88773 GLOBAL SURVEY ON CONSUMER PROTECTION AND FINANCIAL LITERACY: RESULTS BRIEF REGULATORY PRACTICES IN 114 ECONOMIES © 2013 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org ALL RIGHTS RESERVED This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the govern- ments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. RIGHTS AND PERMISSIONS The material in this work is subject to copyright. 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COVER PHOTOS: IFC/World Bank If you have any questions about this product, please contact: The Financial Inclusion and Infrastructure Global Practice The World Bank Group I9-905 1818 H Street NW Washington DC 20433 USA PHONE: +1 (202) 473-1000 FAX: +1 (202) 522-3199 EMAIL: financialinclusion@worldbank.org WEB: responsiblefinance.worldbank.org www.worldbank.org/financialinclusion ii GLOBAL SURVEY ON CONSUMER PROTECTION AND FINANCIAL LITERACY RESULTS BRIEF: ACKNOWLEDGMENTS This brief summarizes the results of the Global Survey on Consumer Protection and Financial Literacy. The survey was made possible by the generous contribution of time and expertise by central bank and financial regulatory authority officials in the 114 economies who responded to this year’s survey. The survey is a product of the World Bank Financial Inclusion & Infrastructure Global Practice conducted in conjunction with FinCoNet. Douglas Pearce and Gaiv Tata provided overall guidance. The team led by Nataliya Mylenko comprised Adetola Adenuga, Roziah Baba, Elizabeth Davidson, Ros Grady, Johanna Jaeger and Valentina Saltane. Siegfried Zottel, Michael Fuchs, Rekha Reddy, Samuel Maimbo and Andrej Popovic provided substantive inputs in the survey design and results analysis. The survey was designed with inputs from FinCoNet, as coordinated by John Rossi. iii REGULATORY PRACTICES IN 114 ECONOMIES iv GLOBAL SURVEY ON CONSUMER PROTECTION AND FINANCIAL LITERACY RESULTS BRIEF: TABLE OF CONTENTS 1 BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 LEGAL FRAMEWORK. . . . . . . . . . . . . . . . . . . . . . . . 4 3 INSTITUTIONAL ARRANGEMENTS. . . . . . . . . . . . 6 4 FAIR TREATMENT. . . . . . . . . . . . . . . . . . . . . . . . . . 12 5 DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 6 RESPONSIBLE LENDING. . . . . . . . . . . . . . . . . . . . 16 7 DISPUTE RESOLUTION AND RECOURSE . . . . . 19 8 FINANCIAL EDUCATION. . . . . . . . . . . . . . . . . . . . 22 v REGULATORY PRACTICES IN 114 ECONOMIES vi GLOBAL SURVEY ON CONSUMER PROTECTION AND FINANCIAL LITERACY RESULTS BRIEF: 1 BACKGROUND About two billion adults worldwide have a deposit or a loan services expand and more people gain access to deposit, pay- with a regulated financial institution.1 Customers not served ment and credit services, there is a new category of clients by the formal system rely on informal providers for their sav- who have no prior experience, including in their family or ings, borrowing, payments and insurance needs.2 Access to among friends, of dealing with banks or any other formal fi- basic financial services is a fundamental element of inclu- nancial services providers. sive economic systems and contributes to poverty reduction. When using financial products, consumers should know and Consumer protection and financial literacy can contribute understand product features. Yet information asymmetries, to improved efficiency, transparency, competition and access power imbalances and behavioral biases in financial markets to retail financial markets by reducing information asymme- may result in poor outcomes for both consumers and for fi- tries and power imbalances among providers and users of fi- nancial service providers. Financial consumer protection and nancial services. Rapid progress toward widespread financial financial education policies, in conjunction with the regula- inclusion must be appropriately complemented with “checks tion of financial institutions and markets, need to ensure safe and balances” that ensure a responsible provision of finan- access to financial services and support financial stability and cial services and products. Consumer protection and finan- financial inclusion objectives. cial literacy and capability can support financial inclusion by encouraging competition which leads to more cost-effective As financial products and the related delivery channels become and higher quality products and by increasing consumer con- more complex, the need for effective consumer protection ris- fidence and reducing risk when purchasing financial products es. Emerging-market economies in which a large number of and services, because they know remedies exist when things people join the formal financial system for the first time face go wrong. particular challenges. In Peru, the number of depositors more than doubled between 2005 and 2011, adding 5.2 million The global financial crisis has highlighted the importance new clients as financial inclusion initiatives drew more cus- of financial consumer protection for financial stability. tomers to banks. Bangladesh doubled the number of deposi- The report of the Financial Stability Board (FSB) on Con- tors in the same period, adding 16.9 million new depositors.3 sumer Finance Protection with Particular Focus on Credit4 Until recently, in low- and middle-income economies, formal endorsed by the G20 notes that “[p]olicies that protect the financial institutions focused only on high-income groups interests of consumers of financial products and services con- serving a small portion of the population. As retail financial tribute to enhanced risk management by households, more competitive financial markets, and greater financial stability. This financial crisis demonstrated the desirability of strength- 1 For estimates using supply side data please see Kendall, Jake, Nataliya ening such policies and ensuring that the use (or misuse) Mylenko, and Alejandro Ponce, 2010, “Measuring Financial Access around the World,” Policy Research Working Paper 5253, World Bank, of individual financial products do not become a source of Washington, DC. For demand side estimates please see Asli Demirguc- financial instability.” The report calls for further work on Kunt and Leora Klapper, 2012, “Measuring Financial Inclusion: The identifying good practices in financial consumer protection, Global Findex,” World Bank Policy Research WP 6025. 2 Collins, Daryl, Jonathan Morduch, Stuart Rutherford, and Orlanda Rutheven, 2009, Portfolios of the Poor: How the World’s Poor Live on $2 a Day, Princeton, NJ: Princeton University Press. 4 FSB, 2011, “Consumer Finance Protection with Particular Focus 3 Data for Peru and Bangladesh from Financial Access Survey, IMF on Credit,” http://www.financialstabilityboard.org/publications/ Financial Access database http://fas.imf.org/ r_111026a.pdf. 1 REGULATORY PRACTICES IN 114 ECONOMIES including on institutional arrangements and supervisory tools and for greater international coordination. BOX 1. HIGH-LEVEL PRINCIPLES ON FINANCIAL CONSUMER PROTECTION ENDORSED BY THE G20 A number of international efforts are in place to improve dia- logue and identify best practices in financial consumer pro- 1. Legal, Regulatory and Supervisory Framework tection. The G20 Principles for Innovative Financial Inclu- 2. Role of Oversight Bodies sion adopted in 2010 include consumer protection as one of 3. Equitable and Fair Treatment of Consumers the nine principles urging countries to “encourage a compre- hensive approach to consumer protection that recognizes the 4. Disclosure and Transparency roles of government, providers and consumers.”5 The High- 5. Financial Education and Awareness level Principles on Financial Consumer Protection were en-  esponsible Business Conduct of Financial Services 6. R dorsed by the G20 Finance Ministers and Central Bank Gov- Providers and Authorized Agents ernors at their meeting in October 20116 (Box 1). The World Bank published Good Practices for Financial Consumer Pro-  rotection of Consumer Assets against Fraud and 7. P tection7 in 2012, based on in-depth country-level reviews of Misuse consumer protection and financial literacy. The Good Prac- 8. Protection of Consumer Data and Privacy tices are a compilation of the most frequently used practices 9. Complaints Handling and Redress that have been successfully carried out in the field. They rep- resent a summary of useful approaches for the improvement 10. Competition of conduct of financial institutions when dealing with retail customers and aim to provide a reference for policymakers in designing their financial consumer protection frameworks. ies.8 The results of the earlier surveys provided comprehensive information and benchmarking of the key financial consumer To contribute to the international dialogue on financial con- protection regulations worldwide. This year, the World Bank sumer protection the World Bank in conjunction with Fin- Global Survey updates this information and collects new CoNet, an international cooperation platform for supervisory information on the financial education efforts by financial agencies in the area of financial consumer protection, con- regulators and on issues related to responsible lending to help ducted a Global Survey on Consumer Protection and Finan- monitor progress in financial consumer protection reforms. cial Literacy to collect information from financial regulatory agencies in 114 economies. This report provides a summary The World Bank Global Survey on Consumer Protection and of the survey results. Financial Literacy was conducted during the period of Febru- ary to May 2013. The questionnaire was developed in con- junction with FinCoNet, with a view to expand and improve WORLD BANK GLOBAL SURVEY the earlier version, and to help provide baseline information ON CONSUMER PROTECTION AND to support ongoing research on institutional arrangements by FinCoNet. The questionnaires were sent to central banks FINANCIAL LITERACY 2013 and bank supervisors in 145 economies and 114 responses The World Bank Global Survey builds on a body of work by were received. The survey focused on the financial consumer the World Bank Group (World Bank, CGAP, IFC), including protection legal and institutional arrangements in relation to various surveys, individual country diagnostics and case stud- deposit and credit services. The Global Survey assessed the progress in a number of areas using the data from the earlier 5 http://www.g20.utoronto.ca/2010/to-principles.html. 6 http://www.oecd.org/daf/fin/financial-markets/48892010.pdf. Progress 8 Please see World Bank, 2012, “Good Practices for Financial Consumer report http://www.oecd.org/finance/financial-education/G20Effective Protection”; Ardic, Ibrahim, and Mylenko, 2011, Consumer Protec- ApproachesFCP.pdf. tion Laws and Regulations in Deposit and Loan Services: A Cross-Country 7 World Bank, 2012, “Good Practices for Financial Consumer Protec- Analysis, World Bank Policy research Working Paper 5536; Rutledge, tion,” http://responsiblefinance.worldbank.org/~/media/GIAWB/FL/ S.L., 2010, “Consumer Protection and Financial Literacy: Lessons from Documents/Misc/Good-practices-for-financial-consumer-protection. Nine Country Studies,” World Bank Working Paper, and individual pdf. country diagnostics available at www.worldbank.org/financialinclusion. 