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Diagnostic Review of
Consumer Protection and Financial Capability
Volume I
Key Findings and Recommendations
Diagnostic Review of
Consumer Protection and Financial
Capability
Volume I
Key Findings and Recommendations
May 2009
ii
This Diagnostic Review is a product of the staff of the International Bank for
Reconstruction and Development/The World Bank. The findings, interpretations, and
conclusions expressed herein do not necessarily reflect the views of the Executive
Directors of the World Bank or the governments they represent.
iii
BULGARIA
Volume I
Key Findings and Recommendations
Contents
Abbreviations & Acronyms ............................................................................................ iv
Foreword......................................................................................................................... v
Acknowledgments........................................................................................................... vi
Tables
Table 1: Household Currency Exposures ..................................................................... 16
Table 2: Household Use of Financial Services by 2008 ............................................... 16
Table 3: Number of Complaints Received by European Complaint Services in 2007 . 33
Figures
Figure 1: Household Loans by Purpose and Maturity .................................................. 14
Figure 2: Shares of Foreign Currency Loans in Household Loan Portfolios ............... 15
Figure 3: Shares of Bad and Restructured Loans in Household Loan Portfolios ......... 15
iii
Abbreviations & Acronyms
iv
Foreword
Consumer protection in financial services lies at the heart of any financial sector that is
efficient, competitive and fair. Three areas are important. Customers of financial
institutions should have the right to receive information that is clear, complete, accurate
and comprehensible before they decide to borrow or to invest. They should have access
to recourse mechanisms that are efficient and cost-effective. They should also be able to
obtain sufficient financial education to understand the terms and conditions and other
information provided to them as financial consumers.
We are pleased to provide this pilot Diagnostic Review of Consumer Protection and
Financial Capability in Bulgaria and thank the Bulgarian authorities for their valuable
cooperation and collaboration in its preparation. The Review not only looks at financial
services in Bulgaria but also refines a set of good practices or benchmarks for use in
reviewing consumer protection in financial services in any jurisdiction. It is expected that
this work will prove helpful to the international community and those in emerging
markets who seek to establish common ground for minimum good practices in consumer
protection in financial services.
v
Acknowledgments
This review was prepared by a team led by Sue Rutledge, Regional Corporate
Governance/ Consumer Protection Coordinator and Senior Private Sector Development
Specialist, World Bank. The project team consisted of Brett Coleman (Senior Financial
Sector Specialist), Evgeni Evgeniev (Private Sector Development Specialist), Martin
Melecky (Financial Economist), Rodolfo Wehrhahn (Senior Insurance Specialist),
Richard Symonds (former Senior Counsel), Juan Carlos Izaguirre Araujo (Consultant)
and Bujana Perolli (Consultant). All are of the World Bank. The Bulgarian version of this
report was made possible thanks to the translation of Simeon Enchev.
The report was prepared under the general guidance of Orsalia Kalantzopoulos (Country
Director for Bulgaria) and Fernando Montes-Negret (Director of the Finance and Private
Sector Development Department of the European and Central Asia Region). Florian
Fichtl (Country Manager for Bulgaria) provided detailed comments and strategic
guidance to the team.
Peer review comments were received from Tomáš Prouza, former Deputy Finance
Minister of the Czech Republic, and Antony Randle, Consultant of the World Bank.
Helpful comments and advice were also provided by the Ministry of Finance, Ministry of
Economy and Energy, Bulgarian National Bank, Financial Supervision Commission and
the Consumer Protection Commission. The authors of this report are grateful to all for
their contributions.
vi
Executive Summary
The global financial crisis has highlighted the importance of consumer protection
and financial capability as medium-term measures supporting financial sector
development. In addition to short term measures to mitigate economic impacts,
policymakers are taking steps to build better foundations for future development of the
financial systems through improved regulatory reforms. These medium-term measures
involve enhanced financial prudential regulation and oversight, financial sector
governance (including governance of financial regulators and supervisors), business
conduct regulation and supervision, and financial consumer protection. The latter
receives an increasing emphasis not only in developed countries but also in emerging
market economies, as most of the risk exposures associated with the latest credit boom
period were assumed primarily by households.
Consumer protection legislation and institutions have been put in place in Bulgaria.
Consumer protection is firmly based in Bulgarian law in both the Constitution and the
Consumer Protection Act. The Act establishes the Consumer Protection Commission
(CPC) within the Ministry of Economy and Energy. In addition, the National Consumer
Protection Council, involving representatives of the government and consumer protection
associations, was set up to advise the Minister of Economy and Energy on policy strategy
concerning consumer protection. The Consumer Policy Strategy for 2004-07 set three
goals: (i) establishment of a high level of consumer protection, (ii) effective enforcement
1
of the legislation and (iii) promotion of the activity of consumer protection associations.
The Consumer Policy Strategy for 2010-2013 is under preparation.
Use of consumer financial services has been increasing in Bulgaria. Between 2003
and 2007, household borrowings increased from 7 to 24 percent of GDP. In addition, a
survey conducted in September 2008 by the market research institute, GfK Bulgaria,
found that one-third of Bulgarian consumers hold a debit card while about 9 percent have
credit cards. The use of bank cards has significantly increased relative to January 2005,
when GfK Bulgaria showed that only 20 percent held debit cards and 2 percent used
credit cards. Saving products appear to be less widespread than bank cards since only 12
percent own a saving product of one form or another.
At the same time, consumers complain about the practices of financial institutions.
About 1,200 complaints and disputes were presented to the authorities in 2008. The
Financial Supervision Commission (FSC) reported 791 complaints related to insurance
products. For banking services about 100 complaints were submitted to the BNB and
another 80 to the CPC. Detail is not provided on the nature of the complaints. However,
some anecdotal information is provided by the financial guide Moite Pari
(www.moitepari.bg), which indicates that consumers have complained that: (1) financial
institutions can change their lending or deposit rates without notice to customers and
without clear explanation of the changes; (2) important details of the terms and
conditions of financial products are contained in contracts that are difficult for consumers
to understand; (3) personnel of financial institutions are unable to explain to customers
their financial products; (4) consumers have difficulty obtaining information in a format
that allows them to compare offers by different institutions; (5) consumers do not receive
monthly statements from financial institutions; and (6) in case of disputes over entries in
credit register, consumers have difficulty obtaining correction of errors.
2
by existing measures to protect consumers, while among the EU just over one-third (39
percent) were similarly critical. When trying to decide what to do when a complaint was
not satisfactorily resolved, 22 percent of Bulgarian consumers (but only 14 percent in the
EU) went to a consumer association or consumer help desk for assistance. However more
than three-quarters gave up. 78 percent of dissatisfied consumers in Bulgaria took no
further action (vs. only 51 percent among the EU).
A) Institutional Structure
A clear structure for consumer protection in financial services is needed. Under the
current structure, several agencies are responsible for addressing problems for financial
consumers. For consumer credit and retail payments, consumers must approach the CPC
for help, but for insurance, securities, investment funds and pensions, consumers should
go to the FSC. However problems with credit registers should be presented to the
Commission for Personal Data Protection. In cases where the law does not explicitly
mention a competent authority, such as residential mortgages or personal leases (which
are not considered to be consumer credits), CPC is the responsible authority for consumer
protection.
3
clear are the responsibilities for enforcing financial consumer protection legislation and
for helping to resolve disputes with consumers on individual cases. To ensure effective
consumer protection in financial services, six functions are needed. They are to: (1)
resolve financial consumers’ inquiries and complaints; (2) reconcile disputes; (3) gather,
publish and analyze data on consumer complaints; (4) submit consolidated reports of
consumer complaints and disputes to financial supervisors; (5) recommend measures to
improve consumer protection; (6) initiate and conduct other activities contributing to
effective and efficient financial consumer protection. All require both clear rules and
effective enforcement mechanisms. Responsibility for the six areas can be divided in
various ways.
