# **Executive Summary**

**Until the financial crisis of 2007-09, the global economy was adding an estimated 150 million new consumers of financial services each year.** Rates of increase have since slowed but growth continues apace. Most new consumers are in developing countries, where consumer protection and financial literacy are still in their infancy. Particularly in countries that have moved from central planning to market economies, protecting consumers has become a prerequisite for sound, stable and competitive financial markets—and protection is needed to give new consumers confidence in the formal financial system. It is also in the interest of financial institutions to have an informed and confident clientele.

**Households worldwide have taken on debt to buy housing, repair cars, educate their children and just pay the bills** . Bank loans to households have dramatically risen in many countries. For example in Russia, household lending has increased from negligible levels to 20 percent of total bank assets in just over five years. Yet many still lie outside the formal financial sector. More than 40 percent of the Russian population still lacks access to any form of financial services, even a basic current bank account. In most developing countries, less than one percent of the population invests in securities, investment funds or insurance. Households are also heavy users of payment services and remittances.

**Despite the increase in retail financial services, consumer protection and financial literacy remain weak in developed and developing countries alike.** For many in the emerging markets, financial service contracts are difficult to understand. It may be the first time that someone among their friends or extended family has signed a long-term financial contract and none has sufficient financial literacy to negotiate with a financial institution. In addition the services, or the consumer disclosure for the services, may be difficult to comprehend—and impossible to compare among service providers. If a consumer has a complaint about a financial service, no agency is clearly responsible for addressing the problems: the consumer is left to fight in a court system that may be slow and inefficient at best and subject to undue influences and additional costs at worst.

**The global financial crisis has highlighted the importance of consumer protection and financial literacy for stability of the financial sector.** In the US, the rapid growth of complex residential mortgage products (for example, interest-only mortgages), combined with securitization of debt into instruments (such as collateralized debt obligations) which were sold to poorly informed parties, has caused much turmoil. Financial institutions worldwide have been obliged to write off trillions of dollars of assets. In Central and Eastern Europe, the damage to the financial sector was also serious. It is not clear how many borrowers understood the risks inherent in taking long-term debt in foreign currencies and at variable interest rates. Strong financial consumer protection is needed for public confidence in the financial system worldwide.

**The objective of this Working Paper is to take the lessons from the nine country studies and to lay out a broad framework for reviewing consumer protection and financial literacy in emerging markets.** Starting in 2005, the Europe and Central Asia Region of the World Bank initiated a pilot program, conducting country reviews in Azerbaijan, Bulgaria, Croatia, the Czech Republic, Latvia, Lithuania, Romania, the Russian Federation and Slovakia. All are considered to be “middle-income” countries and six are members of the European Union. For each, a detailed analysis was provided of financial consumer protection in banking, non-bank credit institutions, insurance, securities, private pensions and for selected Diagnostic Reviews, also microfinance institutions and credit reporting systems. In addition, the World Bank developed a set of Good Practices in Consumer Protection and Financial Literacy based on successful international practices in improving consumer protection and financial literacy. While this Working Paper summarizes key lessons from reviews in middle-income countries, the findings may also be useful for low-income countries.