Protecting consumers of financial services in the context of economic integration

Some common issues related to the protection of consumer of financial services:
Protecting consumers always plays a pivotal role in maintaining fairness and equality, making important contributions to the establishment and development of a healthily competitive market and much more important is social stability. 25 years ago, on September 4th 1985, the United Nations had approved a set of principles guiding the protection of consumers as stipulated in the 39/248 Resolution of the General Assembly of the United Nations. Under this resolution, governments around the world are able to transform these principles into their own Laws on Consumer Protection. These principle were amended for the 1st time in 1999 in order to catch up with international economic development.
The financial industry always plays a crucial and dominant role in economic activities, both nationwide and worldwide. The development of information technology and the trend of globalization in the late 1900s had led to the rapid development of financial products and services, triggering a quick increase in the number of consumers of financial services. It is estimated that each year, the number of consumers of financial services surges by 150 million. Most of them live in emerging economies which enjoy high economic growth rates and rising personal incomes. The so-called “new consumers” are undergoing the stage in which they are getting accustomed to new financial products and services. Due to their limited knowledge and the understood  field finance, they fail to be fully aware of all their legitimate rights and duties when using financial products and services. However, it is the asymmetric power, information and resources causing the problems. Financial institutions always know their products and services perfectly well. Meanwhile, consumers may not have an adequate understanding of the offered products and services. For complex financial products and services, whether we have proper information or not, it is not easy at all to evaluate them.
During the global financial crisis in 2008, no cases of bank runs or panics – which are considered the main causes of systemic crises – were recorded. One of the most effective policy tools used by governments was deposit insurance. There were 2 methods taken: to expand limit coverage (for those countries having an explicit Deposit Insurance system) or to use blanket coverage. In their efforts to restructure their financial Systems after the financial crisis, almost all countries try to give a sharp focus on deepening risk management activities and closer supervising deposit-taking institutions with a view to further protecting depositors. This goal is seen as a solid foundation for nations’ restructuring efforts because deposits is seen as an important base for banking activities. The United States is the 1st nation in the world approving the Financial Sector Reform Act (formally known as “the Dodd-Frank Wall Street Reform and Consumer Protection Act”) on July 22nd 2010. This Act is expected to give consumers best-ever protection. The 2300-page Act acts as a solid base to create the Consumer Financial Protection Bureau, establish the Board of Regulators in charge of managing and supervising systemic risks in the banking system and offer the Federal Government more powers to resolve financial institutions whose failures may have a big and adverse impact on the financial market.
The development of banking services in Vietnam
Despite the fact that there have existed different views on the financial market as well as financial services in Vietnam, banking services are unanimously regarded as the main part of financial services. Hence, this part of the article will mention the development of banking services in Vietnam in recent years with a main focus on the retail banking products and services.
The commercial banks system in Vietnam were allowed to do their business and provide banking services in accordance with market principles since the issuance of the Ordinance on the State Bank of Vietnam and the Ordinance on Banks, Credit Cooperatives and Financial Companies in 1990. Banking activities have been developing rapidly, both in scale and quality. More important, after our accession to the WTO, the Vietnamese banking system has constantly enhance the quality of banking services, further promoting market-oriented activities and diversifying banking products and services. This is an indispensable trend as the Vietnamese economy is further integrating into the world economy and domestic banks are facing huge competitive pressure from their foreign rivals. In the field of retail banking products and services, our domestic commercial banks are taking part in a fair and fierce competition with their foreign rivals thanks to the improvements in some areas:
- Increasing the kinds of services available for individual accounts: in addition to the function as a normal individual deposit account, most banks now offer bank-overdraft services.
- Further promoting the issuance of international credit cards like VISA, Master Card, Amex…
- Expanding other services such as paying salary through individual accounts, payment of goods and services, money transferring and making payment of billing costs through banks.
- Diversifying consumer loans: Commercial banks have been expanding their consumer loan services such as loans serving the purpose of buying automobiles or houses…
- Providing more facilities in account services through modern banking technology such as offering Internet Banking and Mobile Banking services…
- Promoting the inter-connection among banks in the field of bank cards in order to make it possible for the card issued by a commercial bank to be used to withdraw cash in the ATMs of others or used at POS of some banks in the alliance.
