84655 Public Disclosure Authorized PERU Diagnostic Review of Consumer Protection and Public Disclosure Authorized Financial Literacy Educ Public Disclosure Authorized Consum Banking Insurance Protection micro Literacy Business Protec Public Disclosure Authorized November 2013 Protection pensions Banking Insurance microfinanance Financial Education Protection Consumer Schweizerische Eidgenossenschaft Confédération suisse Confederazione Svizzera Confederaziun svizra Swiss Confederation Federal Department of Economic Affairs, Education and Research EAER State Secretariat for Economic Affairs SECO PERU Diagnostic Review of Consumer Protection and Financial Literacy November 2013 Insurance Banking microfinance Business Literacy pensions Banca Financial microfinance Protecti Consumer Education © 2013 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org Financial and Private Sector Development Vice-Presidency, Latin America and the Caribbean Region, Financial Inclusion and Consumer Protection Service Line Some rights reserved This work is a product of the staff of The World Bank with external contributions. 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Authors: Steen Byskov, Johanna Jaeger, Guillermo Caal, Karen Den-Toll, Nadeem Karmali, Jose Rutman, David Thomas and Juan Carlos Izaguirre. Cover and layout design: Shinny Montes First edition: November, 2013 Follow us on: /bancomundial @worldbanklac Acknowledgments The Diagnostic Study was produced by a team led by Steen Byskov (World Bank Senior Financial Economist) and Johanna Jaeger (World Bank Financial Sector Specialist) and comprised Jose Rutman (Senior Banking Sector Expert), David Thomas (Senior Dispute Resolution Expert), Karen Den-Toll (Senior Pensions and Insurance Expert), Guillermo Caal (Senior Microfinance Expert) and Mr. Nadeem Karmali (World Bank Economist). Juan Carlos Izaguirre (Financial Consumer Protection Specialist) provided technical advice and comments to the mission. Peer review comments were received from Nagavalli Annamalai (Lead Counsel, LEGPS) and Ilka Funke (Financial Inclusion Expert). Douglas Pearce (acting Manager, FFIMS Service Line) and Subrahmanya Pulle Srinivas (Sector Manager, LCSPF) provided overall guidance. The team expresses its appreciation to the Peruvian authorities for their cooperation during the preparation of the Review. The project team would like to thank all those who so generously contributed to the final report. The Review was financed by the SECO-funded “Consumer Protection and Financial Literacy” Program. Contents Abbreviations and Acronyms vi Preface vii Executive Summary viii Context for CPFL in Peru 1 I a. Access to financial services in Peru b. Overview of CPFL framework in Peru c. Financial literacy 3 7 8 Framework for Financial Consumer Protection in Peru 10 II a. Institutional arrangements for financial consumer protection b. Recommendations 11 13 c. Legal and regulatory framework 15 d. Recommendations 17 Consumer Disclosure 18 III a. Findings 19 b. Recommendations 19 Business Practices 21 IV a. Findings 22 b. Recommendations 23 Dispute Resolution Mechanisms 24 V a. Findings b. Recommendations 25 26 Financial Education 29 VI a. Findings 30 b. Recommendations 31 Tables Table 1: List of Recommendations x Table 2: Basic Development Indicators 2 Table 3: Adults with a Financial Product at a Formal Financial Institution 3 Table 4: GPU inquiries and complaints statistics 25 Table 5: Division of responsibilities related to dispute resolution 27 Figures Figure 1: Financial institution access points: branches, ATMs, and agents 4 Figure 2: Presence of financial institutions by district 5 Figure 3: Credit and deposit depth by province 6 Figure 4: Institutional arrangements for financial consumer protection 12 Boxes Box 1: Institutional arrangements for market conduct supervision in selected countries 15 Box 2: Impact evaluations of financial education programs 32 vi | PERU Abbreviations and Acronyms AAFP Association of AFPs AFP Administradoras Privadas de Fondos de Pensiones (private pension funds) APESEG Asociación Peruana de Empresas de Seguros (Association of Insurance Companies) ASBANC Asociación de Bancos del Perú (Banks Association of Peru) ASOMIF Asociación de Instituciones de Microfinanzas del Perú (Association of Microfinance Institutions of Peru) ATM Automatic Teller Machine BCRP Banco Central de Reserva de Peru (Central Bank of Peru) CPFL Consumer Protection and Financial Literacy CCT Condicional Cash Transfer DA Defensor del Asegurado (Defender of the Insured) DCF Defensor del Cliente Financiero (Defender of the Financial Client) EU European Union FENACRE Federacion Nacional de Cooperativas de Ahorro y Credito del Peru (National Federation of Savings and Loans Cooperatives) FI Financial Institution (banks and microfinance institutions) FSAP Financial Sector Assessment Program FSD Fondo de Seguros de Depósitos (Deposit Insurance Fund) GDP Gross Domestic Product General Law General Law of the Financial and Insurance Systems and Organic Law of the Superintendence of Banking and Insurance GPU Gerencia de Productos y Servicios al Usuario (Products and User Services Office) IMF International Monetary Fund INDECOPI Instituto Nacional de Defensa de la Competencia y de la Protección de la Propiedad Intelectual (National Institute for Defense of Competition and Protection of Intellectual Property) INEI Instituto Nacional de Estadística e Informática (National Institute of Statistics and Informatics) IOPS International Organization of Pensions Supervisors MEF Ministerio de Economía y Finanzas (Ministry of Economy and Finance) MIDIS Ministerio de Desarrollo e Inclusión Social (Ministry of Development and Social Inclusion) MTPL Motor Third Party Liability NBFI Non-bank financial institutions NGO Non-governmental organization POS Point of Sale SBS Superintendencia de Banca, Seguros y AFP (Superintendence of Banking, Insurance and Private Pension Funds) TCEA Annual effective cost rate TREA Annual effective return rate WB World Bank YoY Year-on-year Diagnostic Review of Consumer Protection and Financial Literacy | vii Preface The Diagnostic Review for Consumer Protection and CPFL Reviews against Good Practices have been Financial Literacy (CPFL) provides a detailed assessment conducted by the World Bank in a plethora of countries of the institutional, legal and regulatory framework for including Armenia, Azerbaijan, Bosnia and Herzegovina, consumer protection in four segments of the financial Bulgaria, Croatia, the Czech Republic, Kazakhstan, Kosovo, sector: banking, microfinance, pensions and insurance. Latvia, Lithuania, Malawi, Mozambique, Nicaragua, The review was undertaken in response to a request for Pakistan, Romania, the Russian Federation, South Africa, WB technical assistance in the field of financial consumer Slovakia, Tajikistan, Tanzania and Ukraine. protection made by the Superintendencia de Banca, Seguros y AFP (SBS) in October 2012. The main objective of the Review is to assess the legal/ regulatory and institutional frameworks for financial A World Bank (WB) mission visited Peru from March 18- consumer protection in a country, with reference to 27, 2013 to prepare the review. An Aide Memoire was international best practices. The Review addresses the prepared in the field highlighting preliminary findings and following issues: 1. Institutional Arrangements, 2. Legal recommendations and shared with official counterparts and Regulatory Framework, 3. Disclosure, 4. Business for comments. The objectives of the CPFL Review were: (i) Practices, 5. Dispute Resolution Mechanisms, and 6. to assess the existing consumer protection and financial Financial Education. literacy framework by reviewing laws, regulations, and practices in Peru compared to international good The Review is based on compliance with a set of Good practices; and (ii) to provide recommendations on ways Practices for Financial Consumer Protection1 which was to improve the level of financial consumer protection and developed by the World Bank since 2006. They provide financial literacy in Peru. a set of good practices based on in-depth country level reviews of consumer protection and financial literacy The CPFL Review is part of the World Bank’s Program conducted by the World Bank as well as international on Consumer Protection and Financial Literacy. It benchmarks, such as the principles released by the seeks to identify key measures in strengthening Basel Committee, IOSCO and IAIS, as well as the OECD financial consumer protection, with the ultimate aim of recommendations for financial education and awareness increasing the availability and transparency of financial on pensions, insurance, and credit products. The Good information, helping build consumers’ trust in the Practices were partly informed by provisions of directives, financial sector and expanding their capacity to wisely laws, regulations and codes of business practices from use financial services. the EU, United States, Australia, Canada, France, Ireland, Malaysia, Mexico, New Zealand, Peru and South Africa. 1 http://responsiblefinance.worldbank.org/~/media/GIAWB/FL/Documents/Misc/Good-practices-for-financial-consumer-protection.pdf viii | PERU Executive Summary A sound consumer protection and financial literacy industry such as the current disclosure and transparency framework is essential to ensure responsible access to regime. financial services and that expanded access benefits consumers and the economy as a whole. Well-designed Current institutional arrangements regarding CPFL consumer protection and financial literacy can improve involve two main institutions with unclear delineation trust and understanding of financial services in turn of responsibilities. The Superintendence of Banking, leading to greater usage and help avoid harmful impacts Insurance and Private Pension Funds (SBS) is the main on consumers and financial institutions. financial supervisory authority in Peru, covering most financial service providers.2 INDECOPI3 on the other hand is Access to finance has improved dramatically in the the general consumer protection and competition agency past decade in terms of amounts of financial balances in Peru. Currently both institutions handle complaints and transactions, presence of points of service, and from consumers and both institutions supervise the number of financial system users. By implication, many financial industry (except regarding pensions) for market users are new to financial services, and the education conduct under separate legal mandates. level for the new customers is probably lower than what it was. The expansion of financial services to the lower A clearer division of responsibilities between both income population raises the bar for the protection of institutions could benefit both consumers and the consumers and the challenge of financial literacy. In industry. It is recommended that the SBS becomes the tandem with policy measures taken to promote greater single authority for supervision and enforcement of financial inclusion, adequate arrangements for ensuring financial consumer protection provisions, and INDECOPI the responsible use of financial services are needed. becomes the single authority for complaints handling and consumer redress. A single point of interaction could Peru has built a comprehensive regime for consumer benefit the consumers as well as the industry; although protection in financial services in the last decade, and the separation of consumer redress and market conduct the approach to consumer protection and financial supervision requires a high degree of collaboration literacy in Peru is generally well-balanced. Peru’s between the two institutions. regulatory and supervisory framework for disclosure and transparency has insights to offer as a model for other Concentrating market conduct activities within the countries. Detailed regulations on complaints handling specialized consumer protection department of and fair treatment of consumers have been established, the SBS can improve organizational efficiency. The and a wide range of financial awareness and education Gerencia de Productos y Servicios al Usuario (GPU), initiatives complement legal and regulatory consumer a department within the SBS, is in charge of market protection measures. conduct oversight for banks, microfinance institutions and insurance companies, the promotion of consumer Notwithstanding an overall well-balanced approach, empowerment as well as the handling of enquiries and this review aims to identify opportunities to improve complaints. By contrast, both prudential and market efficiency for example by streamlining procedures conduct supervision for private pension funds is handled and reducing overlaps. Having in place an extensive by the responsible Superintendencia Adjunta. Given framework for consumer protection and financial literacy Peru’s integrated supervisory model it would be beneficial calls for ongoing evaluation of the effectiveness and if all consumer protection activities within the SBS are efficiency of the measures taken and imposed on the consolidated under GPU in order to combine consumer 2 With the exception of savings and credit cooperatives that are under the supervision of the Peruvian national federation of savings an credit cooperatives (FENACREP), as well as securities markets firms, which fall under the supervision of the Superintendence of Securities Markets. 