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Financial Consumer Protection: Changing Our Perspective

Korean Financial Planning Professional Sunho KimBy Sunho Kim, CFP

The FPA in Australia reports that CFP professionals account for over 35% of the planner population but less than 2% of ASIC enforcement activity. This correlation is pleasantly surprising, but it doesn’t prove that CFP professionals have done everything they can for financial consumer protection.

During the Canne Summit in November 2011, the G20 High-Level Principles on Financial Consumer Protection were established. The Principles identified ten areas, including:

  • Legal, Regulatory and Supervisory Framework
  • Role of Oversight Bodies
  • Equitable and Fair Treatment of Consumers
  • Disclosure and Transparency
  • Financial Education and Awareness
  • Responsible Business Conduct of Financial Services Providers and Authorized Agents
  • Protection of Consumer Assets against Fraud and Misuse
  • Protection of Consumer Data and Privacy
  • Complaints Handling and Redress
  • Competition

The OECD action plan for developing ‘effective approaches’ to support the implementation of the High Level Principles on Financial Consumer Protection is scheduled to be presented to the G20 Summit in St. Petersburg, Russia, in September 2013. The plan announced in June 2012 shows that the actions will be focusing on the three principles of:

  1. Disclosure and Transparency
  2. Responsible Business Conduct of Financial Services Providers and Authorized Agents
  3. Complaints Handling and Redress

Disclosure and Transparency

The Disclosure and Transparency principle in the G20 High-level Principles on Financial Consumer Protection states the following:

  • Financial services providers and authorized agents should provide consumers with key information that informs the consumer of the fundamental benefits, risks and terms of the product.
  • They should also provide information on conflicts of interest associated with the authorized agent through which the product is sold. In particular, information should be provided on material aspects of the financial product.
  • Appropriate information should be provided at all stages of the relationship with the customer. All financial promotional material should be accurate, honest, understandable and not misleading.
  • Standardized pre-contractual disclosure practices (e.g. forms) should be adopted where applicable and possible to allow comparisons between products and services of the same nature.
  • Specific disclosure mechanisms, including possible warnings, should be developed to provide information commensurate with complex and risky products and services.
  • Where possible consumer research should be conducted to help determine and improve the effectiveness of disclosure requirements.
  • The provision of advice should be as objective as possible and should in general be based on the consumer’s profile considering the complexity of the product, the risks associated with it as well as the customer’s financial objectives, knowledge, capabilities and experience.
  • Consumers should be made aware of the importance of providing financial services providers with relevant, accurate and available information.

World Bank’s Good Practices for Financial Consumer Protection

The World Bank, on its part, announced “Good Practices for Financial Consumer Protection” in June 2012. The “Good Practices” presented 39 items divided into eight themes, in each type of financial services: Banking, Securities, Insurance, Non-Bank Credit Institutions, Private Pension, and Credit Reporting Systems.

The eight themes are:

  1. Financial Consumer Protection Institutions
  2. Disclosure and Sales Practices
  3. Customer Account Handling and Maintenance
  4. Privacy and Data Protection
  5. Dispute Resolution Mechanisms
  6. Guarantee and Compensation Schemes
  7. Financial Literacy and Consumer Empowerment
  8. Competition

Among them, the Disclosure and Sales Practices theme contains the following clauses:

  • Before a financial institution makes a recommendation to a consumer regarding a specific financial product or service, it gathers sufficient information from the customer to ensure that the product or service is likely to meet the needs and capacity of that consumer.
  • For all financial products or services, consumers receive a short one or two page summary statement (or electronic equivalent), presented in a legible font and written in plain language, describing the key terms and conditions, including recourse mechanisms, applicable to the financial product or service. Summaries are based on industry-agreed standards for the minimum types of financial product or service, and allow easy comparison among financial service providers. Summaries are distributed by financial institutions.
  • Before a consumer purchases a financial product or service, the financial institution provides a written copy of the institution’s general terms and conditions, as well as the specific terms and conditions that apply to the product or service.
  • The law specifically prohibits the use of fraudulent sales practices, such as misleading advertising, in the marketing of financial products or services.
  • Except for securities and derivatives, financial products or services with a long-term savings component-or those subject to high-pressure sales practices-have a “cooling-off” period, during which the consumer may cancel the contract without penalty. Nothing prevents a financial institution from recovering any processing fees incurred.
  • Whenever an individual borrower is obliged by a financial institution to purchase a product or service as a pre-condition for receiving another product or service, the borrower is free to choose the provider for the product or service.
  • In their advertising, financial institutions disclose that they are regulated and the advertising materials identify the relevant regulatory or supervisory agency.
  • Staff of financial institutions who deal directly with consumers receive adequate training, suitable for the complexity of the products or services they sell. In particular, financial intermediaries are qualified as appropriate for the complexity of financial product or service they sell.

What the G20 Principles and the World Bank Good Practices are covering is similar, except that the former deals with the entire range of financial consumer protection and the latter presents specific clauses for the business practices of financial institutions. Similarities of the two can be found in the recommendations they have presented in the Disclosure sections.

CFP Professional Code of Ethics

What would the specific action plans of G20 and the World Bank, with respect to financial consumer protection and disclosure, mean? This question leads me to suggest that we need to look back once again at the CFP professional Code of Ethics and Professional Responsibility Principles.

The Code of Ethics and Professional Responsibility Principles requires that a disclosure be made when there is a conflict of interest. While a disclosure is better than a non-disclosure, it’s not enough.

The Principles also list things that need to be disclosed to a client. While they are a product of CFP designation’s forty-year experience and work practice, we need to think hard if these are enough.

The ethical principle that is the top priority for CFP professionals is client-first. If we review what needs to be disclosed with this principle in mind, our perspective and the information we feel is necessary to disclose might change.

Given the global trend for consumer protection, let’s instill the client-first principle into the professional standards for CFP professionals, in order to share the forty-year achievements with more and more financial consumers.

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