Building Financial Capability to Strengthen Consumer Protection


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Arabela Aprahamian
Senior Operations Officer
Financial and Private Sector Development
Europe and Central Asia
World Bank

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  • A range of organizations –including the government, state agencies and non-governmental organizations– should be involved in developing and implementing the financial capability program. The government should appoint a cen ministry (e.g. the Ministry of Finance), the central bank or a financial regulator to lead and coordinate the development and implementation of the national financial capability program.
  • Building Financial Capability to Strengthen Consumer Protection

    1. 1. Building Financial Capability to Strengthen Consumer Protection Riga, Latvia 13 May 2010 Arabela Aprahamian Senior Operations Officer Financial and Private Sector Development Europe and Central Asia World Bank
    2. 2. Weak financial literacy undermines development of the financial sector <ul><li>Increase in household debt places new burdens on consumers </li></ul><ul><ul><li>Rapid growth of household lending to levels previously unseen </li></ul></ul><ul><ul><li>Consumers take mortgages in foreign currencies </li></ul></ul><ul><ul><li>… but are unable to manage FX risk </li></ul></ul><ul><li>Move to private pensions requires consumers to understand risk vs. return </li></ul><ul><ul><li>Consumers need to choose pension strategies and products </li></ul></ul><ul><ul><li>… but lack basic financial skills </li></ul></ul>Source: European Credit Research Institute, Central Bank of Azerbaijan
    3. 3. Limited experience of consumers <ul><ul><li>Many consumers in emerging markets lack history of using financial products </li></ul></ul>Source: CGAP/World Bank, Financial Access 2009: Measuring Access to Financial Services around the World
    4. 4. Weak financial literacy affects consumer protection <ul><ul><li>Weak financial literacy impedes consumers’ ability to protect their financial assets </li></ul></ul><ul><ul><ul><li>Russia: 37% of retail financial consumers are unaware that there is a securities law and a regulatory agency to protect their interests. </li></ul></ul></ul><ul><ul><ul><li>Romania: 55% of complaints lack sufficient documentation to be reviewed. </li></ul></ul></ul><ul><ul><ul><li>Azerbaijan: when government introduced pension payments by debit cards, rural families hired intermediaries to access ATMs. </li></ul></ul></ul><ul><ul><li>Poor consumers may be vulnerable to predatory lending practices </li></ul></ul><ul><ul><ul><li>Those with weak financial literacy are particularly vulnerable. </li></ul></ul></ul><ul><ul><ul><li>Slovakia: households without formal income spend 38% more of their income on debt service than middle-income households </li></ul></ul></ul>
    5. 5. Consumer protection & financial literacy promote sound financial markets <ul><ul><li>Attempt to redress imbalances of information, resources and power between consumers and financial institutions: </li></ul></ul><ul><ul><ul><li>Giving individuals clear, comparable, full, simple information about prices, terms and conditions of financial products </li></ul></ul></ul><ul><ul><ul><li>Prohibiting financial institutions from engaging in unfair or deceptive practices (selling products and collecting payments) </li></ul></ul></ul><ul><ul><ul><li>Providing inexpensive, speedy mechanisms to resolve disputes </li></ul></ul></ul><ul><ul><li>Provide important source of market discipline </li></ul></ul><ul><ul><li>Promote good governance of financial institutions </li></ul></ul>
    6. 6. Consumer protection & financial literacy promote sound financial markets <ul><ul><li>Financial capability helps consumers </li></ul></ul><ul><ul><ul><li>Understand financial products and services </li></ul></ul></ul><ul><ul><ul><li>Understand their rights and obligations as financial consumers </li></ul></ul></ul><ul><ul><ul><li>Make well-informed financial decisions </li></ul></ul></ul><ul><ul><li>People who are financially capable are: </li></ul></ul><ul><ul><ul><li>More likely to take up and use financial products, to save, and to plan ahead </li></ul></ul></ul><ul><ul><ul><li>Less likely to buy financial products that they do not understand or do not meet their needs, or to be caught out by financial frauds </li></ul></ul></ul><ul><ul><li>However financial education cannot substitute for adequate regulation </li></ul></ul>
    7. 7. Improving financial capability and regulation are complementary <ul><ul><li>Improving financial capability and sound regulation and supervision are complementary –not substitutes </li></ul></ul><ul><ul><li>Improving financial capability needs to be complemented by: </li></ul></ul><ul><ul><ul><li>Prudential regulation </li></ul></ul></ul><ul><ul><ul><li>Consumer protection regulation </li></ul></ul></ul>
    8. 8. Financial capability initiatives to strengthen consumer protection <ul><li>Develop a broadly-based national financial capability program </li></ul><ul><li>Design a financial education program for schoolchildren </li></ul><ul><li>Use a range of approaches and channels for delivery </li></ul><ul><ul><li>Mass media </li></ul></ul><ul><ul><li>Teachable moments </li></ul></ul><ul><li>Provide consumers with unbiased information on financial products and services </li></ul><ul><li>Consult with consumer and industry representatives </li></ul><ul><li>Measure the impact of financial capability initiatives </li></ul><ul><ul><li>Nationwide financial literacy surveys </li></ul></ul>
    9. 9. Financial literacy surveys <ul><li>Nationwide, covering a representative sample size of the population </li></ul><ul><li>Segmented by key demographic variables (e.g. age, education, geographic area, occupation) </li></ul><ul><li>Questionnaire covering basic financial knowledge, personal finance management, information on financial institutions and products, attitudes and confidence </li></ul><ul><li>Baseline survey would help inform national programs </li></ul><ul><li>Follow-up surveys would help to evaluate effectiveness of programs and identify need for adjustments </li></ul>
    10. 10. More Information <ul><li> </li></ul>