VUZF UniversityOpen Seminar on Financial Consumer Protection

The Role of Regulators

Juan Carlos Izaguirre

Financial Sector Specialist

International ConsultantThe World Bank

Bulgaria, December 2012

o Consumer protection in financial services can be implemented through :

Laws and regulations (government)

Codes of conduct (industry associations)

Financial education for current and potential consumers

o Consumer protection &financial capability

Key Elements of Financial Consumer Protection

Disclosure / Business practices / Complaints handling

Disclosure / Business practices / Complaints handling

SupplySupply

DemandDemand

Why is FCP Important? For Sound and Stable Financial Markets

o FSB Report to G20 (November 2011) highlighted impact of weak FCP in contributing to global financial crisis

o Consumer protection is part of Core Principles/Preconditions of standard setting bodies (BIS, IAIS, IOSCO, IADI, CPSS)

o G20/OECD: High Level Principles of Financial Consumer Protection

o CPFL is statutory objective for some supervisory authorities (e.g. Canada, Colombia, Ireland, Malaysia, Singapore, South Africa, UK, US)

o Irresponsible / abusive practices may financially harm consumers, generating loss of trust in formal financial sector and stability risk:

transfer of excessive risks to households

misleading advertising

mishandling of consumer complaints

unethical debt collection procedures

reckless lending [overindebtedness]

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Why is CPFL Important? For Inclusive Financial Markets

o Promised and actual equitable growth undermined by weak financial consumer protection

o Strong FCP:

o Improves quality of information disclosed to potential consumers

o Helps consumers understand risks/rewards, rights/obligations of engaging in financial sector

o Promotes fair pricing and competition, with potential impact on cost of financial products

o Strengthens transparency, governance and business standards of financial institutions, especially when dealing with new consumers

o Increases consumers’ trust in formal financial sector

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InsIns

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Banking

Insurance

Private Pensions

Securities

Non-Bank Credit,

incl. MFI

Credit Reporting

Financial Consumer Protection Framework

Institutional Arrangements Financial

Capability

Role of Regulators in FCP

o At least one institution with a clear FCP mandate / responsibility

o Prudential supervision and consumer protection supervision can be placed in separate agencies or in a single institutiono but allocation of resources should enable effective implementation of

consumer protection rules

o Financial regulator is a key player in FCP (unique expertise to lead development and implementation of FCP strategy/plan)

o Adequate coordination among regulators is needed to avoid overlaps and inconsistencies, and to provide and gather feedback

o All legal entities that provide financial services to consumers should be licensed and supervised regarding their market conduct

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Institutional Arrangements

Role of Regulators in FCP

o Suitability / affordability requirements o Cooling-off period for retail financial productso Unfair, abusive, misleading practices prohibitedo Minimum qualification requirementso Consumer rights in credit reporting legally

protectedo Privacy and data protection standardso Guidelines on debt collection

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o Periodic and ad-hoc on-site supervision

o Off-site supervisiono Mystery shopping

Regulation

Supervision

Sanctions o Proportional but effective

Role of Regulators in FCP

o Requirement to give copy of contracto Advertising standards / prohibitionso Key facts statementso Standard contract clauses o Statements of accountso Notification of changes o Renewal notices

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o Periodic and ad-hoc on-site supervision

o Off-site monitoringo Mystery shopping

Regulation and

Awareness

Supervision

Sanctions o Proportional but effective

* Consumer research

* Dialogue with

industry

* Consumer research

* Dialogue with

industry

Role of Regulators in FCP

o Standards on complaints handling procedureso Contact points for consumer inquiries &

complaintso Collection and analysis of statistics on consumer

inquiries & complaints o Promoting dialogue on setup of adequate ADR

systemo Training of judges or ADR systems

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o Periodic and ad-hoc on-site supervision

o Off-site supervision

Regulation and

Awareness

Supervision

Sanctions o Proportional but effective

Role of Regulators in FCP

o Key stakeholder (or leader) in the development of a national financial education strategy

o Key stakeholder in the implementation of a nationally representative household survey on financial capability, ensuring accuracy and adequacy

o Publication of objective information on financial products, services and sectors

o Development of materials targeted on risks/rewards and rights/obligations

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Many Stakeholders …but Financial Supervisors Play the Key Role

GOVERNMENT• Ministries (e.g. Finance, Economy, Education)• Public agencies (e.g. consumer protection, data protection, competition)• Councils (e.g. consumer protection, education)

FINANCIAL SUPERVISORS

• Financial supervisory agencies• Central bank• Financial consumer protection agency• Compensation schemes

INTERNATIONAL COMMUNITY

• Donors• Regional organizations• Standard setters• International associations

REDRESS MECHANISMS

• Ombudsman• Arbitration• Mediation, conciliation• Courts

CIVIL SOCIETY• Consumer associations• Debt counseling • Foundations• Academia• Media

FINANCIAL INDUSTRY• Industry associations• Training centers• Financial institutions (incl. distributors)• Financial infrastructure (e.g. credit bureaus)

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www.worldbank.org/consumerprotection

www.worldbank.org/consumerprotection

Thanks!