3 Instituto Nacional de Defensa de la Competencia y de la Protección de la Propiedad Intelectual (National Institute for Defense of Competition and Protection of Intellectual Property). Diagnostic Review of Consumer Protection and Financial Literacy | ix protection along functional lines and mitigate potential The risk of over-indebtedness in select population conflicts of interest between the prudential and market groups needs careful monitoring. The success of the conduct supervision. Relatedly, legal protection of GPU consumer lending and micro-finance industries raises staff needs to be further enhanced as GPU currently lacks the risk of over-indebtedness among the low income the legal protection provided to Deputy Superintendents. population, and industry participants voiced concerns about problems in select groups. Whereas the total Meaningful opportunities to improve the current amounts involved may be small relative to the size and consumer protection regime were identified on strength of the financial system and thus not represent cooperatives, deposit insurance, and the contract a systemic risk, the number of people affected could be clause review process. Bringing savings and credit large, and over-indebtedness in an economic downturn cooperatives under the financial consumer protection could become a social risk. The SBS has already taken regime established by the SBS would ensure consistency measures designed to curb over-indebtedness, and it with other financial services providers. Deposits in is a risk that needs continued monitoring and action as institutions less than two years old are not covered by needed. deposit insurance even though the institution is a member of the Deposit Insurance Fund (FSD). Expanding coverage In addition to the aforementioned consolidation of to such deposits would not only protect consumers complaints handling by INDECOPI, it is recommended and support stability, but would also lower barriers to to ensure that the complaints process starts with the entry for new institutions. Current contract clauses are relevant financial institution. Only in the case of the pre-approved for each institution by the SBS, and the pension system it is legally required that the relevant development of model contract clauses in consultation financial institution be the first point of contact for between the industry and the SBS could help reduce this consumer complaints. It is recommended to extend regulatory burden both for the SBS and for the industry. this principle to all financial sectors before consumers approach an external dispute resolution mechanism. Until The transparency regime might be enhanced based a legal change is in place, administrative measures can be on insights from consumer testing and could be taken to achieve a similar outcome. streamlined through standardized formats of mandatory key facts statements. It is recommended With a plethora of public and private financial to perform a cost-benefit analysis of the existing education initiatives, a coordination mechanism transparency regime in order to further streamline is needed to optimize and streamline ongoing regulatory and supervisory processes and apply industry- and planned efforts. Diverse challenges across wide standardization where possible. Consumer testing demographic and geographical groups require a can assist in this process by measuring the degree diversity of approaches. For example, to be effective, of knowledge and understanding of the information financial education programs should adopt appropriate materials available to consumers. Although key facts methods to reach low income and rural populations, statements such as the Summary Sheet and Informative especially in remote areas of the country where different Note are mandatory and require the provision of certain languages are common. Coordination among programs key information, consumers would benefit further can enhance their combined impact. A financial from standardized formats that could be developed in education committee under the joint leadership of collaboration between the industry and the SBS. Ministerio de Economía y Finanzas (MEF-Ministry of Economy and Finance), the Superintendencia de Banca, In the area of business practices, uniformly im- Seguros y AFP (SBS), the Ministerio de Desarrollo e plemented codes of conduct could benefit consumers. Inclusión Social (MIDIS-Ministry of Development and Industry associations have made some efforts in this Social Inclusion) and the Banco Central de Reserva del direction, and the SBS is currently developing a code of Peru (BCRP) that could be organized under the financial conduct for the whole financial sector. Comprehensive consumer protection and financial literacy subgroup of codes of conduct for each of the financial sectors would the new inter-governmental Financial Inclusion Council establish a uniform standard across financial institutions could provide useful leadership and coordination for the and help establish trust among financial services users. development of a national financial education strategy. x | PERU Table 1 List of Recommendations Recommendations Responsible Term4 Priority Institutional Arrangements Adjust the current division of responsibilities between the SBS SBS, INDECOPI, MT/LT High and INDECOPI in financial consumer protection: the SBS becomes Government the single authority for supervision and enforcement of consumer protection provisions; and INDECOPI handles consumer redress. As a first step (1) amending the existing legislation (Consumer Protection Code, General Law as well as existing regulations) and as a second step by (2) revising the memorandum of understanding between the two bodies to address practical implementation issues and facilitate collaboration / coordination. Strengthen legal protection for GPU staff SBS ST Medium Pensions Consolidate all market conduct functions within the SBS under SBS MT Medium GPU Legal and Regulatory Framework Develop mandatory model contracts and clauses to increasingly SBS, industry ST High substitute the SBS’s pre-approval obligations of contract clauses associations and enhance consumer protection. Banking/ Microfinance institutions5 Consider bringing all savings and credit cooperatives under the Government, MT Medium consumer protection regime of the SBS SBS Amend the General Law to provide that members of the Deposit Government, MT Medium Insurance Fund (FSD) are covered under the deposit guarantee SBS from the moment of their incorporation Consider safeguards for consumers, especially vulnerable SBS ST Medium segments of the population, when developing implementing regulations under the new electronic money law Insurance During the ongoing development of implementation regulations SBS MT Medium under the Insurance Contract Law, consider the establishment of an enhanced set of consumer protection standards for insurers 4 ST, short term, indicates action can be undertaken in 0-6 months. MT, medium term, indicates 6 months-1 year. LT, long term, indicates 1+ years. 5 Microfinance institutions in this note refers to financing companies, municipal savings and loan institutions, rural savings and loans institutions, small & micro enterprise development companies (Edpymes), savings and credit cooperatives and a specialized bank (Mibanco). Diagnostic Review of Consumer Protection and Financial Literacy | xi Recommendations Responsible Term4 Priority Disclosure Consider consumer testing to measure the degree of consumers’ SBS, industry ST High knowledge and understanding of the various information associations, materials available consumer associations Conduct a cost-benefit of the transparency regime comparing the SBS, industry ST High costs that financial institutions and supervisors face in order to associations, comply and supervise these requirements consumer associations Consider issuing public warnings and publishing data on SBS MT Medium sanctions applied to financial institutions for breaching financial consumer protection provisions Banking/ Micro finance institutions Develop and require all institutions to use a standard format for SBS, industry ST High the Key Facts Statements and Informative Note associations Develop a mandatory disclosure wording with respect to financial SBS, FSD MT Medium institutions which are members of the FSD (including stickers with a standard logo) and for savings products that are not covered by the deposit insurance Pensions Consider introducing additional standardized disclosure on SBS, AFP MT Medium historical and projected investment return industry associations Consider introducing limits on pressure selling at the time of the SBS MT Medium pension decision Business Practices Develop industry Codes of Conduct focusing on disclosure, SBS, industry MT Medium complaints, product appropriateness and other areas of business associations practices Banking/Microfinance institutions Monitor and manage the risk of over-indebtedness among the SBS ST Medium low income population Pensions Implement direct financial disincentives for withholding Government MT Medium employer contributions Insurance Strengthen monitoring of broker conduct and practices SBS ST Medium xii | PERU Recommendations Responsible Term4 Priority Complaints Handling Mechanisms Encourage consumers to submit a complaint to the financial SBS, INDECOPI, ST High institution before approaching an external dispute resolution financial mechanism institutions Provide clear guidance to consumers about the existing SBS, INDECOPI, ST High complaints handling mechanisms by requiring financial industry institutions to disclose in all pre-contractual and contractual associations, disclosure documents detailed information on the internal as well consumer as relevant external dispute resolution mechanisms associations, financial institutions If the industry-sponsored ombudsmen are to retain a role, as an Industry-based MT Medium alternative to INDECOPI, it would be advisable to reconstitute ombudsmen, them in accordance with best practice. industry associations Financial Education Establish a Financial Education Committee potentially organized MEF, SBS, BCRP MT High under the financial consumer protection and financial literacy and MIDIS subgroup of the new inter-governmental Financial Inclusion and other Council which is in charge of the development of a national stakeholders financial education program Enhance collaboration with relevant education authorities by SBS, Ministry of ST Medium more effectively implementing the existing MoU Education Consider developing tailored financial education programs MEF, SBS and MT High focusing on reaching low income and also rural populations, MIDIS and other including those with low levels of literacy stakeholders Use financial literacy survey results as a baseline to measure the MEF, SBS and MT Medium impact of financial education initiatives MIDIS and other stakeholders I Context for CPFL in Peru a. Access to financial services in Peru b. Overview of CPFL framework in Peru c. Financial literacy 2 | PERU The financial sector in Peru is dominated by banks. By December 2012, there were 13 cajas municipales, 10 Overall, banking sector assets account for almost 80 cajas rurales and 10 Edpymes. Cajas municipales are MFIs percent of financial system assets and more than 40 that receive deposits from the public and grant credits percent of Peru’s GDP. As of December 2012, there were especially to small and microenterprises. Cajas rurales 16 private banks and 2 state-owned banks. Among the are MFIs that also receive deposits from the public, but private banks, 11 are controlled by foreign shareholders. focus on grant credits to rural small and microenterprises. The number of private banks’ branches has increased Edpymes are not authorized to receive deposits from the from 1,583 by December 2011 to 1,734 by December public, and they are specialized in granting credits to 2012 (which represents 45% of total branches of financial small and microenterprises. The three largest cajas rurales institutions), whereas the number of ATMs and banking accounting for 79 percent of that segment’s credits (and agents also increased, from 4,969 and 10,800 in December 85 percent of depositors) and the three largest Edpymes 2011 to 6,464 and 14,806 by December 2012 (representing accounting for 69 percent of that segment’s credits (as of 85% and 58% of total ATMs and agents of financial December 2012). The segment of cajas municipales is less institutions). The banking sector is concentrated, with concentrated, with the four largest entities representing the four largest banks accounting for about 80 percent of 58 percent of credits and 63 percent of depositors. the sector’s credits and about 75 percent of the sector’s deposits. The insurance industry is of modest size with total assets amounting to 4.1 percent of GDP. Peru’s penetration rate of 1.5 percent (measured as gross written Table 2 Basic Development Indicators premiums as a percentage of GDP) is modest compared to both the global average of 6.6 percent and its neighbors such as Chile (4.07 percent), Argentina (2.5 percent) and GDP (current $US) 197 billion Colombia (2.24 percent). From a total of 14 insurers, 4 are composite (life and non-life), 5 are life insurers and 5 GDP per capita (current $US) 6,568 are general insurers. Two insurers write 60 percent of net Population 29,987,800 premiums, and in the life insurance sector the top five companies held 94 percent of the market in 2012. Motor, - Urban 78% property and credit insurance represent the highest non- - Rural 22% life growth products, whereas life insurance products are mostly for risk protection rather than investment. Adult literacy rate 90% Source: World Development Indicators (2012), UNICEF (2011), UN Data (2010). The system of private pension funds (AFPs) provides a significant source of investment funds with 18 percent of GDP worth of assets under management. There are a total of 4 AFPs operating in Peru.6 All AFPs – except for one The total microfinance sector assets represent about - are foreign owned. Affiliates are able to select from three 3.5 percent of GDP and include cajas municipales investment options: preservation of capital, balanced/mixed (2.7 percent GDP), cajas rurales (0.5 percent GDP), and growth/capital appreciation. By December 2011 the and Edpymes (0.2 percent GDP). In addition, finance number of private pension affiliates represented 49.6 percent companies and savings and credit cooperatives of the total workforce. However, only around 40 percent of account for 1.9 and 1.0 percent of GDP, respectively. affiliates regularly make contributions to their account. 