Financial consumer protection legislation – approaches and recommendations for vietnam

Nội dung text: Financial consumer protection legislation – approaches and recommendations for vietnam

1. FINANCIAL CONSUMER PROTECTION LEGISLATION – APPROACHES AND RECOMMENDATIONS FOR VIETNAM Lan Phuong To, PhD. 4 - University of Economics and Business – Vietnam National University Abstract According to statistics of the World Bank, every year, the world has nearly 200 million new consumers entering the financial market (WB, 2020). The asymmetry of information about financial products/services between consumers and providers has put many financial consumers at a disadvantage. This imbalance is greater when the consumer's financial experience is low and the level of complexity of financial products/services increases. This leads to the case that many financial institutions, on the one hand, still ensure their customers are well served, but on the other hand, take advantage of information to make illicit profits, causing distrust in the official financial market. Therefore, implementing financial consumer protection (FCP) with appropriate regulations can prevent information asymmetry, rebuild financial consumers' confidence, encourage them to actively access to formal financial products/services and thereby promote financial inclusion. FCP is an important factor in promoting financial inclusion, especially for those with limited experience and knowledge. The research will go into the current situation of FCP in Vietnam, examine the approaches to legal FCP in order to make recommendations in the context of Vietnam's economy during and after Covid 19. Keywords: Consumer protection, Consumer behavior, Financial services, Financial consumers, Financial consumer protection, Financial consumer protection legislation. Introduction The global financial crisis of 2007-2009 is, arguably, the most significant financial crisis to occur since the Great Crash of 1929, which led to the Great Depression. The crisis of 2007-2009 was caused by a number of factors for example flawed monetary policy, excessive and uncontrolled use of financial innovation, the proliferation of shadow banking activities and inadequate corporate governance structures within banks and other financial services firms (Avgouleas, 2009). To a large extent, it was also a manifestation of regulators’ failure to maintain the overall stability of the financial system. Apart from this failure to maintain systemic stability, there were also some failures to protect consumers, for example regulators’ approaches to the supervision of financial firms were not assertive enough thus resulting in a situation where a large number of borrowers are struggling to pay back mortgages as a result of irresponsible lending. Apart from this there have been other examples of financial practitioners acting in a way that was detrimental to consumers, for example the scandals arising from the mis-selling of retail financial products such as personal pensions and endowment mortgages (Gray, 2004). Such incidents 4Email: phuongtl@vnu.edu.vn 42
2. illustrate how firms and practitioners in the financial services industry are able to exploit an unfair advantage they have over their consumers (investors) in terms of superior information and expertise. Such opportunistic behaviour, arguably, indicates the need for tighter regulation of financial services. This article looks at some of the principal theories on why we intervene, in markets, to protect consumers. It also looks at how the financial crisis has led to a re-thinking of how this might be done. In so doing, it examines the regulatory philosophies that underpinned consumer protection regulation in UK financial services before the crisis, as well as the new ideas that might replace them in the new post-crisis era. Approaches to consumer protection regulation: The government or regulator tasked with consumer protection will often have to balance the interests of consumers on the one hand with those of the sellers or suppliers on the other hand. To this extent, its approaches to consumer protection regulation will be interventionist, non-interventionist or a mixture of both. The non- interventionist and interventionist approaches to consumer protection will now be discussed in turn. Non-interventionist approaches Non-interventionist approaches emphasize allowing the consumers and sellers the freedom to make bargains and contracts without external interference from government or regulators. The non- interventionist approaches are promotion of competition (between the different suppliers or sellers) (Yeung, 2004) , the use of information disclosure (Howells, 2005) , the use of caveat emptor (McMeel and Virgo, 2001) and the reliance on private enforcement mechanisms (Polinsky and Shavell, 2000 ; Shavell, 1993 ; Van Den Bergh, 2008). The “Chicago School” of economic thought has traditionally been a supporter of non- interventionist approaches. Their arguments are based on a deep-seated belief in the efficacy of the free market as a means of organising or allocating resources (Friedman, 1974). They are also founded on a great deal of scepticism of government intervention in economic affairs (Friedman, 1974). The argument is that in the absence of government intervention the free market functions at least as well as, and probably better than, any other type of economic arrangement (Friedman and Friedman, 2002 ; Wall, 1972). The reason for this, according to Chicagoans, is that voluntary exchange is the most efficient method of allocating resources, promoting