BULGARIA. Diagnostic Review of Consumer Protection and Financial Capability. Comparison against Good Practices. Volume II.

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1 BULGARIA Diagnostic Review of Consumer Protection and Financial Capability Volume II Comparison against Good Practices Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized May 2009 Private and Financial Sector Development Department Europe and Central Asia Region Washington, DC

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3 BULGARIA Diagnostic Review of Consumer Protection and Financial Capability Volume II Comparison against Good Practices May 2009 THE WORLD BANK Private and Financial Sector Development Department Europe and Central Asia Region Washington, DC

4 This Diagnostic Review 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. ii

5 BULGARIA Diagnostic Review of Consumer Protection and Financial Capability Volume II Comparison against Good Practices Contents Abbreviations & Acronyms... v Foreword... vi Acknowledgments... vii Bulgaria: Consumer Protection in the Banking Sector... 1 Good Practices: Banking Sector Bulgaria: Consumer Protection in the Non-bank Credit Institutions Segment Good Practices: Non-bank Credit Institutions Segment Bulgaria: Consumer Protection in the Securities Sector Good Practices: Securities Sector Bulgaria: Consumer Protection in the Credit Reporting System Good Practices: Credit Reporting System Bulgaria: Consumer Protection in the Insurance Sector Good Practices: Insurance Sector Bulgaria: Consumer Protection in the Pensions Sector Good Practices: Pensions Sector Annex Annex 1: Legal and Institutional Framework Annex 2: EU Directives on Consumer Protection in Financial Services and Applicable Bulgarian Legislation Tables Table 1: Structure of the Bulgarian Financial Sector... 2 Table 2: Bulgarian Financial System Structure Table 3: Balance Sheet of Leasing Companies Table 4: Balance Sheet of Credit Cooperatives Table 5: Bulgarian Securities Sector Structure Figures Figure 1: Developments in Bank Credit Growth... 3 Figure 2: Market Share of Major Banks... 4 Figure 3: Percentage of Population Using Financial Products in European Countries... 4 Figure 4: Loans to Households... 6 Figure 5: Relative Shares of Household Credit by Purpose... 6 Figure 6: Claims under Financial Lease Contracts on Residents by Sector iii

6 Figure 7: Cross-Country Comparison of Credit Reporting System Coverage Figure 8: Cross-Country Comparison of the Depth of Credit Information Figure 9: Bulgarian Insurance Market Growth Figure 10: Life and Non-life Insurance Assets Figure 11: Insurance Penetration and Density in EU New Member States Figure 12: Structure of Non-Life Insurance Premium Income by Product Figure 13: Structure of Life Insurance Premium Incomes by Product Figure 14: Pension Funds Membership Figure 15: Pension Funds Assets in European Countries Figure 16: Pension Funds Net Assets under Management Figure 17: Structure of Investment Portfolio of Private Pension Funds Figure 18: Nominal and Real Return Rates of Pension Funds Figure 19: Market Share of Pension Funds by Net Asset Value iv

7 Abbreviations & Acronyms ABB Association of Banks in Bulgaria ABI Association of Bulgarian Insurers ADR Alternative dispute resolution AMC Asset management company APR Annual Percentage Rate of Charge BAAMC Bulgarian Association of Asset Management Companies BAL Bulgarian Association of Leasing BALIP Bulgarian Association of Licensed Investment Brokers BASPSC Bulgarian Association of Supplementary Pension Security Companies BGN Bulgarian Lev (local currency) BNB Bulgarian National Bank BSE-Sofia Bulgarian Stock Exchange-Sofia CEE Central and Eastern Europe CIU Collective investment undertaking COE Council of Europe CPC Consumer Protection Commission DOLCETA Development of On-Line Consumer Education Tools for Adults DG SANCO Directorate-General for Health and Consumers (of the EC) EC European Commission EU European Union EU-15 Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden and United Kingdom FSC Financial Supervision Commission FX Foreign Exchange GDP Gross domestic product IMF International Monetary Fund IT Information technology KYC Know your customer LIBOR London Interbank Offered Rate MFI Act Market in Financial Instruments Act MiFID Directive on Markets in Financial Instruments MOU Memoranda of Understanding MTPL Motor third party liability NBCI Non-bank credit institution NGO Non-governmental organization NMS EU New Member State OECD Organisation for Economic Co-operation and Development SIC Social Insurance Code SOFIBOR Sofia Interbank Offered Rate UCITS Undertakings for Collective Investment in Transferable Securities UK United Kingdom USA United States of America USAID United States Agency for International Development USD United States Dollar n.a. Not Available $1 = 1.48 BGN (April 2009) v

8 Foreword Consumer protection in financial services lies at the heart of any financial sector that is efficient, competitive and fair. Three areas are important. Customers of financial institutions should have the right to receive information that is clear, complete, accurate and comprehensible before they decide to borrow or to invest. They should have access to recourse mechanisms that are efficient and cost-effective. They should also be able to obtain sufficient financial education to understand the terms and conditions and other information provided to them as financial consumers. We are pleased to provide this pilot Diagnostic Review of Consumer Protection and Financial Capability in Bulgaria and thank the Bulgarian authorities for their valuable cooperation and collaboration in its preparation. The Review not only looks at financial services in Bulgaria but also refines a set of good practices or benchmarks for use in reviewing consumer protection in financial services in any jurisdiction. It is expected that this work will prove helpful to the international community and those in emerging markets who seek to establish common ground for minimum good practices in consumer protection in financial services. vi