For Bulgaria, three approaches for the institutional structure might be considered:
The approaches are not mutually exclusive. For example, a financial ombudsman could
complement the work of either the CPC or the financial supervisory agencies.
4
The Diagnostic Review recommends the first option—that the CPC cover consumer
protection legislation for all financial services—as an interim solution, but with
consideration of a financial ombudsman as a long-term solution. Whatever solution is
chosen, substantial effort and resources will be needed to implement an effective
institutional structure. If the option of creating a financial ombudsman is selected, an
intermediate approach would be to start by establishing a financial ombudsman office
within the CPC and later considering spinning-off the office as a separate agency.
Consideration should also be given to whether the ombudsman should be under the
professional associations or set up as an independent authority established by law.
Again the issue is complex. The work of an ombudsman set up under a professional
association is facilitated by a voluntary agreement among the association members to
abide by the ombudsman's decisions, generally up to small awards. Such small amounts
are not generally large enough to be of concern to financial institutions and the
ombudsman can carefully review each case on its merits in order to ensure that
consumers feel that they have been treated fairly. International experience, for example in
Germany, suggests that a banking association ombudsman is an effective and efficient
approach to resolving consumer concerns over treatment by financial institutions. On the
other hand, an ombudsman set up by a banking association would not be able to cover
insurance or other financial services and more ombudsmen—one for each professional
association in the financial sector—would be needed. Also in some countries there is
concern that an ombudsman set up and funded by a professional association would be
beholden to the financial institutions that are members of the association—or would be
seen as such by the public. The Diagnostic Review recommends that careful
consideration of the advantages and disadvantages of each type of ombudsman be
conducted.
B) Consumer Disclosure
Consumer information should be improved. Where consumers can obtain clear and
comparable information, they can make informed choices and ensure that the financial
products that they purchase are suitable for their needs and objectives. Clear laws and
regulations—and effective enforcement mechanism—are needed to ensure meaningful
disclosure of consumer financial products. The Bulgarian legislation on consumer credit
requires clear simple information on key terms and conditions in consumer credit
contracts. However a Key Facts Statement for each type of standard retail financial
product would further help consumers understand the key terms and conditions of their
contracts, particularly for insurance and pensions, and compare the conditions of products
among different financial entities. It is recommended that the professional associations
5
develop standardized formats for a Key Facts Statement for each type of standard retail
product. The disclosure requirements for consumer credits should also be applied to
residential mortgages. Consumers should be able to obtain a copy of the full terms and
conditions of retail financial products before applying for a product. Investment returns
should be presented on a risk-adjusted basis with an indication of basic risk parameters.
Advertising for financial services should be closely monitored to ensure that it is not
misleading. Tariff surveys showing comparison pricing of financial products would be
helpful.
C) Business Practices
6
E) Financial Education
7
Introduction
The good practices used in the Review were developed based on international
approaches in both developed and developing countries to effective and efficient
consumer protection in financial services. 2 A set of good practices was initially
assembled for the Slovakia Review and was subsequently revised for the Romania,
Croatia, Russia and Azerbaijan Reviews. The good practices incorporate the provisions
of the EU Directives related to consumer protection and the reports of European financial
regulatory and supervisory agencies as well as the laws, regulations and business practice
codes in the United States, Australia, Canada and other countries worldwide. The
Organization for Economic Cooperation and Development (OECD) has also released sets
of good practices for financial education and awareness on pensions and insurance3, and a
set of draft good practices for credit products, supplementing the recommendations
presented in its 2005 global review of financial education programs.4 While the good
practices are based on different countries’ international experience in financial consumer
protection, the good practices have not yet been tested as a set of benchmarks during a
global financial crisis. It is likely that the ongoing financial crisis will provide useful
insights to stimulate further revisions of the good practices. In the interim, the good
practices provide a useful tool for conducting systematic assessments of a country’s legal
and regulatory framework for financial consumer protection.
1
In chronological order, other reports on consumer protection in financial services have been prepared for
the Czech Republic, Slovakia, Azerbaijan, Romania, Croatia, Russia and Lithuania. The set of published
final reports on financial consumer protection can be downloaded at
http://www.worldbank.org/eca/consumerprotection.
2
The World Bank has released the document Good Practices for Consumer Protection and Financial
Literacy in Europe and Central Asia: A Diagnostic Tool as a Consultative Draft. A copy can be
downloaded at http://www.worldbank.org/eca/consumerprotection.
3
See OECD, Improving Financial Education and Awareness on Insurance and Private Pensions (2008)
available at http://www.oecd.org/document/8/0,3343,en_2649_34851_41210376_1_1_1_1,00.html.
4
See OECD, Improving Financial Literacy: Analysis of Issues and Policies (2005), available at
http://www.oecd.org/document/28/0,2340,en_2649_201185_35802524_1_1_1_1,00.html.
7
The publication of the Diagnostic Review for Bulgaria aims to enhance development
of financial consumer protection both in Bulgaria and worldwide. In particular, it is
anticipated that application of the good practices in middle-income countries, such as
Bulgaria, will contribute to international policy dialogue on the key components of
financial consumer protection and assist in the development of benchmarks that are
widely accepted as generally applicable to consumer protection in financial services in
any jurisdiction.
The Review is presented in two volumes. Volume I notes the importance of consumer
protection in financial services, provides statistics on the size and growth of the retail
financial sector in Bulgaria, describes the Government's policy strategy for financial
consumer protection, and sets out the key findings and recommendations of the Review.
Volume II provides an assessment of the Bulgarian consumer protection framework and
practices against the benchmark of good practices for five segments of the financial
sector—banking, non-banking credit institutions, securities, insurance and private
pensions. In addition, analysis of consumer protection and financial capability issues for
the credit reporting system is provided. Annex 1 to Volume II provides a list of the key
laws and institutions for consumer protection in Bulgaria.
Each year the global economy adds an estimated 150 million new consumers in
financial services. Most are in developing countries, where consumer protection and
financial literacy are still in their infancy. Particularly in the countries that have moved
from state planning to market economies, protecting the interests of consumers has
become an important component of sound and competitive financial markets.
Weak consumer protection and financial capability affect both developed and
developing countries. Emerging countries worldwide have seen rapid development of
their financial sectors over the last ten years and rapid growth of income has provided
consumers with more resources to invest. Increased competition among financial firms,
combined with improvements in their technology and infrastructure, has resulted in
highly complex financial products sold to the public. However, the public in many
emerging markets (particularly the post-transition countries of Europe and Central Asia)
lacks a history of using sophisticated financial products. Even in well-developed markets,
8
weak consumer protection and financial literacy can render households vulnerable to
unfair and abusive practices by financial institutions—as well as financial frauds and
scams.
At its heart, the need for consumer protection arises from an imbalance of power,
information and resources between consumers and their financial service providers,
placing consumers at a disadvantage. Consumer protection aims to address this market
failure. Financial institutions know their products well but individual retail consumers
may find it difficult or costly to obtain sufficient information on their financial purchases.
Personal insurance, such as auto or life insurance, are often cited as examples of the
imbalances. The complex contracts prepared by insurers—and the risk allocation between
the consumer and the financial institution—are often beyond the capacity of most
consumers to understand. A well-designed consumer protection framework can help
reduce the imbalances of power and information between consumers and financial
institutions.
Strong consumer protection can also have an indirect impact in reducing financial
risks, contributing to financial stability. Both consumer protection and financial
capability are needed to build trust in financial systems and thus broaden and diversify
the deposit base. This, in turn, reduces liquidity risk of the banking sector. Empowered
consumers also help foster financial stability by protecting themselves from incurring
large exposures to market risks. This increases transparency of the credit risk assumed by
the financial system and lowers the related monitoring costs for outsiders, including
financial supervisors.
