Diagnostic Review of Consumer Protection and Financial Capability : Comparison

May 2009

Diagnostic Review of Consumer Protection and Financial Capability

BULGARIA

Private and Financial Sector Development DepartmentEurope and Central Asia RegionWashington, DC

Volume II

Comparison against Good Practices

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

ii

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.

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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 ....................................................................................................... 10 Bulgaria: Consumer Protection in the Non-bank Credit Institutions Segment ................................ 37 Good Practices: Non-bank Credit Institutions Segment .................................................................. 42 Bulgaria: Consumer Protection in the Securities Sector .................................................................. 51 Good Practices: Securities Sector .................................................................................................... 53 Bulgaria: Consumer Protection in the Credit Reporting System ..................................................... 61 Good Practices: Credit Reporting System ........................................................................................ 64 Bulgaria: Consumer Protection in the Insurance Sector .................................................................. 71 Good Practices: Insurance Sector ..................................................................................................... 76 Bulgaria: Consumer Protection in the Pensions Sector .................................................................... 87 Good Practices: Pensions Sector ...................................................................................................... 93

Annex Annex 1: Legal and Institutional Framework ................................................................................ 102 Annex 2: EU Directives on Consumer Protection in Financial Services and Applicable Bulgarian Legislation ..................................................................................................................... 105

Tables Table 1: Structure of the Bulgarian Financial Sector ......................................................................... 2 Table 2: Bulgarian Financial System Structure................................................................................ 37 Table 3: Balance Sheet of Leasing Companies ................................................................................ 38 Table 4: Balance Sheet of Credit Cooperatives ............................................................................... 39 Table 5: Bulgarian Securities Sector Structure ................................................................................ 51

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 ..................................... 38

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Figure 7: Cross-Country Comparison of Credit Reporting System Coverage ................................. 61 Figure 8: Cross-Country Comparison of the Depth of Credit Information ...................................... 62 Figure 9: Bulgarian Insurance Market Growth ................................................................................ 71 Figure 10: Life and Non-life Insurance Assets ................................................................................ 72 Figure 11: Insurance Penetration and Density in EU New Member States ..................................... 72 Figure 12: Structure of Non-Life Insurance Premium Income by Product ...................................... 73 Figure 13: Structure of Life Insurance Premium Incomes by Product ............................................. 73 Figure 14: Pension Funds’ Membership ......................................................................................... 87 Figure 15: Pension Funds’ Assets in European Countries ............................................................... 88 Figure 16: Pension Funds’ Net Assets under Management ............................................................ 88 Figure 17: Structure of Investment Portfolio of Private Pension Funds .......................................... 89 Figure 18: Nominal and Real Return Rates of Pension Funds ......................................................... 90 Figure 19: Market Share of Pension Funds by Net Asset Value ...................................................... 90

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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)

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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.

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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.

Bulgaria Banking Sector

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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 30–65 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.


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Table 1: Structure of the Bulgarian Financial Sector

Assets (in BGN million) Assets (in percent of GDP) Number of Entities

Dec-03

Dec-04

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 69,349 50.0 64.1 76.8 85.5 104.6 107.7 35 35 34 32 29 30

Nonbank financial institutions 1,652 2,610 5,269 10,970 21,401 21,548 4.8 6.7 12.3 22.2 37.9 33.5 123 115 187 302 356 385

Insurance companies 1/ 801 947 1,226 1,755 2,183 2,448 2.3 2.4 2.9 3.6 3.9 3.8 31 31 31 37 39 41

Non-life 567 675 873 1,122 1,379 1,551 1.6 1.7 2.0 2.3 2.4 2.4 20 20 19 21 21 23

Life 233 272 352 633 804 897 0.7 0.7 0.8 1.3 1.4 1.4 11 11 12 16 18 18

Investment funds 2/ 18 34 95 316 898 451 0.1 0.1 0.2 0.6 1.6 0.7 5 9 25 45 68 77

Pension funds 3/ 511 787 1,112 1,517 2,328 2,387 1.5 2.0 2.6 3.1 4.1 3.7 8 8 8 9 9 10

Leasing companies 1,379 2,504 4,622 6,726 3.2 5.1 8.2 10.4 50 54 63 66 Mortgage and consumer lending 1,209 2,275 2,919 2.4 4.0 4.5 61 59 59 Special Purpose Vehicles securitizing claims 6 5 97 89 78 0.0 0.0 0.2 0.2 0.1 1 1 6 9 8 Special Purpose Vehicles securitizing real estate 16 129 542 1,283 1,555 0.0 0.3 1.1 2.3 2.4 2 4 12 34 52 61 Non-banking investment intermediaries 323 820 1,323 3,029 7,723 4,984 0.9 2.1 3.1 6.1 13.7 7.7 77 62 60 56 57 63

Total domestic financial system 18,975 27,480 38,155 53,171 80,495 90,897 54.8 70.8 89.2 107.7 142.4 141.2 158 150 221 334 385 415

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 2008. 2/ Only resident investment funds are included. BNB data for December 2007 and September 2008. 3/ 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 2008.


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Figure 1: Developments in Bank Credit Growth

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.

Credit to the private sector, % year-on-year growth 1/

0

10

20

30

40

50

60

70

80

90

Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07

The administrative measuresto limit credit growth led to a peak in lending and a year later a drop in credit growth.

Bank credit growth to the private sector hasrecently stabilized but at a very high level

0

5

10

15

20

25

30

35

2002 2003 2004 2005 2006 2007 Q1 2008

Other credit

Loans sold by banks

Bank credit

Credit flow to the private sector by resident financial institutions, % of GDP

Banks dominate private credit to the economy, in particular if securitized loans are included

-60

-10

40

90

140

Dec-02 Dec-03 Dec-04 Dec-05

Dec-06 Dec-07

Corporate credit Household credit

of which mortgages

Private sector credit developments bycomponent, percent year-on-year growth

Recently, corporate credit has grown faster than household credit

0

5

10

15

20

25

30

35

2002 2003 2004 2005 2006 2007 Q12008

Residential mortgages

Household credit,excluding mortgagesCorporate credit

And corporate credit continues to dominate the total credit flow to the economy

Credit flow as percent of GDP


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Figure 2: Market Share of Major Banks

DSK Bank (OTP), 13.3%

Raiffeisenbank Bulgaria, 10.1%

Piraeus Bank Bulgaria, 6.0%

Eurobank EFG Bulgaria, 7.4%

United Bulgarian Bank (NBG),

10.4%

Unicredit Bulbank, 15.3%

First Investment Bank, 7.1%

Societe Generale Expressbank,

3.0%

Economic and Investment Bank

(KBC), 3.4%

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 2008. 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

Have Bank Account

020406080

100120

Ukraine

Bulgari

a

Turkey

Roman

ia

Russia

Serbia

Hunga

ryLa

tviaPola

nd

Lithu

ania

Czech

Rep

ublic

Slovakia

Croatia

Slovenia


5

Have Credit or Debit Card

01020304050607080

Ukraine

Russia

Turkey

Roman

ia

Bulgari

a

Serbia

Poland

Slovakia

Hunga

ry

Lithu

ania

Czech

Rep

ublic

Latvi

a

Slovenia

Croatia

Have Mortgage

0.05.0

10.015.020.025.030.0

Turkey

Ukraine

Russia

Serbia

Lithu

ania

Latvi

a

Bulgari

a

Roman

ia

Croatia

Slovenia

Poland

Slovakia

Czech

Rep

ublic

Hunga

ry

Source: EBRD-World Bank, Life in Transition Survey, 2006

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.


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Figure 4: Loans to Households (in BGN millions)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Dec02

Dec03

Dec04

Dec05

Dec06

Dec07

Dec08

Total household loansOverdraftConsumer loansLoans for house purchaseOther loans

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

0%

10%

20%

30%

40%

50%

60%

70%

80%

Dec02

Dec03

Dec04

Dec05

Dec06

Dec07

Dec08

Overdraft Consumer loansLoans for house purchase Other loans

Source: Bulgarian National Bank


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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, 2009. 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.


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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 1992. 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 Recommendations 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.


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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.


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Good Practices: Banking Sector SECTION A

CONSUMER PROTECTION INSTITUTIONS

Good Practice A.1.

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 self-regulatory organizations, regarding consumer protection in general and in financial products and services in particular.

Description 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


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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 197 – 231), 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, 2009. 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.


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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.


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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 186 - 190a 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.

Recommendation The legal framework for consumer protection in Bulgaria is generally comprehensive. Recommendations 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.

Description

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.


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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 non-material 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.

Recommendation 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


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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.

Description 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.

Recommendation 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.

Good Practice A.4 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.

Description 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.”


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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.

Recommendation 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.

SECTION B

DISCLOSURE AND SALES PRACTICES

Good Practice B.1 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.

Description 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.

Recommendation 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.

Good Practice B.2 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


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of the consumer; b. When offering any products or services, the consumer should be given a

range of options to choose from to meet his or her requirement; c. In recommending a product or service to that consumer, sufficient

information on the product or service should be provided to enable the consumer to select the most suitable product or service.

Description a. See section B.1. b. There is no requirement in law to offer a range of products or services to consumers from which they can choose to meet their needs. c. The Law on Consumer Credit (which is applicable only to loans between BGN 400 and 40,000) includes extensive requirements to disclose information on such loans. For example, the bank must inform the consumer in writing about all terms and conditions of the credit agreement prior to the conclusion of the credit agreement. The credit agreement must be in clear and understandable language and include, inter alia:

the net amount of the credit (principal); the maximum amount of the credit, or the methods of determining it; the annual percentage rate; the conditions under which charges may be amended; the conditions for credit repayment by the consumer, including the amount,

number, frequency and dates of the payments, as well as the total amount of these payments where possible;

the items of the total cost of the credit which are not included in the calculation of the annual percentage rate of charge;

expenses related to the agreement payable by the consumer, if any; the right of the consumer to repay the credit before the time fixed by the

agreement and a statement which in this case the consumer shall be entitled to a reduction in the amount of his obligations, as well as the conditions for termination of the agreement;

the security which the consumer is obligated to provide, its value and the conditions under which it may be released;

the required insurances and the expenses thereon when the choice of insurer is not left to the consumer.

The Law on Credit Institutions governs the information that must be provided to consumers on products and services that are not “consumer credit” as defined in the Law on Consumer Credit (e.g. deposits, mortgages and loans that are below BGN 400 or more than BGN 40,000). A bank may accept money on deposit only if it has “announced” the terms and conditions which shall apply to all customers-depositors, and such terms and conditions must contain:

the interest rates and the method of calculating the interest; the intervals for interest payments, and whether the interest rate is variable and

under what conditions; the minimum amount acceptable for deposit; the notice period and consequences of an early withdrawal of the deposit; the amount up to which deposits are guaranteed.

When granting a credit, the bank must offer its customers in writing, in a clear and understandable manner and free of charge, its lending conditions, which must contain:

information on the total costs of the credit (fees, commissions, and other costs directly related to the credit agreement), and on the objective criteria on the basis of which these costs may be altered;

the interest rate, as an annual interest rate, the method of calculating the interest, and the conditions for changing the interest rate until full repayment of the credit;

the additional obligations related to payments; the conditions for and costs of the early repayment of the credit.

Recommendation Ensuring that recommendations are appropriate requires (i) necessary information on the consumer and his needs, and (ii) presenting clear and understandable information to the


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consumer on products and services. See Good Practice B.1 for recommendations on (i). For (ii) the ABB and its members may prepare standard, simplified formats (e.g. Key Facts Statements, discussed below) 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.

Good Practice B.3 Cooling-off Period Unless explicitly waived in advance by a consumer in writing, a bank should provide the consumer a “cooling-off” period of a reasonable number of days immediately following the signing of any loan agreement between the bank and the consumer during which time the consumer may, on written notice to the bank, treat the agreement as null and void without penalty to the consumer of any kind.

Description Under the current Law on Credit Institutions and Law on Consumer Credit, no cooling-off period is stipulated or recognized. However, a new draft Law on Consumer Credit proposes a cooling-off period of 14 days. For distance financial services, article 12, paragraph 1 of the Law on Distance Marketing of Financial Services provides that, "The consumer shall be entitled in a period of 14 calendar days to withdraw the contract concluded without indemnity or penalty and without giving any reason, considered from: (1) the date of concluding the contract; (2) the day the consumer receives the conditions of the contract and the information, when this happens after conclusion of the contract.”

Recommendation It is recommended that loans to consumers be subject to a cooling-off period of 14 days.

Good Practice B.4 Linked Products and Bundling Clauses 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 the provider of the product.

Description The Law on Consumer Credit (article 7) implicitly recognizes that banks may be allowed to bundle products and determine from whom the consumer will purchase the bundled products, when it provides that a credit agreement must include “the required insurances and the expenses thereon when the choice of insurer is not left to the consumer.” Actual practices vary among banks, with some allowing customers to choose where to purchase required insurance (e.g. on collateral) and others selecting the insurer for the customer or requiring that the customer choose from a list.

Recommendation As a general rule, consumers should be allowed to choose where to purchase bundled products. Banks should clearly provide customers with separate prices of each product in a bundle, as well as any discount available if purchased as a bundle from the same bank (or from a bank’s preferred vendor). Such requirements could either be included in the Ethical Code of the ABB or, if necessary, in a law dealing with these issues (such as the Law on Consumer Credit or the Law on Payment Services and Payment Systems)..

Good Practice B.5 Preservation of Rights Except where permitted by applicable legislation, in any communication or agreement with a consumer, a bank should not exclude or restrict, or seek to exclude or restrict:

a. Any statutory liability or duty of care of the bank to the consumer; b. Any duty to act with skill, care and diligence toward the consumer in

connection with the provision by the bank of any financial service or product; or

c. Any liability arising from the bank’s failure to exercise the degree of skill, care and diligence that may reasonably be expected of it in the provision of any financial service or product to the consumer.

Description a. The Law on Consumer Credit (article 11) provides that “The rights granted to consumers under this Law may not be limited. Any provision whereby the rights of consumers are excluded or limited in advance shall be null and void” and “Any waiver of rights granted to consumers under this Law shall be null and void.” Similarly, the Consumer Protection Act


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(article 3) provides that “The rights granted to consumers under this Act may not be restricted. Any stipulation which excludes or restricts consumer rights a priori, shall be void.” b – c. The Consumer Protection Act (article 68d) provides that “A commercial practice, related to the supply of goods or services, shall be unfair if it is contrary to the requirements of professional diligence” and defines "professional diligence" as “the standard of special skill and care which a trader may be expected to possess and exercise towards a consumer, commensurate with honest market practices and/or the principle of good faith in the trader's field of activity” (supplementary provisions). Moreover, the Law on Consumer Credit explicitly provides that articles 143 – 148 (which define “unfair practices”) of the Consumer Protection Act shall also be applied to consumer credit agreements.

Recommendation No recommendation.

Good Practice B.6 Regulatory Status Disclosure In all of its advertising, whether by print, television, radio or otherwise, a bank should disclose: (a) that it is regulated and (b) the name and address of the regulator.

Description There is no requirement in the law for a bank to disclose that it is regulated or to disclose the name and address of the regulator (BNB). The Law on Protection of Competition (articles 29-37) prohibits actions or omissions that are contrary to fair competition (including misleading and unpermitted comparative advertising), whereas the Consumer Protection Act (article 68) prohibits unfair business practices with consumers (and the Law on Credit Institutions makes explicit reference to those provisions), but otherwise these laws do not regulate the contents of any advertising. The Law on Credit Institutions provides that a person who does not have a license to conduct bank activity shall not use either in his name or in his advertising the term ‘bank’ or any other terms designating bank operations. Hence, only licensed banks may use this term in their advertising (but are not required to use this term). As licensed banks are necessarily regulated by BNB, use of this term could be implicitly understood to communicate that they are regulated.

Recommendation Banks should explicitly disclose in their advertising that they are regulated and supervised by BNB.

Good Practice B.7 Terms and Conditions Before a consumer may open a deposit, current or loan account at a bank, the bank should provide the consumer with a written copy of its general terms and conditions, as well as all terms and conditions that apply to the account to be opened. Collectively, these Terms and Conditions should:

a. Disclose details of the bank’s general charges, the bank’s complaints procedures, 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 a default by the consumer;

b. Include information on the methods of computing interest rates paid by or charged to the consumer, any relevant non-interest charges or fees related to the product offered to the consumer, any service charges to be paid by the consumer, restrictions, if any, on account transfers by the consumer and the procedures for closing an account;

c. Set forth clear rules regarding: (i) the reporting of unauthorized transactions, (ii) stolen cards and (iii) liability; and

d. Be written in plain language and in a font size and spacing that facilitates the reading of every word.

