Towards better protection in consumer finance

When consumers and people in general were less educated, the economy and financial system with its services and products were undeveloped, and consumer awareness was insignificant.

Now people are more aware of their rights. So along with the growing business in credit-card and consumer loans, the government has stepped in to try and strengthen consumer protection and the requirements for financial prudence.

What the regulators did was to try to improve consumer protection as well as ensure that non-bank businesses were not going to jeopardise the stability of the financial system.

In essence, the Finance Ministry and Bank of Thailand set guidelines, including who (by minimum income) is eligible for credit cards and consumer loans and the qualifications for companies to be able to provide credit cards and consumer finance.

The guidelines also indicate the price or interest rate that can be charged and the reporting requirements, so that authorities can keep track of what they are doing and improve transparency for the public, society and consumers as a whole. Some examples of good customer-protection in financial

services I have seen were in Singapore.

With a growing hedge-fund industry, the Singaporean government decided to issue regulations to ensure justice for investors.

Three parties are involved. Law firms ensure that management acts according to advertisements. They have to follow the policy and practices that they have outlined.

Insurance companies have to compensate investors should hedge funds slip up.

Auditing or accounting firms have to make sure published financial reports reflect the actual performance of the hedge fund.

In principle consumer finance involves "ex-ante" or pre-borrowing protection and "ex-post" or post-borrowing protection.

With regard to ex-ante protection, one can argue that in some countries there are specific laws about equal credit opportunity, meaning that everyone is entitled to receive credit, whatever their religion, origin, sex or race.

Laws like the Fair Credit Report Act show citizens what reports have been filed on their credit standing, so they know their weaknesses and what they have to do to improve their credit standing and borrowing opportunities.

Ex-post consumer protection involves legal procedures and opportunities for debtors to get temporary relief or escape the vicious debt cycle; this is the so-called bankruptcy solution.

This is very popular in Japan and elsewhere, where legal firms and lawyers advertise to debtors.

Ex-post credit counselling addresses debtors' psychological problems and addiction to borrowing that leads to a vicious circle.

These forms of personal-finance advice, counselling and education are needed. To have such a system would help considerably in trying to promote discipline among borrowers so they can plan to pay debts properly.

 Chodechai Suwanaporn is director of the Fiscal Policy Office's financial-system section.