In addition, consumer protection helps financial firms in facing the specific risks
that arise in dealing with retail customers. In its April 2008 report, the Joint Forum of
the Basel Committee on Banking Supervision, the International Organization of
Securities Commission and the International Association of Insurance Supervisors
identifies three key risks related to possible "mis-selling" financial products to retail
9
customers. 5 They are: (1) legal risk, if successful lawsuits from collective action by
customers or enforcement actions by supervisory agencies result in obligations to pay
financial compensation or fines; (2) short-term liquidity risk and long-term solvency risk,
if retail customers are treated unfairly and thus shun the financial institution and
withdraw their business; and (3) contagion risk, if the problems of one financial
institution (or type of financial product) spread across the financial sector. Effective
consumer protection can help ensure that the actions of financial firms do not make them
subject to criticisms of mis-selling.
Consumer protection could also shield the financial sector from the risk of political
over-reaction in periods of financial turmoil. The political response to collapses of
parts of the financial sector may be to over-compensate with heavy regulation. The
impact of too little consumer protection became evident, for example, during the
insurance and superannuation scandals in the United Kingdom and Australia. The result
of the scandals was seen in extensive studies on recommendations for wide-ranging
regulatory reform.
Financial consumer protection has two modes of delivery: (1) regulation, and (2)
financial education. Some substitution is possible. For example, in developed markets
with informed consumers, financial education can empower consumers to demand clear
and comparable information and seek redress over disputes. However in most markets,
financial education alone is not sufficient and some regulation is needed. The reasons are
three-fold: (1) financial education will always lag behind the development of financial
markets, (2) the direct (immediate) costs of implementing financial education programs
are relatively high compared to regulation, and (3) the existing governance structure
(incentives) of financial markets does not support adequate market discipline.
However regulation also imposes a cost on the financial sector. Regulation can impair
both competition and innovation in the financial sector, thus raise consumer costs and
obstruct development of adequate market discipline that would hold risk-taking in check.
Clear priorities need to be set. Regulation should be subject to cost-benefit analysis and
consumer protection regulations should be assessed to determine their impact on sound
consumer finance.6
10
Choice by ensuring fair, non-coercive and reasonable practices in the selling of
financial products and services and collection of payments;
Redress by providing inexpensive and speedy mechanisms to address complaints
and resolve disputes; and
Privacy by ensuring control over access to personal financial information.
Access to financial education that enables consumers develop the financial
capability required to understand the risks/return (cost) trade-offs, and their rights
and obligations regarding the financial products and services that they buy.7
7
Financial education is also needed to help households in making long-term financial decisions, such as
savings for retirement or sending children to college. However such "life-cycle" planning is beyond the
direct scope of consumer protection in financial services.
8
EU Consumer Policy Strategy 2007-2013 COM (2007) 99 final. http://ec.europa.eu/consumers/
overview/cons_policy/EN%2099.pdf.
9
European Parliament Report on protecting the consumer: improving consumer education and awareness
of credit and finance (2007/2288(INI))
http://www.europarl.europa.eu/sides/getDoc.do?language=EN&reference=A6-0393/2008.
11
4) Member States should develop networks of financial education, with participation
of government and non-government agencies, as well as specially trained tutors;
5) The Commission should encourage Member States to establish special programs
for pensioners and consumers at the end of their professional careers; and
6) The Commission should create a budget for financial education programs at the
EU level, covering media campaigns to increase consumer awareness of the
problems created by low financial literacy.
In Bulgaria, consumer protection is also firmly based in the law. Consumer protection
is firmly enshrined in the Constitution of the Republic of Bulgaria. Article 19 of the
Constitution adopted on July 12, 1991 says that “the state shall establish and guarantee
equal legal conditions for economic activity to all citizens and corporate entities by
preventing any abuse of a monopoly status and unfair competition and by protecting the
consumer.” In addition, the Consumer Protection Act specifies eight consumer rights.
They are the right to:
Be informed about products and services;
Be protected against products and services that are hazardous to consumers' life,
health or property;
Protection of economic interests with regard to unfair commercial practices and
methods of sale, unfair contractual terms, and provision of guarantees associated with
consumer goods;
Obtain redress for damage caused by defective products;
Access judicial and out-of-court procedures for the resolution of consumer disputes;
Education on issues related to consumer protection;
Association for the purposes of protecting consumers' interests; and
Be represented before State bodies making decisions on issues affecting consumers.
The initial legislation created consumer protection institutions. The initial consumer
protection legislation was approved as early as 1999 and it established the Consumer
Protection Commission as a legal entity within the Ministry of Economy. At the same
time, the National Consumer Protection Council was set up to advise the Minister of
Economy on strategic policies on consumer protection.
The Consumer Policy Strategy for 2004-07 identified six priorities for strengthening
of consumer protection in Bulgaria. They were to: (1) complete the process of
harmonizing the consumer protection legislation, including consumer protection in cross-
frontier payments, e-commerce and financial services; (2) create conditions for the
effective implementation and enforcement of legislation and to provide support to law-
enforcement bodies; (3) improve the institutional structure for consumer protection and
10
European Commission, Communication from the Commission: Financial Education, COM (2007) 808
final http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52007DC0808:EN:NOT.
12
its effectiveness; (4) provide assistance to non-government associations for consumer
protection, in order to involve them more actively in the process of setting up policy and
its implementation; (5) ensure a stronger representation of consumer associations in
collective decision-making bodies; and (6) improve consumer access to justice. In 2007
and 2008 new legislations related to financial consumer protection were enacted.
However, in 2008 the Ministry of Economy and Energy’s Consumer Protection
Directorate was inactive in terms of policy initiation in the field of consumer protection.
In addition, the National Consumer Protection Council did not meet even once in the past
year, although its Statute (in force since June 10, 2006) requires a meeting every four
months. In 2009, the Ministry of Economy and Energy is expected to develop the
Consumer Policy Strategy for 2010-13.
The October 2008 Eurobarometer survey of the 27 EU Member States suggests that
Bulgarian consumers need a strengthened consumer protection framework for all
sectors, including financial services.11 The Eurobarometer survey was requested by DG
SANCO to look at consumer protection in all sectors (including financial services).
Among the EU, more consumers in Bulgaria felt that they were inadequately protected on
consumer protection than in any other Member State. Two-thirds (64 percent) of
Bulgarian consumers disagreed that they were adequately protected by existing measures
to protect consumers, while among the EU just over one-third (39 percent) were similarly
critical. Moreover, Bulgarian consumers were reluctant to rely on either government or
non-government organizations (NGOs) to protect their interests. Only 27 percent in
Bulgaria trust public authorities to protect their interests (vs. 54 percent average among
the EU.) Still fewer would rely on consumer associations to help them. Only 22 percent
of Bulgarians trust independent consumer organizations to protect their consumer rights
(vs. 64 percent among the EU). Furthermore, the conciliation committees have not yet
become an effective method of recourse for Bulgarian consumers. Only 12 percent
thought that it was easy to resolve disputes using arbitration, mediation or conciliation
bodies (vs. 39 percent among the EU.) When trying to decide what to do when a
complaint was not satisfactorily resolved, 22 percent of Bulgarian consumers (but only
14 percent in the EU) went to a consumer association or consumer help desk for
assistance. However more than three-quarters gave up. 78 percent of dissatisfied
consumers in Bulgaria took no further action (vs. only 51 percent among the EU).
11
European Commission, Special Eurobarometer No. 298, Consumer protection in the internal market,
October 2008.
