An International Comparison of Financial Consumer Protection

Consumer protection has been an important issue for the society and extensively discussed by the academics since 1950s (Devaney in The Journal of Consumer Affairs, 50(3): 505–514, 2016). The subjects for discussion include a full range of products and innumerable types of consumer complaints. Traditionally the manufactured products, such as cars and food, are the focus of consumer protection. However, the financial crisis of 2008 which caused many people incurring disastrous loss in wealth has attracted attention to financial consumer protection. The creation of the Consumer Financial Protection Bureau (CFBP) in the US in 2010 could be regarded as a significant movement for the trend.

Financial consumers are defined by s 12BC of the ASIC Act (Australian Securities and Investments Commission Act (Cth), No. 51 of 2001, (Australia).) as consumers of services worth less than AUD 40,000.00, (S 12BC (1)(a)) or if worth more, then ‘of a kind ordinarily acquired for personal, domestic or household use or consumption’ (S 12BC (1)(b)); or if the services are for use or consumption in connection with a small business, (Defined in s 12BC (2) as employing less than 100 people if it engages in manufacturing, or otherwise less than 20 people.) and cost more than AUD 40,000.00, ordinarily acquired for business use or consumption (S 12BC (1)(c).).

A person or entity having a bank account, a loan, investment account, or an insurance policy with a financial institution is a consumer of financial services. As a consumer of a financial service one has certain rights, and the consumer group as a whole should get adequate protection in a financial market. A financial system can protect consumer rights if it can offer transparency and appropriate choices. Consumer protection is designed to ensure the rights of consumers as well as fair trade, competition and accurate information in the marketplace.

International assessors regularly benchmark certain practices for consumer protection. Appraisals of prudential protection of Canadian financial institutions are unequivocal: Canada frequently ranks number 1 in the world - triumph for financial institutions, regulator OSFI, the Bank of Canada, all. The IMF praises expertise of professionals regulating in Canada. Metrics exist for consumer protection through financial literacy. The best international evidence (PISA) places Canada 2nd or 3rd among countries tested. This triumph has been earned by Canada’s literacy strategy and by teaching/learning agencies led by the Financial Consumer Agency of Canada. Consumer protection against selling practices in financial services is a source of tribulation. Noticeable inadequacies include perverse selling incentives; lack of competition; unbalanced contracts; demonstrably poor redress systems; and regulation balkanized among numerous provincial agencies. Important institutions for consumer empowerment are absent in Canada; others are under-resourced. The difficulty of detecting ‘financial quality’ harms consumers, productivity, and Canada’s best firms. There are recent signs of progress in provincial policies, though an initiative to hold financial advisors to the “best interest” of clients has been abandoned. To move toward international best practice, Canada needs harmonization, consumer empowerment, improved mandates, restitution measures, balanced innovation policies, and astute market incentives.

When the traditional concept of consumer is applied to the financial sector, sometimes its meaning is ambiguous, and the existing legislation for consumer protection in financial industry is insufficient, which makes setting definition of financial consumer in China a real necessity.

French citizens tend to have relatively high levels of savings; however this does not contribute to strong individuals’ support to the financial market. Traditionally in developed market, the financial assets of most citizens are constituted by their pension funds managed on the basis of the constitution of an individual account, process known as capitalisation whereby each individual owns a set of financial assets, generally through a fund management company. On the contrary, in France, the pensions, for the most part, are based on repartition whereby the workers pay on an ongoing basis the pensions of those retired. The system will be explained further later in this chapter. The result is that financial assets are owned by a limited fringe of the population.

The Indonesian financial system has a long story. Financial system hardly existed before 1966 that is when the commercial banks faced the emergence time. After 1966 under Soeharto governance, central banking and banking sector regulation as the basis of the current financial system in Indonesia was introduced and implemented. After 17 years later, financial structure of Indonesia had the first reformation. In total, there are five phases in Indonesian financial system development between 1966 and the present time (Hamada in Transformation of the Financial Sector in Indonesia, 2003). The first phase, called as formative period, started from 1966 until 1972. The second phase, started from 1973 until 1982, is the period of policy-based finance under soaring oil prices. The third phase, started from 1983 until 1991, is financial-reform period. The fourth phase, started from 1992 until 1997, is the period of financial system’s expansion. The last phase, started from 1998 until present, is the period of financial restructuring, which is in this period the government more concern about consumer protection in financial industry. Financial consumer protection is necessary to increase access and usage of financial services. It can build trust between consumer and financial system, hence in encouraging financial inclusion.

