VUZF UniversityOpen Seminar on Financial Consumer Protection

The Role of Regulators

Juan Carlos IzaguirreFinancial 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

Supply

Demand

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 Protectiono 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 sectoro Promotes fair pricing and competition, with potential

impact on cost of financial productso 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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Ins

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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 ruleso 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 feedbacko 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

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!