AZERBAIJAN. Final Draft. Technical Note on Consumer Protection and Financial Literacy. Volume II Review Against Good Practices.

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1 Final Draft AZERBAIJAN Technical Note on Consumer Protection and Financial Literacy Volume II Review Against Good Practices February 2009 THE WORLD BANK Private and Financial Sector Development Department Europe and Central Asia Region Washington, DC

2 This Technical Note is a product of the staff of the International Bank for Reconstruction and Development/ The World Bank. The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent.

3 AZERBAIJAN Technical Note on Consumer Protection and Financial Literacy Volume II Comparison against Good Practices Contents Azerbaijan: Consumer Protection in the Banking Sector... 1 Good Practices: Banking Sector... 3 Azerbaijan: Consumer Protection in the Insurance Sector Good Practices: Insurance Sector Azerbaijan: Consumer Protection in the Securities Sector Good Practices: Securities Sector Azerbaijan: Consumer Protection in Microfinance & Leasing Institutions Good Practices: Microfinance Institutions Tables Table 1: Bank Lending to Households... 1 Table 2: Regional Distribution of Branches per Type of Credit Institution Boxes Box 1: Industry Associations involved in Microfinance Box 2: Consumers Financial Information Capacity... 39

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5 Banking Sector Azerbaijan: Consumer Protection in the Banking Sector The banking sector in Azerbaijan has enjoyed significant growth in all key indicators in recent years, reflecting high growth levels in the overall economy. In the four years from 2003 to 2006 inclusive, average growth rate of non-oil GDP was 12 percent, and it reached 11.3% in However, consumer credit growth has outstripped growth in GDP by a substantial degree, as seen in Table 1. In this environment of rapid credit growth, the need of setting up an appropriate financial consumer protection and education regime is all the more pressing. Table 1: Bank Lending to Households Household loans Credit from banks to the household sector (in AZM millions) Source: National Bank of Azerbaijan. Statistical Bulletin. December ,605.5 An area of particular focus is mortgage lending, which has also increased substantially in recent years. The relatively underdeveloped state of the markets for other investment products in Azerbaijan means that property investment will probably continue to be popular. The National Bank of Azerbaijan (NBA) is responsible for licensing, regulating and supervising all banking activity. As currently structured, the NBA is a traditional prudential supervisor. Its statutory remit is concerned principally with ensuring that banks are properly managed and appropriately capitalized, and with issues of financial stability. There are 46 banks authorized to conduct banking business, however many of these banks focus exclusively on the corporate sector. The number of banks competing for retail business is around 10. Along the lines of many central banks in different countries, the NBA has recently begun to take measures regarding consumer protection and information. The NBA has established a Banking Service Consumers Right Protection Unit within its Banking Supervision Department, and it has dealt with over 1,000 cases since its creation in It is clear that there is recognition within the NBA of the value that adequate financial consumer protection and education can offer. This attitude, along with the reputation and expertise of the NBA and the actions that it has already taken, provides a promising base for further initiatives in this area. One of the key recommendations in this report is that the mandate of the NBA be broadened to give it explicit responsibility for financial consumer protection and education. Financial exclusion is a policy issue that will need to be considered carefully by the Government and regulators, especially the NBA. Full participation in modern society is not possible unless you have a bank account. There are somewhere above 1.1 million bank accounts operating in Azerbaijan. While acknowledging that some of these accounts are family accounts, this is evidence that, with a population in excess of 8 million people, the Azerbaijani society is substantially under-banked. The conduction of a financial capability study will be useful to explore the reasons why so many people do not participate in the banking sector. There is a deposit insurance scheme in place in Azerbaijan. From 1 January 2008, the Azerbaijan Deposit Insurance Fund (ADIF) covers 100 percent of deposits up to 6,000 AZM. This is sufficient to insure 97 percent of all deposits held by the banking industry. From 1 January 2010 the level of coverage will be raised to 8,000 AZM. The ADIF has published a consumer information leaflet giving 1

6 Banking Sector information on the coverage of the scheme and the banks that are members of the scheme. The leaflet is distributed through bank branches and is also available on the ADIF s website. The ADIF has also put in place a media communications strategy, involving print and broadcast channels, in order to make consumers aware of the operations of the Fund. The International Bank of Azerbaijan (IBA) enjoys a market share of more than 40 percent. The size of this market share, and the fact that the IBA s majority shareholder is the State, via the Ministry of Finance, raises concern on the effects that the IBA has on competition in the retail banking sector. The fact that all government employees and pensioners must open a current account with the IBA may operate neither to the best advantage of the market as a whole nor in the best interests of consumers. It is recommended that the Antimonopoly Department or the NBA conduct a fundamental review of the personal current account market and make recommendations on how competition in that market can be enhanced. 2

