Protecting financial consumers during the COVID-19 crisis

Authors: Responsible Financial Access team, Finance, Competitiveness & Innovation Global Practice, World Bank

Financial regulators around the world are struggling to deal with the impact of the COVID-19 pandemic. As consumers’ financial circumstances deteriorate as a result of the crisis, it is crucial to ensure that financial institutions treat consumers fairly and bad behavior does not add to consumer suffering. 

International media and organizations have highlighted concerns, such as consumer over-indebtedness increasing quickly due to the crisis and fraudsters exploiting fears over the pandemic to target financial consumers. Regulators are recognizing the heightened risk of significant consumer harms, and many are implementing rapid measures to mitigate these harms.

Dealing with the immediate impacts of the crisis has been a major task for regulators, especially in developing countries, due to the limited resources and gaps in legal and supervisory frameworks.  In this blog, we provide practical suggestions for regulators in such countries seeking to prioritize immediate actions that have the most beneficial impact for consumers.

The COVID-19 crisis can inflict immediate harms on financial consumers in several ways, such as through:

• Increased fraud and scams: The crisis has provided fertile ground for fraud and scams, including those related to financial products and services—particularly in a digital context. They range from third parties seeking to gain unauthorized access to individuals’ accounts to entities offering fraudulent or exploitative products, such as insurance or investment products of limited or no use. Desperate consumers are even more vulnerable to such scams than in normal times.
• Credit products:
  • Unexpected loss of income can result in individuals becoming unable to make loan repayments, exposing them to aggressive debt collection practices and late payment or default fees.
  • Individuals may be forced to seek fast access to credit to meet immediate living expenses, including digital credit. This may expose consumers to less scrupulous credit providers, unfavorable terms and conditions, and increasing over-indebtedness.
  • Many countries are providing social protection payments to assist with the widespread negative impacts of the crisis on consumers’ livelihoods. However, such funds may never reach their intended recipients if they are seized first by financial institutions or debt collectors to satisfy debt obligations.
• Insurance products: Consumers can face challenges when trying to make COVID-19-related claims under their insurance policies. Insurers may seek to deny claims based on unclear or unfair exclusions. Consumers may also lose their insurance coverage if they are unable to meet premium payments or they trigger defaults under their policy due to the crisis, such as by using their home for work purposes.
• Accounts and investments: Consumers can face restrictions or penalties when trying to access their accounts or investments, such as restrictions on withdrawals that go beyond what is necessary for liquidity purposes or unclear fees for digital access. These restrictions can unfairly deprive consumers of urgently needed funds.

What immediate actions can regulators take?
Here are some examples:

• Give consumers temporary relief from loan repayments through repayment holidays or restructuring of loans, such as loan extensions. It is also important that financial institutions make such relief options easily accessible, administer relief promptly and fairly, and ensure that consumers understand how such options work.
• Offer temporary restrictions on consumers being charged interest and fees and charges associated with late payments or loan defaults.
• Address barriers such as excessive costs on consumers accessing accounts and payment products, particularly via digital means.
• Impose temporary restrictions on debt collection and enforcement activities. Enhanced monitoring of aggressive and unscrupulous debt collection activities is also crucial during these times.
• Ensure that insurance providers are treating claims fairly, providing clear, transparent information, and where possible encouraging flexible interpretation of policy rules in COVID-19-related circumstances.
• Require financial institutions to allocate resources to facilitate the easy intake and resolution of issues from consumers in a timely fashion, including via digital channels. Financial institutions should be expected to triage urgent complaints appropriately.

How can such measures be implemented?

As a first step, regulators should assess the main risks and harms that are affecting consumers in their own jurisdictions. Then, they should determine how to implement measures quickly to address key risks. Where regulators have existing legal powers with respect to financial consumer protection, such powers should be leveraged to issue short-term measures such as those noted above.

However, lack of specialized legal powers does not mean no action is possible. Directives or circulars that rely on the general authority of a regulator can be considered, or voluntary guidance combined with moral suasion. In all cases, close dialogue between regulators and industry will be crucial given the immediate risk of harm to consumers and the rapidly changing nature of the crisis.

Effective market conduct supervision will also be critical but challenging. Immediate suggestions include identifying formal and informal sources of information that are already available (such as consumer complaints data) and using technological tools to identify spikes and trends in consumer harms as well as to track industry compliance with new measures.

Many regulators are also increasing their efforts to raise consumer awareness regarding fraud and scams and to communicate consumers’ rights. Providing a clear, comprehensive, and trustworthy source of information for consumers during these challenging times is a critical role that policy makers can play.