6 In early 2013 the number of AFPs dropped to 3 as shares of one AFP were acquired by two others. Moreover an additional AFP was just authorized to enter the market. Diagnostic Review of Consumer Protection and Financial Literacy | 3 a. Access to financial services in Peru reported having an account at a financial institution, 8.6 percent saved at a financial institution in the past Peru’s financial sector has developed at a strong year, and 12.7 percent reported having taken a loan pace over the past decade backed by financial and from a financial institution in the past year. In addition, macro-economic stability, and Peruvians’ are now women (17.6 percent) are 5 percent less likely than men frequent users of credit, but still lag the regional (23.4 percent) to have an account at a formal financial average in account ownership and savings (Table 3). institution compared to 34.7 percent and 44 percent Since 2000, economic growth rates have averaged 5.8%, respectively in the region. National data suggests that and inflation has been brought below 3 percent. On the 28 percent of adults are debtors in the financial system back of a more favorable domestic environment and in (as of June 2012) up by 9 percentage points higher since spite of the global financial crisis, real credit has been June 2007.7 In comparison to the Latin America region, growing at 26% per year since 2007. Based on the Global Peru has been relatively successful in developing credit Findex survey, among the adult Peruvians 20.5 percent products. Table 3 Adults with a Financial Product at a Formal Financial Institution (in percentage, adults over age 15) Country Account a/ Saving b/ Loan c/ GNI per capita/US$ Brazil 55.9 10.3 6.33 9,390 Venezuela 44.1 13.6 1.7 11,590 Chile 42.2 12.4 7.8 10,120 Ecuador 36.7 14.5 10.6 3,850 Argentina 33.1 3.8 6.6 8,620 Colombia 30.4 9.2 11.9 5,510 Bolivia 28.0 17.1 16.6 1,810 Paraguay 21.7 9.7 12.9 2,720 Peru 20.5 8.6 12.7 4,700 Latin America and the Caribbean 39.2 9.5 7.8 a/ Defined as an account at a bank, credit union, cooperative, post office, or microfinance institution. b/ Percentage of adults over 15 that saved at a formal financial institution in the past year. b/ Percentage of adults over 15 that look out a loan from a formal financial institution in the past year. Source: Global Findex, 2012. 7 The increase suggested by the national numbers can be explained by many factors, most notably: i) the Findex survey was carried out at an earlier stage with a limited sampling size, ii) real credit growth at 26% per year since 2007, iii) differences in sampling and methodology. 4 | PERU Financial sector policies have progressively pursued reach into more remote areas, and an e-money law innovations to facilitate greater inclusion, and was passed at early 2013 to allow for electronic money. the financial sector has significantly increased This will facilitate the utilization of mobile phones for its presence (Figure 1). The introduction of cajeros financial services.8 corresponsales (bank agents) has dramatically increased the number of points of service and is reaching 7 percent One third of districts representing 83% of the of the population in districts without other points of population have financial sector presence with the service. Enabled by regulatory innovation, in December recent expansion in points of service being associated 2006 banks began opening agents primarily in order to with some geographical dispersion (Figure 2). At shift low-value transactions away from branches with the end of 2012, 59 percent of banks and 48 percent high operating costs, and secondarily, as a cheaper of agents were in Lima, and in total 81 percent and way to pilot the expansion of their networks to newer 67 percent, respectively, were in the 25 departmental areas. By the end of 2012, there were over 16,000 capitals of Peru. 65 percent of Peru’s 1,823 districts had cajeros corresponsales, and since their inception they no financial institution at the end of 2012, but being the have continued to grow at almost 50 percent per year. less populated districts they represent only 17 percent of Moreover, mobile branches (trucks and boats) enable the populations. Figure 1 Financial institution access points: branches, ATMs, and agents Branches ATMs Agents 30 Number ('000) 20 10 0 2001 2004 2007 2010 2013 Source: SBS. 8 A specific Committee, comprised by the relevant areas of the SBS, BCRP, INDECOPI, MEF, National Register of People, Tax Agency and the TELCO regulator) is in charge of proposing the regulation of the electronic money law. Diagnostic Review of Consumer Protection and Financial Literacy | 5 Figure 2 Presence of financial institutions by district Population Weighted 58 19 7 17 Not 8 17 9 65 Weighted 0 20 40 60 80 100 With banks With NBFI With agents only Without presence Source: SBS. Note: A district with a bank branch is labeled ‘bank’; a district with no bank, but with an NBFI branch is labeled ‘NBF’; and a district with neither a bank nor an NBFI branch, but with an agent is labeled ‘agent’. Credits and deposits have expanded not just in volume, but also in the number of debtors and depositors, and they have become more geographically dispersed (Figure 3). The number of debtors has grown from 3.3 million to 5.2 million and depositors from 9.2 to 18 million9 since 2007 implying a very large number of new users of financial services. 9 The number of depositors is the sum of natural persons with a deposit submitted by each bank. Therefore, the total number of depositors in the financial system could be overestimated as a person may have been reported by more than one financial institution as depositor. 6 | PERU Figure 3 Credit and deposit depth by province10 Source: SBS. The expansion of financial services to the lower financial services, in turn leading to greater usage. income population raises the bar for the protection of Effective consumer protection ensures that households consumers and the challenge of financial literacy. As have access to clear and transparent information about the number of financial system users grows, it progressively costs, risks and rewards of financial products. Financial includes more vulnerable population segments with literacy equips consumers with the tools needed to make weaker abilities to understand financial products. In complex financial decisions. As a result, usage of financial tandem with policy measures taken to promote greater services is likely to increase, consumers are better able to financial inclusion, adequate arrangements for ensuring benefit from financial services, and harmful impacts on the responsible use of financial services are also needed. consumers and financial institutions can be avoided (for example from consumer over-indebtedness or from mis- Well-designed consumer protection and financial selling of financial services). literacy can improve trust and understanding of 10 These maps outline the geographic level of deposits and credit in Peru between 2001 and 2012. Darker areas represent provinces with higher deposits or credit. The scale is in nuevos soles, and the number corresponding to each color band indicates the upper limit of deposits or credit within a province. Diagnostic Review of Consumer Protection and Financial Literacy | 7 b. Overview of CPFL framework in Peru recognized in the World Bank Good Practices for Financial Consumer Protection. Over the last decade, Peru built a comprehensive regime for financial consumer protection. Consumer The framework for disclosure and transparency in protection and financial literacy were increasingly particular has insights to offer for other countries. recognized as important elements of the SBS’s functions The current framework includes the requirement for in the 2000s. In 2006 the SBS created the Products and financial institutions to prepare key facts statements User Services Office (GPU - Gerencia de Productos y summarizing in plain language key terms and conditions Servicios al Usuario), charged with consumer protection of any credit or deposit product, which must be disclosed (regulation11, market conduct supervision and disclosure), to the consumer and annexed to the contract. Financial user orientation, and financial education and inclusion institutions are required to use the regulatory definition functions. In addition, the SBS resolves certain individual of annual effective cost and return rate in all their complaints regarding private pension products12. contracts and marketing materials and to clearly disclose The consumer protection and competition agency such indicators to their clients. In addition, since 2002 INDECOPI13, which handles disputes between consumers the SBS has been publishing detailed price comparison and all types of businesses as well as enforces general tools with information on interest rates, annual effective consumer protection provisions, has improved internal cost and return rates, costs associated with credit and arrangements for financial services issues. Specifically, savings products, prices of motor third party liability INDECOPI created a specialized executive dispute (MTPL) insurance policies, and coverage of schoolchildren resolution unit for financial services in December 2010 personal accident insurance policies in the internet and and a specialized consumer protection commission in newspapers. Since 2012, the cost of credits and returns to deal with financial services including banking, of saving products are also published by region. This has microfinance, insurance, pensions and securities. Industry helped increase competition and reduce prices, and it associations have started playing a role in ensuring that is among the most comprehensive efforts to improve financial institutions comply with a set of standards of consumer disclosure among developing countries (see service and quality when dealing with their consumers. In section on disclosure for further information). banking and insurance there are two industry-established ombudsman schemes through which consumers can seek Peru is among the few countries with detailed redress. regulations and published information on complaints handling by financial institutions. Regulated procedures Peru’s financial consumer protection regime is are established for the reception, management, sophisticated in comparison with other developing processing and resolution of complaints by all supervised and emerging markets countries. The regulatory and financial institutions; as well as requirements for the supervisory framework for financial consumer protection submission of indicators, reports and statistics to the regulation in Peru covers the four key consumer protection SBS. The SBS publishes comparative information on pillars of transparency, business practices, complaints complaint statistics submitted by all supervised entities, handling and financial education, and is applicable to and supervised entities publish statistics on the number all types of supervised entities, including microfinance of complaints handled, including the type of operation, institutions and insurance companies. Only savings and product or service, the purpose, whether the complaints credit cooperatives fall outside the scope of financial were resolved in favor of the client or not, and the average sector consumer protection. Effective approaches time taken to resolve complaints. Moreover, SBS has plans implemented by the Peruvian authorities (e.g. key facts to extend complaints statistics reporting requirements of statements as well as price comparison website) are financial institutions to regional breakdowns. 11 GPU coordinates closely with the Superintendencia Adjunta de Asesoria Juridica (SAAJ) in charge of the overall legal and regulatory framework by proposing new regulations/amendments in the area of consumer protection and market conduct. 12 As provided for in the Consumer Protection Code. While SBS resolves complaints regarding affiliate information, general public information, affiliation, contributions and payments other issues such as advertising and market competition are handled by INDECOPI. 13 Instituto Nacional de Defensa de la Competencia y de la Protección de la Propiedad Intelectual (National Institute for Defense of Competition and Protection of Intellectual Property) 8 | PERU The SBS has taken measures to ensure fair treatment well-resourced, and well-motivated. Suggestions for of financial consumers and prevent risks of over- enhancements were identified as described in the next indebtedness. The existing regulatory framework section. requires the SBS approval of selected contract clauses of banks, microfinance and insurance companies14, and c. Financial literacy the SBS publishes the information on approved and prohibited contract clauses on its website. In addition, the Many Peruvians have limited knowledge of basic new Insurance Contract Law requires minimum content financial concepts. A pilot financial literacy survey was requirements for policies of mandatory, mass market undertaken in 2011 based on the survey methodology and and personal insurance products. The SBS has also questionnaire developed by the OECD15. The survey was taken actions to prevent the risk of over-indebtedness applied to 2,254 people with the objective of obtaining of financial consumers, including a 2008 regulation baseline information for the design and prioritization of referenced in the Good Practices for Financial Consumer financial education initiatives. Due to its sampling design Protection. with 96.7 percent of surveyed Peruvians coming from urban areas, the results provide limited representativeness The SBS supervises compliance with the extensive for the whole country. Nevertheless, the survey results financial consumer protection framework through present interesting preliminary information about the regular on- and off-site inspections. In addition, financial knowledge and behavior of the population. The unannounced visits to branches across the nation take survey showed that 40 percent of the respondents know place to monitor the quality of information disclosed how to calculate annual interest rates. At the same time, to consumers and handling of complaints. Supervisory 31 percent of the respondents do not fully understand the activity also includes market monitoring (e.g. monitoring relation between risk and reward, whereas almost half of of financial sector news and advertising). The SBS also respondents do not know that they can reduce their risks uses mystery shoppers for supervision purposes. through portfolio diversification. As expected, those with higher levels of education and income provided a higher Peru offers a good example of how financial regulators number of correct answers. can complement the legal and regulatory framework for financial consumer protection with a range of Many Peruvians do not have a strong savings culture financial awareness and education initiatives. Among at a formal financial institution. Only 30 percent of other initiatives the SBS created a financial education respondents said that they had saved at a financial portal and a financial consumer portal to provide institution in the previous 12 months, whereas 35.4 consumer-oriented information on financial sector issues. percent had kept savings at their homes. Furthermore, In 2007 the SBS also developed a Financial Education 45 percent of respondents with a low monthly income Program for School Teachers (Programa de Asesoría a (approximately below US$250) save at their homes, Docentes) based on an agreement with the Ministry of whereas only 27 percent of those with a higher monthly Education. In addition the SBS prepared a variety of other income (approximately above US$1,200) save at their training modules, educational materials, radio spots and homes. Only 16 percent of respondents with primary newspaper ads. education use the financial system, whereas 40 percent of those with tertiary education use financial products Overall, attention to consumer protection and and services. This shows that most of the financial financial literacy is well balanced, yet suggestions transactions are still carried out outside of the financial for enhancements were identified. The institutional system. Nevertheless, the national savings rate has framework for financial consumer protection and the risen to around 25 percent compared to the 21 percent promotion of financial literacy in Peru are well-developed, regional average. 