7 Banking Sector Good Practices: Banking Sector A proper assessment of the overall banking sector and the environment in which it operates is critical to determine whether or not some of the principles listed below are relevant for the country. Good business relationships between the local commercial banks and the public in general are one of the key issues for the development of the economy. There has to be mutual trust and confidence. In the absence of transparency in pricing, adequate consumer awareness and protection and dispute resolution mechanisms, banking systems have less efficiency and accessibility. SECTION A Good Practice A.1 CONSUMER PROTECTION INSTITUTIONS Legislative Framework The law should provide for clear rules on consumer protection in the area of regulated financial products and services, and there must be adequate institutional arrangements for implementation and enforcement of consumer protection rules. Specifically, the law must provide a statutory agency with a mandate to protect and educate consumers and the powers necessary to perform that function. The Law on Consumer Protection addresses basic consumer issues such as: the right to enter into agreements to purchase goods and services; the quality and safety of goods and services; information concerning goods and services; the right to protect consumer rights in court and to be reimbursed for damages caused by any defects, including moral damages; consumer s right to claim for compensation against a seller where the consumer has received unreliable or incomplete information; consideration of compensation for moral damages when the court is satisfying consumer claims. The Law on Consumer Protection also mentions the role of state authorities, courts and local executive authorities to protect consumer rights, in general (Article 18) While these provisions are welcome, the law is general in nature, and focuses on nonfinancial goods and services. The Law on the NBA provides for appropriate prudential regulation arrangements for banks, which are the first line of defense in a consumer protection regime. However, there are no other legislative or statutory provisions that create an effective regime for the protection of consumers of banking products and services. The statutory mandate of the NBA does not give it an explicit mandate to protect consumers (other than through prudential regulation), and provides no powers to introduce conduct of business rules for banks. The Government of Azerbaijan should consider how financial consumer protection can be put on a statutory footing, in order to help ensure that consumers can make informed decisions on their financial affairs in a safe and fair market. The mandate of the NBA should be enhanced to give it explicit responsibility for consumer protection, education and information in the area of banking products and services. In addition, NGOs such as consumer associations (for example, the Union of 3

8 Banking Sector Independent Consumers) should be strengthened so that they can play an increased role in consumers' awareness of their rights and responsibilities. Such strengthening may require funding from either the state budget or from donor organizations. Good Practice A.2 Code of Conduct a. There should be a principles-based Code of Conduct that is devised in consultation with the industry, and is monitored and enforced by a statutory agency. b. The statutory Code could be augmented by voluntary codes on matters such as facilitating easy switching of current accounts and a common terminology for the description of bank charges, services and products. c. The operation of voluntary codes should be monitored by a statutory agency, and the Annual Report of that agency should comment on the operation of those codes. There is currently no Code of Conduct for banks in Azerbaijan. The Law on the NBA should be amended to give that institution responsibility for consumer protection and education in the banking field, and to give it the powers necessary to enforce a Code of Conduct. Pending progress on this issue, the NBA should commence work with the banking industry to develop specific conduct of business rules that reflect the principles of good business conduct. These rules should be put on a statutory footing when the NBA receives the appropriate powers. At the time of onsite supervision, the NBA should review the compliance of each bank regarding the Code of Conduct, or other conduct of business rules. The NBA should also provide recommendations to banks on ways to improve their compliance with the Code. The Code of Conduct should also be widely available to consumers, for example, in bank branches and on the websites of the banks. In addition, the NGOs and other consumer associations provide advice to banks when they fail to follow the Code. Good Practice A.3 Balance between Prudential Supervision and Consumer Protection Where prudential supervision and consumer protection are the responsibility of a single organization, the head of each function should be at the same level within the organization. Thus, when inevitable differences of emphasis arise, the organization s final position is determined by the quality of the arguments made rather than the rank of the person making the argument. The prudential supervision of banks is overseen by an Officer of Director level within the NBA. The embryonic consumer protection function is within the Banking Supervision Department and ultimately reports to the Director responsible for prudential supervision. The consumer protection and education functions of the NBA should be organized under an Officer of Director level. SECTION B Good Practice B.1 DISCLOSURE AND SALES PRACTICES Know Your Customer Before providing a product or service to a consumer, a bank must gather, record and retain sufficient information from the consumer to enable it to provide a recommendation or a product or service appropriate to that 4

