UKRAINE FINANCIAL SECTOR STABILIZATION TECHNICAL ASSISTANCE PROGRAM STRATEGY FOR FINANCIAL SERVICES CONSUMER PROTECTION & FINANCIAL LITERACY (2012-17) DIAGNOSTIC REVIEW AND ACTION PLAN VOLUME I: MAIN FINDINGS & RECOMMENDATIONS APRIL 2012 THE WORLD BANK EUROPE & CENTRAL ASIA REGION VICE PRESIDENCY GLOBAL PROGRAM ON CONSUMER PROTECTION AND FINANCIAL LITERACY ii TABLE OF CONTENTS Glossary ................................................................................................................................... iv Preface........................................................................................................................................v Executive Summary ...................................................................................................................1 Priority Recommendations & Action Plan ................................................................................7 Background ................................................................................................................................9 Macroeconomic Overview .............................................................................................9 Financial Sector Overview .............................................................................................9 Financial Literacy Survey ............................................................................................14 Recent International Developments in Financial Consumer Protection and their Application to Ukraine.................................................................................................................................16 Ukraine’s Challenges and Next Steps ......................................................................................17 Develop a vision and reach agreement on actions at the highest policy level .............19 Enhance Institutional Structure and Capacity ..............................................................19 Upgrade the Legislative Framework ............................................................................24 Establish an Effective Dispute Resolution Mechanism ...............................................30 Develop a National Financial Education Strategy .......................................................33 Improve Consumer Disclosure, Business Practices, Governance & Transparency.....37 Create a New Insurance/Guarantee Scheme (but only once the remaining pillars are in place) ............................................................................................................................48 Tables Table 1: Macroeconomic Indicators ..........................................................................................9 Table 2: Total Assets of Financial Institutions ........................................................................10 Table 3: Main Bank Indicators ................................................................................................10 Table 4: Bank and Credit Union Loans and Deposits to Households......................................11 Table 5: Insurance Premia .......................................................................................................12 iii Table 6: Market Capitalization of Equities ..............................................................................13 Table 7: Registered Issues of Securities ..................................................................................13 Table 8: Growth of Collective Investment Institutions (CIIs) .................................................13 Table 9: NSPFs Indicators .......................................................................................................14 Table 10: Comparison of Options of Institutional Structures for Financial Consumer Protection .................................................................................................................................20 Table 11: International Approaches to Laws for Financial Consumer Protection...................24 Table 12: Countries with National Strategies on Financial Education (in place or under development)............................................................................................................................34 Table 13: Overview of International Financial Education Initiatives ......................................56 Table 14: Selected Business Initiatives on Consumer Awareness..........................................57 Boxes Box 1: Background on Special Housing Financing Mechanisms ............................................26 Box 2: International Approaches to Key Facts Statements .....................................................38 Graphs Graph 1: Outstanding Mortgage and Consumer Loans ...........................................................12 Annex ANNEX 1: The List of EU Directives on Financial Consumer Protection and Applicable Ukrainian Laws ........................................................................................................................50 ANNEX 2: International Approaches to Institutional Structures on Consumer Protection and Financial Literacy ....................................................................................................................51 ANNEX 3: Summary of Recommendations ..............................................................................52 ANNEX 4: Financial Education...............................................................................................55 iv GLOSSARY ATM Automatic Teller Machine CII Collective Investment Institution CPFL Consumer Protection and Financial Literacy EU European Union FCPFEA Financial Consumer Protection and Financial Education Commission NCRFSM National Commission for Regulation of Financial Services Markets FX Foreign Exchange GDP Gross Domestic Product INFO International Network of Financial Services Ombudsman Schemes LFS Law on Financial Services and State Regulation of Financial Markets MoF Ministry of Finance MoJ Ministry of Justice MTPL Motor Third Party Liability NBFI Nonbank financial institution NBU National Bank of Ukraine NSPF Non-State Pension Fund NPL Nonperforming Loan PDPA Personal Data Protection Authority PFTS PFTS -- Persha Fondova Torgova Systema (First Securities Trading System) NCRSM National Commission for Regulation of Securities Market SCRPI State Consumer Rights Protection Inspectorate SRO Self-Regulatory Organization UAH Ukrainian Hryvnia mn. million bn. billion n.a. not available US $1 = 8.02 UAH (December 2011) v PREFACE A World Bank Technical Assistance mission1 visited Kyiv from November 16 to 25, 2011 as part of the World Bank's financial sector stabilization and development program for Ukraine. The purpose of the mission was to prepare: (1) a Diagnostic Review of the Ukrainian framework for financial consumer protection in comparison to international practice and (2) an Action Plan of priority recommendations of measures to strengthen the framework. The Bank’s findings and recommendations were prepared and presented in two documents: Main Findings & Recommendations (Volume 1) and Diagnostic Review: Assessment Against Good Practices (Volume 2). Meetings were held with the National Bank of Ukraine, National Commission for Financial Services Markets Regulation, the Deposit Guarantee Fund, National Commission for Securities Market Regulation, the State Consumer Rights Protection Inspectorate, the Ministry of Education as well as numerous industry associations, private financial institutions, non- government organizations and donors community. The Bank team would like to thank the Ukrainian authorities and members of civil society for their hospitality, active engagement into consultation process, preparation of answers to the questionnaires, information sharing and overall cooperation during the mission’s stay in Kyiv. The report was updated based on the series of workshops conducted in Kiev in March 2012 on several of key issues discussed in the Diagnostic Review, especially in the areas of institutional setup, legal and regulatory framework, financial ombudsman and financial literacy. The analysis of the regulations is based on the state of the regulatory environment in November 2011. 1 The team was led by Angela Prigozhina (Senior Financial Specialist, Project Task Team Leader) and comprised Sue Rutledge (Senior Private Sector Development Specialist and Head of World Bank's Global CPFL Program as mission leader), Tomas Prouza (Financial Sector/Banking Consultant), Richard Symonds (Capital Markets Consultant), Michael Grist (Senior Financial Sector Specialist - Insurance and Pensions), Johanna Jaeger (Financial Specialist, Non-bank Credit Institutions), Nataliya Lutsenko (Financial Analyst) and Tatiana Mosiuk (administrative support). 1 EXECUTIVE SUMMARY Ukraine’s financial system has been transformed in recent years. Over the past decade, bank intermediation has dramatically expanded, with credit increasing three-fold relative to GDP. Nonbank financial institutions and markets also experienced rapid development, albeit at the lower pace than expected and comparative to other transition economies. These changes were supported by an overhaul of the financial sector legislative framework, and took place against a backdrop of robust economic growth driven by favorable terms of trade, prudent fiscal policy, and exchange rate stability. However improvements in consumer protection and financial literacy have not caught up with the expansion in consumer finance, as was demonstrated during the recent 2008-2010 financial crisis and depositors run in the banking sector, and much work remains to be done. Over a third of Ukrainians are excluded from formal financial services. A nationally representative financial literacy survey, conducted by USAID/FINREP in the fall of 2010,2 found that financial service coverage in Ukraine remains low. According to the survey, over one-third (39 percent) of Ukrainians are unbanked and of those who use banking services, most utilize only the most basic financial services. Almost half stated that they preferred to keep their savings in cash (i.e.“under the mattress” as is commonly referred to in Ukraine) rather than in a bank account. The survey also showed that Ukrainian consumers generally distrust financial institutions and do not know how to defend their legal rights as financial consumers. The survey found that only 15 percent of consumers trust banks and still fewer (five or six percent) trust investment funds or private pension funds. Insurance companies lay in-between. Only 17 percent of consumers believe that if they had a dispute with a financial institution, the issue would be resolved in their favor. Yet over half (52 percent) either had no idea how to submit a complaint or would present their case to an agency with no legal authority to resolve the issue at hand. At its heart, financial consumer protection attempts to reduce the imbalances of power, resources and information between financial institutions and their retail customers. Financial institutions are very familiar with the terms and conditions of their financial services– and their inherent risks and rewards–but it may be difficult for retail customers to understand and to obtain sufficient information on their financial purchases. The primary objective of any financial consumer protection program is to reduce the imbalance. This is achieved by: (1) giving individuals enough information and education to make informed decisions, (2) prohibiting financial institutions from engaging in unfair and deceptive practices, (3) giving consumers an inexpensive and effective mechanism of addressing disputes with financial institutions and (4) making financial education available so that consumers can learn the risks and rewards—and their legal rights and obligations--in using financial products and services. 2 http://www.finrep.kiev.ua/download/finlit_survey_6dec2010_en.pdf 2 The Diagnostic Review for Ukraine presents five key recommendations for immediate action. The recommendations could be implemented within the next 12 months on a priority basis and would provide both the framework as well as an immediate impetus for improvements in financial consumer protection and financial literacy, and thus contribute to increased consumer confidence in the financial sector. The recommendations are to: 1) Enhance financial regulatory requirements and response to market conduct violations by strengthening the existing capacity and accentuating responsibility of the existing financial regulators for consumer protection in all financial institutions that deal with the household sector. This recommendation can be achieved through prompt establishment (if non- existent) and strengthening of special consumer protection units under the framework of financial regulators, namely the National Bank of Ukraine (NBU), National Commission for Regulation of Financial Services Markets (NCRFSM) and National Commission for Securities Markets Regulation (NCSMR); 2) Strengthen and enforce full and timely implementation of information disclosure requirements (including on real owners, effective interest rates etc) to consumers for bank and non-bank financial products and services provided to individuals; 3) Establish an inexpensive and efficient out-of-court mechanism (Financial Ombudsman) for handling consumer complaints and providing redress for consumer disputes with financial institutions. Given existing institutional weaknesses and fragmentation of financial services markets, it may be recommendable to establish a uniform statutory agency (with possible co-financing from the market), rather than rely upon market driven professional ombudsman services due to their fragmentation, gaps in representation (as some financial services markets don’t have organized SROs or professional associations) and more importantly – a conflict of interests; 4) Expand financial education programs for consumers, including development of the National program of financial education, to be supported by and implemented through the Ministry of Education, financial regulators, professional organizations, NGOs and other educational programs and initiatives. 5) Formulate comprehensive concept/strategy for consumer protection, to be supported by the implementation action plan (for 2012-2017 or beyond) and respective legal revisions to laws and regulators in line with the OECD principles and World Bank “good practices” for consumer protection. 6) Enhance coordination and communication of financial regulators and consumer protection agencies, including NBU, NCRFSM, NCSMR, State Agency for Consumer Protection (Derzhspozhivstandart), Anti-Monopoly Committee, professional associations and consumer protection NGOs, to ensure enhanced dialogue and implementation of the above mentioned national strategy and action plan along with financial education program. 7) Harmonize Ukrainian laws and regulations for financial services provided to households (first of all in such areas as insurance, non-state pension funds, other long-term savings accumulation schemes and collective investments plans, housing construction investment schemes and the like) with EU Directives and best international practices, related to day- to-day business practices of financial institutions in their dealings with households; As a starting point, the regulatory and supervisory framework for consumer protection in financial services should be improved. An institutional setup to provide for clear and 3 effective market conduct supervision across the financial market needs to be enhanced. Three options are available. They are to: 1) Expand the role of the State Consumer Rights Protection Inspectorate (SCRPI) to cover issues of consumer protection in the financial services markets; 2) Create specially focused Consumer Protection Departments in the financial supervisory agencies – NBU, NCRFSM and NCRSM; or 3) Set up a new Financial Consumer Protection & Financial Education Agency The preferred long-term option is the third—setting up a new Commission for Financial Consumer Protection and Financial Education. However time is of the essence. For this reason, it may be better to implement the second option and set up special Consumer Protection Departments in the financial supervisory agencies, with a coordinating mechanism/board among the Consumer Protection Departments of financial regulators. The first option of expanding the role of the SCRPI is a possibility but expanding the role of a general consumer protection agency has been shown to be difficult to implement in other post-transition economies in Europe and Central Asia due to the unique and technical nature of financial services compared to other consumer services. Inexpensive but effective methods of consumer redress should be established--and data on consumer complaints should be consolidated, analyzed for trends, and published in an annual report. Simple and effective mechanisms for resolving disputes with financial consumers should be put in place. This requires two key steps. First, all financial institutions should be obliged to maintain internal consumer complaint departments, with contact information provided at the time of opening new accounts. Such departments should be subject to independent review, for they will be the first ‘port of call’ for consumer enquiries, and would be expected to reach agreement in the generality of cases. Second, an ombudsman for all consumer financial services should be established to deal with those disputes where agreement has not been found. The recommended approach is to create a single independent and autonomous financial ombudsman, established by statute and funded in part from the state budget and in part, from fees charged to financial institutions. Another alternative is to create a system of industry-based ombudsmen. However with over 20 industry associations—and five for the banking sector alone—an efficient and effective system of industry-based ombudsmen may be difficult to put in place. A single statutory and autonomous financial ombudsman is therefore recommended. However regardless of the institutional structure, complaints on consumer financial services should be consolidated in one location and analyzed for trends—and the results of the analysis should be published. Consumer complaints provide an early warning signal of weaknesses in the financial system. Analysis of the complaints will reveal if specific financial institutions are having difficulty in their relations with consumers. In addition, a careful review of the data will provide insight into systemic issues for financial consumers. The review may also suggest revisions to laws and regulations that would avoid recurrence of the same difficulties in the future. 4 As members of civil society, consumer organizations3 can also play a valuable role in monitoring how financial institutions treat their retail customers. However the first step is building the institutional strength of consumer organizations. Such institution-building could be accomplished through matching grant programs from the state budget and possibly supplemented by donor funding. It would also be helpful to obtain support from the global consumer organizations, such as Consumers International, or from national consumer organizations from other countries, with appropriate experience. Whatever institutional structure is used, consumer information on financial services should be enhanced. Clear and comparable information should be provided to consumers when they are shopping for a new financial service or product. The best approach is through Key Fact Statements summarizing in plain language the key terms and conditions of a financial service or product. Such Key Facts Statements have been implemented in the United Kingdom and been shown to be effective in helping consumers understand their financial services and products. Price comparison websites (or information accessible by cell phone) would help consumers compare offers by financial service providers for basic services, such as consumer credit and money transfers. Also regular account statements should be sent out to consumers, either electronically or in written form. Other forms of disclosure would also be helpful. Special risks, such as those related to housing construction funds and borrowing in foreign currency, should be highlighted to the consumers. In addition, in their advertising, financial institutions should be obliged to identify the name of their supervisory agency. Consumer disclosure should also be extensively tested to see how consumers understand the terminology in the disclosure provided to them. Laws and regulations related to the day-to-day business practices of consumer financial institutions should be improved. To meet international standards, a number of common business practices by Ukrainian financial institutions should be strengthened. In several areas such a progress can only be achieved by introducing new legal and regulatory frameworks in line with the international practices and EU directives (for example, in such areas as insurance, long term household savings investments into real estate construction, consumer finance and non-bank deposit taking institutions (first of all, credit unions). Cooling-off periods should be extended to all long-term savings products (except for market-based products) and all financial products and services sold through the internet or cell phones. The “front office” staff which deal with retail customers should be required to meet specific standards of competency and professional training. For collective investment and private pension funds, asset managers should be obliged to clearly segregate customer accounts from those of the asset management company. 3 It should be noted that many civil society organizations may deal with consumer issues while not carrying the ‘consumer’ label; for example women’s associations frequently deal with consumer issues and many associations in the Eastern European region started out as women’s or, in past times, ‘housewives’ clubs. 