Financial consumer protection has become a hot topic among financial-sector policymakers in recent years. Consumer protection is increasingly recognized as a critical complement to financial inclusion, particularly after the global financial crisis.
Enabling consumers to understand what financial products they’re buying, and enabling them to “comparison shop” among providers, can lead to safer access to financial services as well as to broader financial stability.
As a result, many policymakers around the world have been putting in place laws and regulation on financial consumer protection, as evidenced by the Global Survey on Consumer Protection and Financial Literacy. At the same time, international organizations have issued guidelines and principles on designing financial consumer protection policy and regulatory frameworks, such as the G-20’s High-Level Principles on Financial Consumer Protection and the World Bank’s Good Practices on Consumer Protection and Financial Literacy.
But less guidance exists on the tricky question that immediately follows new laws and regulation: How do you implement and enforce these new rules? Policymakers have many considerations to juggle, from legal and technical issues to practical and operational concerns. Unclear legal mandates, limited supervisory capacity, the different skill sets required of staff, the need for supervisory tools adapted to financial consumer protection, and the relationship with prudential supervision – these are just some of the many questions facing regulators who are seeking to establish a financial consumer protection supervision department (“FCPSD”).
The latest technical note from the Financial Inclusion and Consumer Protection team at the World Bank (“Establishing a Financial Consumer Protection Supervision Department: Key Observations and Lessons Learned in Five Case Study Countries”) seeks to shed light on this area of growing concern. Surveys and interviews were conducted with financial consumer protection supervisors in Armenia, the Czech Republic, Ireland, Peru and Portugal to gather concrete, practical insights from the experiences of these countries in setting up FCPSDs.
There is obviously no “one size fits all” approach to establishing a FCPSD, as the right approach will be highly dependent on country context. Nevertheless, the five case study countries highlight a few common obstacles and lessons learned.
- The initial starting point for establishing a FCPSD is to ensure a strong and clear legal mandate to undertake financial consumer protection, combined with high-level policymaker support. Ideally, the financial regulator should be assigned (i) rule-making powers, (ii) oversight and monitoring powers, and (iii) enforcement powers in order to effectively undertake financial consumer protection supervision activities. High-level public and political support is also necessary to overcome the inevitable initial obstacles.
- The scope, coverage, and statutory responsibilities of FCPSDs should be broadly established, but actual implementation should begin on a small scale and should expand strategically over time. Covering a wide range of financial institutions and products allows for the long-term harmonization of supervision activities and the greatest breadth of consumer protection. However, given capacity constraints, FCPSDs should develop an initial risk-based agenda to determine immediate priorities and leverage resources for maximum impact.
- FCPSDs can be placed within the organizational structure of a financial regulator as a stand-alone department or as an internal division within an existing department, with pros and cons to either approach. Operating as a stand-alone department provides the benefits of independence and greater levels of resources and authority. For countries faced with limited resources, though, beginning as an internal division within a larger department is easier to launch from an operational perspective. Regardless of organizational structure, there should be a clear separation between financial consumer protection supervision and prudential supervision, or else prudential supervisory priorities will often end up dominant.
- Staff members should have a variety of skill sets and will require significant training. Given that financial consumer protection supervision represents a new area with evolving activities, it is beneficial to hire staff with backgrounds in a variety of sectors. Prior supervisory experience is not mandatory, as all staff will require extensive training and “learning by doing” in financial consumer protection supervision, due to the fact that the content and methodology of financial consumer protection supervision differs greatly from prudential supervision.
- A systematic, risk-based supervisory program should be developed, including on-site inspections, off-site supervision, and market monitoring. On-site inspections can be conducted either: (i) independently by FCPSD staff, (ii) jointly with both FCPSD and prudential supervision staff, or (iii) primarily by prudential supervision staff with occasional participation by FCPSD staff. While it may be preferable to conduct on-site inspections independently, this approach is not feasible in all countries. In the initial stage, leveraging existing prudential supervisory resources may be the most practical approach for low-capacity FCPSDs. Off-site supervision and market monitoring should be regularly utilized to make the most effective use of resources.
The lessons from these case study countries can hopefully provide a starting point for other countries seeking to undertake financial consumer protection supervisory activities. Further research is needed (and is currently under way) at various organizations on more detailed topics, such as effective institutional arrangements and supervisory techniques (for example, see CGAP’s Implementing Consumer Protection), which will help to expand collective knowledge on successful approaches to financial consumer protection supervision as more countries look to expand their efforts in this area.
The full text of the technical note can be found on the World Bank’s Responsible Finance website.