Introduction
Directive
Guidelines
Regulatory framework for digital lending
Regulatory powers of FCCPC and CBN
Other key points
Comment


Introduction

There has recently been a proliferation of digital lending platforms in Nigeria, and many of these lending platforms are focused on retail lending. Arguably, this trend has been driven by increased digital adoption, enhanced smartphone penetration, acceptance of a cashless policy driven by the Central Bank of Nigeria (CBN) and, of course, the covid-19 pandemic, which has deepened the adoption of online banking. The activities of digital lending platforms in Nigeria have met with limited regulatory restrictions.

Recently, there have been complaints about the unethical conduct of certain digital lenders whose operations are reminiscent of loan sharks targeting vulnerable consumers. Examples of this abusive and unethical behaviour include:

  • breach of privacy obligations;
  • illegal debt recovery methods;
  • exploitative interest rates;
  • arbitrary methods of calculating loan balances; and
  • lack of customer feedback avenues.

These issues have caused great concern for consumers and have led to heightened regulatory scrutiny of credit institutions.

It is in the light of the above that the Federal Competition and Consumer Protection Commission (FCCPC) released a statement titled "Further and Continuing Investigation of Rights Violations in Money Lending Industry; and Release of Interim Regulatory Framework" (the directive) and the "Limited Interim Regulatory / Registration Framework and Guidelines for Digital Lending 2022" (the guidelines) as a step towards regulating digital lending in Nigeria. For context, the FCCPC is a federal agency with regulatory purview over consumer protection and the prevention of unfair business practices.

This article analyses the content of the directive and the guidelines, against the backdrop of the CBN's broad statutory powers in the lending space.

Directive

Through the directive, the FCCPC ordered operating payment systems in Nigeria to stop providing payment or transaction services to lenders under investigation or lenders who have been operating without requisite regulatory approval. Similarly, telecoms and technology companies, including mobile network operators, were directed to stop providing server, hosting or other key services such as connectivity to unlicensed digital lenders. The FCCPC disclosed that it had ordered Google to take down specific applications and would continue to trace hosting platforms for non-compliant applications that were not on the Google Play store. The directive also stipulates that service providers in the digital lending ecosystem such as banks, access or download platforms, technology providers, and payment systems should obtain evidence of regulatory approval before providing services to such lenders.

Guidelines

According to the directive, the guidelines were developed and adopted by the joint regulatory and enforcement task force as an interim step to establishing a clear regulatory framework for the digital lending space.(1) The guidelines require digital lenders to register with the FCCPC and complete two forms (Form DLG 001 and Form DLG 002).

Form DLG OO1 is the registration form that requires the applicant company to provide identification and operational information to the FCCPC,(2) while Form DLG 002 contains declarations relating to:

  • legitimacy;
  • compliance with applicable regulatory requirements;
  • lawful source of funds and conformity with anti-money laundering; and
  • data protection laws.

Regulatory framework for digital lending

Broadly, there are four types of entities involved in digital lending in Nigeria.

Deposit money banks
Deposit money banks are financial institutions licensed by the CBN to carry out general banking activities. These include deposit mobilisation and lending to retail and corporate customers.

Microfinance banks
A microfinance bank (MFB) is a financial institution that is licensed to provide financial services such as:

  • loans;
  • savings and deposits;
  • domestic fund transfers; and
  • certain non-financial services to microfinance clients.

Finance companies
Finance companies are licensed by the CBN to offer financial services including consumer lending, asset finance and debt factoring to individuals and businesses. Consumer lending entails provision of consumer and business loans to individuals and micro, small and medium enterprises. Finance companies are precluded from receiving deposits from the public.(3)

Money lending entities
Money lending was originally regulated by the Money Lenders Act,(4) which was enacted to protect borrowers and debtors from the exploitative tendencies of money lending entities. In 1990, the Act was repealed, leaving the regulation of money lending to the Money Lenders Laws of various states in Nigeria.(5)

With the rise in technology, it has become increasingly common to provide certain financial services through digital means. Consequently, a lot of digital lending businesses tend to obtain the money lending licence and then conduct their lending business under the licence. As most state money lending laws were enacted many years ago, they may not adequately cater to today's realities. For example, while other regulated financial institutions are subject to periodic returns and filings that enable their regulators monitor their activities, money lending entities are not generally subject to such requirements.