5 Tying of financial products should not be permitted. A consumer should not be required to buy one financial product from an affiliated financial institution in order to obtain another financial product. For example, if a financial institution requires personal life insurance as collateral for a personal loan, a consumer should be able to choose among a group of independent providers of life insurance. Related to this, “referral commissions” for life insurance should be prohibited, or at least capped at no more than 40 percent of the annual premium for the insurance. Other unfair and abusive sales practices should be specifically prohibited. Regulations concerning advertising by financial institutions should be strengthened, with economic sanctions to be applied by the financial supervisory agency. Particular attention should be paid to the accuracy of advertising by credit unions, whose aggressive marketing messages sometimes obfuscate the true costs of borrowing. Financial institutions should also be obliged to meet suitability tests for products and services sold to consumers. In particular, financial institutions should be obliged to collect sufficient background information from the consumer (i.e. his/her financial needs and capabilities) to ensure that the financial products and services being sold are suitable for the needs of that consumer. In addition, debt collection practices should be regulated by law. Consumers should also have the right to “opt out” or deny third party access to their personal financial data. In addition, attention should be paid to special mechanisms for housing finance. An inter-agency working group should be established to review the complex risks involved in such schemes and how consumers might best be protected from possibility of fraud in the schemes. Voluntary codes of conduct should help ensure consumer rights are applied evenly across each sector. To cover a myriad of consumer protection issues, most industry associations have adopted voluntary codes of conduct. Where the associations have not done so (such as for pawn shops), the associations should develop codes of conduct—and establish measures (such as annual statements of “comply or explain”) to encourage compliance with the codes. It would also be helpful to adopt a law on personal insolvency in order to establish a court-supervised process for restructuring the personal debts of highly over-indebted individuals. A national strategy for financial education needs to be developed and implemented to ensure a comprehensive and systemic approach. Financially literate consumers are empowered consumers. The development and implementation of a national strategy on financial education will help to engage a broad range of stakeholders; provide focus, drive and coordination; establish clear priorities; and reduce the risk both of unplanned gaps and of unnecessary overlaps. The development and implementation of the strategy should be led by the National Bank of Ukraine or by the proposed Financial Consumer Protection and Financial Education Commission. Financial education is helpful to all groups of citizens. Financial education programs should include financial education in schools and could also include financial education programs aimed at young adults; financial education presentations or seminars in workplaces; financial education programs associated with teachable moments; and use of the mass media to deliver financial education – preferably in an entertaining, as well as an informative, manner. The 6 national strategy on financial education could be linked with a national strategy on financial consumer protection: financial literacy, financial consumer protection, prudential regulation and financial inclusion measures are complementary, rather than alternatives as financial education cannot substitute for adequate financial regulation and supervision. Financial education programs should be monitored and evaluated, to help ensure that resources are used cost-effectively. Follow-up financial literacy surveys should be undertaken to help assess the impact of the national financial education and financial consumer protection strategies. 7 PRIORITY RECOMMENDATIONS & ACTION PLAN MEASURES TIMING PRIORITY Financial Supervisory Structure 1) Set up a Financial Consumer Protection and Financial Education ST High Agency (FCPFEA)/or set up Consumer Protection Departments in the financial supervisory agencies (NBU, NCRFSM, NCRSM), with a permanent, effective coordinating mechanism (board) 2) Enhance knowledge of supervision staff in the area of consumer protection, and ensure improved monitoring of financial institutions’ compliance with legal requirements (information disclosure, truth in ST High lending etc) and enforcement in case of violations of market conduct regulations. Consumer Disclosure 1) Develop Key Facts Statements for all basic consumer finance products, ST High test consumer understanding of mandatory disclosure 2) Establish price comparison website for consumer credit, payments ST High services 3) Improve disclosure of special risks, such as FX loans and deposits, ST High housing finance schemes, variable interest rate loans Business Practices 1) Except for market-based products, require that all long-term financial MT Medium products, and those sold via the internet and cell phones, have cooling- off periods 2) Set minimum standards for training and qualifications of retail sales MT Medium staff 3) Improve monitoring of the accuracy of advertising, especially by credit MT Medium unions 4) Prohibit sales of tied products if benefits to customers cannot be shown MT Medium 5) Require segregation of assets for CIIs, pension funds ST High 6) Encourage codes of conduct for all financial sectors, and enforce MT Medium compliance 7) Adopt new legislation on debt collection, personal insolvency MT Medium 8) Set up interagency working group to study special housing finance ST Medium mechanisms 8 Dispute Resolution 1) Require that all financial institutions establish effective internal ST High complaints departments 2) Establish statutory independent financial ombudsman to deal with ST High consumer complaints 3) Consolidate, analyze and publish data on financial consumer complaints MT Medium Financial Education 1) Develop national strategy on financial education MT Medium 2) Develop specialized training programs for judges, journalists and MT Medium teachers 3) Revise training materials for primary and secondary schools MT Medium 4) Conduct updated financial literacy surveys to measure progress in CPFL MT Medium 5) Strengthen consumer organizations through matching grant programs MT Medium 9 BACKGROUND Macroeconomic Overview Ukraine was hit hard by the global crisis. For eight years starting in 2000, Ukraine’s economy grew at an average of seven percent per year. However in 2009, the economy fell by almost 15 percent before recovering by four percent in 2010. The local currency—the hryvnia (UAH)— plummeted while a severe drop in deposits led to a near collapse of the banking sector. Despite a moderate recovery in late 2010 and early 2011, Ukraine’s economy remains fragile. GDP is expected to have increased by another 4.5 percent in 2011 and continue rising by between 4.5 and 5 percent each year through 2013 (see Table 1). If the current macroeconomic stabilization program agreed with the International Monetary Fund remains in place, flows of financing for the widening current account deficit would be secured. At the same time, progress on fiscal consolidation is expected through the implementation of pension reform, utility tariff increases, and additional measures. Table 1: Macroeconomic Indicators Financial Sector Overview Banks play a dominant role in the Ukraine financial sector. Providers of financial services in Ukraine can be divided in two categories: (1) banks, which account for 94 percent of total assets of the financial sector, and (2) non-bank financial institutions, which represent the remaining six percent of the financial sector. Non-bank financial institutions consist of insurance companies, credit unions, other credit institutions, state credit institutions of special purpose, factoring, leasing, money transfer companies, construction financing funds, non-state pension funds, pawn shops and securities firms (see Table 2). 10 Table 2: Total Assets of Financial Institutions Source: NBU, NCRFSM Between 2008 and 2010, total assets of financial institutions fell from 104 percent of GDP to just 92 percent. The greatest decline was in assets of the banking sector (from 98 percent of GDP to 86 percent) but the assets of insurance companies and credit unions also fell. The banking sector was particularly hard hit by the financial crisis. Nineteen banks were placed under liquidation and the market share of state-owned banks doubled to 18 percent, due to nationalization of ailing systemic banks and strong direct lending activity by state institutions.4 At the same time, investment of foreign capital rose from 26 to 42 percent of the banking sector. The quality of bank assets also deteriorated significantly. According to the NBU, non-performing loans (NPLs) stood at only 2.3 of total bank loans in 2008 but increased to 11.2 percent of total loans by the end of 2010 (see Table 3).5 Table 3: Main Bank Indicators Bank Indicators 2008 2009 2010 2011 Number of registered banks 198 197 194 198 Number of banks under liquidation 13 14 18 21 Number of operating banks 184 182 176 176 of which: banks with participation of foreign capital 53 51 55 53 including with 100% foreign capital 17 18 20 22 Share of foreign capital, % 36.7 35.8 40.6 41.9 Loans granted, UAH bn 792.24 747.35 755.03 825.32 4 CEE Banking Report-October 2011, RBI 5 NBU Official Data (over 90 days overdue and foreclosed loans + loss loans). In contrast, in the IMF “Financial Soundness Indicators” Publication non-performing loans comprise the categories “doubtful” and “loss” amounting to 15.3 percent of total loans by the end of 2010. 11 NPL loans6, UAH bn 18.02 69.94 84.85 79.29 Share of NPL loans, % 2.3 9.4 11.2 9.6 Source: NBU In the non-bank financial sector, credit unions saw the largest declines. Total assets of credit unions fell by 40 percent between 2008 and 2010, while the number of institutions declined by 23 percent. At the same time, retail deposits held by credit unions fell to about half of their 2008 levels (see Table 4). Banks dominate consumer lending. Historically, 98 percent of all consumer loans were provided by commercial banks. In 2010, bank loans to households reached UAH 186.5 billion while consumer lending by credit unions amounted to UAH 3.4 billion (see Table 4). Table 4: Bank and Credit Union Loans and Deposits to Households in UAH bn 2007 2008 2009 2010 2011 Bank Loans to individuals 153.6 268.9 222.5 186.5 174.7 Bank Deposits of individuals 163.5 213.2 210 270.7 306.2 CU Loans to individuals 4.51 5.57 3.90 3.35 2.28* CU Deposits of individuals 3.45 3.95 2.96 1.95 1.20* Source: NBU, NCRFSM *data as of end September 2011 Prior to the financial crisis, the Ukrainian household credit market had seen a substantial growth. From 2006 to 2008, consumer loans (including mortgages) more than tripled with the share of loans denominated in foreign currencies increasing from 63 percent of all consumer loans to 72 percent (see Graph 1). During the financial turmoil, consumer lending nearly collapsed due to both tightening of credit underwriting standards, large borrowers’ indebtedness and in many cases – inability to service loans due to loss of job or UAH devaluation, and in some cases - reluctance of some borrowers to take loans (deleveraging) due to risks of further economic downturn and lower debt servicing capacity, or fears of unfair actions of debt collection companies or banks in debt recovery and collateral foreclosure. 7 6 NBU Official Data (over 90 days overdue and foreclosed loans plus loss loans). In contrast, in the IMF “Financial Soundness Indicators” Publication non-performing loans comprise the categories “doubtful” and “loss” amounting to 15.3 percent of total loans by the end of 2010. 7 USAID/FINREP, Consumer Lending in Ukraine: Surveying the Landscape, September 2011 12 Graph 1: Outstanding Mortgage and Consumer Loans Source: USAID/FINREP, NBU The Ukrainian insurance sector has shown inconsistent growth in recent years. Following a year of negative growth in 2005, the sector grew substantially from 2006 to 2008. The financial crisis of 2008, however, led to a 30 percent decrease in the $US value of premiums written in 2009. As a result total premiums written in 2010 are only 9.1 percent higher than the volume of business written in 2006. A total of 450 companies (70 life insurers and 380 in the non-life business) operate in Ukraine. Table 5: Insurance Premia 2006 2007 2008 2009 2010 $ US % $ US % $ US % $ US % $ US % bn. Growth bn. Growth bn. Growth bn. Growth bn. Growth Life 0.09 42.10 0.16 54.0 0.21 34.0 0.10 (50.5) 0.11 10.9 PA H* 0.14 (41.15) 0.10 (27.0) n.a. n.a. 0.19 n.a. 0.22 13.8 Non-Life 2.51 6.92 3.31 31.9 3.71 12.2 2.43 (34.4) 2.65 9.1 Total 2.74 9.19 3.57 30.2 3.92 9.8 2.73 (30.4) 2.99 9.5 *Personal Accident and Health Insurance, which is written by non-life insurers in the Ukraine. Source: Axco Global Statistics/Industry Associations/ Regulatory Bodies The growth of the capital markets showed a significant increase in 2004-2007 and then a leveling off during the beginning and through the global financial crisis. Even so, the relation of market capitalization to Gross Domestic Product is still low at 19.08 percent in 2008 (see Table 6). While the reported market capitalization of the primary stock market, PFTS, is currently UAH 182 billion (approximately US$ 22.7 billion), the “free float” (amount of securities available for trading) is estimated at less than 10 percent and may be as low as three to five percent. 13 Table 6: Market Capitalization of Equities bn. UAH 2004 2005 2006 2007 2008 2009 2010 Market 71.1 147.1 222.9 564.7 181.3 145.6 255.0 Capitalization GDP 344.8 441.4 544.2 720.7 949.9 914.7 1,094.6 Market Cap/GDP 20.6 33.32 40.95 78.34 19.08 15.92 23.30 % Source: www.pfts.com The number of public securities registered with the NCRCM has declined significantly from 2004 to 2005. At the same time, the value of the issues has increased markedly (see Table 7). This probably reflects the consolidation and winnowing-out of public companies, many of which became public during the mass privatization efforts over the last fifteen years. Table 7: Registered Issues of Securities bn. UAH 2004 2005 2006 2007 2008 2009 2010 Number of Issues 1,705 1,435 1,419 1,292 1,161 1,144 5,407 Value of Issues 28.34 24.185 43.54 49.97 46.14 162.68 95.55 Source: www.NCRCM.gov.ua The financial crisis has had a significant impact on the bond market, particularly bonds issued by banks. These are frequently considered to be the most profitable and secure bond issues. However the financial crisis may have changed that evaluation and significantly reduced a pool of relatively profitable debt instruments for investment by pension funds. Collective investment funds also saw dramatic increases from 2004 to 2010. Unlike other parts of the financial sector, total assets of collective investment institutions continued to rise in 2008 through 2010 (see Table 8.) Table 8: Growth of Collective Investment Institutions (CIIs) 2004 2005 2006 2007 2008 2009 2010 Total number of CIIs 105 284 519 834 1244 1202 1226 Total number of CII reached the -- 165 401 577 888 985 1095 normative minimum assets value Total number of CII excluding 29 66 109 120 207 245 268 venture funds Assets of CII, bln UAH 1.94 6.90 17.15 46.16 63.55 82.54 108.13 Net Assets of CII, bln UAH 1.52 4.90 13.93 38.74 54.61 72.58 96.45 Assets of CII excluding venture -- 0.45 1.37 4.16 4.56 6.51 8.89 funds, bln UAH Net Assets of CII excluding 0.12 0.40 1.18 3.12 4.05 5.91 8.30 venture funds, bln UAH Source: www.uaib.com.ua The private pension sector remains poorly developed. Ukraine started moving towards establishment of a three pillar pension system in 2004. Pillar II was intended to be a mandatory system of individual defined contribution pension accounts funded from individual and employer contributions. However the second pillar has not yet been implemented. Pillar III is a system of voluntary non-state pension funds (NSPFs) introduced by the 2004 legislation. In 2010, 101 NSPFs 14 were operating in Ukraine with total assets totaling UAH 1,144.3 billion and pension plan contributions from individuals amounting to UAH 41 million (see Table 8). Table 9: NSPFs Indicators 2006 2007 2008 2009 2010 Number of Plans NA 64 n.a. n.a. 101 Number of Participants 193,000 278,700 n.a. n.a. 500,000 Contributions of 5 14 26 32 41 individuals (UAH mn.) Total Assets (UAH mn.) 137.0 280.7 612.2 854.7 1,144.3 Source: Axco Insurance Market reports 2011, USAID Confidence of Ukrainian citizens in NSPFs remains low. By 2008 the value of collective investment institutions (CIIs) was eight times greater than the value of non-state pension funds. The extremely large discrepancy between the NSPFs and CIIs is surprising given the tax benefits associated with the NSPFs. This is due to a number of factors, including the difficulty in withdrawing money from the NSPFs, the long-term nature of the NSPFs, and a degree of investee skepticism as to the adequacy of regulation and safety of the NSPFs. The financial system needs to be made more resilient to potential future shocks. Commercial banks taken over by the state during the financial crisis remain under government administration. In healthy banks, the level of NPLs remains high. In addition, low client demand and high risk aversion limit lending growth while the high level of NPLs continues to depress bank earnings. Volatility in international financial markets raises new risks given significant outstanding external liabilities and the reliance of the balance of payments on sustained roll-over of existing debt. At the same time, the level of non-bank financial institutions remains underdeveloped. Needed is a comprehensive program to strengthen resilience of the financial system against future crises.8 Financial Literacy Survey In the fall of 2010, FINREP conducted a nationally representative financial literacy survey.9 Over a two week period, face-to-face interviews were conducted with 2,014 adults aged 20 to 60 years from across all regions of Ukraine. The survey consisted of 64 questions, covering the respondent’s self-estimation of his/her financial literacy, understanding of basic financial calculations, knowledge of financial terminology and legal rights regarding financial products, use of financial services, and financial behavior. Many of the questions were adapted directly from similar financial literacy surveys conducted by the World Bank in nearby countries such as Russia and Azerbaijan. 10 Financial service coverage in Ukraine is low. The survey found that 39 percent of Ukrainians do not have a bank account. Most of the population limits their use of financial services to basic 8 World Bank Country Partnership Strategy for Ukraine for the Period FY12-FY16 9 http://www.finrep.kiev.ua/download/finlit_survey_6dec2010_en.pdf 10 The survey was conducted by InMind, a Kiev-based survey research firm, and funded by the US Agency for International Development. 15 requirements, such as a current account and plastic card (61 percent). Three-quarters (78 percent) use banks just to pay their utility bills, often by bringing receipts to a bank and making money transfers to a receiving bank at a cash desk. Low use of financial services is due to both lack of savings and weak trust in financial institutions. More than one in four consumers (27 percent) identify the lack of savings as the primary reason for not maintaining a bank account. However 14 percent of the population also cite a lack of trust in financial institutions. Almost half (49 percent) of consumers note that they prefer to keep their savings in cash rather than in a bank account. Very few (just two percent) say that they invest in either an investment fund or a private pension fund. Many Ukrainian consumers are facing financial problems. Households are managing budgets based on limited financial resources. One quarter (27 percent) of respondents state that they are not able to save anything from month to month. Most consumers refer to low income as the main reason for a lack of savings (76 percent). Just 14 percent indicate that–at the end of the month– they had money available for savings. However a larger issue is weak trust in the Ukrainian financial sector. Only five or six percent of respondents trust investment funds or private pension funds (although 50 percent trust the National Pension Fund). More trust insurance companies at 11 percent of respondents. However even banks were trusted by only 15 percent of respondents. One out of four consumers has had a bad experience with a financial transaction. Of those who report a bad experience with financial services, the most common problem involves bank deposits (29 percent) and consumer loans (28 percent). Only 17 percent believe that if a financial dispute arose with a financial institution, it would likely be resolved in favor of the consumer. Part of the problem is weak financial literacy. The survey found that almost two thirds of the respondents consider themselves financially literate. However only 22 percent of those surveyed could correctly answer five out of seven simple mathematical questions which may be helpful to be able to manage one’s finances. More than half could only answer three or fewer questions (out of seven) correctly. Furthermore most households do not know how to resolve disputes with financial institutions. When asked which organization they could appeal to for help, 22 percent of respondents had no idea. Only about one-third (31 percent) referred to the courts. Even though the state regulators have no authority to resolve disputes between individual consumers and financial institutions, one in three respondents would refer their complaints to the regulators, of which eleven percent of respondents said that they would complain to the NBU, another 11 percent to the SCRPI and eight percent to the NCRFSM. At the same time, many Ukrainian consumers are not interested in the news about the financial sector. Over 43 percent of consumers state that they do not follow financial news at all. Among those who follow financial news, the most frequently cited sources of information on personal finance are newspapers, magazines and television (66 percent altogether), friends (19 percent), and specialized websites (17 percent). When choosing a financial service, more than half (52 percent) rely on advice from friends and family. One quarter (25 percent) listen to the 16 consultants employed by the financial institution and about the same (23 percent) read promotional materials. Just 14 percent use advertising materials, while only 9 percent of consumers use recommendations of independent consultants. RECENT INTERNATIONAL DEVELOPMENTS IN FINANCIAL CONSUMER PROTECTION AND THEIR APPLICATION TO UKRAINE The Group of Twenty (G20) has encouraged