Description See section B.2 for the information that must be announced, offered, or included in deposit and credit agreements. The Law on Credit Institutions provides that a bank may accept money on deposit only if it has “announced” the terms and conditions which shall apply to all customers-depositors


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and “on premises accessible to customers”. The law is silent on the form that such an “announcement” may take. In contrast, when granting a credit, this Law requires that a bank must “offer” its customers in writing, free of charge, its lending conditions. Moreover, the costs of the credit must be “explicitly and exhaustively” determined by a credit agreement, including in case of early repayment, but the Law does not define what “explicit and exhaustive” includes. The law also states that the terms and conditions for deposits and credits must be formulated in a clear and understandable manner (article 57-59). In practice, some banks require that consumers formally apply for a product before they can receive the detailed terms and conditions. Disclosure requirements for consumer loans, as set out in the Law on Consumer Credit, are more exhaustive and explicit (again, see section B.2). An appendix to this Law provides the method of calculating the annual percentage rate that must be disclosed on consumer loans. Disclosing the APR is not required on mortgages and other loans. In the case of an overdraft consumer credit agreement, where the creditor allows the consumer to exceed the funds available in his current account beyond a period of three months and there is no agreement to this effect, the creditor must “immediately” inform the consumer of the annual rate of interest, the charges, and the conditions for any amendment thereof. The various laws are silent (see exception below) on requiring that banks establish and announce internal dispute resolution mechanisms. However, the Ethical Code of the ABB calls on its member banks to “establish internal procedures or rules to process customers' claims. These shall include reasonable and the shortest possible deadlines for considering complaints and replying to the claimant. The bank shall ensure that all employees dealing with customers are acquainted with the above internal procedures or rules.” In practice, most banks have established such internal mechanisms, but these are not typically included in loan and deposit agreements. The Law on Funds Transfers, Electronic Payment Instruments and Payment Systems provides for the duties and obligations of issuers and holders of electronic payment instruments, such as debit and credit cards, as well as liability sharing. Generally, a card holder must notify the card issuer immediately upon becoming aware that his/her card is lost or stolen or that his/her account information is being abused. Before such notification, the holder is liable for up to BGN 300 of charges; after such notification, the issuer is liable for all charges. This law requires that the general terms and conditions be provided to the consumer and include the card holder’s and issuer’s obligations and liabilities, as well as “the procedures and the time limit for submitting and satisfying objections related to the [electronic payment instrument] issuance and use in a given transaction, including information on the procedures for settling disputes under this Law and other legislative acts” (article 29).

Recommendation All 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. Such terms and conditions should include the information indicated in Good Practice B.7 above. The ABB, working with BNB, could consider preparing a standardized format in clear, understandable language. Similarly, specific terms and conditions should be given to a customer on his specific product, the bank officer should explain how these amend the general terms, and the customer should be allowed ample time to review and consider these, including the option to take them home and return another day. Provisions for this could be included in the ABB’s Ethical Code or in the Law on Credit Institutions.

Good Practice B.8 Key Facts Document A bank should have a single-page Key Facts Document, written in plain language, in respect of each of its accounts, types of loans or other products and, prior to a consumer opening any account at, or signing any loan agreement with, the bank, the consumer should have delivered a signed statement to the bank to the effect that he or she has duly received a copy of the relevant document from the bank.


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Description Key Facts Documents are not required by law, and banks do not provide them in practice.

Recommendation Banks should provide one-page Key Facts Documents for each type of loan, deposit, and other service they provide and make these available online and in the public areas of their offices. The ABB should work with its members to develop a standard format to be used by all banks, which would facilitate comparisons by consumers.

Good Practice B.9 Advertising and Sales Materials a. Banks should ensure that the advertising and sales materials and

procedures do not mislead customers. b. All advertising and sales materials should be easily readable and

understandable by the general public. c. Banks should be legally responsible for all statements made in

advertising and sales materials.

Description a – b. The Law on the Protection of Competition (articles 31-34) prohibits misleading and unpermitted comparative advertising. The Consumer Protection Act (article 68) prohibits unfair business-to-consumer commercial practices (including advertising). The Law on Consumer Credit makes specific reference to these provisions and applies them not only to consumer credit, but also mortgages (article 15) – this is the only portion of this Law that is applicable to mortgages. Article 15 specifically provides that “any advertisement, including any notice displayed at business premises, whereby the advertiser undertakes to grant credit or to intermediate in the conclusion of a consumer credit agreement, and in which an interest rate or any data relating to the cost of the credit are indicated, shall also include a statement of the annual percentage rate of charge.” Moreover, the Ethical Code of the ABB also prohibits members from engaging in misleading advertising. In practice, however, misleading advertising of bank products is common, and banks acknowledge that most of them engage in it. Particularly common is misleading advertising regarding interest rates. For example, for a consumer loan, advertisements will typically present a low interest rate in large bold figures, without clearly indicating that it applies for a limited period of time or does not include the cost of additional fees. The APR will be included in the advertisement in much smaller figures and, in the case of television commercials, for a briefer period of time than the teaser rate. The converse is true for deposit interest rates – a high teaser rate will be shown in large bold figures, while the effective rate is shown in small figure and more briefly. Consumers and consumer associations reported that, even in bank branches, sales staff may not disclose the true, effective interest rates, but will emphasize the teaser rates. c. The CPC is responsible for overseeing unfair commercial practices against consumers. The Law on the Protection of Competition issued in November 2008 transferred the responsibility for enforcing provisions on misleading and comparative advertising from the CPC to the Commission for the Protection of Competition. Article 32 of the Law provides that the advertiser and the advertising agency shall be held liable for misleading and unpermitted comparative advertising. Moreover, the authority may impose pecuniary sanctions and fines for infringements to the Law, which may be up to BGN 50,000 (article 102). However, misleading advertising of financial products is not uncommon..

Recommendation Stronger enforcement of the provisions against misleading advertising is needed, especially with regard to advertised interest rates on mortgages and deposits. Moreover, greater specificity in the law, to outlaw current practices that might technically be legal but in substance are misleading, may be necessary. Increasing the size of penalties established in the Law on the Protection of Competition and the Consumer Protection Act may serve as a deterrent to misleading advertising.

Good Practice B.10 Guarantees No advertisement by a bank should describe either an actual or future deposit or interest rate payable on a deposit as being guaranteed or partially guaranteed unless:

a. There is a legally enforceable agreement between the bank and a third party who or which has provided such a guarantee.

b. The advertisement states:


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(i) the extent of the guarantee; (ii) the name and address of the party providing the guarantee; and (iii) in the event that that party is in any way connected to the bank,

the precise nature of that connection.

Description Other than the general prohibitions on misleading and unfair advertising discussed in section B.9, there is no prohibition with respect to advertising guarantees on interest rates. However, this type of advertising is not reported to be a problem in Bulgaria.

Recommendation See Good Practice B.9.

Good Practice B.11. Professional Competence a. In order to avoid any misrepresentation of fact to a consumer, any bank

staff member who deals directly with consumers, or who prepares bank advertisements (or other external distribution channels) or who markets any service or product of the bank should be familiar with the legislative, regulatory and code of conduct guidance requirements relevant to his or her work, as well as with the details of any product or service of the bank which he or she sells or promotes.

b. Regulators and industry associations should collaborate to establish and administer minimum competency requirements for any bank staff member who:

(i) deals directly with consumers, (ii) prepares any Key Fact Document or any advertisement for

the bank, or (iii) markets the bank’s services and products.

Description As discussed in section B.5, the Consumer Protection Act defines "professional diligence" as “the standard of special skill and care which a trader may be expected to possess and exercise towards a consumer, commensurate with honest market practices and/or the principle of good faith in the trader's field of activity” (supplementary provisions). Moreover, it provides that “A commercial practice, related to the supply of goods or services, shall be unfair if it is contrary to the requirements of professional diligence” (article 68d). The CPC may fine a bank (or any trader) up to BGN 10,000 for failing to meet professional diligence requirements (article 210a). The Ethical Code of the ABB provides that each member bank “shall operate in conformity with the legislation, internal rules and procedures as well as all the other bank acts, professional behavior and the terms concluded in contracts with customers. The bank shall ensure that all bank employees related in their work to the above mentioned acts and procedures are aware of and strictly adhere to them.”

Recommendation While the laws and the Ethical Code are fairly comprehensive, market participants report numerous cases of less-than-fully-competent staff whose actions do not fully comply with requirements under the law or Code. Banks and the Association of Banks, individually and collectively, may wish to redouble efforts to train staff to ensure that they meet their requirements. The ABB could consider developing minimum competency tests that key bank staff would be required to pass. However, products of banks differ from each other, and generalized training is never sufficient for the purposes of this good practice. ABB could set the curricula and minimum training requirements for sellers of financial products. The nature of the training should depend on the product, and sellers of similar products should be subject to similar training requirements. For simple financial products such as a current account, a limited amount of training may be sufficient. For complex securities, such as financial derivatives, extensive training for sellers will be needed so that those who sell and market such services are completely familiar with both the risks and returns of the products. Banks will need to ensure that their employees are well trained and banks ought to undertake this as a duty in the Ethical Code.

SECTION C

CUSTOMER ACCOUNT HANDLING AND MAINTENANCE


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Good Practice C.1 Statements a. Unless a bank receives a customer’s prior signed authorization to the

contrary, the bank should issue, and provide the customer with, a monthly statement regarding every account the bank operates for the customer. Each such statement should:

i) set out all transactions concerning the account during the period covered by the statement; and

ii) provide details of the interest rate(s) applied to the account during the period covered by the statement.

b. Each credit card statement should set out the minimum payment required and the total interest cost that will accrue, if the cardholder makes only the required minimum payment.

c. Each mortgage or other loan account statement should clearly indicate the amount paid during the period covered by the statement, the total outstanding amount still owing, the allocation of payment to the principal and interest and, if applicable, the up-to-date accrual of taxes paid.

d. A bank should notify a customer of long periods of inactivity of any account of the customer and provide a reasonable final notice in writing to the customer if the funds are to be transferred to the government.

e. When an investor signs up for paperless statements, such statements should be in an easy-to-read and readily understandable format.

Description a. Ordinance No. 3 on Funds Transfers and Payment Systems provides a suggested (not required) format (Appendix 3) and contents required in bank account statements (articles 8 – 11). The statements must contain, inter alia:

initial balance; obligations of the account holder to the bank; obligations of the bank to the account holder; all changes (crediting or debiting of the account by the bank) in the balance of

the account during the period covered by the report (including date, amount, counterparty, and type of transaction);

total amount of credit turnover; final balance.

The bank “may”, but is not “required” to, provide information on the interest rates applied during the account period. The ordinance does not specify the periodicity of account statements. Instead, the regulation states that a bank must issue an account report for a specified period “at the request of the titleholder of the account” (article 8). In practice, banks in Bulgaria do not typically send hardcopies of account statements to their customers. Instead, they prepare hardcopies for the customer to pick up at the branch, make statements available online, or email statements to the customer, depending on the request of the customer. b. The law and ordinances that cover electronic payment instruments, including credit cards, are silent on requiring statements to set out minimum payment required and the total interest cost that will accrue, if the cardholder makes only the required minimum payment. c. The required contents of account statements are listed in item “a” above. However, they do not specify that the allocation of payment to the principal and interest must be clearly identified; nor are accrued taxes required to be identified. d. The law does not require a bank to notify a customer of long periods of inactivity of any account of the customer or provide a reasonable final notice in writing to the customer if the funds are to be transferred to the government. e. Banks may provide paperless statements, with the contents specified in item “a” above.


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Recommendation In addition to the information that is now required, bank statements should also include information on: (i) interest rates applied; (ii) for electronic payment instruments, the minimum payment required and the total interest cost that will accrue if the cardholder makes only the required minimum payment; (iii) for loans, the allocation of payment to the principal and interest. The banking regulation should require that banks send their customers monthly account statements by default, and not at their customers’ request. However, a customer should have the right to opt out of this requirement or request the bank not to send the account statement in a written form.

Good Practice C.2 Notification of changes in interest rates and non-interest charges A customer of a bank should be notified in writing by the bank of any change in:

a. The interest rate to be paid or charged on any account of the customer as soon as practicably possible;

b. A non-interest charge on any account of the customer a reasonable period in advance of the effective date of the change.

The customer should have the right to exit the contract, if the revised terms are not acceptable to the customer.

Description The Law on Funds Transfers, Electronic Payment Instruments and Payment Systems provides that, where there has been a “significant” change in the interest rate on an electronic payment instrument (e.g. credit card or debit card), the issuer shall notify the card holder of the change as soon as possible, and the card holder may terminate the contract (article 29). The Law on Consumer Credit provides that: (i) any amendments to a concluded consumer credit agreement shall be made in writing and shall be signed by both parties to the agreement (article 6); and (ii) in the case of an overdraft agreement, the creditor shall immediately inform the consumer of any change in the annual rate of interest or in the charges related to credit granting (article 9). Other than these cases, the laws and ordinances are silent on the obligation to notify the consumer of changes in interest rates and the right of the consumer to exit the contract. The Law on Credit Institutions merely requires that the conditions under which interest rates and fees on deposits and loans may change be included in the terms and conditions of such products.

Recommendation The Law on Credit Institutions or a BNB ordinance should specify that banks are obliged to notify a consumer of changes in interest rates and that the consumer has a right to exit the contract if the changes are not acceptable.

Good Practice C.3 Customer Records A bank should maintain up-to-date records in respect of each customer of the bank that contain the following:

a. A copy of all documents required to identify the customer and provide the customer’s profile;

b. The customer’s address, telephone number and all other customer contact details;

c. Any information or document in connection with the customer that has been prepared in compliance with any statute, regulation or code;

d. Details of all products and services provided by the bank to the customer;

e. A copy of correspondence from the customer to the bank and vice-versa and details of any other information provided to the customer in relation to any product or service offered or provided to the customer;

f. All documents and applications of the bank completed, signed and submitted to the bank by the customer;

g. A copy of all original documents submitted by the customer in support of an application by the customer for the provision of a product or service by the bank; and


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h. Any other relevant information concerning the customer. A law or regulation should provide the minimum permissible period for retaining all such records and, throughout this period, the customer should be provided ready free access to all such records.

Description The Law on the Measures against Money Laundering includes numerous provisions to ensure that banks can identify their customers. The Law on Credit Institutions provides that banks must establish, keep and update an information system containing, for each customer, “particulars” of the bank’s transactions with or for the account of that customer and the credit and debit balances thereof (article 67). Moreover, the bank must create and keep credit files of any customer containing data about the customer, the grounds for the credit, the terms and conditions and the amount of the credit and its collateral, the decision of the competent authority for the extension of the credit, and any other information in relation to the conclusion of the contract and the performance thereof (article 68). The Law on Consumer Credit requires that each credit agreement contain the name, personal identification number, and address of the consumer. Ordinance No. 3 also states that a bank account report shall include this information. However, banks are not required to maintain the other documents specified by the good practice above and there are no minimum permissible periods for retaining customer records. In practice, banks report that they maintain originals or copies of all correspondence, applications and other relevant customer documents.

Recommendation Banks should be required to maintain documents and correspondence related to the provision of a product or service to a customer. Regulation should provide the minimum permissible period for retaining customer records.

Good Practice C.4 Checks There should be clear rules on the issuance and clearing of checks that, among other things, set reasonable requirements for banks on the following issues:

a. For any bank on which a check is drawn, when the account on which it is drawn has insufficient funds;

b. For any bank at which a customer of that bank seeks to cash or deposit a check, which is subsequently found to be drawn on an account with insufficient funds;

c. Informing the customer of the consequences of issuing a check without sufficient funds, at the time a customer opens a checking account;

d. Regarding the crediting of a customer’s account and its timing, when a check deposited by the customer clears; and

e. In respect of capping charges on the issuance and clearance of checks. There should be clear rules on consumer protection, including procedures for error resolution.

Description Bulgarian laws are largely silent on checks. The Law on Credit Institutions simply provides that a bank may trade for its own account or for customers’ accounts with checks. The Law on Funds Transfers, Electronic Payment Instruments and Payment Systems specifies that it does not apply to checks (article 2). The Commercial Act of 2008 (articles 539-547) specifies the contents of checks, defines different types of checks, notes that checks may be drawn only on banks, and states that the drawer of the check shall be liable for its payment. Check forms, issued by banks, are registered with the BNB before use. BNB may reject the check form if it is not secure or the technical design does not correspond to the standard. Otherwise, the good practices specified above do not appear to be covered in the Bulgarian legislation. However, checks are rarely used by consumers in Bulgaria.


Good Practice C.5 Electronic Checks a. Customers should be provided with consistent, clear and timely

information about the checks and the cost of using them, at all relevant stages in a consumer's decision, in easily accessible and understandable forms.

b. Customers should be informed on: (i) how the use of credit card checks differs from the use of a credit


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card; (ii) the interest rate that applies and whether this differs from the

rate charged for card purchases; (iii) when interest is charged and whether there is no interest free

period; (iv) whether additional fees or charges apply and how much; (v) whether purchases using a credit card checks benefit from the

same protection as using a credit card. c. Credit card checks should not be sent to consumers without prior

consent. d. Authorities should encourage efforts to enable end users to better

understand the market for electronic checks, such as providing comparative price information or undertaking educational campaigns.

e. There should be clear rules on consumer protection, including procedures for error resolution.

Description See section C.4.


Good Practice C.6 Electronic Fund Transfers and Remittances a. There should be clear rules on the rights, liabilities and responsibilities

of the parties in electronic fund transfers. b. Banks should provide information on prices and service features of

electronic fund transfers and remittances in easily accessible and understandable forms. As far as possible, this information should include:

(i) the total price (e.g. fees at both ends, foreign exchange rates and other costs);

(ii) the time it will take the funds to reach the receiver; (iii) the locations of the access points for sender and receiver; (iv) terms and conditions of the fund transfers services to the

customer. c. To ensure full transparency, it should be clear to the sender if the price

or other aspects of the service vary according to different circumstances, and the bank should disclose the information without imposing requirements on the consumer.

d. There should be a legal provision requiring documentation of electronic fund transfers.

e. There should be clear, publicly available and easily applicable procedures in cases of errors and frauds.

f. Authorities should encourage efforts to enable end users to better understand the market for electronic fund transfers and remittances, such as providing comparative price information or undertaking educational campaigns.