Regulatory powers of FCCPC and CBN

The FCCPC's proactiveness in releasing the directive and the guidelines is laudable given the practices of operators in this space referenced above. However, broadly understood, to the extent that lending businesses fall within the regulatory scope of the CBN, it is necessary to consider the interaction of the CBN's regulatory powers over its licencees with the FCCPC's powers to advance consumer protection in general.

In particular, the FCCPC is empowered to:

  • protect and promote consumer interests;(6)
  • act generally to reduce the risk and injury that may occur from consumption of certain products and services;
  • restrict and prohibit service providers;(7)
  • ensure that consumers' interests receive due consideration at appropriate fora; and
  • provide redress to obnoxious practices or the unscrupulous exploitation of consumers by companies, firms, trade associations or individuals.(8)

Specifically, the FCCPC is authorised to make regulations and issue guidelines and notices for the effective implementation and operation of the provisions of the Federal Competition and Consumer Protection Act (FCCPC Act). This includes the power to prescribe procedures to be followed, forms of applications and related documents, and fees, penalties or charges.(9) The regulations, guidelines or notices may include procedural and enforcement rules and regulations pertaining to consumer protection under the FCCPC Act.(10) From the foregoing, the FCCPC is empowered to make regulations, and carry out other incidental actions for the advancement of consumer protection in Nigeria.

The CBN has regulatory oversight over financial institutions whose objects include advancing credit and lending. These financial institutions include MFBs and other financial institutions such as finance companies and other corporate bodies that carry on business with a licence issued by the CBN, regardless of whether such businesses are conducted digitally, virtually or electronically.(11) Regarding consumer protection, the Banks and Other Financial Institutions Act (BOFIA) specifies that the CBN governor will have the power to make regulations, policies and guidelines to ensure responsible conduct and protect the interests of consumers of products and services, notwithstanding provisions of other laws.(12)

Indeed, the CBN has issued its Consumer Protection Framework and Consumer Protection Regulations pursuant to its powers under the BOFIA. Particularly, the Consumer Protection Regulations (CBN Regulations) highlight minimum standards on fair treatment of consumers, disclosure and transparency, business conduct, and handling of complaints with a view to protecting consumers rights and holding institutions accountable. The CBN Regulations also requires licensed entities to comply with responsible lending practices. These include assessments of the capability of potential borrowers to sustainably repay their loans, early engagement of clients on alternative repayment options where there are repayment difficulties and deployment of debt recovery processes that are transparent, courteous and fair, and devoid of undue pressure, intimidation, harassment, humiliation or threat.

Therefore, there is seemingly an overlap between the FCCPC's general powers on consumer protection and the CBN's supervisory authority over its licensed financial institutions. Notably, the BOFIA provides that the provisions of the FCCPC Act will not apply to financial products, functions or services licensed and regulated by the CBN.(13) Although the supremacy of the FCCPC Act in matters of consumer protection has been established by some of its provisions,(14) such supremacy may not comport with the CBN's power to exclusively regulate consumer protection as it pertains to CBN-regulated financial institutions.(15)

It should also be noted that the BOFIA was enacted in 2020 after the enactment of the FCCPC Act in 2018. Based on the legal principle that a latter statute would prevail over an earlier one when there is an inconsistency,(16) the BOFIA's provisions on this point would appear to supersede the FCCPC Act. Additionally, where there is a specific and a general statute on the same subject, the specific legislation prevails.(17) Consequently, the provisions of the BOFIA (being specific) will likely prevail on issues of consumer protection in the financial services sector as it relates to CBN regulated entities.

It therefore appears that advancing robust consumer protection regulation in the digital lending space may only be best carried out by the FCCPC adopting a collaborative approach with the CBN, given that the latter is the principal regulator of financial institutions in Nigeria. The FCCPC can only exercise absolute powers in regulating digital lenders who are not licensed by the CBN, that is, money lending entities operating under state-issued money lending licences.

Although the FCCPC's recent regulatory activities have been primarily targeted at the activities of digital money lenders and the need to protect the interest of users of such services, the scope of the directive and guidelines also extend to ancillary services providers in the digital lending ecosystem such as banks, application stores, technology providers and payment systems as they are required to ensure confirmation of regulatory approval before providing support services to digital lenders. This incites several issues which the directives and guidelines may not have comprehensively addressed, such as the appropriate approach, which should apply to non-traditional forms of lending, such as buy now, pay later products.