the international financial community to strengthen regulation of consumer protection in financial services. In summits and meetings starting in September 2009, the leaders of the G20 countries highlighted the need to improve global standards for financial sector regulation related to financial consumer protection. During its October-November 2011 Meetings, the G20 adopted a set of High Level Principles for Financial Consumer Protection, prepared by a Task Force of the Organization for Economic Co-operation and Development (OECD).11 In addition, the G20 received the report of the Financial Stability Board (FSB) on Consumer Finance Protection with particular focus on credit, for which an international Consultative Group provided comments.12 The World Bank was a member of both advisory groups. Development of global standards on financial consumer protection has also been conducted in other international organizations. Supporting the work of the OECD, FSB and the international community, the World Bank has prepared Good Practices for Financial Consumer Protection.13 The Good Practices summarize the best of international laws, regulations, codes of conduct and policies related to consumer protection in financial services worldwide and have been used extensively in country reviews and diagnostics of financial consumer protection. (A detailed assessment of Ukraine’s compliance with the Good Practices is provided in Volume II of the Diagnostic Review.) Other international organizations have also expanded their work in financial consumer protection. In response to the G20 communiqués of 2011, the international network of financial consumer regulators, FinCoNet, formally adopted a charter and started to expand its activities to help support the further development of global standards on financial consumer protection. In addition, with the support of the World Bank, members of the International Network of Financial Services Ombudsman Schemes (INFO) reviewed the experience of countries in Western and Central Europe and developed a set of proposed guidelines for financial ombuds structures worldwide.14 Efforts have also been made by civil society working with government regulators. Consumers International, the umbrella organization for consumer agencies and associations worldwide, has prepared policy papers supporting the development of international standards and guidelines on consumer protection in financial services. The European Commission has also expanded its focus on consumer protection in financial services. The Commission has conducted extensive studies on retail financial services, including 11 See http://www.oecd.org/dataoecd/58/26/48892010.pdf 12 See http://www.financialstabilityboard.org/publications/r_111026a.pdf 13 http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTFINANCIALSECTOR/0,,contentMDK:22876721 ~pagePK:148956~piPK:216618~theSitePK:282885,00.html 14 http://siteresources.worldbank.org/EXTFINANCIALSECTOR/Resources/Financial_Ombudsmen_Vol_1.pdf 17 surveys on residential mortgages, retail consumer credit, investment advice, distance marketing of financial services, consumer education in financial services, and the Single Euro Payments Area (SEPA) initiative. The studies are used as input into the Commission's Directives related to consumer finance. In light of Ukraine’s interest in signing an Association Agreement with the European Union, the Diagnostic Review also notes the status of Ukrainian consumer finance legislation vis-à-vis the EU Directives on consumer finance provided in Annex 1. Numerous initiatives are also underway to strengthen financial literacy and financial education worldwide. Starting in 2008, the OECD has led the creation of the International Network on Financial Education (INFE) comprising financial educators worldwide. Over several years, the OECD has also developed Good Practices for Financial Education and Awareness (2005), as well as Good Practices on financial education and awareness relating to credit (2009), insurance (2008) and private pensions (2008). Under development are draft Good Practices for insurance intermediaries and insurance consumers' education and protection. Under a $15 million Trust Fund provided by the Russian Federation, both the World Bank and the OECD are conducting primary research related to financial education strategies and the measurement of financial literacy programs. In addition, with the support of the Bill & Melinda Gates Foundation, the World Bank is conducting a multi-year survey measuring levels of financial literacy in households worldwide. Behind the various guidelines and recommendations is a global view that an efficient and well-regulated financial system should provide consumers with five key elements:15 (1) Transparency, by providing full, plain, adequate and comparable information about the prices, terms and conditions (and inherent risks) of financial products and services: (2) Choice, by ensuring fair, non-coercive and reasonable practices in the selling and advertising of financial products and services, and collection of payments; (3) Redress, by providing inexpensive and speedy mechanisms to address complaints and resolve disputes; (4) Privacy, by ensuring protection over third-party access to personal financial information; and (5) Trust, by ensuring that financial firms act professionally and deliver what they promise. In the Diagnostic Review, consumers are considered to be individuals who use financial services for consumer reasons (rather than business investment). The Diagnostic Review thus uses the definition of consumer as used in the EU. Thus natural persons who use financial services for business and investment purposes are not considered as financial consumers for the purpose of the Review. Note also that the Review does not consider beneficiaries or other stakeholders (such as the beneficiaries of payments under an automobile accident insurance policy) to be consumers. The focus is on the decision-making process of the individual who buys (or sells) a financial product or service for use by himself or herself (or their households). UKRAINE’S CHALLENGES AND NEXT STEPS 15 World Bank, Good Practices for Financial Consumer Protection, Consultative Draft, March 2011 18 Ukraine’s challenge in improving consumer protection in financial services is one that is shared by most post-transition economies. The country’s financial regulatory and supervisory structure was established with the objective of ensuring the stability and soundness of the financial system. However over the last ten years, tens of millions of consumers have entered the financial marketplace—for the first time for any member of their family or immediate friends. Consumers have started using formal financial services in unprecedented numbers. With the development of an increasingly consumer-based economy, financial institutions see households as a new customer segment. Yet the financial supervisory structure (and the laws and regulations) were those required where financial institutions primarily looked to corporations and government agencies as their primary customers. With households as a new--and potentially very risky--customer segment for financial institutions, consideration needs to be given to the supervisory structures needed to ensure long-term stability of the financial sector. Measures should be taken to ensure that consumers have the information and resources needed both to protect their legal rights and to be fully cognizant of their legal obligations. At the same time, a light touch is needed to ensure that financial institutions compete on price and quality of service, particularly in providing new financial services to previously under-served households. As the recommendations of the Diagnostic Review illustrate, there are many actions required to bring consumer protection and financial literacy building on par with the best international practices. These actions should be coordinated and systematically introduced throughout the financial market to avoid the risks of uneven regulatory regimes and the ensuing regulatory arbitrage. The government has decided to act. In line with this diagnostic report, the government of Ukraine has recognized the need for a substantial redesign of the legal and regulatory framework of consumer protection and market conduct in the area of financial services. The Government has established a Government Task Force to prepare a draft Strategy for Financial Consumer Protection in Ukraine and – based on the approved Strategy – an Action Plan for Strengthening Financial Consumer Protection in Ukraine for 2012-2017. The government has also created a high level Legal Reform Working Group that should propose a redesign of the legal and regulatory framework for the Ukrainian financial sector. The Diagnostic Review recommends a strategy consisting of seven pillars of financial sector reform. They are: 1) Develop a vision and reach agreement on actions at the highest policy level; 2) Enhance institutional structure and capacity; 3) Upgrade the legislative framework; 4) Establish an effective dispute resolution mechanism; 5) Develop a national financial education strategy; 6) Enhance consumer disclosure, business practices, governance and transparency; and 7) Create new insurance and guarantee schemes (but only once the first six pillars are in place). 19 Develop a vision and reach agreement on actions at the highest policy level A long-term plan for improving consumer protection and financial literacy should be prepared and approved at the highest policy level. Strengthening the rights of consumers of financial services and building the necessary levels of financial literacy among the population will require a long-term commitment to addresses the key issues. The first pillar is thus to develop a clear strategic vision of a financial sector that treats its retail customers fairly and transparently— and then to ensure that the strategy is strongly endorsed at the highest policy level of the Government and Presidential administration. The strategy should cover the period of 2012 to 2015 or beyond and include a program for revising and upgrading the legislative framework. Once the vision has been articulated, a special task force should be appointed to take the lead in policy formulation to implement the strategy. Enhance Institutional Structure and Capacity The starting point for any comprehensive program on financial consumer protection lies in a review of the financial supervisory structure. Fortunately Ukraine has just three financial supervisory agencies. However the challenge is that only two of the agencies—the NCRFSM and the NCRCM--include consumer protection as part of their formal mandates. The mandate of the third, the NBU, has no reference to consumer protection beyond protection of the interests of depositors. At the same time the SCRPI, which covers a broad range of consumer products from clothing to food, is responsible for supervising consumer protection related to consumer credits. Not surprisingly, consumers are confused as to whom they should approach if they have a question or a dispute. The FINREP survey found that 52 percent of consumers had no idea which agency to approach or would complain to one of the financial supervisory agencies that has no authority to help the consumer resolve the issue at hand. Supervision of financial services providers is conducted by three state authorities. The NBU regulates and supervises banks as well as the payments system. The NCRCM supervises stock market participants. The NCRFSM supervises all other non-bank financial institutions, including credit unions, credit information bureaus, pawn shops, leasing companies, insurance companies, and housing finance schemes that are not implemented through a mutual fund, or other securities structure. The authority of the financial supervisory agencies to conduct market conduct supervision is uneven. Under the LFS, one of the objectives of the NCRFSM is protect the interests of consumers of financial services. Similarly the NCRCM is responsible for market conduct supervision of the securities markets. The NCRCM does receive investor complaints and attempts to resolve the disputes, particularly if the issues appear to be systemic in nature. If warranted, the NCRCM can also bring an enforcement action to stop securities violations. By contrast, the NBU is formally mandated to protect the interests of bank depositors but not consumers of other banking services. As the prudential supervisor of banks, the NBU has three mandates: first, to maintain 20 price stability and, second, to promote stability of the banking system. (The third mandate is to promote the sustainability of economic growth.) The Law on the NBU defines the objectives of banking supervision as maintaining "security and financial stability of the banking system and protection of interests of depositors and creditors". However the NBU does not interpret supervision of the business conduct of banks as part of its stability mandate. Thus banking consumers who are depositors benefit from NBU’s supervision of the banking sector but consumers of other banking services (such as loans and payments) do not have the same protection. At the same time, the SCRPI has only limited authority with regards to financial services. The SCRPI has responsibility for general consumer protection issues in Ukraine and it deals with complaints on financial institutions that the SCRPI receives. The SCRPI also advises consumers in lawsuits and acts as an expert witness during the court proceedings. However, the SCRPI’s authority in the field of financial consumer protection is limited to consumer credit.16 Three possible options could be considered. The first option is that the formal authority of the SCRPI be extended to cover all financial services, not just consumer credit. The second option is that the financial supervisory agencies create special Consumer Protection Departments, with a coordinating committee to ensure that the activities of the three financial supervisors are consistent with each other. The third option is to create a special Financial Consumer Protection and Financial Education Commission (FCPFEA) with responsibility for dealing with market conduct supervision for financial institutions (and for coordinating the national strategy on financial education). All three options have advantages and disadvantages. Whichever option is chosen, both functions (prudential and consumer protection supervision) will need to be balanced--and the two functions will need to complement each other to ensure the effective functioning of the supervisory system. Table 10 provides a summary of the three options. Table 10: Comparison of Options of Institutional Structures for Financial Consumer Protection Expand the role of the State Create specially focused Set up a new Financial Consumer Consumer Rights Protection Consumer Protection Protection & Financial Education Inspectorate to financial services Departments in the financial Agency supervisory agencies Advantages Advantages Advantages • Long existing structure with • Can be promptly instituted • Specialized agency with clear regional representation without legal changes mandate and powers will be • Can be relatively efficient • Can work in close coordination better fit to address conflicting through synergies with other with financial supervisors issues and establish balance of non-financial products and • Financial supervisors have powers and interests economy of scale adequate knowledge of the • Absence of conflict of interests markets and products • Can play important role in developing uniform for all the financial Challenges Challenges Challenges 16 Constitutional Court of Ukraine, Ruling on the consumer rights protection with regard to credit services (Case No. 1-26/2011) 21 • No knowledge and experience • Other priorities of financial • Creation of a new agency in financial services supervisors can dominate, requires legal changes • Limited existing capacity and neglecting the importance of • Funding and staffing are always recognition consumer protection serious problems, unless market • Due to large spectrum of • Conflict of interests may co-financing mechanism will be tasks/products, financial prevent fair treatment and introduced (which so far was services consumer protection enforcement against non- impossible for financial can be marginalized compliant institutions regulators) • Funding is constrained • Coordination between • Co-financing by the market will • Coordination with financial financial regulators in require legal changes and regulators and other agencies in consumer protection, preparatory work financial sector for the information sharing and • In Ukrainian context it may take purposes of standards setting, financial literacy will be several years (from inception to uniform policies and financial required but has been difficult implementation) to set up a new literacy may be difficult if in Ukraine agency possible at all due to various • Coordination with regulators level of political standing and may be possible only if the leverage agency will have respective recognition and powers The first option—expanding the role of the SCRPI--is the most problematic. Looking at the experience of general consumer protection agencies in Bulgaria and Romania, for example, their challenge is in providing sufficient resources to properly handle financial services issues. The technical aspects of financial services require specialized staff with expertise and experience in financial services. General consumer protection agencies, such as that of Sweden, set up a special department dedicated to financial services. However such agencies find that they need to offer financial staff compensation levels that are higher than those of other staff, thus creating discrepancies and uneven treatment of staff within the same agency. At the same time, such agencies finds themselves constantly training new financial staff since once staff members are proficient in financial services, they are often hired away by the industry. The second option—creating special Consumer Protection Departments in the financial supervisory agencies—is viable. Among the three supervisory agencies, the NBU would have the most difficulty since it would likely require an amendment to the Law on NBU to provide an explicit mandate to facilitate consumer protection in the banking sector. (Note however that the NBU can bring the amendment directly to the Parliament and does not have to go through the Government.) Consumer protection regulation and supervision would thus be a part of the mandate of the current three financial markets supervisors and each would establish strongly independent departments responsible for this area with sufficient powers and resources. Some countries, such as Azerbaijan, have set up consumer protection departments within the banking supervision department of the central bank. However in other cases, the banking supervisor has appointed a specific member of the board of directors to be responsible for consumer protection issues. The difficulty is that within a central bank, if there is a perception that financial stability and consumer protection are in conflict, the central bank will generally favor financial stability issues and view consumer protection issues as a second priority. At least by appointing a board member for 22 consumer protection, the conflicts can be addressed at the issue of the board of directors rather than at a middle management level. However the primary difficulty with the second option is that the coordinating committee would have no official legal status and thus would have no ability to enforce its decisions. The third option—setting up a new Financial Consumer Protection and Financial Education Agency (FCPFEA)—may be the most effective approach for Ukraine. A separate Commission focused on financial consumer protection (and financial education) would ensure that the issues related to consumer protection in financial services receive sufficient high-level attention from government authorities that they will be resolved. Recent trends in financial consumer regulation point to the development of such specialized agencies, as seen in the creation of the Financial Consumer Agency of Canada (2001), the establishment of the Consumer Financial Protection Bureau in the United States (2011) and the proposed Financial Conduct Authority of the United Kingdom. Using the approach applied in both Canada and the United States, the current financial supervisory agencies would still be responsible for supervision, inspection and enforcement regarding the activities of the financial institutions. However the FCPFEA would set standards and guidelines for market conduct practices of financial institutions as well as supervise firms as regards market conduct issues. It would also conduct market research to identify trends (and issues) for financial consumers. It may also be helpful to assign responsibility for consumer financial education to the new Commission. Thus its role should be to coordinate and prioritize all work in the area of consumer protection in financial services and financial literacy, ensuring the level playing field for financial institutions by keeping all regulation as similar as possible across sectors, discussing needed legislative changes, and coordinating and evaluating financial literacy projects to seek the most effective programs. An issue remains also how to handle the thousands (and potentially tens of thousands) of consumer complaints about financial services. The Diagnostic Review for Ukraine suggests the creation of an ombuds structure, discussed below under Redress. The Review considers the options of: (1) the current structure of reliance on the court system, (2) development of industry-based ombuds services and (3) establishment of an autonomous ombuds service established by statute. If the third option is selected, it may be helpful to combine the statutory ombuds service with the FCPFEA into just one government institution. However in this case, strong internal controls (known as “Chinese Walls”) would be needed to clearly separate out the two functions. Consideration should also be given to measures that will ensure a high level of accountability and transparency in the new Commission (as well as the existing financial supervisory agencies). For example, it may be helpful to require that all the supervisory agencies prepare a five-year supervisory plan. The plan would include key performance indicators and an annual report, describing the Commission’s key activities and findings as well as the work plan for the following year. The annual report could include information on the state of the market from a consumer protection perspective. It should also discuss market conduct trends. In addition, it should report on the outcomes of the Commission’s consumer protection activities. The annual report should be presented to Ukraine’s President, the Government and the relevant committees of the Parliament. To ensure a high level of accountability, it would be best if the supervisory plan were also made available to the public, and particularly to the consumer advocacy organizations. 