9 Acknowledgments This review was prepared by a team led by Sue Rutledge, Regional Corporate Governance/ Consumer Protection Coordinator and Senior Private Sector Development Specialist, World Bank. The project team consisted of Brett Coleman (Senior Financial Sector Specialist), Evgeni Evgeniev (Private Sector Development Specialist), Martin Melecky (Financial Economist), Rodolfo Wehrhahn (Senior Insurance Specialist), Richard Symonds (former Senior Counsel), Juan Carlos Izaguirre Araujo (Consultant) and Bujana Perolli (Consultant). All are of the World Bank. The Bulgarian version of this report was made possible thanks to the translation of Simeon Enchev. The report was prepared under the general guidance of Orsalia Kalantzopoulos (Country Director for Bulgaria) and Fernando Montes-Negret (Director of the Finance and Private Sector Development Department of the European and Central Asia Region). Florian Fichtl (Country Manager for Bulgaria) provided detailed comments and strategic guidance to the team. Peer review comments were received from Tomáš Prouza, former Deputy Finance Minister of the Czech Republic, and Antony Randle, Consultant of the World Bank. Helpful comments and advice were also provided by the Ministry of Finance, Ministry of Economy and Energy, Bulgarian National Bank, Financial Supervision Commission and the Consumer Protection Commission. The authors of this report are grateful to all for their contributions. vii

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11 Banking Sector Bulgaria: Consumer Protection in the Banking Sector Overview Bank intermediation in Bulgaria has been growing rapidly with the entry of foreign banks and rapid credit growth. Annual credit growth has been high, ranging between percent. The banking sector has been among the most profitable in the region, with an average return on assets of 2.4 percent. This is leading foreign banks to set ambitious targets for their subsidiaries in Bulgaria, which in turn is driving a rapid expansion of staff and branch networks. Such dynamics explain the more aggressive and risky strategies of some banks. The global credit crunch, however, could lead to a decline in credit growth in Bulgaria. The Bulgarian financial sector is dominated by the banking sector. The total assets of the banking sector have increased from about 40 percent of GDP in 2002 to about 105 percent in 2007 (Table 1 and Figure 1), driven largely by the entry of foreign banks. In total, there are 29 commercial banks. The concentration of the sector is relatively low, with the largest banks having a 15.3 percent share of the market (Figure 2). Six of the seven largest banks are subsidiaries of major EU banks representing 63 percent of total banking assets. All EU subsidiaries and EU bank branches combined represent 83 percent of banking assets. 1

12 Banking Sector Table 1: Structure of the Bulgarian Financial Sector Dec- 03 Dec- 04 Assets (in BGN million) Assets (in percent of GDP) Number of Entities Dec- 05 Dec- 06 Dec- 07 Sep- 08 Dec- 03 Dec- 04 Dec- 05 Dec- 06 Dec- 07 Sep- 08 Dec- 03 Dec- 04 Dec- 05 Dec- 06 Dec- 07 Sep- 08 Commercial banks 17,323 24,870 32,886 42,201 59,094 69, Nonbank financial institutions 1,652 2,610 5,269 10,970 21,401 21, Insurance companies 1/ ,226 1,755 2,183 2, Non-life ,122 1,379 1, Life Investment funds 2/ Pension funds 3/ ,112 1,517 2,328 2, Leasing companies 1,379 2,504 4,622 6, Mortgage and consumer lending 1,209 2,275 2, Special Purpose Vehicles securitizing claims Special Purpose Vehicles securitizing real estate ,283 1, Non-banking investment intermediaries ,323 3,029 7,723 4, Total domestic financial system 18,975 27,480 38,155 53,171 80,495 90, Memorandum item: GDP (annual) 4/ 34,628 38,823 42,797 49,361 56,520 64,384 Source: Bulgarian National Bank, Financial Supervision Commission, National Statistical Institute Notes: 1/ BNB data for December 2007 and September / Only resident investment funds are included. BNB data for December 2007 and September / FSC data. Balance sheet assets for December 2007 and September 2008 (preliminary data). In columns 'number' data on the number of pension insurance companies are included. 4/ Preliminary data from National Statistical Institute for 2007 and

13 Banking Sector Figure 1: Developments in Bank Credit Growth Bank credit growth to the private sector has recently stabilized but at a very high level Credit to the private sector, % year-on-year growth 1/ Banks dominate private credit to the economy, in particular if securitized loans are included Credit flow to the private sector by resident financial institutions, % of GDP Other credit Loans sold by banks Bank credit The administrative measures to limit credit growth led to a peak in lending and a year later a drop in credit growth Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec Q Recently, corporate credit has grown faster than household credit Private sector credit developments by component, percent year-on-year growth And corporate credit continues to dominate the total credit flow to the economy Credit flow as percent of GDP Residential mortgages Household credit, excluding mortgages Corporate credit Corporate credit Household credit of which mortgages -60 Dec-02 Dec-03 Dec-04 Dec- Dec Dec Q Source: Bulgarian National Bank and IMF calculations. 1/ Note: Credit growth data include loans sold by commercial banks to non-residents and non-bank financial institutions. 3