- Providing more international banking services such as services in derevatives, fund management, remittance…
Currently, there are 16 millions ATM cards in use. Newly - integrated cards with higher security are also massively produced. Banks have been greatly expanding their networks of ATMs and POS, offering various services, providing customers with more facilities, thus accelerating the cash flow and pouring more funds into the economy. Nevertheless, these deemed convenient services may bring about risks for both consumers and commercial banks, especially when and where there is a lack of cooperation and coordination among banks in developing services, both the stability in banking activities and the quality of the services available are still at a lower level than that of international standards.
 
In the year 2010, Vietnam has completely opened up its banking services market, reduced most of the obstacles preventing foreign firms from entering the domestic market and removed some limits on banking activities (such as the limits on the scale and the kinds of services that foreign banks are permitted to offer), fairly and equally treated both domestic credit institutions and their foreign rivals in accordance with the Most Favoured Nation, the National Treatment and other principles as stipulated in the GASS/WTO Agreement. Thanks to these positive changes, Vietnamese consumers may have more choices in the field of banking products and services. However, they will be faced with higher risks while the majority of them are still unable to have an adequate knowledge and understanding of their legitimate rights when using these products and services. A typical example is the case of the ATM card. It is widely recognized that most of the card-owners fail to fully understand the facilities of an ATM card and only use their cards to withdraw cash; unable to cope with the cases when their cards are captured by the ATM and/or they don’t remember their PIN code; even some card-owners had their PIN code and money stolen. Besides, there are numerous cases annoying customers such as the ATM become overloaded on the occasion of festivals, Tet holiday or wage-paying periods, preventing customers from withdrawing their cash, angering them because they don’t know how and where to lodge a complaint.
The legal framework in force protecting legitimate rights of consumers of financial services and depositors
The relationship between commercial banks and the public in general and the consumers of banking services in particular plays a pivotal role in the Vietnam’s economic development especially when this relationship is based mainly on the confidence both sides have in each other. In fact, the mechanisms designed for examining and dealing with violations of the rights of consumers using banking services are too complicated and difficult to carry out. This has had an adverse impact on the banks’ business activities. According to the National Committee for Financial Supervision, as of 2009, 80% of the amount of credit worth 1.700.000 trillion Dongs for the economy came from the commercial banks system.
The large amount of money raised from the public (individual depositors) is regarded as a stable source of funds and accounts for a considerable amount of the banks’ capital, thus being seen as a springboard for banks’ business activities. Hence, the loss of confidence of depositors in the banking sector will certainly cause unpredictable socio-economic consequences. The lessons and experiences drawn from the collapse of the People’s Credit Funds in the 1990s, the Asian Financial Crisis in the late 1990s and most recently is the global financial crisis in 2008 demonstrate that the better protection of consumers will make greater contributions to the stable and sustainable development of the banking sector.
The draft Law on Consumer Protection built and presented to the National Assembly in May 2010 contains 8 chapters and 67 articles. The 2 main focuses of the draft law are the superiority of consumers in their relationship with producers and the use of market power to eliminate consumer rights – breaking firms. However, the drafted law doesn’t mention newly offered products and services in the market economy, specifically financial services.
Currently, there are only 3 legal documents named the Law on Credit Institutions and the 2 Decrees Numbered 89/1999/ND-CP and 109/2005/ND-CP on Deposit Insurance promulgated by the Government protecting the rights of depositors. However, these regulations are inadequate and their legal status is still inferior to that of other, thus causing shortcomings in protecting consumers of banking services. Therefore, on the basis of existing legal documents protecting depositors, we need to transform them into the Law on Depositor Protection or the Law on Deposit Insurance consistent with legal documents regulating banking activities in accordance with international norms and practices in order to ensure that:
- This new Law provides Deposit Insurance Organization with full legal jurisdiction to protect consumers and resolve insured institutions in a timely and effective way.
- The new Law clearly stipulates the field and content of Deposit Insurance operations aimed at protecting depositors such as supervision, examination, payout, resolution.
- Depositors are given a higher priority than other creditors in the resolution of troubled insured institutions.
In summary, in order to effectively protect consumers of financial services as Vietnam has been integrating into the world economy, it is necessary to do research on and promulgate a new law appropriate for the socio-economic development. In the coming time, it is urgently needed to build the Law on Deposit Insurance with a view to protecting depositors – an important part of consumers of financial services, thus contributing to the safety of the Vietnamese banking system as well as making it consistent with international norms and practices.