Financial Education in Pakistan: Will it work to increase financial inclusion?

For all its popular support, financial education needs to be very carefully evaluated. As part of a nationwide program launched last month, the central bank of Pakistan (known as the State Bank) started a pilot financial education program targeting poor and marginalized populations. About 50,000 low-income households will receive training in six areas: (1) budgeting, (2) savings, (3) investments, (4) debt management, (5) financial products, including branchless banking, and (6) consumer rights and responsibilities. The training materials will be translated into the national language as well as the five main regional languages, Urdu, Sindhi, Punjabi, Pushto and Balochi. Following completion of an independent assessment, the program will be expanded to 500,000 beneficiaries.

The training programs will be complemented by consumer awareness campaign using such novel approaches as street theater, board games, comic strips and activity-based competitions. Website and media campaigns will also be used.

The issues are important for financial inclusion. The State Bank has found that only 12 percent of Pakistani households use formal financial services, with the balance relying on unreliable informal arrangements. Of those outside the formal financial system, 40 percent cite lack of understanding of financial products as the main reason for not using financial services.

Safe and Fair Finance Blog supports this initiative by the State Bank of Pakistan but recommends that its impact be carefully evaluated. Research by Shaun Cole, Thomas Sampson and Bilal Zia on effectiveness of financial education programs show that low-income households benefit from basic financial training. However financial education is generally an expensive process with unclear results. Cole et al found that a more cost-effective approach is to give low-income households a small amount of money – if they open a basic bank account. All this suggests that the evaluation by an independent third-party will be a critical part of making the nationwide program as effective as possible. That assessment should look at more than just the issue of whether the trainees better understand financial products. The evaluation should also try to determine if households receiving training in personal and household finance are more likely to use formal financial services that those not receiving such training.

However financial education cannot solve problems due to weak regulation. Safe and Fair Finance Blog recommends that a systemic review of the financial consumer protection laws and regulations compared to international practice also be conducted and published.

* Cole, Shawn, Thomas Sampson, and Bilal Zia. 2009. “Financial Literacy, FinancialDecisions, and the Demand for Financial Services: Evidence from India and Indonesia”. Harvard Business School Working Paper 09-117

Pin It Now!

Is Facebook using your Personal Data?

Part of consumer protection in financial services relates to protection of personal data – how financial institutions use and share the data and how consumers can correct inaccuracies. Today’s The New York Times article, "Facebook is Using You", describes how data aggregators collect and share consumers’ data without advising consumers of the use of such data. If this happens with Google searches, email and Facebook pages, can consumers be assured that personal data is not similarly abused by financial institutions?

Pin It Now!

Banks should not be allowed to use an Inaccurate Data-base to evict Homeowners

Earlier this week, Safe and Fair Finance Blog wrote about Hernando de Soto’s article on the need to clean up public registries of assets, in particular the US electronic registry of mortgages known as MERS. The registry remains a mess. It holds an estimated 60 percent of all residential mortgages in the U.S., i.e. about 70 million individual loans. Yet the MERS records are widely believed to be less than accurate.

On Friday, New York State Attorney General Eric Schneiderman filed a lawsuit against MERS and three banks -- Bank of America, J.P. Morgan Chase and Wells Fargo. The complaint accuses MERS and the banks of engaging in “deceptive and fraudulent practice.”

The complaint under the lawsuit identifies six specific ways in which homeowners and the public have been harmed by MERS.

1. By bringing foreclosures without proper legal standing, MERS subjected homeowners to improper foreclosures;
2. By submitting to the court invalid assignments of mortgages, MERS obtained foreclosure judgments through fraudulent and illegal means;
3. By making misrepresentations regarding the identity of the holder of mortgage notes, MERS undermined the integrity of the court system and impeded the ability of homeowners to present legal defenses;
4. By creating foreclosure  judgments for entities that did not hold the notes, the actions of MERS created invalid liens and clouds on title, thus subjecting foreclosure victims to the risk of monetary judgments by the true holders of the notes;
5. By creating mortgage assignments by MERS employees who were not adequately trained or supervised, MERS misled and deceived homeowners and the courts; and
6. By obscuring the identity of the beneficial owners of mortgages and the chain of title, MERS deprived homeowners and the public of the ability to determine true property ownership through publicly available records.

One wonders how it was the MERS was created – and allowed to continue to operate.