9 Banking Sector consumer. The level of information gathered should be appropriate to the nature and complexity of the product or service being sought by the consumer, but must be to a level that allows the bank to provide a professional service. There are no provisions to this effect in Azerbaijan. Good Practice B.2 A rule should be put in place requiring banks to comply with the good practice cited above. Suitability Keeping in mind the facts disclosed by the consumer and other relevant facts about that consumer, a bank must ensure that: a. Any product or service offered to a consumer is suitable to that consumer; b. Where it offers a selection of product options to the consumer, these product options represent the most suitable from the range available to the bank; and c. Where it recommends a product to a consumer, the recommended product is the most suitable product for that consumer. There are no provisions to this effect in Azerbaijan. Good Practice B.3 A rule should be put in place requiring banks to comply with the good practice cited above. Cooling-off Period Unless explicitly waived by the consumer in writing, there should be a cooling-off period of at least seven days associated with all credit products. There are no cooling-off provisions in place in Azerbaijan. Good Practice B.4 The customer should have the right to withdraw from the arrangement without having to incur expenses other than the transaction processing fee agreed upfront. A rule should be put in place requiring banks to provide a cooling-off period for contracts such as mortgages and loans, and to inform consumers of their rights. As an immediate measure, a seven day cooling off period would be helpful. However in 2010, following the approach of the EU, the cooling off period should be increased to 14 days. Linked Sales Where a bank requires as a condition of granting a loan that a borrower puts a payment protection insurance policy in place (or other similar policy), the bank may not insist that the insurance policy from any particular insurer be used. Consumers should be free to shop around for insurance products. There are no provisions to this effect in Azerbaijan. Given that many of the major banks are associated with insurance companies, this is an issue of particular relevance in this market. A rule should be put in place requiring banks to comply with the good practice cited above. 5

10 Banking Sector Good Practice B.5 Preservation of Rights A bank should not, in any communication or agreement with a consumer (except where permitted by applicable legislation), exclude or restrict, or seek to exclude or restrict: a. Any legal liability or duty of care to a consumer, which it has under applicable laws or regulations; b. Any other duty to act with skill, care and diligence, which is owed to a consumer in connection with the provision of financial services; or c. Any liability owed to a consumer for failure to exercise the degree of skill, care and diligence that may reasonably be expected of it in the provision of a financial service. There are no provisions to this effect in Azerbaijan. Good Practice B.6 A rule should be put in place requiring banks to comply with the good practice cited above. Regulatory Status Disclosure Banks should disclose in all advertising, print, television and radio, the fact that they are regulated, and by whom. There is no requirement to this effect in Azerbaijan. Good Practice B.7 A rule should be put in place requiring banks to disclose their regulatory status in all advertisements in the format XYZ Bank is regulated by the National Bank of Azerbaijan Terms and Conditions a. Before a customer opens a deposit, current or loan account, a bank must provide the customer with a copy of its general terms and conditions, and any terms and conditions that apply to the particular account. b. The terms and conditions should disclose details of the bank s general charges, the bank s complaints procedure, information about any compensation scheme that the bank is a member of, and an outline of the action and remedies which the bank may take in the event of default by the consumer. c. The terms and conditions should include information, inter alia, on the methods of computing interest rates paid or charged, any relevant non-interest charges or fees related to the product, any service charges, any restrictions on account transfers and the procedures for closing an account. d. Insofar as possible, the terms and conditions must be written in plain language, and always in a font size and spacing that facilitates easy reading. The Law on Banks provides that relations between banks and their customers shall be governed by the Civil Code, regulations of the NBA pursuant to the Civil Code and by agreements between them (Article 36.1). It also provides that procedures for opening, maintaining and closing bank accounts shall be carried out in accordance with the Civil Code, the Law on Banks and the NBA regulations (Article 36.2). In addition, the Law requires that in their offices, banks must provide customers with written information about the terms and conditions of deposit-taking, lending, and other activities the bank is engaged. (Article 36.4) 6

11 Banking Sector There are however no requirements to provide terms and conditions to consumers, nor that they be in plain language. Good Practice B.8 A rule should be put in place requiring banks to provide their terms and conditions to their customers in plain language prior to opening any account. Key Facts Document Banks should prepare a single-page Key Facts Document, written in plain language, in respect of each of its products. This should be given to the consumer prior to the opening of an account or the drawing down of a loan. There are no rules to this effect in Azerbaijan. Good Practice B.9 A rule should be put in place requiring banks to comply with this good practice. Guarantees An advertisement must not describe a deposit, or the interest rate payable on a deposit, as guaranteed or partially guaranteed unless: a. There is a legally enforceable agreement with a third party who undertakes to meet, to whatever extent is stated in the advertisement, the consumer s claim under the guarantee; and b. Where it is the case, the advertisement states that the guarantee is from a connected party of the bank. There are no rules to this effect in Azerbaijan. Good Practice B.10 A rule should be put in place requiring banks to comply with this good practice. Professional Competence a. Bank staff who deal directly with consumers and those who are involved in marketing activities must keep up-to-date on all regulatory and legislative requirements relevant to their work, and also with the details of the products that they are selling or promoting. Mis-selling can easily occur if staff are unable to correctly identify the needs of consumers or if they do not fully understand the products and services offered by their bank. b. Regulators and industry associations should collaborate to establish and administer minimum competency requirements for bank staff. The Azerbaijan Bank Training Centre, a subsidiary of the Azerbaijan Banks Association, offers training courses on many aspects of retail banking, however at present there are no components dealing with regulatory compliance. The courses offered are not mandatory. The NBA and the Azerbaijan Banks Association should consider how a minimum competency framework can be developed for bank staff that deal with consumers or who are involved in the marketing of bank products and services. SECTION C Good Practice C.1 CUSTOMER ACCOUNT HANDLING AND MAINTENANCE Statements a. Unless agreed in writing with the customer a bank must, at least annually, issue a statement over every account operated by it, setting out: 7

