upfront bonuses provide strong incentives for high-pressure sales through multi-level distribution and distribution needs to be carefully regulated. In general, providing a substantial cooling-off period (of say 14 days) will help to protect consumers from high-pressure marketing tactics but specific legal prohibitions are also needed.

**Pyramid schemes and other forms of financial fraud should be prosecuted by those with sufficient expertise in financial matters.** The problem of financial fraud, where consumers pay for services not rendered or invest in residential construction projects that are in fact pyramid schemes, should be handled by ensuring that the criminal authorities have sufficient financial expertise to adequately handle financial fraud. The temptation to develop a Ponzi scheme—and repay later early-stage investors with the funds from late-stage investors rather than investment earnings—will be present in all financial markets. However, the securities supervisory agency should have broad powers to investigate such schemes—and then assist the criminal authorities in prosecution. Anyone who solicits funds from the public for the purpose of investment or speculation should be required to obtain a license from the securities supervisory agency. In this way, the securities supervisor can investigate any scheme that appears to be illegitimate. The Russia Diagnostic Review highlighted the ongoing problem of financial pyramids and their impact in undermining public confidence in financial markets. When households were asked if they would like financial education—and why—more than half who were interested in financial training wanted to know how to protect their rights and avoid investing in a financial pyramid.

**Consumers should also be allowed to choose the provider of any product required to supplement or complement another financial product.** Financial institutions 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 institution (or from a preferred vendor). Different practices of tied sales were found among the nine countries studied. In Bulgaria, auto dealers would often only allow the consumer to choose the provider of collision and comprehensive insurance—and the dealer would later intermediate the liability insurance via its insurance broker, without letting the consumer choose the liability insurance provider. In Latvia, banks set their own specific insurance requirements for borrowers in order to grant a credit, which include providing customers with a list of approved insurance companies.

**Another issue relates to handling of client money—and compensation for retail customers if the financial institution (or its agent) goes bankrupt and cannot repay the funds held on behalf of customers.** The Diagnostic Reviews found that compensation schemes for financial products vary across countries (see Table 6). The country studies found that all nine countries provided insurance for bank depositors in the case a bank collapsed, although most had increased their limits during the financial crisis.<sup>35</sup> The maximum amount covered ranged from about €14,000 in Croatia to as much as €100,000 in Lithuania. Also all nine countries provided 100 percent coverage for policyholders of compulsory motor third party liability (MTPL) insurance policies in case the insurance company becomes insolvent.

**Apart from bank deposits and compulsory MTPL, deposit or guarantee insurance varies by the type of financial product** . For cases where the broker-dealer or asset management company has collapsed, the EU member states generally provided for compensation of up to about €20,000 for loss of client funds. However no investor insurance was available in either Russia or Azerbaijan. For other types of insurance, such as life or health insurance, coverage in the country studies was either nonexistent or limited to a maximum of 70 percent of the insurance claims.

> 35 Prior to the financial crisis, international practice recommended that the compensation schemes be funded from a levy on financial institutions. However during the financial crisis, large commitments particularly for the banking sector have placed additional demands on government budgets, as seen in the US and elsewhere.

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