Description The Law on Funds Transfers, Electronic Payment Instruments and Payment Systems and Ordinance No. 3 on Funds Transfers and Payment Systems cover all of these topics. a. The Law and the Ordinance enumerate exhaustively the various rights, obligations and liabilities of the parties to an electronic funds transfer. b. Article 8 of the Law provides that the performing institution shall make available in its premises to any interested parties free of charge accessible information in writing on the general conditions and procedure for executing domestic transfers. Ordinance No. 3 (article 23) details the information that must be provided to the originator and beneficiary of a transfer, both before and after execution. Prior to execution, this includes the manner of calculating any charges and commission fees payable, the exchange rate if applicable, the time to credit the beneficiary’s account, the value date applied by the performing institution, and the complaint and dispute settlement procedures. Subsequent to the transfer, the required information includes data enabling the customer to identify the transfer; the amount of transferred funds prior to the deduction of any expenses, charges


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and commission fees payable by the beneficiary; the amount of all expenses, charges and commission fees payable by the respective customer – the originator or beneficiary of the transfer; the value date applied by the performing institution; the exchange rate if applicable. c. As noted in “b” the information that must be provided to the originator before the transfer includes the manner of calculating any charges and commission fees payable. d. Ordinance No. 3 (article 13) provides that a transfer shall be executed on the basis of duly drafted payment documents in duplicate or electronic messages. A bank shall enter the payment document in the respective system by sending an electronic message which contains all the elements of the payment document. The bank that has delivered the electronic message shall be responsible for the lack of compliance between the content of the payment document and that of the electronic message. All banks shall establish a system for the processing and storing of payment documents. e. Article 13 of the Law on Funds Transfers, Electronic Payment Instruments and Payment Systems provides rules for correcting errors. The institution that made the error should correct the error, at no cost to the customer, within a day of its discovery, and must reimburse the customer for interest for the period between the error and its correction. The customer’s right to require a correction of an error expires 3 years after the error is committed. Moreover, no correction is permitted if the error in a transfer order was through a customer’s fault. Ordinance No. 3 (article 23) requires that, before execution of a transfer, the customer be informed of the complaint and dispute settlement procedures. f. The authorities are not actively involved in providing comparative price information or undertaking educational campaigns with respect to transfers and remittances.


Good Practice C.7 Debt Recovery a. No bank, agent of a bank or third party should employ any abusive debt

collection practice against any customer of the bank, including the use of any false statement, any unfair practice or the giving of false credit information to others.

b. The type of debt that can be collected on behalf of a bank, the person who can collect any such debt and the manner in which that debt can be collected should be indicated to the customer of the bank when the credit agreement giving rise to the debt is entered into between the bank and the customer.

c. No debt collector should contact any third party about a bank customer’s debt without informing that party of:

(i) the debt collector’s right to do so; and (ii) the type of information that the debt collector is seeking.

Description a. The Consumer Protection Act provides that consumers shall not be subject to harassment or coercion, including the use of physical force or undue influence, threatening or abusive language or behavior (article 68h – 68i). The Act also provides that a “commercial practice shall be misleading when it contains false information and is therefore untruthful or in any way, including overall presentation, deceives or is likely to deceive the average consumer” (article 68e). Ordinance No. 22 on the Central Credit Register of Banks provides that the banks and their subsidiary financial institutions shall be liable for the accuracy of the information they submit to the Register. Otherwise, the various banking laws and ordinances listed in section A.1 are silent on the use of abusive debt collection practices. The Law on Credit Institutions provides that, where a credit or individual installments thereon are not repaid on the agreed payment dates, and in the cases where the credit is called ahead of schedule because one or more installments thereon have not been repaid on time, the bank shall have the right to obtain an order for immediate execution under the provisions of article 418 of the Code of Civil Procedure on the basis of a statement of account. The credit agreement may provide for the bank the right to sell the collateralized


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item at an auction, under a procedure established jointly by an ordinance of the Minister of Justice and the Governor of the BNB (article 60). Banks report that, in practice, they try to reschedule loans in arrears if customers are cooperating. However, in some cases, banks sell non-performing loans to collection agents, which then assume the risk of collection. Market participants report that in a very small number of cases (perhaps 1 percent) abusive techniques are used, including threats of violence. Consumer associations and others report that, after a borrower misses just two or three installments on their loan, some creditors request an order for immediate execution under article 418 of the Code of Civil Procedure as described above. Moreover, article 442 provides that the “creditor may levy the enforcement against any corporeal thing or receivable owned by the execution debtor”. This entitles the creditor to seize any property of the borrower, even if it was not originally pledged as collateral for the loan. The Law on Obligations and Contracts (article 174) stipulates that, “the mortgage shall secure the claim irrespective of any changes that may have occurred in the latter, but only to the amount covered by the registration.” However, some consumer associations report that the creditor may keep the entire proceeds from selling the seized property, even if it exceeds the value of loan. b. While the Law on Credit Institutions and the Law on Consumer Credit require certain information to be included in credit agreements (see section B.2 above), neither requires disclosure of debt collection procedures or persons authorized to collect debt. c. The law is silent on this.

Recommendation It is recommended that the authorities verify that creditors, when selling seized property, are retaining only an amount corresponding to the registration, per article 174 of the Law on Obligations and Contracts. If creditors are keeping the entire proceeds from selling seized property, as reported by some consumer associations, then stricter enforcement of the law is warranted. Creditors should be able to recover only the cost of the debt, accrued interest and legal penalties, and reasonable debt recovery costs. Debt collection agencies that buy non-performing loans or collect debts should be required to register with the Financial Supervision Commission or the BNB, since they effectively become non-bank credit institutions.6 The increased use of debt collection agencies by financial institutions may also warrant additional monitoring of business practices.

SECTION D

PRIVACY AND DATA PROTECTION

Good Practice D.1

Confidentiality and Security of Customers’ Information Customers have a right to expect that their financial transactions are kept confidential. The law should require banks to ensure that they protect the confidentiality and security of personal data, against any anticipated threats or hazards to the security or integrity of such information, and against unauthorized access.

Description The Law on Personal Data Protection regulates the protection of rights of individuals with regard to the processing of their personal data. It requires that personal data must be: (1) processed in legal compliance and in a bona fide manner; (2) captured for specific, precisely defined and legal purposes and not be submitted to additional processing in a manner incompatible with such purposes; (3) proportional to the purposes for which they are being processed; (4) accurate, and updated as needed; (5) destroyed or adjusted when found to be imprecise or disproportional to the purposes for which they are being processed; (6) maintained in a form that enables identification of the respective individuals for a period not to exceed the time necessary for the purposes for which such data are being processed. The law generally forbids processing personal data which reveal racial or

6 Such business entities will be required to register with BNB according to the recent amendments of Law on Credit Institutions (March 2009).


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ethnic origin; reveal political, religious or philosophical convictions; or refer to health, sex life, or human genome. The Law on the Bulgarian National Bank, Law on Credit Institutions, Law on Consumer Credit, and Ordinance No. 22 on the Central Credit Register of Banks all require that employees of banks, BNB and other institutions working for a bank (e.g. liquidators, receivers) maintain bank secrecy (defined as “facts and circumstances concerning the balances and transactions on accounts and deposits of the bank’s customers”). (See, e.g. the Law on Credit Institutions, Chapter 8, articles 62 – 66 for a detailed description of bank secrecy requirements.) The Law on Consumer Credit requires that the CPC, when carrying out its duties, be obliged not to disclose official, bank, professional or trade secrets, and not to use the information from its inspections for purposes other than the originally intended ones. The Ethical Code of the ABB provides that a member bank “shall strictly observe the principle of confidentiality for information that is considered а 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 ensure that information containing а bank secrecy is internally accessible only for bank employees directly requiring it.”


Good Practice D.2

Sharing Customer’s Information a. A bank should inform its customer in writing:

(i) of any third-party dealing for which the bank should share information regarding any account of the customer, such as any legal enquiry by a credit bureau; and

(ii) how it will use and share the customer’s personal information. b. No bank shall sell or share account or personal information regarding a

customer of the bank to or with any party not affiliated with the bank for the purpose of telemarketing or direct mail marketing.

c. The law should allow a customer of a bank to stop or "opt out" of the sharing by the bank of certain information regarding the customer and, prior to any such sharing of information for the first time, every bank should be required to inform each of its customers in writing of his or her rights in this respect.

Description a. The Law on Credit Institutions (article 62) provides that banks may disclose information on individual customers only: (i) to BNB for the purposes of BNB’s Central Credit Register, (ii) with the customers’ consent, or (iii) pursuant to a court ruling. The Law on Personal Data Protection (article 34a) provides that an individual shall be entitled to be informed before his or her personal data are disclosed for the first time to third parties and to object to the processing of his/her data on the basis of legitimate grounds. Moreover, the data administrator must inform the individual of these rights. b. The Law on Personal Data Protection (article 34a) provides that an individual may object to the processing of his or her personal data for the purposes of direct marketing. The data administrator must inform the individual of this right. c. See a – b above.

Recommendation See also the section on Credit Reporting Systems.

Good Practice D.3 Permitted Disclosures The law should:

a. State specific rules and procedures concerning the release to any government authority of the records of any customer of a bank;

b. State what the government authority may and may not do with any such records;

c. State what exceptions, if any, apply to these rules and procedures;


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d. Provide penalties for the bank and any government authority for any breach of these rules and procedures.

Description a. The Law on Credit Institutions (article 62) provides that a variety of state bodies may request a court order to release the records of a bank customer and cites the circumstances under which a court may order the release. The court must provide a motivated answer for its decision, which is not subject to appeal. b – c. The law is silent on what the government authorities may do with such records after obtaining them. d. The Law on Personal Data Protection provides for fines up to BGN 100,000 for unlawful data processing.

Recommendation The laws should clarify that state bodies who receive personal data may not use the data for purposes other than those for which they received it and may not disclose such data to others unless allowed by law or with the individual’s consent. See also the section on Credit Reporting Systems.

Good Practice D.4 Credit Reporting Credit reporting systems should be subject to appropriate oversight and have sufficient enforcement authority.

Description See the section on Credit Reporting Systems.

Recommendation See the section on Credit Reporting Systems.

SECTION E

DISPUTE RESOLUTION MECHANISMS

Good Practice E.1 Internal Complaints Procedure a. Every bank should have in place a written complaints procedure for the

proper handling of any complaint from a customer, with a summary of this procedure forming part of the bank’s Terms and Conditions referred to in B.7. above.

b. Within a short period of time following the date a bank receives a complaint, it should:

(i) acknowledge in writing to the customer/ complainant the fact of its receipt of the complaint; and

(ii) provide the complainant with the name of one or more individuals appointed by the bank to deal with the complaint until either the complaint is resolved or cannot be processed further within the bank.

c. The bank should provide the complainant with a regular written update on the progress of the investigation of the complaint at short intervals of time.

d. Within a few business days of its completion of the investigation of the complaint, the bank should inform the customer/complainant in writing of the outcome of the investigation and, where applicable, explain the terms of any offer or settlement being made to the customer/ complainant.

e. When a bank receives a verbal complaint, it should offer the customer/complainant the opportunity to have the complaint treated by the bank as a written complaint in accordance with the above. A bank may not require, however, that a complaint be in writing.

f. A bank should maintain an up-to-date record of all complaints it has received that are subject to the complaints procedure. For each complaint, this record should contain the details of the complainant, the nature of the complaint, a copy of the bank's response(s), a copy of all other relevant correspondence or records, the action taken to resolve the complaint and whether resolution was achieved and, if so, on what basis. The bank should make these records available for review by the bank supervisor or regulator as and when requested.


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Description a. The ABB in Bulgaria has a principles-based Ethical Code covering a broad range of topics, including establishing internal procedures to settle disputes with customers, and ensuring that these procedures are available to clients. However, banks do not necessarily include a summary of this procedure in their terms and conditions. Among the various banking laws and ordinances, the Law on Funds Transfers, Electronic Payment Instruments and Payment Systems provides that banks’ internal rules must include a “procedure for filing complaints, settlement of disputes and determining indemnities as regards execution of account operations, transfers or [electronic payment instrument] issuance and use.” Ordinance No. 3 on Funds Transfers and Payment Systems requires that banks have in place, and inform customers of, an internal dispute resolution mechanism. Other banking laws and ordinances are silent on the requirement to have internal complaint procedures. b – d. The Law on Funds Transfers, Electronic Payment Instruments and Payment Systems provides that “the performing institution or the [electronic payment instrument] issuer shall deliver and notify in writing its customers of its decision on any received complaint within 7 business days from its filing.” Other laws and ordinances are silent on deadlines for addressing customer complaints. The Ethical Code of the ABB stipulates that each bank’s internal procedures to process customers' claims “shall include reasonable and the shortest possible deadlines for considering complaints and replying the claimant” and each “bank shall ensure that bank procedures or rules on settling disputes are available to clients”. e. The laws and ordinances are silent on equal treatment of verbal and written complaints. In practice, some banks report that all complaints are treated equally, and need not be in writing. f. The laws and ordinances are silent on requiring banks to maintain records of complaints. In practice, some banks report maintaining a register of complaints, but note that neither the bank supervisor nor the CPC reviews or requests them.

Recommendation 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.

Good Practice E.2 Formal Dispute Settlement Mechanisms a. A system should be in place that allows a customer of a bank to seek

affordable and efficient recourse to a third-party banking ombudsman or equivalent institution, in the event the customer’s complaint is not resolved to his or her satisfaction in accordance with the procedures outlined in E.1 above.

b. The existence of the banking ombudsman or equivalent institution, and the procedures before this institution, should be set forth in every bank’s Terms and Conditions referred to in B.7 above.

c. The banking ombudsman or equivalent institution should be impartial and act independently from the appointing authority, the banking industry and the specific bank with which the complaint has been lodged.

d. The decision of the banking ombudsman or equivalent institution should be binding upon on the bank with which the complaint has been lodged and this fact, as well as the mechanism to ensure the enforcement of such a decision, should be set forth in every bank’s Terms and Conditions referred to in B.7 above.

Description a. The Consumer Protection Act provides for the establishment of conciliation committees to assist in the resolution of disputes between consumers and traders (including banks). The role of such committees is to mediate disputes and propose resolutions that both parties may agree to voluntarily. However, proceedings before a conciliation committee are not a prerequisite for bringing a court action (article 182-185) In general, a separate conciliation committee is formed for each dispute brought to the CPC. The committee should consist of three members: one representative from the CPC, one from the banks’ association, and one from a consumer association. In practice, these conciliation committees are considered to be ineffective, for a number of reasons: they lack


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the technical capacity to deal with banking disputes; the banks’ association often does not provide a representative; and they require the parties to be physical present for proceedings, but if one party does not show up, then the proceedings are ended without resolution. In the case of payment disputes, however, a special standing conciliation commission has been established, pursuant to the Law on Funds Transfers, Electronic Payment Instruments and Payment Systems (article 68-76). The Conciliation Commission on Payment Disputes consists of five members, including a chairperson designated by the BNB Governor, two members designated by the banks’ association, and two members designated by the CPC. Complaints to the commission must be in writing and include all documents necessary to clarify the complaint. Complaints are processed and heard according to a strict timetable, with each party allowed to respond to the other party. However, as with the other committees, the commission issues a written proposal which the parties may accept or reject, and either party may take the dispute to court. Nevertheless, this commission is considered more effective due to its standing nature, the capacity of its members, and its written procedures that do not require physical presence of the parties. b. Both the Consumer Protection Act and the Law on Consumer Credit note the right of consumers to approach conciliation committees when they believe their rights have been violated. However, the laws are silent on requiring banks to disclose the existence of the conciliation committee mechanism. c. The representatives from the CPC and the chairman appointed by BNB are generally considered to be impartial and independent. However, the representatives of the consumer associations and the ABB typically support the case of the consumer and the bank, respectively. d. Conciliation committee proposals are non-binding on all parties, either of which may refuse the proposal and go to court.

Recommendation There should be a clear institutional structure to deal with consumer complaints. The preferred option is establishing a financial ombudsman, but in the interim the authority and capacity of the CPC should be expanded. A specialized financial services department could be established in the CPC and assigned with the responsibility of handling all financial consumers’ inquiries, complaints and disputes. Staff from the BNB and the FSC could be seconded to the CPC to help develop the expertise of the financial services department. A public awareness campaign could inform consumers that all financial sector complaints should be sent to the department. In the medium to long term, the department could be detached from the CPC to establish an independent statutory ombudsman for financial services. Consideration could also be given to creating conciliation committees for each of the main types of financial services, modeled after the Conciliation Commission on Payment Disputes, including: (i) making such committees standing committees, rather than being established separately for each dispute; (ii) basing proceedings on written submissions, rather than requiring physical presence at proceedings; and (iii) having the committees’ chairmen appointed by the BNB chairman; (iv) allowing them to issue binding decisions for financial institutions for small amounts of money. For additional recommendations on dispute resolution mechanisms, see Volume I.