individual choice and preserving political freedoms (Friedman and Friedman, 2002). This belief in free markets, minimal government and the promotion of private enterprise is, in turn, founded on the proposition that human beings maximise their own self-interests and are therefore rational economic creatures (Stigler, 1982). This is known as rational choice theory. Rational choice theory is, in many ways, the foundation for the law and economics movement (Jacoby, 2000). It is based on the premise that human beings are maximisers of their satisfaction, or utility, and that when faced with a set of choices, will always pick the option that they believe maximises their satisfaction or utility (Becker, 1978; Posner, 1990). This premise is, in turn, based on the assumption that when making choices people have adequate information (to aid them in making those choices) and the ability to properly process that 43
3. information (Ogus, 1994). Consequently individual choice must be preserved, while limiting external or government interference (in individual’s decision-making about their welfare) to the improvement of information flows (Ogus, 1994). Rational choice theory, therefore, seems to argue for limited, if any, regulation or other government intervention, since individuals know how to maximise their utility and are capable of doing so. A major criticism of non-interventionist approaches arises from a significant defect of rational choice theory. This criticism can be found in the behavioural economics and psychology literature. The problem with rational choice theory is that people do not always make rational choices. Individuals can, and do, make inferior decisions with regards to their welfare-decisions that they would not have made if they had complete information, unlimited cognitive abilities and unlimited self-control (Jolls et al., 1998). This arises because people often use heuristics (rules of thumb) which are aimed at making complex tasks, of assessing probabilities and predicting values, simpler, but which can sometimes lead to severe and systematic errors (Avgouleas, 2008). There is a wealth of empirical studies, in both behavioural economics and psychology, that show that the use of heuristics, such as the availability heuristic (Slovic, 2000) and the affect heuristic (Slovic et al., 2004) , results in cognitive biases (cognitive weaknesses) in individuals’ decision-making, which, in turn, lead them to make systematic errors (Tversky and Kahneman, 1974). Some examples of cognitive biases are overconfidence (Shiller, 2000) , probability neglect (Sunstein, 2005) and loss aversion (Kahneman and Tversky, 1979; Kahneman et al., 1990; Kahneman and Knetsch, 1991). Individuals, thus, suffer from bounded rationality (Jolls et al., 1998; Simon, 1955), bounded self-control (Frederick et al., 2002 ; Jolls et al., 1998) and the effect of framing (Camerer, 2000; Johnson et al., 2000) when making choices regarding their welfare. Interventionist approaches Interventionist approaches to consumer protection are characterised by the greater involvement of government or regulators in the monitoring of suppliers and sellers of goods and services in a bid to protect the interests of consumers. Typical interventionist approaches include bans and regulation, altering the default rules and risk-sharing (Howells, 2005). Interventionist approaches in financial services include conduct of business regulation and product regulation. A significant justification for interventionist approaches comes from the extensive scholarly empirical literature on the behaviour of individual consumers, which concludes that rational choice theory is a simplistic theory that has little correspondence with the real world (Jacoby, 2000; Jacoby et al., 1998; Peter and Olson, 2008 ). Human behaviour is a complex function of many known and unknown factors, and although economic variables play an important role in our choices, there are many other variables which also play a role in our choices, for example psychological, sociological, cultural and environmental variables (Jacoby, 2000). The upshot of this is that the application of rational choice theory will not work for all markets and all consumers all of the time or in all situations (Jacoby, 2000). Another significant justification for interventionist approaches to consumer protection is information inadequacy. Information is necessary in order for markets to function properly- for a 44
4. market to function well buyers must have enough information to help them evaluate products (Hayek, 1945), and there should be as much information available as consumers are willing to pay for in order to improve the quality of their choices (Breyer, 1982). This is, however, not always the case, for a number of reasons. The first of these reasons is that information is sometimes expensive to produce and difficult to restrict to only those who pay (Breyer, 1982), therefore there is less of an incentive to produce such information (Asch, 1988). This can lead to the production of inadequate or too little information (Sunstein, 1990), and thus constitutes an argument in favour of regulation. The second reason is that one of the parties to a transaction may deliberately try to mislead or deceive the other party, by conveying false information or omitting important facts – the fact that individual consumers will often have incomplete information, coupled with the significant costs involved in determining the quality of a particular good or service, create favourable conditions for fraud to take place (Darby and Karni, 