14 Banking Sector Figure 2: Market Share of Major Banks Societe Generale Expressbank, 3.0% Piraeus Bank Bulgaria, 6.0% Economic and Investment Bank (KBC), 3.4% Unicredit Bulbank, 15.3% First Investment Bank, 7.1% Eurobank EFG Bulgaria, 7.4% United Bulgarian Bank (NBG), 10.4% DSK Bank (OTP), 13.3% Raiffeisenbank Bulgaria, 10.1% Source: Raiffesen The main source of funding for Bulgarian banks is deposits. The loan-to-deposit ratio of the banking system rose slightly from 99 percent at end-2006 to 103 percent in May The ratios are growing faster for the larger banks, which have been aggressively vying for market share in the retail market. Euroization of assets and liabilities is significant and partly reflects the convergence process and parent bank funding. A range of consumer financial products are offered by banks in Bulgaria. These include savings products (current accounts and term deposits), loans (consumer loans, mortgages, overdrafts, and other loans), bank cards (debit and credit), and payment services (transfers, bill pay, and internet banking). Despite the relatively rapid growth of the financial sector, the percentage of the population in Bulgaria that has a bank account, a bank card, or a mortgage is relatively low compared to other countries in the region (see Figure 3). Figure 3: Percentage of Population Using Financial Products in European Countries Ukraine Bulgaria Have Bank Account Turkey Romania Russia Serbia Hungary Latvia Poland Lithuania Czech Republic Slovakia Croatia Slovenia 4

15 Banking Sector Have Credit or Debit Card Ukraine Russia Turkey Ukraine Turkey Romania Bulgaria Serbia Poland Slovakia Have Mortgage Source: EBRD-World Bank, Life in Transition Survey, 2006 Hungary Lithuania Czech Republic Latvia Slovenia Croatia Russia Serbia Lithuania Latvia Bulgaria Romania Croatia Slovenia Poland Slovakia Czech Republic Hungary Consumer borrowing in Bulgaria is still relatively low compared with other EU emerging market countries, but is increasing rapidly. Household loans have risen from less than 5 percent of GDP in 2000 to 27 percent of GDP in 2008, mainly concentrated in consumer credit and mortgage loans. 1 From end-2003 to end-2007, the average annual increase in household loans was 53 percent. This was driven largely by loans for house purchase, which grew at an annual rate of 94 percent during the same period, as well as overdrafts, which grew at an annual rate of 102 percent (albeit from a low base). Consumer lending growth was also strong at 36 percent per year (Figure 4). 1 The figures cited in the text as household loans include lending to households and to NGOs serving households and are based on BNB data, which does not disaggregate lending to households and lending to NGOs serving households. It is assumed in this analysis that lending to NGOs is a small portion of this lending. 5

16 Banking Sector Figure 4: Loans to Households (in BGN millions) 20,000 18,000 16,000 14,000 12,000 Total household loans Overdraft Consumer loans Loans for house purchase Other loans 10,000 8,000 6,000 4,000 2,000 0 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Source: Bulgarian National Bank The respective growth rates have essentially equalized the relative shares of housing and consumer credit in household loan portfolio. Loans for house purchase and consumer loans currently represent about 40 percent of the credit portfolio each (Figure 5). Figure 5: Relative Shares of Household Credit by Purpose 80% 70% 60% 50% 40% 30% 20% 10% 0% Dec 02 Dec 03 Dec 04 Dec 05 Overdraft Loans for house purchase Dec Dec Consumer loans Other loans Dec 08 Source: Bulgarian National Bank 6

17 Banking Sector Housing loans in Euros has been increasing rapidly, reaching 47 percent of the housing loan portfolio in December 2008 (from about 12 percent in 2003). Consumer loans are denominated mainly in Levs, although Euro-denominated lending has been rising significantly. Currencies other than Lev and Euro account for one percent of household loans. An adequate framework for consumer protection in financial services is a key element in the development of financial sector infrastructure. Establishing good business relationships, mutual trust and confidence between local commercial banks and the public in general is one of the key issues for the development of any economy. In the absence of transparency in pricing and adequate consumer awareness and protection, as well as fair and reliable dispute resolution mechanisms, banking systems discourage public access and generate inefficiencies. Legal Framework and Institutional Arrangements There is a fairly comprehensive legal framework governing consumer protection in the banking system. The key laws and regulations are: Consumer Protection Act (effective 10 June 2006, most recently amended 2008); Law on Consumer Credit (effective 1 October 2006, most recently amended 2008); Law on Credit Institutions (effective 1 January 2007, most recently amended 2009); Law on Funds Transfers, Electronic Payment Instruments and Payment Systems (effective 8 October 2005, most recently amended 2008); 2 Law on the Bulgarian National Bank (effective 5 June 1997, most recently amended 2007); Law on Bank Deposit Guaranty (effective 15 April 1998, most recently amended 2008); Law on Personal Data Protection (effective 1 January 2002, most recently amended 2006); Ordinance No. 3 on Funds Transfers and Payment Systems (29 September 2005, most recently amended 2008); Ordinance No. 16 on Electronic Payment Instruments (effective 29 September 2005); Ordinance No. 23 on the Terms and Procedure for Payment of Insured Amounts on Deposits with Banks with Revoked Licenses (effective 4 February 1999); Ordinance No. 22 on the Central Credit Register of Banks (effective 16 July 1998, most recently amended 2007); and The Consumer Protection Commission (CPC) is the oversight authority of the Consumer Protection Act and operates under the responsibility of the Ministry of Economy and Energy. The role of the CPC regarding complaints relates to mediating disputes, primarily through its conciliation committees. Under the Law on Funds Transfers, Electronic Payment Instruments and Payment Systems, a special Conciliation Commission for Payment Disputes has been established for cases regarding electronic payment instruments, including credit cards and debit cards. The Bulgarian National Bank (BNB) is in charge of regulating and supervising banks activities in Bulgaria. 3 The Law on the Bulgarian National Bank provides it with the mandate of maintaining price stability through ensuring the stability of the national currency and implementing monetary policy. The Law on Consumer Credit also provides that the BNB shall supervise the activities of banks and may intervene and impose corrective measures if a bank violates the Law or regulations, breaches its fiduciary 2 A new Law on Payment Services and Payment Systems transposing the Directive 2007/64/ EO has been enacted by Bulgarian Parliament on March, The new law will enter into force on November, 1, 2009 and will abolish the Law on Funds Transfers, Electronic Payment Instruments and Payment Systems. 3 Under the amendments of Law on Credit Institutions enacted by the Parliament on 31, March, 2009, the BNB will become responsible for registering all financial institutions not licensed by FSC. 7