SECTION F

GUARANTEE AND COMPENSATION SCHEMES

Good Practice F.1 Depositor Protection a. The law should ensure that the regulator can take prompt corrective

action on a timely basis. b. The law on deposit insurance should be clear on amongst other things:

the insurer, the classes of those depositors who are insured, the extent of insurance coverage, the holder of all funds for payout purposes, the


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contributor(s) to this fund, each event that will trigger a payout from this fund to any class of those insured, and the mechanisms to ensure timely payout to depositors who are insured.

c. In the absence of deposit insurance, there should be an effective and timely payout mechanism in the event of insolvency of a bank.

Description a. The Law on the Bulgarian National Bank provides that BNB shall regulate and supervise other banks’ activities in this country for the purpose of ensuring the stability of the banking system and protecting depositors’ interests (article 2). The Law on Credit Institutions provides that BNB shall supervise the activities of banks to ensure the observance of the rules in the Law, the sound and safe management of banks, and the risks they are exposed to (article 79). The Law provides that BNB “may” intervene (but does not “require” such intervention) and impose numerous corrective measures if a bank violates the Law or BNB guidelines, breaches its fiduciary duty, concludes transactions that affect the bank’s stability, violates the terms of its license, threatens depositors’ interests, threatens the stability of the payment systems, or conducts other offenses. b. The Law on Bank Deposit Guaranty applies to all licensed banks and provides that the Deposit Insurance Fund shall guarantee the full payment of funds held on a depositor’s account with a bank regardless of the number and size of the deposits. The amendments of the Law (in force since November 2008) increased the coverage of the deposit insurance fund from BGN 40,000 to BGN 100,000. Articles 7 – 10 provide for the establishment, status, functions, management and structure of the Fund. Per article 16, each bank shall make into the Fund an annual premium contribution equal to 0.5 percent of the total amount of the deposit base for the preceding year, determined on an average daily basis. Article 23 provides that the Fund shall pay the liabilities of a particular bank to its depositors up to the amount guaranteed, in the cases where the BNB has withdrawn the banking license granted to the commercial bank. Further provisions in this article stipulate the detailed procedures for payouts. c. Not applicable.


Good Practice F.2 Insolvency a. Depositors should enjoy higher priority than other unsecured creditors

in the liquidation process of a bank. b. The law dealing with the insolvency of banks should provide for

expeditious, cost effective and equitable provisions to enable the maximum timely refund of deposits to depositors.

Description The Law on Bank Deposit Guaranty provides that a bank’s liability to its depositors shall be reduced proportionally by the amounts paid to depositors, and depositors’ claims in excess of the amount received from the Fund shall be settled from the bank’s property, pursuant to current legislation. The Law on Bank Bankruptcy (article 94) provides the sequence of claims, placing the claims of the Deposit Insurance Fund and depositors fourth, behind: (1) claims secured by a pledge or mortgage, (2) claims on which the right of distraint are exercised, and (3) bankruptcy expenses. b. The Law on Bank Deposit Guaranty provides that, within 15 days from the resolution of the BNB withdrawing a bank’s license, the appointed conservator, liquidator or assignee in bankruptcy shall be obliged to submit to the Fund’s Management Board written information about the deposits held with the bank. Within 15 days from the receipt of this information, the Deposit Insurance Fund’s Management Board shall publish in at least two major dailies information about the date after which depositors shall be paid from the Fund, and the name of the bank which will effect these payments. Payments from the Fund must begin no later than 45 days from the date of BNB’s resolution to withdraw the bank’s license. The Law on Bank Bankruptcy provides for expeditious liquidation procedures with strict time limits for each stage of the process.



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SECTION G

CONSUMER EMPOWERMENT

Good Practice G.1 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. Schools should also teach basic financial concepts such as risk vs. return, long-term financial planning and consequences of over-indebtedness.

Description Some financial education is provided in Bulgarian schools.

Recommendation Financial education programs should be evaluated to determine the effectiveness in improving the financial literacy of students.

Good Practice G.2 Financial Education through the Media a. Print and broadcast media should be encouraged to cover issues related

to retail financial products. b. Regulators and/or industry associations should provide sufficient

information to the press and broadcast media to facilitate analysis of issues related to financial products and services.

Description Some print and broadcast media cover issues related to retail financial products on an ad hoc basis. For example, the daily newspaper Dnevnik reports on EU-wide financial education initiatives. It recently included an article about the importance of financial education against financial crisis at the EU level. The article focused primarily on some practices in Austria, Sweden and initiatives at the EU level, without any emphasis on Bulgaria. In addition, several months ago the chairman of the Conciliation Commission on Payment Disputes was interviewed by DARIK (national radio station) regarding the Commission’s activities and the issues around debit and credit card fraudulent draws.

Recommendation The media should increase their coverage related to financial services, including stories on truth in advertising (e.g. comparing advertising on products to the true terms offered). As noted in section A.4, human interest stories are often an effective way to entertain and educate.

Good Practice G.3 Information Resources for Consumers a. Financial regulators should seek to improve consumer awareness of

financial products and services by devising, publishing and distributing independent information on the costs, risks and benefits of such products and services.

b. Non-governmental organizations should be encouraged to provide consumer awareness programs to the public regarding financial products and services.

Description a. While both BNB and CPC respond to some consumer requests, particularly in the context of consumer complaints, neither is actively engaged in public awareness campaigns on financial products and services. b. Similarly, consumer associations respond more to consumer complaints, rather than engage in systematic consumer awareness programs. While some consumer associations have conducted surveys of consumers’ financial capabilities, they have generally not made the results of these surveys publicly available.

Recommendation The CPC, with technical advice from BNB, could consider developing an ongoing public awareness campaign to improve public awareness. Such a campaign should be based, at least in part, on regular national surveys of financial literacy to identify high-priority needs for education. The CPC may wish to involve consumer associations in such a campaign.

Good Practice G.4 Financial Consumer Advocacy In the development of financial sector policy, government and state agencies need to consult with banks and consumers and their respective associations in


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order to develop proposals that meet the needs and expectations of these key stakeholders. To ensure that consumers are actively involved in the policy development process, the government, or private sector organizations, should either provide appropriate funding to non-governmental organizations for this purpose or create a special entity to lobby on behalf of consumers in the policy-making process.

Description The Consumer Protection Act provides that consumer associations are entitled to receive information on drafts of any statutory instruments concerning the rights and interests of consumers and express opinions on them. In practice, BNB has been actively involved in preparing banking legislation, including the Law on Consumer Credit, and has sought the views of key stakeholders after drafts have been reviewed and revised internally.

Recommendation It is recommended that BNB and other state bodies continue to ensure adequate and timely consultation with all stakeholders, including consumer associations, in preparing banking legislation and take into consideration their views.

Good Practice G.5 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, the financial capability of consumers should be measured periodically by way of large-scale market research that gets repeated from time to time. For these purposes, the term “financial capability of consumers” means the ability to manage money, keep track of finances, plan ahead, choose appropriate financial products and services and stay informed about financial matters.

Description No such surveys have been done. Some consumer associations reported conducting surveys of financial capability of consumers on an ad hoc basis but use the results for internal purposes and do not publish them.

Recommendation The Ministry of Finance, Ministry of Economy and Energy, Ministry of Education and BNB should collaborate to design and conduct regular surveys of consumers’ financial capability. They may wish to seek technical assistance from the EU or another international organization for this purpose.

SECTION H

COMPETITION AND CONSUMER PROTECTION

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, application and enforcement of consistent policies regarding the regulation of financial services.

Description Bulgaria’s Commission for the Protection of Competition is an independent agency established in 1991 whose members are directly elected by Parliament. It has signed a memorandum of understanding with the CPC, which permits, inter alia, sharing information and cooperating on unfair competition. If the CPC suspects anti-competitive behavior (e.g. a cartel), it will send the relevant information to the Commission for the Protection of Competition to take appropriate actions. The Commission for the Protection of Competition also cooperates with BNB and recently closed proceedings on a sector analysis of financial services. This study, which covered 2006-08 and took one year to complete, includes an analysis of retail banking and the market for deposits and consumer loans. The CPC also assisted in the study.


Good Practice H.2 Review of Competition Given the significance of retail banking to the economy as a whole and to the welfare of consumers, competition authorities should:

a. Maintain a watching brief on competition in retail banking; and b. Conduct and publish periodic assessments of competition in retail


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banking, and make recommendations on how competition in retail banking can be enhanced.

Description a. The Commission for the Protection of Competition has been entitled to making sector inquiries since 2003. It has conducted 5 analyses in different sectors, including energy, food, pharmacy and banking. They are not obliged to make regular assessments of any sector, but instead do sector analysis only when assigned. For example, sector analysis may be initiated:

In case of a current problem of public interest and impact related to competition, raised by state authorities and institutions, mass media, trade or business organizations, public, or any other entity.

When in the course of proceedings on one or several cases dealing with similar issues, it is established that prevention, restriction and distortion of competition is occurring in a particular sector, branch, sub-branch or region.

When in course of proceedings on one or several cases dealing with similar issues, it is established that the Commission for the Protection of Competition and the Supreme Administrative Court encounter difficulties in defining, interpreting, or assessing essential elements in the investigation or analysis of particular cases. Such problems may be related to the definition of the relevant market, inconsistencies in the legislative framework, difficulties in assessing the position or conduct of undertakings on the market, etc.

In case of a signal which poses serious questions about competitive behavior and environment in the relevant market and suggests appreciable problems in terms of impeded competition.

b. As noted in section H.1, the Commission for the Protection of Competition recently completed a sector analysis of financial services, which includes an analysis of retail banking and the market for deposits and consumer loans.

Recommendation While the current practice has resulted in timely analysis of the banking sector, the Commission for the Protection of Competition may wish to consider institutionalizing a regular watching brief on the banking sector (e.g. on a semi-annual or annual basis).

Good Practice H.3. Licensing of Commercial Entities All commercial entities that either collect funds from consumers or lend funds to consumers need to be licensed and supervised.

Description The Law on Credit Institutions provides that accepting public deposits or other repayable funds shall only be carried out by a person who has been granted a bank license by the BNB (article 2). The Law defines bank as “a legal person which is engaged in the business of publicly accepting deposits or other repayable funds and extending credits and other financing for its own account and at its own risk” (article 2). The Law also establishes that BNB shall supervise the activities of banks to ensure the observance of the rules in this Law and the acts on its implementation, the sound and safe management of banks and the risks they are exposed to or may be exposed to, and the maintenance of own funds adequate to the risks (article 79).


Bulgaria Non-bank Credit Institutions Segment

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Bulgaria: Consumer Protection in the Non-bank Credit Institutions Segment

Overview The segment of non-bank credit institutions (NBCIs) comprises mainly leasing companies, corporations specialized in mortgage and consumer lending, and credit cooperatives. The Cooperatives Act governs the establishment and operations of credit cooperatives. The establishment of leasing companies and corporations specialized in mortgage and consumer lending is governed by the Commercial Act, and their operations are regulated by the Law on Credit Institutions. The assets of NBCIs specialized in leasing and mortgage and consumer lending accounted for 7 percent of the financial system in Bulgaria by end-2007. As financial deepening—the share of the financial system assets relative to GDP—progressed in Bulgaria from 55 percent of GDP in 2003 to 141 percent of GDP in 2007, the banking sector established its dominance, similarly as in other Central and Eastern European countries. The banking sector accounted by end-2007 for 74 percent of the total financial system assets in contrast to the share of NBCIs’ assets of 7 percent. Nevertheless, the niche market that NBCIs occupy grew as well over the same period, outpacing the growth in assets of insurance, pension or investment funds. This development has been to some extent fueled by lighter regulation of the NBCI segment.

Table 2: Bulgarian Financial System Structure

Assets (in percent of GDP) Number of Entities 2003 2004 2005 2006 2007 Sep08 2003 2004 2005 2006 2007 Sep08 Commercial banks 50.0 64.1 76.8 85.5 104.6 107.7 35 35 34 32 29 30

Nonbank financial institutions 4.8 6.7 12.3 22.2 37.9 33.5 123 115 187 302 356 385

Insurance companies 2.3 2.4 2.9 3.6 3.9 3.8 31 31 31 37 39 41

Investment funds 0.1 0.1 0.2 0.6 1.6 0.7 5 9 25 45 68 77

Pension funds 1.5 2.0 2.6 3.1 4.1 3.7 8 8 8 9 9 10

Leasing companies ... ... 3.2 5.1 8.2 10.4 ... ... 50 54 63 66

Mortgage and consumer lending ... ... ... 2.4 4.0 4.5 ... ... ... 61 59 59 Special purpose vehicles securitizing claims ... 0.0 0.0 0.2 0.2 0.1 ... 1 1 6 9 8

Special purpose vehicles securitizing real estate ... 0.0 0.3 1.1 2.3 2.4 2 4 12 34 52 61

Non-banking investment intermediaries 0.9 2.1 3.1 6.1 13.7 7.7 77 62 60 56 57 63

Total domestic financial system 54.8 70.8 89.2 107.7 142.4 141.2 158 150 221 334 385 415

Source: BNB, FSC

The 2008 credit growth slowdown can test the efficiency and competitiveness of the NBCI sector. The number of NBCIs involved in mortgage and consumer lending remained roughly constant from 2007 to 2008 although some consolidation in this market could be expected during 2009. Leasing Companies Car leasing contracts are the almost sole product sold by leasing companies to households and account for about 10 percent of the leasing companies’ portfolio. The total leasing companies’ claims under financial and operational leases were about 8 percent of GDP in June 2008. They increased by 83 percent compared with June 2007 (5 percent of GDP). Claims under financial lease contracts grew by 84 percent between June 2008 and June 2007. Claims under financial lease contracts of cars (the practically sole leasing product sold to consumers) increased by 95 percent and their share in the total amount of


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claims under financial leases amounted to 34 percent. Claims on households and NGOs serving households grew by 49 percent over 2007-2008, however their share in the total amount of claims on residents decreased from 11 to 9 percent. Reportedly, consumers account for about 25 to 30 percent of the total car leasing contracts.

Figure 6: Claims under Financial Lease Contracts on Residents by Sector

Jun-08

Monetary financial

institutions0.1%

Nonfinancial corporations

90.0%

Households and NGOs serving households

9.2%

Government sector0.1%

Other financial corporations

0.6%

Jun-07

Other financial corporations

0.4%

Government sector0.1%

Households and NGOs serving households

11.4%

Nonfinancial corporations

87.9%

Monetary financial

institutions0.2%

Source: BNB Funding of leasing companies consists mainly of long-term loans. In June 2008, leasing companies’ liabilities increased by 90 percent relative to June 2007 and stood at BGN 5,732 million. Ninety percent of liabilities corresponded to loans, and 90 percent of these loans were granted by non-residents. Short-term loans accounted for a quarter of total financing loans. In June 2008, the total amount of debt securities issued was BGN 112 million, an increase of 24 percent in comparison with June 2007.

Table 3: Balance Sheet of Leasing Companies (in million BGN)

Sep-05 Jun-06 Jun-07 Jun-08 Assets 1,079.2 1,857.8 3,321.1 5,978.2 Loans 802.9 1,424.5 2603.3 4,785.5 Securities other than shares 0 0.1 0.2 0.1 Shares and other equity 1.3 1.5 5.4 5.8 Other assets 274.9 431.8 712.2 1,186.8 Liabilities 1,017.0 1,777.3 3,169.0 5,732.0 Loans 829.5 1,477.1 2,707.4 5,134.8 Up to 1 year 125.1 363.8 614.9 1,317.3 Over 1 year 704.4 1,113.2 2,092.4 3,817.5 Debt securities issued 50.5 69.1 89.8 111.6 Other liabilities 137.0 231.1 371.8 485.6 Equity 62.2 80.5 152.2 246.2 Capital 33.5 35.5 70.1 88.1 Financial result 17.8 28.7 33.7 66.1 Number of companies 50 50 60 63

Source: BNB

Corporations Specialized in Mortgage and Consumer Lending Consumer finance companies, which are largely unregulated, have grown significantly in recent years. The total assets of these companies amounted to 4 percent of the banking system assets by end-2007. Consumer finance companies fund themselves abroad through their parent banks, domestic and international capital markets, and international syndicated loans. They lend to consumers and generally take higher risks that are reflected in much higher lending rates than those charged by banks.


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Banks tend to set up consumer credit subsidiaries to benefit from regulatory and supervisory arbitrage. Most foreign-owned banks in Bulgaria are providing specialized financial services via credit disintermediation, through domestically-controlled subsidiaries, parent-bank owned consumer credit companies or joint venture companies (leasing, factoring, brokerage, consumer credit, investment and asset management companies). These companies are established as NBCIs, which are less regulated than banks. The reason for outsourcing some financial services is the current high cost of banking intermediation. Banks are subject to capital requirements that are higher than the EU minimum capital ratio (12 percent), high and un-remunerated reserve requirements on deposits (12 percent) and high annual deposit insurance fees (0.5 percent of insured deposits). NBCIs are not subject to such requirements as this sector is for now unregulated. Reportedly, about 80 percent of consumer finance companies are tied to foreign banks. The typical products of corporations specialized in mortgage and consumer lending are fixed-rate consumer loans and credit cards. Reportedly, mortgage lending is still largely provided by the banking industry. The niche of the corporations specialized in consumer lending typically consists of credit cards and fixed-rate consumer loans with and without stated purpose. The typical maturity of a fixed-rate consumer loan with a stated purpose is reportedly about 15 months with an interest rate of 36-40 percent per annum. Most often consumer loans are not collateralized. Currently, the consumer credit companies associated with banks have access to the BNB’s Central Credit Register, which gives them some advantage over companies not associated with banks in terms of pricing effectiveness. Credit Cooperatives Household loans for consumption and house purchases amount only to 5 percent of the total lending of credit cooperatives. Almost 50 percent of credit cooperatives in Bulgaria are agricultural credit cooperatives. As seen in Table 4, the main business of credit cooperatives is lending for productive purposes to self-employed individuals–“other purposes (residual)” under total loans. Credit cooperatives are precluded from conducting payment operations. They extend mortgage loans up to 10 years of maturity to their members and require a minimum of 125 percent of collateral relative to the loan value. Also, credit cooperatives are currently denied access to the Central Credit Register.