2 GLOBAL SURVEY ON CONSUMER PROTECTION AND FINANCIAL LITERACY RESULTS BRIEF: survey conducted in 2010.9 Of the 114 countries, 109 have the role and responsibilities of financial supervisors within a data for both 2010 and 2013 allowing for comparison. While broader financial consumer protection context, building on other financial services such as insurance, payments and in- the earlier research and following High-level Principles on Fi- vestment services are essential elements of financial systems nancial Consumer Protection endorsed by the G20 and World and equally require clear and effective financial consumer Bank Good Practices for Financial Consumer Protection. The protection framework, this year, World Bank Global Survey survey collected basic information on the key elements of fi- did not cover these products. Future iterations of the survey nancial consumer protection system. This brief summarizes may expand the scope to analyze these issues.10 the key results of the survey and accompanies the release of the data collected to provide timely feedback on the results. Institutional arrangements for financial consumer protection A full report drawing on further analysis and consultation will vary greatly among countries and include multiple agencies. be released at a later date. The focus and primary objective of this survey is to review 9 Ardic, Ibrahim, and Mylenko, 2011, Consumer Protection Laws and Regulations in Deposit and Loan Services: A Cross-Country Analysis, World Bank Policy research Working Paper 5536, Washington, DC. CGAP and World Bank, 2010, “Financial Access 2010,” Washington, DC. 10 World Bank Good Practices on Financial Consumer Protection cover a broad range of practices including securities, insurance and non-bank credit providers. 3 REGULATORY PRACTICES IN 114 ECONOMIES 2 LEGAL FRAMEWORK The survey asked the respondents to indicate which of the G20 HIGH LEVEL PRINCIPLES ON FINANCIAL following elements of legal framework were present within CONSUMER PROTECTION. PRINCIPLE 1: their economy: (1) general consumer protection law without Financial consumer protection should be an integral part explicit reference to financial services and covering a broad of the legal, regulatory and supervisory framework and range of products and services; (2) general consumer protec- should reflect the diversity of national circumstances and tion law with an explicit reference to financial services, offer- global market and regulatory developments within the ing specific provisions for consumers of financial products and financial sector. services; (3) separate financial consumer protection law; and (4) consumer protection regulations within the framework of financial sector legislation. In 112 out of 114 countries, there WORLD BANK GOOD PRACTICES FOR FINANCIAL CONSUMER PROTECTION: The law provides clear consumer protection rules regarding financial products and services. FIGURE 1. MOST ECONOMIES HAVE A LEGAL FRAMEWORK IN PLACE, AND A NUMBER WERE REFORMED BETWEEN 2010 AND 2013 WORLD BANK GLOBAL SURVEY FINDING In 112 out of 114 economies, a legal framework for finan- cial consumer protection is in place. Legal frameworks are Regulations on financial 103 diffused through various laws and statutes often result- consumer protection within financial legislation framework 96 ing in gaps and overlaps. The reform to rationalize and streamline legislation is ongoing in many jurisdictions. 70 Two broad sets of legislation govern financial consumer pro- General consumer tection. On the one hand, various financial sector laws and protection law 70 regulations contain provisions on consumer protection cover- ing the operations of financial service providers and the rela- tionships between financial service providers and their clients. 58 Consumer protection law On the other hand, consumer protection and fair competi- with a reference to financial tion legislation defines the rights of consumers of various services or a separate financial 49 consumer protection legislation goods and services often including financial products and ser- vices. More recently, a number of countries added new legal 0 20 40 60 80 100 120 acts dealing specifically with the consumer protection within financial services in a comprehensive manner. 2013 2010 Note: Data on 109 countries responding to 2010 and 2013 surveys. 4 GLOBAL SURVEY ON CONSUMER PROTECTION AND FINANCIAL LITERACY RESULTS BRIEF: is some form of legal framework in place for consumer pro- FIGURE 2. FIGURE 2. LEGAL FRAMEWORK IS tection. The number of countries with laws and regulations DIFFUSED—IN MORE THAN A THIRD OF COUNTRIES, increased between 2010 and 2013 (Figure 1). FINANCIAL CONSUMER PROTECTION PROVISIONS ARE FOUND IN CONSUMER PROTECTION, FINANCIAL Regulations under financial legislation are the most common AND OTHER LAWS form of legal framework for financial consumer protection; they were used in 103 economies (94%), up from 96 (88%) 2% in 2010. The actual number of countries reforming legisla- tion is higher because many countries that had regulations 6% in 2010 revised and enhanced them over the past three years. 14% General consumer protection laws that cover the rights of the 31% consumers in relation to a broad range of goods and services are present in 70 economies (64%). These laws put in place a broad foundation for the protection of consumer rights but do not include any specific provisions for financial services 27% and products. To address the specific issues relating to the 20% consumption of financial products and services, countries generally follow two broad approaches. The first is to include specific provisions covering financial products and services into the general consumer protection law. The second is to General law, explicit law or both (only) - 7 countries issue a dedicated law to address financial consumer protection Regulations within financial framwork (only) - 16 countries issues.11 As countries focus on enhancing legal frameworks for financial consumer protection, more countries issued laws General law and regulations within financial framework - 31 countries explicitly dealing with the financial products and services in General law, explicit law and regulations within financial framework - 35 countries the past two years. Explicit law and regulations within financial framework - 23 countries In most countries, provisions governing financial consumer None - 2 countries protection are diffused throughout multiple laws (Figure 2). A third of countries had all three types of laws, a general con- sumer protection law, a consumer protection law covering Note: Based on responses from 114 economies in 2013. financial services and regulations within financial consumer protection framework. And about a half had regulations within financial legal framework and either general or explicit consumer protection legislation. Complex legal structures with multiple laws and regulations can result in conflicting provisions and gaps and overlaps. Reforms to rationalize and streamline financial consum- wrong doing by the provider of financial services, and restric- er protection are ongoing in a number of countries. There tions on unfair and misleading practices by providers of fi- is some degree of consensus reflected in the laws across the nancial services. At the same time, there is a need for further world on a broad set of consumer rights, such as rights to analyses of the implementation arrangements for financial be informed about the products offered, to obtain advice consumer protection, such as institutional setup of agencies about the suitability of products on offer for the consumer’s responsible, coordination mechanisms among various agen- needs and objectives and for financial institutions to engage cies involved and enhancement of compliance monitoring in responsible lending practices, to seek recourse in case of tools and enforcement actions. 11 For the purposes of the figures 1 and 2 these two types of laws are combined in one group. 