Susan Rutledge talking points at "Consumer Protection in Financial Services" Workshop

1. The financial crisis of September 2008 rocked the financial world to its foundations.

2. In August 2007, two hedge funds from the Wall Street firm, Bear Stearns, were repriced not at 95 cents on the dollar, or even 50 cents, but at less than 10 percent of their nominal value.

3. Just the day before, the funds had been rated as AA and AAA by the credit rating agencies.

4. We in the financial world asked, “What happened?” and “How did this happen?”

5. A year later, we saw three of America’s largest investment banking firms—plus the largest insurance company in the world—disappear as independent private sector companies. Worldwide, taxpayers have been asked to provide trillions of dollars of financial support for financial institutions.

6. We are still learning the lessons of the last year.

7. It is clear that part of the problem was weak consumer protection in financial services.

8. Over the last decade, households have borrowed at rates not previously seen.

9. Bank lending to Russian households increased from almost nothing a decade ago to 9.2 percent of Gross Domestic Product in 2008.

10. This is an average annual increase of 84 percent a year for five years.

11. Across Europe, this was one of the most rapid rises in consumer lending—only Romania was higher at 100 percent annual increases.

12. In just four years (from 2003 to 2007) consumer borrowings—excluding mortgages—skyrocketed from a minimal level of $100 per person in Russia to over $1,200 per capita.

13. Yet the increases have been uneven throughout the Russian population.

14. Even now, more than 40 percent of the population lacks access to any form of financial services.

15. Only 16 percent have bank accounts and less than one percent of the population invests in securities, investment funds or insurance.

16. At the G-8 meeting in St. Petersburg in 2006, the Russian authorities took the lead in calling for improved global programs for financial literacy and financial education.

17. In 2007, the World Bank started a pilot global program in consumer protection and financial literacy, using the Europe and Central Asia Region as a starting point.

18. We put together a group of leading experts in financial regulatory reform and compiled a summary of good practices worldwide.

19. Then we started preparing detailed country diagnostic reviews to identify gaps and weaknesses in the legal and regulatory frameworks as they relate to financial consumer protection.

20. The review for Russia is the ninth report that we have prepared. It is also the most interesting.

21. First we conducted a survey of financial literacy and financial behavior of Russian consumers.

22. This covered 1,600 households in 40 regions.

23. What we found did not surprise us.

24. More than half of respondents felt that they lacked adequate financial skills. Over 80 percent were unable to correctly answer five out of six basic financial questions, such as whether compound interest increases savings more or less rapidly than simple interest.

25. More than one in ten believed that the government should bail them out of bad investment decisions.

26. Over 15 percent thought that the government should compensate them if they lost money investing, in the stock market or even in residential real estate.

27. We also found little confidence that financial institutions would solve problems if they arise.

28. Over three-quarters gave only a 50:50 chance (or worse) that disputes with financial institutions would be resolved quickly and fairly.

29. We also found that consumers want to know how to protect themselves, especially how to identify (and avoid) pyramids and other financial frauds.

30. Almost a third of respondents wanted to know what laws protect them and what procedures should be followed in case of a dispute with a financial institution.

31. One quarter wants to understand how the pension schemes work and almost as many want information on how to avoid “getting up to one’s neck when using credits.”

32. Consumers also want to have confidence that their financial institutions are reputable.

33. You might think that this is a daunting task. It is not.

34. The report that we are releasing this week presents a number of concrete and practical steps that can be taken to improve consumer protection in financial services in Russia.

35. Our objective was to find ways to empower Russian financial consumers in three areas. For this, we looked to the European Union for guidance.

36. First, consumers should have easy-to-understand--but complete--information about financial services.

37. Second, consumers should have an easy way to solve problems when they feel that the financial institution has made a mistake.

38. Third, consumers should have access to financial education and training when they want it and in the form that they want it.

39. We in the World Bank worked long and hard with the Russian authorities and the professional associations to find ways to achieve those goals.

40. We would like to thank the Ministry of Finance, the FFMS, the Bank of Russia, the Consumer Protection Service, KonfOP and the professional associations in banking, securities, insurance and pensions and countless others for their long hours of patience in helping us understand the situation in Russia and the legal and regulatory framework for financial consumer protection.

41. Together we identified six areas for improvement.

42. Some suggestions would need changes to laws or regulations but many recommendations can be done without government involvement.

43. Taken together, the six areas would form a strong foundation for financial consumer protection in Russia.

44. But individual measures would also help.

45. So what are the six areas?

46. The first area is the regulatory and supervisory institutional structure responsible for financial consumer protection.

47. It should be simplified and strengthened.

48. The current structure is at best, complex, and at worst, insufficiently effective.

49. Several options are available.

50. You may have noted that US President Obama has announced that at the G-20 meeting this week in Pittsburgh, he will propose the creation of a new Consumer Financial Protection Agency.