Table 4: Balance Sheet of Credit Cooperatives (in million BGN)

Dec-07 Mar-08 Change

(%) Assets 42.1 48.4 15.0% Loans – Total 30.6 28.7 -6.2%

Companies 0.0 0.0 0.0% Households 30.5 27.1 -11.2%

Consumer credit 0.3 0.3 16.3% Lending for house purchase 1.1 1.1 -2.1% Other purposes (residual) 29.1 25.6 -11.8%

Shares and other equity 0.2 0.2 0.0% Other assets 11.2 19.5 73.3% Liabilities and Capital 42.1 48.4 15.0% Deposits and loans taken 6.8 7.0 3.9% Debt securities issued 0.0 0.0 0.0% Other liabilities 18.7 24.4 30.3% Capital and reserves 16.6 17.1 2.4% Number of companies 34 34

Source: BNB


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Legal Framework and Institutional Arrangements

The main legislation governing consumer protection issues for non-bank credit institutions are:

Commercial Act Code of Civil Procedures Obligations and Contracts Act (1950, as amended in 1996) Consumer Protection Act (2006, as amended in 2008); Law on Credit Institutions (2007, as amended in 2009); Cooperatives Act (1999) Law on Consumer Credit (2006, as amended in 2008); Law on the Bulgarian National Bank (1997, as amended in 2007); Law on Personal Data Protection (2002, as amended in 2006).

The Bulgarian National Bank (BNB) plays a role regarding consumer protection in the non-bank credit institutions segment. The Law of the BNB states that leasing companies, corporations specialized in mortgage and consumer lending, and credit cooperatives shall provide financial account statistics to the BNB, in accordance with a procedure established by the BNB. According to the last amendments of the Law on Credit Institutions (dated March 2009), all financial institutions listed in article 3 of this Law have to be registered with BNB in order to take up business. This provision brings financial institutions which are not subject to licensing and supervision under another law, under supervision of BNB. The BNB establishes a list of requirements for financial institutions under the Law on Credit Institutions regarding their minimum capital level, qualification and reputation of their executive board members and main shareholders, as well as reporting to the BNB, etc. Moreover, institutions specialized in providing credits and leasing companies are obliged to provide credit data to the Central Credit Register and allowed to have access to the register as well. A non-bank credit institution collecting, handling and storing personal data has to be licensed and registered with the Commission for Personal Data Protection as personal data administrator. The Bulgarian Association for Leasing (BAL) is the representative body for the leasing industry and it has adopted a code of ethics which includes a section on relations with customers. The Bulgarian Association of Cooperative Credit Organizations represents Bulgarian cooperative financial organizations and international organizations for microcredit development, and is a self-regulatory organization for the industry. The Association enforces a code of conduct for credit cooperatives. The Consumer Protection Commission (CPC) has the responsibility of protecting consumers from unfair and deceptive business practices, including practices in the financial sector.

Key Recommendations

The key recommendations from the review of consumer protection issues for non-bank credit institutions are the following:

The Law on Consumer Credit exempts mortgage loans and mortgage-backed consumer loans. Consumer protection provisions similar to those in the Law on Consumer Credit should be also applicable to mortgage loans and mortgage-backed consumer loans.

Corporations specialized in mortgage and consumer lending should engage in establishing an industry association that would represent and build consensus among its members.

The association should adopt a code of ethics with a specific section devoted to interactions with consumers, and be responsible for enforcing the adopted code of ethics among its members.


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The code of ethics should be visibly displayed in all points of sale or branches of the NBCIs.

Loan officers should be trained. They should interview their customers to understand their financial situation and the risks they are facing, and provide them with instructions on how to maintain sound personal finance and avoid risks overexposure. These practices for loan officers should be described in detail in the internal procedures of the NBCIs.

There should be requirements on education, experience and integrity that loan officers and point-of-sale representatives are obliged to satisfy. These requirements should be formalized and agreed upon within the industry.

NBCI associations should engage in initiatives that would increase disclosure of pre-contractual information to consumers (e.g. terms and conditions available in branches, points of sale and institutions’ websites) and enhance awareness and clarity of complaints procedures, both within NBCIs and for out-of-court dispute resolution mechanisms (e.g. inclusion of the channels available for complaints submission in the codes of ethics and general terms and conditions).

The CPC statutory power and technical capacity in the area of financial services should be strengthened. The CPC should (i) have the faculty of issuing binding decisions on NBCIs up to a certain small amount, (ii) arrange secondments of staff from the BNB and FSC, (iii) enter twinning arrangements with partner institutions in the EU, (iv) conduct on-site inspections for supervision on compliance with consumer protection legislation, and (v) improve the institutional functioning of the conciliation committees following the model of the Conciliation Commission on Payment Disputes. As a starting point, a specialized financial services department should be created within CPC. In the medium-to long-term, the financial services department could be detached from the CPC as a separate financial ombudsman office.

More resources should be channeled to consumer associations and earmarked to their engagement in financial education. Consumer associations should be more heavily involved in product comparison, comparison of disclosure practices, sales practices, communication of principles of sound personal finance, etc.

The survey conducted under the USAID umbrella should be repeated or a new similar survey should be launched and used as a basis for identifying the most financially vulnerable groups of the Bulgarian population, and for designing a targeted and effective financial education program. This survey should be repeated every several years to assess the effectiveness of the implemented financial education programs and implement measures to improve consumer protection.


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Good Practices: Non-bank Credit Institutions Segment

SECTION A


Good Practice A.1 Consumer Protection Regime The law should provide for clear rules on consumer protection in the area of non-bank credit institutions, and there must be adequate institutional arrangements for implementation and enforcement of consumer protection rules.

a. There should be specific provisions in the law, which create an effective regime for the protection of consumers of non-bank credit institutions

b. The rules should prioritize a role for the private sector, including voluntary consumer protection organizations and self-regulatory organizations.

Description The non-bank credit sector comprises mainly leasing companies, credit providers and credit cooperatives. The establishment of leasing companies and credit providers is governed by the commercial law on joint stock companies and limited liability companies under the Commercial Act. Their operations and business are regulated by the Law on Credit Institutions (2007, last amended in 2009), the Law on Consumer Credit (2006, last amended in 2007), the Law on Personal Data Protection (2002, last amended in 2006) and the Obligations and Contracts Act (1950, last amended in 1996). Their interactions and relations to consumers are regulated by the Consumer Protection Act (2005, last amended in 2008). For further laws and regulations pertaining to leasing, see: http://www.leasing-bulgaria.org/en/main_legislation.htm The establishment of credit cooperatives is governed by the Cooperatives Act (1999). Their operations and business are governed by the Cooperatives Act and the Obligations and Contracts Act (1950, last amended in 1996). There are also bylaws issued by the National Assembly concerning agricultural credit cooperatives on their use of EU funds (grants). The revised Law on Credit Institutions is bringing under BNB supervision all financial institutions providing credit to the household sector, including leasing companies, consumer finance companies and cooperatives. Non-deposit taking institutions would not be subject to the full panoply of prudential supervision but they would at least be obliged to register with the BNB. In addition, as per article 42 of the Law of the Bulgarian National Bank, leasing companies, corporations specialized in mortgage and consumer lending, and credit cooperatives shall provide financial account statistics to the BNB in accordance with a procedure established by the BNB. At present, this procedure appears to involve only leasing companies and corporations specialized in mortgage and consumer lending (as per instructions on the BNB’s website: http://www.bnb.bg/bnb/home.nsf/fsWebIndex?OpenFrameset.) Under the draft Law on Consumer Credit which is planning to transpose the Directive 2008/48/ EO, mortgage credits are subject to the law to some extend, although it is not required under the respective EU directive.

Recommendation Although there is no Leasing Directive at the EU level, specific ordinances to regulate operations and business of leasing companies and corporations specialized in mortgage and consumer lending could be beneficial to further minimize the counterparty risk that a consumer is facing when interacting with both types of financial institutions. The Law on Consumer Credit exempts mortgage loans and mortgage-backed consumer loans.


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Consumer protection provisions similar to those in the Law on Consumer Credit should be also applicable to mortgage loans and mortgage-backed consumer loans.

Good Practice A.2 Code of Conduct (Customer Protection Code) a. There should be a principles-based Code of Conduct for non-bank credit

institutions that is devised in consultation with the industries involved, and is monitored and enforced in the last resort by a statutory agency.

b. The statutory Code should be limited to good business conduct principles. It should be augmented by voluntary codes on matters specific to the industry (banks, credit unions, other non-bank credit institutions).

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.

Description There is neither an association for corporations specialized in mortgage and consumer lending nor an industry-wide code of ethics focused on the interaction between corporations and consumers. Nevertheless, those corporations specialized in mortgage and consumer lending which are directly linked to foreign banks, have adopted the internal codes of conduct of their particular banking group. The Bulgarian Association for Leasing (BAL) which is the representative body for the leasing industry has adopted a code of ethics. The code of ethics includes Section IV on Relations between the Leasing Companies and the Customers (articles 14-22). As per the code’s article 13 of Section III on the Relationship between the Leasing Companies and the Association, the enforcement function of the BAL is not determined and there are no specific enforcement actions stated that the BAL could apply in order to enforce application of the ethical code. The article merely obliges the association’s members that adopted the code to inform BAL of violations of ethical values and misconduct. The Bulgarian Association of Cooperative Credit Organizations (http://creditcoops.org/) represents the Bulgarian cooperative financial organizations and international organizations for microcredit development. The industry is self-regulated by the association through by-laws and in-house regulations. The latter regulations include a code of conduct for the credit cooperatives.

Recommendation Corporations specialized in mortgage and consumer lending should engage in forming an industry association which would represent and build consensus among its members. The process of building consensus and harmonizing practices in the industry should include the adoption of a code of ethics with a specific section devoted to interactions with consumers. The newly formed association should be also responsible for enforcement of the adopted code of ethics among its members. BAL should explicitly engage in enforcement of the adopted code of ethics within its members. To provide for greater awareness and visibility of consumers’ rights and improve the commitment of the non-bank credit institutions to fair lending practices, it is recommended that the codes of ethics, namely its sections on the relationship with consumers, be visibly displayed in all points of sale or branches of the non-bank credit institutions. The sections of the codes related to interactions with customers should re-iterate and elaborate on the consumer protection principles present in the law. Although the recent amendments to the Law on Credit Institutions state that non-bank credit institutions are subject to registration and supervision of their activities by the BNB, the associations should take on stronger role in the enforcement of their respective industries’ codes of ethics. This role could include regular reporting on breaches of the code of conduct by their members and non-members within the scope of the code of ethics.

Good Practice A.3 Other Institutional Arrangements a. There should be an equal balance between prudential supervision and

consumer protection.


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b. The judicial system must provide credibility to the enforcement of the rules on financial consumer protection.

c. The media and consumer associations ought to play an active role in promoting financial consumer protection.

d. Non-bank credit institutions should be legally responsible for all statements made in marketing and sales materials related to their products.

Description a. Consumer protection monitoring and supervision in the segment of NBCIs is conducted by the CPC based on their annual plan and complaints from consumers under the Consumer Protection Act. The NBCIs are already reporting some financial information to the BNB and the degree of data reporting is envisaged to expand substantially with the last amendments of the Law on Credit Institutions (in force from 31 March 2009). In addition to off-site supervision of the NBCI, the Law authorizes the BNB to undertake on-site data monitoring. This new mandate of BNB in fact will complement the mandate of the FSC for financial supervision of the non-banking sector (over investment funds, insurance companies and pension funds). BNB is also preparing special ordinances under the Law on Credit Institutions, aiming to provide the regime for registration of financial companies and their deletion from the BNB Register as well as to place requirements for financial institutions’ business and their reporting to BNB. b. In relation to the products of the NBCIs, consumers are reportedly reasonably aware of their rights and the fact that the appropriate authority to file complaints with is the CPC –for complaints unresolved to their satisfaction at the individual NBCI level. Nevertheless, fewer consumers are aware that the Commission for the Protection of Competition has recently taken over the responsibility for complaints related to misleading and unpermitted comparative advertising (although CPC is still responsible for cases of unfair business-to-consumer commercial practices). In cases of violation of the Consumer Protection Act, the CPC and the Commission for the Protection of Competition can issue binding corrective orders, administrative acts or impose fines. Disputes not clearly in breach of the Law and outside of competence of the CPC could be passed on to BNB to facilitate mediation, or the consumer could be directed to the court as the last resort. Market participants repeatedly point to slow court procedures, resolution of their cases, and the need for more efficient out-of-court settlement mechanism in the light of the relatively small claims the disputes relate to. c. The Federation of Consumers and the Bulgarian National Consumers Association are the most active and largest consumer protection associations with regional offices. Reportedly, there are four consumer protection associations in Bulgaria that would satisfy the government’s requirement for a “representative” consumer protection association eligible to apply for a participation in the National Consumer Protection Council, the Ministry of Economy and Energy’s advisory body. This requirement for representation involves an association having at least 7 regional offices across Bulgaria. The consumer protection associations, the press and media are becoming increasingly active in the area of financial education especially in reaction to a similar initiative at the EU level. Apart from advisory and advocacy services, such institutions as the Bulgarian National Consumers Association issue magazines with sections that compare financial products and provide tips on sound personal finance. The Association conducts surveys on consumer financial services and is involved in a comprehensive regional survey on financial services coordinated by SOS – a Czech Consumer Protection Association. The Federation of Consumers carried out a survey on the population who do not use banking services and presented the summary results at an EU workshop. Editorials and articles on consumer finance regularly appear in the press, only the TV media appears to be lagging behind in the educational aspect at the expense of advertising of financial products. d. The Commission for the Protection of Competition is responsible for monitoring and investigating cases of misleading and unpermitted comparative advertising on a regular basis, based on its own initiative and on signals from consumers and firms (competitors). While market participants point to occasional cases of misleading advertising, the complaints in the area of NBCI are mostly initiated by consumers rather than competitors.


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Recommendation Greater awareness of consumer rights in all three areas of NBCI could be ensured by establishing stronger links between NBCI professional associations and consumer protection associations. To educate their consumers, NBCI associations should engage in initiatives that would increase disclosure of pre-contractual information to consumers (e.g. through regular NBCIs product comparison in the press) and require the disclosure of clear complaints procedures within NBCIs themselves and with the CPC and the court, and disclosure of all the available channels for submission of complaints in the ethical codes and the general NBCI contracts’ terms and conditions.

SECTION B


Good Practice B.1 Know Your Customer

A non-bank credit institution must gather, file or record sufficient information appropriate to the risk of the transaction, the nature and complexity of the product or service being sought by the consumer.

Affordability A non-bank credit institution must ensure that, under consideration of information disclosed by the consumer or third parties, any product or service offered to a consumer is adequately based upon possible affordability of the consumer.

Description Reportedly, NBCIs collect a comprehensive set of information of their customers to screen their creditworthiness, NBCIs keep a live file on the customer and, upon request, the consumer (customer) is allowed to view the file. The diversity of products and terms is more limited in case of NCBIs and their variation comes primarily from the choice of maturity. The typical credit product is a 15-month fixed-rate consumer loan. The general conditions are not readily available to consumers in sufficient time before a contract is signed, which could result in higher incidence of high pressure sales of NBCIs’ financial products. In this context, NCBIs do not appear to advise customers on a sound ratio of debt service charges to income. NBCIs also often receive requests from customers to extend the maturity of their existing loan, which the NCBIs reportedly do without a rescheduling fee but at a higher interest rate -- assuming an upward sloping yield curve. There seems to be a general requirement that the loan officers and point-of-sale representatives have at least a bachelor degree, and some in-house training for the positions is required.

Recommendation The loan officers should be trained in, and provide the consumer with, instructions on how to maintain sound personal finance. They should conduct interviews to understand the personal/household balance sheet composition and the risks their customer is facing to avoid overexposure of the consumer to changes in interest rates and to avoid endangering his/her credit history and future ability to borrow. These practices should be described in detail in the internal procedures of the NBCI, and the principles and the entitlements of consumers to such treatment and service should be included in the code of ethics of the industry. The code should be displayed visibly in each point of sale or NBCI branch. The general terms and conditions of the NBCIs contracts should be available to consumers upon request in NBCIs branches and points of sale, and readily available for download from their respective websites. The requirements on education, experience or integrity that the loan officers and points of sale representatives are obliged to satisfy should be formalized and agreed upon within the industry under the umbrella of the NBCIs associations.


