KAZAKHSTAN Diagnostic Review of Consumer Protection in Financial Services Volume I Key Findings and Recommendations [January 2011] THE WORLD BANK Private and Financial Sector Development Department Europe and Central Asia Region Washington, DC    7KLV'LDJQRVWLF5HYLHZLVDSURGXFWRIWKHVWDIIRIWKH,QWHUQDWLRQDO%DQNIRU5HFRQVWUXFWLRQDQG 'HYHORSPHQW7KH:RUOG%DQN7KHILQGLQJVLQWHUSUHWDWLRQVDQGFRQFOXVLRQVH[SUHVVHGKHUHLQ GR QRW QHFHVVDULO\ UHIOHFW WKH YLHZV RI WKH ([HFXWLYH 'LUHFWRUV RI WKH :RUOG %DQN RU WKH JRYHUQPHQWVWKH\UHSUHVHQW       Kazakhstan Diagnostic Review of Consumer Protection in Financial Services Volume I – Key Findings and Recommendations  Contents Abbreviations & Acronyms ................................................................................................. ii Acknowledgments ............................................................................................................... iii Foreword............................................................................................................................ iv ([HFXWLYH6XPPDU\ ,QWURGXFWLRQ ,PSRUWDQFHRI&RQVXPHU3URWHFWLRQ )LQDQFLDO/LWHUDF\ .D]DNK3ROLF\UHJDUGLQJ&RQVXPHU3URWHFWLRQLQ)LQDQFLDO6HUYLFHV %DFNJURXQGRQ.D]DNK+RXVHKROG)LQDQFHV .H\)LQGLQJV 5HFRPPHQGDWLRQV &RQVXPHU'LVFORVXUH %XVLQHVV3UDFWLFHV 'LVSXWH5HVROXWLRQ0HFKDQLVPV )LQDQFLDO(GXFDWLRQ 6XUYH\VDQG(YDOXDWLRQ 5HIHUHQFHV  Annex Annex I: Legal and Institutional Framework ........................................................47 Annex II: List of Recommendations ....................................................................50 Tables Table 1: Kazakh Households’ Financial Position ................................................24 Table 2: Number of complaints received by AFN ................................................40  Figures Figure 1: Non-performing Loans Ratios ..............................................................24 Figure 2: Household Loans in Local and Foreign Currency (as percentage of GDP) ...................................................................................................................25 Figure 3: Volumes and Interest Rates of Mortgage Lending * ............................25 Figure 4: Credit to Households – International Comparison (% GDP) ................26  Boxes Box 1: Highlights of Consumer Protection Measures taken by Countries after Global Financial Crisis ........................................................................................20 Box 2: Financial Consumer Agency of Canada ..................................................28 Box 3: Multi-Level Insurance Schemes in Australia ............................................38   Abbreviations & Acronyms  $&3  $JHQF\IRU&RPSHWLWLRQ3URWHFWLRQ $'5  $OWHUQDWLYHGLVSXWHUHVROXWLRQ $)1 $JHQF\ RQ 5HJXODWLRQ DQG 6XSHUYLVLRQ RI )LQDQFLDO 0DUNHW DQG )LQDQFLDO 2UJDQL]DWLRQV $0&  $VVHWPDQDJHPHQWFRPSDQ\ $0)2. $VVRFLDWLRQRI0LFURILQDQFH2UJDQL]DWLRQV $3)  6WDWHRZQHG3HQVLRQ)XQG $35  $QQXDO3HUFHQWDJH5DWHRI&KDUJH &,8  &ROOHFWLYHLQYHVWPHQWXQGHUWDNLQJ &2(  &RXQFLORI(XURSH &3  &RQVXPHU3URWHFWLRQ &6'  &HQWUDO6HFXULWLHV'HSRVLWRU\ )&$&  )LQDQFLDO&RQVXPHU$JHQF\RI&DQDGD ),$.  )LQDQFLDO,QVWLWXWLRQV¶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cknowledgments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oreword  Consumer protection in financial products and services lies at the heart of any financial sector that is efficient, competitive and fair. Three areas are important. Customers of financial institutions should have the right to receive information that is clear, complete, accurate and comprehensible before they decide to borrow or to invest. They should have access to recourse mechanisms that are efficient and cost-effective. They should also be able to obtain sufficient financial education to understand the terms and conditions and other information provided to them as financial consumers. We are pleased to provide this Diagnostic Review of Consumer Protection in Financial Services in Kazakhstan and thank the Kazakh authorities for their valuable cooperation and collaboration in its preparation. 