- _The payoff to the consumer is postponed or very high_ (for example, long-term investment products, where performance cannot be evaluated for many years and expenses may consume a large part of profits).

# **Box 1: Insights from the Country Studies**

The Diagnostic Reviews provide a wide array of problems faced by consumers of financial services in emerging economies. Here are a few examples.

In **Slovakia** , the country study found consumers were borrowing from unregistered consumer credit companies at effective interest rates of 120 and 229 percent per annum when they could have borrowed from banks at 14 percent of less. Worse still, if they missed a single payment or two, they could find their wages garnished and eventually would lose their homes—court order or no court order. In the **Czech Republic** , trying to prepay a consumer loan could result in a prepayment fee of 100 percent of the original loan amount. In **Lithuania** , banks had made “exotic” housing loans with an initial grace period on repayments and low variable interest rates. As interest rates rose (but housing prices fell), new homeowners found themselves squeezed by mortgages that were increasing in size rather than declining—at the same time as home values were falling. In **Latvia** , banks notified borrowers of increased fees in their checking accounts—and advised them to open new accounts for loan payments. However after borrowers signed the new account contracts, they found that they had in fact agreed to new terms and conditions—and an acceleration of the repayment schedule from 25 years to just two years.

In **Croatia** , the common complaint to the central bank was that, “We did not understand what we signed”. If they had co-signed a loan, consumers did not realize that they might be obliged to pay the debt of their friend or family member. Consumers were also not aware if their personal data was sold to a third party. In **Bulgaria** , personnel of financial institutions are unable to explain to customers their financial products and if consumers had disputes over entries in credit register, correction of errors was difficult at best. In **Romania,** borrowers received mortgage contracts printed in a 6-point font size that was too small to be read by anyone with less than perfect vision. Trying to obtain a copy of a contract before signing or finding out the amount of fees (or the foreign exchange rate) for a remittance before sending the money was a test in patience.

In **Russia,** over 400,000 investors had paid $1.4 billion to Ponzi schemes for investments that would never be repaid or apartments that would never be built. Over $60 billion a year is paid into stand-alone machines in subways and on the street to pay for utility bills, rent and other amounts under $1,000. It is estimated that at least 70 million consumers, or virtually all of the Russian working population, use such terminals at least occasionally. However the effective fees are not always disclosed. Furthermore the owners and operators of the machines are not registered with any financial supervisory agency. Also investors in private pensions received no information about their pension funds—or the financial performance of the funds. In **Azerbaijan** , elderly pensioners were obliged to learn how to use an ATM cash machine or give their personal identification number (PIN) to a third party to use the ATM card for them. In the weekly call-in hour to the central bank’s executive management, the most common complaint was that the consumer did not understand why the bank would not provide a credit.

_Source_ : Diagnostic Reviews

**Consumer protection and financial literacy promote efficiency, transparency, competition and deepening of retail financial markets.** The retail public operates in a marketplace where imbalances of information, resources and power are on the side of financial institutions. Consumer protection attempts to redress the imbalance, by giving individuals clear and complete information to make well informed decisions, by prohibiting financial institutions from engaging in unfair or deceptive practices, and by providing adequate mechanisms to resolve disputes between individuals and financial institutions. Consumers who are empowered with information and basic rights—and who are aware of their responsibilities—provide an important source of market discipline to the financial sector, encouraging financial institutions to compete by offering better products and services rather than by taking advantage of poorly informed consumers. Consumer protection also improves governance of financial institutions. By strengthening transparency in the delivery of financial services and accountability of financial firms, consumer protection helps build demand for good governance of the sector and the strengthening of business standards in the financial sector. Financial literacy helps consumers understand the information

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