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Good Practice B.2 Cooling-off Period Unless explicitly waived by the consumer in writing there should be a cooling-off period of fourteen days associated with all credit products.

Description Under the current Law on Credit Institutions and Law on Consumer Credit, no cooling-off period is stipulated or recognized. However, a new draft Law on Consumer Credit proposes a cooling-off period of 14 days. However, for distance financial services, article 12, paragraph 1 of Law on Distance Marketing of Financial Services provides that, "The consumer shall be entitled in a period of 14 calendar days to withdraw the contract concluded without indemnity or penalty and without giving any reason, considered from: (1) the date of concluding the contract; (2) the day when the consumer receives the conditions of the contract and the information, if this happens after conclusion of the contract.”

Recommendation It is recommended that loans to consumers be subject to a cooling-off period of 14 days.

Good Practice B.3 Bundling and Tying Clauses Whenever a non-bank credit institution contracts with another merchant to distribute its credit contracts, no product should be offered “only” in a bundle without being available separately,

Description Market participants report that tying of financial services could take place on occasions in relation to mortgage loans. Mortgage loans are almost exclusively provided by banks due to their higher amounts and NBCIs are practically not involved in this line of business. While bundling is taking place to offer a consumer some scale discount, financial services sold in a bundle are also sold separately. Both the CPC and the Commission for the Protection of Competition monitor this aspect of financial services.

Recommendation NBCIs should clearly provide customers with separate prices of each product in a bundle, as well as any discount available if purchased as a bundle from the same NBCI (or from an NBCI’s preferred vendor). The ethics code of NBCIs should include these requirements and state that compulsory tying of financial products or their availability exclusively in bundles are prohibited sales practices.

Good Practice B.4 General Practices Customer disclosure and sales practices should be included in the non-bank credit institutions’ code of conduct and monitored by the supervisory authority.

Description Although the best practice among NBCIs is to provide consumers with brochures and leaflets with simple but materially comprehensive information on products’ characteristics, there is no requirement for a harmonized, simple fact sheet to be provided to customers to facilitate comparability of similar products’ conditions, especially costs, risks and contractual obligations. Sales practices are described in internal rules for loan/sales officers and their consistency with the principles of sales to consumers in the code of ethics is reportedly ensured. Due to the fact that the NBCIs were not subject to prudential or business conduct supervision, the monitoring and enforcement of the code of ethics was effectively left to the NBCIs’ associations.

Recommendation See also recommendation A.2.

Good Practice B.5 Roles of Third Parties a. The regulator or supervisor ought to publish annual public reports on the

development, health, strength and penetration of the non-bank credit institutions either as a special report or as part of the disclosure and accountability requirements under the law governing it.

b. Non-bank credit institutions should be required to provide their financial information to enable the general public to form an opinion as to the financial viability of the institution.

Description The BNB, according to the Law on BNB, can require any NBCI to report to it financial accounting information and statistics. This reporting is happening, but the coverage and


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selection of NBCIs reporting to the BNB is not clear. The format of the reporting is clear and available on the BNB’s website: http://www.bnb.bg/bnb/home.nsf/fsWebIndex?OpenFrameset . The March 2009 amendments to the Law on Credit Institutions require NBCIs to register with the BNB. It is envisaged that all of them will submit their financial information and reports to the BNB prepared in accordance with BNB explicit requirements regarding their reports’ content and form of the reports. To our knowledge, the BNB does not publish an annual report on the development, health and strength and penetration of the NBCI sector. The role of the NBCIs associations should be strengthened in this respect. The BAL could be seen as setting a good example, as it does issue a report although the average pricing of different leasing products in terms of APRs is not published. Such information would be useful to consumers in making their decision making and forming their overall opinion on the leasing sector. The NBCIs are mostly joint stock companies who prepare their annual reports for their shareholders. These annual reports are not commonly disclosed to customers nor are the customers sufficiently aware of their right to view the reports.

Recommendation Information submitted by NBCIs to the BNB should include a description and pricing of the main products, and data of customers’ delinquencies, such as overdue loan payments, non-performing loans or default rates for each of their loan products. The financial information collected by the BNB should be published in a consolidated manner, but only to the extent that will enable the general public to form an opinion on the development, health, strength and penetration of the non-bank credit institutions. The annual reports of NBCIs should be available in NBCIs’ branches to customers upon request and published on the NBCIs websites.

SECTION C


Good Practice C.1

Non-bank credit institutions’ customers have a right to expect that their financial transactions are kept confidential. The law ought to require non-bank credit institutions to ensure that they protect the confidentiality and security of personal data, against any anticipated threats or hazards to the security or integrity of such information, and against unauthorized access.

Description The Law on Personal Data Protection requires NBCIs to be registered as personal data administrators and strictly obey the rules specified in the Law. See also section B.1.

Recommendation Consumers’ awareness of their right to view the personal file that an NBCI keeps on them should be raised by including this right in the code of ethics visibly displayed at NBCIs’ branches. Consumers’ awareness of the fact that incorrect or incomplete information in their file can impede their ability to borrow in the future should be increased by consumer protection associations, NBCIs associations and the media.

Good Practice C.2 Credit Bureaus a. A non-bank credit institution must ensure the accuracy and timeliness of

the information that it shares. b. Credit bureaus must comply with the timeliness of updating information

of consumers. c. Customers’ 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 customer's credit report.


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Description Under the Law on Data Protection the NBCIs are precluded from sharing consumers’ information with third parties without the consent of the consumer. In addition, by end-2008 the NBCIs were not obliged to report information to the Central Credit Register as other lenders such as banks were. Leasing companies report/register their pledges in the Central Pledge Registry established by the BAL. Furthermore, the NBCIs linked directly to banks have the advantage of accessing the information through the affiliated bank which is allowed to access and utilize such data. This could be seen as an “unfair” competition environment from the viewpoint of the NBCIs not linked to banks. The information file kept on each customer contains, among others, personal data provided by the consumer and verified by the NBCI. According to the last amendments of the Law on Credit Institutions dated 31 March 2009, the NBCIs are obliged to report to the Central Credit Register and are allowed to access the information from the registry. The Central Credit Register may provide information to non-banks if and only if the customer consents (Law on Credit Institutions, Article 62). In the case of private credit bureaus, they may release data only if the customer consents, too (Law on Personal Data Protection). In both cases, the legislation does not require that the consent be written. There is one private credit bureau in Bulgaria, Experian, with total coverage of 5 percent of the adult population compared with the coverage of the Central Credit Register of 30.7 percent of the adult population (Doing Business, 2008). The participation of banks and other financial institutions and utility companies is very low. The NBCIs could participate in such an information exchange but chose not to due to the low coverage. They often mention that the information that they would provide to Experian would be more than they can retrieve from Experian. Although there is a plan to include utility companies in obligatory reporting to the Central Credit Register, the long-term strategy for this register and its limits are not known to the financial institutions. It could be expected that credit scoring of consumers will not be performed by the Central Credit Register, but the market is not aware of that fact, due to nonexistent or uncommunicated long-term strategy of the BNB for the development of the Central Credit Register.

Recommendation The registry should further collect reports on consumers’ payment discipline from utility companies and telephone operators and cable TV providers. The functioning of the private credit bureau should be enhanced to increase participation of financial institutions. This is important because even if the Central Credit Register records both positive and negative information and further expands the information of consumers’ credit history, it is expected not to provide a credit scoring of consumers in the future. Credit scoring provided by a private credit bureau could have a positive effect on the availability and cost of credit for consumers. The BNB should clearly communicate the long-term strategy for the Central Credit Register and its targeted ultimate information content/structure. For more recommendations, see the Section on Credit Reporting Systems.

SECTION D


Good Practice D.1 Complaint Handling Complaint resolution should be included in the non-bank credit institutions’ code and monitored by the supervisory authority.

Description Complaints handling and resolution is not included in the NBCI associations’ code of ethics (conduct) or in the general contract conditions of the NBCIs. The NBCI sector is not supervised neither is the handling of complaints.

Recommendation Complaints handling and resolution should be described in the NBCIs associations’ code of ethics, and reference to this description made in the general contract terms of the NBCIs.


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The market conduct of NBCIs should be supervised so that their operations and interactions with consumers are in line with the code of ethics adopted or required to be adopted by the industry.

Good Practice D.2 Formal Dispute Settlement Mechanisms a. A system should be in place that allows consumers to seek affordable

and efficient third-party recourse in the event they cannot resolve an issue with the non-bank credit institution, which could be an ombudsman or tribunal.

b. The role of an ombudsman or equivalent institution vis-à-vis consumer complaints must be in place and made known to the public.

c. Ombudsman's impartiality and independence from the appointing authority and industry must also be assured.

d. The enforcement mechanism of the decisions of the ombudsman or equivalent institution and binding nature of the decision on non-bank credit institutions must be in place and publicized.

Description a. Currently, the consumer has the choice of submitting a complaint, which is unresolved at the individual NBCI level, to the CPC or to the BNB or FSC. Since neither of the latter two institutions supervises NBCIs, the effectiveness of these channels could be rather low. If the consumer complains to the CPC, the CPC could assist in several ways. First, if the complaint concerns misleading or unpermitted comparative advertising the consumer could have complained to the CPC and the CPC would direct such a complaint to the Commission for the Protection of Competition and advise the consumer. Second, CPC can issue penalty orders (decrees), administrative acts and impose coercive administrative measures if the Law on Consumer Credit or the Consumer Protection Act was breached, based on article 35 of the Law on Consumer Credit and articles 4 and 233 of the Consumer Protection Act. Third, the CPC can ask for expert advice and mediation assistance from the supervisor. Since the NBCIs are not supervised the BNB would be practically the closest expert authority to provide such an advice or mediation assistance to settle the dispute between a consumer and an NBCI. Fourth, the CPC can try to put together a conciliation committee that will mediate the dispute between the consumer and the NBCI. According to the Consumer Protection Act (article 183), the committee shall include a representative of the CPC (the chairman), a representative of the traders association (e.g. representative of a NBCI association) and a representative of a consumer association. The representatives of the traders and the consumer associations have to be present for the committee to be established. The CPC will send an invitation to the parties to participate in such mediation. If all parties accept, the mediation takes place in the CPC office closest to the location where the complaint was submitted (Consumer Protection Act, article 182, paragraph 3). If a conciliation committee cannot be established for lack of a representative of a traders association or of a consumer association, the Minister of Economy and Energy shall designate by an order a conciliation committee which shall assist in the resolution of disputes in the area where a conciliation committee cannot be established. The recommendations issued by the conciliation committees are not binding on the consumer or the NBCI. If the NBCI rejects participation in the mediation process, this channel is closed. If a party to a dispute fails to meet the obligations thereof under the accommodation, the other party may go to court for consideration of the dispute subject to the accommodation. Fifth, the CPC can also advise the consumer to take the complaints to a court directly, where the process is reportedly lengthy and too expensive relative to the typical size of a consumer claim on the NBCI. b. There is no ombudsman for financial services in Bulgaria and the CPC is the main statutory consumer protection advocate in the field of financial services provided by NBCIs.


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Recommendation There should be a clear institutional structure to deal with consumer complaints. The preferred option is establishing a financial ombudsman, but in the interim the authority and capacity of the CPC should be expanded. A specialized financial services department could be established in the CPC and assigned with the responsibility of handling all financial consumers’ inquiries, complaints and disputes. Staff from the BNB and the FSC could be seconded to the CPC to help develop the expertise of the financial services department. A public awareness campaign could inform consumers that all financial sector complaints should be sent to the CPC. In the medium to long term, the department could be detached from the CPC to establish an independent statutory ombudsman for financial services. Consideration could also be given to creating conciliation committees for each of the main types of financial services, modeled after the Conciliation Commission on Payment Disputes, including: (i) making such committees standing committees, rather than being established separately for each dispute; (ii) basing proceedings on written submissions, rather than requiring physical presence at proceedings; and (iii) having the committees’ chairmen appointed by the BNB chairman; (iv) allowing them to issue binding decisions for financial institutions for small amounts of money. For additional recommendations on dispute resolution mechanisms, see Volume I.

SECTION F

CONSUMER ADVOCACY AND FINANCIAL LITERACY

Good Practice F.1 Information Resources for Consumers of Financial Services a. Policymakers, industry and advocates should understand the financial

capability of various market segments, particularly those most vulnerable to abuse.

b. Consumers, especially the most vulnerable, should have access to sufficient resources to enable them to understand financial products and services available to them.

Description There is consensus among policymakers, consumer advocates and industry about the need for consumers’ education in the area of financial services. The access of consumers to financial education is rather low at present, and so are the resources devoted to consumer protection associations to help out in this respect. However, the Ministry of Finance is engaged in an initiative on financial education following the EU wide program in this area. The BNB, FSC and the Deposit Insurance Fund carried out a financial consumer survey in 2004 sponsored by USAID. This survey has been found generally very informative but was kept confidential amongst the three authorities and not disclosed to the public. The survey has not been repeated since then. Most of the public is currently being educated mainly through financial information disclosure, by shopping around for best deals and comparing products, through learning by doing, and bitter experiences of the on-going financial turmoil.

Recommendation More resources should be channeled to consumer associations and earmarked for their engagement in financial education, product comparison, comparison of disclosure practices, sales practices, communication of principles of sound personal finance, etc. The survey already conducted under the USAID umbrella should be repeated or a similar survey launched and used as a basis for identifying the most financially vulnerable groups of the Bulgarian population, and for designing a targeted financial education program. This survey should be repeated every several years to assess the effectiveness of implemented financial education programs and measures to improve consumer protection.

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Bulgaria: Consumer Protection in the Securities Sector

Overview Historically, consumer protection in the securities area has developed somewhat differently from banking. Bank customers in most countries enjoy deposit protection and strong prudential banking supervision – factors that create a solid safety net for the customers. On the other hand, investors in securities are not guaranteed any returns, and hence on average, are required to be more sophisticated and financially educated than average bank customers. The most important market conduct regulations protecting the investors are those dealing with the disclosure of a variety of investment information by industry intermediaries. The current number of holders of securities accounts in Bulgaria is relatively low. Estimates by members of the associations of intermediaries are that there are no more than 10,000 retail investors in Bulgaria and about 6-10 institutional investors. Nonetheless, for such a small number of clients, there is a relatively large base of intermediaries and collective investment undertakings (CIUs) as noted in Table 5. Moreover, the assets in accounts at investment intermediaries grew significantly until 2007, when they represented 13.7 percent of GDP. However, the crisis in global markets has also affected Bulgaria, with the SOFIX Index falling 81 percent in 2008. The total assets of the securities sector is expected to fall more than 50 percent by end-2008.

Table 5: Bulgarian Securities Sector Structure

Assets (in percent of GDP) Number of Entities 2003 2004 2005 2006 2007 Sep08 2003 2004 2005 2006 2007 Sep08 Collective Investment Schemes 0.1 0.1 0.2 0.6 1.6 0.7 5 9 25 45 68 77 Non-banking Investment Intermediaries 0.9 2.1 3.1 6.1 13.7 7.7. 77 62 60 56 57 63

Total securities sector 1.0 2.2 3.3 6.6 15.3 8.4. 82 71 85 101 125 140.

Source: BNB and FSC.

Overall, the formal structure for investor protection in Bulgaria is in place and the new laws and regulations enacted to implement MiFID are well crafted. Increased vigilance will be needed during the current crisis to ensure that the investor protection provisions are effectively implemented and enforced. Legal Framework and Institutional Arrangements The following are the key laws and regulations addressing consumer protection in the securities sector:

Financial Supervision Commission Act (2003) Law on the Public Offering of Securities (1999, as amended) Markets in Financial Instruments Act (2007) Law against Market Abuse with Financial Instruments (2007) Law on Personal Data Protection (2002, as amended) Consumer Protection Act (2005, as amended) Law on Distance Marketing of Financial Services (2006) Ordinance No. 38 on the Regulation of Activities of Investment Intermediaries Ordinance No. 26 on the Regulation of Activities of Management Companies

Bulgaria Securities Sector

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Ordinance No. 25 on the Regulation of Activities of Investment Companies and Common Funds

The Financial Supervision Commission (FSC) is a quasi-consolidated regulator that supervises the non-bank financial institutions, including insurance, pensions and the securities markets. Banks are regulated by the Bulgarian National Bank for prudential issues, while the FSC regulates the capital market activity of the banks. The Bulgarian Stock Exchange-Sofia (BSE-Sofia) is the only registered stock exchange in Bulgaria, although other trading facilities can be established in Bulgaria under new amendments to the Bulgarian securities laws that brought them in alignment with the MiFID Directive. In June 2008 BSE-Sofia introduced the electronic trading system XETRA and replaced the Russian Trading System (the original trading system of BSE since 2000). XETRA is one of the most modern and technically advanced systems in the world, offers a wide variety of functions, supports different types of orders and provides the investors with the opportunity of using more complicated investment strategies. The Central Depository, A. D. acts as the independent central depository in Bulgaria, and clears all trades on the BSE-Sofia. It also sets regulations for members regarding record keeping and accounting for securities transactions. There are two main securities industry professional associations, the Bulgarian Association of Licensed Investment Brokers (BALIP) and the Bulgarian Association of Asset Management Companies (BAAMC). Both are active in representing their members before the FSC and in the development of the capital market. While they are active in investor education and the general ethical conduct of their members, they do not engage in dispute resolution between investors and their members. 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 Consumer Protection Commission (CPC) has the responsibility for protecting consumers and investors from unfair and deceptive business practices, including practices in the financial sector. Key Recommendations

BALIP should implement its Code of Ethics as soon as possible Specific provisions for account closing should be implemented A qualifying examination for bank staff selling CIUs should be implemented There should be a requirement for a statement to be sent to purchasers of units of a CIU sold

through a bank There should be a provision in the ordinances for prompt payment of funds or transfer of

accounts The Commission for Personal Data Protection should conduct audits on intermediaries,

management companies and CIUs as part of its regular activity An inexpensive means of dispute resolution for small retail investors should be developed Consumer education initiatives should be developed via the media to reach a large number

of people



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Good Practices: Securities Sector SECTION A

INVESTOR PROTECTION INSTITUTIONS

Good Practice A.1 Consumer Protection Regime The law should provide for clear rules on investor protection in the area of securities markets products and services, and there should be adequate institutional arrangements for implementation and enforcement of investor protection rules.

a. There should be specific legal provisions in the law, which create an effective regime for the protection of investors in securities.

b. There should be a governmental agency responsible for data collection and analysis (including complaints, disputes and inquiries) and for the oversight and enforcement of investor protection laws and regulations.