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²RUQHHGWREHLPSURYHG    6800$5<2)5(&200(1'$7,216  RECOMMENDATION ACTION REQUIRED RESPONSIBLE Priority PARTY INSTITUTIONAL STRUCTURE Enhance the institutional structure for financial consumer Build institutional AFN, Government High protection. Choose one of the two options: (Vol 1-Pg 18) capacity of AFN or establish new agency 1. AFN to retain financial consumer protection authority but strengthens its capacity to handle consumer protection matters. 2. Establish a specialized financial consumer protection agency. AFN should devise a long term plan to encourage industry New policy AFN High associations to play a more active role in financial consumer protection. (Vol 2- Pg 19; 65; 97) For example, FIAK should: x Have standardized rules on addressing complaints mechanisms and ensure disclosure of these mechanisms on banks’ website x Adopt a voluntary code of conduct and publish it on its website x Provide comprehensive information on its website that promotes consumer financial literacy x Establish permanent working groups on banking, securities markets, insurance and pension. AFN should require the licensing of all entities (be they legal or physical persons) who solicit funds from the public for the purposes New regulation AFN High of investment or speculation. (Vol 1- Pg 28; Vol 2-Pg 66) The Government and the AFN should consider strengthening the New policy AFN, Government Medium capacity of consumer organizations to take on a more active role on consumer protection matters. (Vol 1- Pg 32; Vol 2- Pg 18; 49; 63; 66; 95; 98; 110; 120; 121; 131) The Competition Agency should monitor the banking sector closely Competition and encourage better competition. It should publish the New policy Agency Medium competition assessment of the banking system. (Vol 2- Pg 52) CONSUMER DISCLOSURE AFN should make available to consumers useful comparative New policy AFN Medium information. AFN (or one of the consumer advocacy organizations) should publish information to allow easy comparisons of fees, charges and commissions charged for the same service. (Vol 1-Pg     20, Vol 2-Pg 31) AFN should publish a glossary of key terms. (Vol 1- Pg 21) New policy AFN Medium Professional associations should develop standardized contracts for New policy Industry High all financial services to be adopted by member institutions. associations (Vol 1 - Pg 21) Professional associations should develop Key Facts Statements for New policy Industry High all retail financial products and services to be adopted by member associations institutions. (Vol 1-Pg 21; Vol 2- Pg 24; 102; 123) The Law on Advertising, and legislation on securities, insurance, and Amend the Law on AFN Medium pension funds should be amended to ensure proper advertising Advertising, Securities practices by securities intermediaries, investment management Markets Law, companies and pension funds. AFN should strengthen its the Investment Funds Law, capacity of monitoring advertising practices in the securities, Pension Systems Law, insurance and private pension sectors. (Vol 1- Pg 23; Vol 2- Pg 69; insurance legislation, 73; 101; 122) Build capacity of AFN x For insurers, securities intermediaries, and pension funds, the laws should explicitly state that these entities are legally responsible for all statements that are made in marketing and sales materials. x For insurance services, the Law on Advertising should cover benefit illustrations, which allow consumers to estimate their future payments from insurance contracts. AFN should coordinate with the Competition Agency to ensure effective mis-selling of financial products and misleading New policy AFN, Competition High advertisements by entities not supervised by AFN. (Vol 2 – Pg 73; Agency 101; 122) Insurance Amend insurance AFN Medium Insurance legislation should be strengthened to provide specific legislation, Build provisions on disclosure and account handling for insurance capacity of AFN customers. (Vol 1- Pg 23) It should: x Specify that traditional life insurance savings contract policyholders shall receive statements of value at least annually (possibly after the first two years), and shall have mechanisms to dispute the accuracy of the statement. (Vol 2- Pg 105) x Require insurers to notify policyholders about the need to renew policies that are due to expire, and to provide a renewal notice to that effect. (Vol 2-Pg 105) x State explicit requirements for insurance companies to disclose     commissions on non-mandatory insurance policies to the customer. (Vol 2-Pg 101) Pensions