18 Banking Sector duty, threatens depositors interests or conducts other offenses. However, the Law does not require such intervention. Although the Consumer Protection Act stipulates that the CPC is the controlling authority over consumer complaints, consumers frequently submit complaints regarding banks to the BNB. This can be explained by the consumers perception of the supervisory role over banks of the BNB and by the consumers trust in BNB. The Commission for Personal Data Protection is tasked with the maintenance of the regime for the privacy of personal information collected by entities in Bulgaria, including financial sector entities. The Commission enforces the Law for Protection of Personal Data. The Association of Banks in Bulgaria (ABB) was established in April Currently all banks operating in Bulgaria are members of the Association. The ABB adopted an Ethical Code in 2004 which includes, inter alia, sections covering bank-clients relations and settlement of disputes. Key s Among the key recommendations of the review of consumer protection in the banking sector are the following: There should be a clear, effective, and expedient institutional structure to resolve consumer disputes in financial services. Banks in Bulgaria should include the Ethical Code of the ABB on their websites, display it in the public areas of their banks accessed by customers, and make copies available to customers on request. The ABB should redouble its efforts to ensure its enforcement and the CPC could consider reviewing compliance with the Code in the course of its supervision work. Cases of non-compliance with the codes of conduct could be published on the website of the ABB or the CPC. The role of BNB with respect to consumer protection should be clarified, to ensure that it has no conflict of interest and that it can focus on its key mandate of conducting monetary policy and supervising banks to ensure the safety and soundness of the banking system. The ABB should work with its members to develop standard, simplified formats (e.g. Key Facts Statements) that all banks could follow to present information on its products and services, so consumers can compare products and services of the same bank and across different banks. Loans to consumers should be subject to a cooling-off period of 14 days. Whenever a borrower is obliged by a bank to purchase any product, including an insurance policy, as a pre-condition for receiving a loan from the bank, the borrower should be free to choose any qualified provider of the product. Banks should disclose in their advertising that they are regulated and supervised by BNB. Banks should make their general terms and conditions available not only in their premises, but also at their websites and upon any request made in person in a bank. The ABB, working with BNB, could consider preparing a standardized format in clear, understandable language. Stronger enforcement of the provisions against misleading advertising, especially with regard to advertised interest rates, is needed, along with greater specificity in the law to outlaw current practices that might technically be legal but in substance are misleading. 8

19 Banking Sector Debt collection agencies which buy non-performing loans and/or collect debts should register with the BNB or the Financial Supervision Commission (FSC), and their business practices should be supervised. 4 All banks should establish written internal complaints procedures, include a summary of these procedures in their terms and conditions, and maintain records of these complaints. Consideration should be given to creating conciliation committees for financial sector disputes modeled after the Conciliation Commission on Payment Disputes. A financial services department could be established in the CPC as an interim step to establish a separate financial ombudsman. A public awareness campaign could inform consumers that all financial sector complaints should be sent to the secretariat. Complaints should also be published and reported to financial supervisors. The Ministry of Finance, Ministry of Economy and Energy, Ministry of Education, and/or BNB should collaborate to design and conduct regular surveys of consumers financial capability. 4 In accordance with the last amendments to the Law on Credit Institutions (March 2009), legal entities dealing with factoring and other form of debt collection have to register with BNB in order to carry out their business. 9