12 Banking Sector (i) all transactions over the account during the period covered by the statement; and (ii) details of the interest rate(s) applied to the account during the period covered by the statement. b. Current account and credit card account statements should normally be issued monthly. c. Credit card statements must set out the minimum payments required and the total interest costs that will accrue if the cardholder makes only the requested minimum payment. d. Mortgage account statements should clearly indicate the amount paid, the outstanding amount and the allocation of payment to the principal and interest and, if applicable, tax accruals. There are no explicit rules to this effect in Azerbaijan. Good Practice C.2 A rule should be put in place requiring banks to comply with this good practice. Notification of changes in interest rates and non-interest charges Consumers should be notified of changes in the interest rates paid or charged on their accounts in advance where possible, and as soon as practicable otherwise. Consumers should be notified of changes in non-interest charges at least 30 days in advance of the effective date. There are no rules to this effect in Azerbaijan. Good Practice C.3 A rule should be put in place requiring banks to comply with this good practice. Consumer Records A regulated entity must maintain up-to-date consumer records containing at least the following: a. A copy of all documents required for consumer identification and profile; b. The consumer s contact details; c. All information and documents prepared in compliance with the regulations in force; d. Details of products and services provided to the consumer; e. All correspondence with the consumer and details of any other information provided to the consumer in relation to the product or service; f. All documents or applications completed or signed by the consumer; g. Copies of all original documents submitted by the consumer in support of an application for the provision of a service or product; and h. All other relevant information concerning the consumer. Details of individual transactions should be retained for 6 years after the date of the transaction. All other records required as noted above should be retained for 6 years from the date the relationship ends. Consumer records need not be required to be kept in a single location but must be complete and readily accessible. The Law on Banks provides that the banks should keep on file, for a period time and according to a list set by the legislation, the pertinent documents of banking operations, concluded agreements and transactions, including electronic information. In addition, records relating to the identification of customers and documents confirming the customers settlements and transactions must be stored by banks for a minimum period of five years after the relationships with the customers are terminated and payments are over (Article 39). 8

13 Banking Sector Good Practice C.4 No recommendation is presented. Checks a. The issuance and clearing of checks must be based on clear legal rules. b. Banks must act fairly and reasonably when dealing with dishonored checks and honor checks without inquiry as long as the legal requirements are met. c. Banks must inform customers upfront of the consequences of issuing a check without sufficient funds. d. Banks must credit consumer accounts when a deposited check clears, within the hold period allowed by law. e. Banks must promise to return funds to a consumer checking account within agreed number of business days when something goes wrong with a check. f. Where necessary, there must be rules and regulation to cap the charges on check issuance and clearance. Good Practice C.5 Checks are not frequently used in Azerbaijan. No recommendation is presented. Debt Recovery a. The customer must be protected against abusive debt collection practices by the bank or third-party debt collectors. b. The type of debt that can be collected, the person who can collect the debts and the manner in which debt can be collected must be indicated to the customer at the time the transaction is entered into. c. The right of a debt collector to contact anyone else about a customer s debt must be indicated, and the type of information they may seek must also be provided. d. There ought to be legal rules prohibiting debt collectors from using false statements when collecting a debt, using unfair practices, giving false credit information to others, including a credit bureau. There are no provisions to this effect in Azerbaijan. A rule should be put in place requiring banks to comply with this good practice. SECTION D Good Practice D.1 PRIVACY AND DATA PROTECTION Data Privacy Bank customers have a right to expect that their financial activities will have privacy from federal government scrutiny and others. The law ought to require banks to ensure that they protect the confidentiality and security of a customer s information against any anticipated threats or hazards to the security or integrity of such information; and against unauthorized access to, or use of, customer information that could result in substantial harm or inconvenience to any customer. The Law on Banks provides that bank secrecy applies to customers and correspondent accounts and deposits, information about existence of accounts, account transactions and balances, as well as information about account holders, including names, locations and administrators of clients pursuant to the Civil Code. Bank secrecy also applies to customers property held by a bank, and information about owners, nature and value of 9