14 As foreseen in the Transparency Regulation 8181 and the Insurance Contract Law. 15 The same survey has also been conducted in Armenia, Czech Republic, Estonia, Germany, Ireland, Malaysia, the Netherlands Norway, Poland, South Africa, and United Kingdom. Diagnostic Review of Consumer Protection and Financial Literacy | 9 The financial product most used by the respondents is the savings account, but Peruvians are not used to comparing the best offer. The three main financial products were: savings account (48.4 percent), public health insurance or EsSalud (34.7 percent) and credit card (28.3 percent). About 34.4 percent of respondents has some type of pension plan (21.5 percent are affiliates to the private pension system and 12.9 percent are affiliates to the public pension system). The survey also showed that only four out of ten respondents do compare different offers before acquiring a financial product, due to lack of will or knowledge. More than half of the respondents had some difficulties paying the bills over the previous year despite conducting some type of money management. At least 70 percent of the respondents indicated that they carry out some type of activity to manage their money, including the analysis of their payment capacity, the revision of their financial condition, and the payment of bills on time. Also 80 percent revealed that they had a family budget. Despite these efforts, more than half of the respondents said that they had faced difficulties to pay the bills at some point over the previous year. The respondents indicated that the most common solution to deal with such problem was the reduction of expenses (44 percent), followed by additional paid work (19 percent), and asking for money or food from family or friends (16 percent). II Framework for Financial Consumer Protection in Peru a. Institutional arrangements for financial consumer protection b. Recommendations c. Legal and regulatory framework d. Recommendations Diagnostic Review of Consumer Protection and Financial Literacy | 11 a. Institutional arrangements for financial handling of complaints as well as potential conflicts with consumer protection the latter department’s prudential supervisory roles. The prudential supervisor, the SBS, is also responsible INDECOPI20 is responsible for cross-sector consumer for market conduct supervision – including for protection, as well as for competition and intellectual banks and microfinance institutions16, insurers and property. INDECOPI is an autonomous institution, private pension funds. It is an autonomous institution, established by law in 1992. It enjoys a high profile with established under the constitution, with power to consumers. Unlike the SBS, INDECOPI cannot make make binding rules for the financial institutions17 that binding rules for financial institutions – but INDECOPI it supervises and (where necessary) impose sanctions does have power to impose binding remedies and impose or intervene. In November 2006 the SBS created a sanctions for breaches of the Consumer Protection Code. department (GPU), charged with consumer protection It can also conduct supervisory activities against financial (regulation, market conduct supervision and disclosure), institutions under the consumer protection code. The user orientation, and financial education and inclusion proceeds of any sanctions are retained by INDECOPI as a functions (see Figure 4 for further information). contribution towards its budget, potentially giving rise to the perception that it might have a financial interest in the GPU seems to be well-resourced to fulfill its tasks, decisions it makes about sanctions. In earlier years there but in particular with expanded responsibilities were suggestions of inconsistencies among the approach and relevance lacks the necessary legal protection. of different INDECOPI regional offices and lack of expertise Reportedly, GPU is well-resourced with a staff of in some specialist financial-services issues (though 6518. It maintains close relationships with the SBS’s there are arrangements for INDECOPI to seek technical Superintendencias Adjuntas (Deputy Superintendencies) input from the SBS). But now INDECOPI appears to have dealing with supervision, risk, legal matters and developed improved internal arrangements for providing economics. However, GPU lacks the legal protection consistency as well as a specialist financial-services unit. provided to Deputy Superintendents by the General Law.19 Powers of the SBS and INDECOPI as regards to consumer protection of financial institutions are overlapping Consumer protection responsibilities for private and the division of responsibilities between agencies pensions within the SBS are divided across departments remains unclear (see Figure 4).The SBS oversees prudential which is inconsistent with the arrangements for regulations and many of the consumer protection aspects banking, microfinance and insurance. Although GPU of the financial sector under the sector specific regulatory is the responsible body for financial consumer protection framework. INDECOPI, on the other hand, oversees the within the SBS, the functions of consumer protection financial sector pursuant to the Consumer Protection Code, supervision, enforcement and complaints handling for which states that the legal consumer protection framework AFPs fall under the responsibility of the Superintendencia for those entities supervised by the SBS comprises the Adjunta de Administradoras Privadas de Fondos de provisions of the Consumer Protection Code and Law Pensiones y Seguros (Deputy Superintendency for 28587, which complements the Consumer Protection Code AFPs and Insurance). This bears the risks of inconsistent in financial services matters. Together with the regulations approaches across sectors e.g. when it comes to the issued to enforce it, Law 28587 precedes the general 16 Except for savings and credit cooperatives. Capital markets are supervised by the Superintendency of Securities Markets (Superintendencia de Mercado de Valores (SMV). 17 The term financial institutions used in this note refers to the main institutions supervised by the SBS including banks, insurance companies, private pension funds and microfinance institutions. 18 The GPU hired an additional 10 temporary employees for its Call Center in order to attend the increased demand for information on the recent pension funds reform. As a reference, the Deputy Superintendence for Banks and Microfinance Institutions has around 130 staff. 19 According to Article 366 of the General Law any criminal complaint against the Deputy Superintendents needs to be directly filed before the public prosecutor. In case the complaint is founded, the Attorney General shall submit directly to the Specialized Court of the Superior Court of Lima, which has to be involved in first instance. 20 Instituto Nacional de Defensa de la Competencia y de la Protección de la Propiedad Intelectual (National Institute for Defense of Competition and Protection of Intellectual Property) 12 | PERU legislation. Law 28587 foresees that violations can either own laws and regulations and INDECOPI focusing on the be sanctioned by INDECOPI or the SBS according to their Consumer Protection Code – especially as some the SBS field of responsibility. It remains unclear how these fields regulations replicate or even go beyond requirements in of responsibilities are divided.21 As a consequence financial the Code. Such dual supervision by INDECOPI and the SBS institutions can be subject to inspection and sanction by leads to risks of inconsistency and duplication as raised by two separate institutions, with the SBS focusing on its several stakeholders. Figure 4 Institutional arrangements for financial consumer protection SBS INDECOPI Regulating and supervising nancial sector (except capital market and savings Supervising and and credit cooperatives) enforcing consumer protection legislation, consumer complaints General Law of the Financial and Insurance Systems and Organic Law of the Superintendence of Banking and Insurance, nancial sector speci c regulation MoU Consumer Banks, insurance companies, micro nance Protection Code institutions, AFPs All sectors of economy Non-binding decisions, administrative sanctions, corrective measures Market conduct supervision, Market conduct supervision, complaints handling, nancial complaints handling education/inclusion, market conduct regulation* Main responsibilities Banks, insurance companies, Private pension funds micro nance institutions, Supporting regulation(s) informal sector Non-binding response letter, Binding decisions, Types of institutions administrative sanctions administrative sanctions Enforcement power Deputy Superintendency Inter-institutions GPU for AFPs and Insurance relationships * In coordination with the Superintendencia Adjunta de Asesoría Jurídica (Superintendency for Legal Affairs), GPU can propose/review market conduct reuglation. Source: World Bank staff analysis. 21 This relates to the general articles on transparency, and ways that information needs to be disclosed (format, font size) as well as unfair business practices and complaints handling procedures. Diagnostic Review of Consumer Protection and Financial Literacy | 13 The SBS and INDECOPI coordinate and collaborate, Consumer Protection Code, it should – instead of making but their interaction can be enhanced. A memorandum its own inspection – inform the SBS accordingly and let the of understanding between the SBS and INDECOPI governs SBS follow through with the inspection. It will therefore be cooperation between the two institutions in relation to necessary to amend the Consumer Protection Code and the exercise of their respective powers and functions. The Law 28587 accordingly to ensure that the SBS is the sole current version, dating from September 2012, contains authority to deal with financial sector consumer issues, comprehensive provisions about information-sharing even if it relates to broad contractual matters referred to and a monthly liaison meeting, but it appears that many in the Consumer Code. of its provisions are not fully and effectively implemented in practice. The National Consumer Protection Council International experiences show that inconsistencies headed by INDECOPI, and created under the Consumer and duplications can have counter-productive effects. Protection Code, is aiming to propose and harmonize As an example, in Brazil the National Consumer Protection national consumer protection policies as well as develop Secretary (Senacon), which is responsible for general the National Plan of Consumer Protection, which will then consumer protection, is supported at the local level by be approved by the Presidency of the Council of Ministers, consumer protection bureaus known as “procons”. The and promote the creation of a national integrated system latter provide services directly to citizens across all product of information and orientation toward consumers. The and service categories. On several key consumer protection Council comprises 16 members, including one member issues leading procons have taken positions against those from the SBS. However, the focus of the Council is very supported by financial regulators and arguably against broad in nature, covering overall consumer protection the better interests of consumers. For example in the case issues rather than specific financial services related of the payment card industry, procons defend the right of challenges. “one price” or “nao sobre preco” arguing that consumers should not be subject to higher costs for purchasing b. Recommendations goods with credit cards instead of cash. However, a study conducted by the Central Bank of Brazil in 201022 found The current division of responsibilities between the that such a no-surcharge rule leads to distortions in the SBS and INDECOPI in financial consumer protection market and is as a consequence detrimental to consumers should be adjusted. It is recommended that the SBS as it impedes competition between payment services becomes the single authority for supervision and providers and incentivizes consumers to use certain enforcement of consumer protection provisions with payment instruments which may not necessarily be the respect to the SBS-supervised financial institutions cheapest option. Furthermore, freely established prices and that INDECOPI handles consumer redress (see would reduce the adverse effects stemming from the further details under Dispute Resolution Mechanisms). acquirers’ market power and, on the other hand, would With respect to the financial institutions supervised increase bargaining power of customers. In the UK the by SBS, its powers of inspection and sanction should regulation of consumer credit was recently transferred clearly be extended to cover breaches of the Consumer from the Office of Fair Trading to the new Financial Protection Code, even if there is not a parallel breach of the Conduct Authority. One of the main objectives for the SBS laws and regulations. Where INDECOPI has relevant restructuring was to remove unnecessary regulatory information of consumer detriment concerning the duplication and burdens on financial institutions. 