5 REGULATORY PRACTICES IN 114 ECONOMIES 3 INSTITUTIONAL ARRANGEMENTS supervision. The supervisors employed a broader range G20 HIGH LEVEL PRINCIPLES ON FINANCIAL of compliance monitoring tools and regulatory powers CONSUMER PROTECTION. PRINCIPLE 2: were expanded to enforce financial consumer protection There should be oversight bodies (dedicated or not) norms. A number of jurisdictions reformed institutional explicitly responsible for financial consumer protection, with arrangements to enhance and streamline supervision of the necessary authority to fulfill their mandates. financial consumer protection. They require clear and objectively defined responsibilities and appropriate governance; operational independence; accountability for their activities; adequate powers; resources and capabilities; defined and transparent enforcement frame- FIGURE 3. SUPERVISORY STRUCTURE DIFFERS work; and clear and consistent regulatory processes. ACROSS COUNTRIES REFLECTING EXISTING INSTITUTIONAL ARRANGEMENTS FOR CONSUMER PROTECTION AND FINANCIAL SECTOR SUPERVISION WORLD BANK GOOD PRACTICES FOR FINANCIAL 3% CONSUMER PROTECTION: The necessary institutional arrangements are in place to 16% 16% ensure thorough, objective, timely and fair implementation (and enforcement) of the rules. Prudential supervision and consumer protection supervision may be placed in separate 10% agencies or lodged in a single institution. However, regard- less of the institutional structure, the allocation of resources 4% 48% between prudential supervision and consumer protection is 3% adequate to enable the effective implementation of consumer protection rules. Integrated single agency (only) - 18 countries WORLD BANK GLOBAL SURVEY FINDING Integrated multiple agency (only) - 53 countries In 74 percent of jurisdictions, multiple regulators are in- volved in financial consumer protection, and in 26 per- Twin Peaks (only) - 4 countries cent of economies the responsibilities are shared between General CP regulator (only) - 4 countries financial and general consumer protection authorities. Integrated single agency & general CP regulator - 11 countries The number of financial regulators dedicating resources Integrated multiple agency & general CP regulator - 18 countries to financial consumer protection increased between 2010 and 2013 from 68 percent to 89 percent. In more than Other - 3 countries half of economies, some financial consumer protection function is established in a unit separate from prudential Note: Data for 111 countries that provided information on financial consumer protection institutional arrangements. 6 GLOBAL SURVEY ON CONSUMER PROTECTION AND FINANCIAL LITERACY RESULTS BRIEF: Mirroring the variety of legal frameworks is the variety of su- It is possible to think of the role of financial consumer pro- pervisory structures (Figure 3). The survey asked respondents tection as spanning two dimensions (Figure 4). On the one to classify institutional arrangements in their jurisdiction into side, there is a product dimension in which a consumer uses one of the five categories (Box 2). a range of products and services including financial services. The question is whether financial services are sufficiently dif- Survey results show that institutional structures for financial ferent to require a separate structure for consumer protection consumer protection in most countries are complex and of- from that existing for other goods and services. On another ten do not fit neatly into one of these stylized models. In a side, there is the institutional dimension of the supervision large number of countries institutional arrangement is a mix of financial service providers. Here, the question is whether among integrated single or multiple models and a general ensuring adequate consumer protection is a distinct function consumer protection model. from that of ensuring the soundness of a financial institution Financial supervisors are solely responsible for financial con- through prudential supervision. There is the recognition that sumer protection in a majority of countries (Figure 3). The consumer protection supervision requires a different set of integrated multiple agency model is most common, found in tools and methods, including active monitoring of consumer 53 economies (48%) in which multiple regulators are respon- financial markets and interaction with consumers, from the sible for consumer protection within their respective sectors. methods used in prudential supervision focused on the analy- Eighteen economies (16%) have a single integrated regula- sis of financial institution performance. There is also a con- tor and four (3%) have a dedicated financial consumer pro- cern that without a separation of the two functions, consumer tection or market conduct agency. In about a quarter of the protection would not get sufficient attention from supervi- economies (26%) the responsibility for financial consumer sors. Another concern is a potential conflict between consum- protection is shared among financial supervisors and general er protection and prudential supervision mandates, though in consumer protection agencies. the review by FSB most regulators viewed these functions as BOX 2. INSTITUTIONAL ARRANGEMENTS FOR FINANCIAL CONSUMER PROTECTION Integrated Single Agency Model. Financial consumer An example of this model is the Australian Securities and protection supervision responsibilities fall under a single agency Investments Commission. that is responsible for all aspects of supervision, including Specialized Financial Consumer Protection Agency Model. prudential, market conduct and financial consumer protection, Financial consumer protection supervision responsibilities of all supervised financial service providers operating within fall under a single specialized financial consumer protection the jurisdiction. An example of this model is the Financial agency that does not have broader financial sector market Superintendence of Colombia. conduct supervisory responsibilities. A country in which Integrated Multiple Agency Model (Sectoral). Financial institutional structure approaches this model is Mexico where consumer protection supervision responsibilities fall under National Commission for the Protection of Users of Financial multiple agencies that hold responsibility for all aspects Services (CONDUSEF) has a responsibility for financial con- of supervision, including prudential, market conduct and sumer protection and financial education across all supervised financial consumer protection, of financial service providers, financial institutions. At the same time Bank of Mexico also most often separating regulatory authority over banking, has a responsibility for the supervision of the payments system insurance and capital markets. An example of this model is and as a result some aspect of consumer protection in relation present in Albania where Bank of Albania is in charge of to credit cards. banking and non-bank financial institutions supervision, and General Consumer Protection Agency Model. Financial the Financial Supervisory Authority is in charge of insurance consumer protection responsibilities fall under an agency or companies, pension funds and issuance of securities. agencies responsible for broader consumer protection supervi- Dedicated Market Conduct Agency Model (Twin Peaks). sions within the jurisdiction, including other non-financial Financial consumer protection supervision responsibilities areas of activities. An example of this model is Russia where fall under a single agency dedicated to broad financial market the Federal Consumer Protection Agency (Rospotrebnadzor) conduct supervision, separated from prudential supervision. is responsible for consumer protection in financial services as well as for broad range of products and services. 7 REGULATORY PRACTICES IN 114 ECONOMIES FIGURE 4. INSTITUTIONAL ARRANGEMENTS FOR There is no one-size-fits-all model. But there are common FINANCIAL CONSUMER PROTECTION REFLECT considerations that need to be taken into account in the de- CHOICES ON REGULATION OF PRODUCTS AND sign of the institutional structure for financial consumer pro- SERVICES VERSUS INSTITUTIONS tection supervision. General consumer protection agencies are more likely to have systems, processes and infrastructure Consumer General consumer Twin Peaks protection protection agency + (5 countries: Australia, for handling complaints used for a broad range of products supervision prudential bank Belgium, Canada, UK, US) and services. But these agencies also generally do not have separate from supervision agency prudential (4 countries) expertise in financial sector issues. Financial regulators, in turn, have expertise in financial sectors but often lack systems INSTITUTIONS and processes for adequately overseeing financial consumer protection. Some countries, such as Russia, made a decision Prudential Integrated single or Integrated single and consumer multiple supervisor or multiple agency to place financial consumer protection within a general con- protection + general consumer (only 63 countries) supervision protection agency sumer protection agency and develop capacity within this en- together (21 countries) tity to oversee financial consumer protection. Others have fol- lowed the route of enhancing financial consumer protection All products Financial services function within financial regulators while coordinating with and services, SEPARATE from including PRODUCTS other products and the general consumer protection regulators. For example, in financial services Peru, the Superintendencia de Banca, Seguros y AFP (SBS) and the consumer protection and competition agency, IN- DECOPI, signed a memorandum of understanding covering cooperation between the two institutions in relation to the complimentary.12 At the same time, financial consumer pro- exercise of their respective powers and functions, including tection has implications for financial stability as the recent comprehensive provisions about information-sharing and a crisis has clearly demonstrated. monthly liaison meeting. And in a small but growing num- Using this two-dimensional approach, there are broadly four ber of high-income countries, a dedicated agency for finan- choices for organizing financial consumer protection super- cial consumer protection and market conduct has been put vision. The first is integrating financial consumer protection in place to centralize the responsibility for financial consumer with prudential supervision within a single agency or within protection across all financial services within one entity. This multiple sectoral financial supervisory authorities existing is the case in the United States with the creation of the Bureau in a country (the integrated single agency model and inte- of Consumer Financial Protection mentioned in the previous grated multiple agency model, sectoral). The second choice section. is creating a specialized dedicated agency, separate from pru- The survey asked whether financial supervisors in countries dential supervision, to oversee financial consumer protection in which