Financial innovation in the 1990s allowed residential mortgages to be easily bought and sold by financial institutions. The traditional way of recording changes in ownership was a visit to the county clerk, where for a fee of $30 or so, the seller could record the sale of the mortgage to a buyer. With the securitization of residential mortgages into mortgage-backed securities, such re-registrations became cumbersome. The major mortgage banks got together and created a private registry – Mortgage Electronic Registration Systems or MERS – to act as the holder of record of the mortgages. The problem was that MERS had weak governance. With a staff of under 100 employees, and no legal responsibility to ensure the accuracy of its records, MERS hired employees from its member firms to certify the loan documentation.

However MERS remains a private registry. Even homeowners cannot obtain reliable information from MERS on which financial institution legally holds their mortgage. So when it is time to try to find someone in the bank who is authorized to discuss a modification of the loan … there is no one to be found. More accurately, there is often no one who is sure which financial institution has the authority to modify the loan.

In this environment, no amount of financial incentives will be effective in helping homeowners renegotiate their home loans.

In the opinion of Safe and Fair Finance Blog, this is simply a mess. Surely as a starting point, a public registry should be established for all new residential mortgages. The registry should be run by a government agency, operating with clear rules of corporate governance and an electronic data-base accessible to the public at no charge.

For the existing mortgages, financial institutions should be obliged to accurately reconstruct the legal records before initiating any foreclosures. Alternatively financial institutions might be encouraged to offer all existing clients a discount on the monthly payment if they are willing to provide the legal documentation for the mortgage and submit it to the new public registry. Finally all mortgage lenders should be obliged to set up special departments to deal with existing murky mortgages until all have finally been repaid. 

If nothing is done, it is likely that the threat of foreclosures -- invalid or not -- will continue to hang over the residential real estate market. Such uncertainly makes it difficult for the real estate market to become efficient. It is also a question of fairness in the way that financial institutions treat their retail customers.

Safe and Fair Blog would be interested to hear your views on how to solve this problem in a way that helps financial consumers while maintaining the soundness of the financial sector. This is a problem that certainly will not go away very easily.

Pin It Now!

Have Financial Markets Colluded once Again against Consumers?

Advocates of protection of financial consumers might be interested in recent news about the Swiss probe of LIBOR rates. Today the Swiss Competition Commission, COMCO, announced that it has opened an investigation against 12 international banks asking about possible manipulation of LIBOR rates.

The London interbank offered rate (or LIBOR) has been used for decades as a reference rate for short-term bank loans to businesses. With the growth of consumer finance, particularly over the last twenty years, LIBOR has also become the most commonly used base rate for the calculation of variable rate residential mortgages, particularly in the U.S.

Originally LIBOR was calculated by asking (at 11 am London time each day) a group of about eight major banks what they would charge to lend to each other. The highest and the lowest rates were thrown out and an average was calculated using the remaining six banks.

In the early 1980s, traders also started using LIBOR to calculate interest rate swaps and other “derivatives” of financial instruments. In 1984, the British Bankers Association (to its credit) stepped in and developed a more formal system for calculating LIBOR rates. Since then the market for financial derivatives has exploded into $615 trillion, according to the Bank for International Settlements. Gazillions in laypersons' terms.

In its official statement, COMCO said that, “Collusion between derivative traders might have influenced” Libor and its Tokyo-based equivalent, Tibor, “coordinating their behavior, thereby influencing these reference rates in their favor.”

COMCO further noted that, “Market conditions regarding derivative products based on these reference rates might have been manipulated too… Derivative traders might have colluded to manipulate the difference between the ask price and the bid price of derivatives based on these reference rates to the detriment of their clients.” In total, 12 banks have been named including UBS and Credit Suisse

This is serious stuff.

It is also potentially very important for anyone who has borrowed – or plans to borrow – a residential mortgage at adjustable interest rates. Collusion among market traders could result in borrowing rates that are higher than the market would otherwise determine – and this hurts anyone who is planning to sell their house or struggling to pay off a home loan.

Safe and Fair Blog argues that financial markets should safe, fair and competitive. Collusion among traders in the marketplace undermines competition. It just ain't fair.

Pin It Now!

Can Financial Education save Capitalism? The View after Eight Centuries of Financial Folly

Readers of Safe and Fair Finance Blog will be pleased to see intellectual support from an unexpected source. Kenneth Rogoff was formerly head of economic research of the International Monetary Fund. He is now professor of economics at Harvard University. In 2009, he co-authored with Carmen Reinhart the ground-breaking book on financial crises, This Time is Different: Eight Centuries of Financial Folly. Their book has become the bible of economic long-term forecasters.