22 https://www.bcb.gov.br/Pom/Spb/Ing/Payment_Cards_Report.pdf 14 | PERU The refocusing of responsibilities between the SBS and It is therefore recommended that all consumer INDECOPI should be reflected as a first step in the form protection activities within the SBS be consolidated of revisions to legislation (Law 28587) and - secondly under GPU. Given GPU’s experience and focus on - any necessary amendments to the memorandum of consumer protection matters, and the desirability of understanding between the two bodies, to deal with segregating the functions of prudential and consumer practical implementation issues. This should include protection supervision, it seems appropriate that all a staged program for transfer of functions, coupled consumer protection responsibilities would transition to with mutual assistance in developing the capacity of GPU. the other institution and ongoing support through provision of technical advice. This may be facilitated by This would include consolidating the handling of mutual secondments of staff. It should include ensuring complaints related to AFPs as well as the oversight an appropriate flow of information from INDECOPI to of market conduct aspects of pensions regulation the SBS about any systemic issues (or new/emerging such as consumer disclosures, advertising and sales issues) disclosed by consumer redress claims handled by representation under GPU. While the supervision INDECOPI, to inform the SBS priorities in supervision and activities under the prudential category including such vice versa. matters as corporate governance, investments, segregation of client assets, risk management, outsourcing, and the International experience suggests that when financial selection of insurance would stay with the responsible regulators adopt consumer protection as part of their Superintendencia Adjunta, the consumer protection mandate business conduct supervision should be matters such as complaints (including collections, death separated from prudential supervision to mitigate benefits, funeral costs, and disability claims), advertising conflicts of interest (see Box 1 for further information). and marketing, and affiliate contract issues would be Although having financially sound institutions is an dealt with by GPU. This separation would not preclude important mechanism to protect consumers, the focus of GPU from referring matters to the Adjunta which are prudential supervision is on the strength of the institution, prudential in nature, or which require specialized advice. whereas the focus of market conduct/consumer protection It will be important to further enhance communication is on ensuring that the institution interacts on a fair and between GPU and the Superintendencia Adjunta. An appropriate basis with the consumer. The International adjunct to the existing communication channels could be Organization of Pensions Supervisors (IOPS)23 found that the adoption of a Supervision Committee, or equivalent, the majority of its members have separate units handling to ensure coordinated and timely responses to issues, and each of prudential and market conduct supervision of enable information sharing. pension funds. 23 IOPS Working Paper No.16: Structure of Pension Supervisory Authorities and their Approaches to Risk-Based Supervision: http://www.oecd.org/site/iops/ iopsworkingpapersoneffectivepensionsupervision.htm Diagnostic Review of Consumer Protection and Financial Literacy | 15 Box 1 | Institutional arrangements for market conduct supervision in selected countries In Malaysia the Bank Negara Malaysia (central bank) is responsible for both prudential and consumer protection oversight of financial institutions (except securities). The two mandates are overseen by separate departments but with close coordination. This is also the case in Portugal, where a specialized Banking Conduct Supervision Department of the Central Bank of Portugal is responsible not only for the regulation and supervision of the conduct of credit institutions in their dealings with customers, but also the promotion of financial literacy. Current trends go even further by establishing a specialized financial consumer protection/market conduct agency (so-called twin peak model) as seen in the creation of the Financial Consumer Agency of Canada (2001), the establishment of the Consumer Financial Protection Bureau in the United States (2011) and the Financial Conduct Authority of the United Kingdom. Conflicts of interest can thereby be avoided between oversight that focuses on ensuring the stability of the financial system as a whole, and supervision that seeks to ensure that individual consumers of financial services are protected in the market. Strengthening of the legal protection for GPU is with consumer protection issues in the financial sector recommended. The proposed broadening of SBS’s including provisions on transparency and disclosure of supervisory responsibility, as well as the proposed information, general contract clauses, interest rates and consolidation of consumer protection supervision and commissions, and abusive clauses. The General Law of the complaints handling for AFPs, would result in GPU Financial and Insurance Systems and the Organic Law of fulfilling a heightened consumer protection role. It the Superintendence of Banking and Insurance (General would also require the issuing of official decisions such Law) provides as general rule that all financial institutions as penalties and rulings that should receive the legal (as providers of credit, savings and other related financial protection brought about by Article 366 of the General products) and insurance companies should comply Law. Strengthening legal protection will enable GPU with its rules and regulations, and governs the activities to better fulfill its role and will signal to consumers and and tasks of the SBS (including the credit registry that it regulated entities the heightened status of consumer administers) and the Deposit Insurance Fund (FSD). The protection in financial services. Transparency Regulation 8181 deals with very detailed information that needs to be disclosed to consumers by c. Legal and regulatory framework banks or microfinance institutions. The Regulation also deals with contract issues (e.g. approval and dissemination A comprehensive legal and regulatory framework for of general clauses, criteria to determine abusive clauses, financial consumer protection exists. The Consumer examples of abusive clauses, requirement to provide Protection Code provides for the broad-based protection a list of transactions), and the requirement to set up a of consumers including addressing key matters user services system and designate an official in charge such as unfair contracts, discrimination, transparent (with specific responsibilities), while other regulations24 disclosure, suitability and misleading practices. The deal with the procedures and handling of complaints by Law Complementing the Consumer Protection Law consumers. The Law of the Private Pensions System Reform regarding Financial Services Matters (Law 28587) deals requires AFPs to implement orientation and disclosure 24 Circular SBS G-146-2009 and Reglamento del Libro de Reclamaciones (DS N° 011-2011- PCM). 16 | PERU schemes for (potential) pension members and pensioners. A total of about 160 savings and credit cooperatives The Insurance Contracts Law25 represents a very significant are not yet subject to the financial consumer advance in the area of consumer protection, with respect protection regime established by the SBS. Supervision to which implementing regulations are currently being of savings and credit cooperatives is currently delegated prepared and circulated for consultation. by the General Law to FENACREP (Federación Nacional de Cooperativas de Ahorro y Crédito del Perú – National The new electronic money law is expected to foster Federation of Savings and Loans Cooperatives)26, the development of electronic money-based financial which combines this supervisory responsibility with services. Whereas these services hold the potential to its principal role as a representative industry body. advance financial inclusion, they also entail challenges However, FENACREP lacks the powers to effectively for financial education and consumer protection. An supervise cooperatives, which poses a risk to consumers e-money law was recently passed to allow for electronic in relation to the financial standing of these organizations money and implementing regulations are currently being and to their conduct. A proposed law for cooperatives prepared by SBS. These challenges could be more daunting (Proyecto Ley N°03324/2008) has been reactivated, which regarding the previously unbanked, the poor, the illiterate, foresees transferring overall oversight responsibilities and those who do not have access to or are familiar with for cooperatives to the SBS. It is under revision by the mobile phone technology, text messaging, or other aspects Congress. related to the provision and use of such services. SBS is currently working on a draft regulation which will enable The General Law excludes deposit insurance coverage bank agents to operate with more than one financial during the first 24 months of a new institution. institution and allow them to open e-money accounts. Although new institutions must become members of the Deposit Insurance Fund (FSD)27 and pay the corresponding Regulatory challenges and gaps remain, such as premium from the commencement of their operations, cumbersome regulatory requirements for the their deposits will be covered by the FSD only after 2 approval process of contract clauses by the SBS. The years of being incorporated as a member.28 Since there Transparency Regulation 8181 puts the SBS in charge of is no requirement for depositors in newer institutions to approving all contract clauses of banks and microfinance be specifically informed that they are not protected by institutions as a measure of consumer protection. A recent deposit insurance this raises issues of lack of transparency, revision of the General Law as well as the newly passed and risks adverse effects on consumer confidence in the Insurance Contract Law require the SBS to follow the same banking system and in the FSD in the event of the failure process for insurance contract clauses of mandatory, mass of the institution within the two year qualifying period. market and personal insurance products. The approval process consumes a large amount of specialist resources Long term savings and single premium life insurance within the SBS. To reduce this regulatory burden, the SBS are not subject to specific regulation. Although such is currently working on improving its approval processes, products are not yet common in Peru, they are gathering and is coordinating with ASBANC (bank association) increasing interest. There are currently no specific rules to develop standard clauses for key products (credit regarding these products, such as the provision of cards, mortgage loans and savings accounts). It is also financial projections at the point of sale, regular provision conducting an evaluation on the feasibility of standard of cash value, and specific education requirements for clauses for insurance products. intermediaries selling such products. 25 The law came into effect in May 2013 (Resolution SBS 3199-2013). 26 The SBS can currently only directly supervise one. 27 Members of the FSD comprise all deposit-taking institutions supervised by the SBS: 16 banks, 8 “financieras”, 13 “cajas municipales” and 10 “cajas rurales”. Savings and credit cooperatives are not covered by the FSD. 28 This exclusion of deposit insurance coverage currently applies to two banks, five “financieras” and one caja rural that are members of the FSD. Diagnostic Review of Consumer Protection and Financial Literacy | 17 d. Recommendations During the ongoing development of implementation regulations under the Insurance Contract Law, it is The requirement for financial contract terms to be recommended that the SBS establish an enhanced set administratively approved by the SBS should be of consumer protection standards for insurers. The increasingly substituted by the already ongoing SBS has already addressed key gaps by approving the development of model contract clauses. It would Insurance Transparency Regulation 3199-2013 which will be helpful if the industry and the SBS in collaboration enter into force in December 2013. Further areas for focus developed model clauses for basic financial products could potentially be clarity on how and what commissions and services, which would make it easier for consumers should be disclosed, such as soft dollar29 or non-financial to compare similar products from different financial incentives, detail on what occurs in the event of non- institutions. At the same time this would reduce the disclosure and how this can be verified, clear disclosure of SBS’s current regulatory burden due to its pre-approval the total cost differences between installment and annual obligations of contract clauses. It would also be advisable premiums (and not just interest payable), the servicing of to assess the effectiveness of the current pre-approval policies and claims in particular, protection of confidential process. consumer information and the handling of records and complaints by insurers. As noted, rules concerning long Savings and credit cooperatives should be brought term or single premium life insurance should also be under the financial consumer protection regime included. It would be beneficial to conduct are view established by the SBS. Clients of cooperatives should of the impact of the laws within a fixed period after full receive the same protection as other microfinance operation of the new framework to understand whether clients, particularly with regard to disclosure and any negative consumer effects such as an increase in complaints handling provisions and procedures. A new prices or confusing disclosure have been felt, and whether law that brings cooperatives under the SBS supervision, further amendments are needed to refine either the law requiring them to comply with the existing consumer or the regulations. protection framework and ensure its monitoring and enforcement, should be implemented to achieve this It is recommended that the new implementing outcome. Interlinkages between market conduct regulations under the electronic money law take and prudential supervision and practical issues in into account safeguards for consumers, especially different supervisors for the two are recognized, but the vulnerable segments of the population. In particular, institutional arrangements for prudential oversight are relevant implementing regulations should set minimum beyond the scope of this report. requirements for disclosure of pricing information including fees and commissions, clarify responsibilities There would be considerable benefit in amending the of financial institutions and mobile network operators General Law to provide that all members of the FSD over agents, prohibition of tying and bundling with are covered under the deposit guarantee from their other products and services, provision of internal dispute incorporation. Moreover, it is important to make clear to resolution procedures that work properly for mobile consumers which financial institutions are covered by the delivery channels as well as disclosure of complaints deposit insurance system, and which are not (see section handling mechanisms to the end-user and require on Disclosure for further information). providers to educate customers on how to use electronic devices, including how to keep passwords safe. 29 A means of paying brokers for their services through commission revenue, as opposed to through normal direct payments (hard dollar fees). 