14 Banking Sector such property. Banks are required to guarantee that all the information considered a matter of bank secrecy shall be maintained in confidence (Article 41.1). In a case where a bank has illegally disclosed the information subject to bank secrecy in accordance with the Civil Code, bank customers whose rights have been violated may demand redress of losses incurred as a result of this violation (Article 41.6). Good Practice D.2 No recommendation is presented, however the NBA is encouraged to monitor the operation of data privacy legislation as it affects bank customers, and to make recommendations for enhancements where appropriate. Credit Bureaus a. Banks must ensure the accuracy and credibility of the information that it shares. b. Credit bureaus must comply with the timeliness of updating information of consumers. c. Consumer records should be kept confidential and only be provided for permitted and lawful purposes. d. There ought to be clear procedures and rules on the retention period of credit records, and customers must be informed about the retention period. e. Customers must have access to their credit reports and be provided with a copy of their reports on conditions that are transparent. f. There must be established procedures for correcting mistakes on a consumer's credit report. According to the Article 35.4 of the Law on Banks, banks are obliged to inform the central credit bureau (established at the NBA) on matters concerning the solvency and creditworthiness of customers for the purpose of soundness of banking system. Article 35 also states that Bank secrecy provisions hereof shall apply to the information kept in, and disclosed from the credit bureau. The Law on Protection of Information (Article 12) asserts the right of natural persons and legal entities to get access to information about them. The Law requires that a list of documented information on natural persons and legal entities, and a procedure for its use in information systems, shall be established by Azerbaijani legislation. This Law also provides that natural persons and legal entities shall have a right to get access to documented information about them, to require the information to be corrected, and to know who sought information about them and for what purposes (except cases determined by legislation of Azerbaijan). No recommendation is presented, however the NBA is encouraged to monitor the operation of data privacy legislation as it affects bank customers, and to make recommendations for enhancements where appropriate. SECTION E Good Practice E.1 DISPUTE RESOLUTION MECHANISMS Complaints Procedure a. A bank must have in place a written procedure for the proper handling of complaints. This procedure need not be applied where the complaint has been resolved to the complainant's satisfaction within a short period of time, provided that a record of this fact is maintained. At a minimum, this procedure must provide that: (i) the bank will acknowledge each complaint in writing within a few business days of the complaint being received; 10

15 Banking Sector (ii) the bank will provide the complainant with the name of one or more individuals appointed by the bank to be the complainant s point of contact in relation to the complaint until the complaint is resolved or cannot be processed any further; (iii) the bank will provide the complainant with a regular written update on the progress of the investigation of the complaint at reasonable intervals of time; (iv) the bank will advise the complainant in writing, within a few business days of the completion of the investigation of a complaint, of the outcome of the investigation and, where applicable, the bank will explain the terms of any offer or settlement being made. b. A summary of the bank s procedure for handling complaints must be contained in the bank s terms and conditions. c. When a bank receives a verbal complaint, it must offer the consumer the opportunity to have the complaint treated as a written complaint. In any event a bank may not require that a complaint be put in writing. d. A bank must maintain an up-to-date record of all complaints subject to the complaints procedure. This record must contain the details of each complaint, a record of the regulated entity's response(s), any other relevant correspondence or records and the action taken to resolve each complaint. These records should be reviewed from time to time by the regulator. Banks are not required to have a complaints procedure in place. Good Practice E.2 A rule should be put in place requiring banks to comply with this good practice. Formal Claims Dispute Mechanisms a. A system should be in place that allows consumers to seek cheap and efficient third-party recourse in the event they cannot resolve an issue with the bank, which could be a banking ombudsman. b. The role of the third-party system vis-à-vis consumer complaints must be in place and made known to the public. c. The impartiality and independence of the system from the appointing authority and the banking industry must also be assured. d. The enforcement mechanism of the decisions of the ombudsman or equivalent institution and the binding nature of its decisions on banks must be in place and publicized. There are no out-of-court dispute resolution mechanisms in place in Azerbaijan. The NBA should establish a mechanism whereby consumers can quickly obtain redress at no cost. This mechanism could be an alternative dispute resolution system, and independent statutory ombudsman or an ombudsman working under the professional associations, such as the bankers association. Whichever mechanism is chosen, its impartiality and independence from the appointing authority and the industry must also be assured. In addition, the enforcement mechanism of the decisions of the ombudsman or equivalent institution and the binding nature of its decisions on financial institutions should be clearly established and be known to the public. When this mechanism is in place, an obligation to inform consumers of their right to refer their complaint to the ombudsman or equivalent institution when the internal complaint process is completed should be incorporated into the internal complaints procedures, described in the previous recommendation. 11

