Vincent Lingga - Opinion Column

View Point: Better regulation and protection for financial consumers

Vincent Lingga, Jakarta | Opinion | Sun, May 19 2013, 11:29 AM

Paper Edition | Page: 5

The seemingly endless string of financial scandals involving the sale of fraudulent investment products which has caused many small investors to lose their life savings has prompted the Financial Services Authority (OJK) to strengthen the mechanism of its financial consumer protection.

The latest cases of financial fraud using commodity (gold) trading as the underlying transaction seem to have jolted the OJK to realize how inadequate has been the regulatory framework and inter-ministerial coordination for financial consumer protection, while the average financial literacy of the rising middle class consumers remains very low.

Supervision coordination is indeed most imperative. The OJK oversees only investment and financial service products that it has licensed and has nothing to do with products linked to commodity trading.

Commodity trading, including the futures exchange, lies within the jurisdiction of the Ministry of Trade and with Bapeppti (the Commodity Futures Trading Regulatory Agency).

The problem though is that it is often extremely difficult, especially for uninitiated investors, to distinguish between investments linked to commodity trading and financial products.

The OJK, through its financial customer care (FCC), has stepped up a campaign to educate financial consumers and retail investors and has designed a new way for investment products to be sold in a concerted bid to drive shoddy and aggressive merchants out of the financial service industry.

It has set up a task force consisting of all law-enforcement agencies and various ministries to deal with bogus investment and fraudulent financial products.

In the year to date, OJK Chairman Muliaman Hadad said, the FCC received complaints about the sale of fraudulent investment products by 29 companies, all linked to gold and futures foreign exchange trading.

Last year, the number of complaints raised by financial service customers increased by more than 25 percent to almost 854,000.

In late 2008, hundreds of retail investors who bought Lehman Brothers structured investment products through Citibank Indonesia lost millions of dollars when the US investment bank went bankrupt.

But Citibank, in a good gesture to maintain its customer trust, last December reimbursed the Lehman note buyers with 70 percent of their original investment made in 2007 by buying back the Lehman notes at 70 cents to the dollar.

Hundreds of other retail investors got “burned” when the investment products issued by PT Antaboga Delta Sekuritas through Bank Century (now Bank Mutiara) turned out to be fraudulent.

Even the American government immediately set up a politically independent consumer financial protection agency after the 2008 global financial crisis, triggered by the Lehman Brothers bankruptcy, which caused millions of mortgage borrowers and retail investors to suffer big losses.

The OJK should indeed lead the protection of financial consumers because it will soon take over the oversight of the whole financial service industry and capital market, including banks.

The combination of poor financial consumer protection — caused by incompetent financial service oversight — and low financial literacy of most bank customers and retail investors has made it possible for Ponzi-scheme investments to operate for several years before being detected by regulatory agencies.

Rather than simply ensuring that consumers are provided with complete and accurate information, the OJK should also closely monitor companies to make sure that the right kinds of products are offered to the right kinds of people.

This activist approach is especially needed now when the risk of mis-selling and poor consumer choices is especially high.

With deposit interest rates at historic lows, many investors and savers who are searching for higher returns are turning to complex, poorly understood products, while banks and brokers are under heavy pressure to find new sources of revenue.

Many surveys have found that investors cannot be counted on to make rational choices and often make complex decisions contrary to their own interests because of their aversion to losses, so regulators should ban the sale of potentially harmful products.

Investors or financial product consumers in general are not always rational. Faced with complex decisions or too much information, they often default or they hide behind credit agencies.

Financial institutions therefore should be required to provide customers with simple, user-friendly product information, including “warnings” (risks) on complex investments.

Equally important is that bank tellers and other employees, except those in the wealth management department, should be barred from selling investment products or pushing customers toward representatives selling them.

The OJK or its FCC should conduct a nation-wide campaign to educate financial service customers to improve their financial literacy or their understanding of financial products and their ability and confidence to appreciate financial risks and opportunities, to make informed choices.

The core principle of this campaign is also a cornerstone of economic theory: Well-informed consumers make for vigorous competition and efficient markets.

This idea should be embodied in the design of the new regulatory and protection framework for financial consumers, focusing on improving the information that consumers get from banks and other financial institutions, so that they can do the same kind of comparison shopping as that for other consumer products.

In a complex and opaque industry such as finance, a strong regulator is essential to make sure that market participants are telling the truth. A strong supervisory body is crucial if people are going to have the confidence to invest.

The writer is senior editor at The Jakarta Post.