51. My country, Canada, has a similar agency.

52. This is a complex issue but we think that for Russia, at least in the immediate term, the best approach is to strengthen the capability and expertise of the Russian Consumer Protection Service (Rospotrebnadzor) in dealing with financial consumer issues.

53. At the same time, the Consumer Protection Service should improve its transparency and accountability, for example, by publishing detailed statistics on complaints over financial services and what happened to the complaints.

54. In addition, all financial institutions, including financial intermediaries, should be subject to financial regulation.

55. This includes credit cooperatives.

56. Also all entities (be they legal or physical persons) that, for the purpose of investment or speculation, solicit funds from the public should be obliged to obtain licenses from the financial supervisory agencies.

57. Credit brokers, insurance intermediaries, and particularly debt collection agencies should be subject to financial regulation with a system of qualification and certification of intermediaries.

58. All non-credit payment service providers should also be supervised by a financial supervisory agency.

59. In addition, improved regulation of consumer credit is needed as is a law on personal bankruptcy.

60. Also helpful would be standard contracts—or at least standard basic provisions of contracts—for retail financial services.

61. The second area is consumer disclosure.

62. Consumers should be able to take the information they receive from financial institutions and easily understand it.

63. The information should be in plain language and explain the key terms and conditions of the financial contract.

64. One approach is a Key Facts Statement used in Australia.

65. On one page, all the important information should be presented to consumers.

66. The professional associations could develop a format for the Key Facts Statement and then encourage their members to use it for consumers.

67. Russian consumers already compare different offers when deciding on financial services.

68. Standard simple disclosures would make their work a little easier.

69. Detailed rules are also needed on advertising of financial services.

70. The report includes more suggestions for the different segments of financial services but all need improvement—from consumer credits to insurance contracts to non-state pension funds.

71. The third area relates to commercial practices.

72. Unfair business practices should be explicitly prohibited.

73. Debt collectors should not be able to call delinquent borrowers at any time of the day or night.

74. Cooling-off periods, when consumers can change their mind for a few days after signing a contract, also make sense for long-term financial contracts (such as residential mortgages or insurance contracts with long-term savings components).

75. A law on personal bankruptcy is also needed.

76. In addition, the professional associations should develop codes of business practice for their respective parts of the financial sector.

77. Such codes of conduct would help set the tone for fair and equitable treatment of retail financial customers.

78. Special training may be needed for all officials of financial institutions that deal with the retail public, so that they understand their obligations to provide clear and accurate information to consumers.

79. The fourth area is the mechanism for dispute resolution.

80. You recall that the financial literacy survey where consumers thought that they had only a 50:50 chance (or worse) of getting their problems with financial institutions solved fairly and efficiently.

81. This is far too low.

82. So what can be done?

83. As a starting point, each financial institution should be obliged to designate a department (or an individual) responsible for receiving customer complaint.

84. When the financial service is purchased, the contact point should be identified to the consumer.

85. Also consumer complaints about financial services should be collected in one central location.

86. One agency should publish statistics on the number and status of complaints and analyze the trends in the different types of complaints.

87. This is just a starting point.

88. Over the long-term, consideration could be given to establishing a form of consumer financial ombudsman.

89. This would be an institution with specialized staff to whom consumers could send their complaints when the financial institutions do not seem to listen.

90. The fifth area is financial education.

91. One should never underestimate the ability of consumers to learn about what is important for their personal finances.

92. But the information should be easy for consumers to access.

93. It should be available to them when they want it.

94. Recent research shows that there are “teachable moments” when consumers are particularly interested in learning about personal finance.

95. This is when they take a home mortgage for the first time, or when they get married and start a family.

96. Or when they start to think about retirement.

97. At those moments, consumers need to learn not just about the terms of service.

98. They also need to know about the risks and rewards of different financial strategies.

99. For the youngest members of society, it is also important to teach them that financial health is as important as physical health—and both need proper attention.

100. Already the FFMS has an active program of investor education. But there are many different initiatives on financial education.

101. It may therefore be helpful to adopt a national strategy on financial education.

102. The sixth area relates to measuring progress.

103. Regular surveys of financial consumers should be conducted.

104. This should cover not only levels of financial literacy but also consumer spending habits, behavior, and financial well-being.

105. The surveys provide useful information on well the programs are working.

106. Do consumers understand their financial rights?

107. Do they know what to do if things go wrong?

108. Do they know where to find out more information?

109. We in the World Bank are pleased to be part of this program on consumer protection and financial literacy.

110. Now the next step is to work out action plans to implement the key recommendations.

111. Starting tomorrow and continuing through Thursday, the professional associations will lead discussions on what they can do in their parts of the financial sector.

112. We in the World Bank look forward to seeing the results of all the hard work—and for consumer protection to become one of the pillars of a robust and dynamic financial sector.

113. Thank you.