13
While the Eurobarometer survey provides useful insights, a survey focused on
consumer protection in financial services is needed. Due to their specialized nature,
financial services constitute a unique set of issues related to consumer protection. A
specialized survey on consumer behavior and attitudes regarding financial services would
be helpful in designing targeted policy measures to strengthen financial consumer
protection. Such a survey could be part of a survey on financial capability, as proposed
below.
80% 80%
70% 70%
60% 60%
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec
02 03 04 05 06 07 08 02 03 04 05 06 07 08
Overdraft Consumer loans Loans with maturity up to 1 year
Loans with maturity over 1 up to 5 years
Loans for house purchase Other loans Loans with maturity over 5 years
Source: BNB.
12
The data on household loans used in this section correspond to the statistics on “loans to households and
non-profit institutions serving households” granted by “other monetary financial institutions” as published
in the English version of the Bulgarian National Bank’s Monetary Statistics of December 2008.
14
Figure 2: Shares of Foreign Currency Loans in Household Loan Portfolios
50%
40%
30%
20%
10%
0%
Dec Dec Dec Dec Dec Dec Dec
02 03 04 05 06 07 08
Total household loans Consumer loans
Loans for house purchase Overdraft and other loans
Source: BNB.
Delinquencies in household loans were rising but stabilized in 2007. Bad and
restructured household loans have increased from 1 percent of total household loans in
December 2004 to 3 percent by the end of 2008 (see Figure 3). The highest percentage of
bad and restructured loans appeared during 2004 and 2006 in the segment of “other
loans". Loans made by non-bank credit institutions have shown higher delinquencies than
those originated by commercial banks (10 percent of total household loans vs. 4 percent).
Despite the share of bad and restructured loans in foreign currency (household loans
increased by mid-2006), it is relatively low and stabilized in 2007.
5%
4%
3%
2%
1%
0%
Dec Dec Dec Dec Dec Dec Dec
02 03 04 05 06 07 08
Total household loans Foreign currency household loans
Consumer loans Loans for house purchase
Other loans
Source: BNB.
15
household borrowings are in Euros. 13 This situation has left households with a net
currency exposure in Euros greater than 5 billion Levs (see Table 1).
Table 1: Household Currency Exposures
(in BGN millions)
13
Household borrowings include borrowings from non-profit institutions serving households.
14
See World Bank, Finance for All? Policies and Pitfalls in Expanding Access, 2008.
16
Key Findings & Recommendations
The years of 2006-07 witnessed a flurry of new legislation related to consumer
protection in financial services in Bulgaria. In particular, the revisions to the Consumer
Protection Act transposed many of the key EU Directives related to financial consumer
protection. In this period the Directives on Consumer Credit, Distance Selling and Unfair
Commercial Practices were also transposed into Bulgarian law. At the same time,
changes to the securities legislation incorporated the Directive on Markets in Financial
Instruments (MiFID) while revisions to insurance legislation transposed the Directives on
Life Insurance and Insurance Mediation. In March 2009, the Payment Services Directive
was transposed into Bulgarian law. All have substantially and substantively strengthened
the rights of consumers regarding the purchase of financial services in Bulgaria.
Importantly, the Consumer Protection Act states that where the provisions of any two
laws are in conflict, the provisions of the law providing a higher degree of consumer
protection shall apply. The revised legislation brought Bulgaria's consumer protection
legislation into compliance with those applicable for all EU Member States. While some
Directives, such as the April 2008 revised Directive on Consumer Credit provides for a
two-year period for transposition into national law, the Bulgarian authorities have already
planned its incorporation into local legislation.
More legislative revisions for supervision of the financial sector have recently been
approved. The amendments to the Law on Credit Institutions were enacted by the
Parliament on 31 March 2009. The revised Law brings leasing and consumer finance
companies under supervision of the BNB. Non-deposit taking institutions would not be
subject to the full panoply of prudential supervision but they would be obliged to register
with the BNB. Over time, non-bank credit institutions may also be subject to some form
of market conduct regulation and supervision related to business practices (but not capital
solvency levels). Ensuring that financial institutions are supervised by a financial
supervisory agency will help limit possible abuses in treatment of financial consumers in
Bulgaria.
17
some anecdotal information. It notes that consumers have complained that: (1) financial
institutions can change their lending or deposit rates without notice to customers and
without clear explanation of the changes; (2) important details of the terms and
conditions of financial products are contained in contracts that are difficult for consumers
to understand; (3) personnel of financial institutions are unable to explain to customers
their financial products; (4) consumers have difficulty obtaining information in a format
that allows them to compare offers by different institutions; (5) consumers do not receive
monthly statements from financial institutions; and (6) in case of disputes over entries in
credit register, consumers have difficulty obtaining correction of errors.
While much improvement has been made in Bulgaria’s legal and regulatory
framework for financial consumer protection, some gaps remain. Such weaknesses
create loopholes and undermine the effectiveness of supervisory agencies in improving
consumer protection. For example, the rules on consumer disclosure for consumer credits
are extensive and determined by the Law on Consumer Credit (which was in turn based
on the recently revised EU Directive on Consumer Credit). By contrast, consumer
disclosure on residential mortgages (for which the EU Directive has not yet been
approved) remains minimal—even though consumer purchases of mortgages are
typically the single most important financial decision for households. Furthermore
consumer associations note that consumers are often unable to distinguish between a
mortgage loan versus a consumer loan with a mortgage used to pledge collateral.
18
The program should empower consumers. The program should be evaluated in terms
of its ability to empower consumers—to give consumers information in a form that they
can easily understand, that allows them to compare offers by different service providers,
that ensures that they can find out the accurate costs of different products, and that they
know how to obtain more information and dispute an incorrect charge or credit.
Institutional Structure
Under the Consumer Protection Act, the Ministry of Economy and Energy is the
main administrative body responsible for consumer protection in Bulgaria. The
Ministry is responsible for: (1) carrying out and coordinating state policy for consumer
protection, (2) taking measures to integrate consumer concerns into government policies,
(3) conducting the work of the National Consumer Protection Council, and (4)
coordinating the activities of the other administrative bodies having an impact on
consumer protection in Bulgaria.
19
the CPC has the right to issue individual administrative acts, penal decrees and impose
“forceful administrative measures”. Regarding consumer disputes, the role of the CPC is
limited to mediating disputes, primarily through its conciliation committees. The
proposals of the conciliation committees are non-binding on all parties, any of which may
refuse the proposal and go to court.
20
The approaches are not mutually exclusive. For example, a financial ombudsman could
complement the work of either the CPC or the financial supervisory agencies. The
advantages and challenges of each proposed option are discussed next.
This option should require expanding the authority of the CPC to include all
financial products and services and not only consumer credit. The CPC would be
responsible for: (1) resolving financial consumers’ inquiries and complaints, (2)
reconciling disputes, (3) gathering, publishing and analyzing data on consumer
complaints, (4) submitting consolidated reports of consumer complaints and disputes to
financial supervisors, (5) recommending them to apply measures to improve consumer
protection, and (6) initiating and conducting other activities contributing to effective and
efficient financial consumer protection.
Expanding the authority of the CPC will require substantial building of CPC’s
institutional capacity. The CPC assumed the responsibility for consumer protection in
the field of consumer credit just recently, after the approval of the updated Law on
Consumer Credit (in force since October 2006) which followed the harmonization of the
Bulgarian legislation with the acquis. Consumer protection in non-financial products and
services require substantial resources and adding a highly complex area, such as the full
spectrum of retail financial services, would place a substantial burden on both the CPC
and its line ministry, the Ministry of Economy and Energy. To be successful, a detailed
capacity building plan will be needed, accompanied by the necessary funding from
budget resources and possibly donor funds.
Under this option, financial consumer disputes should be resolved by the BNB, the
FSC and the Commission for Personal Data Protection. The supervisory functions of
the BNB and FSC should be extended to cover all institutions relevant for financial
21
consumer protection, and the legal mandate of the BNB should be revised to include the
additional responsibility of financial consumer protection.