they have a responsibility for financial consumer and business conduct (the dedicated market conduct agency protection have a dedicated team or unit in place and if this model [Twin Peaks] and specialized financial consumer pro- team or unit is part of prudential supervision function or a tection agency model). In both of these cases, a general con- separate function. Among the agencies that have established sumer protection agency exists only if it has a remit over non- a dedicated team or unit, such unit is more likely to be sepa- financial products and services. The third choice is to place rate from prudential supervision (Figure 5). Out of 72 econo- financial consumer protection functions within a general mies with dedicated teams or units for financial consumer consumer protection agency and focus financial supervisors protection, 39 (54%) are separate from prudential supervi- only on prudential supervision. And the fourth option is to sion, 26 (36%) are part of prudential supervision, and in 7 have integrated prudential and financial consumer protection (10%) economies such teams were created in both prudential agencies working in close coordination with general consum- and non-prudential supervision sections. At the same time, er protection agencies. The choices countries make depend most agencies that do not have a dedicated team or unit noted on the existing structure of the financial supervision and con- that consumer protection function is performed as part of the sumer protection and the nature of financial markets. regular bank supervision activities. More countries moved to enhance supervision of financial 12 FSB, 2011, “Consumer Finance Protection with Particular Focus on Credit,” http://www.financialstabilityboard.org/publications/ consumer protection and dedicated resources to this task over r_111026a.pdf. the past three years (Figure 6). The number of agencies that 8 GLOBAL SURVEY ON CONSUMER PROTECTION AND FINANCIAL LITERACY RESULTS BRIEF: FIGURE 5. MORE THAN HALF OF THE ECONOMIES FIGURE 6. MORE COUNTRIES ASSIGNED A LEGAL WITH A DEDICATED TEAM FOR FINANCIAL RESPONSIBILITY FOR FINANCIAL CONSUMER CONSUMER PROTECTION HAVE IT SEPARATELY PROTECTION TO FINANCIAL SUPERVISORS AND FROM PRUDENTIAL SUPERVISION CREATED DEDICATED TEAMS OR UNITS BETWEEN 2010 AND 2013 97 Agency is responsible for financial consumer 26% protection (no separate unit) 28% 74 7% 70 39% Agency has a dedicated unit for consumer protection 46 As part of prudential supervision (only) - 26 countries 0 20 40 60 80 100 Separate from prudential supervision - 39 countries Numbers of Countries Both within and separately from prudential supervision - 7 countries 2013 2010 No unit - 28 countries Note: Data for 109 countries with data for 2010 and 2013. institutions’ conduct including disclosure and complaints Note: Data for 100 countries that have a responsibility for handling. Between 2010 and 2013, more countries started some aspect of financial consumer protection in 2013. using a broader range of supervisory tools such as monitoring financial institutions websites (50 compared to 48), collecting and monitoring complaints (49 compared to 23), operating responded that they have a responsibility for financial con- hotlines (47 compared to 36), conducting focus groups (28 sumer protection increased from 74 in 2010 to 97 in 2013.13 compared to 16) and mystery shopping in 26 economies in The number of economies that have agencies with dedicated 2013 compared to 14 in 2010 (Figure 7). resources and staff in this area of work also increased from 46 in 2010 to 70 in 2013. As a result, in 2013 72 percent of Not surprisingly, agencies with a dedicated team for financial agencies with the responsibility for financial consumer pro- consumer protection and hence more resources were more tection had a dedicated team or unit in place to perform this likely to use a broad range of compliance monitoring tools function compared to 62 percent of economies in 2010. (Figure 8). For example, 64 percent of agencies with a financial consumer protection team collected statistics on complaints Monitoring of compliance with financial consumer pro- compared to only 11 percent among those without a clear fi- tection regulations requires a different set of tools and ap- nancial consumer protection function. Among agencies with proaches from that used in prudential supervision. Prudential a dedicated unit, 61 percent operated hotlines for complaints supervision relies on detailed assessment of performance of and inquiries compared to 11 percent of those without dedi- individual financial institutions through off-site monitor- cated consumer protection function. Another useful tool for ing and on-site inspections. Monitoring compliance with improving transparency and monitoring compliance is price consumer protection rules requires analyses of the feedback comparison websites publishing rates and fees reported by fi- from consumers and assessments of performance of financial nancial service providers. Among the agencies with dedicated teams or units, 43 percent operated such websites compared 13 Data for countries with information for 2010 and 2013. Overall 100 to 21 percent among those without a dedicated financial con- economies in 2013 stated that they have a responsibility for financial sumer protection function. Such websites provide consumers consumer protection. 9 REGULATORY PRACTICES IN 114 ECONOMIES FIGURE 7. RESPONSIBLE AGENCIES BROADENED FIGURE 8. AGENCIES WITH DEDICATED UNITS OR THE RANGE OF COMPLIANCE MONITORING TOOLS TEAMS USE A BROADER RANGE COMPLIANCE BETWEEN 2010 AND 2013, ESPECIALLY IN TERMS TOOLS BEYOND ONSITE INSPECTIONS OF COLLECTING STATISTICS ON THE NUMBER OF COMPLAINTS 85% Onsite inspections 75% 81 Onsite inspections 75% 74 O site 32% 50 64% Monitor FI advertising, Collect complaints websites 48 statistics from FIs 11% 61% 49 Monitor FI advertising, 21% Collect complaints websites statistics from FIs 23 61% Operate a hotline 11% 47 Operate a hotline 43% 36 Price comparison website 21% 28 36% Conduct interviews Conduct interviews 7% 16 33% 26 Mystery shopping 11% Mystery shopping 14 0 20 40 60 80 100 0 20 40 60 80 100 Consumer Protection unit exists Number of countries No unit 2013 2010 Note: For 97 agencies with responsibility fo financial consumer Note: For 100 agencies with responsibility for financial protection and data in 2010 and 2013. consumer protection in 2013. with the means to compare the costs (or returns) and terms of proach, 41 according to 2013 data. The majority of super- similar financial products. In addition, they also have a posi- visory agencies collect complaints and have a responsibility tive impact on financial services providers ability to compete to respond to complaints (81) and register complaints (79). by offering better products and services rather than by taking At the same time, a much smaller number of agencies have advantage of poorly informed consumers. the authority for assisting directly in resolving complaints or making binding decisions in case of disputes (Figure 10). To make supervision effective, dedicated resources are neces- sary regardless of the institutional model chosen by the coun- try. There is also a need for more identification of the most effective approaches and models for compliance monitoring in financial consumer protection as well as the effective co- ordination mechanisms between prudential supervision staff and those responsible for financial consumer protection. Survey responses also suggest that regulatory powers and the range of enforcement actions regulatory agencies can take have expanded in the past three years (Figure 9). Issuing warnings and imposing fines and penalties are the most com- mon forms of action, though often derived from the authori- ties existing under prudential regulations. Public notices of violation are found to be an effective deterrent, but despite a marked increase, relatively few countries practice this ap- 10 GLOBAL SURVEY ON CONSUMER PROTECTION AND FINANCIAL LITERACY RESULTS BRIEF: FIGURE 9. ENFORCEMENT POWERS WERE FIGURE 10. MOST SUPERVISORS COLLECT AND EXPANDED IN A NUMBER OF COUNTRIES MONITOR COMPLAINTS THOUGH FEW HAVE AN AUTHORITY FOR DIRECTLY RESOLVING COMPLAINTS OR MAKING BINDNG DECISIONS 83 Warning 59 70 Fines and penalties Respond to complaints 81 47 58 Withdraw advertisements Register complaints 39 79 58 Require refund 27 Assist indirectly in 62 resolving complaints 42 Withdraw license 27 Analyse/publish 57 complaints statistics 41 Public notice 27 Assist directly in 46 24 resolving complaints Other 17 0 10 20 30 40 50 60 70 80 90 Make binding decisions 27 Number of countries 0 20 40 60 80 100 2013 2010 Numbers of Countries Note: Based on 97 economies with a responsibility for Note: For 100 agencies with responsibility for financial financial consumer protection and data in 2010 and 2013. consumer protection in 2013. 11 REGULATORY PRACTICES IN 114 ECONOMIES 4 FAIR TREATMENT FIGURE 11. PROVISIONS ENSURING DATA G20 HIGH LEVEL PRINCIPLES ON FINANCIAL CONFIDENTIALITY AND RESTRICTING DECEPTIVE CONSUMER PROTECTION. PRINCIPLE 3: ADVERTISING ARE MORE COMMON THAN FINANCIAL INDUSTRY SPECIFIC PROVISIONS All financial consumers should be treated equitably, SUCH AS COLLECTION PRACTICES OR BUNDLING honestly and fairly at all stages of their relationship with OF PRODUCTS financial service providers. Unauthorized use of client data or breach 91 of client confidentiality WORLD BANK GOOD PRACTICES FOR FINANCIAL CONSUMER PROTECTION: Deceptive advertising 86 The law specifically prohibits the use of fraudulent sales Predatory lending 67 practices such as misleading advertising in the marketing of financial products and services. Bundling and tying 56 Financial institutions are prohibited from employing abusive collection or debt recovery practices against their Abusive collection practices customers. 