VUZF University Open Seminar on Financial Consumer Protection The Role of Regulators Juan Carlos Izaguirre Financial Sector Specialist International Consultant The 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 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] 3

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 4

Ins 5 Banking Insurance Private Pensions Securities Non-Bank Credit, incl. MFI Credit Reporting Financial Consumer Protection Framework Institutional Arrangements Business Practices Consumer Disclosure Consumer Redress 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 institution o 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 6 Institutional Arrangements

Role of Regulators in FCP o Suitability / affordability requirements o Cooling-off period for retail financial products o Unfair, abusive, misleading practices prohibited o Minimum qualification requirements o Consumer rights in credit reporting legally protected o Privacy and data protection standards o Guidelines on debt collection 7 Business Practices o Periodic and ad-hoc on-site supervision o Off-site supervision o Mystery shopping Regulation Supervision Sanctions o Proportional but effective

Role of Regulators in FCP o Requirement to give copy of contract o Advertising standards / prohibitions o Key facts statements o Standard contract clauses o Statements of accounts o Notification of changes o Renewal notices 8 Consumer Disclosure o Periodic and ad-hoc on-site supervision o Off-site monitoring o 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 procedures o Contact points for consumer inquiries & complaints o Collection and analysis of statistics on consumer inquiries & complaints o Promoting dialogue on setup of adequate ADR system o Training of judges or ADR systems 9 Consumer Redress 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 10 Financial Capability

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) 11

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