1973). Although there are other ways of dealing with this particular problem, for example service contracts, leasing arrangements, extensive warranties, client relationships and branding (Darby and Karni, 1973) [37], regulation should not be ruled out. The third reason is that even if the necessary information is provided the buyer may be unable to evaluate all the characteristics of the products or services on offer, for example a layman cannot readily evaluate the competence of a doctor or lawyer (Breyer, 1982). The result of such information asymmetries between buyers and sellers (where the sellers have more knowledge about the quality of the goods on sale than the buyer) is often described as a “market for lemons” (Akerlof, 1970). In a market for lemons there is an incentive for sellers to market poor quality merchandise because the returns for good quality accrue to all sellers rather than to the individual seller (Akerlof, 1970). The market will, therefore, supply quality at inefficiently low levels (Cheffins, 1997). Although there are other ways of dealing with the market for lemons (that is, the effects of quality uncertainty) for example the use of guarantees and brand-names, there is still a strong case for licensing and other forms of regulation, in order to increase the welfare of all parties (Akerlof, 1970). The problem of quality uncertainty is particularly relevant with regards to experience goods rather than search goods (Nelson, 1970) [40]. With search goods there is less danger the buyer will make incorrect purchase decisions because the relevant characteristics can be known prior to purchase, whereas with experience goods there is a greater likelihood of unsuitable purchases because the relevant characteristics will often only be ascertainable after purchase and use (Breyer, 1982). The problem of quality uncertainty is also relevant with regard to credence goods because it is difficult to ascertain their characteristics or their quality even after they have been used or consumed. The problem of quality uncertainty is, therefore, particularly relevant to banking and other financial services because long-term savings and investment products tend to be credence goods rather than search or experience goods. The problem of quality uncertainty thus contributes positively to the argument in favour of regulation. The fourth reason why there might be inadequate information in a market is that the market may simply not be competitive enough to provide all the information that consumers would be willing to pay for, for example until the US government mandated disclosure, accurate information 45
5. was unavailable, to most buyers, regarding the fuel economy for cars, durability of light bulbs, nicotine content of cigarettes or care requirements for textiles (Breyer, 1982). Having looked at the four reasons it is clear that information inadequacy poses a very strong justification for regulation. By making information more extensively available, accurate and affordable, regulation can protect buyers against the adverse consequences of information inadequacy thus encouraging the operation of healthy markets (Baldwin and Cave, 1999). To this extent regulation is a desirable thing. Morality presents another justification for interventionist approaches to consumer protection. This is because capitalism itself encourages the baser human motives such as self-interest and the desire for personal profit, while at the same time discouraging the more traditional moral virtues such as honesty, integrity, self-sacrifice and the charitable instinct (Barry, 1991). Thus, if an unregulated market is likely to produce self-serving conduct which breaches widely accepted standards of morality, then there could be an argument made for the introduction of regulation into such a market (Cheffins, 1997). In attempting to curb conduct that breaches widely accepted standards of morality, regulation can also promote confidence in the market, since unethical or improper conduct is precisely the thing that undermines public confidence in the market (Barry, 1991; Cheffins, 1997). Morality thus provides a good justification for regulation. A further justification for interventionist approaches is paternalism. It is largely based on the weaknesses of rational choice theory. The perceived inability of individuals to make correct choices with regards to their welfare is a justification for regulation that is paternalistic in nature – such regulation is based, largely, on the belief that the market is unable to regulate itself in a particular area of social or economic activity, thus requiring government initiatives that are interventionist in nature (Avgouleas, 2005). Paternalism itself has been defined as “the interference with a person’s liberty of action justified by reasons referring exclusively to the welfare, good, happiness, needs, interests or values of the person being coerced” (Dworkin, 1971; Ogus, 2010; Van De Veer, 1986). It is a powerful justification for regulation, even when other justifications, such as externalities, are also appropriate (Ogus, 1994), and it has even been argued that, very often paternalism is inevitable (Sunstein and Thaler, 2003). The problem with paternalism is that it is viewed by some, especially libertarians, as coercive, restrictive on choice and freedom and it blurs the boundaries of state intervention (Friedman and Friedman, 2002; Hayek, 1960; Hayek, 1973; Nozick, 1974). To overcome the criticisms of paternalism, Sunstein and Thaler have come up with the idea of libertarian paternalism (Sunstein and Thaler, 2003). They argue that arguments against paternalism are based on a false assumption (that people always make choices that are in their best interests) and misconceptions that there are viable alternatives to paternalism and that paternalism always involves coercion (O’Donoghue and Rabin, 2003; Sunstein and Thaler, 2003). Libertarian paternalism is a fairly weak and non-intrusive version of paternalism, whereby choices are not blocked but planners self-consciously attempt to move people in welfare-promoting directions (Sunstein and Thaler, 2003), thus making the regime both libertarian and paternalistic at the same time. 46