52 Financial institutions are required to protect the confidenti- Prepayment fees 46 ality and technical security of customer data. 0 20 40 60 80 100 Numbers of Countries WORLD BANK GLOBAL SURVEY FINDING The legal framework in most countries provides broad Note: Based on responses from 114 economies in 2013. provisions on fair treatment, but less than half of econo- mies have financial industry specific provisions. economies (40%) had rules on prepayment fees, 52 (45%) on restricting abusive protection practices and 56 (49%) on The World Bank Global Survey asked respondents to identify bundling of financial products, mostly loans and insurance. whether there are provisions in the legal framework that ad- dress fair treatment (Figure 11). Protection of the confiden- tiality of client data and restrictions on deceptive advertising are present in most countries. Confidentiality provisions are often covered by bank secrecy provisions in financial legisla- tion or by data protection legislation where it exists. Decep- tive advertising rules are also part of the broader legislation of consumer protection and fair competition applying to all products and services. A smaller number of countries have financial services related fair treatment provisions. Only 46 12 GLOBAL SURVEY ON CONSUMER PROTECTION AND FINANCIAL LITERACY RESULTS BRIEF: 5 DISCLOSURE WORLD BANK GLOBAL SURVEY FINDING G20 HIGH LEVEL PRINCIPLES ON FINANCIAL Disclosure requirements at opening are more common CONSUMER PROTECTION. PRINCIPLE 4: than periodic disclosure. Few countries have require- Financial services providers and authorized agents should ments for disclosure by unregulated institutions. provide consumers with key information that informs the consumer of the fundamental benefits, risks and terms The World Bank Global Survey asked a set of questions on of the product . . . Appropriate information should be the contents of mandatory disclosure on deposit and credit provided at all stages of the relationship with the customer services at opening and on a periodic basis. The results show . . . Standardized pre-contractual disclosure practices (e.g., that the requirements for mandatory disclosure at account forms) should be adopted where applicable and possible opening are present in the majority of jurisdictions (Figure to allow comparisons between products and services of the 12). Banks are required to disclose terms and conditions at ac- same nature. count opening in 90 economies (79%) and regulated financial institutions in 76 (67%). Only in a handful of economies are WORLD BANK GOOD PRACTICES FOR FINANCIAL FIGURE 12. DISCLOSURE REQUIREMENTS AT CONSUMER PROTECTION: OPENING ARE MORE COMMON THAN PERIODIC DISCLOSURE. FEW COUNTRIES HAVE REQUIREMENTS For all financial products or services, consumers receive a FOR DISCLOSURE BY UNREGULATED INSTITUTIONS short one- or two-page summary statement (or electronic equivalent), presented in a legible font and written in 90 plain language, describing the key terms and conditions, Banks including recourse mechanisms, applicable to the financial 70 product or service. Before a consumer purchases a financial product or service, 76 the financial institution provides a written copy of the insti- Regulated FIs 54 tution’s general terms and conditions, as well as the specific terms and conditions that apply to the product or service. 21 Financial institutions prepare regular statements for each Unregulated FIs customer account regarding key details of customer finan- 6 cial transactions as well as written (or electronic) confirma- tions of the terms of each transaction. 0 20 40 60 80 100 Number of Countries As early as possible, customers are individually notified in writing (or by electronic means) of changes in interest rates, At opening Periodic fees, and charges or other key terms and conditions of their financial products or services. Note: Based on responses from 114 economies in 2013. 13 REGULATORY PRACTICES IN 114 ECONOMIES FIGURE 13. DISCLOSURE AT OPENING FIGURE 14. PERIODIC DISCLOSURE Required insurance 63 Annual percentage rate 57 (applied during the period) Computation method 78 Minimum amount due 58 Annual percentage rate using a standard formula 88 Date due 63 Fees 88 Outstanding balance 65 Minimum balance requirements 47 All transactions concerning the account 66 for the period covered by the statement Method of compounding 48 Fees charged for the period 68 Early withdrawal penalties 61 Interest charged for the period 69 Annual percentage yield and interest rate 78 Annual percentage yield 30 Fees and penalties 85 Amount of interest earned 46 Prescribed standardized disclosure format 54 Account balance 50 Recourse rights and processes 58 Fees imposed 52 Local language requirement 60 Procedures to dispute the accuracy 42 Plain language requirement 74 Detailed transactional information 64 0 20 40 60 80 100 0 10 20 30 40 50 60 70 80 Numbers of Countries Numbers of Countries Note: Based on responses from 114 economies in 2013. Note: Based on responses from 114 economies in 2013. there requirements for disclosure by unregulated financiain- on the usage. Periodic disclosure not only serves to inform stitutions. A number of countries, including Italy, Oman, and the consumer, but is also an important tool in detecting fraud Saudi Arabia, clarified that all financial service providers are or mistakes. As technology improves and more customers rely regulated and hence this question does not apply. on Internet banking, the requirement for paper statements may be relaxed. But the contents of the periodic disclosure The structure of financial supervision in most jurisdictions and the rights of access need to be clearly defined. implies that financial regulators do not have a mandate to issue requirements for the institutions they do not supervise. Most economies have requirements to disclose rates and fees In cases in which a general consumer protection framework for deposit and credit services. More economies put specific exists, the disclosure by unregulated providers may be gov- disclosure requirements at opening for credit products, espe- erned by those laws. The variations in disclosure standards for cially in relation to credit cards, than for deposit products. different types of providers of credit services may distort the Periodic disclosures on credit products, mostly credit cards, market and confuse the consumers. The efforts to harmonize are more common than on deposit products. About half of disclosure standards across various groups of regulated and the economies 54 (47%) stated that there is a prescribed stan- unregulated providers of similar financial services are an im- dardized disclosure format in place. The debate and research portant part of reform agendas in many countries. The focus on the effectiveness of alternative forms of disclosure is ongo- on a product rather than the institution providing it is one ap- ing. proach. Consumer credit legislation implemented in a num- ber of European countries aims to level the playing field and The Truth in Lending Act of 1968 introduced the annual put in place a common standard of disclosure across different percentage rate (APR) disclosure in the United States for the groups of providers of financial services. This approach also first time and the efforts to improve disclosure continued allows for more specific guidance, because disclosure terms since then. The decades of research and results of extensive need to be tailored for different groups of financial products consumer testing summarized in a recent article by Federal and are proportional to the risks involved. Reserve indicate that some forms of disclosure are more effec- tive than others.14 The study found that minor differences in The survey results show that disclosure of terms and condi- language and design features of the disclosure form can have tions at opening is far more common than the requirements for periodic disclosure (Figures 13 and 14). Periodic disclo- sure is especially important for certain products such as credit 14 Jeanne M. Hogarth and Ellen A. Merry, 2011, “Designing Disclosures cards and debit-card-linked accounts where the cost depends to Inform Consumer Financial Decision-making: Lessons Learned from Consumer Testing,” Federal Reserve Bulletin August 2011 Vol. 97, No. 3. 14 GLOBAL SURVEY ON CONSUMER PROTECTION AND FINANCIAL LITERACY RESULTS BRIEF: effects on consumer’s understanding of disclosure. Repeated member countries. While there is a discussion on the need to studies show that many consumers find it difficult to under- enable a degree of flexibility to reflect specific features of cer- stand annual percentage rates (APR), which shows in a single tain products, the need for broader minimum standards for rate the applicable interest rate and mandatory fees and en- disclosure is not in doubt. When Peru embarked on improv- ables comparison across providers compared to other forms of ing financial disclosure, the survey of providers showed that disclosure. While it is important to ensure that the total cost there were over 4,000 different terms in use to describe vari- of the financial product is disclosed to enable comparabil- ous financial terms. A standard dictionary reduced the num- ity, there are mixed results on the effectiveness of alternative ber of terms to 50 and brought in consistency in disclosure. forms of disclosure such as annual percentage rate and further refinements are needed based on consumer testing.15 Effective monitoring of compliance with disclosure standards is required to ensure that providers follow the rules. Price There is an indication that presentation of terms matter and comparison websites mentioned earlier are also an important graphics, titles and boxes all could influence the understand- element of improving transparency and disclosure in the fi- ing of the terms presented. The use of standard templates nancial markets. Financial education efforts are necessary referred to as a key-facts statement such as the “Schumer Box” to improve the basic understanding of financial concepts by used for disclosure in credit card solicitations in the United consumers. Even with these measures however, disclosure has States indicates that familiarity with the format may make it its limits and the question is whether additional and more easier for consumers to understand and compare