Relying on the BNB and the FSC to resolve consumer disputes with financial
institutions could be challenging. The role of the FSC is to review consumer disputes to
see if the actions of the financial institution have violated the law and to determine if the
practice creates systemic risks for the financial sector. By contrast, the BNB views
consumer protection as an important element in building a strong and resilient financial
sector—but one that creates conflicts with its key mandate of ensuring financial stability.
In some cases, decisions that defend the interests of consumers will require compensation
from financial institutions. It could be argued that having the BNB rule in favor of the
consumer and require payment by the financial institution would—in the short-run—
harm the financial institution. However, over the long-term, a financial system needs a
strong level of public confidence to maintain soundness and stability and fair treatment of
its customers helps build that public support.
Under this option, the financial ombudsman should be the only out-of-court
institution responsible for consumer disputes for all financial products and services.
The office of the financial ombudsman would be responsible for: (1) resolving financial
consumers’ inquiries and complaints; (2) reconciling disputes; (3) gathering, publishing
and analyzing data on consumer complaints; (4) submitting consolidated reports of
consumer complaints and disputes to financial supervisors; (5) recommending them to
apply measures to improve consumer protection; and (6) initiating and conducting other
activities contributing to effective and efficient financial consumer protection.
22
The EU experience on financial ombudsman shows that several models are available
but two are particularly effective—that of the independent statutory ombudsman (as
found in the United Kingdom and Ireland) and the ombudsman established by the
professional associations (as seen in the Ombudsman Scheme of the Private Commercial
Banks of Germany). The approach of the United Kingdom and Ireland requires the
establishment of a permanent office, set up by law and with funding from the government
budget and the industry. The German Ombudsman Scheme is set up by statute of the
Association of German Banks, operates under the auspices of the association, and
consists of five Ombudsmen who are generally retired judges. The decisions of the
Ombudsman Scheme are binding on the banks for amounts up to Euros 5,000 although
the consumer retains the right to appeal to the courts. Both structures are effective in
redressing the imbalance of power, information and resources between a consumer and
its financial institution. In the case of an ombudsman established by professional
association, attention should be paid to the presence of conflicts of interest. Since a
professional association’s main goals are to develop its financial segment and protect the
rights and interests of its members (financial institutions), the associated ombudsman
may find it difficult to objectively fulfill functions related to protection of rights and
interests of consumers.
There should be an evaluation of the costs and benefits for Bulgarian financial
institutions of the different approaches to financial ombudsman. Most post-transition
countries, including the new Member States of the European Union, are making efforts to
reduce the number of government structures and institutions. The creation of yet another
government institution may be perceived as an additional administrative burden for
private sector institutions that are the source of growth for the economy. However, an
institutional framework that does not operate effectively also introduces inefficiencies
that generate burden on the private sector. At the same time, consideration should be
given to the specific needs of Bulgarian consumers, particularly in light of the experience
of the financial crisis in 1996-97 and the context of an on-going global financial crisis
and its spillover to emerging market economies.
23
provide advice and information to consumers. The law specifies that for a consumer
association to be considered as sufficiently representative of all consumers, it must
maintain representative offices in at least one-third of the regional centers of the country,
and it must conduct effective actions for protection of consumer interests (producing and
disseminating publications on consumer protection, conducting campaigns to raise
consumers’ awareness of their rights, or undertaking actions for protection of collective
interests of consumers). The representative consumer associations shall participate in the
National Consumer Protection Council, in the collective and advisory bodies for
consumer protection.
Consumer Disclosure
At the foundation of effective financial consumer protection is consumer disclosure.
Financial institutions should be obliged to present their financial products in a clear and
comparable format, which is easy for consumers to understand and allows consumers to
compare offers from different financial institutions. Where consumers can obtain clear
and comparable information, they can make informed choices and ensure that the
financial products that they purchase are suitable for their needs and objectives. Clear
laws and regulations—and effective enforcement mechanism—are needed to ensure
meaningful disclosure of consumer financial products.
The Bulgarian legislation requires clear information on key terms and conditions in
consumer credit contracts. The Law on Consumer Credit applies to loans between BGN
400 and 40,000 and requires detailed disclosure to the consumer. This must include: (1)
the principal of the credit; (2) the maximum amount of the credit, or the methods of
determining it; (3) the annual percentage rate (APR); (4) the conditions under which
charges may be amended; (5) the conditions for credit repayment by the consumer,
including the amount, number, frequency and dates of payments, as well as the total
amount of these payments, where possible; (6) other fees and charges outside the
calculation of the annual percentage rate of charge; (7) expenses related to the agreement
24
payable by the consumer; (8) a statement of the right of the consumer to repay the credit
before the due date and the conditions for termination of the agreement; (9) the required
security or collateral, its value, and the conditions under which it may be released; and
(10) the required insurance and related expenses when the choice of insurer is made by
the financial institution and not the consumer. In addition, the credit agreement must be
presented in clear and understandable language. These provisions are very useful but still
more could be done. The transposition of the revised EU Directive on Consumer Credit
into national law will be a further step to strengthen consumer protection in Bulgaria.
A Key Facts Statement for each type of standard retail financial product would help
consumers understand material conditions of their contracts. For financial products,
consumers need a short standardized description written in plain language that is
comparable across products provided by different institutions. A Key Facts Statement for
each type of financial product would provide such standardized information for
consumers. For example, for a consumer credit, the Key Facts Statement should provide a
summary in a page or two of all key terms and conditions. This would include not only
the items noted in the Law on Consumer Credit but also: (1) all fees—particularly
prepayment and overdue penalty fees—and any other charges that could potentially be
incurred; (2) any required deposits or advance payments; (3) if the interest rate is
variable, the basis on which the calculation is made, i.e. the base rate using a published
reference rate such as LIBOR or SOFIBOR (Sofia Interbank Offered Rate) plus a fixed
margin over the base rate; and (4) the contact information for submission of inquiries,
complaints and disputes. In particular, the Key Facts Statement should indicate the name
of the department (with telephone number and fax numbers and email address) where
inquiries, complaints and disputes can be submitted to the financial institution. If the
credit is used to finance a consumer product, such as a television or washing machine, the
consumer should be advised of the cash price of the product without financing charges.
For insurance, securities and pension products, an easily similarly readable and
comprehensible Key Facts Statement should appear at the front of all proposal and policy
documents. Special attention should be paid to credit card disclosures, where consumers
should be informed of the impact of paying only the minimum amount due. For the credit
reporting system, a brochure could explain to consumers the procedures for correcting
inaccurate information in the credit registers. The Key Facts Statements would not
replace the contract for legal purposes but each financial institution would be obliged to
ensure that their disclosures under the Key Facts Statements included no incorrect
material information.
Key Facts Statements should be provided for all classes of consumer financial
products, including insurance and pensions. Use of Key Facts Statements would make
it easier for consumers to compare offers by different service providers. Financial
consumers in Bulgaria can access websites such as www.moitepari.bg (Moite Pari) and
www.fincity.bg to review offers by different financial institutions. Requiring that all
financial institutions prepare their offers for commonly-used retail financial products in a
standardized format will further facilitate the ability of consumers to shop around and
compare offers—and thus ultimately increase transparency and competition in the
financial sector.
25
It is recommended that the professional associations develop standardized formats
for a Key Facts Statement for each type of standard retail product. The supervisory
agencies should also review and comment on the formats (for example, to ensure that
they provide material information that would not mislead consumers) but the preparation
of the formats would best be done by the respective professional associations. Thus, for
consumer credits, the ABB would develop a standard format that would allow banks to
efficiently prepare the Key Facts Statements, which would be reviewed by the BNB.