In his February 1^st letter to the Financial Times, Professor Rogoff comments on recent commentaries about the future of capitalism. He notes that. “Entrepreneurs who have earned billions, world leaders who have spent trillions, journalists, academics, and even ‘Occupiers’ have all weighed in.”

He notes that even China’s recent economic successes are not sustainable. “Creating impressive infrastructure eventually runs into diminishing returns, as evidenced by the history of Japan and the Soviet Union,” and he might have noted the U.S. in the 19^th century.

Professor Rogoff also emphasizes the point made by Martin Wolf that “contemporary capitalism, which does such an extraordinary job of generating a cornucopia of private goods, is far less effective at generating public goods, whether it be education, infrastructure, environment or financial stability.”

The question is how to strike a balance that creates a wealth of both private and public goods. His solution is education. He points to the arguments made by David Rubenstein of the current inadequacies of primary and secondary education, as well as the need to re-educate and retrain adults.

However Professor Rogoff goes much further, arguing that, “Societies need to find ways to make adult education, including economic and financial literacy, far more available and far more compelling… The idea that the masses are indifferent to education, and that any broader notion of literacy beyond the three R’s (reading, writing and arithmetic) is a hopeless cause, is nonsense.” He further notes that, “As someone who has spoken to all kinds of people in the wake of the financial crisis, my sense is that most citizens are starved of information, and would consume it hungrily if offered in a palatable form.”

Starved of information on economic issues and personal finance—that is the plight of the vast majority of the population is today’s economies. However it need not be the case.

Professor Rogoff lays out a few suggestions: (1) attractive web learning platforms, (2) expanded public radio and television, and (3) greater educational choice for children. These are all useful programs but far more is needed. Follow Safe and Fair Finance Blog for more ideas.

Safe and Fair Finance Blog argues that financial education, contributing to improved levels of financial literacy, is an essential element in staving off the next financial crisis. Without both improved financial literacy and financial consumer protection, the next decade will become the subject of Professor Rogoff’s next book, How we Failed to Learn the Lessons of the Last 80o Years of Financial Crises.

As Professor Rogoff concludes, “Improved education alone will not resolve the flaws inherent in today’s capitalism, but it is an essential first step down any path to a solution.” Safe and Fair Finance Blog can only agree.

Pin It Now!

US: Cleaning up the Mortgage Registration System

If you want to understand why the current financial crisis remains unresolved, you need look no further than the article by Hernando de Soto in today’s Financial Times. Mr. de Soto is author of The Mystery of Capital, where he showed that by documenting the community-based agreement on who owned what, it was possible to provide collateral to the poor—and thus allow the poor and marginalized communities to borrow money from banks, for the first time.

In the FT article, Mr. de Soto explains that the problem is that “To regain its vitality, western capitalism must bring under the rule of law and public memory hundreds of trillions of dollars now swirling mindlessly out of control in the obscure world of financial innovation.” More precisely, it is a matter of formally documenting the trillions in loans that were made by lenders to homeowners.

Those loans were recorded in a system known as MERS, the mortgage electronic registration system established in 2004 by private sector lenders to formally record residential mortgage loans to homeowners. This was long before the explosion of securitization. Unfortunately MERS has never worked perfectly. Safe and Fair Blog estimates that for every home loan under foreclosure, the borrower has a 50:50 chance of being able to prove that the holder of the mortgage loan is not the lender of record – and therefore the lender lacks the legal authority to foreclose on the loan and evict the homeowner from her or his house. Safe and Fair Blog does not recommend such a tactic. Certainly the homeowner knows that she or he took on a loan and that s/he has a moral responsibility to repay the debt. However the failure of a privately-owned debt registration system in the U.S. should not be allowed to imperil the global financial system.

This is not, strictly speaking, an issue of consumer protection and financial literacy. However the failure of the MERS to work properly undermines the financial vitality of tens of millions of financial consumers by destroying the financial markets that financed their homes. The vagaries of MERS thus impede the ability of homeowners to sell their primary financial assets (their homes) and move to a part of the country where jobs are plentiful and their skills are in scarce demand.

Part of President Obama’s State of the Union speech should surely have been to clean up this badly working mortgage registration system – and allow the U.S. economy to get back on its feet. The question is ... why hasn't this been done by now?

Pin It Now!