23 Industry associations should also be consolidated and strengthened. Most parts of the financial sector have more than one industry association: the banking sector has no fewer than five separate industry associations. However even with the large number of associations, in some areas (such as credit unions) almost half of the institutions belong to none of the associations. In addition, many associations are filled with members who are not actively involved in the sector but nevertheless have the right to vote in the association’s policy decisions. Consumer organizations have, as yet, little expertise in financial sector issues. Most consumer organizations follow general issues such as food and district heating. Furthermore the organizations that do cover financial services tend to be focused on a single issue (such as the Association for Support to Deceived Investors) and lack sufficient institutional capability to represent the interests of a broad range of financial consumers. Nevertheless, as members of civil society, consumer organizations can play a valuable role in monitoring how financial institutions treat their retail customers. Consumer non-government organizations could be responsible for a number of functions, including collecting and disseminating comparable offers from financial service providers, providing financial education and debt counseling for consumers, and potentially representing consumers in court cases. However the first step is building the institutional strength of consumer organizations. Such institution-building could be accomplished through matching grant programs from the state budget and possibly supplemented by donor funding. It would also be helpful to obtain support from the global consumer organizations, such as Consumers International. Other national consumer associations in other countries have developed considerable expertise in this domain and may be prepared and able to share it with Ukrainian colleagues. This expertise involves comparative assessment of financial products, and participation in consumer education programs, but also includes participation in policy making, often at national legislative level and regional (e.g. the EU) or global (e.g. OECD/G20) level. A support mechanism for consumer organizations should be developed. While the originality, insight and independence of civil society groups may result in work of a high standard, it may be difficult for such work to be maintained on a regular basis. This can be problematic as the needs of consumers are permanent. For this reason civil society / consumer association groups may need to work in partnership with regulatory authorities regarding provision of comparable consumer information and monitoring of the financial market. Consumer organizations may be involved in other key areas. The knowledge of consumer issues as well as the ability to collect and analyze information from the grassroots level and bring problems to the attention of regulators mean that consumer associations could also be usefully consulted regarding proposed legislation or regulatory arrangements governing consumer protection. This should not usurp in any way the ultimate authority of the relevant sector regulators, and the regulators also have to bear in mind the need to balance a variety of consumer interests as the consumer interest is not always monolithic. But it is one of a range of sources of information and consultation with consumer associations can be a useful ‘testing ground’ for policy proposals. 24 Upgrade the Legislative Framework The legal and regulatory framework for consumer protection in financial services in Ukraine is fragmented and inconsistent. There are many laws and regulations that refer to the protection of financial services consumers and draft laws seem to be issued on a monthly basis. However, the existing legal provisions are not sufficiently specific and protect consumers only indirectly. The Law on Financial Services and State Regulation of Financial Markets (LFS) establishes general legal principles in the area of provision of financial services and assigns the State Commission for Regulation of Financial Services Markets (NCRFSM) responsibility for regulation and oversight of the financial services market. Similarly the Law on State Regulation of Securities Market determines the framework of state regulation and control over the securities and gives the Securities and Stock Market State Commission (NCRCM) authority to handle retail investor protection issues. The Law on the National Bank of Ukraine governs the supervisory responsibilities of the National Bank of Ukraine (NBU). The Law on Consumer’s Rights Protection addresses basic consumer issues such as the quality and safety of goods and services, information concerning goods and services, prohibition of unfair business practices, judicial protection of consumer rights and liability for violation of consumer rights protection legislation. The State Consumer Rights Protection Inspectorate (SCRPI) is responsible for enforcing the Law on Consumers’ Rights Protection. Depending on the final structure of the financial consumer protection function, new laws (or revised legislation) will likely be needed for the financial consumer supervisory agency and for consumer lending. As noted below, new laws may be required to: (1) establish a special financial consumer protection agency and (2) regulate consumer lending in accordance with the EU Directive on Consumer Credit. It would also be helpful to conduct a systematic review of Ukraine’s consumer finance legislation compared to the EU Directives, particularly the EU Directive on Consumer Credit. (A summary of comparisons is provided in Annex 1.) Three choices exist on how to prepare the legislation necessary to provide sufficient authorization for market conduct regulation and supervision. Table 11 provides a summary of international approaches to drafting the legislation that establishes the authorized financial consumer protection supervisors. Table 11: International Approaches to Laws for Financial Consumer Protection Special Law on Financial Part of General Consumer Embedded into Financial Consumer Protection Protection Law Sector Legislation Canada Australia United Kingdom USA France Ireland Serbia Poland Slovakia Korea Belgium Czech Republic Mexico Finland Hungary Peru Albania Armenia Colombia Singapore New Zealand Korea India Brazil 25 Bosnia & Herzegovina Costa Rica Indonesia (planned for 2012 / 2013) Malaysia In addition, a new law on debt collection is needed as a matter of some urgency. Currently debt collection is conducted using the laws intended for factoring and new legislation is needed. Consumer advocacy organizations complain that an original debt of UAH 4,000 can increase to UAH 40,000 as the result of compounding fees and charges and consumers may be harassed by unethical debt collections agencies. Regulations should specify the types and forms of communication with debtors and should ban aggressive and deceiving business practices. Legislation should also provide caps on maximum penalties and fees lenders may charge for late payments. Debt collectors should be permitted to accept payments in foreign currencies for collection of loans made in foreign currencies. In addition, debt collectors should be required to inform credit history bureaus when the debt is paid in full. Until the law is prepared and passed, the NBU and NCRFSM should work with the industry association of debt collectors to identify unfair or aggressive business practices and promote proper functioning of debt collection. The NBU and NCRFSM should also monitor the banks' and credit unions' policies and practices for debt collection to identify possible consumer abuses. Debt collection agencies should be licensed. The licenses should be issued by the agency responsible for consumer protection in the banking sector (i.e. the NBU or the FCPFEA). In addition, fit-and-proper requirements should be set for management, members of the boards of directors and the significant owners of debt collection companies. The licensing authority should be empowered to withdraw the license for any serious misconduct and thus prevent banks from using this agency as banks would be legally required to collect their debts only by themselves or through licensed debt collection agencies. As part of the licensing process, debt collection agencies would be obliged to prove: (1) adequate capital requirements, including the source of the capital: (2) sufficient technical equipment, including a call center able to record all calls to and from debtors, manage the workflow management and convert paper documents into electronic form; and (3) clear internal procedures and training programs for all employees that come into contact with debtors. As licensed financial institutions, debt collectors should be permitted to collect debts both in local and foreign currency. A law on pawn shops is also needed. Pawn shops are regulated under the general financial services legislation and supervised by the NCRFSM. However they are sometimes used to avoid other specific regulations. For example, in the absence of other legislation, pawn shops are permitted to place a lien on apartments and houses used as collateral for loans. Since banks are prohibited from evicting households from their primary residence, pawn shops may be used to provide consumer loans using residential property as collateral. Pawn shops should be used for very short-term lending, using jewelry and other valuables in a sale and repurchase (or Lombard) arrangement. A new law on pawn shops should clarify that pawn shops are prohibited from term lending and from taking immovable property as collateral. The Law on Protection of Personal Data should be revised. While information defined as bank secrecy is protected, information usable for marketing purposes is insufficiently protected by law. Consumers should be given an explicit right to prohibit any information-sharing with third parties 26 (except for information sharing based on legal requirements). However consumers should also be given the right to opt out of any previous information sharing arrangements, with the third parties being obliged to destroy all information they hold. In addition, the NBU, NCRFSM and NCRCM should ensure they have enough resources to conduct supervision so that the requirements for data protection (including both technical features and staff training) are met in all financial institutions. Consideration could also be given to developing a law on personal bankruptcy. In light of the high levels of debt accumulated by consumers since 2000, it may be helpful to develop rules for bankruptcy of individuals. This would be based on the agreement of all involved lenders, allowing for partial debt write-offs after the indebted person agrees to repay a part of his/her debts over the following three to five years. As with other consumer finance legislation, drafts should be prepared by the financial supervisory agencies in consultation with the industry associations and consumer organizations. Special attention should be paid to housing construction financing mechanisms alternative to a conventional bank mortgage lending. Specifically, this relates to the housing construction investments by the households established by the Law on Special Mechanisms for the use of individual investments in housing construction. These alternative financing schemes pose significant risk for retail investors (see Box 1). Since the crash of 2008, many of the housing construction projects have been suspended. Indeed some were never started, leading to substantive concern for investor protection. These problems stemmed from five key issues: 1) Lack of sufficient disclosure prior to entry into the contract, including information about effective real interest rate (including fees, commissions, insurance and taxes), provisions of the loan agreements, requirements for the foreclosure of the collateral and eviction, availability of social housing, existing state subsidies and their distribution channels, and the risk of investing; 2) Lack of detailed rules on advertising for the construction projects; 3) Complex legal relationships between the trustee for the funds and the retail investor (“beneficiary”) resulting in weak responsibility and liability for the trustee in relation to the investor; 4) Lack of a clear legal relationship between the beneficiary and the developer of the property thus preventing beneficiaries from directly enforcing their rights; and 5) Unclear procedures and rights of investors for the termination of their contracts and settling of accounts. An inter-agency coordination mechanism/board should be created to address the five weaknesses related to special housing financing mechanisms. Thus the NCRFSM, NBU and NCRCM should work together to establish specific rules on pre-contractual disclosure and advertising to the public. The committee should also agree on regulations needed to clarify the complex legal relationships between trustees and investors and between beneficiaries and developers. Regulations should also clarify the procedures and investors’ legal rights in termination of such contracts and settling of accounts. Box 1: Background on Special Housing Financing Mechanisms A conventional Ukrainian mortgage finance market began development in the middle of 2003 and early 2004 following the enactment of the 2004 Law on Mortgage. Banks have launched mortgage lending 27 activities somewhere in 2004, showing record high levels of portfolio growth during 2005-2008. However, long before the new Law on Mortgage was enacted, alternative schemes of housing finance were developed, first offered only by Bank Arkada (under the special arrangement (supported by the Law) with the municipally owned construction company Kyivmiskbud) and then expanded to other banks and non-bank institutions after adoption of a new Law on Special Mechanisms for Housing Construction with the use of individuals’ investments (2004). In this mechanism (further elaborated and expanded during 2005-2008), future homeowners provide up- front financing for housing construction through a respective SPV (several different legal vehicles similar in nature but regulated by different laws), with all three financial regulators involved into the oversight of various players, schemes or fragmented parts of this process. Specifically, under the above mentioned Law on Housing Construction, Construction Finance Funds (CFFs) and Real Estate Management Funds (REFs) can be established, and as non-bank financial institutions they are regulated by the NCRFSM. Such funds can be established by banks, developers, construction companies. Albeit there are formal requirements for “firewalls”, many banks often act as trustees (fund managers) for CFFs established by the related construction companies or developers (like in the case of Bank Arkada). Apart from the NBU regulation, banks as trustees/asset managers, or issuers of mortgage securities are also regulated by the NCRSM. Finally, mutual funds under the Law on Collective Investments (ICIs) establish open or closed ended housing construction funds for construction companies or developers, and are subject to regulation of NCRCM. In all these housing financing mechanisms services (more specifically – “square meters”) are sold to retail investors (under the securities sale or investment agreements) , who have the right to move into the housing once construction is complete. Of the retail investor housing finance projects, the CFF and REF structures are the most commonly used. At end 2010, only 10 financial companies were allowed to issue REF certificates and 4 of them established REF. Therefore, vast majority of investments is made through CFFs or ICIs (Mutual funds). As of December 2010, there were 87 financial companies licensed to raise funds from investors (“trustors” or “beneficiaries”) to finance construction projects and/or complete the performance of other transactions with residential real estate. Over 12,000 individuals and 122 legal entities were acting as trustors/beneficiaries (means – investors) and had entered into contracts with financial companies acting as “trustees” for participation in CFFs. During 2004-2009 the market has been shaken by news about bankruptcies of some construction schemes, misuse of funds, or other improper activities bringing significant losses to the individuals. Thousands of people face the risk of both losing their money and not-receiving the long-awaited apartment in the environment when ¼ of population of Ukraine needs housing conditions improvement. Unfortunately, under the existing legal mechanisms, the risk of failure to complete housing construction (and therefore the risk to individuals’ investments) is vested in the real estate development company, while the role of a trustee in actual oversight of the efficient use of people’s money is limited and/or inefficient for a number of reasons, starting with conflict of interests, lack of oversight capacity and limited knowledge in housing construction of trustees. Source: Mission analysis Whatever choice is made on the legislation for financial consumer protection, it would be best to take a “holistic” approach to legislative reform in the financial sector. As indicated by the graph below, new legislation—and revisions to existing legislation—need to be considered in the context of the rest of the financial sector legislative framework. Thus when revising legislation, 28 care should be taken to ensure that that the new/revised financial legislation is structurally clear, detailed and not in conflict with other special laws. 29 30 Establish an Effective Dispute Resolution Mechanism Consumer complaints provide useful information on the state of consumer finance. For financial supervisors, complaints regarding consumer financial services provide a window into the daily business activities of financial institutions—and insights into the internal governance of the institutions. In this sense, consumer complaints represent an early warning signal of problems to come in the financial sector. The primary source of redress for financial consumer disputes is the court system. Cases dealing with financial consumer rights protection fall within the jurisdiction of the general courts. According to statistics provided by the appellate courts, in 2009 local courts of the first instance examined 197,600 civil-law disputes arising from lending relations.17 The majority of court disputes between consumers and banks related to loans. However the Ukrainian court system is reportedly slow and very unpredictable in its decisions. The general courts dealing with claims related to financial services lack expertise in financial and economic matters. Some industry associations have recently set up arbitration mechanisms but they are not effective mechanisms of redress for consumers. In 2011, the League of Insurance Organizations of Ukraine created a mediation and arbitration service, which is available to consumers to resolve disputes with insurance companies. A similar board was established by the Banking Association. However a 2011 court decision has ruled that arbitration boards are not empowered to hear consumer disputes, thus invalidating the role of industry-based arbitration boards for households’ disputes. As a first step, all financial institutions should be obliged to maintain internal consumer complaint departments. It would be helpful if NBU, NCRFSM and NCRCM could require that all financial institutions formally establish internal complaints resolution procedures. The law should require single point of contact for consumers, documented procedures for dealing with sales and claims disputes and independent reporting on the status of complaints to the institutions’ board of directors. In addition regulations should require that: 1) All complaints be formally recorded in a single complaint-handling system whatever method they were lodged–in writing, personally in branches, through a call center or via email; 2) The websites and branches of the financial institution make information on how to lodge complaints easily available, including providing all contacts; 3) All actions, communication and documents related to a complaint be recorded in the complaint-handling system; 4) All complaints be acknowledged in writing or via email within three working days of receipt and the receipt should include direct contacts (name, position, telephone and email) of the person dealing with the complaint; 17 USAID/FINREP. Financial Services Consumer Protection in Ukraine: Legal Analysis, September 2011 31 5) All complaints be answered within 30 days unless the issue is too complex and in such cases, the complainant should be informed within 30 days that the complaint will take longer to be handled; 6) Complaints be analyzed and the financial institution’s board of directors be provided with an analytical report twice a year, with recommendations on how the products and processes could be updated to limit the number of received complaints; and 7) The analytical report be provided to the financial supervisory agencies and the agencies should use the reports to consider amendments to legislation or regulations. Financial institutions should be required to help consumers learn how to submit complaints. Consumer information should be made available in bank branches and other offices of financial institutions, on their websites, in contracts and brochures. The information should explain how a client may complain or raise a question regarding his products, first internally through a designated contact point and if not satisfied, then through other channels. Any answer from a bank regarding a client's complaint should also disclose what other steps the client may take if he is not satisfied with the handling of his/her complaint. The financial supervisory agencies should also review complaints as part of onsite supervision. The