6. A good look at some of the things that paternalistic regulation has been put in place to avoid, for example under-aged smoking and drinking and the failure to wear seatbelts (Dworkin, 1971), makes it clear to us that individuals, if left to their own devices, do not always make rational decisions or welfare-maximising choices. This therefore counts as a good justification for intervention in order to ensure their welfare. Consumer protection in the financial industry in Vietnam FCP is vital to financial stability and financial inclusion. An effective FCP framework is a necessary condition to expand access to and use of financial services, bring practical benefits to consumers, and enable them to have sufficient information to provide financial services. make decisions to use financial services in the best and most effective way. This is one of the ways to help strengthen consumer confidence in the formal financial sector, contributing to the healthy and sustainable development of the financial market.” Vietnam follows a market economy, socialist orientation, which means that there is state management in the economy, so the appropriate method in Vietnam in current practice is to combine both intervention and non-intervention methods. Specifically in Vietnam, the FCP currently involves four agencies, namely the State Bank of Vietnam, the Ministry of Industry and Trade, the Ministry of Information and Communications and the Consumer Protection Association. However, these agencies do not have a specialized department as well as specific management processes to perform the task of FCP. In addition, the coordination mechanism between the above agencies is not clear and lacks binding, so the handling of conflicts of interest that occurs when using financial products and services is still quite confusing. Regarding the legal framework: Currently in Vietnam, the legal framework for consumer protection is the Consumer Protection Law in general, with no separate reference for consumers in the financial sector. Vietnam does not have a specific, separate law on consumer protection in the financial sector, while the laws or regulations on transactions in the financial sector, for example the Law on Credit Institutions 2010 have one provisions on protecting the interests of customers are also general and incomplete. Regarding management and supervision agencies: Currently, Vietnam does not have a specialized management agency responsible for FCP. Vietnam has four agencies related to the protection of consumer interests in the financial sector, including: the State Bank of Vietnam, the Ministry of Industry and Trade, the Ministry of Information and Communications and the Consumer Protection Association use. All four agencies have the ability to participate in the consumer protection process, but these agencies do not have specialized departments as well as specific management processes to perform the task of protecting consumers consumption. In addition, supervisory responsibilities for consumer protection issues have not been properly assigned and coordinated among these agencies. Out of six criteria to evaluate consumer protection activities in the financial sector, Vietnam currently only meets two factors: Having a complaint management agency and having customer support via a hotline. Other criteria (such as: 47
7. universalization of consumer risk programs; direct handling of complaints; receipt of complaint reports from financial institutions and control of service quality ) are all met by the countries. Others (Indonesia, Korea, Thailand, Philippines, Malaysia) apply, but have not been recorded to apply in Vietnam. In particular, the lack of separate regulations for financial consumers as well as consumer borrowers in the Consumer Protection Law makes it difficult to protect the interests of consumers in general and consumer borrowers in particular in Vietnam is vacant. The reality of violations of consumer rights in the field of consumer credit is that the information provided to consumers is not complete, clear, accurate, even showing signs of intentionally causing confusion or fraud; information collected from consumers is used for improper purposes; consumers are harassed, threatened, their reputation and honor affected in the process of debt recovery; the reception and settlement of complaints is unprofessional and ineffective; ambiguity between formal consumer credit and “black” credit. The fact that the law does not have specific provisions for consumer shows that this group is not considered as vulnerable and requires appropriate protection regulations. In fact, financial consumers will easily encounter five groups of conflicts of interest, including: Product development risks (financial products and services do not comply with legal requirements) ; technology risks (reliability of security systems, information system failures); marketing risk (false advertising, service fees, etc.), fraud risk (transaction monitoring, credit institution staff supervision) and sales risk (wrong transaction, disclosure) customer information). Therefore, it is necessary to specialize the subject of consumers in order to have appropriate legal provisions to protect rights, especially in the context that Vietnam's economy is being heavily affected by the Covid-19 pandemic lasting from 2020 to date and possibly even longer. Conclusion and recommendation Consumer protection is mainly based on the legal basis of the Law on Protection of Consumer Rights, but there is no separate regulation on protection of consumer products. Meanwhile, laws in the financial fields such as the Law on Credit Institutions, the Law on Securities or the Law on Insurance Business have provisions on protecting the interests of customers but are incomplete and lack guidelines. Specifically, promptly and effectively handle complaints of financial consumers. Not to mention Vietnam currently does not have specialized organizations to centrally manage financial consumer protection. Given that situation, the author proposes the following recommendations to improve the legal framework in the law on protection of NTDs in Vietnam as follows: Firstly, it is necessary to raise awareness of financial consumers: The protection of financial consumers is not only the protection of individual consumers but also has very important implications for financial stability and financial inclusion. Because an effective FCP framework is a necessary condition to expand access to and use of financial services, bringing practical benefits to consumers, and enabling them to have enough information to make decisions about the best use of financial services. Only when the financial consumers is safely protected will there be confidence in the official financial sector, contributing to the healthy and sustainable development of the financial 48
8. market. The financial sector is facing major changes, which is the trend of using digital financial services. Vietnam is accelerating the implementation of financial inclusion and to successfully implement financial inclusion, financial education and consumer protection need to be one step ahead. Not only regulatory agencies, policy makers, consumer representative organizations but also financial institutions need to pay attention to the protection of financial consumers and this is evident in the Financial Strategy. comprehensive national policy to 2025 with orientation to 2030. Second, separate regulation is needed: Previously, a survey conducted in 124 countries by the World Bank in 2018 showed that the legal framework for NTDTC protection has appeared in 118 countries. Accordingly, there are three common approaches to regulations on FCP in the world, including: Bringing consumer protection regulations into the regulations for transactions in the financial industry as in the Banking Law; include consumer protection provisions in the general consumer protection law but with specific references to consumers in the financial sector; promulgate separate, specialized laws and regulations for consumer protection in the financial sector. According to the results of a survey in Vietnam conducted in a narrow scale on social networks, it shows that the trend of invasion of privacy, invasion of information confidentiality, even insulting the honor of financial consumers is increasing sharply, especially since the advent of consumer finance companies. A search engine on social networks shows that on average, there are nearly 100 complaints a day about being bothered by consumer finance companies and banks, such as asking for a loan, inviting to use services, even someone asking for a loan was also being called dozens of phone calls a day from a financial company, a bank. Many people also reported that they were "reprimanded" when they refused to borrow money. It is worth mentioning that the majority of these individuals who reported being bothered said they had at least once had a transaction with the financial company, the bank or its affiliate partner surname. A survey on Google with the keyword "annoyed by financial companies" gives about 9,560,000 results. With the keyword "debt collection by terrorist financial companies" for about 2,050,000 results. This shows that customers who are financial consumers of financial companies and banks are being compromised to a high degree. While legal sanctions are not strong enough to FCP, on social networking sites, financial consumers protect themselves by offering plans to deal with annoying calls from financial companies and banks Given the above situation, it is necessary to soon complete the legal framework related to the FCP, establish specialized agencies on FCP and establish a coordination mechanism between these agencies and the Department of Competition and Consumer Protection consumers and the Consumer Protection Association. Develop qualitative and quantitative criteria to assess the level of FCP in Vietnam to be able to orientate appropriate FCP solutions On the part of financial institutions, there should be regulations with strong sanctions on the responsibility of financial service providers in matters of confidentiality of information and assets of FCP. There is an effective mechanism for receiving, managing and settling complaints. Financial institutions also need to research, analyze and evaluate the risks or difficulties that FCP may face when using their financial services products to have appropriate customer protection plans. The 49
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