Editorial: Consumer financial protection

Yunus Husein, formerly chief of Indonesia’s financial intelligence agency, raised a very important issue for the newly-established Financial Services Authority (FSA) to deal with when it gradually takes over the responsibility of supervising the whole financial service industry – banks, non-bank financial firms, capital market institutions and insurance firms.

Husein, one of the candidates for the FSA governing board, told a hearing of the House of Representatives selection committee last week that consumer financial protection has been acutely inadequate and the financial literacy of most customers is very low.

He pointed out the number of complaints raised by financial service customers increased by more than 25 percent to almost 854,000 last year. In late 2008, hundreds of retail investors who bought Lehman Brothers structured investment products through Citibank Indonesia lost millions of dollars when the US investment bank went bankrupt.

Hundreds of other retail investors got “burned” when the investment products issued by PT Antaboga Delta Sekuritas through Bank Century (now Bank Mutiara) turned out to be fraudulent. Even the American government immediately set up a politically-independent consumer financial protection agency after the 2008 global financial crisis, triggered by the Lehman Brothers bankruptcy, which caused millions of mortgage borrowers and retail investors to suffer big losses.

These cases showed how weak has been the mechanism of consumer financial protection in the country and how irresponsibly free have been domestic and foreign financial companies in selling their products here.

Such extremely unfortunate developments have been made possible by the combination of poor consumer financial protection and the low financial literacy of most bank customers and retail investors.

Husein rightly stressed the importance of educating financial services customers to improve their financial literacy, defined as their understanding of financial products and concepts and their ability and confidence to appreciate financial risks and opportunities, to make informed choices.

FSA therefore should have a strong consumer financial protection department to ensure that customers or consumers get clear information from banks and other financial institutions so that they can do the kind of comparison shopping that makes the markets of other consumer products run well.

As the case of the Lehman notes sold by Citibank Indonesia in 2007 showed, many customers, mostly served by the Citigold department, were ill informed about the Lehman investment products as they had hardly read the dozens of pages of legalese in the prospectus.

Many borrowers often make poorly informed decisions about the debt they take on and likewise retail investors
cannot be counted on to make rational choices.

Hence, regulators like the FSA need to step up and police the market to protect investors so that the alleged mis-selling scandals that have dogged the financial market in the past few years do not happen again.

The FSA should monitor firms to make sure that the right kinds of products get sold to the right kinds of people.

Bank depositors will remain vulnerable to risky financial derivatives as long as there is no strong oversight and guidelines on how banks, securities and insurance companies sell investment products to their clients. It is therefore most imperative for the FSA to strengthen the mechanisms for reviewing and certifying risky investment products for safety before they are released on to the market.