Financial Consumer Protection in Latvia

1. Financial Consumer Protection in Latvia Action Plan on Strengthening Consumer Protection Riga, April 28, 2010 TomasProuza, MBA

2. Speaker introduction • Following financial services since 1996: • as a financial journalist (1996-2004) • as deputy minister of finance for financial services, EU and international relations (2004-2007) • as co-founder and vice-chairman of a personal finance advisory company (since 2007) • Working on financial services issues with: • the World Bank • the government of the Czech Republic

3. Why consumer protection? • Consumershaveless: • information • knowledge • resources to compareoffers • Thestate: • can NOT makedecisionsforpeople, but • MUST makesurepeoplecanmake INFORMED decisions

4. Key players • Three key groupsofstakeholders: • supervisorsandthegovernment • financialinstitutionsandassociations • consumerorganizationsand media • Mainrulesof a well-functioningsystem: • cooperationandcommunication • accountability • high-levelcommitment • mutualeducationandcapacitybuilding • responsibleself-regulation

5. Key pillars of healthy financial market • Three key areas: • prudential supervision – usually the strongest pillar • market conduct supervision – consumer protection, often weak in new economies • financial capability – educating customers so that they can make informed decisions • All must be used at the same time – balance is important!

6. Key areas for development • Institutions and Institutional Setup • Disclosure of Information • Business Practices • Dispute Resolution • Financial Education and Financial Capability • The Action Plan provides guidance but timing and priorities should be decided by the Steering Committee of all stakeholders. • Firm commitment of key players necessary.

7. Institutions and Institutional Setup • Consumerprotectionisanequal part ofmandateof financial market supervisory structure • Managers responsible for consumer protection / market conduct supervision have direct reporting line to the top management • Results of market conduct supervision influence priorities of prudential supervision – coordination between FCMC and CRPC very important • Consumer protection activities must be properly communicated and accounted for (media, yearly reports, meetings with stakeholders)

8. Effective Supervision and Regulation • Five conditions: • sufficient legal environment • powers of supervisors • no room for regulatory arbitrage • whole financial market covered (for market conduct) • supervisors can fine-tune the rules • officially – decrees, rulings, guidances • informally – through associations, media, in meetings • effective sanctions • knowledgeable and motivated staff • accountability

9. Disclosure of Information • Five key aspects: • fullness – all key information included • comparability – easy comparison with similar products, same vocabulary, same calculations • understandability – plain language • easy access – websites, branches, distributors • key warnings – prominently displayed

10. Disclosure of Information II • Tools of disclosure: • Key Fact Statements (more detailed for complex products) • standardized contract provisions (with implemented "comply or explain" policy) • glossary of terms to prevent misunderstandings • product guides • contracts available in advance • All tools should be created in cooperation with the public, use plain language, be well publicized with usage monitored by supervisors.

11. Business Practices • Worlwide best practices: • "Know Your Customer" – collect enough data to verify the product is suitable for the client (e.g. responsible lending, investment adcice) • strict prosecution of unfair and aggressive business practices, including misleading advertising • sector-wide codes of conduct • set rules for distributors (education, experience, knowledge)

12. Dispute Resolution • Handling of complaints: • standardized and supervisor-monitored complaint handling system at financial institutions • standardized complaint information sheet • complaints first made to financial institutions • education of police and judges about financial market • Analysis of complaints should influence focus of prudential supervisors • Long-term issue: an effective out-of-court redress mechanism (ombudsman) may be needed, start with improving current system now.

13. Financial Education • Financial literacy survey – national benchmarks • Diagnostic test in schools, financial literacy issues added into the curricula • Centralized data exchange about effective programs • Regular tariff surveys

14. Final rules • Supervisors, financial institutions and consumers will all benefit from a well-functioning consumer protection system by stimulating demand and improving confidence of customers • Agreements are preferable • Functioning self-regulation should be the goal whenever possible • The state should always act in cooperation and apply the same rules across sectors

15. Financial Consumer Protection in Latvia Thank you for your attention! Tomas Prouza, MBA Financial Services Consultant and Former Deputy Minister of Finance of the Czech Republic tomas@prouza.cz