ISLAMABAD: The institutional framework for financial consumer protection in Pakistan is fragmented, and has important gaps and overlaps, according to the results of a first of its kind financial study for Pakistan, commissioned by USAID and completed by the World Bank.

The diagnostic study for Consumer Protection and Financial Literacy (CPFL) says that the two principal financial regulators — State Bank and SECP — have the primary responsibility for regulating and supervising both prudential matters and market conduct in their respective market segments.

CPFL is key to increasing responsible access to financial services in Pakistan which is overwhelmingly dominated by banks, which hold about 74 per cent of financial system assets, a level that has remained fairly constant over the past decade.

The study says non-deposit taking microfinance institutions (MFIs) are unregulated, which leaves vulnerable clients largely uncovered from a consumer protection standpoint. There are, however, a number of other players which play a role in ensuring financial consumer protection, including, the Competition Commission of Pakistan, industry associations, ombudsmen, and provincial consumer protection councils.

There is a need to establish an effective coordination mechanism among regulators and key stakeholders and key stakeholders to define strategic priorities and clarify roles and responsibilities, it says.

A primary objective of the study was to increase Pakistani consumers’ financial knowledge and explain to them how to responsibly access needed financial services.

USAID Mission Director Gregory Gottlieb said that financial literacy is critical to ensure that consumers are able to make smart financial decisions.

While financial regulators have strengthened disclosure requirements, in practice terms and pricing often remain non-transparent. The lack of standardised, comparable pricing information on financial products impedes competition in the sector and no doubt contributes to the relatively high costs of financial products and services in Pakistan.

The study emphasised the need to establish and monitor appropriate industry codes of conduct across the financial sector, and to require appropriate training and certification of market intermediaries.

Most industry segments do not have codes of conduct in place which commit financial institutions to fairness, transparency and ethical conduct. Such codes should also be established by relevant industry associations in cooperation with regulators, and compliance with the codes should be monitored.

According to the study, effective and speedy alternative dispute resolution mechanisms are of particular importance in Pakistan where courts cannot be relied upon to provide timely, affordable and predictable redress to consumers.

Awareness of the insurance ombudsman is low, and there is no ombudsman in place for resolution of disputes for retail customers in the securities market or for microfinance clients.

In the newly demutualised environment in Pakistan, where demutualised stock exchanges are profit-oriented, it is critical for the self regulatory organisation (SRO) system to be sound, with a strong oversight framework to be implemented by SECP.

The study says that a mechanism is needed to provide for effective coordination among all relevant stakeholders because of the fragmented nature of financial consumer protection.