16 Banking Sector SECTION F Good Practice F.1 GUARANTEE AND COMPENSATION SCHEMES Depositor Protection a. There must be a clear provision in the law to ensure that the regulator can take prompt corrective actions on a timely basis. b. The law on deposit insurance must be clear on the amount of deposit and the type of deposits that are covered under the law. c. There must be an effective mechanism in place for the timely pay-out of deposits protected by the guarantee. d. In the absence of deposit insurance, there must be an effective and timely payout mechanism in the event of insolvency of a bank. There is a deposit insurance fund in place in Azerbaijan. The Azerbaijan Deposit Insurance Fund insures banking deposits up to 6,000 AZM from January 1, This amount will be increased to 8,000 AZM from The current level of coverage is sufficient to fully insure 97 percent of all deposits held by banks in Azerbaijan. The law and procedures in place seem consistent with good practice in the area of deposit insurance. As an example, there is an excellent consumer information leaflet that the Azerbaijan Deposit Insurance Fund has produced, which is distributed on the internet and through bank branches. No recommendation is presented. SECTION G Good Practice G.1 CONSUMER EMPOWERMENT Financial Education in Schools Information about basic financial products such as current and deposit accounts, leasing contracts, term loans and mortgages and credit cards, as well as how to calculate and compare interest rates should be taught in schools. There is no formal teaching of financial products although the mathematics and business curricula cover some of this ground. Good Practice G.2 The NBA, together with the Insurance Supervision Department under the Ministry of Finance, the State Securities Commission and the Ministry of Education should take steps to establish a National Steering Group for financial education in schools. Industry associations and consumer representative bodies should also be represented. The purpose of the National Steering Group should be to oversee and coordinate financial education in Azerbaijan based on best international practices. Financial Education through the Media a. Print and broadcast media should be encouraged to actively cover issues related to retail financial products. b. Regulators and industry associations should provide sufficient information to the press to facilitate analysis of related issues. Coverage of financial consumer issues in the Azerbaijan media is ad-hoc in nature. The regulators and the industry do not provide enough support and information resources. The statutory regulators, perhaps under the leadership of the NBA, should develop a new media communications office staffed by communications experts - and established 12

17 Banking Sector separately from the office which deals with monetary policy/financial stability/prudential supervision issues. The office should seek to promote debate within the media on financial consumer issues and should be available to deal proactively with questions from the media. The statutory regulators should conduct regular cost comparisons of financial products and services, and in addition to publishing these comparisons in print and on their websites, they should also use the media to amplify the message from these comparisons that shopping around is a good idea. Good Practice G.3 Plain Language All communications intended for retail consumers, whether from regulators or from industry participants, should seek to use plain language and avoid using jargon or complicated phrasing. There are no standards in this regard in Azerbaijan. Good Practice G.4 The regulators and the industry, perhaps in consultation with voluntary agencies should try to develop a plain language standard for use. Information Resources for Consumers Financial regulators should devise, publish and distribute information resources for consumers that seek to improve awareness by providing independent information on the costs, risks and benefits of financial products and services. Public education on consumer awareness in the area of financial services by non-governmental organizations should also be encouraged. The sectoral regulators in Azerbaijan do not produce consumer information. The Azerbaijan Deposit Insurance Fund has developed a consumer information leaflet, which is distributed through bank branches, and which explains the coverage of the scheme. The sectoral regulators, perhaps under the leadership of the NBA, should establish consumer communications functions charged with developing a suite of consumer publications that explain financial products and services in plain language. A distribution strategy appropriate to Azerbaijan will need to be developed and could include making the publications available in government and municipal buildings, libraries, colleges and schools, etc. Awareness of the publications should be stimulated through a media strategy. Organizations within Azerbaijan society that wish to develop information resources for their members, for example farmers organizations, the military, trade unions, etc. should be encouraged and assisted by the sectoral regulators, by providing advice and information and by drafting articles for the publications of those organizations. Good Practice G.5 Financial Inclusion Participation in the financial system, at the very minimum by operating a current account, is increasingly necessary in order to participate fully and effectively in society. Thus, there should be special initiatives to bring the unbanked within the financial system and to combat financial exclusion. These initiatives may include the creation of low- cost and limited-flexibility bank accounts. 13