NCRFSM and NCRCM already conduct such reviews. The NBU should also do so also in a more systematic manner, especially since banking services are the most commonly used and complaints in Ukraine are often associated with repayment of deposits. This is one of the most important issues for financial stability, consumer confidence and prevention of run on banks. The requirements should also be periodically examined as part of regulatory onsite examinations to determine if full compliance is achieved. Using their complaint data, financial institutions should be obliged to present recomendations to their boards of directors on proposals for improvement of consumer protection—and the NBU could follow-up to see how well the decisions of the boards are implemented. The financial supervisory agencies should also review trends in consumer complaints. The financial supervisory agencies should regularly analyze complaints they receive as well as complaints information submitted by all supervised financial institutions. The agencies should also present their analysis as well as proposals for improvement of consumer protection based on the analysis to their respective boards, the financial ombudsman and either the FCPFEA or the coordinating committee, depending on which is established. The industry associations and consumer organizations should also be encouraged to analyize the trends and present suggestoins on measures to improve financial consumer protection. Creation of a financial ombudsman is also strongly recommended. In countries such as the United Kingdom, Ireland and Germany, the presence of an effective ombuds structure substantially contributes to building strong consumer confidence in the financial sector. Two models for financial ombudsmen are available: (1) ombudsmen appointed by the industry associations and (2) an independent statutory ombudsman. In countries, such as Germany, a ombuds structure of ombudsmen for each part of the financial sector has proven effective. The disadvantage of the industry-based model is that consumers may perceive the ombudsman as someone who will always decide in favor of the financial institution and against 32 the consumer. The German Banking Ombudsman addresses this issue by ensuring that the powerful consumers organization has the opportunity to appoint one of the three judges deciding a case. However Ukraine is very different from Germany. In each part of the financial sector, there are at least two industry associations—and five separate associations in the banking sector. Furthermore for some types of financial institutions, such as credit unions, about half of the institutions belong to neither industry association. Two industry assocations—one for insurance and another for banking--set up arbritation boards. In addition, the Professional Association of Registrars and Depositories (PARD) has established an arbitration board that is used on a regular basis by market participants. However retail investors often find the arbitration too expensive for small claims. A still more important issue is that the Constitutional Court has determined that the arbitration boards are not authorized to hear complaints from consumers. The Review recommends that a statutory ombudsman be established to cover all financial services. As noted in Annex 2, the countries with independent statutory ombudsmen enjoy the highest level of consumer confidence.18 A single statutory ombudsman would make it easy for consumers to identify to which agency they should submit their inquiries and complaints. Established by law, the independent ombudsman would have the authority to make decisions on consumer finance issues where the decisions are binding for the financial institution but not for the consumer. It is recommended that the maximum amount of the ombudsman’s award be set relatively low. Most consumer finance disputes are over small amounts of money and disputes over substantial amounts should be resolved through a full court process. The maximum amount for decisions by the German Ombudsman is Euro 5,000 and it may be helpful to set an amount of UAH 10,000 or even UAH 20,000. The amounts should be set low enough to ensure that it is not worthwhile for financial institutions to debate the award but will address most consumer finance disputes with financial institutions. The ombuds service should be set up in accordance with best international practice. This requires that the ombudservice adhere to the principles of independence, fairness, accessability, accountability and transparency for such services. In addition, the scope of services and methods and remedies should be clearly defined and should cover all financial services.19 In principle, the financial ombuds service should meet several key criteria. The service should: (1) be free for consumers; (2) make decisions binding on financial institutions for complaints for small amounts, for example up to UAH 20,000; (3) permit the consumer to go to court if he/she is not satisfied with the ombudsman’s ruling; (4) regularly analyze complaints brought to the ombudsman and report main issues and trends yearly to the financial services supervisors, the government and the relevant parliamentary committee to inform their work on regulation of financial services; (5) be appointed by a high authority (either the president or the government) and be independent in his decisions; (6) be financed through financial industry contributions, with each financial institution paying a basic yearly fee that covers the first three complaints and then the institution is charged an additional fee for each case brought against the institution; (7) be vested with official authority to develop and coordinate financial education initiatives, serve as a depository of all existing financial education projects and (8) have responsibility for evaluation of effectiveness of all 18 Based on surveys conducted for the European Commission. 19 It may be helpful to consult the experience of Western and Central Europe in establishing dispute resolution mechanisms. See World Bank, Resolving Disputes between Consumers and Financial Businesses, Consultative Draft June 2011. 33 programs, with part of the ombudsman's budget used for supporting non-profit financial education activities. The financial ombudsman should have an important role in financial policy development. In particular, the financial ombudsman should regularly analyze complaints and report main issues and trends yearly to the financial services supervisors, the government and the relevant Parliamentary committees to inform their work on regulation of financial services. Supporting the FCPFEA, the ombudsman should be vested with official authority to develop and coordinate financial education initiatives, serve as a depository of all existing financial education projects, and evaluate the effectiveness of all programs. The financial ombudsman should be autonomous and independent, with funding from both the industry and the state budget. The ombudsman should be appointed by a high authority (either the president or the government) and be independent in his decisions. Financing of the ombudsman will be a critical issue in determining the independence of the office. If the ombudsman is financed entirely by the industry, it will be perceived as beholden to the financial institutions that finance the office. On the other hand, if it is financed through the state budget, the office runs the risk of being starved of sufficient funding to do its work. An alternative is recommended. The office should be financed 50 percent through financial industry contributions, with each financial institution paying a basic yearly fee that covers the first three complaints and then the institution is charged an additional fee for each case brought against the institution. The remaining 50 percent should be financed by the state budget. One consideration is whether the statutory ombudsman should be combined with the FCPFEA, if the Commission is put in place. In a period of restricted budget spending, it may be better to consider creating a single commission rather than two separate institutions. However if the combined approach is selected, consideration should be given to ensuring a system of internal controls (or “Chinese Walls”) to separate the two different activities, with resolution of consumer disputes with the ombudsman and supervision of market conduct of financial institutions in the FCPFEA. Other mechanisms may also be helpful in strengthening the ability of the court systems to address financial consumer protection issues. For example, it may be helpful for the courts to provide a unified rulings recommendation (“Practice Consolidation”) in typical financial services- related lawsuits to ensure the law is applied evenly throughout the court system. Another useful measure would be for the consumer protection legislation to allow consumer organizations to launch lawsuits on behalf of groups of consumers which have been subject to unfair, aggressive or misleading practices by financial institutions. Develop a National Financial Education Strategy A national financial education strategy should be developed to strengthen current levels of financial literacy. A financially literate consumer is an empowered consumer. However, many people in Ukraine lack the ability and confidence to manage their personal finances well. 34 People who are financially literate have the knowledge, understanding, skills, motivation and confidence to make financial decisions which are appropriate to their personal circumstances. Ultimately it is about how people behave. For example, the UK’s Financial Services Authority distinguished five components of financial literacy: • making ends meet; • keeping track of your finances; • planning ahead; • choosing financial products; and • staying informed about financial matters. Improving people's financial literacy produces a number of benefits. These include the following: • people who lack financial literacy are less likely to use formal financial products – so, they are more likely to be financially excluded; • many people are not saving enough – or are not saving at all; • the consequences of not being insured, or being under-insured, can be devastating; • the range and complexity of products is increasing – and this gives rise to risks which people may not understand; and • people who lack financial literacy are more likely to be cheated out of their money through fraudulent “get rich quick” schemes. A broadly-based national strategy on financial education should be developed and adopted as part of the Government’s economic development program. The development and implementation of a national strategy on financial education will help to engage a broad range of stakeholders; provide focus, drive and coordination; establish clear priorities; and reduce the risk both of unplanned gaps and of unnecessary overlaps. It will not only bring together financial education programs from across the government sector, the financial services industry and consumer organizations, but will also lead to the development of further programs. Countries that either have a national strategy on financial education, or are developing a national strategy, are listed in the following table. Table 12: Countries with National Strategies on Financial Education (in place or under development) Australia Azerbaijan Brazil Canada Eastern Caribbean Currency Union Hungary Ireland Kenya Malaysia New Zealand Singapore South Africa Tanzania Trinidad and Tobago Uganda UK US Zambia 35 Lessons can be learned from these countries and also from international organizations (including the World Bank and the OECD) which have been active in the development and dissemination of good practices relating to the provision of effective financial education. The development and implementation of the national strategy on financial education should be led by the National Bank of Ukraine or alternatively, if it is created, the FCPFEA20. However, the strategy should be inclusive and participatory across the government, private and NGO sectors. The national strategy on financial education could be linked with a national strategy on financial consumer protection. Financial literacy, financial consumer protection, prudential regulation and financial inclusion measures are complementary, rather than alternatives. None is likely to be successful on its own. For example, a financially literate consumer will understand that it is risky to use financial services which are subject to inadequate prudential regulation or inadequate/non-existent consumer protection (including effective mechanisms for handling and resolving complaints) – and in these circumstances, financial inclusion initiatives are likely to fail. The national strategy on financial education should include a planned and coherent program of financial education in schools, in order to give schoolchildren the competence and confidence to manage their finances well throughout their adult lives. This should begin at as an early an age as possible – though it may be most practicable to focus first on developing a comprehensive program of financial education for secondary school students (since many secondary school students will soon be in a position in which they need to manage their own personal finances). Existing school curricula are already crowded: so, it is more realistic to incorporate financial education into existing subjects, than to seek to persuade the education authorities to create a new, stand-alone subject of financial education. Financial literacy is a life skill which all students will need, as they move into adulthood: at least the basics of financial education should be included in compulsory subjects, so that all students receive a grounding in financial education. Teachers will need to be trained, and to have access to effective teaching resources, in order to be able to provide effective financial education to schoolchildren. Consideration should be given to whether existing curricula should be reviewed in order to ensure that they provide a satisfactory framework for the provision of financial education in schools. A range of additional initiatives should be undertaken to improve the financial literacy of the adult population. These could include: • financial education programs aimed at young adults; • financial education presentations, or seminars, in workplaces; 20 In other countries, the development and implementation of a national strategy on financial education is typically led by the central bank (e.g. Central Bank of Azerbaijan, Bank Negara Malaysia, Central Bank of Trinidad and Tobago, Eastern Caribbean Central Bank, Monetary Authority of Singapore, Bank of Uganda, Bank of Zambia); the Government or a Government agency (e.g. US Treasury, New Zealand Retirement Commission) or a financial services regulator (e.g. Australian Savings and Investments Commission, South Africa Financial Services Board). 36 • financial education programs associated with teachable moments (which are times in people's lives when they are likely to be more receptive to financial education). Examples of teachable moments include: • people who are planning to get married; • people who are separating from their partner; • parents before or after the birth of a child; • people starting a new job – particularly if it is their first job; • people planning for retirement; • households receiving overseas remittances; and • those complainants who are, in reality, seeking information (for example, about why their financial institution declined to provide a credit or changed the interest rate); • use of the mass media to deliver financial education – preferably in an entertaining, as well as an informative, manner. This can include: • television and radio – personal finance can be made accessible to the population: for example, through incorporating it into “soap operas”, radio phone-ins, or “edutainment” (ie the use of entertainment and media to promote educational messages); • publications, eg booklets, newspapers (preferably, in a section which has broad appeal, rather than the finance section), magazines, comic books and posters; • developing a personal finance consumer website – and publicizing and promoting it, including through links from other websites. Even trainers and presenters who are capable of managing their own money well need training and effective resources to give them the knowledge and skills to deliver personal finance education to others. This is especially important where the trainers or presenters lack confidence, skill or knowledge in managing their own personal finances. Monitoring and evaluation should be built into financial education programs from the outset, in order to ensure that the cost-effectiveness of the programs can be assessed. This will provide a basis for deciding which programs should be continued in their existing form, which should be modified and which should be closed. It would be useful to undertake follow-up financial literacy surveys every few years, in order to track changes in consumer financial literacy – and in consumer confidence in financial institutions – among the population as a whole and within relevant sections of the population. The FINREP national financial literacy survey provides a helpful baseline assessment of existing levels of financial literacy, and of consumer confidence, across the population. Follow-up surveys would help to indicate whether the national financial education and financial consumer protection strategies were achieving their aims and would provide useful insights into whether, and if so how, these strategies should be modified. Consideration should be given to briefing media representatives, to help equip them to deliver relevant and accurate financial education to the public. The media can potentially play 37 a useful role – ranging from the provision of simple messages in (for example) popular television or radio programs to more specialist programs or articles – in delivering effective financial education to their audiences. They will be better placed to do so if they are briefed (for example, by financial services regulators – including through the dissemination of press releases) on some of the building blocks of financial literacy; on emerging developments; and on concerns relating, for example, to consumer protection violations, unfair business practices or financial services companies operating without appropriate licenses. Consideration should also be given to briefing the police, prosecutors and the judiciary on developments and concerns which may be relevant to criminal cases relating to financial services. Such assistance will help the enforcement authorities better understand financial market and issues they will be faced, whether during criminal or civil proceedings. Civil society and industry associations should also be encouraged to expand their activities in financial education. In particular, consumer organizations should be helped to work together to contribute to a common website where they could upload their education materials for consumers. Professional industry associations should also provide information for consumers on the risks and rewards of using different financial services and products. A follow-up financial literacy survey should be done in three to five years to see how consumer financial literacy—and consumer confidence in financial institutions—has changed. The FINREP national financial literacy survey provides an excellent baseline assessment of the existing weaknesses in financial literacy across the population. It also shows a high level of consumer distrust in financial institutions. A follow-up survey would indicate if the financial consumer protection program (and the financial education program) has achieved the goals that were set. The follow-up survey would also provide useful insights into how the financial consumer protection and financial education programs should be modified. Improve Consumer Disclosure, Business Practices, Governance & Transparency In considering mechanisms to strengthen financial consumer protection, specific attention should be given to improving consumer disclosure. International experience shows that where consumers can obtain clear and comparable information prior to the signing of the contract, they are more inclined to shop around and find the financial product or service that best meets their needs. Furthermore providing a single point of access for comparable offers—or at least publishing an average rate for consumer products and services—helps consumers negotiate a fair deal with financial institutions. Key Facts Statements would be helpful. A Key Facts Statement provides consumers with simple and standard disclosure of key contractual information of a banking product or service, contributing to the consumers’ understanding of the product or service. Prior to purchasing a financial product or service, Key Facts Statements allow consumers to compare offers provided by different financial institutions. After buying the product or service, the Statements provide a 38 useful summary for reference during the life of the financial product or service. This is of special importance when the retail market is opening-up to new financial consumers who may be inexperienced in the use of financial products or services. Key Facts Statements should be developed for all basic financial products. This would include the range of available banking products such as deposit accounts, consumer loans, credit cards, and mortgage loans. Key Facts Statements should also be prepared for long-term and short-term insurance policies, such as life insurance and vehicle insurance as well as basic investment products, such as collective investment funds. For similar types of products and services, the format of disclosure materials should be required to be drafted in such a way as to avoid misunderstandings. The law should require that all consumers are provided with a Key Facts Statement for any financial product and for any third-party product sold to consumers by representatives of financial institutions. Prior to a consumer opening any account--or signing any legal agreement to buy a financial product or service--the consumer should be required to sign a statement saying that he/she has duly received, read, and understood the relevant Key Facts Statement. Besides information on key features and all relevant costs, the Key Facts Statements should also include the key legal obligations and information on sanctions the consumer may face if he/she breaches the contract (e.g. by demanding an early withdrawal, overdraft of his account, late payment of a loan installment, etc.) For consumer credit, the information about the 14 day cooling-off period should be prominently displayed in the Key Facts Statement. Key Facts Statements should be presented in plain and easily understandable language, and should summarize the key terms and conditions of the financial product and service. Examples of international approaches with Key Facts Statements are provided in Box 2. Box 2: International Approaches to Key Facts Statements Several countries provide formats on Key Facts Statements. The UK FSA has developed mandatory key facts statements in the form of initial disclosure documents (or IDDs) applicable to housing credit products, including residential mortgage credit. IDDs are supported by a regulation on Mortgage: Conduct of Business. The regulation provides recommendations for wording pre-disclosure and offering documents. In the European Union, the Directive on Credit Agreements for Consumers (2008/48/EC) includes a recommended format, namely the Standard European Consumer Credit Information form. Also the European Associations of Consumers and the European Credit Sector Associations have developed the European Standardized Information Sheet which provides a recommended format for pre-contractual information on home loans. The European regulation of UCITS funds has established in the UCITS IV Directive a specific disclosure format for mutual funds, the so-called Key Investor Information Documents. In the US, the Truth in Lending Act (Appendix G-10) includes models for the "Schumer Box" for credit cards. Peru has developed the “Hoja Resumen” or Summary Sheet, following similar key-fact-statement principles. Australia has also recently introduced legislation which will require credit licensees to provide consumers with a "Key Facts Sheet" for standard home loans and certain credit card contracts. Source: Staff analysis Key Facts Statements and any other required disclosure materials should be developed by the proposed FCPFEA or the financial supervisory agencies--or by the financial industry associations working with the supervisors. The disclosure rules should cover the definition of commonly used terms as well as the text and size of relevant warnings and they should be 39 understandable to average clients. Consumer organizations should also be engaged to provide comments on the proposed disclosure. Key Facts Statements should also be tested to ensure that they are easily understood by consumers. Before the regulation is issued, the proposed Key Facts Statements should be verified by independent marketing analysis experts for their readability and understandability by average consumers. The regulation should also define formulas for any calculations and define vocabulary terms to be used so that consumers may easily compare Key Facts Statements from various banks. As part of on-site supervision, financial supervisors should verify that Key Facts Statements are delivered to consumers. For example, the supervision departments of the NBU, NCRFSM and NCRCM could regularly monitor whether banks provide the Key Facts Statements by requiring there is a signed copy on each consumer's file. The current rules on disclosure of the real cost of credit are helpful but could be further improved. NBU’s Regulation Number 168 on consumer credit disclosure requires that all mandatory third-party costs (such as compulsory life insurance and other fees) be included in the calculation of the “real rate” of interest on a loan. This provides very useful information for consumers to understand the true costs of the credit. However it does not allow for easy comparison of offers by different service providers. In addition, numerous loopholes allow financial institutions to avoid compliance with Regulation Number 168. For example, in order to obtain the “real rate”, a consumer must provide estimated drawdown and repayment schedules. Those that do not provide such information do not receive the real rate calculation. Furthermore loans made under credit cards or through department stores or other retailers are exempt from Regulation 168—as are loans made by credit unions, pawn shops and other credit providers supervised by the NCRFSM (rather than the NBU). Regulations by the NBU and NCRFSM should require disclosure of the Annual Percentage Rate calculated according to the EU Consumer Credit Directive. For consumers interested in shopping around, it would be helpful they could receive the Annual Percentage Rate, using the standard methodology laid out in the EU Consumer Credit Directive. This would allow for easy comparison of the cost of credit offered by different service providers. Other detail would also be helpful for banking customers. Each credit card statement should set out the minimum payment required and the total interest cost that will accrue, if the cardholder makes only the required minimum payment. Each mortgage or other loan account statement should clearly indicate the amount paid during the period covered by the statement, the total outstanding amount still owing, the allocation of payment to the principal and interest and, if applicable, the up-to-date accrual of taxes paid. The law should specify that all material information must be provided to clients in writing if it has impact on how much they pay for a loan or what the return is on their deposits other that demand deposits. When concluding a deposit contract, the first page of the contract should specifically state whether the deposit is covered by the deposit guarantee insurance and for what amount for the specific consumer, taking into account his other deposits with the bank. Should the contract be not for a specific sum but only providing framework agreement allowing the client to deposit additional money on a later date, the contract should stipulate what would be the maximum insured deposit for the individual client. 40 It would also be helpful if consumers could receive clear and timely information about price changes for financial products, especially consumer loans. Consumers in Ukraine complain that the interest rate of their loans is set by management of the financial institution—and that the rate may be changed by the institution’s management by referring to vague “market interest rate changes.” While “material adverse change” provisions are widely used for loan contracts for commercial enterprises, they have no place in credit contracts with consumers. Regulations of the NBU and NCRFSM should require that for all consumer credits, and especially residential mortgage loans, the basis for calculation of the interest rate be clearly specified. Ideally credit providers should be required to use an independent reference rate such as LIBOR or other widely used—and widely quoted--reference rates. Furthermore financial institutions should be obliged to provide written notice to borrowers at least one month before the price changes take effect. Consumers should also have the right to terminate their bank account contracts free of charge within two months if they disagree with the proposed changes.21 Financial institutions should be obliged to send out regular statements on all consumer finance accounts. The statements could be distributed either electronically or in writing but should show current balances and recent account activity. Since practices on credit cards vary from bank to bank, the NBU should issue a regulation defining statements for credit cards. These statements should set a prescribed format to make the disclosure documents simple and comparable and should include: (1) all credit card transactions, (2) all fees and interest due, (3) the total amount owed, (4) the minimum payment required, and (5) the total interest cost that will accrue if the cardholder makes only the required minimum payment each month. For mortgages, the NBU should issue a regulation defining mortgage loan statements and requires that statements be sent out at least once a year. The statements should include: (1) the amount paid during the period covered by the statement, (2) the allocation of payment to the principal and interest, (3) the total outstanding amount still owed, and (4) any overdue payments and sanctions for late payments. Statements on life insurance contracts should be provided annually to consumers. It would also be helpful if, in their advertising, financial institutions were obliged to identify the name of their supervisory agency. Currently banks are required to include the identification number and date of their license in print advertising as well as radio, television and internet ads. From a consumers’ perspective, the key issue is which supervisory agency is responsible for the financial institution. Stating that the financial institution is supervised by the NBU (or the NCRFSM or NCRCM) in the media would be sufficient. Key risks, such as borrowing in foreign currency, should also be highlighted for consumers. With as many as two-thirds of consumer loans issued in foreign currency, most Ukrainian borrowers were taking on very high levels of risk. (In 2008, an estimated 75 percent of residential mortgages were issued in US dollars, two percent in Swiss Francs and one percent in Euros.) Even professional experts in foreign exchange trading frequently incur losses. The approach of the NBU 21 The 2007 Directive 2007/64/EC on payment services (PSD) provides for a two month period for consumers to cancel contracts (without penalty) where there the terms and conditions are changed by the payment service provider. (see Article 44 of the PSD Directive). The same provisions apply to all contracts over 12 months (not just contracts with payment service providers). http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2007:319:0001:01:EN:HTML 41 has been to explicitly prohibit banks from providing consumer loans denominated in foreign currency. Unfortunately some borrowers have argued that if the loans were provided in violation of an NBU regulation, repayment to the lender was not required. Rather than explicitly prohibiting consumer loans in foreign currency, an alternative approach would be to require that lenders provide explicit—and very clear—warnings of the risks to the consumer. This might include, for example, providing a table of the estimated repayment schedule if the hryvnia were to decline by 50 percent in value compared to US dollars or the Euro. Improved disclosure is needed for collective investment funds and non-state pension funds. The NCRFSM and NCRCM should adopt regulations requiring that all sales materials be written in plain and understandable language and printed using a font that is easy to read. In addition, NCRFSM regulations should require disclosure of the names of all entities servicing a client’s account and all conflicts of interest by registered entities and how the conflicts are being handled. In particular, the law should require that all conflicts of interest of the founders, administrator, asset manager, custodian or any other entity servicing the participant’s account be disclosed to the client prior to and after participating in the fund. Also regulations should require disclosure to consumers of the funds’ leverage and risk profile. In addition, asset managers should be required to publish the performance history of the funds they manage and their policies on frequent trading. For securities, the NCRCM should issue detailed regulations on customer statements and confirmations. The NCRCM should promulgate a rule requiring that securities brokers, and collective investment funds provide a client with a contract note, in written or electronic form (depending on the client’s preferences). The note should provide the detailed conditions of any trade made for the client. CII clients should receive a confirmation that they have purchased a unit or share of the CII and the terms of the purchase. The NCRCM should also issue a regulation requiring specific records to be maintained by asset managers for CIIs and by brokers and the time period for retention of the records should be defined. Special attention is needed to disclosure of risks related to special housing construction funds. In countries ranging from the Russian Federation to Azerbaijan, special housing construction funds have been used as a vehicle of fraud. Most investors in such schemes are not skilled in investing in securities markets. Instead their primary interest is in buying an apartment, often at a discount to the current market per square meter of space. As noted below under Business Practices, the special housing funds may be in any of three different types of legal structures, all with unclear liability for the construction company and for the bank (or asset management company) responsible for selling the investments—and an unclear responsibility for the trustee. Consumer disclosure for all types of special housing construction funds should clearly highlight the substantial risks being assumed by retail investors in such funds. Consumer disclosure should be extensively tested. It may be helpful to test consumer understanding of mandatory disclosure statements. In the US, the Federal Reserve Board has conducted extensive consumer testing of credit card disclosure information in order to develop an easily understood format.22 Before the regulation requiring a Key Facts Statement is issued, the proposed formats should be verified by independent marketing analysis experts for their 22 For a summary of lessons learned, see http://www.federalreserve.gov/pubs/bulletin/2011/articles/DesigningDisclosures/default.htm 42 readability and understandability by an average consumer. The regulation should also define formulas for any calculations and define vocabulary terms to be used so that consumers may easily compare Key Facts Statements from various financial institutions. Mystery shopping may also be a useful method of testing consumer understanding of financial products being sold. The consumer protection supervisor should regularly conduct inspections through mystery shopping. Mystery shoppers, briefed in advance, could pose as customers and in this way verify if they have been provided with all relevant information--and if accurate explanations of risks and rewards for each product are provided. Codes of conduct provide a valuable mechanism for improving the business practices of financial institutions. Ultimately improvement of consumer protection in financial services will be seen in the business practices of financial institutions in their day-to-day dealings with households. Voluntary codes of conduct provide a mechanism for encouraging improvement in the day-to-day practices without having the heavy weight of a regulation on each specific issue. Consideration could be given to developing a single code of conduct for all financial service providers (including intermediaries), as was recently done by the Central Bank of Ireland.23 Alternatively codes of conduct could be prepared for each part of the financial services sector, such as banking, credit unions, pawn shops, leasing companies, insurance, securities, and non-state pension funds. Where codes of conduct are not already in place, codes of conduct should be developed by industry associations. The process of developing codes of conduct should be collaborative and participatory with all key stakeholders (including financial supervisory agencies and consumer organizations) so that they become widely recognized summaries of appropriate behavior for financial institutions in their dealings with consumers. At a minimum such a code should require the financial institutions, including intermediaries to: (1) evaluate clients' needs; (2) disclose material information relevant to the purchasing decision; (3) conduct all activities in a competent manner; (4) protect clients' interests and privacy; (5) carry out the business in good faith and (6) act with honesty and decency of purpose and a sincere intention to represent the client's best interest. Note that code(s) of conduct cannot substitute for laws or regulations. Rather the code(s) should be used to clarify or improve existing consumer protection rules. The code(s) should also be consistent with international best practices, including the November 2011 G20 High Level Principles for Financial Consumer Protection.24 They should also be consistent with the industry- specific principles such as the principles issued by the International Association of Insurance Supervisors (IAIS) for insurance companies. The codes should be widely published and compliance with the codes should also be enforced. The general terms and conditions of CU contracts and the Code of Conduct should be displayed visibly in each point of sale or CU branch and should be readily available for download from their respective websites. After approval of the codes by the supervisory agencies (or the proposed FCPFEA), the codes should be applicable for all members of the relevant industry associations. All intermediaries should be obliged to adhere to the industry code of conduct, with professional 23 See http://www.centralbank.ie/regulation/processes/consumer-protection- code/Documents/Consumer%20Protection%20Code%202012.pdf 24 http://www.oecd.org/dataoecd/58/26/48892010.pdf 43 liability insurance for agents selling life insurance should be required. Furthermore there should be clear penalties for banks and other financial institutions breaching the codes. Currently compliance with voluntary codes can only be enforced through the threat of expulsion of the violating firm from the association—but expulsion from the industry association does not terminate a firm’s activity. At a minimum, financial institutions should be obliged to issue an annual statement saying that they comply with the code, or explain why they do not (“comply or explain”). In addition, the associations should be required to inform the consumer protection supervisor about any breaches and penalties so that the supervisor can use this information when planning its onsite supervision. The industry should be required not only to implement the codes but also to publicize the codes and disseminate information about the codes with each specific transaction, including at the time of the initial signing of a contract with a consumer. Furthermore following the EU Unfair Commercial Practices Directive, it should be illegal for any financial institutions to claim that it follows a code of conduct while not accepting or not applying properly its provisions. Attention should also be paid to licensing of intermediaries, especially for insurance and private pension funds. All agents, brokers (and for insurance, claims adjusters) should be licensed with the register of licensed firms made available to the public. In particular, representative agents for administrators of NSPFs should be licensed with the NCRFSM. For example, the list of registered intermediaries could be published on the websites of the appliable financial supervisory agencies. Also the supervisory authority should require that agents and adjusters give consumers information on the licensing status of the intermediaries and service agents for administrators. The minimum qualifications for “front office” staff should also be strengthened. For all financial institutions and their intermediaries, all employees who sell financial products and services to the public should be required to meet specific standards of competency and professional training. The minimum standards should focus on three key areas: (1) functioning of financial products, including the institution’s legal obligations related to signing a financial-service contract; (2) financial planning with consumers and explanations of the potential impact of various financial products on their financial well-being, including the relationships of risks and rewards of different types of financial products and services and (3) consumers’ legal rights, including procedures for settling any claim or dispute with a financial institution. The standards should be set by the financial supervisors in cooperation with the industry associations and consumer associations. For banking, the NBU University should also be involved. While responsibility for training should be given to the financial institutions (or third parties selected by the financial institutions), the financial supervisors should verify the content of the training programs and participate in testing and other verification of the competency standards. For intermediaries (and particularly for agents selling life insurance and non-state pension funds), the companies should be specifically required to meet educational and product knowledge standards. Improper and fraudulent sales tactics by salespeople of financial products should be clearly stated in the laws and regulations and prohibited with substantial penalties. Front office staff of a finanical institution and agents of the institution should be explicitly prohibited from improper sales tactics, such as high pressure phone calls, disparaging written warnings and misrepresentation of risk. Both the finanical institution and the sales person must incur liability for such actions. NPF administrators should be liable for all activity of their representative agents. 