Description Article 11 of the Financial Supervision Commission Act provides that FSC shall have as one of its objectives the protection of the interests of investors. The Law on Markets in Financial Instruments provides for a regulatory regime for securities intermediaries and the Law on the Public Offering of Securities provides for a regulatory regime for CIUs. These laws have been implemented by a number of ordinances issued by FSC, most importantly Ordinance No. 38 on the Requirements for the Activities of Investment Intermediaries (2007) and Ordinance No. 26 on the Requirements for the Activities of Management Companies (2006).


Good Practice A.2 Code of Conduct for Securities Intermediaries and Collective Investment Undertakings.

a. Securities Intermediaries and CIUs should have a voluntary code of conduct.

b. Securities Intermediaries and CIUs must publicize the code of conduct to the general public through appropriate means.

c. Securities Intermediaries and CIUs should comply with the code and an appropriate mechanism should be in place to provide incentives to comply with the code.

Description The BAAMC has a Code of Ethics published on its website. BALIP is currently developing a more advanced Code of Ethics for its members. The associations do not enforce the codes on behalf of consumers in dispute resolution proceedings in the associations. The BAAMC’s Ethics Commission plays a role in taking disciplinary actions against members of the association that do not comply with the Code of Ethics. In case of infringement of the Code of Ethics, the Ethics Commission meets with the infringing member and issues a recommendation. The recommendation usually persuades the member to undertake the necessary corrective measures. The expulsion of a member from the association is an extreme measure reserved for severe violations of the Code. The Ethics Commission has issued some disciplinary recommendations for members (mostly related to unfair advertising), but there are no cases of expulsion.

Recommendation The new BALIP Code of Ethics should be developed as soon as possible. The association should develop adequate mechanisms to ensure compliance with the codes.

Good Practice A.3 Other Institutional Arrangements a. The judicial system should provide an efficient and trusted venue for the

enforcement of laws and regulations on investor protection. b. The media should play an active role in promoting investor protection. c. The private sector, including voluntary investor protection organizations,

industry associations and, where permitted, self-regulatory organizations should play an active role in promoting investor protection.


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Description The judicial system is one of the venues for investors to bring complaints against brokers, but is expensive and time consuming and does not appear to be useful for small complaints by retail investors. Bulgaria has a very active financial media that plays an active role in informing investors about the condition of the securities markets in Bulgaria. The industry associations in Bulgaria, BALIP and BAAMC, are active in promoting consumer protection through seminars, lectures, meetings with community groups and the like.


SECTION B


Good Practice B.1 General Practices There should be disclosure principles that cover an investor’s relationship with a person buying or selling securities, or offering to do so, in all three stages of such relationship: pre-sale, point of sale, and post-sale.

a. The information available and provided to an investor should inform the investor of the choice of accounts, products and services; the characteristics of each type of account, product or service; and the risks and consequences of purchasing each type of account, product or service.

b. A securities intermediary or CIU should be legally responsible for all statements made in marketing and sales materials related to its products.

c. A natural person acting as the representative of a securities intermediary or CIU should disclose to an investor whether he is licensed to act as such a representative and by whom he is licensed.

Description Article 27 of the Market in Financial Instruments Act (MFI Act) provides that an investment intermediary must provide information to clients regarding the accounts and services that it offers and the risks related to the products or services. Ordinance 38 contains further elaboration as to the information that must be given to an investor. This is also required of CIUs. Intermediaries are legally liable for the statements made in their sales and marketing literature under article 127 of the MFI Act, although the sanctions do not appear to be very strong. CIUs are also liable under the provisions of the Law on the Public Offering of Securities. The Law on Distance Marketing of Financial Services requires that natural persons disclose their representation status. In addition, telephone sales practices for CIUs are regulated under article 75 of Ordinance 25 and require full disclosure of identity of the person making the call, the purpose of the call and the obligation to send a prospectus.


Good Practice B.2 Terms and Conditions Before commencing a relationship with an investor, a securities intermediary or CIU should provide the investor with a copy of its general terms and conditions, and any terms and conditions that apply to the particular account. Insofar as possible, the terms and conditions should always be in a font size and spacing that facilitates easy reading. The terms and conditions should disclose:

a. Details of the general charges; b. The complaints procedure; c. Information about any compensation scheme that the securities

intermediary or CIU is a member of, and an outline of the action and remedies which the investor may take in the event of default by the securities intermediary or CIU;


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d. The methods of computing interest rates paid or charged; e. Any relevant non-interest charges or fees related to the product; f. Any service charges; g. Any restrictions on account transfers; and h. The procedures for closing an account.

Description Ordinance 38 further elaborates the requirements for disclosing the terms and conditions of the contract by securities intermediaries which include these elements. The prospectus and simplified prospectus are required to contain the information regarding the CIU and must be given to the investor. There are no specific provisions related to account transfers or the procedures for closing an account.

Recommendation Specific provisions for account closing and transfer should be implemented.

Good Practice B.3 Professional Competence Regulators should establish and administer minimum competency requirements for the sales staff of securities intermediaries and CIUs, and collaborate with industry associations where appropriate.

Description Ordinance 7 provides for a comprehensive examination system for individual brokers. It is intended that starting in January 2009 the preparation for these examinations will be done in conjunction with BALIP. Article 16 of Ordinance 26 provides for the use of natural persons to sell CIUs through banks. They must meet the same background qualifications as a salesperson for an intermediary but they are not required to pass an examination.

Recommendation Qualification examinations for CIU sales people should be implemented.

Good Practice B.4 Know Your Customer (KYC) Before providing a product or service to an investor, a securities intermediary or CIU should obtain, record and retain sufficient information to enable it to form a professional view of the investor’s background, financial condition, investment experience and attitude toward risk in order to enable it to provide a recommendation, product or service appropriate to that investor.

Description Article 28 of the MFI Act provides for a KYC rule that is further elaborated in Article 19 of Ordinance 38.


Good Practice B.5 Suitability A securities intermediary or CIU should ensure that, taking into account the facts disclosed by the investor and other relevant facts about that investor of which it is aware, any recommendation, product or service offered to the investor is suitable to that investor.

Description Article 28 of the MFI Act provides for a suitability requirement that is further elaborated in Article 19 of Ordinance 38.


Good Practice B.6 Sales Practices Legislation and regulations should contain clear rules on improper sales practices in the solicitation, sale and purchase of securities. Thus, securities intermediaries, CIUs and their sales representatives should:

a. Not use high-pressure sales tactics; b. Not engage in misrepresentations and half truths as to products being

sold; c. Fully disclose the risks of investing in a financial product being sold; d. Not discount or disparage warnings or cautionary statements in written

sales literature; e. Not exclude or restrict, or seek to exclude or restrict, any legal liability

or duty of care to an investor, except where permitted by applicable


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legislation. Legislation and regulations should provide sanctions for improper sales practices.

Description Ordinance 38 (articles 7-10 among others) provides for the conduct of intermediaries and their sales people in dealing with clients that cover these areas. The provisions in the Ordinance do not specifically deal with items “a” and “e” although they are included in the general obligation to deal fairly with clients. Sanctions for improper sales tactics are found in the MFI Act, but the fines do not appear to be very strong. Sales by intermediaries of CIUs are covered by intermediary requirements. Seminars and speeches by CIUs must be submitted for approval to the FSC under article 76 of Ordinance 25. Telephone sales practices for CIUs are regulated under article 75 of Ordinance 25 and require full disclosure of the person calling and the purpose of the call and the obligation to send a prospectus. There are no specific provisions for elements “d“ and “e” although they would be covered under the general obligation for fair dealing.


Good Practice B.7 Advertising and Sales Materials a. All marketing and sales materials should be in plain language and

understandable by the average investor. b. Securities intermediaries, CIUs and their sales representatives should

ensure their advertising and sales materials and procedures do not mislead the customers.

c. Securities intermediaries and CIUs should disclose in all advertising, including print, television and radio, the fact that they are regulated and by whom.

Description The MFI Act (article 27) and Ordinance 38 require that points “a“ and “b” be met. As appropriate, the identity of the intermediary and salesperson must be disclosed. Under article 74 of Ordinance 25, all sales and promotional material for CIUs must be sent to the FSC who can prohibit their use.


SECTION C


Good Practice C.1 Segregation of Funds Funds of investors should be segregated from the funds of all other market participants.

Description Ordinance 38 (article 29) provides for the separation of customers’ funds from the funds of the intermediary. This implements article 39 of the MFI Act. CIU assets must be kept with a depositary in conformity with the UCITS Directive.


Good Practice C.2 Contract Note Investors should receive a detailed contract note from a securities intermediary or CIU confirming and containing the characteristics of each trade executed with them, or on their behalf. The contract note should disclose the commission received by the securities intermediary, CIU and their sales representatives.

Description Article 45 of Ordinance 38 requires an intermediary to provide a confirmation of each transaction to a client containing the details of the transaction. Article 33 of Ordinance 25 requires that a confirmation be sent for all CIU transactions.



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Good Practice C.3 Statements

An investor should receive periodic, streamlined statements for each account with a securities intermediary or CIU, providing the complete details of account activity in an easy-to-read format.

a. Timely delivery of periodic securities and CIU statements pertaining to the accounts should be made.

b. Investors should have a means to dispute the accuracy of the transactions recorded in the statement within a stipulated period.

c. When an investor signs up for paperless statements, such statements should also be in an easy-to-read and readily understandable format.

Description Article 46 of Ordinance 38 requires that an intermediary provide a statement to a client every 6 months or quarterly if the client so requests. However, there does not appear to be a similar requirement for a statement to be made to an investor who invested directly with a management company for a CIU that was sold through a bank.

Recommendation There should be a requirement for a statement to be sent to purchasers of units of a CIU sold through a bank.

Good Practice C.4 Prompt Payment and Transfer of Funds When an investor requests the payment of funds in his or her account, or the transfer of funds and assets to another intermediary or mutual fund, the payment or transfer should be made promptly.

Description There are not specific provisions for the prompt payment of funds.

Recommendation Such a provision should be included in Ordinance 26.

Good Practice C.5 Investor Records A securities intermediary or CIU should maintain up-to-date investor records containing at least the following:

a. A copy of all documents required for investor identification and profile; b. The investor’s contact details; c. All contract notices and periodic statements provided to the investor; d. Details of advice, products and services provided to the investor; e. Details of all information provided to the investor in relation to the

advice, products and services provided to the investor; f. All correspondence with the investor; g. All documents or applications completed or signed by the investor; h. Copies of all original documents submitted by the investor in support of

an application for the provision of advice, products or services; i. All other information concerning the investor which the securities

intermediary or CIU is required to keep by law; and j. All other information which the securities intermediary or CIU obtains

regarding the investor. Details of individual transactions should be retained for a reasonable number of years after the date of the transaction. All other records required under a. to j. above should be retained for a reasonable number of years from the date the relationship with the investor ends. Investor records should be complete and readily accessible.

Description Article 74 of Ordinance 38 requires intermediaries to keep all records set forth here for a period of 5 years. Article 41 of Ordinance 25 requires that investment companies and management companies managing CIUs should keep all relevant records for 5 years.


SECTION D


Good Practice D.1

Confidentiality and Security of Customers’ Information Investors of a securities intermediary or CIU have a right to expect that their


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financial activities will have privacy from unwarranted private and governmental scrutiny. The law should require that securities intermediaries and CIUs take sufficient steps to 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.

Description Article 35 of the MFI Act provides that an intermediary shall keep its clients’ information confidential and only disclose it under certain specific circumstances such as upon lawful demand. This article is also applicable to management companies, according to article 210 of the Law on Public Offering of Securities. Article 33 of Ordinance 26 requires that management companies have systems in place to keep data confidential. The Law on Personal Data Protection is administered and enforced by the Commission for Personal Data Protection. It is applicable to banks and would appear to also be applicable to non-banking financial institutions, however the Commission in its annual reports does not appear to have taken any action in the non-bank financial institution sector.

Recommendation The Commission for Personal Data Protection should conduct audits on intermediaries, management companies and CIUs as part of its regular activity.

Good Practice D.2

Sharing Customer’s Information Securities intermediaries and CIUs should:

a. Inform an investor of third-party dealings in which they should share information regarding the investor’s account, such as legal enquiries by a credit bureau, unless the law provides otherwise;

b. Explain how they use and share an investor’s personal information; c. Allow an investor to stop or "opt out" of certain information sharing,

such as selling or sharing account or personal information to outside companies that are not affiliated with them, for the purpose of telemarketing or direct mail marketing, and inform the investor of this option.

Description Article 35 of the MFI Act includes rules for professional secrecy and allows a customer to prohibit disclosures. This article is also applicable to management companies, according to article 210 of the Law on Public Offering of Securities. The Law on Personal Data Protection also provides for customer rights in relation to their data. The Law requires that the customer be informed when the customer’s information is being processed for direct marketing, and gives the customer the right to object to such use (article 34a).


Good Practice D.3 Permitted Disclosures a. The law should state specific procedures and exceptions concerning the

release of customer financial records to government authorities. b. The law should provide for penalties for breach of investor

confidentiality.

Description Article 35 of the MFI Act allows for disclosures pursuant to the law and provides for penalties for breach. This article is also applicable to management companies, according to article 210 of the Law on Public Offering of Securities. The Law on Personal Data Protection also permits disclosures and provides for penalties for breach.


SECTION E


Good Practice E.1 Internal Dispute Settlement


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a. An internal avenue for claim and dispute resolution practices within a securities intermediary or CIU should be required by the securities supervisory agency.

b. Securities intermediaries and CIUs should provide designated employees available to investors for inquiries and complaints.

c. Securities intermediaries and CIUs should inform their investors of the internal procedures on dispute resolution.

d. The securities supervisory agency should provide oversight on whether securities intermediaries and CIUs comply with their internal procedures on investor protection rules.

Description Article 72 of Ordinance 38 requires intermediaries to keep a register of all complaints and the persons handling the complaints. Article 75 requires the intermediary to have efficient and transparent procedures for reasonable and timely review of the complaints. Management companies that handle portfolios for individuals must also keep such records under Article 33 of Ordinance 26. The article states that management companies shall ensure effective and transparent procedures for the reasonable and prompt handling of complaints received from retail clients or potential retail clients. In addition, article 40 of Ordinance 25 establishes a reimbursement procedure where an error has been made in calculating the net asset value per share, resulting in an increase in the issue price or a decrease in the redemption price. This register and the procedure for handling complaints are open for inspection by the FSC.


Good Practice E.2 Formal Claims Dispute Mechanisms There should be an independent dispute resolution system for resolving disputes that investors have with their securities intermediaries and CIUs.

a. A system should be in place to allow investors to seek third-party recourse, such as an ombudsman or arbitration court, in the event the complaint with their securities intermediary or CIU is not resolved to their satisfaction in accordance with internal procedure, and it should be made known to the public.

b. The independent dispute resolution system should be impartial and independent from the appointing authority and the industry.

c. The enforcement mechanism of the decisions of the independent dispute resolution system and the binding nature of the decision on securities intermediaries and CIUs should be established and publicized rules.

Description There are two formal methods of dispute resolution for securities claims in Bulgaria: the court system and arbitration. While the arbitration court may be adequate for large claims, it is expensive and probably not useful for retail investors with small claims. Investors can file a complaint with the FSC and obtain the results of the FSC’s inquiries, although the FSC does not act as an arbiter or otherwise attempt to adjudicate the claims.

Recommendation An inexpensive dispute resolution mechanism for retail investors should be implemented in Bulgaria. For additional recommendations on dispute resolution mechanisms, see Volume I.

SECTION F

INSOLVENCY OF AN INTERMEDIARY OR CIU

Good Practice F.1 Legal Provisions a. There should be clear provisions in the law to ensure that the regulatory

authority can take prompt corrective action on a timely basis in the event of distress at a securities intermediary or CIU.

b. The law on the investors guarantee fund, if there is one, should be clear on the funds and financial instruments that are covered under the law.

c. There should be an effective mechanism in place for the pay-out of funds and transfer of financial instruments by the guarantee fund or insolvency trustee in a timely manner.


