Financial Consumer Protection And Literacy: A Compative Study Between Bulgaria And Romania

Up until the financial crisis of 2007 - 2009, the global economy was adding an estimated 150 million new consumers of financial services each year. The rates of increase have since slowed down, but the growth continues. Most of the new consumers are in developing and emerging economies, where consumer protection and financial literacy are still in their infancy and where consumers are faced with an array of new financial products despite their relatively low familiarity with financial matters. The level of understanding of financial issues is too low there, with negative consequences for both individuals and economies. The common definition of ‘financial capability’ refers to the ability of consumers to gather, compare and use relevant information in acquiring financial services. Financial education is seen as the key intervention which reduces financial ignorance and improves the consumers’ position on the financial market. Several high-income countries have established national financial capability strategies and many other middle-, and low-income countries have also started implementing such policies. As a result of demographic, economic and policy changes, the needs of both the European citizens and the financial products themselves have grown in complexity. This, coupled with the deregulation and globalisation of the financial markets, poses not only considerable opportunities but also threats for the financial wellbeing of individuals and households. If left unattended, changes in the financial system can also pose a variety of risks to society, which will bear the costs arising from market inefficiency. This further highlights the importance of consumer protection and financial literacy for ensuring confidence in the financial system (which is also relevant for Bulgaria and Romania) and for increasing financial inclusion. In April 2010 the World Bank commissioned two nation-wide surveys of the levels of financial literacy in both Romania and Bulgaria. The main objective of these surveys was the establishment of a well-targeted national program for financial education. The data obtained from the respective surveys form the basis for the comparative study on financial capability and consumer protection in Bulgaria and Romania, which is the focus of this report. The purpose of this paper is to define the main challenges as regards consumer protection in the financial services sector in Bulgaria and Romania. The survey revealed several important problems that need further policy consideration. One main observation is that the financial sector in both Bulgaria and Romania is underutilized; it is comprised mainly of banking services such as debit cards and consumer loans. Outside the banking system only insurance and, to a certain degree, leasing services enjoy popularity. Furthermore, it can be inferred that large proportions of the populations of both countries are not involved in the formal financial sector, whilst those who are, are of relatively low financial literacy. Such tendencies limit individuals’ access to financial services and in turn have economy-wide implications in terms of hampered growth of the sector. The next section (part two) discusses conceptual issues and literature related to financial capability in the broader context. In part three we look at the case for comparison between Bulgaria and Romania. Part four of the study deals with data from the respective surveys conducted in Bulgaria and Romania and seeks to draw parallels between the two countries on the questions of: financial status and money management, financial product usage and trust in institutions, and staying informed. Section five offers a summary of the preceding data discussion before concluding with some country-specific policy recommendations.