44 While the insurance company should be be ultimately responsible for the conduct of its agents, the agents should also have liability for the policies they sell with respect to misrepresentation or malfeasance—and professional liability insurance should be required for all agents who sell life insurance. Similarly in the securities sector, regulations should be passed to provide for liability for misstatements by salespeople, in addition to those of the registered entity and its directors. In addition, industry associations should be encouraged to develop procedures to be implemented across their distribution networks on how client needs should be evaluated for specific insurance products. Financial institutions should be obliged to collect sufficient information to ensure that the products and services sold are suitable for the consumer. In particular, regulations should require that banks and other financial institutions collect enough data about customers, their financial goals, risk profiles and their financial portfolio to match offered products with their needs. Thus loan officers of banks and credit unions should conduct interviews to understand the borrowers’ balance sheets and the risks faced by their customer to changes in interest rates--and to help customers avoid endangering their credit histories and future ability to borrow. In the securities sector, the law and regulations should require that brokers, traders and collective investment institutions obtain sufficient information about potential and existing clients to determine the characteristics, goals, sophistication and liquidity of the clients. In this way, the financial institution can properly recommend securities or services to the customer. Furthermore the law or regulations should require that financial institutions recommend only securities that are suitable to a client's investment goals, sophistication and available assets. The information collected (of which the customer should always receive a copy) should also be used in any complaint resolution or lawsuit to prove whether or not the product was sold properly and in line with the consumer's interest. Such information will also help the financial institution (and its intermediary) prove that the recommended product was the most appropriate to the client. The regulations should apply not only to banking products but to any financial products (including investment, pension and insurance products) sold by agents or brokers of any financial institution. This duty should be legally defined and the consumer protection supervisor should regularly monitor how financial institutions select products for their clients. While it is difficult to determine the best approach to ensuring suitable products, the example of the EU Markets in Financial Instruments Directive25 or of Australia’s recently approved consumer protection legislation may be helpful. In Australia, the National Consumer Credit Protection Act of 200926 mandates suitability assessments of consumers’ abilities to repay and alignment of the product with the objectives of the consumer. In addition, industry associations should be encouraged to develop procedures to be implemented across their distribution networks on how client needs should be evaluated for specific financial services and products. Regulations concerning advertising by financial institutions should also be strengthened. As revealed by the FINREP survey, advertising is one of the ways in which consumers receive information about financial products and services (although other sources, such as recommendations of friends and family are far more important). Currently the financial supervisory agencies are responsible for supervising the print and multimedia advertising by financial institutions. However misleading advertising fills the radio and television airwaves, 25 See http://ec.europa.eu/internal_market/securities/isd/index_en.htm 26 See http://www.comlaw.gov.au/Details/C2009A00134 45 promising below-market interest rates on consumer loans and above market rates on bank deposits. Proposed regulations would require pre-approval of planned advertising for banking and insurance products and services. Such pre-approval is already required in the securities and pensions sectors. Alternative approaches may be more effective. For example, the NCRFSM should have the legal authority to immediately order a withdrawal of any advertisement seen as breaking the legal rules. Draft amendments to the law would give the NCRCM the authority to review advertisements and apply sanctions. The amendments should be approved and extended to cover all consumer financial services. In addition, all rules regarding advertising should be consolidated and the financial supervisors should devote adequate resources to monitoring and enforcing the rules. Additional provisions are also needed regarding advertising. The provisions in the law regarding false statements need to be amended to strengthen them so that they clearly identify what is unfair and a misrepresentation in an advertisement. Issuance of permits for advertising should require that the advertisement be presented in plain language and that the information and data be accurate. Also the distinction between sales materials and advertising (and the rules applicable to each) need to be clearly set out in the law. In addition, the NBU, NCRFSM and NCRCM should make their decisions regarding unfair advertising public and explain why they consider any specific advertising in breach of regulations. These rulings can then inform banks, other financial institutions and their advertising agencies as to what is still an acceptable practice and what forms of advertising will not be allowed. The financial supervisors should also encourage consumer organizations to monitor financial services and assist in collecting documentation of questionable advertising practices. As in many post-transition economies, the insurance sector in Ukraine is at particular risk of being abused for tax avoidance. A large portion of premiums written in Ukraine is thought to be the result of tax optimization schemes rather than true risk transfer. Rather than paying a 25 percent tax rate on corporate profits, corporations may pay a large “financial risks” insurance premium to a non-life “pocket” insurer, which is subject to a much lower three percent tax on premium income. The insurer can then lend the money back to the insured, or return it through investments or by ceding funds through reinsurers to the insured. Local observers suggest that that such tax avoidance schemes may account as much as half of the non-life insurance market in Ukraine. Widespread abuse of the tax system generally undermines corporate governance of a sector and should be avoided. Public transparency of ownership and control of insurance companies and their intermediaries would be helpful. At the same time, consolidation of the insurance sector is needed to ensure that only true insurance companies remain licensed and authorized to sell insurance products and services. In addition, coercive tied selling should be explicitly prohibited. Life insurance products should not be used as a means of increasing the profits of banks. Banks play an important role in the sale of insurance. Where banks do not own their own insurer, they may refer or recommend business to particular insurers. They may also have agreements with various insurers to sell products, such as motor third party liability insurance (MTPL) or simple property insurance as agents. Commissions to banks can range up to 40 percent for some motor insurance products and up to 60 percent for some property classes and even 80 percent of the annual premium on some classes of insurance. In addition, insurers may also be required to maintain deposits in the referring bank. The best solution would be adequate prudential supervision of the insurance sector with 46 appropriate transparency of ownership and control of all financial institutions (as required under the EU Transparency Directive.) In the absence of such corporate governance of financial institutions, one approach may be to prohibit the payment of a referral commission. However if the practice is to be permitted, the total payment for life insurance should be limited. For example, the maximum amount could be limited to 40 percent of the yearly premium, with the follow-up commission from the second year not to exceed five percent of yearly premium. The cap should apply to all commissions, bonuses, profit-sharing arrangement and any other form of payment related to the sales of insurance products tied to banking products. In addition, the NCRFSM should have adequate enforcement tools to ensure that the restrictions are implemented. (Note that the proposed draconian provisions on limiting commissions could be eliminated once adequate prudential supervision and corporate governance have been established.) It should also be easy for consumers to switch providers of financial services. The EU Payment Services Directive requires that all financial contracts extending beyond 12 months must be cancellable by the consumer without penalty. In addition, all EU members are required to implement “voluntary” switching codes related to bank accounts.27 Consideration should be given to similar measures in Ukraine. Studies should also be conducted on the levels of competition in the financial sector. As a starting point, the NBU, NCRFSM and NCRCM should work with the Antimonopoly Committee to prepare and sign a Memorandum of Understanding (MOU). The MOU should allow the Antimonopoly Committee to use data on the financial sector collected by the financial supervisors so that the state of competition could be properly monitored. The NBU should also reflect the work of the Antimonopoly Committee on the tying practice of life insurance with consumer credit and improve Regulation 168 on consumer credit disclosure to reflect the requirement for free choice of financial products. Each consumer should always have the option to select from among at least two different (and unaffiliated) insurance providers. In addition, the Antimonopoly Committee should monitor whether prices of the offered insurance options reflect competitive environment. With assistance from the financial supervisors, the industry associations and consumer organizations active in financial services, the Antimonopoly Committee should regularly monitor the state of competition in the financial sector. In particular, on a monthly basis they should follow prices of basic financial products and services. A jointly prepared report on the state of financial market competition should be published yearly and presented to the president's administration, the government and the relevant committees of Parliament (Rada), as well as to the public. Regardless of which structure is selected, the financial consumer protection authority should help consumers shop around. The financial regulators of Peru found that when they published information of offers for consumer loans by different financial providers, interest rates fell by as much as 200 basis points (or two percentage points) at a time when interest rates were otherwise stable. The same approach could be taken by a consumer organization that each week asked financial institutions for quotes on an identical consumer loan and then published the results on the website of the consumer organization, with a press release to the media. Another approach used by the Slovak regulators was to calculate the average rate for consumer loans each 90 days and then publish the rate. This allows consumers to go to their lender and inquire if a similar rate might be available to them. In Ukraine, similarly to Serbia, due to existing of additional fees and 27 See http://ec.europa.eu/internal_market/finservices-retail/mobility/bank_switching_en.htm 47 commissions charged by banks, such a practice of disclosure should most likely apply also to effective interest rates (to be disclosed on the banks’ and NBU websites) in addition to information which is already published by the National Bank of Ukraine. The price statistics should be widely publicized so that consumers know what an average price in the area of his/her interest is and could better discuss the pricing of products offered. The Antimonopoly Committee could also be involved in strengthening competition. In cooperation with the NBU and the NCRFSM, the Antimonopoly Committee should keep long- term statistics on prices of financial products and services and publish the statistics at least once every 90 days. The statistics should include prices of bank accounts with predefined features, prices of ATM withdrawals and deposit interest rates. In addition, the Antimonopoly Committee, the NBU and the NCRFSM also define between five and seven typical loan products and publish the effective interest rates for these products. A similar approach could be taken for basic investment and life insurance products. It may also be helpful to extend cooling off periods to all long-term savings products, except for those products that are market based. Similar to the EU Directive on Distance Selling, all consumer credit contracts in Ukraine have 14 day cooling-off periods during which the consumer can cancel the contract without penalty. A similar approach may be helpful for all long-term savings products, such as securities and collective investment funds. Such long-term products typically carry large commissions for sales staff, thus resulting in high-presssure sales. Cooling off periods thus allow consumers to reverse the effects of high-pressure sales practices. The law should strengthen provisions on segregation of client assets held by collective investment institutions (CIIs). There is no effective provision to ensure that the assets of the CII are held separately from depository's assets, if the fund administrator (acting as what is generally called a “depository”) goes bankrupt. Nor is there a provision that the CII's assets shall themselves be kept in a separate account from the asset manager. A clear, irrevocable statement of segregation is needed to protect CII assets. The law should be amended to provide for robust segregation of asset provisions for CIIs. Strengthening of the law on pension funds is also needed. The Law on NSPFs needs to be amended to clearly set out: (1) the effective segregation of pension fund assets, (2) the rights of the NPF to take possession of the assets, (3) the rights of the participants to the assets in the NPF, and (4) the protection of the assets in the event of the bankruptcy of entities servicing the fund or holding the assets for investment purposes. In addition, the fiduciary duties of the board of directors of NSPFs and the administrators need to be set out clearly in the law and regulations. On a related issue, the law should require prompt payment of funds by brokers and CII asset managers and provide for penalties for failure to do so, similar to the rules for Pillar III pension funds. Other specific legal issues should be addressed. For example, a legal dispute exists as to whether a person leaving a corporation can withdraw his/her money from the corporate pension fund. The issue needs to be resolved to provide legal certainty as to the right and ability of contributors to withdraw from a corporate pension fund. 48 Create a New Insurance/Guarantee Scheme (but only once the remaining pillars are in place) Over the medium-term, both policies and legislation related to insolvency of financial institutions should be revised. As for bank resolution, the NBU should improve the banking industry monitoring system (at macro and micro level) to ensure a timely identification of an individual (micro) or a systemic (macro) risk and develop an adequate response in case when a bank fails to comply with the key performance and prudential indicators. The law requires the NBU to take action only in case of risks to solvency of a bank. As a result, in a number of cases heavy corrective actions are long delayed and are applied to banks only when they are already behind the stage of financial stability. Furthermore the law specifies that the NBU's ability to appoint a provisional administrator or take other corrective action is a right rather than an obligation. The law on Banks and Banking should therefore be revised to trigger NBU timely prompt corrective action of NBU as needed to maintain the soundness and stability of the financial sector. This issue is expected to be partially addressed after the passage of the new Law on Deposit Guarantee Fund. DGF’s functions will be expanded in the area of failed (insolvent) bank resolution, while NBU will remain responsible for supervision of solvent banks and corrective actions to problem institutions before they are recognized insolvent. To make this reform truly efficient, resulting in enhanced solvency and stability of the banking sector and more efficient and least cost bank resolution, NBU and DGF will need to establish efficient mechanisms for coordination, cooperation and information sharing. Also, NBU will need to further strengthen its early warning system indicators’ supervisory response and calibration of problem banks, to ensure timely and efficient intervention into problem banks. DGF, on the other hands, will need to establish bank resolution capacity, bring new professional staff and develop whole set of new procedures and skills for least cost resolution. As for credit unions, the mechanisms for proper prudential supervision and resolution of failed banks still need to be established. While credit unions are subject for regulation and supervision of the National Commission for Regulation of Financial Services Markets, the quality of their oversight is weak and significantly differs from bank supervision. Moreover, as non- profit entities, credit unions have no legal mechanism to declare bankruptcy, and the regulator has no vehicle for their resolution/liquidation. Consideration should therefore be given to revise existing legal and regulatory framework for credit unions to strengthen their regulation and supervision (as credit unions are deposit taking credit institutions and therefore require enhanced regulation more in line with respective EU Directives for deposit taking institutions). Also, measures need to be taken to develop efficient mechanism for resolution/closure of insolvent credit unions. In parallel, similar regulations are needed for capital markets to ensure an effective means for the liquidation of a securities market participant and an expeditious payout to its customers. Consideration should also be given to extending bank deposit guarantee scheme to cover credit unions. Retail deposits in all deposit-taking institutions should be covered by a deposit guarantee program. However, creation of a new deposit guarantee system similar to the bank’s deposit guarantee fund will be too costly for the system and risky for the state in the absence of quality regulation and supervision of credit unions. Therefore, it may be more rational to extend the existing bank deposit guarantee fund to credit unions, but only after and if the quality of 49 financial regulation and supervision for credit unions will be brought to a comparable level for that of banks, and insolvent or non-compliant credit unions will exit the market. It may also be worth considering that all deposit taking institutions (banks and credit unions) be brought under the supervision of the National Bank of Ukraine, as is the common practice in the EU. 50 ANNEX 1: The List of EU Directives on Financial Consumer Protection and Applicable Ukrainian Laws CELEX EU Directive Responsible Ukrainian Law Reference Supervisory Agency 3 2008 L 0048 Directive On Consumer Credit, 2008/48/EC, repealing SCRPI Partially in Law on Consumers' Rights Protection. NBU Directive 87/102/EEC Regulation nr. 168 / 2007 on Real Cost of Loan Disclosure Policy 3 1993 L 0013 Directive on Unfair Terms in Consumer Contracts, SCRPI Partially in Law on Consumers’ Rights Protection 1993/13/EEC 3 2005 L 0029 Directive concerning Unfair Business-to-Consumer SCRPI Partially in Law on Consumers’ Rights Protection Commercial Practices in the Internal Market, 2005/29/EC 3 1998 L 0027 Directive on Injunctions for the Protection of Consumer n.a. Not clear if has been implemented. Interests, 1998/27/EC 3 1994 L 0019 Directive on Deposit Guarantee Schemes, 1994/19/EC with DGF Mostly implemented in the Law On the Deposit amendments of 2009 Guarantee Fund 3 1997 L 0009 Directive on Investor Compensation Schemes, 1997/9/EC n.a. Not clear if has been implemented. 3 1995 L 0046 Directive on the Protection of Individuals with regard to the PDPA Partially in Law on the Protection of Personal Data Processing of Personal Data, 1995/46/EC 3 1997 L 0007 Directive on Protection of Consumers in Respect of Distance SCRPI Partially in Law on Consumers’ Rights Protection Contracts, 1997/7/EEC 3 2002 L 0065 Directive on the Distance Marketing of Financial Services, SCRPI Partially in Law on Consumers’ Rights Protection 2002/65/EC 3 2006 L 0114 Directive on Misleading and Comparative Advertising, NCRFSM Partially in Law on Advertising 2006/114/EEC 3 1985 L 0611 Directive on UCITS 1985/611/EEC, as amended NCRCM Partially in Law on Collective Investment Institutions 3 2004 L 0109 Directive on Transparency, 2004/109/EC NCRCM Partially in Law on Securities and Stock Market 3 2004 L 0072 Directive on Market Abuse, 2004/72/EC 3 2004 L 0039 Directive on Markets in Financial Instruments, 2004/39/EC NCRCM Partially in Law on Securities and Stock Market (MiFID) 3 2002 L 0083 Directive on Life Insurance, 2002/83/EC NCRFSM Partially implemented in Law on Insurance 3 1992 L 0049 Directive on Non-Life Insurance, 1992/49/EEC 3 2002 L 0092 Directive on Insurance Mediation 2002/92/EC NCRFSM Minimally implemented in Law on Insurance, Resolution of the State Commission for Financial Services Markets Regulation No 285 Articles 81 to 89 of the Treaty of Rome n.a. Not clear if has been implemented 51 ANNEX 2: International Approaches to Institutional Structures on Consumer Protection and Financial Literacy Financial Special Consumer General Consumer Special Out-of-Court Dispute Resolution Consumer Supervision Protection Protection Financial Mechanism Confidence includes Departments in Supervisor covers Services Consumer Supervisors Financial Services Consumer Protection Protection Supervisor United - To be transferred to - To be created in Statutory ombudsman for all 80% Kingdom special agency 2012 financial services. Austria All financial - - - Industry-based ombudsmen. 79% services Ireland - All financial - - Statutory ombudsman for all 79% services financial services. Denmark - All financial - - Industry-based ombudsmen. 72% services Hungary - All financial - Covers financial Statutory ombudsmen for all 51% services services financial services planned. Slovakia All financial - - - Industry-based ombudsman for 51% services banking only. Poland All financial - - - Industry-based ombudsman for 49% services banking. Statutory for insurance. Czech All services - Only for consumer - Statutory ombudsman covers 47% Republic except consumer credit payments, credit, investments. To credit cover insurance in 2012. Latvia All services - Only for consumer - General Consumer Protection 38% except consumer credit Agency with limited authority. credit Industry based ombudsmen. Russia All services - Only for consumer - Industry-based ombudsmen for n.a. except consumer credit banking only. credit Canada - - - All financial None but mediation advice available. n.a. services USA - Reports to US - - None but mediation advice available. n.a. President Australia - - - All financial Industry-based ombudsmen. n.a. services India All financial - - - Statutory ombudsmen for banking, n.a. services insurance. 