18 Banking Sector There are no policy measures in place to address financial exclusion in Azerbaijan. For a population in excess of 8 million people there are just over one million bank accounts in operation. Good Practice G.6 The NBA should conduct a study in order to identify the reasons for the low level of bank account ownership. The NBA should also consult with relevant regional, state, and community organizations, and bring forward appropriate proposals to address this issue. Financial Consumer Advocacy In the development of financial sector policies, public authorities need to consult with industry and consumer representatives, in order to develop proposals that meet the needs and expectations of these key stakeholders. Industry groups are typically well resourced in terms of personnel and funds. However, consumer groups are rarely as well resourced because consumers are not well organized, and most consumer bodies deal with all kinds of issues, and do not have specialized skills to follow financial issues closely. Given that it is in the interest of better public policy that consumers be actively involved in this process, it may be appropriate for the State to either provide some funding to an NGO for this purpose, or to create a special entity to lobby on behalf of consumers within the policy-making process. There is no specialized financial consumer lobby group in Azerbaijan. There are a number of general-interest consumer groups, however these groups do not currently have the capacity to fulfill this function. Good Practice G.7 Over the medium term, the Ministry of Finance may wish to consider providing funding for NGOs focused on advocacy for the rights of financial consumers. Establishing a Baseline for Measuring Financial Capability In order to ensure that financial consumer protection, education and information initiatives are proportionate and appropriate, and in order to measure the effectiveness of those initiatives over time, it is necessary to measure financial capability, by way of a large-scale market research project, and to repeat that measurement periodically. Financial Capability means being able to manage money, keep track of your finances, plan ahead, choose financial products and stay informed about financial matters 1. The market research must be sufficiently detailed to capture all aspects of the financial affairs of typical consumers and the sample population must reflect the population of the country in terms of gender, socio-economic status, urban versus rural, etc. Financial capability has not to date been measured in Azerbaijan. A financial capability research project should be commenced as soon as practicable. Because of the greater resources available to it, and because of the statistical capacity it already possesses, the NBA would be best suited to establish the scope of work, conduct the tender process and oversee the project. SECTION H COMPETITION 1 This definition is used on the website of the UK s Financial Services Authority. 14

19 Banking Sector Good Practice H.1 Regulatory Policy and Competition Policy Financial regulators and competition authorities should be required to consult with one another for the purpose of ensuring the establishment and pursuit of consistent policies regarding the regulation of financial services. There are no requirements in place that require the sectoral regulators in Azerbaijan and the Antimonopoly Department to consult with one another. Good Practice H.2 There should be a statutory obligation that requires the Antimonopoly Department to consult with the banking, insurance and securities regulators in order to ensure adequate and consistent policies regarding regulation in the financial system. Review of Competition Because of the key significance of the retail banking sector to the economy and to the welfare of consumers, competition authorities should maintain a watching brief on competition in that sector. Competition authorities should conduct and publish periodic assessments of competition, and make recommendations on how competition can be enhanced. The Antimonopoly Department has not to date conducted any assessment of the general levels of competition in retail financial services markets, though they have conducted some investigations of particular banking and insurance contracts to see if they were in compliance with legislation. The Herfindahl-Hirschman Indices 2 for the current account and deposit account markets in Azerbaijan are 2639 and 2373 respectively. These high values arise in particular from the size of the market share enjoyed by the International Bank of Azerbaijan. These are very important markets because current and deposit accounts are typically the most commonly held financial products, and particularly because of the role that current accounts play as a gateway to other financial products and services. The Antimonopoly Department or the NBA should conduct a detailed analysis of competition in the personal current account market. The analysis should focus on: anti-competitive practices (including restrictive arrangements with Government and other State agencies); evidence of rivalry and of co-operation between banks; barriers to entry; price transparency; search and switching costs for consumers; and the operation of the clearing system. The government agency should publish this report and make recommendations as to how competition in the personal current account market can be enhanced. 2 Herfindahl-Hirschman indices (HHI) are calculated by squaring the market share of each participant in a market and then summing the results. The higher the HHI number, the more concentrated is market power. Increases in the index occur as the number of competitors in a market decreases and/or the disparity in size between financial service providers' increases. Another relevant factor is where market share is relatively evenly distributed among participants, this will give rise to a lower HHI number than where there is a small number of financial service providers that all enjoy a high market share. Markets in which the HHI is between 1000 and 1800 points are considered to be moderately concentrated and those in which the HHI is in excess of 1800 points are considered to be concentrated 15

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21 Insurance Sector Azerbaijan: Consumer Protection in the Insurance Sector Compared to the banking sector, the insurance industry in Azerbaijan is quite underdeveloped. The life insurance sector is dwarfed by the non-life sector, and unit-linked investment funds do not exist. The principal retail product is motor insurance, with third-party liability insurance of up to 10,000 AZN being compulsory. Other product lines revolve around various categories of motor, property, health, personal accident and liability insurance. There are 30 active insurance companies in the market and many of the larger participants are subsidiaries of major banks. The total amount of premiums earned in 2007 was approximately 170 millions. A new Law on Insurance Activity was approved in March 2008, and it represents a significant advancement in the development of insurance law in several respects. The new law provides many new consumer protection provisions and anticipates greater development in the life assurance business. One area in which the regulator could provide enhanced market transparency, thus facilitating more efficient competition, is the publication of market statistics. An annual statistical digest that gave details of net underwriting revenues by insurance class and a summary of the profits and loss account of each market participant (segregating the underwriting profit and loss from the investment result) would represent a major enhancement. For all categories of compulsory insurance, aggregated details of claims costs development for each underwriting year should also be published. 17