Other key points

Extent of moratorium under guidelines
The directive indicates that the guidelines would provide a limited moratorium period for existing businesses to comply with the guidelines' requirements. However, no timelines are specified under the guidelines.

Implication of non-compliance
Although section 163(1)(c) of the FCCPC Act empowers the FCCPC to make regulations on fees, administrative penalties, charges or levies, and such other related matters, there are no clear provisions in the guidelines or the directive concerning penalties for non-compliance.

Sequencing of approval process
Neither the guidelines nor the directive indicate whether registration with the FCCPC would precede the procurement of a relevant operational licence. It should be noted that the CBN has strict regulations in connection with the latter. It is not clear that potential licencees can deviate from these without recourse to the CBN.

Comment

The regulatory intervention of the FCCPC is a notable development in addressing the excesses and exploitative behaviours of some digital lending businesses in Nigeria. The regulatory framework for digital lending as outlined above indicates that any business carrying on digital lending activities will fall under the purview of the CBN, the FCCPC and/or a relevant state government. The FCCPC has general powers to make regulations on consumer protection in Nigeria. However, what remains somewhat imprecise is the scope of the application of the FCCPC's powers, given the CBN's broad statutory powers in this space. In particular, digital lenders operating under a CBN licence may not be subject to the powers of the FCCPC due to the exclusion of the provisions of the FCCPC Act under the BOFIA. Interestingly, the FCCPC recently released a list of digital lenders, including a finance company and a microfinance bank, to which it has granted full or conditional approvals under the guidelines.

It appears that, regardless of whether a digital lending entity is operating under a money lending licence or a CBN licence, it is still a regulated entity that must comply with the extant laws that have been put in place to protect consumers. It follows that a comprehensive and uniform regulatory framework specifically enhancing cohesion between the various regulatory agencies is necessary. Given that the FCCPC has indicated that the guidelines are only an interim measure, it is expected that the relevant regulators will drive a collaborative effort to provide a robust regulatory framework for the digital lending business in Nigeria.

For further information on this topic please contact Ajibola Asolo, Tomilola Tobun, Bukola Akinsulere or Funmilola Aliu at Aluko & Oyebode by telephone (+234 1 462 8360 71) or email ([email protected], [email protected], [email protected] or [email protected]). The Aluko & Oyebode website can be accessed at www.aluko-oyebode.com.

Endnotes

(1) However, it is reported that the CBN is a part of the task force and it is unclear which regulatory agencies make up this task force.

(2) These include:

  • physical address;
  • contact details;
  • identity of promoters, directors and initial key role players;
  • affiliated companies;
  • source(s) of funding;
  • proposed interest rate regime;
  • service providers and service level agreements; and
  • a list of all applications in the business operations or intended for operation.

(3) CBN Revised Guidelines for Finance Companies 2014.

(4) Cap 124, Laws of the Federation of Nigeria (1958), now repealed.

(5) In Lagos State, for example, the relevant law is the Money Lenders Law, Chapter M7, Laws of Lagos State 2003.

(6) Section 17(l) of the FCCPC Act.

(7) Section 17(x) of the FCCPC Act.

(8) Section 17(s) of the FCCPC Act.

(9) Section 163(1) of the FCCPC Act.

(10) Section 163(2)(e) of the FCCPC Act.

(11) Section 131 of the BOFIA.

(12) Section 30 of the BOFIA.

(13) Section 65(1)(a) of the BOFIA.

(14) Section 104 of the FCCPC Act states that:

Notwithstanding the provisions of any other law but subject to the provisions of the Constitution of the Federal Republic of Nigeria, in all matters relating to competition and consumer protection, the provisions of this Act shall override the provisions of any other law.

Section 105(2) of the FCCPC Act also provides that for industries that are regulated by another government agency, such primary agency would have concurrent jurisdiction with the FCCPC in matters of consumer protection and the FCCPC would also have precedence.

(15) Sections 30 and 65 of the BOFIA.

(16) CBN v Regd Trustees, NBA (2021) 5 NWLR (Part 1769) page 268 at 344.

(17) NDIC v Governing Council, ITF (2012) 9 NWLR (pt 1305) page 252 at 273.