terms across proactive measures of consumer protection are in order. providers. The Consumer Credit Directive in Europe also in- troduced a Standard European Consumer Credit Information form enabling comparison of terms across all providers in 15 Various assessments by FSA in the UK be found at www.fsa.gov.uk/ pages/Library/ research/Consumer/index.shtml. In Canada Les Études de Marché Créatec, 2008, Qualitative Testing of ProposedMasterCard Plain Language Application Form (Ottawa: FCAC,May), www.fcac-acfc.gc.ca/ eng/resources/PDFs/2008PlainLanguage-eng.pdf. Aging Agendas Social Policy Consultants, 2004, Superannuation Fees Disclosure Consumer Testing Report, prepared for the Association of Superannuation Funds of Australia (January), www.superannuation.asn.au/ArticleDocuments/116/ AgeingAgendas&ASFA_SuperFeesDisclosure.pdf. 15 REGULATORY PRACTICES IN 114 ECONOMIES 6 RESPONSIBLE LENDING consumer protection framework as well as incentives systems G20 HIGH LEVEL PRINCIPLES ON FINANCIAL among financial service providers. CONSUMER PROTECTION. PRINCIPLE 6: In theory, rational informed individuals were not expected Financial services providers and authorized agents should to borrow beyond their means. Lenders were not expected to have as an objective to work in the best interest of their grant a loan if they had doubts about repayment. But practic- customers and be responsible for upholding financial es appeared to be different. Recent research from behavioral consumer protection . . . Depending on the nature of the economics provides some insights on consumer decisions.16 transaction and based on information primarily provided A review of practices among financial service providers also by customers, financial services providers should assess the shows that misaligned incentives for financial service provid- related financial capabilities, situation and needs of their ers play a role. Compensation for loan officers based on loan customers before agreeing to provide them with a product, volumes when an originating institution does not eventually advice or service. carry the credit risk means there is less concern for repayment ability. Revenue generation from late fees and penalties can be an important source of income and a lender may prefer a WORLD BANK GOOD PRACTICES FOR FINANCIAL borrower who pays late. Lenders may also overestimate the CONSUMER PROTECTION: capacity to repay if there is no adequate credit information system to check information on the borrower’s existing debts Before a financial institution makes a recommendation to a or reliable means to verify income. consumer regarding a specific financial product or service, it gathers sufficient information from the customer to en- One element of the responsible business conduct that the sure that the product or service is likely to meet the needs global survey covered is a policy on affordability or limiting and capacity of that consumer. of over-indebtedness. The survey asked whether there were explicit limits set by regulations such as loan-to-income ra- WORLD BANK GLOBAL SURVEY FINDING: tio and whether regulations require lending institutions to In 77 percent of economies, borrowers are required to as- assess borrower ability to repay the loan, but no specific lim- its are set. The majority of economies—88 of 114 (77 %)— sess borrower ability to repay and 35 percent of econo- stated that either one or both of these measures are present. mies have explicit limits restricting the amount of loans Among those with requirements, slightly more than half, or debt service in relation to income for certain products 48 economies (54%) had requirements for lenders to assess such as credit cards and mortgages. The limited empirical the ability to repay but no explicit limits, and 40 economies research however does not provide clear guidance on the had explicit limits in place. The increase in the number of effectiveness of such limits. countries with explicit limits from 20 in 2009 to 40 in 2013 The issues of over-indebtedness, affordability and responsible lending became a subject of much debate in the aftermath of 16 See World Bank, 2013, Global Financial Development Report 2014: the recent subprime crisis in the United States. High levels of Financial Inclusion, World Bank, Washington DC; Ardic, Ibrahim, indebtedness by households arguably borrowing beyond their and Mylenko, 2011, Consumer Protection Laws and Regulations in means raised questions on the effectiveness of the existing Deposit and Loan Services: A Cross-Country Analysis, World Bank Policy Research Working Paper 5536. 16 GLOBAL SURVEY ON CONSUMER PROTECTION AND FINANCIAL LITERACY RESULTS BRIEF: is striking and reflects a sea change in the outlook to financial or microfinance loans. These explicit limits are also mostly consumer protection and financial sector regulation in general defined as part of prudential regulations often in relation to in the aftermath of the financial crisis. loan risk classification and provisioning requirements and ad- dress consumer protection and risk management concerns. In most countries, the requirement to assess a borrower’s For example, Bolivia requires higher general provisions and ability to repay, without setting explicit limits in relation to establishes a debt-service-to-income ratio of 15 percent for income or value of the financed asset is part of prudential salaried employees. In Japan, the Money Lending Business regulations and guidance on risk management to financial Act provides that no new loans may be made when the exist- institutions. These regulations set the requirement in broad ing amount outstanding exceeds one-third of the borrower’s terms and do not necessarily provide detailed instructions or annual income. In Malawi, non-deposit taking microfinance methodology on assessing affordability. As part of the imple- institutions are required to restrict loan repayments of sala- mentation of the Consumer Credit Directive, a number of ried employees to 50 percent of take-home pay. In Pakistan, EU countries expanded guidance on assessing affordability monthly amortization payments of consumer loans should and suitability of financial products. One of the elements not exceed 50 percent of the net disposable income of the of such regulations, for example in Bulgaria, Czech Repub- prospective borrower. In Saudi Arabia, the debt-service-to- lic, and Greece, is a requirement to consult relevant databases income ratio cannot exceed 33 percent for working persons such as credit information registries to obtain information on and 25 percent for pensioners. existing commitments of the loan applicant. In Ireland, for variable interest rate loans, lenders are required to conduct a A number of countries set limits for mortgage lending. In stress test on the consumer ability to repay due to a change Hong Kong, specific limits relate to mortgage loans and in- in interest rate. clude loan-to-value ratios of 20 to 40 percent depending on the source of income and whether this is a first mortgage. Reviewing the regulations that set explicit limits shows that The rules also set a debt service ratio in relation to income usually the limits are applied selectively for specific loan depending on the size of the mortgage, residential or com- categories such as mortgages, consumer loans, credit cards mercial purpose and source of income. In Eastern Europe, where foreign currency exposures constitute an important risk, Hungary put in place loan-to-value limits for mortgages FIGURE 15. MOST COUNTRIES DO NOT SET EXPLICIT and vehicle financing in the range of 50 to 80 percent de- LIMITS AS PART OF AFFORDABILITY OR REDUCING pending on loan currency. Romania requires stress tests for OVER-INDEBTEDNESS GUIDANCE exchange rate and interest rate changes on borrower’s ability to repay and sets a loan-to-value limit of 60 to 85 percent depending on the currency of financing. 11% 23% In line with rapid growth of credit card users, a number of countries placed explicit limits relating to credit card lend- ing. In Indonesia, no more than two credit cards are allowed 24% for clients with income below a below certain threshold. In Panama, the maximum borrowing limit for credit cards is set to 3 times monthly income. In Thailand, the approved credit 42% line for each credit card holder and each personal loan by a regulated institution shall not exceed 5 times the average in- come per month. And in Taiwan, the sum of approved lines of credit plus the total balance of the credit card applicant’s No regulations/guidance on a ordability/overindebtedness - 26 countries unsecured debts with all financial institutions cannot exceed Overall giuidance on responsible lending, but no explicit limits - 48 countries 22 times the average monthly income of the applicant within Explicit limits (DSR, LTV) - 27 countries the most recent year. Overall guidance and explicit limits - 13 countries The variation of definition of the limits and thresholds re- flect in part domestic-economy contexts and the nature of the concern, be it currency risk in mortgage finance, anticipation Note: Based on responses from 114 economies in 2013. of a property bubble, rapid expansion of credit card lending 17 REGULATORY PRACTICES IN 114 ECONOMIES or raising over-indebtedness. There is very little empirical re- search on whether these quantitative limits work or justifica- tion for setting the value of the limits. A comprehensive as- sessment conducted by the UK’s Financial Service Authority as part of mortgage market reform is one study that presents an empirical analysis of the correlations between debt service ratio and probability of impairment.17 The study found that debt-service ratio was not a strong predictor of loan impair- ment based on the mortgage data they had available, result- ing in a recommendation not to set any explicit limits. There are a number of challenges and data constraints in estimating loan affordability. Further analytical work is needed to bet- ter understand the empirical relationship among debt-service ratios, loan-to-value ratios and loan performance. The results are likely to differ across countries and by asset class. Without better understanding of these measures, the concern remains that the imposition of strict debt-service and loan-to-value ratios could restrict access to finance, and push lower income borrowers into informal sector. 