52 ANNEX 3: Summary of Recommendations RECOMMENDATION ACTION REQUIRED AGENCY PRIORITY FINANCIAL SUPERVISORY STRUCTURES Create a Financial Consumer Protection and Financial Education Commission (FCPFEA) (or set up special Consumer Protection New law/policy NBU, NCRFSM, High Departments in the financial supervisory agencies, with a coordinating committee) NCRCM, SCRPI Strengthen consumer organizations through matching grants. New policy MOF Medium CONSUMER DISCLOSURE In cooperation with the NBU and the NCRFSM, the Antimonopoly Committee should keep long-term statistics on prices of Initiative of NBU, NCRFSM and NBU, NCRFSM, High financial products and services and publish the statistics at least once every 90 days. Antimonopoly Committee Antimonopoly Key Facts Statements should be developed for all basic financial products. Committee • The law should require that all consumers are provided with a Key Facts Statement for any financial product and for any New legislation or regulation New Consumer High third-party product sold to consumers by representatives of financial institutions. Protection Commission, • Key Facts Statements should be presented in plain and easily understandable language and should summarize the key industry associations, terms and conditions of the financial product and service. NBU, NCRCM, • Key Facts Statements and any other required disclosure materials should be developed by the FCPFEA, or by the financial NCRFSM industry associations working with the supervisors. • Key Fact Statements should be tested to ensure that they are easily understood by consumers. • As part of on-site supervision, financial supervisors should verify that Key Facts Statements are delivered to consumers. Current rules on disclosure of the real cost of credit should be further improved. Amend NBU regulation no. Medium 168/extend it to all financial NBU, NCRFSM Regulations by the NBU and NCRFSM should require disclosure of the Annual Percentage Rate following the EU Consumer products and services Credit Directive. Revise regulations Medium Disclosure for consumers should be enhanced in the following areas: NBU, NCRFSM • Each credit card statement should set out the minimum payment required and the total interest cost that will accrue, if New regulations Medium NBU, NCRFSM the cardholder makes only the minimum payment. • Each mortgage or other loan account statement should clearly indicate the amount paid during the period covered by the statement, the outstanding amount still owning, the allocation of payment to the principal and interest and, if applicable, the up-to-date accrual of taxes paid. • When concluding a deposit contract, the first page of the contract should specifically state whether the deposit is covered by the deposit guarantee insurance and for what amount. Regulations of the NBU and NCRFSM should require that for all consumer credits, and especially residential mortgage loans, the New regulations Medium basis for calculation of the interest rate be clearly specified. Furthermore financial institutions should be obliged to provide written NBU, NCRFSM notice to borrowers at least one month before the price changes take effect. Consumers should also have the right to terminate their bank account contracts free of charge within two months if they disagree with the proposed changes. Financial institutions should be obliged to send out regular statements on all consumer finance accounts. In their advertising, financial institutions should be obliged to identify the name of their supervisory agency. New regulation Medium Key risks, such as borrowing in foreign currency, should also be highlighted for consumers. Revise legislation or regulation NBU, NCRFSM Medium Improve disclosure for collective investment funds and non-state pension funds. New policy NBU, NCRFSM, Medium For securities, the NCRCM should issue detailed regulations on customer statements and confirmations. New NCRFSM regulation NCRCM Medium Consumer disclosure for all types of special housing construction funds should clearly highlight the substantial risks being assumed New NCRCM regulation NBU, NCRFSM Medium by retail investors in such funds. New regulation NCRFSM Medium Consumer understanding of mandatory disclosure statements should be tested. NCRCM Marketing analysis NCRCM, NCRFSM Medium The consumer protection supervisor should regularly conduct inspections through mystery shopping. Regular inspections Medium 53 RECOMMENDATION ACTION REQUIRED AGENCY PRIORITY Marketing analysis experts Consumer Protection Supervisor BUSINESS PRACTICES Develop a single Code of Conduct for financial institutions. Alternatively codes of conduct could be prepared for each part of the New policy Industry associations, NBU, High financial services sector, such as banking, credit unions, pawn shops, leasing companies, insurance, securities, and non-state NCRFSM, NCRCM pension funds. • If not already in place, Code(s) of Conduct should be developed by industry associations in collaboration with all key stakeholders. • Code(s) of Conduct should be approved by the supervisory agencies. • They should be applicable for all members of the relevant industry associations. • There should be clear penalties for banks and other financial institutions breaching the codes. • The association should be required to inform the consumer protection supervisor about any breaches and penalties. All agents, brokers (and for insurance, claims adjusters) should be licensed with the register of licensed firms made available to the public. New regulation NCRFSM High Strengthen minimum qualifications for ‘front office’ staff. The standards should be set by the financial supervisors in cooperation with the industry and consumer associations. For banking, NBU University should also be involved. New policy NCRFSM, NCRCM, NBU, Medium Clearly state and prohibit improper and fraudulent sales tactics by salespeople of financial products. NBU University Require financial institutions to collect sufficient information to ensure that the products and services sold are suitable for the New regulation NBU, NCRFSM, NCRCM Medium consumer. New regulation NBU, NCRFSM, NCRCM Medium Strengthen regulations concerning advertising by financial institutions. • All rules regarding advertising should be consolidated. Revise regulations, new policy NBU, NCRFSM, NCRCM Medium • Financial supervisors should devote adequate resources to monitoring and enforcing the rules • Amend provisions in the law regarding false statements so that they clearly identify what is unfair and a misrepresentation in an advertisement. • Issuance of permits for advertising should require that the advertisement be presented in plain language and the information and data be accurate. • NBU, NCRFSM and NCRCM should make their decisions regarding unfair advertising public and explain why consider any specific advertising in breach of regulations. New legislation/regulation Prohibit abusive practices in the insurance sector: NCRFSM Medium • Widespread abuse of the tax system should be avoided, including through transparency of ownership and control of insurance companies and their intermediaries. • Consolidate the insurance sector to ensure that only true insurance companies remain licensed and authorized to sell insurance products and services. • Disallow coercive tied selling by prohibiting or controlling referral commissions paid by the insurer to the bank. NCRFSM should have adequate enforcement tools to ensure that the restrictions are implemented. New policy Review the level of competition in the consumer finance sector. NBU, NCRFSM, NCRCM, Low • NBU, NCRFSM and NCRCM should work with the Antimonopoly Committee to prepare and sign a MOU to allow the Antimonopoly Committee Antimonopoly Committee to use data on the financial sector collected by the financial supervisors so that the state competition in the financial sector could be properly monitored. Amend legislation Extend cooling off periods to all long-term savings products, except for those products that are market based, such as securities and NBU, NCRFSM, NCRCM Medium collective investment funds. New law Develop a new law on debt collection. Debt collection agencies should be licensed. New law NCRFSM High Develop a law on pawn shops. Revise law NCRFSM Medium Revise the Law on Protection of Personal Data Personal Data Protection Medium New law Authority Develop a law on personal bankruptcy. New law/policy NCRFSM High 54 RECOMMENDATION ACTION REQUIRED AGENCY PRIORITY Revise policies and legislation related to insolvency of financial institutions. Personal Data Protection Medium New law Authority The bank deposit guarantee scheme should be extended to cover credit unions. New law NCRFSM, NBU Medium A new provision should require mandatory segregation of client assets held by collective investment institutions, pension funds and NCRFSM Medium depositories. New policy Special provisions should address housing financing mechanisms which are highly risky to retail investors. An inter-agency NCRFSM, NBU, NCRCM Medium committee should be created to address the weaknesses related to special housing financing mechanisms. DISPUTE RESOLUTION MECHANISMS All financial institutions should be obliged to maintain internal consumer complaint departments. New law NBU, NCRFSM, NCRCM Medium Financial institutions should be required to help consumer learn how to submit complaints. New regulation NBU, NCRFSM, NCRCM Medium NBU should review its complaints as part of onsite supervision. New policy NBU Medium Financial supervisory agencies should review trends in consumer complaints. New policy NBU, NCRFSM, NCRCM Medium Create a financial ombudsman. Two models of ombudsmen are available – appointed by the industry associations or an New law NBU High independent statutory ombudsman covering all financial services as the recommended option. NBU, NCRFSM, NCRCM • The ombuds service should be set up in accordance with best international practice. NBU, NCRFSM, NCRCM, • The financial ombudsman should have an important role in financial policy development, such as analyzing complaints, industry associations report main issues and trends yearly to the financial service supervisors, the government and the relevant parliamentary committee, develop and coordinate financial education initiatives. • The financial ombudsman should be autonomous and independent, with funding from both the industry and the state budget. Considerations could be given whether the statutory ombudsman should be combined with the FCPFEA, if put in place. New policy (New) ombuds scheme, Low (new) FCPFEA Other mechanisms should be considered to strengthen the ability of the court systems to address financial consumer protection Amend law MoJ Low issues, including unified rulings recommendations, and consumer organizations launching lawsuits on behalf of groups of consumers. FINANCIAL EDUCATION A national strategy on financial education – to be led by the National Bank of Ukraine or, if it is created, the FCPFEA – should be New policy (new) FCPFEA High developed and adopted as part of the Government’s economic development program. This should include financial education in schools and should also include some, or all, of financial education programs aimed at young adults; financial education High presentations or seminars in workplaces; financial education programs associated with teachable moments; and use of the mass media to deliver financial education. High Civil society and industry associations should also be encouraged to expand their activities in financial education including their New policy (new) FCPFEA High participation in the development of a common website for education materials for consumers. High Follow-up financial literacy survey should be undertaken every few years to help assess the impact of the national financial New policy (new) FCPFEA education and financial consumer protection strategies. 55 ANNEX 4: Financial Education 1. Financial consumer awareness is relatively low in Ukraine. For example, the survey conducted by the USAID Financial Sector Development Project (FINREP) in 2010 showed that consumers of financial services in Ukraine know very little about financial products and services and experience difficulties in doing simple calculations. 2. The role of the state in the provision of financial education remains limited and fragmented. The main activities include the publication by the National Bank of Ukraine (“NBU”) of leaflets such as a Note to the borrowers of the banks, a Note to a borrower who experienced difficulties and a Note to the clients; and the publication on the State Financial Services Regulator's website of a Guide for credit unions’ members. 3. State agencies lack the institutional capacity and resources to undertake effective financial education programs and are heavily dependent on international grants for the financial education work which they undertake. Strong public-private partnerships need to be developed to maximize the prospects of ongoing funding being provided for financial literacy programs. For example, the State Financial Services Regulator published the Guide for credit unions’ members as a result of its participation in the GIZ/DGRV project on Development of Rural Credit Cooperatives. The regulator does not have sufficient funds to cover the costs of disseminating consumer publication or of undertaking educational programs. Since 2007, several donor-sponsored programs have been implemented in Ukraine, with the active participation of the Government and NGOs. However, there is very limited sustainability after project funding has come to an end, partly as a result of the absence of effective partnerships between the public and private sectors. 4. Private market participants are interested in engaging in financial consumer education programs. A number of private sector initiatives on financial consumer education have been launched and successfully implemented in Ukraine. In addition, banks are willing to organize educational programs for schools to raise children’s awareness of banking services, but they face difficulties in dealing with the Ministry of Education (MoE), which gives approval for teaching events organized in schools. Financial Education in Schools 5. Introducing financial education programs in schools is one the most effective means of equipping the next generation to choose the financial products and services which are suitable for them and to exercise their rights. Many teachers recognize the need for financial literacy programs in schools and are keen that these programs should include practical elements (for example, what to do if my rights are abused; or what clients should know about the obligations of financial services providers). 6. The Ministry of Education introduced consumer education into schools in 1999. Issues related to financial consumer knowledge and protection were added to the courses “Fundamentals of Economics” and “Fundamentals of Law”. In addition, a voluntary course “Fundamentals of Consumer Knowledge” was introduced in 2010 for the 8th-11th grades: this contains information on, in particular, the rights and obligations of consumers. In 2008, an EU-UNDP project “Consumer Society and Citizen Networks” 56 financed the textbook for the course “Fundamentals of Consumer Knowledge” (1-12 grades), together with teaching materials and notebooks. More than 10,000 schools have implemented this course in their school plan and feedback from schools has been positive. Table 13: Overview of International Financial Education Initiatives Donor Objectives Description Results EU-UNDP Promote Apr 2006 – 1) Contest “Youth tests quality” (started in project responsible Dec 2009 Nov 2009) in cooperation with “Foxtrot “Consumer corporate Budget - $3.15 home appliances” and TM “Shostka” Society and citizenship and million (members of UN Global Impact Network). Citizen enlist the support 2) New concept of consumer education course Networks” of the business for Ukrainian secondary schools, developed sector in a detailed syllabus for consumer education achieving a more courses, outlined specific recommendations sustainable and for teachers and prepared school notebooks. equitable global 3) Through December 2007 – January 2008, in economy. cooperation with EPSI Rating, Swedish agency of consumer satisfaction measurement the CSCN Project conducted the first pioneering survey on the level of satisfaction of Ukrainian consumers covering five service sectors of Ukrainian market, in particular retail banks and general insurance. 4) National public awareness program “New Ukrainian Consumer” through TV and radio channels. Apart from public service announcements and social advertising, the Campaign features a number of educational and general interactive programmes. 5) Consumer portal www.consumerinfo.org.ua launched in June, 2007. 6) Handbook “Consumer Essentials” (2008) as a voluntary course for Ukrainian colleges in the framework of Bachelor degree in Economics. More than 3000 schools and 50 universities have volunteered to implement the course. 7) TV programme for consumers “SPOZHYTYV” (from 2009). Polish Raise awareness, July-Dec 2007 1) 33 training-of-trainers workshops with the Development increase participation of teachers, credit unions’ staff, Assistance engagement and rural citizens, handicapped people and implemented by build skills of the others. Micro-finance most promising 2) National conference. Centre together stakeholders in 3) Strategy to improve financial capabilities of with the Ukraine. Ukrainian citizens. Ukrainian Association of Credit Unions UN Global Enhance social Launched in 1) 160 members in Ukraine, including 7 banks, Compact responsibility of April 2006 2 credit unions, 2 insurance companies and Network business, in 1 asset-management company. particular in the 57 area of consumer 2) 38 companies in Ukraine prepared protection and nonfinancial reports during 2005-2010. consumer 3) Concept of the National Strategy of the awareness. Social Responsibility of Business in Ukraine to be implemented by 2015. 4) Course “CSR” for bachelors. USAID Ukraine Strengthen the N/A 1) Grant to the Centre for CSR Development (CSR National organizational Centre) at the amount of $199,990 to create Initiatives to capacity of enabling environment for CSR development in Enhance leading Ukrainian Ukraine. CRS Centre has organized 2 Reforms NGOs to better exhibitions of social projects. (UNITER) represent citizens and drive the reform agenda through more effective advocacy, monitoring and activism USAID Assist Ukraine in October 2009 – 1) Financial Literacy Survey (2,000 FINREP rebounding from October 2012 respondents and Focus Groups discussions the economic and Budget - $12.4 in 6 cities). financial crisis million 2) Distribution of financial literacy materials and in (including 27,000 copies of the Pension establishing a Investment Glossary). sound financial 3) Online Financial Awareness Toolkit free of sector. charge, which includes mortgage calculator, mortgage glossary, information on payments cards and other materials. 4) A series of media programs to provide journalists with essential knowledge and new insights into the financial sector. 5) Workshops to help Ukrainians understand the pension reform. 6) Other research initiatives. Table 14: Selected Business Initiatives on Consumer Awareness Initiators Description of Projects Platinum Bank 1) Launched project “Platinum Posidelki” - regular discussions of banks and bank services with children of 7-14 years old to increase their financial literacy. This project took the 3rd place at the exhibition of social projects CSR Market Place (2011). 2) Launched project “PB-Perspective Education Technologies” in cooperation with teachers of Fundamentals of Economics (2011). 3) Code of Conduct “Platinum Standards”. UniCredit Bank 1) All-Ukrainian Student Olympics which tests knowledge of banking business and finance. Participants have to submit a presentation on 1 of the 5 offered topics, try themselves in the role of a client manager and try themselves in role of CEO of a big bank. ProCredit Bank 1) Open Bank Day on the International Savings Day with the lectures on savings. 2) “School ProCredit” with the aim to help pupils of 2nd-4th grades to understand finances and banking. The course offers 9 classes per a year on savings, payment cards and other topics. At the end of the year pupils receive a certificate of 58 “Young Banker”. More than 3000 pupils from 72 schools participate in this project. 3) Brochure “How to understand banking services” (2008). Credit Union “Vygoda” 1) Seminar-training on financial literacy in Kalush (2010) with the participation of 25 members of credit unions and other stakeholders. 59 ANNEX 5. List of Institutions Met during November 2011 Visit Regulators • National Bank of Ukraine • National Commission for Securities Market Regulation • National Commission for Regulation of Financial Services Markets • State Consumer Rights Inspectorate Other State Agencies • Presidential Administration • Ministry of Education • Deposit Guarantee Fund Professional Associations • Association of Ukrainian Banks • FLIFI Banks Association • All Ukrainian Credit Union Association • Ukrainian National Credit Union Association • Professional Association of Registers and Custodians • Mortgage Association (UNIA) • League of Insurance Companies • Ukrainian Insurance Federation • Ukrainian Association of Investment Business (UAIB) • Ukrainian Union of Leasing companies • Association of Debt Collectors of Ukraine Professional Institutions and Service Providers • Ukrainian Stock Exchange • All Ukrainian Bureau of Credit Histories • MFS Securities Depository • AUCU Stabilization Fund • Arkada Bank • Oschadniy Bank • Ukrsibbank • Raiffeisen Bank Aval • Platinum Bank • Delta Bank • PZU Risk • Vienna Insurance Group • AIG Insurance 60 • QBE Insurance Group • Credit Union “Profspilkova Skarbnytsia” • First Ukrainian Credit Union • Kinto Investment Company NGOs/Consumer Protection Organizations • NGO Committee for Oversight of Banking Institutions • NGO “Our Protection” • NGO “Union for protection of depositors and consumers of banking services” • Arbitration tribunal of the Association for corporate rights protection “Attorney” • Association for Support to Deceived Investors • Association of anti-collectors and lawyers “Vasha Nadiya” • NGO Prymyrennia Other organizations and donor agencies • All Ukrainian Union “Consultants on economics and law” • School #38 Management • International Renaissance Foundation • NBU Banking University • Institute for Global Economic and Energy Strategy of Ukraine • Commission of Small and Medium Enterprises • USAID/FINREP