Amend the Law on AFN Medium Pension Systems The Law on Pension Systems should be strengthened to improve disclosure requirements for private pension funds. (Vol 1- Pg 23) It should: x Regulate the content of disclosure on the status of pension savings to the contributor. (Vol 2- Pg 122) x Include provisions requiring agents to disclose information on the implications of transferring funds from one pension fund to the other. (Vol 1- Pg 23) x Require disclosure requirements at the point of sale. (Vol 1- Pg 23) x Require risk disclosures concerning the volatility of pension fund investments. (Vol 1- Pg 23) New regulation AFN Medium AFN should ensure that information on the performance of pension funds is published on time, using clear and comparable formats. (Vol 1- Pg 23) Securities Amend Law on AFN Medium Securities The Law on Securities should be amended to require market participants to inform investors of the sharing of their personal information and allow them to opt out of information sharing. (Vol 1- Pg 24; Vol 2 - Pg 78) New regulation AFN Medium AFN should adopt regulations to standardize the rights and duties of securities brokers and investors. Improve the regulatory framework to include specific provisions relating to account transfers or the procedures for closing an account. (Vol 2-Pg 70) Credit Reporting and Personal Data Amend the Law on Loan AFN Medium Offices and Formation of The Law on Loan Offices and Formation of Credit Histories should Credit Histories be amended to require credit institutions to inform customers that they are agreeing to allow the institution to share their credit history. (Vol 1- Pg 23) New policy AFN, FIAK Medium AFN or FIAK should educate consumers on the importance of having an accurate credit report. Consumers must have a direct means to seek correction of data in their credit report. (Vol 2 -Pg 39) New policy FIAK Medium FIAK should create an easy to read key information brochure for its members that explains the basics of a credit report, credit score and     credit reporting system, and indicate sources of information where the consumer can access his/her report. This brochure should be given to the consumer at the point of purchase of a financial service. (Vol 1- Pg 24) BUSINESS PRACTICES AFN should take a leading role in dealing with illegal financial Amend the Law on AFN High schemes. It should have legal authority to freeze the assets of the Securities Markets, build financial pyramids and impose severe penalties for operating or institutional capacity of being affiliated with any such scheme. (Vol 1- Pg 28; Vol 2-Pg 67) AFN Legislation should be amended to identify a multi-level sales Amend legislation AFN Medium scheme if: (1) payment is required for the right to receive compensation for recruiting new salespersons into the scheme; (2) there is inventory loading, that is, new salespersons must purchase an unreasonable quantity of a product or service; and (3) purchases of services are required as a condition of entry into the scheme. (Vol 1-Pg 29) AFN should require financial institutions to state that they are New policy AFN High regulated by AFN. (Vol 1- Pg 29; Vol 2- Pg 22) AFN should issue consumer alerts of possible frauds. (Vol 1- Pg 30; New policy AFN Medium Vol 2-Pg 67) AFN should adopt a regulation to ensure that debt collection New Regulation AFN Medium practices are not abusive. (Vol 1- Pg 25; Vol 2-Pg 32) AFN should introduce cooling-off periods for all consumer financial New Regulation AFN High products, except for securities and investment funds. A cooling-off period should apply to: contracts with a long-term component, (such as housing and mortgage loans; or a large savings component. (Vol 1- Pg 25; Vol 2- Pg 21; 102; 104; 125) AFN should adopt a regulation to discourage tied selling of financial New regulation AFN Medium products. The regulation should clarify that if a specific financial service must be purchased in order to obtain another service, the consumer has the right to choose the supplier of the related service. (Vol 1- Pg 25, 26; Vol 2- Pg 22; Pg 99) Industry associations should develop codes of business practice for New policy Industry High their respective parts of the financial sector. (Vol 1-Pg 27; Vol 2 - Pg associations 18; 41; 64; 97) AFN should require financial institutions