Friday, 13 January 2012

Consumer education and protection are crucial in the face of poor financial services


Indrani Thuraisingham, Head of the CI Office for Asia Pacific and the Middle East, on the importance consumer financial know-how.

Financial education must always be integrated with consumer protection. This message was reiterated during the Citi-FT Financial Education Summit in November last year where I was invited to take part in the key plenary panel discussion entitled, “Achieving the Ultimate Goal – Financial Capability for All.”

This session looked at the steps that could be taken to achieve universal financial education and the challenges that would have to be overcome. I presented CI’s position on the role of financial education in improving individuals' financial capability and empowering consumers to deal with marketplace complexities and economic volatility.

CI subscribes to the three pillar approach for financial services advocated by the Organisation for Economic Co-operation and Development (OECD), namely, education or information; protection; and, access. These three are all necessary and interlocked. There cannot be one without the other.

This is especially important now looking at the global scenario of financial services. Weak consumer protection in the form of irresponsible mortgage lending was a catalyst for the global financial crisis.

There is currently a monumental increase in consumer and household lending accompanied by unsustainable levels of indebtedness in many parts of the world

Financial services providers are able to issue contracts which do not transparently and clearly communicate all applicable costs, fees or interest rates, and anti-competitive practices such as obligatory bundling of financial products as well as inappropriate collateralisation of borrower's debt. And for consumers with grievances, there is generally a lack of redress mechanisms. 

As well as measures such as debt relief and credit counselling dispute resolution facilities such as mediation services, ombudsman, public interest litigation and legal aid clinics also have to be in place to ensure consumer welfare.

CI has contributed to the OECD and Financial Stability Board's (FSB) work under a G20 mandate to make recommendations on consumer protection. The OECD principles were endorsed in November last year by the G20 leaders and whilst CI would like them to have been stronger (in particular they lack force in terms of the development of minimum standards of suitability, product withdrawal and contract nullification, where manifestly unsuitable products are sold) they are a useful basis for further work. In contrast, the FSB recommendations, which have also been endorsed by the G20, are stronger in terms of suggesting suitability standards and prohibitions

Both the FSB recommendations and the OECD principles are voluntary, however the G20 countries have committed to their implementation and requested progress reports to be presented at future G20 summits.

There must be protection along with education and access. Financial education helps but protection is still needed so that the illiterate, vulnerable or desperately poor are not enticed into abusive agreements. 

There is a difference between education for life skills and education for detailed knowledge about financial products. We want youngsters to learn the basics of budgeting and to be aware that if something looks too good to be true, then it most definitely is.

They do not have to be financial experts to know this just as we do not expect drivers to have detailed knowledge of car mechanics when they buy a car. What we do expect though is cars to be safe and for the government to pass legislation to that effect.

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