On the Guard of Financial Consumer Rights: Who Should Deal and How?
It is an outstanding issue in Ukraine taking into account the anticipated changes in the regulatory system of the financial sector.
Institutional framework is one of the most difficult matters for financial consumer protection worldwide, and Ukraine is not an exception in this regard. In other words, the question is which of public authorities will protect rights of consumers by the law and on practice and what powers they need to ensure it.
At first sight, plenty of approaches and models of institutional frameworks exist all over the world. At that, they come to three models, two of which are basic.
Institutional framework is one of the most difficult matters for financial consumer protection worldwide.
The first one is the integrated model. It provides combination of prudential supervision and market conduct supervision (including consumer rights protection) in one authority, namely financial sector mega-regulator. Another model is the twin-peaks, which splits prudential supervision and market conduct supervision between different institutions. And, finally, institutional (sectoral) model which is the modification of the first model. This type anticipates a number of regulators covering each sub-sector of the financial sector. Each separate regulator is responsible for prudential supervision as well as market conduct supervision over the relevant regulated sub-sector.
Effective Approaches to Support the Implementation of the Remaining G20/OECD High-Level Principles on Financial Consumer Protection (2014) recommend despite of the chosen model:
1. There shall be one or more supervisory bodies for consumer rights protection.
2. Powers shall be determined and clear.
3. Powers shall include:
- Regulation and supervision over consumer rights protection;
- Compliance monitoring;
- Law enforcement;
- Complaints handling.
There shall be one or more supervisory bodies for consumer rights protection.
My practical observations over evolution and trends in institutional frameworks for financial consumer protection have shown the following. Whereas several years ago the prejudice against combination of prudential supervision and market conduct supervision in one institution existed, because of conflict of interest fear, nowadays most regulators including central banks are willing to undertake consumer rights protection. Even if consumer rights protection is vested in a separate structure, the latter is usually subordinated (by the type of establishment, mutual management, etc.) and cooperative with the financial sector regulator. Cases when general agencies for consumer rights protection, which functions are to protect consumers of products and services, cover financial services, are becoming less widespread. The list of financial regulators’ powers and leverages on service providers due to their misconduct has also become quite impressive.
Thus, among the current trends of institutional frameworks for financial consumer protection are: separation from the general consumer protection, intergration with prudential supervision and extension of regulators’ powers.
Trends of financial consumer protection are: specialization, integration with prudential supervision and extension of regulators’ powers.
The results of the survey conducted by the International Banking and Finance Institute of the Banque de France among 27 countries-participants in April 2016 confirmed the above trends. 70% of the respondents answered that their domestic central banks have the legal mission of financial consumer protection. The relevant figure for financial literacy and financial inclusion functions of the central banks is 91%. The following number of respondents answered “yes” to the questions on special powers of central banks to protect consumers:
- Does the authority consider consumer appeals and claims? 91%;
- Does the authority conduct on-site market conduct supervision? 96%;
- Does the authority conduct off-site market conduct supervision? 91%.
France and Georgia are the examples of institutional framework models within the continental law system. Please find more details and conclusions which could be made for Ukraine in my next column.
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