The UK’s sub-prime mortgage crisis and subsequent credit crunch has led many banks and lenders to increase interest rates and tighten up on lending criteria. But according to a recent OECD (Organisation for Economic Cooperation and Development) report, financial providers need to clarify exactly what their customers are getting in for when they sign up to new mortgages, loans and other products in order not to repeat the mistakes that led to the current crisis.
The report issues new guidelines to better protect consumers and help them understand credit and other complex financial products.
“Even in the absence of the crisis, developments in financial markets, demographics, economic and policy changes all point to the importance of financial education and enhanced financial consumer protection.
Surveys of financial literacy continue to show that consumers in virtually every country lack adequate financial backgrounds or understanding and that they underestimate their needs for education in the financial area,” said André Laboul, Head of the Financial Affairs Division of the OECD.
The report recommends that governments make it a legal obligation for financial services to provide clear language in all mortgage agreements and that these be standard and comparable across all mortgage providers.
Lenders should, for instance, be required to display prominently a summary of key terms and conditions of a loan and explain the implications of missing a payment deadline. This should include: the loan amount and interest rate; any fee and charge (including broker fees); the number of installments; the amount of payments and when they are due; the total amount repayable and the total cost of credit. Lenders should also be made legally responsible for checking customers’ credit needs and whether they will be able to meet their payments.
It also suggested that governments, meanwhile, should do their bit to better protect consumers and help them understand credit and other complex financial products. This means informing people of their rights and responsibilities, working to clamp down on fraud and unethical practices and promoting fair pricing of credit products through the development of independent credit bureaus.
The UK’s Financial Services Authority (FSA) meanwhile plans to crack down on lenders who fail to address concerns that firms are repeatedly failing to improve standards (e.g. in relation to miss-selling to consumers and market misconduct). They said in a recent report they would ensure that fines better reflect the scale of the wrongdoing and that any profits made from the breaches are clawed back.
“These proposals are an important step in pushing forward our ethos of credible deterrence. By hitting companies and individuals in the pocket where it hurts, the fines will be a stark warning to others on what they can expect to pay for flouting our rules. Moving to this new framework will enable our enforcement policy to continue making a real difference to consumers and to changing behaviour in the financial services sector.” commented Margaret Cole, director of enforcement at the FSA.
Mr. Laboul concluded that the OECD recommendations address a central issue that has been largely and surprisingly overlooked in discussions on the resolution to the crisis, namely the protection and empowerment of consumers in an increasingly complex and volatile financial environment.
The report issues new guidelines to better protect consumers and help them understand credit and other complex financial products.
“Even in the absence of the crisis, developments in financial markets, demographics, economic and policy changes all point to the importance of financial education and enhanced financial consumer protection.
Surveys of financial literacy continue to show that consumers in virtually every country lack adequate financial backgrounds or understanding and that they underestimate their needs for education in the financial area,” said André Laboul, Head of the Financial Affairs Division of the OECD.
The report recommends that governments make it a legal obligation for financial services to provide clear language in all mortgage agreements and that these be standard and comparable across all mortgage providers.
Lenders should, for instance, be required to display prominently a summary of key terms and conditions of a loan and explain the implications of missing a payment deadline. This should include: the loan amount and interest rate; any fee and charge (including broker fees); the number of installments; the amount of payments and when they are due; the total amount repayable and the total cost of credit. Lenders should also be made legally responsible for checking customers’ credit needs and whether they will be able to meet their payments.
It also suggested that governments, meanwhile, should do their bit to better protect consumers and help them understand credit and other complex financial products. This means informing people of their rights and responsibilities, working to clamp down on fraud and unethical practices and promoting fair pricing of credit products through the development of independent credit bureaus.
The UK’s Financial Services Authority (FSA) meanwhile plans to crack down on lenders who fail to address concerns that firms are repeatedly failing to improve standards (e.g. in relation to miss-selling to consumers and market misconduct). They said in a recent report they would ensure that fines better reflect the scale of the wrongdoing and that any profits made from the breaches are clawed back.
“These proposals are an important step in pushing forward our ethos of credible deterrence. By hitting companies and individuals in the pocket where it hurts, the fines will be a stark warning to others on what they can expect to pay for flouting our rules. Moving to this new framework will enable our enforcement policy to continue making a real difference to consumers and to changing behaviour in the financial services sector.” commented Margaret Cole, director of enforcement at the FSA.
Mr. Laboul concluded that the OECD recommendations address a central issue that has been largely and surprisingly overlooked in discussions on the resolution to the crisis, namely the protection and empowerment of consumers in an increasingly complex and volatile financial environment.