US vs. UK: Crack Down on Bad Behavior or Just Ban the Products?

Over the last week, both the U.S. and the U.K. have moved to protect consumers of financial services. In his State of the Union address on January 24, 2012, President Obama highlighted the appointment of Richard Cordray as the new head of the Financial Consumer Protection Bureau. However the U.S. President went further and announced the creation of a new Financial Crimes Unit, consisting of federal prosecutors and leading state attorneys general with the mandate to “expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis." 

The special unit has no fewer than five co-chairs. They are:

1. Eric Schneiderman, Attorney General of New York State,
2. John Walsh, Attorney General of the District of Colorado,
3. Robert Khuzami, Director of Enforcement for the Securities and Exchange Commission,
4. Tony West, Assistant Attorney General for the Civil Division of the US Department of Justice and
5. Lanny Breuer, Assistant Attorney General for the Criminal Division of the Department of Justice.

See Rachel Maddow's interview with Eric Schneiderman on MSNBC.

Not all analysts welcomed the move, citing concerns over the Financial Fraud Task Force. Despite – or perhaps because of -- representatives from more than 20 federal agencies and 94 U.S. attorneys offices, in two years the Financial Fraud Task Force resulted in no major successes. Among the banks that had wrongfully foreclosed upon homeowners, not one of the CEOs was held accountable for their actions.

Safe and Fair Finance Blog takes a different view. Much has changed since 2009. President Obama and other politicians have come to recognize that the 2008 financial crisis was also a crisis of fairness. It showed that ordinary people – those who work two or three jobs just to pay the bills – have little chance of winning a battle with financial institutions. It showed that ordinary consumers are befuddled by confusing financial products and smooth-talking sales personnel. It showed the unfairness of the current financial system.  Safe and Fair Finance Blog therefore welcomes the creation of a special unit with strong teeth and encourages the five co-chairs to do all necessary to improve the fairness of U.S. financial system.

Change is also afoot in the United Kingdom. As noted in his interview last week with the Financial Times, the head of the new investor protection and markets watchdog, Martin Wheatley, explained that the 2008 crisis changed the way financial regulators think about consumers of financial services. Mr. Wheatley noted that in the past the regulators had thought of consumers as homines economici. The regulators relied on game theory and assumed that all agents (a.k.a. consumers) would behave rationally and use optimal reason. No longer. The new approach is to allow the Financial Conduct Authority to “step into their [consumers'] footprints.”

Mr. Wheatley points out that, “Faced with complex decisions or too much information, they [consumers] default…They hide behind credit rating agencies or behind the promises that are given to them by the salesperson.” The decision then is to allow the new financial conduct regulator to explicitly ban – or at least limit the sale of – financial products that could harm consumers.

Now we need to wait and see.  Is the U.S. approach of cracking down on bad behavior effective? Or would it be better to follow the U.K. and simply ban the sale of harmful financial products, as if they were toasters? Keep posted for updates.

Pin It Now!

BELARUS: Using Safe and Fair Finance to Reduce Social Dependence

The problems of weak consumer protection and financial literacy are also felt in Belarus, a country of 9.5 million people that lies between Poland at the west and Russia at the east.

As noted on January 5, 2012 in telegraf.by, the National Bank is concerned that recent increases in the refinancing rate that it provides to commercial banks will cause interest rates on consumer loans to rise. Deputy Chairman Sergei Dubkov warned that this increase will “make it impossible for most borrowers to fulfill their obligations to banks."

To soften the blow, the National Bank plans to try to improve consumer protection in financial services. Part of the problem, noted Mr. Dubkov, is that the law on advertising of banking services does not require full disclosure of the total interest rate of a consumer loan. The National Bank has proposed draft amendments to make information on banking services clear, simple and easy to understand.

The National Bank is also looking at international approaches on financial consumer protection. It plans to create a call center for consumer complaints and is working with the banking association to create a financial ombudsman service. The objective of financial ombudsman would be three-fold: (1) resolve consumer disputes with financial institutions (2) improve financial literacy of consumers and (3) promote consumer confidence in the national banking system.

Emphasizing the need for Belarusian consumers to take an active role in managing their personal finances, Mr. Dubkov complained that "ignorance and recklessness" flourish in Belarusian society. He emphasized that households should take responsibility for planning their budget. “Cultivating social dependence is a road to nowhere," exhorted Mr. Dubkov.