In Europe, general legislation requires protection of the economic interests of consumers. This includes, for instance, the consumer protection from financial services, misleading advertising and unfair contract terms. However, only after the global financial crisis, the European Union (EU) has become aware of the lack of transparency, poor handling of conflicts of interest, over-indebtedness, and low awareness of risks of the consumers in dealing with financial services. This paper aims to investigate the financial knowledge and overconfidence in Europe, and to provide an overview of consumer protection policy in EU. Here, it will be analyzed the EU regulatory framework, whose aim is to ensure the stability of the financial markets and to establish specific and common rules for banks and investments companies among the Member States. Furthermore, it deals with protections of financial consumers in the Italian legislation and within a European context. It concludes providing the Italian financial system as best example of crisis management and resolution, by providing out-of-court settlements, collective redress and crisis management procedures, with the aims to establish a systemic stability and financial consumers’ confidence in the bank system.

Financial services play a critical role in society at large, enabling individuals, families and businesses to thrive. When a buyer utilizes services from a financial institution, there is a monetary transaction that takes place with an expectation to gain a profit in the future. There are various risks inherent in the process based on the time between paying and receiving money.

Although not in adopted in any law in Korea yet, the term ‘financial consumer’, has been widely and increasingly used by the government, policy circles and the financial industry in Korea since 2010, when the Korean Academy of Financial Consumers (hereinafter “KAFC”) was set up probably for the first time in its kind in the world.

The public (or retail) consumer is a very important aspect in any financial market. Although they do not provide the bulk of the financing income compared to business consumers or corporations, they make up in terms of quantity and is an essential contributor to the performance of any financial institution. However, financing retail consumers are very much fragile and volatile in nature due to their inability to gasp their own financial capability as well as the tendency to overextend their credit limit which may create problems in the future and affect their ability to pay their financing. This in turn, creates problems for the financial institutions making the recovery process very lengthy and expensive. With that in mind, it is imperative that the retail consumers are educated and taught the proper ways to manage their credit and protect themselves against the inability to pay their financing. Thus, the purpose of this chapter is to highlight the importance of consumer protection and the means that have been put in place by the central bank of Malaysia, Bank Negara Malaysia (BNM) to help increase customer awareness and financial literacy in Malaysia. This chapter will also highlight the challenges that are faced in consumer protection and efforts that have been made to improve consumer protection. This chapter found that the highest percentage of loan approved in Malaysia are loans from the household sector and despite the measures to increase financial literacy and consumer awareness that have been put in place by BNM, there has been a steady increase of bankruptcy cases and scam victims for the past years in Malaysia. It would be interesting to see the impact of the measures put in place by FSA 2013 and IFSA 2013 on financial institutions and retail consumers and it is recommended that a more stringent regulative framework be put in place to address the increase in bankruptcy and scam scandals among the working population.

In Spain the notion of consumer does not coincide with the legal definition of the individual protected by domestic financial regulation. That is, while a consumer (or user) refers to a physical or legal entity, which operates in an area outside a business or professional activity; the individual in financial regulation is a client. The client can be an active or passive user of banks’ services, or a retail consumer (investor) in the capital market. The concept of client is more general than the concept of consumer. For instance the non-financial firms are also included in the former, while they are not in the later.

In the U.S., financial consumers include individuals and businesses purchasing any type of financial product. The protections afforded these individuals come from many directions, and reflect the variation in the products, the markets for the products, and the ways in which the products are distributed. The scope of financial products available to the U.S. consumer is large and includes, for example, savings accounts, mortgages, loans, credit accounts, insurance policies, real estate, stocks and bonds, and a variety of other securities. These products are distributed by companies in several sectors that are generally referred to as banking, insurance, and other financial services. While many of these are marketed directly to the consumer, many financial products are also distributed through employers.