Non-bank credit providers might also comment on the format, although to date no
professional association of consumer finance companies or other form of non-bank credit
institutions has been put in place. It is also recommended that the professional
associations for insurance companies and pension management companies prepare Key
Facts Statements for their standard products—and their formats should be reviewed by
the FSC. The Key Facts Statements should also be tested in order to ensure that the
average consumer understands their content and can use the information to make relevant
comparisons and decisions.
Consumers should be able to obtain a copy of the full terms and conditions of retail
financial products without having to submit an application for a product. Access to
pre-contractual information is essential for informed decision-making. Consumers that
are considering entering into a contract with a financial service provider should have easy
access to the full set of contractual terms before they apply for the product. This will
allow them to familiarize themselves with the contractual terms without the pressure of a
salesperson looking to complete a sale. It also allows consumers to obtain the advice of
friends and family members, upon whom most consumers rely as a first source of advice
in post-transition countries. However, a study by the Bulgarian National Consumers
Association found that only about half of Bulgarian banks provide a copy of the full
consumer contract on their websites. Consumers who are considering buying an
insurance policy, be it life insurance or motor third-party liability (MTPL) can download
a copy of the full standard contract from the website of each insurance company.
Alternatively, they may visit the office of an insurance company and obtain the same
document. Similar access to the standard contract should be available for borrowers on
consumer credits or mortgages, unlike the practice today to submit to the consumer the
individual contract in the last minute with a limited possibility to review the general
terms and conditions. All the banks (and other financial institutions) should be obliged to
place the standard contracts in full on their websites—and provide copies to any
26
consumers who visit their offices. The requirement could be set by regulation by the
supervisory agencies, or it could be part of a code of conduct set by the professional
associations. However, either supervisory agencies or consumer associations should
regularly monitor the easy availability of standard contracts of retail financial service
providers.
Despite legislation and prohibitions in the ethical code, misleading advertising is not
uncommon. The Law on Protection of Competition includes extensive provisions
prohibiting the use of misleading and unauthorized comparative advertising in the
marketing of financial products. The Consumer Protection Act provides for the
prohibition of unfair commercial practices against consumers, including misleading
advertising. The Ethical Code of the Association of Banks also prohibits members from
engaging in misleading advertising. However consumer associations complain that
advertisements in the mass media continue to make unrealistic offers, including loans at
zero percent interest rates. For example, advertisements for a consumer loan often present
a low interest rate ("teaser rate") in large bold font, without clearly indicating that the
interest rate applies only for a limited amount of time or does not include the cost of
additional fees. The APR is included in the advertisement in much smaller font than the
nominal loan rate. For television commercials, the APR is displayed for a briefer period
of time than the teaser rate. The converse is true for deposit interest rates—a high teaser
rate will be shown in large bold font, while the effective yield is shown in small font and
more briefly. Consumer associations reported that, even in bank branches, sales staff will
often emphasize the teaser rates and may fail to disclose the true effective interest rates.
Advertising for financial services should be closely monitored to ensure that it is not
misleading. As of December 2008, responsibility for enforcing the provisions on
misleading and comparative advertising of the Consumer Protection Act was transferred
to the Commission for the Protection of Competition. CPC has maintained responsibility
for enforcing the provisions on unfair business-to-consumer commercial practices. It
would be advisable for the authorities to monitor ongoing advertising practices for
consumer financial products to ensure that advertising for such products is not misleading
or unfair. In the case of private pensions, the FSC has established requirements for the
advertising and written information materials of pension insurance companies, and
compliance with them is closely monitored. The authorities should also enhance their
coordination to ensure consistent policies and enforcing actions in terms of advertising.
In some jurisdictions, such as Ireland, the financial legislation goes still further. The Irish
27
law requires that, in their print, television and radio advertising, financial institutions
indicate that they are regulated and by which financial supervisory agency. Such
obligatory disclosure would also be helpful in Bulgaria.
Business Practices
The codes of ethics (or conduct) prepared by the professional associations should be
widely disseminated and their implementation regularly monitored by professional
associations and the CPC. The ABB has developed a code of ethics for banks and
placed the code on the Association’s website. This is an important first step. However,
the distribution of the code of ethics is not broad enough. A search of banks’ websites
found that only one out of 12 banks that were researched had placed the code of ethics on
their websites. The Association’s code of ethics should be placed on the websites of each
of the banks that are members of the ABB. Furthermore, the code of ethics should be
available at each branch of the bank and should be given to all new customers of the
banks. Consideration could also be given to a simple consumer “bill of rights” (that
would include the section of the code of conduct dealing with customer relationships)
which could be visibly displayed on a wall in every bank branch. Similarly, the Bulgarian
Association of Supplementary Pension Security Companies (BASPSC) should ensure
that all its members comply with the code of ethics for pension insurance companies and
make it easily available for consumers. The Association of Bulgarian Insurers (ABI)
should implement its draft code of conduct and ensure that its members comply with it
and provide easy consumer access to it. Similar requirements should apply to investment
and insurance intermediaries. CPC could review whether the financial entity has
complied with its code of conduct. Cases of non-compliance with the codes of conduct
should be published on the website of the professional associations or the CPC.
28
collection agencies and independent financial advisors, are exempt from monitoring by
any supervisory agency. With the recent amendments of the Law on Credit Institutions,
such financial service providers are at least required to register with either the FSC or the
BNB. Such financial service providers do not need to be subject to prudential
supervision, unless they have custody or control of client funds, but their market conduct
should be subject to surveillance by a supervisory agency. Professional associations can
also be delegated administrative, preparatory, or ancillary tasks related to the granting of
authorizations for financial service providers, but only the FSC, BNB or other relevant
governmental agency can grant, suspend or revoke their authorizations.
Debt collection practices should also be monitored. The increased use of debt
collection agencies by financial institutions may also warrant additional monitoring of
business practices. The law allows lenders to seize collateral to repay outstanding debts,
even if the collateral has not been specifically pledged to the lender. However, the
amount of the collection is limited to the size of the debt. Some consumer advocacy
organizations complain that in some cases, the proceeds of the sale of collateral exceed
the amount of the debt outstanding—and the owner retains the excess amount.
Consideration should also be given to the training and certification of all sellers of
financial services. In the securities sector, the FSC requires that investment
intermediaries be subject to periodic specialized training. For insurance products, the
FSC sets minimum training requirements and certifies individuals who sell insurance
products. A similar approach should be taken for private pensions. 15 In the banking
sector, it is the financial institution that determines the necessary training for those who
sell financial services to the public but it would be preferable if the ABB took an active
role in setting the curricula and minimum training requirements for sellers of banking
products. The nature of the training should depend on the product, and sellers of similar
products should be subject to similar training requirements. For simple financial products
such as a current account, a limited amount of training may be sufficient. For complex
products, such as financial derivatives, extensive training for sellers will be needed so
that those who sell and market such services are completely familiar with both the risks
and returns of the products. In addition, professional financial advisors are emerging as a
possible source of advice for retail consumers. As independent financial advisors become
active in Bulgaria, the financial supervisory agencies should consider what types of
training and certification will be needed. For this, the experience of other new Member
States of the EU may be helpful. Slovakia, for example, is putting together a three-tiered
program, where the training and certification for the first tier (for very simple products)
15
The FSC has proposed an amendment of the Social Insurance Code, which includes a provision obliging
pension insurance companies to train their agents.
29
would be set by the financial institution. Training and certification for more complex
products would be established by the professional associations and for the complex
sophisticated products, the financial supervisory agencies would set the curricula and
conduct the certification of both sellers of financial products and independent financial
advisors.
Consumers should be allowed to choose the provider of any product required for
another financial product. In many countries, banks require insurance policies when
granting a consumer loan—but then offer the consumer an insurance policy from the
company that is part of the same financial group. Consumers should be permitted to
choose any qualified provider of the service that is required for another financial product.