17 U.K. Financial Services Authority, “Mortgage Market review: proposed package of reforms,” Consultation Paper CP11/31 http://www.fsa.gov. uk/pages/Library/Policy/CP/2011/11_31.shtml 18 GLOBAL SURVEY ON CONSUMER PROTECTION AND FINANCIAL LITERACY RESULTS BRIEF: 7 DISPUTE RESOLUTION AND RECOURSE The first line of defense in resolving disputes between finan- G20 HIGH LEVEL PRINCIPLES ON FINANCIAL cial service users and providers are the complaint-handling CONSUMER PROTECTION. PRINCIPLE 9: mechanisms within financial service providers. Financial institutions should have mechanisms to receive and handle Jurisdictions should ensure that consumers have access to complaints from their customers. According to the 2013 adequate complaints handling and redress mechanisms that survey results, the majority of jurisdictions—83 out of 114 are accessible, affordable, independent, fair, accountable, (73%)—have a requirement in place for financial institutions timely and efficient. There are a number of mechanisms for to implement procedures and processes for resolving customer handling complaints and resolving disputes within modern complaints. The number of countries with such requirements financial system. increased dramatically between 2010 and 2013 from 55 to 80 for the countries for which survey data for both years is avail- able. To monitor the functioning of complaints handling by WORLD BANK GOOD PRACTICES FOR FINANCIAL financial institutions, supervisors can collect the statistics on CONSUMER PROTECTION: complaints received and addressed by financial service provid- ers. As discussed in section 3, a relatively small but increasing Every financial institution has a designated contact point number of supervisors report collecting complaints statistics with clear procedures for handling customer complaints, (49 in 2013 compared to 23 in 2010, Figure 7). Complaints including complaints submitted verbally. statistics monitoring can be an important indicator of the Consumers have access to an affordable, efficient, respected, emerging problems in the financial sector and can help iden- professionally qualified and adequately resourced mecha- tify issues relating to specific institutions or products. nism for dispute resolution, such as an independent finan- If a financial institution and a consumer cannot resolve a dis- cial ombudsman or equivalent institution with effective pute, they can turn to courts for resolution. Dispute resolu- enforcement capacity. tion through courts, however, is costly and time-consuming. Statistics of customer complaints, including those related Alternative dispute resolution systems such as financial om- to breaches of codes of conduct, are periodically compiled budsmen or mediation services seek to assist the parties in and published by the ombudsman or financial supervisory resolving a dispute out of court. The key principles of op- authority. eration for such mechanisms include independence, transpar- ency, fairness and effectiveness. In addition to helping resolve disputes, financial ombudsmen can deal with consumer en- WORLD BANK GLOBAL SURVEY FINDING quiries and share the lessons from their work to help gov- Financial service providers in 73 percent of economies are ernments, regulators, financial businesses and consumers im- required to implement procedures and processes for re- prove the financial consumer protection framework.18 solving customer complaints. Alternative dispute resolu- tion mechanisms such as financial ombudsmen or similar institutions exist in 75 percent of economies. In about one-third of jurisdictions, the function is performed by a 18 Thomas, David, and Francis Frizon, 2012, “Resolving disputes be- tween consumers and financial businesses: Fundamentals for a financial supervisory agency. ombudsman,” World Bank. 19 REGULATORY PRACTICES IN 114 ECONOMIES FIGURE 16. MOST COUNTRIES HAVE A THIRD PARTY FIGURE 17. IN A THIRD OF ECONOMIES, FINANCIAL DISPUTE RESOLUTION MECHANISM IN PLACE SUPERVISORS OPERATE OMBUDSMAN-LIKE ENTITY Financial ombudsman 69 14% 17% Mediation /Arbitration service 30 22% 46% No dispute resolution system 29 General ombudsman Industry based - 12 countries 18 Independent statutory body - 15 countries 0 20 40 60 80 Within supervisory agency - 32 countries Numbers of Countries Multiple - 10 countries Note: Based on responses from 114 economies in 2013. Note: For 69 economies with finanical ombudsman or similar institutions. The survey asked respondents to indicate whether there was a system that allowed a customer of a financial institution to respond to complaints and assist in the resolution of disputes. seek affordable and efficient recourse with a third party such The activities of such an entity are most often funded from as a supervisory agency, a financial ombudsman or equivalent the budget of the regulatory agency. institution in the event that the customer’s complaint was not resolved to the customer’s satisfaction under the internal pro- The analyses of the functions performed by different types of cedures of the relevant financial institution. The majority of ombudsmen show that these are largely similar across coun- economies—85 (75%)—operate some form of an alternative tries with the primary focus on receiving and responding to dispute resolution mechanism and often parallel mechanisms complaints and directly assisting in resolving disputes. Not exist (Figure 16). surprisingly, supervisor-operated, dispute-resolution mecha- nisms are more likely to assist dispute resolution indirectly The countries that reported having a financial ombudsman or by involving regulatory agencies compared to independent or similar entity were asked to classify the existing mechanisms industry-based ombudsmen. Overall, about half of respon- into one of three broad categories: (i) independent statutory dents stated that the dispute resolution mechanism can make body, (ii) industry-based, or (iii) an entity or function within binding decisions on a case. There is a slight variation across a supervisory agency. An independent statutory body is es- the types, with industry-based ombudsmen being less likely tablished by legislation and usually funded by its members to have powers for binding decisions (41%) and independent or a combination of member contributions and allocation ombudsmen more likely to have such powers (63%), reflect- from a central government or a responsible regulatory agency ing the nature of legal framework. Further review shows that budget. An industry-based, dispute-resolution mechanism is the structure and authority of an ombudsman or equivalent formed by an industry association or its members and is fi- institution varies greatly among countries, making any gener- nanced by association or member contributions. Independent alizations difficult. As an example, an independent ombuds- statutory bodies and industry-based ombudsmen are mostly man in Italy, Arbitro Bancario Finanziario (ABF), makes de- found in European countries and high-income OECD coun- cisions that have the effect of recommendations and are not tries. For most economies (41 out of 69) that had a financial binding on either party. However, if the institution does not ombudsman or a similar entity, it was hosted by a regulatory comply with an ABF decision its breach is published on the agency (Figure 17). In this case, an agency responsible for fi- website of ABF and at the expense of the institution in two nancial consumer protection also has a function to collect and 20 GLOBAL SURVEY ON CONSUMER PROTECTION AND FINANCIAL LITERACY RESULTS BRIEF: national newspapers. The decisions of the UK ombudsman are binding on both parties but only once the consumer has agreed to the suggested award. Continued international efforts focus on identifying the key principles of operation and promoting best practices in opera- tion of dispute resolution mechanisms. As the survey shows, regardless of the form, there is a fair amount of homogeneity of the functions performed by these institutions. The specific choice of locating the service within a supervisory agency, having a statutory entity, having an industry based organiza- tion, whether having a single ombudsman for all services or industry specific entities, all depends on the specific situation within a country and is somewhat secondary, as long as the key principles are incorporated. 21 REGULATORY PRACTICES IN 114 ECONOMIES 8 FINANCIAL EDUCATION tive protection of the interests of the consumer of the finan- G20 HIGH LEVEL PRINCIPLES ON FINANCIAL cial services. Only informed and educated users of financial CONSUMER PROTECTION. PRINCIPLE 5: services can be fully empowered by the opportunities modern Financial education and awareness should be promoted financial system provides. Increasing awareness of the impor- by all relevant stakeholders and clear information on tance of financial literacy and capability and the crucial role consumer protection, rights and responsibilities should be public policy must play in this area have resulted in a number easily accessible by consumers. Appropriate mechanisms of international initiatives and extensive reforms at a national should be developed to help existing and future consumers level. develop the knowledge, skills and confidence to appropri- In addition to the High-Level Principles on Financial Con- ately understand risks, including financial risks and op- sumer Protection and the High-level Principles on National portunities, make informed choices, know where to go for Strategies for Financial Education, the G20 state that “[a]ll assistance and take effective action to improve their own potentially relevant public stakeholders should be involved, financial well-being. to the extent possible, including ministries (and in particular the Ministries of Finance and Education), the Central Bank, the financial regulator(s) and supervisor(s), as well as other WORLD BANK GOOD PRACTICES FOR FINANCIAL public national, regional and local authorities.” CONSUMER PROTECTION: The survey asked a number of questions on the role finan- A broad-based program of financial education and cial regulators play in promoting financial education in information is developed to increase the financial literacy their countries (Figure 18). The majority of regulators, in of the population. 