20 Banking Sector Good Practices: Banking Sector SECTION A Good Practice A.1. CONSUMER PROTECTION INSTITUTIONS Consumer Protection Regime The law should provide for clear consumer protection rules regarding any regulated financial product or service, and all institutional arrangements should be in place to ensure the thorough, objective, timely and fair implementation and enforcement of all such rules. a. Specific statutory provisions need to create an effective regime for the protection of any consumer of a banking product or service. b. Either a general consumer agency or a specialized agency should be responsible for implementing, overseeing and enforcing consumer protection, as well as collecting and analyzing data (including inquiries, complaints and disputes). c. The law should provide and not prohibit a role for the private sector, including voluntary consumer protection organizations and selfregulatory organizations, regarding consumer protection in general and in financial products and services in particular. a. There is a fairly extensive legal framework governing consumer protection in the financial system. Some of the key laws and provisions related to consumer protection in the banking system are listed below. Consumer Protection Act (effective 10 June 2006, most recently amended 2008). This law regulates the protection of consumers, the powers of state bodies, and the activity of consumer associations in the area of consumer protection for a variety of consumer products and services. The purpose of the law is to ensure protection of the following consumer rights: (1) right to be informed about products and services; (2) right to be protected against the risk of acquisition of products and services that are hazardous to consumers' life, health or property; (3) right to protection of consumers' economic interests upon acquisition of products and services with regard to unfair commercial practices and methods of sale, unfair contractual terms, and provision of guarantees; (4) right to obtain redress for damage; (5) right of access to judicial and out-of-court procedures for the resolution of consumer disputes; (6) right to education on issues related to consumer protection; (7) right of association for the purposes of protecting consumers' interests; (8) right to be represented before State bodies making decisions on issues affecting consumers. The law defines consumer broadly as any natural person who acquires products or uses services for purposes that do not fall within the sphere of his or her commercial or professional activity, and any natural person who, as a party to a contract under this Act, acts outside his or her commercial or professional capacity. Law on Consumer Credit (effective 1 October 2006, most recently amended 2007). The purpose of this law is to protect consumers with respect to the provision of consumer credit, including: (1) establishing requirements applicable to all forms of consumer credit; (2) creating equal conditions for obtaining consumer credit; (3) ensuring protection of consumers against unfair terms in consumer credit agreements; (4) providing information to consumers on their rights and obligations under the consumer credit agreement and on the conditions and cost of credit; (5) enabling consumers to exercise their rights to pursue legal and administrative procedures; and (6) ensuring access of consumers to out-of-court procedures for settlement of disputes related to consumer credit. The law applies to credit agreements involving amounts between BGN 400 and BGN 40,000 and for terms of at least 3 months. The law does not apply to mortgages (except for article 15 on advertising). Law on Credit Institutions (effective 1 January 2007, most recently amended 2009). This law governs the terms and procedures for granting bank licenses; conducting 10

21 Banking Sector banking activities; supervising and terminating banks for the purpose of ensuring a stable, reliable, and sound banking system; and protecting depositor interests. The law includes a number of provisions having a direct bearing on consumer protection in the banking sector, including information disclosure and reporting requirements, keeping bank secrecy, and banking supervision to protect depositors interests. Law on Funds Transfers, Electronic Payment Instruments and Payment Systems (effective 8 October 2005, most recently amended 2008); Ordinance No. 3 on Funds Transfers and Payment Systems (29 September 2005, most recently amended 2008); and Ordinance No. 16 on Electronic Payment Instruments (effective 29 September 2005). 5 This law and these ordinances govern, inter alia, electronic payment instruments, including debit and credit cards. The law and ordinances contain numerous provisions related to consumer protection, including information that must be provided to consumers, duties and obligations of banks and consumers, liability of the parties, remedial measures, and internal and out-of-court settlement of disputes. Law on the Bulgarian National Bank (effective 5 June 1997, most recently amended 2007). This law includes, inter alia, provisions that BNB shall regulate and supervise banks activities for the purpose of protecting depositors interests and, in exercising their duties, BNB employees must not disclose confidential customer information that they have access to. Law on Bank Deposit Guaranty (effective 15 April 1998, most recently amended 2008) and Ordinance No. 23 on the Terms and Procedure for Payment of Insured Amounts on Deposits with Banks with Revoked Licenses (effective 4 February 1999). This law and ordinance regulate the establishment, functions and operation of the Deposit Insurance Fund in Bulgaria and specifies the circumstances that give rise to payment of resources by the Fund and the procedure for paying the deposits up to the guaranteed amount. Ordinance No. 22 on the Central Credit Register of Banks (effective 16 July 1998, most recently amended 2007). Per this ordinance, the Central Credit Register was established in the BNB to centralize the information on credit indebtedness of the bank customers, provide information to banks and their subsidiary financial institutions about credit indebtedness of their customers, and consolidate collected information in the Register to be used for the purposes of economic analysis by the BNB and its Banking Supervision Department. Law on Personal Data Protection (effective 1 January 2002, most recently amended 2006). This law regulates the protection of the rights of individuals with regard to the processing of their personal data. The purpose of the law is to guarantee the inviolability of personality and privacy by ensuring the protection of individuals in case of unauthorized processing of personal data relating to them. b. The control authority of the Consumer Protection Act is the Consumer Protection Commission (CPC), which is under the Ministry of Economy and Energy. Among the CPC s functions are to exercise control over unfair commercial practices; ( ) pursue collective remedies for consumer protection; ( ) elaborate guidelines and recommendations in connection with specific unfair terms in contracts. The Chairperson s functions include to: issue individual administrative acts, penalty decrees and impose coercive administrative measures and empower other officials to issue penalty decrees in the cases provided for in statutory instruments (article 165). The CPC is authorized to issue penalty decrees (article 233) including fines (their maximum amounts are stipulated in articles ), as well as issue other orders or instructions to traders, including financial institutions, which are violating provisions of the Consumer Protection Act. 5 A new Law on Payment Services and Payment Systems transposing the Directive 2007/64/ EO has been enacted by Bulgarian Parliament on March, The new law will enter into force on November, 1, 2009 and will abolish the Law on Funds Transfers, Electronic Payment Instruments and Payment Systems. 11