Banks should clearly provide customers with separate prices of each product in a bundle,
as well as any discount available if purchased as a bundle from the same bank (or from a
bank’s preferred vendor). Also, customers should be able to choose the provider of all
30
types of car insurance required for the purchase of an auto leasing product. It is a
common practice in Bulgaria that an auto dealer would only allow the consumer to
choose the provider of collision and comprehensive insurance—the dealer would later
intermediate the liability insurance via its insurance broker, without letting the consumer
choose the liability insurance provider.
Consideration might also be given to requiring that banks offer a low-cost minimum
bank account service. Bank accounts are considered to be "gateway" products that open
the door for consumers to use other forms of financial services. Providing a minimum
service and low-cost bank account can help deepen use of the financial sector—and
provide a future expansion of the customer base for the financial system.
Use of a "mystery shopper" may also provide useful insights. Hiring an expert to pose
as an ordinary consumer of financial services and attempt to buy simple financial
products may help government agencies and consumer associations in understanding the
experience of typical financial consumers. This practice is reportedly being used by FSC
and could also be applied by other agencies and associations, and for various financial
products.
31
boards of financial institutions, as well as for the supervisory agencies. When the same
type of complaint arises frequently—or a specific institution is the subject of numerous
disputes—financial supervisors are given valuable insights into the fissures of the
financial system (and which types of financial products or which institutions might be at
risk in the future).
The issue of redress for violation of consumer protection laws has gained increasing
importance within the European Commission. In a report prepared for the Directorate-
General for Health and Consumers of the EC (DG SANCO) in August 2008, Civic
Consulting noted the "significant" number of mass claims/issues in EU Member States.16
The report indicated that only a part of the claims/issues had been subject to a collective
redress proceeding, explaining that just a small portion of consumers of large-scale low-
value claims ("scattered mass claims") take action and are compensated. The report also
noted that the financial sector had the largest number of reported mass claims/issues,
although in the United Kingdom the telecommunications sector also received a large
number of mass claims/issues.
The rough estimate of about 1,200 disputes regarding financial services in Bulgaria
may underestimate the actual number of complaints. Where dispute resolution
services covering all parts of the financial sector are in place, such as in the United
16
Civic Consulting, Study regarding the problems faced by consumers in obtaining redress for
infringements of consumer protection legislation, and the economic consequences of such problems, DG
SANCO, Final Report, 26 August 2008.
17
FSC, Annual Reports 2006-2008.
32
Kingdom, the number of annual complaints is many times higher (see Table 3). Even for
a single area such as insurance, the number of complaints in France and Belgium reaches
over 3,000 annually.
It would be best if the statistics on the number and types of consumer complaints
regarding financial services were published and analyzed. Publication of detailed
statistics, including the final result for each complaint, would provide an invaluable data-
base upon which policy could be developed.18 In the absence of published statistics, it is
difficult to determine trends in problems with financial services. In addition, both the
CPC and consumer associations should be encouraged to analyze trends in consumer
complaints and recommend measures to address the issues. Both the CPC and consumer
associations have a valuable role to play in identifying the cause of common consumer
complaints and finding measures to prevent such problems from emerging. Financial
supervisors should analyze the reports on consumer complaints and look for systemic
risks that may thread financial sector stability.
33
to “(…) establish internal procedures or rules to process customers' claims”. These shall
include reasonable and the shortest possible deadlines for considering complaints and
replying the claimant. The bank shall ensure that all employees dealing with customers
are acquainted with the above internal procedures or rules.” In practice, most Bulgarian
banks have established such internal mechanisms but it is difficult for consumers to
identify the way in which they should present claims. It would be best if all contracts
with retail customers (and Key Facts Statements) provided the name and contact
information of the person or department to which complaints should be submitted.
However, for customers not satisfied with the resolution proposed by the financial
institution, the next step is difficult to identify. The Consumer Protection Act requires
that in case of violation of the rights provided under the Act, consumers and consumer
associations shall be entitled to submit alerts, complaints and petitions to the control
authorities performing consumer protection functions (article 178, paragraph 1). The state
bodies shall be obligated to register any consumer alerts, complaints and petitions
submitted and to institute proceedings for consideration of the said alerts, complaints and
petitions (article 179, paragraph 1). Customers with consumer credits are supposed to
complain to the CPC but some go to the BNB, which is not authorized to intervene in a
contractual dispute between a financial institution and its customer. According to the Law
on the Bulgarian National Bank (article 2) the primary objective of the BNB is to
maintain price stability through ensuring the stability of the national currency and
implementing monetary policy. In addition, the BNB is in charge of monitoring the
payment system, as well as regulating and supervising the banks, with the purpose of
ensuring the stability of the banking system and protecting depositors’ interests. The Law
on Consumer Credit also provides that BNB shall supervise the activities of banks and
“may” intervene and impose corrective measures if a bank violates the Law or
regulations, breaches its fiduciary duty, threatens depositors’ interests or conducts other
offenses. However, the Law does not “require” such intervention. By contrast, the
mandate of the FSC explicitly includes protection of consumers’ interest—and the FSC
has set up consumer protection departments in each of its sections for securities,
insurance and pensions. However, for both the BNB and the FSC, their role is limited.
The agencies check to see if a law or regulation has been violated. They ask the financial
institution to look into the complaint and respond to the financial supervisor regarding
their investigation. The supervisory agency may also use the occasion of the consumer
complaint to launch an on-site inspection to do its own review. However, in the final
analysis, no supervisory agency can take a binding decision as to what action a financial
institution should take in a particular consumer dispute.
A conciliation committee can also attempt to find an amicable solution. For cases that
are referred to the CPC, i.e. those relating to consumer credits and retail payments, the
CPC is authorized to create a conciliation committee that attempts to mediate a solution.
Under the Consumer Protection Act, the Minister of Economy and Energy shall establish
conciliation committees which shall assist in the resolution of consumer disputes (article
182). The Minister shall also establish the geographical area of competence of the
conciliation committees and approve a list of the members of the said committees who
shall assist for a consumer dispute settlement. Each committee shall include one
representative each of the CPC (designated by its Chairperson) a traders association and a
34
consumer association (article 183). The difficulty is that the conciliation committees
operate on the basis of an amicable settlement, acceptable to both parties. As described
by both consumer associations and local lawyers, the traders' associations have an
incentive not to present themselves on the hearing date. If one of the parties fails to
appear at the hearing, the conciliation committee is terminated and the case closed. Local
lawyers estimate that the average time for a case to be heard in court is five years (and
sometimes seven) even for simple cases. For the perspective of the financial institution,
the easy approach is not to participate in the conciliation committee and wait for the
consumer to take the institution into court. As per information from the CPC, there have
been only 13 ad-hoc conciliation committees related to financial services, established by
the CPC between 2006 and 2008. Out of these, only three have reached an agreement
between the two parties. The limited number of settled cases through out-of-course
mechanisms and the prolonged duration of court proceeding means that there is no
effective mechanism for dispute settlement in issues related to financial services, thus
limiting the conditions for fair, open, efficient and healthy financial market in Bulgaria.
35
Consideration should be given to various mechanisms of making the decisions of the
conciliation committees binding on financial institutions for small amounts of
money. Most consumer credits in Bulgaria are under BGN 6,000, and under BGN 3,000
when overdrafts are excluded. An upper limit of BGN 2,000 or 3,000 might be
appropriate. Such small amounts are generally not worth the time and resources of the
managerial time of financial institutions. The financial institutions would be better served
by having an outside party, such as a conciliation committee, review the details of each
case and make a decision based on the law and the facts of the case. Financial institutions
may be willing to accept binding decisions made by a respected third-party, where the
maximum amount of penalty is set at a relatively low level. 19 At the same time, the
presence of a standing conciliation committee will give confidence to financial
consumers that if there is a problem with a financial transaction, it can be quickly
resolved. An investment in strengthening consumer confidence may bring financial
institutions more consumer business—and thus more than overset the cost of making
payments under decisions by conciliation committees.
