Let financial customers beware

I WRITE this week from downtown New York, the financial center of the city, which is trying to wake up from the nightmare of the global financial crisis. While toppling one giant financial institution after another, the crisis also uncovered deceptive practices on the part of financial institutions. There were headline-grabbing banking scandals, but most heartbreaking were stories of millions of home foreclosures and personal bankruptcies.
The investment industry has been forced to take major steps to restore consumers’ confidence. The US government has practically overhauled its financial regulatory system, and is taking new steps to protect consumers, despite strong opposition from the industry and its Congressional allies.
By contrast, in countries and regions where the financial crisis has not hit as hard, it has been business as usual: Banks and investment institutions have maintained the same pre-crisis practices and consumers remain without added protection.
Some of the practices unmasked over the past few years were outright fraud, but most were borderline conduct that had similar effects to those fraudulent practices.
As the extent of deception and fraud became known, consumers fled the financial system to the safety of cash and gold, leading to the near collapse of the financial system worldwide.
To restore confidence, the US Securities and Exchange Commission has tried to help consumer on how to analyze costs of owning US mutual funds, with detailed analysis of each fund’s costs. In addition, private consumer groups and financial analysts have done a good job in keeping taps on all of those costs, hidden, deferred or explicit.
As a result, consumer awareness, which was heightened after the global financial crisis, has forced mutual funds to be on alert regarding costs.
One new tool to regain consumer confidence in the financial system is the establishment of watchdog agencies to protect consumers.
For example, the United States federal government has recently set up the Consumer Financial Protection Bureau (CFPB). It started operations on July 21, 2011, after some delay due to lobbying by the industry, opposition by Republican lawmakers, and political disagreement over who should run it.
The new bureau is charged with regulating consumer protection with regard to financial products and services. It is set up as an independent unit funded by the US Federal Reserve with interim affiliation with the US Treasury Department.
According to its website, “The central mission of the Consumer Financial Protection Bureau (CFPB) is to make markets for consumer financial products and services work for Americans—whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products.”
Part of the new agency’s responsibility is to write and enforce bank rules, conducts bank examinations, monitors and reports on markets, as well as collects and tracks consumer complaints. According to the US Department of the Treasury, it seeks to “promote fairness and transparency for mortgages, credit cards, and other consumer financial products and services.”
FCPB has jurisdiction over institutions such as banks, credit unions, securities firms, payday lenders, mortgage-servicing operations, foreclosure relief services, debt collectors and other financial companies. Its most pressing concerns are mortgages, credit cards and student loans.
The new agency will consolidate responsibilities from a number of other federal regulatory bodies, including the Federal Reserve, Federal Trade Commission, Federal Deposit Insurance Corporation, National Credit Union Administration, as well as Department of Housing and Urban Development.
After a year in operation, the bureau has received mixed reviews. It has become an issue in the US presidential campaign: Republican nominee Mitt Romney is opposed to CFPB, while President Barack Obama supports it.
But the watchdog agency is making headlines. Over the past weekend, it announced its decision ordering the giant Discover Bank to refund $ 200 million to more than 3.5 million consumers and pay a $ 14 million in civil penalty for its misleading practices.
Similarly, last July, it ordered Capital One Bank to refund $ 140 million to two million customers and pay an additional $ 25 million as civil penalty.
The agency has also been collecting hundreds of comments from US consumers regarding various complaints each week, and is encouraging consumers to submit complaints.
On the other hand, in countries and regions where the effects of the global financial crisis were not as sharp, the level of scrutiny has been less and there have been no perceptible moves toward increasing awareness of consumers to avoid the tricks and traps of the trade.
Take credit card fees, for example. There was an outcry in the US and elsewhere about escalating fees, leading to Congressional hearings and regulatory agency investigations. As a result, credit card companies were forced to scale back fees. By contrast, our banks still charge up to 27 percent and more in interest fees for credit cards.
We face the same problem with investment fees. Many banks and investment institutions charge their customers fees when they sell them a mutual fund or any other investment vehicle. These fees are collected upfront as a percentage of the investment, regardless of how long the investment is owned. They go by many names — subscription fees, sales fees, loads … etc.
In general, consumers are least comfortable with these fees, because they have the effect of reducing upfront the amount they invest, and they are collected regardless of duration or the performance of the fund. In fact, studies have shown that there are no differences in performance between load funds and no-load funds or between funds with a subscription fee and those without.
In addition to these fees that are charged upfront, banks also charge consumers annual fees for managing their investments. They are not connected to the performance of the fund, which means they are collected whether the fund makes or loses money. These too go by many names, but in general they are more acceptable to consumers as they are proportional to the time the money is kept in the mutual fund or investment vehicle and not taken upfront from the investment.
We saw how consumer awareness, especially after the global financial crisis, has forced mutual funds to maintain a tight leash on costs and pushed governments to establish new agencies to protect consumers. However, in countries where the financial crisis has not hit hard, investment fees have been going up, not down. Subscription fees of 3 percent or more are the norm, in addition to high annual fees.

- This article is exclusive to Arab News