22 Banking Sector The Consumer Protection Act provides (article 178) that consumers and consumer associations may submit (in writing, verbally, or by other means) alerts, complaints, and petitions to the CPC and the consumer protection units in the municipal administration. Any alerts, complaints and petitions submitted to a non-competent authority must be forwarded to the CPC within seven days after the date of receipt, and the submitters must be notified. The CPC must register the consumer alerts, complaints, and petitions and institute proceedings to consider them. Although the law makes references to the decision to be made by the Commission, scope of decision making authority is not defined in the law. In practice, the role of the CPC is limited to mediating disputes, primarily through its conciliation committees. Such conciliation committees are authorized to assist the voluntary settlement of disputes through reaching an accommodation between the parties to the dispute. However, participation in such committees is effectively voluntary since proceedings before a conciliation committee are not mandatory for bringing a court action. Moreover, if a voluntary agreement is not reached, either party may go to court. The Law on Consumer Credit reinforces the Consumer Protection Act with respect to consumer credit and provides that consumers are entitled to (i) file complaints with the CPC regarding consumer credit agreements or agreements on intermediation in consumer credit granting, and (ii) approach conciliation committees established pursuant to the Consumer Protection Act, whenever their rights and legal interests have been infringed upon. The CPC (as well as consumer associations) may bring actions for the cessation or prohibition of any acts or commercial practices pursuant to the Law on Consumer Credit which violate the collective interests of consumers. The CPC (as well as consumer associations) must explain the rights and obligations of consumers in relation to consumer credit agreements, provide consumers with free advice and information on their rights when using consumer credits, and assist in settling consumer disputes and complaints. Under the Law on Consumer Credit, the CPC may access all relevant documents and information and carry out onsite inspections. The Law also explicitly empowers the CPC (article 35) to draw up statements for established violation and issue penalty orders and fines (the maxima of which are stipulated in articles 28 34a). Under the Law on Funds Transfers, Electronic Payment Instruments and Payment Systems, a special Conciliation Commission has been established for disputes regarding electronic payment instruments, including credit cards and debit cards. While this commission follows special procedures and is the only standing conciliation commission, its decisions again are only proposals, which the parties may accept or reject. Although the law stipulates that the CPC is the controlling authority over consumer complaints, including in the financial sector, consumers frequently submit complaints regarding banks to BNB due to its supervision role over banks and due to consumers trust in BNB. In the case of a legitimate complaint, BNB sends a letter to the bank that is the subject of the complaint, requesting a response. Following receipt of the response, BNB will write to the consumer to inform him if he has a legal dispute and/or on available options to him. Depending on the circumstances, BNB might instruct the bank to improve its internal rules and procedures. BNB generally does not inform the CPC or copy it on correspondence when it receives a complaint from a consumer. However, CPC sometimes refers consumer complaints to BNB, in which case CPC will request BNB to keep it informed, which BNB does. No consumer agency has been charged to collect and analyze data on complaints, disputes, and inquiries. BNB has established since 2004 a register of complaints by consumers and companies. The register comprises of the following data: (1) name and address of the person; (2) name of the bank that is referred to; (3) description of the case; (4) opinion and measures undertaken by the BNB. The register is for supervision purposes, and the data are not generally reported. The statistics suggest that around 100 complaints are received by the BNB annually. Almost 50 per cent of them fall within the definition of "consumers" while the rest are complaints by juridical entities. The CPC generally does not report on its statistics. However, it collects statistics and was able to provide a consolidated report to the mission on request. 12