Safe and Fair Finance Blog supports the work of the Belarusian authorities to strengthen consumer protection and financial literacy. Finding an effective system of redress of consumer disputes with financial institutions is “where the rubber hits the road” and should be tackled in every country, regardless of the level of financial market development. Requiring that banks make consumer information clear and easy to understand is also important. In addition, the authorities may wish to test (through consumer surveys or focus groups) how easily consumers understand the information in the new disclosure statements issued by banks.

Pin It Now!

EUROPEAN UNION: Better Consumer Credit Disclosure is Needed

While consumer finance practices are improving in Europe, they still have a long way to go. EUobserver.com notes that in a September 2011 survey of the 27 European Union countries plus Iceland and Norway, two-thirds of 242 banks (and another 320 intermediaries) failed to meet the EU requirements on consumer credit disclosure. Every country except four (Bulgaria, Greece, Iceland and Ireland) reported problems in banks failing to meet the minimum standards of EU consumer law.

In the UK, the Office of Fair Trading found that in a sample of 47 websites of credit providers targeting sub-prime or “non-status” consumers, 38 failed to comply with EU law. The failure rate was still higher in Spain where the National Institute for Consumer Protection discovered that 29 out of 29 credit websites failed the test.

The most common violations were failure to disclose the annual percentage rate (APR) on credit and indicate if interest rates were fixed or variable. Also inaccurate was information on requirements to obtain personal insurance as collateral for the consumer credit.

To date, the names of the offending banks have not been publicly released.

However the European Commission’s own website provides additional detail. It notes that of the 562 websites that were checked, the most common problems regarding consumer credit were three-fold:

1)       Missing information in advertising: Advertising on 46% of websites did not include some of the standard information required by the Consumer Credit Directive, specifically, the annual percentage rate of charge (APR), information on whether charges on obligatory ancillary services (such as insurance) were included in the total cost, and the length of time for which the credit agreement was valid.

2)      Missing key information on offers: 43% of websites failed to give full information about the total cost, in particular the type of interest rate (fixed, variable or a combination of both) and detail about extra costs related to the credit, such as an arrangement fee.

3)      Misleading presentation of the costs: 20% of websites gave misleading information about the way the price is calculated or the total cost for consumer credits where insurance is obligatory.

In the coming months, the national enforcement authorities have been asked to contact the financial institutions and request clarifications or corrections to the websites, under penalty of legal action leading to possible fines or closure of the institutions’ websites. The national authorities have also been requested to report back to the European Commission by the autumn of 2012 on the actions taken. The Commission will thereafter report publicly on the results.

Pin It Now!

THAILAND: New Financial Consumer Protection Center

Financial products have become increasingly complex and difficult for consumers to understand. While most work has been done in developed countries, emerging markets are also taking steps to help financial consumers. On January 13, 2012, the Bank of Thailand announced the creation of a special center – the Financial Consumer Protection Center (FCC) – to help financial consumers in Thailand.

The FCC will operate as a “one stop” shop for consumer complaints about the services of financial institutions under the Bank of Thailand’s supervision as well as the securities operations of the Bank of Thailand itself. In addition, the FCC has a financial education role with three objectives: (1) equip consumers with financial knowledge in order to raise awareness and understanding of their rights and responsibilities, (2) avoid becoming victims of financial fraud, and (3) enable consumers to make informed decisions about financial products and services.

The Bank notes that about 2,600 consumer complaints are filed annually, with up to 91 percent of the cases solved according to the Bank’s statistics. The most common complaints concern scams related to call centers and debt restructuring.

The FCC has set itself ambitious customer service targets, with complaints to be addressed within 15 days (versus 30 days in the past) although complex complaints may take more time, according to the FCC. Consumers will have access to three ways of contacting the FCC: (1) a telephone hotline, (2) email submissions and (3) postal services.

For financial education, the FCC plans to join forces with the Ministry of Finance, the Securities and Exchange Commission, the Stock Exchange of Thailand, the Thai Bankers' Association as well as the media.

Safe and Fair Finance Blog strongly welcomes this action by the Bank of Thailand and recommends that the complaint data be carefully analyzed – and the analysis published. Such data can provide valuable insight into the sources of the troubles for financial consumers. The issues might include not only fraudulent practices but also cases where consumers could not obtain enough information to make informed decisions — or where the information was too complicated to be easily understood. Where consumer complaint data is published in the media, the data brings the additional benefit of helping industry associations and consumer organizations focus their efforts related to consumer protection.

Pin It Now!