18 | PERU III Consumer Disclosure a. Findings b. Recommendations Diagnostic Review of Consumer Protection and Financial Literacy | 19 a. Findings The decisions that need to be made by the consumer in the private pensions environment have the potential A comprehensive transparency regime for financial to significantly impact the consumer’s financial future, services is in place.30 However, consumer testing and and yet are riddled with complexity. The regulatory cost-benefit analysis would further enhance this work. regime places a heavy emphasis on disclosure, mandating Regulations designed to ensure that financial institutions the provision of information to the consumer in order to disclose - clearly and fairly - the key features of their assist their decision-making. However, disclosure can be products and services, may have little impact on consumer flawed in an area as complex as pensions and needs to be behavior if they do not understand why it is important to complemented with responsible business practices. At the read disclosure documents or are not able to understand, time of the pension decision, pension providers (usually and to put into context, information contained in these life insurers) are provided with access to the affiliate’s documents. Consumer testing verifying the degree of information in order to provide quotes for the available knowledge, understanding and user-friendliness of this products. While this is positive from a competition point of information for financial consumers appears to be missing. view, it can result in the staff of multiple insurers pursuing the affiliate for the sale, only adding to the pressure and The existing key facts statements such as the ‘Summary confusion of the consumer. Sheet’ for loans and the ‘Informative Note’ for deposits have no standard format. The regulation establishes b. Recommendations detailed information to be included in the Summary Sheet for loans, such as the amount of the loan, TCEA, Consumer testing would be helpful in tailoring the moratorium interest rate, description of the guarantee – formats and contents disclosed to best suit consumer if applicable-, the right to make prepayments as well as understanding and communication preferences. It the table of payments. While this is already a considerable would be advisable for the SBS to conduct consumer improvement, the variety of formats will likely cause testing in order to measure the degree of knowledge and confusion among consumers. A similar situation exists as understanding of the various information materials available regards to the Informative Sheet for deposits. to consumers. For example, preliminary results of an audit study conducted by World Bank/CGAP in peri-urban Mexico There is no explicit requirement to disclose in standard suggests disclosure and transparency policies might be wording whether an institution is a member of the ineffective if not linked to proper sales practices, product FSD. The FSD website includes a section with the list of regulation, and tools such as cooling-off periods. The aim FSD members31 and the SBS website has a section with of the study was to understand the quality of information the list of entities authorized to receive deposits from and products offered to potential low-income customers. the public32. But there is no requirement to publish and Trained “shoppers” visited multiple financial institutions disclose in standard wording whether an institution is a interested in credit and savings products. Results suggest member of the FSD and, whether its deposits are already that staff provide little information voluntarily, especially to covered by the deposit protection scheme (see paragraphs auditors trained to reveal little experience with the market. 48 and 52). This lack of information could create confusion Even when probed, most staff appears to be misinformed among depositors as not all deposit taking institutions are about key characteristics of the products they offer. More members of the FSD and subject to full coverage by the importantly, clients are almost never offered the cheapest FSD. product that fits their needs, most likely because institutions make more profits by offering more expensive products. 30 The current framework includes the criteria for the determination and definition of interest rates, commissions, charges and yields (including methods for calculating TCEA and TREA, information to be permanently disclosed to consumers (e.g. through booklets, tariffs, webpages, ATMs, verbally, which includes a requirement for sales officers to disclose the annual effective cost rate or TCEA and annual effective return rate or TREA), information to be disclosed before the signing of a contract (e.g. content of summary sheets for credits and informative leaflets for deposits), as well as the publication of comparative tables with the costs associated to specific savings products. The SBS also publishes comparative information on complaint statistics submitted by all supervised entities as well as information on contract clauses on its website. 31 http://www.fsd.org.pe/paginas/02-Miembros.html 32 http://190.102.151.31/0/modulos/jer/jer_interna.aspx?are=0&pfl=1&jer=1692 20 | PERU Additionally, it is recommended to perform a cost- branch, identifying the institution as member of the FSD benefit analysis of the transparency regime. The and indicate whether they are already covered or not with benefits of the transparency regime have to be compared regard to their deposits. to the costs that financial institutions and supervisors face in order to comply and supervise these requirements. Such Due to its complexity, private pensions consumers an analysis could help to further streamline regulatory would benefit from additional standardized disclosure and supervisory processes and allocate resources where on historical and projected investment returns. With most needed.33 the transition to the new fee regime under the July 2012 reforms, it is recommended that the SBS work with the It is recommended that the industry and the SBS in AFP industry to introduce a set of rules to standardize collaboration developed standard formats for key the presentation of historical and projected investment facts statements and require all institutions to use returns by AFPs. This should ideally result in standardized them. This standardization will assure that the most disclosures that can be easily compared between AFPs. relevant concepts of these sheets are disclosed in the The SBS and AFP industry could agree on a standard format same format and in a user-friendly way, facilitating the for illustrations of future earnings, and consider a set of client’s identification of the main characteristics of the mandated assumptions to be used by all AFPs in providing financial products and simplifying the comparisons such illustrations. For AFP promotional materials, it will be among different institutions. Examples of such standard important to illustrate gross investment returns for the key facts statements are found in Mexico34 and Chile35. funds as a whole, net investment returns to show the real historical earnings for investors, and total fees. GPU could consider issuing public warnings and publishing data on sanctions applied to financial Since affiliates making a pension decision can intuitions for breaching financial consumer protection be subject to sales pressure from sales people provisions. Public warning and the publication of consideration could be given to limit opportunities sanctions may make a significant contribution to general for pressure selling. Currently, there is a limited time prevention of violations. Sanctioning regimes will better for affiliates to make a decision about which pension prevent other potential offenders from future violations, option they wish to take up, and which insurer they will if those are aware that the sanctions provided for by law purchase from. Whilst AFPs are subject to strict rules about are actively applied and enforced and there is a real risk recommending products, anecdotal evidence suggests that violations will be detected. A first important step that people making a decision could be overwhelmed by has been already made by SBS as its internal committee contact from multiple insurers who receive their contact on sanctions approved that - starting January 2014 - details. Given the complexity of the pension decision, this sanctions related to transparency will be published. is likely to place the affiliates under unwarranted pressure where they may not feel empowered to make a well- It would be advisable for the SBS to develop a reasoned decision. The short timeframe for a decision mandatory disclosure wording with respect to would exacerbate the pressure felt by the consumer, financial institutions which are members of the FSD so consideration could be given to allowing a longer and require them to disclose the logo accordingly. timeframe for decisions. Further, it is recommended that, These logos could be included in all advertising and main an affiliate be given the option to receive information documents sent to the clients (e.g. deposit statement). about annuity products in their chosen format (such as Additionally, the regulation could require each institution by email) and given the option of prohibiting uninvited to place a standardized sticker at the entrance of each contact from insurers. 33 See for example the Australian Handbook of Cost-Benefit Analysis which provides guidance in the use of cost-benefit analysis for evaluation and decision- making - http://www.finance.gov.au/publications/finance-circulars/2006/docs/Handbook_of_CB_analysis.pdf. 34 http://www.condusef.gob.mx/PDF-s/marco_juridico/disposicion_entidades_financieras.pdf 35 http://www.sernacfinanciero.cl/wp-content/uploads/2012/08/Reglamento-sobre-informacion-al-consumidor-de-creditos-de-consumo-DTO-42_13- JUL-2012.pdf IV Business Practices a. Findings b. Recommendations 22 | PERU a. Findings side evidence reviewed did not rule out the possibility, and anecdotal evidence suggested that at least some Industry associations have started playing a role in borrowers are becoming over-indebted. The credit ensuring that financial institutions comply with a reporting system effectively covers information on loans/ set of standards of service and quality when dealing borrowers of microfinance institutions37 providing for an with their consumers. The Bank Association (Asbanc) important tool to monitor arising risks. has a Code of Ethics, approved in 2002, which includes general principles such as the compliance with the The SBS has been taking action to prevent the risk of legal and regulatory framework, integrity of the market, over-indebtedness of financial consumers, and the banking secrecy, conflict of interest, as well as respect BCRP has regularly reported on this issue38. Consumer of the competence and responsibility of directors and lending has been increasing well above GDP growth employees. This Code of Ethics is not publicly available and reflecting both the entrance of new borrowers and an has not been enforced. The SBS is currently developing increase in the average loan size. The measures taken by a Code of Conduct for the banking and microfinance the SBS include the publication of a regulation on over- sector. The Association of Microfinance Institutions of indebtedness related to small loans (SBS 6941-2008), Peru (ASOMIF) issued a mandatory Ethics Code and set up the improvement of disclosure to users (such as total an Ethics Commission in charge of handling accusations effective annual cost, and the risks of not paying debts), of noncompliance with the Code. In 2010 the Peruvian measures related to credit limits (requiring previous Association of Insurance Companies (APESEG) issued a consent from the costumer to increase them), regulation Code of Conduct with 9 overall conduct principles. The on the calculation of minimum payment (to guarantee Association of AFPs (AAFP) has also implemented a Code the repayment of credit cards and revolving loans in a of Conduct containing a set of principles for the industry. short term), and enabling customers to have the option to The majority of codes has not yet been widely published, decline using credit cards to make cash advances. The SBS and there is a need to enhance implementation of the has recently increased the capital risk weights for long- existing codes of conducts. term and revolving payroll loans (and to a lesser extent, for other long-term consumer loans) as well as for mortgage The rapid expansion in micro-credit and strong loans with high loan to value ratio. Additionally, new draft competition among especially small providers brings regulations require banks to be cautious in promoting attention to the risk of over-indebtedness. Peru’s new loans to small debtors which are not classified as successful microfinance industry has expanded micro- “Normal” and standard warnings -to be included in credit credit to levels seen in few other countries. The long card financial statement- regarding the financial impact of period of strong economic growth has underpinned the paying only the minimum. All these measure have been expansion of the sector both in terms of credit volume complemented with the SBS´s financial literacy programs. and number of debtors, but the long period of growth may also be concealing the build-up of excessive risk. Despite the importance of the insurance broker’s Institutions lending to the micro-finance segment role, monitoring and supervision has not focused expressed concerns about over-indebtedness for some enough on brokerage services. With the historically borrowers. Over-indebtedness in this segment will not poor perception of insurers, exacerbated by low levels of present a systemic risk, but rather a social risk as large financial literacy, it is little surprise that the distribution parts of the low income population could be affected. of insurance continues to be dominated by brokers. Such risk has globally received the attention of both The nature of the broker-client relationship will often policy makers and researchers36. Whereas the mission mean that the consumer places a high degree of trust did not find hard evidence of over-indebtedness, supply in the broker, potentially leaving them vulnerable, and 36 See for example Shahidur R. Khandker and Hussain A. Samad (2013), “Are microcredit participants in Bangladesh trapped in poverty and debt?”, World Bank Policy Research Working Paper WPS 6404. 