23 Banking Sector c. The Consumer Protection Act affirms the right of citizens to associate for the purpose of protection of the rights and interests of consumers (article 167). Consumer associations are entitled to: (1) receive information on drafts of any statutory instruments concerning the rights and interests of consumers, and express opinions on any such drafts; (2) inform the control authorities of any cases in which the rights of consumers are violated; (4) propose to all control authorities to conduct checks, analyses and testing of goods and services; (5) assist to the resolution of disputes that have arisen between consumers and traders; (6) approach the court on violations of the rights and interests of consumers in the cases and under the terms established by [the Consumer Protection Act]; (7) conclude collective agreements with traders associations. As noted above, consumers and consumer associations may submit (in writing, verbally, or by other means) alerts, complaints, and petitions to the CPC and the consumer protection units in the municipal administration, and the CPC must register them and institute proceedings to consider them. Consumer associations also may bring actions for the cessation or prohibition of any acts or commercial practices pursuant to the Law on Consumer Credit which violate the collective interests of consumers, as well as claims for damages under the terms and procedure of Articles a of the Consumer Protection Act; and consumer associations must explain the rights and obligations of consumers in relation to consumer credit agreements, provide consumers with free advice and information on their rights when using consumer credits, and assist in settling consumer disputes and complaints. The legal framework for consumer protection in Bulgaria is generally comprehensive. s on specific areas of the legal framework will be discussed below. A clear institutional structure for consumer protection in financial services is needed. The authority and capacity of the CPC should be expanded. Thus, the CPC should be responsible for gathering, consolidating, analyzing, and reporting on data on inquiries, complaints and disputes resolution, as well as general and specific issues and trends related to financial consumer protection and literacy. Under this option, the CPC should be the only institution responsible for consumer disputes for all financial products and services. Good Practice A.2 Code of Conduct for Banks a. There should be a principles-based code of conduct for banks that is devised in consultation with the banking industry and if possible with consumer protection associations, and is monitored by a statutory agency or an effective self-regulatory agency. b. Every bank, acting alone and together, should publicize and disseminate this statutory code of conduct to the general public through appropriate means. c. The statutory code should be augmented by voluntary codes of conduct for banks on such matters as facilitating the easy switching of consumers current accounts and establishing a common terminology in the banking industry for the description of banks charges, services and products. a. The Association of Banks in Bulgaria (ABB), of which every bank in Bulgaria is a member, adopted on 6 April 2004 a principles-based Ethical Code which includes, inter alia, sections covering bank-clients relations and settlement of disputes. The Code was developed internally and was not sent to consumer protection associations for consultation. The Code is available at the ABB website and published in its annual report. However, some individual banks were not aware of the Code. The Code aims to: promote mutual understanding, fair and free competition among banks; create a favorable environment for defending the rights and legal interests of clients; and encourage the development of the banking system and its good reputation. Among the key features of the Code are: Banks shall not use in advertising incorrect or misleading information regarding their operation or that of their competitors. 13

24 Banking Sector In conducting transactions or operations, bank employees shall comply with clients' interests and rights in conformity with the laws, internal bank regulations and the Code. Bank employees cannot accept from а client or third party any material or nonmaterial benefits with а view to performing or restraining from performing official actions. The bank shall not impede the right of the client to choose between banks, bank products or services. The bank shall ensure the availability of complete and truthful information on the main products or services offered, service charges, interest rates and the way they are calculated, as well as additional terms determining the use of а respective product or service. The information given should be freely available in а simple and clear written form in each branch or office of the bank where these products or services are offered. The bank should exhibit sample documents, necessary to open an account and perform transactions in а freely accessible place in the halls where customers are served and bank employees shall give instructions on filling in documents upon the client's request. The bank shall stipulate procedures to inform clients on any changes of terms, conditions, product and service charges and commissions. The bank shall strictly observe the principle of confidentiality for information that is considered to constitute bank or business secrecy, as well as data identifying the economic status of the client or personal data, acquired in communicating with the customer, unless it is stipulated by the law. The bank shall aim to resolve conflicts with clients to а mutual benefit, avoiding arguments, which are not related to the common bank activities. The bank shall establish internal procedures or rules to process customers' claims. These shall include reasonable and the shortest possible deadlines for considering complaints and replying the claimant, when required. The bank shall ensure that all employees dealing with customers are acquainted with the above internal procedures or rules. The bank shall ensure that bank procedures or rules on settling disputes are available to clients. The bank shall ensure that all its employees are acquainted with the present Code and all subsequent amendments in due time. The Code is not monitored by a statutory agency, but is monitored by the ABB and its members. In two cases in which a member bank was considered to have violated the Code, the ABB sent a letter to the bank to request it to cease the offending activity. In one case, the bank did so, but in the other case, the bank did not cease; no further actions were taken against the bank. Although no statutory code of conduct exists for banks in Bulgaria, the Law on Credit Institutions and the Law on Consumer Credit include provisions covering key aspects that would be expected in a comprehensive code of conduct. b. Although the Code stipulates that each member bank must ensure that all their employees are acquainted with the Code, some senior bank managers were not aware of the Code (and indicated that no such code existed). The Code itself does not require that member banks make the Code available to customers. Instead, it stipulates only that The Ethical Code is available for all the members of the Association of Banks in Bulgaria, which will contribute in promoting and observing it (emphasis added). c. The ABB s Ethical Code is voluntary. Most banks in Bulgaria do not have their own individual codes. Of 12 randomly selected banks (out of 28), only one had its own separate code of conduct that was available at its website. Another had an internal code of conduct that was available only to staff and requires its entire staff to undergo annual training on its internal code. It is recommended that all banks in Bulgaria include the ABB s Ethical Code on their website, display it in the public areas of their banks accessed by customers, and make 14