The Consumer Protection Act and the recent changes to the Code for Civil
Procedures allow for class-action lawsuits by consumers but their effectiveness in
providing collective redress should be monitored. Under the Code for Civil Procedures
(chapter 33) and the Consumer Protection Act (chapter 9, section III) consumers and
consumer advocacy organizations can lodge a complaint on behalf of two or more
individuals in cases that affect collective interests of consumers. The legislation is
intended to provide a powerful method of collective legal redress for consumers,
including those of financial services, and is a useful first step. However, the specific
provisions may make it difficult for consumers (or consumer advocates) to use the law.
One issue is that four percent of the claimed amount must be paid as a court fee at the
beginning of the trial (according to article 4 of the Tariff for the State Fees collected by
the Courts under the Code for Civil Procedures, SG 50/2008 from 30 May 2008). While
court fees are useful in discouraging frivolous court cases, an inappropriately high fee
may also discourage consumers from presenting legitimate cases. The authorities may
therefore wish to monitor the use of the class action procedures to see if they provide an
effective form of collective redress for financial consumers. If the class action procedure
is not used, a reduction of the court fee should be evaluated in order to encourage the
effective use of the procedure by consumers.
19
The EC Recommendation also notes that a decision taken by the body concerned may be binding on the
parties only if they are informed of its binding nature in advance and specifically accepted this (see
Commission Recommendations 98/257/CE and 2001/310/CE).
36
Financial Education
The importance of financial education for the financial sector is seen in the work of
the European Commission. The October 2008 Report of the European Parliament on
protecting the consumer noted that empowered and educated consumers help foster
competition, quality and innovation within the banking and financial services industries.
The Report further noted that educated and confident investors can provide additional
liquidity to capital markets for investment and growth. In addition, in the end of 2008 EU
Consumer Affairs Commissioner Meglena Kuneva launched DOLCETA
(www.dolceta.eu)—a website designed to help adults and children learn about basic
consumer issues. One of the four modules covers financial services (family budget, bank
account, consumer credit, mortgages, payment services, savings and investments).
Another covers basic consumer legal rights (contracts, labeling, distance selling,
advertising, redress). The DOLCETA modules have been translated into all EU
languages, including Bulgarian.
Some programs in Bulgaria are underway. The Ministry of Finance has conducted
one seminar in 2008 oriented towards businesses on changes in European legislation
related to financial services. The FSC maintains a several-week training program for high
school students interested in learning about the operations of the non-banking financial
sector. A limited number of newspapers also provide useful information for consumers.
The daily newspaper, Dnevnik, publishes reports on EU-wide financial education
initiatives, such as a recent report on the importance of financial education during the
current financial crisis, which included a discussion of practices in Austria and Sweden
and initiatives at the EU level. In addition, the national radio station, DARIK, has
interviewed the chairman of the Conciliation Commission for Payment Disputes about
fraudulent use of debit and credit cards. The Ministry of Education and Science also
conducts a training program in elementary and high schools with teaching materials on
personal finance translated from US consumer associations.
Preparing effective financial education programs is not an easy task. The experience
of industrialized countries over the last thirty years—and more recently in developing
countries—has identified lessons of “what works and what does not” in consumer
protection, and particularly in consumer information. By contrast, improving financial
capability is a long-term process and little is clearly understood as to what works (and
what does not) in improving financial capability, at least in the industrialized countries.20
20
For a summary of academic research on the limited effectiveness of financial education in the US, see
Shawn Cole and Gauri Kartini Shastry, If You Are So Smart, Why Aren’t You Rich? The Effects of
Education, Financial Literacy, and Cognitive Ability on Financial Market Participation, October 2007.
37
Techniques of delivering financial education have been well-tested in the US, Europe and
elsewhere over the last 30 years but their impact on levels of financial capability is still
unclear. Yet more unclear is the impact on consumer behavior.
Other analysts go further and argue that financial education fails to improve consumer decision-making and
may even be harmful by developing consumer over-confidence. See Lauren E. Willis, "Against Financial
Literacy Education", University of Pennsylvania Law School, Public Law and Legal Theory Research
Paper Series, Research Paper No. 08-10. However, most analysts agree that both consumer protection and
financial education are needed.
21
For a summary of programs see Shaun Mundy, Financial Education Programmes in Schools,
Universities and Colleges: Analysis of Selected Current Programmes and Recommendations for Best
Practices, OECD Draft Report, forthcoming.
38
A baseline assessment of financial capability in Bulgaria would be helpful. The
survey should use the methods that have been successfully applied in other EU Member
States, such as the United Kingdom. The survey should be comprehensive and
segmented. It should be large enough to cover all key groups in Bulgaria, segmented by
geographic area, socio-economic level, gender, family status, household income, level of
formal education, profession and ethnic origin. Special consideration should also be
given regarding how low-income groups will be reached since collecting data from these
groups is notoriously difficult.22
The baseline financial capability survey should be used to identify vulnerable parts
of the Bulgarian population and design the financial education program. Using the
information in the survey, programs of financial education and consumer awareness can
be targeted to those who need the training and information the most. The survey can be
used by financial supervisory agencies and NGOs to identify and focus on the most
vulnerable to find the most effective ways of providing education—whether through
class-room training, seminars or at the time they purchase a financial service ("point of
sale").
Follow-up surveys should be conducted every three to five years to evaluate the
effectiveness of the programs of financial education and consumer awareness. The
follow-up surveys can be used to determine to what extent the programs are effective and
what further modifications may be needed. Follow-up surveys should be conducted every
three to five years to see if the financial education programs are working—and if they, or
the financial consumer protection framework, need further revision.
22
One informal approach would be to use a financial IQ quiz to test consumers’ understanding of retail
financial services. The quiz could be administered through a consumer survey. An example of a financial
IQ test is given in Marianne A. Hilgert and Jeanne M. Hogarth, "Household Financial Management: The
Connection between Knowledge and Behavior" Federal Reserve Bulletin, July 2003. Available at
http://www.federalreserve.gov/pubs/bulletin/2003/0703lead.pdf.
39
References
Civic Consulting, Study regarding the problems faced by consumers in obtaining redress
for infringements of consumer protection legislation, and the economic consequences of
such problems, DG SANCO, Final Report, 26 August 2008.
Cole, Shawn and Gauri Kartini Shastry, If You Are So Smart, Why Aren’t You Rich? The
Effects of Education, Financial Literacy, and Cognitive Ability on Financial Market
Participation, October 2007.
---------, Communication from the Commission: Financial Education, COM (2007) 808
final, December 2007.
---------, Green Paper on Retail Financial Services in the Single Market, COM (2007)
226 final.
---------, Special Eurobarometer No. 298, Consumer protection in the internal market,
October 2008.
FIN-USE, Response to the Green Paper on Retail Financial Services in the Single
Market, 2007
40
Joint Forum of the Basel Committee on Banking Supervision, the International
Organization of Securities Commission and the International Association of Insurance
Supervisors, Customer suitability in the retail sale of financial products and services,
April 2008.
Llewellyn, David T., "The Economic Rationale for Financial Regulation, Financial
Services Authority," FSA Occasional Papers in Financial Regulation (UK); No. 1:1-57,
April 1999.
World Bank, Finance for All? Policies and Pitfalls in Expanding Access, 2008.
---------, Good Practices for Consumer Protection and Financial Literacy in Europe and
Central Asia: A Diagnostic Tool, Consultative Draft, 2008.
41