37 Except for savings and credit cooperatives. 38 Financial Stability Reports of November 2011 and 2012. The challenge of establishing reliable income information on borrowers, particularly in the low income segments of the population, is recognized. Diagnostic Review of Consumer Protection and Financial Literacy | 23 less inclined to raise formal complaints. It is crucial that It would be advisable to monitor and manage the this sector receives a level of regulatory oversight that risk of over-indebtedness among the low income is commensurate with its influence and responsibility to population. With an oversight mandate for all but a consumers. Due to resourcing constraints, brokers have small minority of microfinance institutions (cooperatives not been a high priority for supervision and monitoring, and informal lenders), the SBS has the mandate and so there is likely to be a highly variable level of compliance ability to oversee micro-credit. A comprehensive demand with existing laws. The introduction of the new Insurance perspective can be accomplished through the planned Contracts Law provides an excellent opportunity for household survey, and ongoing monitoring could for the SBS to commence a new engagement strategy example be established in collaboration with INEI (Instituto with brokers and enhance the existing monitoring and Nacional de Estadística e Informática - National Institute of supervision framework. Statistics and Informatics), which surveys the country on an ongoing basis. Supply side data are comprehensively Uncollected employer pension contributions consti- collected in the SBS credit registry providing an excellent tute a consumer protection concern. Although the law basis for analysis (although it does not include information provides for the AFPs to pursue unpaid contributions, a on cooperatives). In addition, reviewing credit policies substantial volume of payments remains outstanding and behaviors in the financial industry (as the SBS is doing from both public and private sector employers. Recent already for prudential purposes) provides for an early reforms have implemented technical and oversight understanding of supply side risks for over-indebtedness. changes that may contribute to a resolution. With regard to outstanding pension contributions b. Recommendations of employers, direct financial disincentives for withholding employer contributions could be The development and uniformly implemented Codes implemented. Depending on the specific situation in of Conduct for all financial sectors would benefit Peru, this could include the imposition of a tax39 on the consumers. Such codes could be developed jointly by employer for unpaid contributions, and personal liability the SBS and industry associations. They should include for directors of employer entities. requirements in the area of disclosure of information, complaints, product appropriateness, and other key areas The SBS may be advised to consider putting further of business practice such as high pressure sales practices. emphasis on the monitoring of broker conduct and It is important that such a code comprises all relevant practices. This could include using risk-based supervision institutions and contains an effective mechanism to assessments, and adopting strategies such as mystery detect and sanction non-compliance. Self-commitment shopping in order to understand the interactions and of individual institutions could further ensure compliance potential regulatory issues that arise in the insurance with such codes e.g. by declaring in the annual report or broking process. If resourcing for such monitoring is report to the regulator that they have complied with the limited, a risk-based approach would involve targeting code of conduct. Moreover, it needs to be ensured that those brokers or groups of brokers that are likely to have Codes of Conduct are published widely and information the largest impact on consumers (assessed using such on them is included in financial education campaigns, so measures as the volume of consumer clients), and those that consumers know the standards to which financial with the largest number of representatives. institutions have agreed to adhere in order to ensure accountability for compliance. 39 In Australia, the Superannuation Guarantee Charge Act 1992 and the Superannuation Guarantee (Administration) Act 1992 require that employers who do not meet mandatory contributions to their employee retirement funds in a timely manner must pay a tax of the amount of the missed contribution plus additional amounts. V Dispute Resolution Mechanisms a. Findings b. Recommendations Diagnostic Review of Consumer Protection and Financial Literacy | 25 a. Findings Adjunta. The SBS established a User Orientation Platform under the responsibility of GPU in charge of responding There is a comprehensive legal and regulatory inquiries, providing orientation, and receiving formal framework in place for the handling of complaints by complaints. In addition, consumers are able to seek financial institutions. Circular SBS No. G-146-2009 of redress via industry-established ombudsman schemes 30 December 2009 requires financial institutions to set for banking and insurance or approach the courts. up complaints handling procedures, and to designate However, the judicial system in Peru is rarely used to a respective staff member. It specifies the process settle consumer matters due to high costs and delays. and timing (30 days generally, or 15 business days for pensions) for financial institutions supervised by the GPU has established a User Orientation Platform, an SBS to solve their customers’ complaints, and obliges area in charge of responding to inquiries, providing them to have a Complaints Department and established orientation, and receiving formal complaints. However, procedures for dealing with complaints. However, with except for private pensions, the SBS cannot resolve a the exception of pension funds, financial institutions consumer’s complaint. Between 2010 and 2012, the are not explicitly required under the law to be the first number of complaints increased by 1.4 times from 1063 point of contact for consumer complaints. In addition, to 1518. Over 80 percent of complaints related to banks, a supreme decree40 requires all types of businesses to microfinance and insurance companies. In addition, have a complaints and suggestions book available in GPU initiated 135 sanctioning procedures between 2010 each branch and outline procedures and clear timelines and 2012. Sanctions or corrective measures can only be in the handling of such complaints. INDECOPI is charged applied to financial institutions in case of violations of the with handling individual consumer disputes regarding SBS´s regulations. Consumers can contact the Platform in entities supervised by the SBS, with the exception of person via offices in Lima, Arequipa and Piura, through most cases related to the private pension fund system customer service platforms in Moquegua, Huancayo and which is handled by the respective Superintendencia Iquitos, or using a toll-free number, internet or mail. Table 4 GPU inquiries and complaints statistics 2010 2011 2012 Inquiries 50,189 43,915 48,391 Personal Attention 28,889 25,709 26,410 Call Center 15,667 12,602 15,414 E-mail 5,633 4,662 5,969 Written Inquiries 1500 942 598 Complaints 1063 1,251 1,518 Claims against financial and insurance companies 788 1032 1,262 Claims against private pension funds administrators 275 219 256 Sanctioning Procedures 48 48 39 Fuente: SBS. 40 Regulation on Complaints Book (Supreme Decree No. 011-2011-PCM), applicable to all economic sectors in the context of the Code of Consumer Protection and Defense. 26 | PERU INDECOPI is charged with handling individual to the claim, such as administration errors or misleading consumer disputes regarding entities supervised by information. The new Insurance Contract Law requires that the SBS, with the exception of most cases related to the SBS promotes external dispute resolution with respect the private pension fund system. INDECOPI’s citizen to insurance, and the current draft regulations contain orientation service (SAC) and its decentralized offices are some minimum criteria for external dispute resolution in charge of handling inquiries, complaints and disputes, bodies in the insurance area. and may also initiate a free-of-charge conciliation process to the consumer. About 40 percent of total complaints41 As a consequence, there is a variety of external redress are related to financial services. The Consumer Protection mechanisms in place resulting in confusion of the Code explicitly recognizes the authority of the SBS to consumer about where to best pursue their complaints. handle disputes from consumers regarding private The information by different sources (SBS/INDECOPI pension funds or related insurance products. Asbanc websites, institutions website, complaint forms, and has formally agreed with INDECOPI on a mechanism complaint information brochures) is not precise in terms called “aló banco”, under which bank clients who visit of where the claim should be submitted. Consumers end INDECOPI’s office with a complaint may contact the bank up with a perplexing list of external complaints handling from INDECOPI’s office before submitting the complaint mechanisms without knowing who can do what for them, to INDECOPI. In most cases consumers already approach and some pursue more than one avenue simultaneously. their financial institution first before turning to INDECOPI. It is not made clear where consumers should choose to go Secondly, the existing regime does not require explicit if their priority is to obtain redress or their priority is for a mentioning of internal as well as external complaints sanction to be imposed on the institution (see Table 5 for handling mechanisms in disclosure and sales materials. further details). In banking and insurance there are also industry- b. Recommendations established ombudsman schemes through which consumers may seek redress. The Defensor del Cliente It is recommended to encourage consumers to Financiero (DCF, or Defender of the Financial Client) is submit a complaint to the financial institution a banking ombudsman scheme established voluntarily before approaching an external dispute resolution by the bankers’ association in 2003. It covers all banks in mechanism. This procedure gives the financial institution Peru plus some finance companies. However the current the opportunity to solve the claim directly with its client ombudsman’s term expired on March 31, 2013 and the within a certain period of time, reducing the user´s time association decided to transfer most of its functions to “aló and pressure on the SBS and INDECOPI resources. In the banco”. The Defensor del Asegurado (DA, or Defender of medium term, a revision of the current legal framework the Insured) on the other hand is an insurance ombudsman will be advisable to ensure that the SBS and INDECOPI do scheme established voluntarily by the insurers’ association not investigate such cases until the financial institution in 2000, which covers all insurers in Peru. It takes complaints has responded, or its time for responding has expired. from consumers and enterprises (of any size) who remain This would help speedy resolution of most cases, and save dissatisfied with the outcome of an insurance claim. INDECOPI for cases where the parties cannot themselves However, it does not look at other issues not directly related reach a resolution. 41 Between March 2012-2013, INDECOPI received around 26000 complaints. Diagnostic Review of Consumer Protection and Financial Literacy | 27 Table 5 Division of responsibilities related to dispute resolution Subject matter External dispute Consumer resolution mechanisms Orientation/Inquiries Banking42 INDECOPI or DCF SBS/INDECOPI/industry and consumer associations Microfinance INDECOPI or DCF44 SBS/INDECOPI/industry and consumer institutions43 associations Insurance45 INDECOPI or DA46 SBS/INDECOPI/industry and consumer associations Private Pension SBS or INDECOPI SBS/INDECOPI/industry and consumer associations There would be advantage in the SBS becoming process. This item is associated with the recommendation the single agency responsible for supervision and above as to the general consolidation of supervision for enforcement of consumer protection provisions, while pensions, and the elevation of GPU to Supertintendencia INDECOPI would be the institution where complaints, Adjunta. in second instance, are submitted for redress (see also section on Institutional Arrangements). To provide clarity Clear guidance should be made available to for consumers, it is desirable to work towards a point consumers about where they can turn to in the event where all redress complaints, including in relation to of a dispute. A provision should be introduced in circular private pensions, fall under the jurisdiction of INDECOPI.47 G-146-2009 requiring financial institutions to disclose in INDECOPI may (as now) continue to seek technical input all pre-contractual and contractual disclosure documents from the SBS; for example, on interpretation of the SBS detailed information on the internal as well as relevant regulations and is likely to need to seek information or external dispute resolution mechanisms. Financial expert support from the SBS, such as the calculation of institutions could be required to disclose to dissatisfied pension benefits. consumers internal procedures and contact points for complaints within the financial institution as well as In the meantime, the SBS should consolidate the external dispute resolution mechanisms and respective handling of pension complaints into one team under contact information including that they should go to GPU. This would resolve the currently fragmented INDECOPI (or alternatively to the Ombudsman, where approach to the resolution of those complaints, and there is one) if what they want is redress; or to the SBS also create efficiencies in the complaints management if what they want is for the financial institution to be 42 For banks, microfinance institutions as well as insurance companies, SBS only handles information requests and inquiries while INDECOPI is in charge of complaints handling and individual redress. 