to develop a “Know Your New policy AFN Medium Customer” policy, to improve the suitability of financial products. (Vol 2 - Pg 20; 71; 72; 102; 125) AFN and professional associations should collaborate closely to set Legislation/regulation AFN, industry Medium     competency requirements for staff of financial institutions. (Vol 1- associations Pg 27; Vol 2-Pg 27; 71; 124) x Establish minimum competency requirements for any staff member of a financial institution that deals directly with consumers. x Give AFN or the industry association the responsibility for x establishing educational requirements and tests for more complex contracts. The legal and regulatory framework for securities sector should be Amend Securities AFN Medium strengthened to: (Vol 2- Pg 72; 75; 76) Market Law, Investment Funds Law, and x Require more detailed sales practice rules for the securities applicable regulations industry x Require more detailed requirements on the contents of the contract note on an industry-wide basis for securities. x Require more specific regulations on the procedure for contesting the accuracy of statements by the client of the securities intermediary. x Introduce clear provisions that require broker/dealers and management companies to immediately pay the customers any cash balances in their accounts and proceeds from sales when the payment is received by them. DISPUTE RESOLUTION MECHANISMS AFN should require all financial institutions to establish a specific New regulation AFN High procedure to deal with consumer complaints. The professional associations should develop recommendations on complaints’ handling procedures for their member institutions. (Vol 1- Pg 30; Vol 2- Pg 41; 79; 107; 124; 129) Improve the mechanism of handling and addressing complaints by: (1) expanding the scope of existing ombudsmen and setting up new Amend legislation, new AFN Medium ombudsmen for securities and pensions sector; and (2) consider regulation establishing a single financial ombudsman for all financial services under the draft financial consumer protection law. (Vol 1 – Pg 31; Vol 2-Pg 43, 66; 81; 98; 108; 129) Under (1): x Expand the scope of the new ombudsman to be established under the draft consumer protection law to cover all banking services. x Expand the scope of the insurance ombudsman to cover all insurance services. x Set up an ombudsman covering securities intermediaries. x Consider setting up an ombudsman covering the pensions sector.     FINANCIAL EDUCATION An umbrella organization could be created that brings together New policy New umbrella Medium initiatives of government entities, consumer associations and organization private institutions. (Vol 1- Pg 33) Long-term financial education programs should be based on life- New policy AFN, RFCA, new Medium cycle planning. (Vol 1- Pg 34) umbrella organization Financial literacy programs should be differentiated between those New policy AFN, RFCA, new Medium that provide broad financial education vs. those that give targeted umbrella consumer information. (Vol 1- Pg 34; Vol 2- Pg 49) organization x The targeted information should include reliable, comprehensive and clear information about consumer protection in the area of financial services. x For the broad program, a comprehensive learning framework would be useful to develop policies and build consensus, and could be used as a basis for designing educational programs and initiatives. Require both professional educators and technical experts in New policy AFN, RFCA, new Medium financial markets to deliver financial education programs. umbrella (Vol 1- Pg 35) organization Consumer organizations should be encouraged to deliver financial New policy AFN, RFCA, new Medium education awareness programs. (Vol 2-Pg 110; 131) umbrella organization SURVEYS AND EVALUATION Evaluate the effectiveness of financial education programs via New policy AFN, RFCA, new Medium controlled trials and surveys. (Vol 1- Pg 35; Vol 2-Pg 51; 83; 110) umbrella organization A nationwide household survey should be conducted every 3-5 years to measure impact of initiatives. Use the results of the survey AFN, RFCA, new to revise design of financial education programs and consider New policy umbrella Medium review of the consumer protection framework. 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