63 economies (55%), responded positively to the question, “Does your agency have the responsibility to implement and/ The financial literacy of consumers and the impact of or oversee any aspect of financial education/literacy?” In 18 consumer empowerment measures are measured through more economies (16%), financial supervisory agencies do not broad-based household surveys that are repeated from time have an explicit mandate for financial education and literacy to time to see if the current policies are having the desired but introduced some elements of financial education within impact on the financial marketplace. their broader mandate for financial stability or financial de- velopment. WORLD BANK GLOBAL SURVEY FINDING The activities undertaken by regulators fall in two broad cat- Financial supervisors in 71 percent of economies were egories: improving public awareness on financial sector topics involved in financial education activities. The activities and working directly with financial service providers and us- mostly involved improving public awareness as well as ers to deliver financial education. The activities to improve developing training materials and providing training on a awareness include publication and posting on agency websites broad range of financial topics. various educational materials on the role of the financial sys- tem and its various institutions and guidance to consumers Effective consumer protection frameworks and institutional on various financial consumer products. The vast majority of structures are necessary but not sufficient conditions for effec- respondents indicated that this was part of their duties and 22 GLOBAL SURVEY ON CONSUMER PROTECTION AND FINANCIAL LITERACY RESULTS BRIEF: FIGURE 18. MOST FINANCIAL AUTHORITIES PROVIDE FIGURE 19. PROVIDING TRAINING, AWARENESS AND FINANCIAL LITERACY MATERIAL, OFTEN WITHIN A DEVELOPING TRAINING MATERIALS ARE THE MOST BROADER MANDATE FOR FINANCIAL STABILITY AND COMMON DEVELOPMENT Develop training materials 63 Provide training directly 60 29% 55% Develop a stategy 49 for financial literacy 16% Conduct survey 37 of financial literacy Issue guidelines on FL to FIs 34 Responsible for financial literacy - 63 countries No explicit authority, but involved in financial literacy - 18 countries 0 10 20 30 40 50 60 70 Numbers of Countries Not involved in financial literacy - 33 countries Note: Based on responses from 114 economies in 2013. Note: Based on responses from 114 economies in 2013. was managed by communications department or as part of The High-level Principles on National Strategies for Financial the activities of a financial education unit within a financial Education define a national strategy for financial education as regulator. “a nationally coordinated approach to financial education that consists of an adapted framework or program that (1) recog- The survey asked a question concerning more targeted finan- nizes the importance of financial education, including pos- cial education efforts of supervisors (Figure 19). Among the sibly through legislation, and defines its meaning and scope supervisors indicating that they were involved in financial at the national level in relation to identified national needs education activities, most were focused on designing train- and gaps; (2) involves the cooperation of different stakehold- ing materials (63 economies or 78%) and providing training ers and the identification of a national leader or coordinating directly (60 economies or 74%). Supervisors in 49 economies body/council; (3) establishes a roadmap to achieve specific (60%) indicated that they developed and monitored imple- and predetermined objectives within a set period of time; and mentation of strategies for financial literacy, education or (4) provides guidance to be applied by individual programs capability. Slightly less than half (46% or 37 economies) in- to efficiently and appropriately contribute to the NS.” Such dicated that they conduct a survey of financial capability/lit- strategy can be a part of a broader financial inclusion strategy. eracy and publish regular reports. Only 34 regulators (42%) stated that they issued guidelines to the providers of financial A review conducted by OECD in 2012 identified 15 coun- services on financial education/literacy. tries that have designed and implemented a national strategy and 21 countries are considering or designing a national strat- Delivery of financial education requires the coordination of a egy.19 In this year, the World Bank Global Survey summa- number of government agencies including not only financial rized here and covering financial regulators in 114 countries, regulators but education ministries and often social protec- 49 responded that their responsibilities included “developing tion and welfare ministries to address the needs of disadvan- tage groups. A national strategy for financial education can be an effective platform to coordinate the efforts of various 19 Grifoni, Andrea, and Flore-Anne Messy, 2012, “Current Status of government agencies, ensure efficient allocation of budget re- National Strategies for Financial Education: A Comparative Analysis sources and put in place a systematic approach for delivering and Relevant Practices,” OECD Working Papers on Finance, Insurance financial education in a country through variety of channels. and Private Pensions No. 16. The paper focused on a review of relevant information for 47 countries. 23 REGULATORY PRACTICES IN 114 ECONOMIES and monitoring implementation of a strategy for financial lit- influence behavior. Financial education delivered at teach- eracy/education/capability.”20 able moments such as when a consumer is in the process of making a financial decision, such as obtaining a mortgage or There is no one-size-fits-all solution and the approaches dif- restructuring debts, appear more effective. Combining finan- fer greatly among countries. Other coordination mechanisms cial literacy training with other interventions such as financial such as memorandums of understanding signed between counseling and reminders are found more effective. The ob- relevant agencies or working committees to coordinate the jective of improved financial education is changed behavior work of various agencies are present in a number of countries. and thus it is not just the knowledge of financial concepts that The work on financial education is led by financial regulators matters but a change in habits and behavior. In this respect, in some countries, including Bank Negara in Malaysia and the use of social and mass media, for example, by portraying ASIC in Australia, by ministries of finance in others, such as characters dealing with various financial challenges in movies South Africa and Netherlands, or ministries of education, as and popular television shows, have a potential. Recent work in Latvia and Lithuania. undertaken by the World Bank and funded by the Russian The research on the effectiveness of various financial educa- Federation on measuring financial capability and the effec- tion approaches is ongoing. Financial education programs tiveness of financial education included large-scale evalua- vary greatly in terms of content, audience and delivery chan- tions of various financial education initiatives and resulted in nels. Classroom training for students in school, explanatory the development of a toolkit for the evaluation of financial sessions for first-time home buyers on getting a mortgage capability programs.22 provided by a lender, computer games teaching to save or Financial regulators can play an important role in facilitating invest and television shows highlighting the risks of borrow- financial education. From a supervisory perspective, there is a ing beyond one’s means are just some examples of financial need for identifying best practices for the approaches that fi- education programs countries put in place. Measuring the ef- nancial regulatory agencies can take to enhance overall finan- fects and generalizing the results from these interventions for cial education efforts by leveraging their role as supervisors of broader policy formulation is a challenge. financial institutions. Some of the debated issues now include This year, the World Bank Global Financial Development Re- whether providers of financial education should be regulated, port provided an overview of the results of impact analysis of what form can guidance on providing financial advice take financial education programs.21 Drawing on over 100 studies, and how to ensure that guidance provided by financial insti- the report finds that financial capability is closely aligned with tutions is adequate. the level of general education and programs targeting specif- ic groups for example those with lower levels of education have measurable effect. There is evidence that school-based programs can improve knowledge of financial concepts and 20 The survey did not ask respondents to provide information on the details of the mentioned strategies, and it is not possible to determine whether these refer to specific financial education strategies, financial inclusion or broader financial sector development strategies which may have elements of financial education. 21 World Bank, 2013, “Global Financial Development Report 2014: Financial Inclusion,” World Bank, Washington DC. 22 Please see http://www.finlitedu.org/evaluation/wb/ 24 GLOBAL SURVEY ON CONSUMER PROTECTION AND FINANCIAL LITERACY RESULTS BRIEF: 25 REGULATORY PRACTICES IN 114 ECONOMIES FINANCIAL INCLUSION AND INFRASTRUCTURE GLOBAL PRACTICE THE WORLD BANK 1818 H STREET, NW WASHINGTON DC 20433 www.responsiblefinance.worldbank.org www.worldbank.org/financialinclusion