22 Insurance Sector Good Practices: Insurance Sector A proper assessment of the overall insurance sector and the environment in which it operates is critical to determine whether or not some of the principles listed below are relevant for the country. Good business relationships between the local insurers and the public in general are one of the key issues for the development of the economy. There has to be mutual trust and confidence. In the absence of transparency in pricing, adequate consumer awareness and protection and dispute resolution mechanisms, insurance systems have less efficiency and accessibility. SECTION A Good Practice A.1 CONSUMER PROTECTION INSTITUTIONS Legislative Framework The law should provide for clear rules on consumer protection in the area of regulated financial products and services, and there must be adequate institutional arrangements for implementation and enforcement of consumer protection rules. Specifically, the law must give a mandate to protect and educate consumers to a statutory agency, and give that agency the powers necessary to perform that function. The Law on Insurance of 1993 did not provide explicitly for consumer protection for insurance consumers. The new Insurance Law contains a provision requiring the regulator to take measures for the protection of rights and legal interests of insurers (re-insurers), insureds, insured persons, beneficiaries and other participants of insurance market, as well as the state (Article ). The Government of Azerbaijan should consider how financial consumer protection can be put more explicitly on a statutory footing, in order to help ensure that consumers can make informed decisions on their financial affairs in a safe and fair market. The mandate of the Insurance Supervision Department under the Ministry of Finance should be enhanced to give it explicit responsibility for consumer protection, education and information in the area of insurance products and services. Good Practice A.2 Code of Conduct a. There should be a principles-based Code of Conduct for insurance companies that is devised in consultation with the industry, and is monitored and enforced by a statutory agency. b. The statutory Code could be augmented by voluntary codes on matters such as genetic testing and life insurance medical reports, etc. There are no codes of conduct for insurance companies or intermediaries in Azerbaijan. The law in relation to the Insurance Supervision Department under the Ministry of Finance should be amended to give that institution responsibility for consumer protection and education in the field of insurance and also to give it the powers necessary to enforce a Code of Conduct for insurance companies and insurance intermediaries. Pending progress on this issue, the Insurance Supervision Department under the Ministry of Finance should commence work with the insurance industry to develop specific conduct of business rules that reflect the Good Business Conduct Principles. These rules should be put on a statutory footing when the Insurance Supervision 18

23 Insurance Sector Department (or the executive authority envisaged in the new Insurance Law) receives the appropriate powers. SECTION B Good Practice B.1 DISCLOSURE AND SALES PRACTICES Know Your Customer Before providing a product or service to a consumer, an insurance company or intermediary must gather, record and retain sufficient information from the consumer to enable it to provide a recommendation or a product or service appropriate to that consumer. The level of information gathered should be appropriate to the nature and complexity of the product or service being sought by the consumer, but must be to a level that allows the insurance company or broker to provide a professional service. There are no provisions to this effect in Azerbaijan. Good Practice B.2 A rule should be put in place requiring insurance companies and intermediaries to comply with the good practice cited above. Suitability Keeping in mind the facts disclosed by the consumer and other relevant facts about that consumer, an insurance company or intermediary must ensure that: 1. any product or service offered to a consumer is suitable to that consumer; 2. where it offers a selection of product options to the consumer, these product options represent the most suitable from the range available to the insurance company or broker; and 3. where it recommends a product to a consumer, the recommended product is the most suitable product for that consumer. There are no provisions to this effect in Azerbaijan. Good Practice B.3 A rule should be put in place requiring insurance companies and intermediaries to comply with the good practice cited above. Cooling-off Period Unless explicitly waived by the consumer in writing, there should be a cooling-off period of at least seven days associated with all life insurance contracts. There are no cooling-off provisions in place in Azerbaijan. Good Practice B.4 A rule should be put in place requiring insurance companies to provide a cooling-off period for life insurance contracts, and to inform consumers of their rights. The customer must have the right to withdraw from the arrangement without having to incur expenses other than the transaction processing fee agreed upfront. Preservation of Rights An insurance company or intermediary should not, in any communication or agreement with a consumer (except where permitted by applicable legislation), exclude or restrict, or seek to exclude or restrict: 1. any legal liability or duty of care to a consumer, which it has under applicable laws or regulations; 19