25 Banking Sector copies available to customers on request. The ABB should redouble its efforts to ensure that its own members are aware of the Code and to monitor and strengthen its implementation by member banks. The CPC could consider reviewing compliance with the Code in the course of its supervision work. Cases of non-compliance with the codes of conduct could be published on the website of the ABB or the CPC. Good Practice A.3 Balance between Prudential Supervision and Consumer Protection Where prudential supervision and consumer protection are the responsibility of a single organization, there should be a balance of prudential supervision and consumer protection to ensure that one is not subservient to the other. BNB s Supervision Department is responsible for prudential supervision of banks. Officially, the CPC and its conciliation committees are responsible for consumer protection regarding banking services, products, and actions, and neither BNB nor the CPC is subservient to the other. In practice, however, many consumers contact BNB s Supervision Department when they have a complaint about their bank. In such cases, the Supervision Department will send a letter to the bank that is the subject of the complaint, requesting a response. Following receipt of the response, BNB will write to the consumer to inform him/her if he/she has a legal dispute and/or on options available to him or her. Depending on the circumstances, BNB might instruct the bank to improve its internal rules and procedures and/or mediate a solution. Moreover, when consumers contact the CPC with their complaint about a bank, the CPC sometimes refers the complaints to BNB (e.g. if the complaint deals with interest rate changes on mortgages, which the CPC does not have the technical capacity to handle). BNB s Supervision Department recognizes the potential conflict of interest in its involvement in consumer protection and would prefer that a separate, independent agency deal with all consumer protection issues (e.g., CPC or newly created agency). However, based on consumers trust in BNB and on its technical capacity, both consumers and the CPC continue to depend on BNB in many instances. Moreover, there are no reports of BNB s Supervision Department responding in a less-than-fully objective manner. Still, the potential conflict of interest remains. Good Practice A.4 The role of the BNB regarding consumer protection should be clarified, to ensure that it has no conflict of interest and that BNB will not be involved in dispute resolution between banks and their clients. Instead, the Central bank should stay focused on its key mandate of conducting monetary policy and supervising banks to ensure the safety and soundness of the banking system. Particular suggestions are discussed below. Other Institutional Arrangements a. The judicial system should provide credibility to the enforcement of the rules on financial consumer protection. b. The media and consumer associations should play an active role in promoting financial consumer protection. a. The Consumer Protection Act provides that consumers, the CPC, and consumer associations may bring actions to court. Moreover, if a conciliation committee s proposed resolution to a consumer dispute is not accepted by the consumer or the bank, either party may go to court. However, the judicial system s handling of consumer protection cases in Bulgaria is considered to be costly and inefficient, taking as long as seven years to resolve even small cases. As a result, most consumers find the option of going to court prohibitive for the usually small amounts that they are contesting. b. The Consumer Protection Act provides that consumer associations are entitled to: (1) receive information on drafts of any statutory instruments concerning the rights and interests of consumers, and express opinions on any such drafts; (2) inform the control authorities of any cases in which the rights of consumers are violated; (4) propose to all control authorities to conduct checks, analyses and testing of goods and services; (5) assist in the resolution of disputes that have arisen between consumers and traders; (6) approach the court on violations of the rights and interests of consumers in the cases and under the terms established by this Act; (7) conclude collective agreements with traders associations. 15

26 Banking Sector Some consumer associations are active in promoting consumer protection in financial services, but none specialize in this area. Instead, greater priority is given to promoting consumer protection in other areas, such as disputed energy bills. Indeed, since the adoption of the Law on Consumer Credit in 2006, consumer associations routinely advise consumers to take their complaint directly to the CPC, which is responsible for handling such complaints. The media plays a limited role in promoting financial consumer protection. Some articles appear on a range of financial services, but typically report the viewpoints of the banks and other service providers, rather than consumer issues. SECTION B Good Practice B.1 The media should increase its coverage of consumer protection issues in the financial sector. Human interest stories, which depict individual cases where a consumer has been subject to unethical behavior or is involved in a dispute, can be effective in educating the public and disciplining the market. Consumer associations should also increase their education programs, provide information to consumers, and assist consumers to defend their rights. DISCLOSURE AND SALES PRACTICES Know Your Customer (KYC) When making a recommendation to a consumer, a bank should gather, file and record sufficient information from the consumer in order to ensure that the bank s recommendation, product or service is appropriate to that consumer. The extent of information the bank gathers should: a. Be appropriate to the nature and complexity of the product or service being proposed to or sought by the consumer; and b. Enable the bank to provide a professional service. The Law on Credit Institutions requires that a bank submit to BNB copies of its Articles of Association, regulations, instructions, and other documents containing provisions regarding the scope and procedures for conducting operations, within 10 days of their adoption. Regarding a bank s credit activities, such rules must contain at least (articles 72-73): the information required from the credit applicant; the way of assessing the creditworthiness of the applicant (and his guarantors); the way of evaluating the offered collateral; the way of evaluating the efficiency of the project offered to be funded with the credit; the procedure for making a decision on the extension of a credit, in accordance with its type; the way of using and repaying the credit; the procedure for controlling the use of the credit according to the purpose for granting it, the current financial position of the borrower and his guarantors, and the adequacy of the collateral; the various types of credit and other sanctions and the procedure for imposing them. BNB is not required to approve these rules, so no industry-wide standard exists. The Law on Consumer Credit does not include any additional requirements regarding information to be obtained from consumers. Banks report that their internal procedures and training of staff are designed to ensure that sufficient information is gathered to provide appropriate products and services to customers. Good Practice B.2 The ABB may wish to develop minimum standards regarding the type of information that banks should gather from customers to ensure the appropriateness of products and services offered, while not burdening the customer with too many information requirements. Affordability of Products When making a recommendation to a consumer, the bank should ensure that: a. Any product or service it offers to that consumer is in line with the need 16