1. M. Singer: Consumer protection in financial services: CNB approach 1M. Singer: Inflation and Monetary Policy in a Small Open Economy 1M. Singer: Capital Market in the Czech Republic 1 Consumer Protection in Financial Services: The CNB Approach VI. International Forum CIFA Prague, 28 April 2008 Miroslav Singer Vice-Governor, Czech National Bank

2. M. Singer: Consumer protection in financial services: CNB approach 2 Retail consumer finance sector in CR Czech Republic has seen substantial growth in consumer financial services over last five years  implications for regulation and supervision Source: World Bank, 2007

3. M. Singer: Consumer protection in financial services: CNB approach 3 Consumer protection On February 12, 2008, consumer protection in the retail financial services sector became a new area of responsibility of the CNB (transposition of EU laws) From now on, two distinct areas will be supervised:  Financial market: stability of financial sector  Consumer protection: satisfaction of consumers Some questions:  Are the two areas of supervision in conflict?  Is the current level of regulation and supervision of consumer protection sufficient?  What are the implications and risks for the CNB?

4. M. Singer: Consumer protection in financial services: CNB approach 4 Direct and indirect consumer protection; short-run vs long-run Regulation and supervision of financial sector  financial stability of financial services providers  ability of financial institutions to meet their obligations  consumer protection: regulation and supervision of financial market provides indirect consumer protection over long run Regulation and supervision of consumer protection works directly in short run (possibly at cost of financial services providers in certain cases) The two areas of regulation and supervision may reinforce each other over the long run (to the benefit of consumers and the whole financial sector) but conflict with each other in the short run

5. M. Singer: Consumer protection in financial services: CNB approach 5 Reasons for consumer protection in financial services Potential market failures (World Bank, 2007):  Inadequate information for consumers  Consumers’ inability to assess the quality of financial products  Asymmetric information and the “lemon problem”  Inadequate monitoring of providers of financial services While the need to protect consumers in the goods market is generally acknowledged, the need for protection in financial services is less straightforward The need for consumer protection in less developed countries may be greater than in the case of more developed ones

6. M. Singer: Consumer protection in financial services: CNB approach 6 Is the current level of regulation and supervision of consumer protection sufficient? Frequent complaints from Consumer Protection Association The responsibilities (scope of jurisdiction) and administrative capacity of the Financial Arbiter are limited The Czech Trade Inspection has been active in consumer affairs related to goods, but lacks expertise in financial issues Self-regulation and self-imposed control is still partial Education of consumers is still limited Regulation and supervision: dispersed vs. insufficient Regulatory and supervisory responsibilities are dispersed: Ministry of Finance, CNB, Ministry of Industry and Trade, Czech Trade Inspection, Financial Arbiter, etc.

7. M. Singer: Consumer protection in financial services: CNB approach 7 CNB and consumer protection: Supervised entities and responsibilities Entities:  Banks (and bank-related business; but not unregulated)  Capital market participants  Insurance, pension funds, etc. Responsibilities:  Prohibition of deceptive practices (misleading and aggressive advertising)  Prohibition of consumer discrimination  Obligation to inform consumers about prices of services Allocation of consumer protection to the CNB is at best the second-best solution

8. M. Singer: Consumer protection in financial services: CNB approach 8 Risks for the CNB Diversion of expertise and capacity from supervision of financial market to consumer protection (especially if consumer protection workload expands quickly) Possible conflicts between two areas of supervision in the short run (conceivably less attention to consumer protection if financial stability is at stake) Possible diversion of legal activities towards “less important” areas (from systemic point of view) Erroneous or insufficient implementation of CNB obligations in the area of consumer protection may undermine the reputation of the CNB

9. M. Singer: Consumer protection in financial services: CNB approach 9 Other issues Possible over-regulation?  Adoption of EU laws (Czech Republic participates)  Active versus “less active” approach to consumer protection The proper scope of regulation and supervision will be assessed by taxpayers Variable trade-off between financial regulation (and supervision) and consumer protection over business cycle? (Is it less costly to have less protected consumers in an economic downturn as opposed to an economic boom?) Education of consumers versus consumer protection  An intrinsic contradiction?  Moral hazard stemming from consumer over-protection

10. M. Singer: Consumer protection in financial services: CNB approach 10 Thank you Miroslav Singer Česká národní banka Na příkopě 28 115 03 Praha 1 Miroslav.Singer@cnb.cz Tel: 2 2441 2008