43 For banks, microfinance institutions as well as insurance companies, SBS only handles information requests and inquiries while INDECOPI is in charge of complaints handling and individual redress. 44 Only some Microfinance Institutions have been affiliated to the DCF. 45 For banks, microfinance institutions as well as insurance companies, SBS only handles information requests and inquiries while INDECOPI is in charge of complaints handling and individual redress. 46 Only residual matters not covered by Titles IV, V or VII of the Private Pensions Compendium. According to the Consumer Protection Code, SBS is the authority in charge of imposing corrective measures regarding AFP related complaints. In addition, SBS handles respective information requests and inquiries. 47 While SBS resolves complaints regarding affiliate information, general public information, affiliation, contributions and payments other issues such as advertising and market competition are handled by INDECOPI. 28 | PERU sanctioned. It is recommended that detailed contact information, including all the contact alternatives available, is disclosed in the summary sheets and informative notes, complaints procedure brochures, their websites as well as other information materials. Additionally, there is a need to clearly specify the possibility of submitting a claim to the Ombudsman, including the scope, kind of claims and requirements. Moreover, it is important to improve access to complaints handling mechanisms for the vulnerable segments of the population. Nowadays, these mechanisms are scarce in rural areas and people who speak a language different from Spanish have virtually no access to them48. Finally, it would be beneficial to require financial institutions to provide complaints statistics by regional breakdowns. If the industry-sponsored ombudsmen are to retain a role, as an alternative to INDECOPI, it would be advisable to reconstitute them in accordance with best practice. The key issues to be addressed in relation to both DCF and DA are to establish independent governance, independent appointment of the ombudsmen and security of funding. Guidance on best practice, and how to implement it, is available from the World Bank report on fundamental principles for financial ombudsmen.49 In particular, this would require independent governance, independent appointment of the ombudsmen and security of funding. 48 One exception is the “aló banco” mechanism which is available to clients in regional INDECOPI offices. 49 http://siteresources.worldbank.org/EXTFINANCIALSECTOR/Resources/Financial_Ombudsmen_Vol1_ Fundamentals.pdf VI Financial Education a. Findings b. Recommendations 30 | PERU a. Findings Industry associations and private financial institutions have also been active in financial education by A plethora of public or private initiatives for financial developing educational materials and providing literacy or education exist or are in planning stage. training, although with still unclear division between GPU created a comprehensive and user-friendly financial marketing and financial education activities. education portal as a specific section of the SBS website For example, Asbanc has developed an initiative to including a wide range of educational materials, advices, communicate via TV spots in more simple terms with videos, comics and other audiovisual tools. The portal was their clients (“Upa. Let’s Talk Simple”) with a standardized redesigned in 2012 to ensure enhanced user-friendliness advertising format. In addition, its financial education page and a better distribution of contents through separate includes brochures, leaflets and tips. Aspec has produced portals on financial education and financial services users an online/printed brochure “Basic guideline for users of (including the recently redesigned price comparison financial services.” Many financial institutions have also tool RETASAS for financial products as well as REPRIMAS included sections in their web sites to promote financial for insurance products). In 2013, the SBS has initiated education and responsible financial behavior, accompanied work on the implementation of an e-learning platform with campaigns against the misusage of credit cards.51 for financial education programs as well as the redesign of its REPRIMAS tool. The SBS also developed a Financial The current high school curriculum puts very limited Education Program for School Teachers based on an emphasis on financial education, and teachers memorandum of understanding signed with the Ministry typically lack specialized training. Currently financial of Education. In addition, the SBS prepared a variety of education is taught by teachers of the subject courses other training modules50, supplementary educational of History, Geography and Economics and Education materials and radio spots. INDECOPI has included on its for work who in the majority of cases are not versed in website and brochures several recommendations for the financial sector matters. Within the last seven years, around appropriate use of credit cards and other consumer loans, 5,000 teachers have been trained under the Programa debt collection methods forbidden by the Consumer de Asesoría a Docentes program with the objective Protection Code as well as where and how to submit of equipping them with financial literacy content and a claim. The BCRP website includes (“BCRP Educa”) specialized teaching methodology in order to allow them educational information (including instructional videos) to transfer this knowledge to their students. However, it regarding consumer credits, electronic transfers and is unclear how much financial education is actually given security measures in the bills. to the students, as schools and the teachers themselves have some flexibility in determining what to emphasize Coordination is needed to support an over-arching on within the scope of the overall curricula. In order to strategy. Financial education activities are fragmented try to evaluate the effectiveness of the program, an initial across multiple public and private institutions. Combined baseline assessment on the program has been performed with a lack of an over-arching strategy, it creates the risk in 2012. The SBS has strengthened its relationship with of unmet needs in the population and inefficiency in the Ministry of Education. Both institutions are currently allocating resources. working on revising the curricula as well as other initiatives to improve financial education in schools. 50 During 2012 the SBS has trained more than 15,000 people on financial education. The SBS has performed trainings workshops and developed materials targeted atdifferent groups of the population such as: high school students, high school teachers, youths, dependent workers, micro entrepreneurs and retirees. The trainings are tailored depending on the type of participants and are mainly focused on the following topics: financial system, insurance system, pension systems, financial products and services, transparency and consumer protection, credit bureaus, financial intelligence unit and financial regulation. 51 Among others there are individual initiatives that have been developed by institutions, such as “El ABC de la Banca” by Banco de Crédito and “Aprendo” by BBVA Banco Continental. Diagnostic Review of Consumer Protection and Financial Literacy | 31 A pilot survey was conducted in 2011 providing of Education in 2006 provides for a good basis for closer some initial data on financial literacy of the Peruvian coordination on financial education activities. Going population. However, the survey sample focused mainly forward it will be important to focus on its implementation. on the urban population. A follow up survey using the same An effective communication plan could be helpful to methodology is planned for October 2013. In addition, the ensure that key decision-makers of the relevant education SBS plans to conduct a nationally representative survey in authorities have appropriate information on the 2014 that will provide useful demand side information importance of financial education, to be actively involved on access and usage, financial capability and consumer in the strengthening of financial education curriculum protection combined with a variety of information on content in schools as well as use synergies as regards to socio, economic and demographic characteristics of teacher trainings. financial inclusion levels of the urban as well as rural population and potential barriers faced by different Financial education programs should adopt segments of the population. appropriate methods to reach low income and rural populations, especially for remote areas of the country So far impact assessments of the effectiveness of (see Box 2). Currently, the majority of the measures are these financial education initiatives have been web-based, thus excluding the illiterate and poor. Peru’s scarce. International experience in financial education unique country characteristics pose specific challenges to demonstrates that increasing the number of financial financial education programs tailored to low income and education programs does not automatically lead to rural populations. It is also advisable to consider providing increases in the level of financial literacy or positive information materials and education programs in Quechua change in consumer behavior. Therefore, it is crucial to and, to a lesser extent, Aymara, as the languages spoken identify which programs are most effective and should in Andean provinces. Moreover, cultural aspects will need receive wide support. to be considered, as well as the languages spoken in the Amazon region. An additional study would be helpful to b. Recommendations assess the feasibility of translation of materials to a variety of existing language and dialects that are spoken only It would be helpful to develop a national program and/or to use other approaches, particularly for illiterate on financial education under the joint leadership groups of the population.52 of MEF, SBS, BCRP and MIDIS. The establishment of a financial education committee consisting of a broad range of stakeholders from public and private sector The financial literacy survey results could serve as a could be established as the main body developing the baseline to measure the impact of financial education program. This could potentially sit under the financial and consumer awareness initiatives going forward. consumer protection and financial literacy subgroup of The results of the survey should be used by the proposed the new inter-governmental Financial Inclusion Council, committee to inform the design of financial education which could bring together various ongoing and planned programs and to evaluate them later. By administering key initiatives into a coordinated program with resources to questions in the survey periodically such as every three extend to the rural areas. years or so, progress in financial education can be assessed, policies reformed, and financial education approaches The SBS should further deepen its cooperation with revised to better meet the outstanding challenges. There relevant education authorities. A memorandum of would be advantage in widely disseminating the results in understanding signed between the SBS and the Ministry order to make the data available to all relevant stakeholders. 52 Impact Evaluation Studies of financial education programs targeted to low-income house-holds which were conducted by the World Bank showed positive results. 32 | PERU Box 2 | Impact evaluations of financial education programs targeted to low-income households53 • South Africa - This study, which sought to deliver financial literacy messages to low-income households through a soap opera, resulted in significant improvements in financial knowledge and behavior, and found the messages to be more memorable. There was greater likelihood to borrow from formal sources, reduced gambling, and reduced likelihood to enter into hire-purchase agreements. • Uganda – A study examined the effect of an eight-week financial education module on low-income households’ financial attitudes and behaviors. The training led to increased knowledge of financial literacy, but this did not always translate into direct behavior change. However, savings groups and SACCOs did “nudge” some members towards making better financial decisions. • India and Kenya - For this study, comic books and targeted discount vouchers were used to encourage farmers in rural India and Kenya to take up index-based weather insurance. Though both the vouchers and financial literacy training increased insurance take-up, the ‘comic book’ financial literacy materials had positive spillover effects on neighbors insurance uptake as well. • Mexico – A study assessed the impact of af our-hour financial literacy training for credit card customers on approximately 40,000 consumers in Mexico. Results highlighted a significant increase in financial knowledge and an increase in savings for study participants, though the effect was often short lived. • Brazil – A large scale study tested the impact of financial education on high school students as well as complimentary workshops for parents. The study which included nearly 900 schools and 20,000 students, led to improved financial proficiency scores for children as well as parents through a “trickle up” effect. Evaluating the impact of the SBS training programs those who do not. Both the credit register and the SBS on credit behavior could help guide future program trainings include the national ID thus allowing a merging design. A relatively low cost assessment can be of data. Impact can be evaluated on propensity to take undertaken by evaluating the difference in credit behavior loans, repayment speed, and likelihood to default on between those that participate in the SBS trainings and loans. 53 “Financial literacy and education in low-and middle-income countries: measurement and effectiveness” by Robert Holzman, Florentina Mulaj, and Valeria Perotti, The World Bank. 2013. Schweizerische Eidgenossenschaft Confédération suisse Confederazione Svizzera Confederaziun svizra Swiss Confederation Federal Department of Economic Affairs, Education and Research EAER State Secretariat for Economic Affairs SECO Educ Consum Banking Insurance Protection micro Literacy Business Protec Protection pensions Banking Insurance microfinanance Financial Education Protection Consumer