WORLD BANK

Building Financial Capability to Strengthen Consumer Protection

Riga, Latvia13 May 2010

Arabela AprahamianSenior Operations Officer

Financial and Private Sector DevelopmentEurope and Central Asia

World Bank

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Weak financial literacy undermines development of the financial sector

Increase in household debt places new burdens on consumers

Rapid growth of household lending to levels previously unseen

Consumers take mortgages in foreign currencies

… but are unable to manage FX risk

Move to private pensions requires consumers to understand risk vs. return

Consumers need to choose pension strategies and products

…but lack basic financial skillsSource: European Credit Research Institute, Central Bank of Azerbaijan

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Limited experience of consumers

Many consumers in emerging markets lack history of using financial products

Source: CGAP/World Bank, Financial Access 2009: Measuring Access to Financial Services around the World

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Weak financial literacy affects consumer protection

Weak financial literacy impedes consumers’ ability to protect their financial assets Russia: 37% of retail financial consumers are unaware that there

is a securities law and a regulatory agency to protect their interests.

Romania: 55% of complaints lack sufficient documentation to be reviewed.

Azerbaijan: when government introduced pension payments by debit cards, rural families hired intermediaries to access ATMs.

Poor consumers may be vulnerable to predatory lending practices Those with weak financial literacy are particularly vulnerable. Slovakia: households without formal income spend 38% more of

their income on debt service than middle-income households

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Consumer protection & financial literacy promote sound financial markets

Attempt to redress imbalances of information, resources and power between consumers and financial institutions: Giving individuals clear, comparable, full, simple information

about prices, terms and conditions of financial products

Prohibiting financial institutions from engaging in unfair or deceptive practices (selling products and collecting payments)

Providing inexpensive, speedy mechanisms to resolve disputes

Provide important source of market discipline

Promote good governance of financial institutions

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Consumer protection & financial literacy promote sound financial markets

Financial capability helps consumers Understand financial products and services

Understand their rights and obligations as financial consumers

Make well-informed financial decisions

People who are financially capable are: More likely to take up and use financial products, to save, and to

plan ahead

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

However financial education cannot substitute for adequate regulation

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Improving financial capability and regulation are complementary

Improving financial capability and sound regulation and supervision are complementary –not substitutes

Improving financial capability needs to be complemented by: Prudential regulation

Consumer protection regulation

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Financial capability initiatives to strengthen consumer protection

1. Develop a broadly-based national financial capability program

2. Design a financial education program for schoolchildren

3. Use a range of approaches and channels for delivery Mass media Teachable moments

4. Provide consumers with unbiased information on financial products and services

5. Consult with consumer and industry representatives

6. Measure the impact of financial capability initiatives Nationwide financial literacy surveys

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Financial literacy surveys

1. Nationwide, covering a representative sample size of the population

2. Segmented by key demographic variables (e.g. age, education, geographic area, occupation)

3. Questionnaire covering basic financial knowledge, personal finance management, information on financial institutions and products, attitudes and confidence

4. Baseline survey would help inform national programs

5. Follow-up surveys would help to evaluate effectiveness of programs and identify need for adjustments

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More Information

www.worldbank.org/eca/consumerprotection