the controls in place ensure their uniform application in practice.
For example, to verify adherence with the principle regarding the prevention of over indebtedness, the certification team conducts interviews with the board, management team and operations staff to understand the FSP growth strategy and targets and investigates whether an effective control and monitoring system in place to promote sustainable and quality growth. The team also carefully reviews the loan underwriting and approval process by interviewing all the staff involved in the process.
The quality of the repayment capacity analysis is discussed directly with the field officers in charge of collecting client data and is supported by the review of a sample of loan files – which also allows the team to verify the credit bureau checking process when applicable as well as key aspects of transparency and privacy of client information. Interviews are also conducted with the staff in charge of verifying the compliance with credit policies as well as with internal and/or self-regulatory/regulatory provisions. The information collected by the FSP staff is also triangulated during the focus group discussions with the clients, who are for example asked about the loan applicable process and about their debt exposure and capacity to afford loan repayments.
Similarly, the adherence with the principle regarding fair and respectful treatment of clients is triangulated thought interviews with different staff. For example, the certification team verifies the appropriateness of the policies and procedures in place to orientate the staff towards fair and respectful treatment of clients with the HR management and training team as well as with the operations team. The dissemination of such policies is also investigated during the interviews with the staff directly interacting with clients to understand whether they have been properly trained on the dos and don’ts, especially in case of challenging situations such as late loan management, and whether they are aware of the consequences for non-complying with the code of conduct. During the focus group discussions with clients, the certification teams also investigates whether they are aware of the behavior they should expect from the FSP staff, especially during collection, and whether they have experienced inappropriate behavior or excessive pressure.
Another important point in the Client Protection Principles is the existence of complaint mechanisms. How do you check the functioning of these mechanisms?
The certification team closely investigates the communication channels in place to raise the clients’ awareness about their right to voice a complaint and the effectiveness of the complaint mechanisms in place. This is done through a review of the complaint mechanism policy and procedures as well as of the systems in place to disseminate them and ensure their uniform application in practice (e.g. training, consideration of complaints in the staff evaluation, communication materials, internal audit). Internal reports on complaints are also checked to understand the actual use of the complaints’ channels as well of the effectiveness of the complaint’s resolution process. The functioning of the complaint mechanisms is also verified through interviews with staff at different organization levels and during the focus group discussions with clients.
How independent are you as a rating agency? Institutions seeking certification have to pay for your services. One could argue that there is an inherent interest not to scare potential clients away by being too detailed in your analysis. Could you tell us how you deal with this conflict of interests?
Over more than 20 years of activity, MFR has built a strong reputation among industry stakeholders of being an independent rating agency. Providing objective, detailed and evidence-based opinions is therefore a key objective for us to minimize reputational risk and remain a trusted and reliable player in the industry. Regarding the client protection certification, MFR has been accredited by CERISE and SPTF through a formal agreement. The agreement specifically covers impartiality and conflict of interests and states that surprise audits can be carried out by CERISE and SPTF to verify compliance with the certification process and the integrity analysis. Internal controls are also implemented by MFR as certifications are reviewed by the quality control team and finally approved by the certification committee, which is responsible for issuing the final output and results.
Mrs. Bertotti, thank you very much!