Latvia - World Bank Diagnostic Review of Consumer Protection and Financial Capability for Latvia: Improving Protection in Financial Services for Latvian Consumers
Over the last decade, households across Europe, North America, Latin America and Asia have discovered a new commodity - consumer credit. From western reaches of the European Union to eastern shores of Central Asia, households have taken on debt to pay for housing, cars and just getting by. In some cases, high levels of household indebtedness left the countries highly vulnerable to the global financial crisis. Latvia has been one of these countries.
Bank loans to Latvian households dramatically increased during this decade, at an average rate of 70 percent per year from 2004 to 2007. Mortgage debt alone rose from 8 percent of Gross Domestic Product in 2003 to 31 percent in 2008, the second highest level among new European Union member states. Most housing loans have been granted in foreign currency and at variable interest rates. Furthermore, houses and appartments have been used as collateral for not only housing loans but also consumer loans and credit card debt. At the same time, housing prices have fallen by half over the past 2 years, after rising more than twofold from 2005 to 2007. What is clear from the picture is that in recent years, Latvian households were increasingly assuming more financial risks.
Yet, despite the rapid expansion of consumer credit in recent years, a large number of Latvians are still not part of the financial system. About a third of the population does not have bank accounts. The public credit register only covers information on 4 percent of the adult population. Even more, non-life insurance policies sold to households represent less than one percent of Gross Domestic Product.
This week, the World Bank will release its Diagnostic Review of Consumer Protection and Financial Capability for Latvia.* The report considers that, although Latvia has adopted key regulations relating financial consumer protection, there is need for further support in five core areas:
- Strengthening the institutions resposible for financial consumer protection,
- Improving consumer disclosure for all financial services,
- Improving the business practices of financial institutions when dealing with their retail customers,
- Expanding the dispute resolution mechanisms for financial consumers, and
- Expanding programs of financial education and financial capability for both students and adults.
First, the current institutional framework could be strengthened to ensure improved protection of consumers. The review recommends that as an initial step the Consumer Rights Protection Center build up its expertise to handle financial sector issues. Support from the Financial and Capital Market Commission would be key at this stage, as well as assistance from other European countries. Over the long term, consideration could be given to establishing a financial consumer protection agency, which has proved to be effective in many countries. Furthermore, a financial ombudsman could be established to handle individual inquiries, complaints and disputes.
Second, clear, easy to understand, accurate and comparable information provided by financial institutions would benefit existing and prospective customers. Basic information regarding financial products could be presented in simple formats like the Key Fatcs Statement (used in the UK), the Standard European Consumer Credit Information or the European Standardized Information Sheet for mortgage credit Tariff surveys showing comparison of pricing of financial services would also be helpful.
Third, retail customers could benefit from better business practices and stronger self-regulation based on well-designed codes of conduct and an effective system for the training and certification of sellers of financial products. Regulation, licensing and business conduct supervision of non-bank credit institutions (including debt collection agencies) would be helpful. "Mystery shopping" could be used to see the issues that arise for consumers as they try to buy financial products and learn about the risks and rewards of different products, and to monitor disclosure practices in the selling of financial products and services. Also it would be helpful if cooling-off periods are set for all long-term financial products, such as residential mortgages.
Fourth, the mechanisms for dispute resolution could be improved, starting with each financial institution setting clear procedures for handling and tracking customer complaints, and providing consumers with information on how to seek a remedy for problems arising with the financial institution or its intermediaries. Consumer complaints about financial services should be consolidated by one central location (such as the Consumer Rights Protection Center), which would analyze and publish trends in the different types of complaints. Over the long term, Latvia could discuss establishing a financial ombudsman - an institution with specialized staff to whom consumers could send their complaints when the financial institutions cannot resolve them. Although the banking and the insurance associations have set up ombudsmen for their segments, their authorities are limited. The small number of consumer complaints that each receives per year could represent that the public does not perceive these institutions as effective mechanisms to provide fair and speedy resolution to their disputes.
Fifth, there is room to expand programs of financial capability. Consumers would benefit from having easy access to financial education, so that they can learn not just about the terms of their financial services but also the risks and rewards of different personal financial strategies. Financial education is most effective when provided at "teachable moments", when consumers are searching for information about financial services and financial planning. As part of consumer awareness, leaflets could be prepared by the Consumer Rights Protection Center to provide advice and assistance to financial consumers, and consumer associations could help to promote awareness throughout the country. Financial matters should become an integral part of school courses. Finally, the review recommends that a nationwide financial literacy survey of households be conducted as a baseline analysis, covering consumer spending habits and financial well-being, as well as levels of financial literacy and understanding. The results of the baseline survey would help to define national programs of consumer awareness and financial education, and follow-up surveys (every three to five years) would help to evaluate program effectiveness and determine what further modifications may be needed.
These sets of measures are not easy to put in place but all are important. Taken together, they will establish the foundations needed to ensure that Latvian households can make even difficult financial decisions with confidence - whether it is to buy a new house, pay for a car repairs or just find a way to save a little between pay checks. The program requires an active role not just by the Latvian government authorities but also by the financial industry and members of civil society. The result will be empowered financial consumers - and a stronger society.