Defending Financial Consumers

Got a problem with your bank? If so, you’re not alone. In March, Chile’s new financial consumer protection agency – the SERNAC Financiero – received over 7,000 complaints, including those submitted online and in person, about inappropriate charges, unilateral changes to contracts, difficulties in terminating services, abusive extrajudicial collection fees and misleading or incorrect advertising.

This represents a 92% increase from the number of complaints related to the financial market that were received in the same period of last year.

“This is a good sign, it shows the SERNAC Financiero is working,” says Juan Antonio Peribonio, director of Chile’s National Consumer Service (SERNAC).

This new division of SERNAC, which opened its doors on March 5, was created as part of a new consumer protection law approved in November last year. It is too early to judge its effectiveness, but it has made consumers more aware of their rights, says Peribonio.

“There is an important asymmetry in the information available to the consumer,” he says. “Our challenge is to give confidence back to the consumer.”

Chile’s banking sector has a well-earned reputation for being solvent and well-managed, which has grown in light of its stability following the 2008 global financial crisis. Last year, total loan placements grew 12% year-on-year, representing around 70% of GDP.

“Let’s not forget that the main role of the banks is solvency, stability and the permanent development of the means of payment,” says Jorge Awad, president of the Association of Banks and Financial Institutions (ABIF).

Banks are also responding to consumer demands by improving their after-sales service, he says. So why are consumers clamoring for greater protection?

Paradoxically, the answer lies partly in Chile’s success. As the economy has grown in the last two decades, so too has the demand for banking services. Chile’s financial system has been staggeringly successful in extending financial services to a much wider segment of the population. Today, more Chileans than ever – over 12 million – have access to banking services.

However, as banking coverage has expanded, especially amongst low-income segments, more families have got into debt by consuming beyond their means. Over 22 million credit cards have been issued in Chile, about four for every working Chilean, including 18 million by non-bank issuers, such as department stores.

The problem is that these issuers are not regulated by the Superintendency of Banking and Financial Institutions (SBIF) and recent revelations of dubious credit practices by some of them have shaken the financial sector. The most important involves La Polar, a Chilean department store that unilaterally renegotiated the debts of over 1 million customers.

But the demand for better consumer protection has been growing for decades. “There is no doubt we needed to level the playing field in favor of the consumer,” says Peribonio.

President Piñera promised, during his election campaign, to beef up protection for financial consumers, partly by creating the SERNAC Financiero.

“Today is a good day for customers of financial companies, for small and medium companies, and also our middle class,” he said when the legislation was approved in November.

Empowering consumers

The new law will come into force gradually. The first stage, implemented in March, was the publication of a list of financial consumers’ rights.

These include information about the total cost of a loan, the conditions required for it to be approved and the reasons it may be denied. Loan quotes are valid for seven days, which is designed to give consumers time to shop around. This is aimed at increasing competition between banks and lowering the cost of borrowing, says Peribonio.

Crucially, the regulation also aims to put an end to the practice by which banks offer “tie-in” products, such as health insurance, with credit card or loan contracts. Now banks must put these in a separate contract so consumers know what they are signing up for.

Another important change is that accountholders have the right to request that their account be closed within 10 business days if all debts are paid. Like the recent implementation of mobile number portability in Chile, this aims to give consumers back the “freedom of decision”, says Peribonio.

As for the banking sector, ABIF’s Jorge Awad is reluctant to comment on the new norms until they are approved by the Office of the Comptroller General, which is expected in May. However, their aims – namely education, transparency and protection – are positive depending on how they are implemented, he says. 

Educating financial consumers is an important part of the solution and banks are voluntarily making more information available so customers can compare products, says Awad.

“The regulations need to be clear that a loan application is a request, not a right,” he says.

Consumers, however, are not impressed. According to Hernán Calderón, president of the National Consumer Association (CONADECUS), the law is a small advance, but does not go far enough.

“SERNAC is simply an observer that can evaluate bad behavior but not control it,” he says. “All the measures that could benefit the consumer are voluntary.”

Still, he admits some changes are positive. For example, the SERNAC has created a team of 40 observers (Ministros de Fe in Spanish) who are empowered to witness possible infractions of the new law in the field.

These observers – spread around Chile at random financial institutions – are tasked with gathering evidence to use against companies found to be violating the law. However, their reach will be limited. “Having just over 50 observers for the whole country is clearly insufficient,” says Calderón. 

Multiplier effect

The SERNAC Financiero is not just a witness – it can also levy fines, facilitate mediation, or launch class-action lawsuits on behalf of consumers.

For instance, it recently launched lawsuits against five banks and other financial institutions that risk fines up to US$80,000 each for claiming, in their advertising, that their products are in line with the agency’s new norms.

A more important issue for consumers is harassment by extrajudicial collection agencies, which accounted for 12.8% of complaints received in March. In this regard, SERNAC is analyzing information gathered by its observers to see if legal action will be taken.

But there are not enough resources to chase every lead. SERNAC Financiero’s budget for 2012 is around 1.2 billion pesos (US$2.5 million), which is about 20% of SERNAC’s total budget, but this will drop to 740 million pesos next year.

“We expect our actions to have a multiplier effect so other institutions do not commit the same infractions,” says Peribonio. “If we had an army, it would be different but resources are limited.”

For this reason, mediation – except in cases like La Polar where thousands of clients are affected – is preferred over lawsuits that can be time-consuming and costly. Information about how banks are responding to cases of mediation will not be available until June, but SERNAC is optimistic the results will be positive, says Peribonio.

As happens today, however, complaints not resolved through mediation could end up in local courts. Since no legal aid is available, this leaves consumers with the choice of defending themselves against the resources of large corporations or hiring a lawyer. An alternative proposed by CONADECUS is that part of the income collected through fines could be used to pay consumers’ legal fees, which is similar to the Peruvian system.

“Mediation is not enough, we need a service to defend consumers,” says Calderón.

Sello SERNAC

The second stage of the law, to be implemented later this year, involves a voluntary process by which banks will be able to request SERNAC’s seal of approval, known as the Sello SERNAC.

To become certified, banks must submit all contracts for revision and create a three-pronged system to address complaints that includes customer service, mediation and, as a last resort, financial arbitration.

According to Peribonio, this is the “heart” of the new law because it guarantees consumers a certain level of customer attention.

“Banks will line up because they will realize that consumers prefer institutions with the certificate,” he says.

But so far the signs aren’t promising. Arturo Tagle, CEO of Banco de Chile, Chile’s second largest bank, said last November that his bank will not seek the certification because submitting its contracts for revision would take time and affect its competitiveness.

Even if other banks decide to seek the certification, a better way to protect consumers would be modifying the law to stop abusive interest charges and give consumers the ability to sue in cases of possible antitrust violations, says CONADECUS’ Calderón.

Overall, however, Chile’s financial system is healthy, stable and competitive with some exceptions. La Polar drew attention to abuses by some credit issuers but, looking at the glass half full, it also had the effect of catalyzing political will to strengthen consumer protection legislation.

“Thanks to La Polar, Chile’s financial system is one of the most scrutinized on the planet,” says Peribonio.

Ultimately, the success of the SERNAC Financiero will depend to a large degree on how banks react to the new norms, but it is a much-needed step forward in consumer education and protection.

“The future is very promising for the financial consumer,” says Peribonio. “But our work is just beginning – we have a lot to do.”

Julian Dowling is Editor of bUSiness CHILE

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