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d. The legal provisions on the insolvency of securities intermediaries and CIUs should provide for expeditious, cost-effective and equitable provisions to enable the timely payment of funds and transfer of financial instruments to investors by the insolvency trustee of a securities intermediary or CIU.

Description a. The law does not give the FSC the authority to take action in the event of distress of an intermediary or CIU. However, Article 212 of the Law on the Public Offering of Securities allows the FSC to appoint a “quaestor” when “the interests of investors are jeopardized.” This could be used to take control of a company on the verge of bankruptcy but does not appear to have been used in this manner b. The provisions regarding the Fund for the Compensation of Investors are set forth in the Law on the Public Offering of Securities in article 77a. c. There appears to be an effective mechanism in place for the payout to investors, although it has not been used so its operation in practice remains to be seen. d. The legal provisions for the insolvency of an intermediary are the same as for any other entity under the law. There are no special procedures. The payout of the fund would be the quickest way for investors to be paid and residual compensation would go through the usual procedures of a bankruptcy proceeding.

Recommendation Bulgaria should consider the development of specialized bankruptcy proceedings for brokers and intermediaries.

SECTION G


Good Practice G.1 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/or industry association should provide sufficient

information to the press and broadcast media to facilitate analysis of issues related to financial products and services.

Description a. The Bulgarian media are very active in covering financial issues and have a number of high quality news outlets for financial issues. b. The FSC and industry associations provide information to the press through their website and press conferences. Extensive use of the media, such as with television shows, has not been used.


Good Practice G.2 Information Resources for Investors a. Financial regulators should devise, publish and distribute information

resources for investors that seek to improve awareness, providing independent information on the costs, risks and benefits of financial products and services.

b. Non-governmental organizations should be encouraged to provide investor awareness programs to the public regarding financial products and services.

Description a. The FSC has an outreach program for speaking to community groups and conducting seminars, including seminars for journalists, and it also has an extensive education program for students. The FSC does not appear to publish investor protection material, although it does publish technical and professional information about the market on its website. b. The professional associations provide some information to investors, but do not appear to be as active as the FSC.


Bulgaria Credit Reporting System

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Bulgaria: Consumer Protection in the Credit Reporting System

Overview The overall coverage of adult population by the credit reporting systems in Bulgaria still lags significantly behind the most advanced new EU Member States (NMS). Although the coverage of Bulgaria’s public credit register operated by the BNB is one of the highest among the NMS reaching about 31 percent of adult population – followed by Turkey with a public credit register coverage of about 13 percent – the overall coverage of the adult population in Bulgaria by credit reporting systems is significantly lower than the coverage in Croatia, Czech Republic, Poland or Slovakia. This is mainly due to the low coverage of the private credit bureau in Bulgaria, which is about 5 percent of adult population. This is mainly due to the short period in which the private credit bureau has been operating in Bulgaria.

Figure 7: Cross-Country Comparison of Credit Reporting System Coverage (% of adults)

0

20

40

60

80

100

120

UK

Croatia

Czech

Rep

.

Poland

Slovak

ia

Turkey

Roman

ia

Estonia

Lithu

ania

Bulgari

aLa

tvia

Sloven

ia

Public registry coverage (% adults) Private bureau coverage (% adults)

Source: Doing Business (2008)

However, Bulgaria ranks among the best NMS in terms of depth of credit information collected by the credit reporting systems. Based on the most recent Doing Business statistics (2008), Bulgaria’s credit reporting system scores 6 out of 7 in terms of the depth of captured credit information by the industry. Bulgaria, together with Lithuania, is thus leading the group of NMS in this respect, outperforming countries like the Czech Republic, Estonia or Poland. The Central Credit Register of the BNB collects mainly information pertaining to outstanding loans with a limited emphasis on historical negative information and reportedly no positive credit history. Therefore, most of the Bulgaria’s credit reporting systems success in capturing broad variety of credit information among the NMS could be attributed to Bulgaria’s private credit bureau. The private credit bureau owned by Experian not only develops its membership base among the financial institutions but works with telecom and other utility companies in Bulgaria. It thus has the potential to collect information on payment discipline and credit history outside of the financial sector which is still rather underdeveloped compared with financial product penetration in other NMS.


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Figure 8: Cross-Country Comparison of the Depth of Credit Information (Index)

0 1 2 3 4 5 6 7

SloveniaCroatia

LatviaPoland

SlovakiaEstonia

RomaniaTurkey

Czech RepublicBulgaria

LithuaniaUnited Kingdom

Source: Doing Business (2009)

The Central Credit Register developed and maintained by the BNB comprises data on customers’ debt to the banking system. The number of loans increased 34 percent from 2,009,006 in 2006 to 2,698,093 in 2007. The balance sheet exposure of borrowers increased from BGN 22,603 million (46 percent of GDP) in 2006 to BGN 37,434 million (66 percent of GDP) in 2007. By end-2007, borrowers totaled 1,622,797, of whom 1,540,666 were individuals, 79,438 were resident legal entities and 2,693 were non-resident legal entities. In 2007, banks conducted 3,938 thousand debt checks in the Register, up by around a million relative to 2006 (2,980 thousand). The monthly average number of certificates in 2007 was 328,000 or over 16,000 per business day. Of the total checks, 3,176,652 were on individuals and 760,810 on resident legal entities. The growing usage of the Register indicated its increasing importance in managing bank credit portfolios. Experian Bulgaria, the only private credit bureau operating in Bulgaria, was registered in 2004 and is fully owned by Experian Ltd. The company has two lines of business: (i) credit bureau services and (ii) decision analytics. The credit bureau’s operational and IT delivery team comprises 18 employees. The bureau is licensed by the Commission for Personal Data Protection. Personal data are shared by the bureau only if there is explicit written consent provided by the loan applicant. Most of the Bulgarian credit institutions and even utilities have had such consent clauses in place for the last two to three years. Legal Framework and Institutional Arrangements The list of principal laws and regulations concerning credit reporting systems activities include:

Law on Personal Data Protection (effective 1 January 2002, most recently amended 2006). Law on Credit Institutions (effective 1 January 2007, most recently amended 2009). Ordinance No. 22 on the Central Credit Register of Banks (effective 16 July 1998, most

recently amended 2007). Law on the Bulgarian National Bank (effective 5 June 1997, most recently amended 2007) Law on Consumer Credit (effective 1 October 2006, most recently amended 2008)

The Central Credit Register covers all bank claims irrespective of amount, except debit card overdrafts of up to BGN 1,000 (provided they are classified as standard), loans to government, and loans to the BNB. Interbank lending is not covered. The system ensures reliable information submission and storage. Financial institutions participating in the Register exchange data with the Register online. Authorized


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officer access is via digital certificates, and the fee per customer debt check is BGN 0.50. Amendments to Ordinance No. 22 in 2007 expanded the Register’s scope under Article 56 of the Law on Credit Institutions to include loans by financial institutions’ subsidiaries, which may now access Register data for evaluating credit risk through parent banks. Ordinance No. 22 also extends the duty of care in submitting information, checking and amending data to subsidiaries. According to the last amendments of the Law on Credit Institutions (dated 31 March 2009), NBCIs are obliged to report to the Central Credit Register and are allowed to access the information from the registry. The Commission for Personal Data Protection is an independent government body established by the Law on Personal Data Protection to ensure the protection of individuals in the processing and access of their personal data, and to monitor the observance of the Law. Private credit bureaus are required to be registered as an administrator of personal data with the Commission for Personal Data Protection. Key Recommendations The main recommendations for improving consumer protection and financial capability in the area of credit reporting systems are:

When a consumer is asked to consent to provision of his/her personal data to a private credit bureau, the consumer should receive a brochure, supplied by the bureau, explaining its data handling and sharing procedures in a simple way (diagram).

The pricing of the loan including the credit risk premium that the consumer is charged and its calculation should be clearly communicated to the consumer. This should include reference to any information (credit history factors) obtained from the credit reporting system.

The Central Credit Register should red flag credit information under dispute. The institutions reporting to the private credit bureau should be required to flag or temporarily withdraw any disputed information, and be obliged to resolve the disputed information within a certain period or initiate an out-of-court settlement process.

To avoid a potential negative evaluation by creditors, private credit bureaus should not include in their reports information on the number of inquiries made by an individual for credit, but only the number of rejected loan applications if desired. Consumers should also be able to obtain individual loan pricing without submitting formal application for a loan.

The credit scoring system (methodology) of the private credit bureaus should be reviewed by the BNB and FSC, and its main features communicated to the public so that consumers are encouraged to engage in active credit history management.

The annual reports of the private credit bureaus should be reviewed by the Commission for Personal Data Protection, BNB, and FSC on a no objection basis. The annual reports of each private credit bureau should be published on the bureau’s website and disseminated via financial institutions’ branches.

The Commission for Personal Data Protection should publish, in a consolidated manner, information on complaints concerning violation of personal data protection in financial services to inform and educate the public in the area of financial services.

The Central Credit Register should have a clearly defined budget for raising the awareness of the public about the importance of maintaining a good credit history and its impact on the borrowing cost and access to finance. Also, the Central Credit Register and private credit bureaus should, in cooperation with the Commission for Personal Data Protection, inform and educate the public about key issues on personal data protection in financial services. The websites of the Register and private credit bureaus should include information on consumers’ rights, as well as procedures to obtain a copy of the information that the Register or bureau maintains on them.


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Good Practices: Credit Reporting System

SECTION A


Good Practice A.1 Consumer Rights in Credit Reporting Laws and regulations should require basic consumer rights. These rights may include:

a. The right of the consumer to consent to information-sharing based upon the knowledge of the institution’s information-sharing practices.

b. The right to access the credit report of the individual, subject to proper identification of that individual and free of charge (at least once a year).

c. The right to know about adverse action in credit decisions or less-than-optimal conditions/prices due to credit report information. In this process, consumers should be provided with the name and address of credit bureau.

d. The right to be informed about all inquiries within a period, such as six months.

e. The right to correct factually incorrect information or to have it deleted. f. The right to mark (flag) information that is in dispute. g. The right to decide if the consumer's credit information (for purposes not

related to the granting of credit) can be shared with third parties. h. The right to have sensitive information especially protected (not

included in the credit report), such as race, political and philosophical views, religion, medical information, sexual orientation or trade union membership.

i. The right to reasonable retention periods such as those for positive information (for example, at least two years) and negative information (for example, 5-7 years.)

j. The right to have information kept confidential and with sufficient security measures in place to prevent unauthorized access, misuse of data, or loss or destruction of data.

k. Credit registers should refrain from negatively taking into account any of the consumer rights granted in calculating credit scores or for otherwise inferring creditworthiness.

l. The number of inquiries by an individual on credit pricing should be evaluated in a way that allows for comparison shopping without negatively impacting on the credit score.

Description There is a clear legal framework with respect to the public credit registry (the Central Credit Register maintained by the BNB), under the Law on Credit Institutions and the Ordinance No. 22 on the Central Credit Register of Banks. The legal framework for establishment and operations of private credit bureaus is less specific. Their establishment is governed by the Commercial Act, and their operations are subject to licensing by the Commission for Personal Data Protection and governed by the Law on Personal Data Protection. The key laws and ordinances applicable to credit reporting are listed below. 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 Law applies, inter alia, to processing of personal data that are designed to become part of a register. The purpose of the law is to guarantee the inviolability of personality and privacy by ensuring protection of individuals in case of unauthorized processing of personal data relating to them. It requires that personal data be: (1) processed in legal compliance and in a bona fide manner; (2) captured for specific, precisely defined and legal purposes and not be submitted to additional processing in a manner incompatible with such purposes; (3) proportional to the purposes for which they are being processed; (4) accurate, and updated as needed; (5) destroyed or adjusted when found to be imprecise or disproportional to the purposes for which they are being


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processed; (6) maintained in a form that enables identification of the respective individuals for a period not to exceed the time necessary for the purposes for which such data are being processed. Law on Credit Institutions (effective 1 January 2007, most recently amended 2009). This law authorizes BNB to establish a credit information system (article 56). Ordinance No. 22 on the Central Credit Register of Banks (effective 16 July 1998, most recently amended 2007). Per this ordinance, a central credit register was established in BNB to: (i) centralize the information on credit indebtedness of the bank customers, (ii) provide information to banks and their subsidiary financial institutions about credit indebtedness of their customers (subsidiaries must receive and submit information to the Central Credit Register through their parent banks), and (iii) consolidate collected information in the Register to be used for the purposes of economic analysis by the BNB and the Banking Supervision Department. This ordinance, as well as several banking laws (e.g. Law on the Bulgarian National Bank, Law on Credit Institutions, Law on Consumer Credit) require that employees of banks, BNB, and other institutions working for a bank (e.g. liquidators, receivers) maintain bank secrecy (defined as “facts and circumstances concerning the balances and transactions on accounts and deposits of the bank’s customers”). While Ordinance No. 22 provides for the establishment of a credit register in BNB, no specific law or ordinance governs the establishment or operation of private credit bureaus. Instead, private credit bureaus are established as companies and must comply with the laws of Bulgaria, including the Law on Personal Data Protection. a. Ordinance No. 22 provides that all banks, as well as their subsidiaries (through their

parent banks), are required to submit information to the Central Credit Register on all customer credits and transactions on these credits (article 5). The Ordinance is silent on the duty of a bank or its subsidiary to obtain the customer’s consent or inform the customer that it will submit information to the Central Credit Register. In practice, BNB requires that banks have customers sign declarations acknowledging that their data will be shared with the Central Credit Register. Private credit bureaus are not covered by any particular law or regulation, so they must by law obtain the customer’s consent to a bank’s sharing information with a credit bureau and to the credit bureau’s sharing information with third parties (e.g. Law on Personal Data Protection, article 4; Law on Credit Institutions, article 62).

b. Ordinance No. 22 provides that bank customers may request and be provided by their

banks with statements from the Central Credit Register containing information about them (article 11) or may request information directly from the Register (article 16). The Ordinance stipulates that BNB will set a fee to charge to customers who request copies of the information on them in the Register. Currently, the fee is BGN 10. The Ordinance is silent on what banks may charge if customers request them to provide a copy of the report received from BNB. However, the Ordinance provides that customers may not be charged for challenging the contents of their reports. Moreover, the Law on Personal Data Protection (article 28) provides that individuals may obtain from a data administrator, free of charge once every 12 months, data that the administrator is processing on them. Persons may request a private credit bureau to provide a copy of the information that it has on them. Per the Law, they may obtain one free report every 12 months. The only private credit bureau operating in Bulgaria currently charges BGN 5 for each additional report.

c. Ordinance No. 22 is silent on the right to know about adverse action in credit decisions

or less-than-optimal conditions/prices due to credit report information. In practice, banks will of course inform the customer if he is denied credit (though this information will not necessarily state that the credit report was the deciding factor). While banks will price a loan according to information in the credit report, they need not inform the consumer that the price depends on the credit report information. The law is silent on the need to provide the consumer with the name and address of the Central Credit Register or private credit bureau whose information was used in the credit decision.


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d. Ordinance No. 22 is silent on the right to be informed about all inquiries made on a consumer. While consumers may request information from the Central Credit Register as discussed above, the Register does not include information on inquiries made.

e. Any person has the right to verify the information relating to him in the Register,

including the names of the banks and their subsidiary financial institutions which have submitted the information to the Register (Ordinance 22, articles 11 and 16). Upon a legitimate request from a customer, BNB must provide the requested information within seven working days. If a person considers that the information in the Register is incorrect, he may request that the information be adjusted or updated by the bank which has submitted it to the Register. Within seven working days from receipt of the request, the bank must consider the request and decide on it. The applicant cannot be charged for the request. If the request is justified, the bank must send an instruction to the Central Credit Register to make adjustments, with a copy sent to the person who has submitted the request. If the request is not justified, the bank must send a detailed answer in writing to the person, with a copy to the BNB (article 17-19). Similarly, after private credit bureaus provide a person with his credit report, the person must take up any disputes with the institution that provided the information to the credit bureau. The credit bureau will change information only if instructed by the institution that provided the information.

f. Ordinance No. 22 is silent on the right to mark (flag) information that is in dispute,

and this is not done in practice by the Central Credit Register. In practice, the operating credit bureau will flag disputed data only if the provider of the information agrees that it is under dispute.

g. Ordinance No. 22 provides that the Central Credit Register shall provide banks with

information on the credit indebtedness of the particular customers of the banks and their subsidiary financial institutions against fee payment. No specific purpose, such as loan application, is required by this Ordinance (article 11). The Central Credit Register may provide information to non-banks if and only if the customer consents (Law on Credit Institutions, article 62); however, the law does not specify that this consent must be in writing. Private credit bureaus may release data only if the customer consents, per the Law on Personal Data Protection; again, this law does not require that the consent be written.

h. The Law on Personal Data Protection (article 5) generally forbids processing personal

data which reveal racial or ethnic origin; reveal political, religious or philosophical convictions; or refer to health, sex life, or human genome. Exceptions given in the Law to this prohibition would not apply to a credit registry or credit bureau.

i. Ordinance No. 22 is silent on retention periods of positive and negative information.

The recent amendments to the Law on Credit Institutions have expanded the scope of the Central Credit Register to include not only negative but also positive information. The private credit bureau currently operating in Bulgaria retains information for 5 years and reports both positive and negative information.

j. Ordinance No. 22 requires that banks’ subsidiaries observe bank secrecy with respect

to any information provided to or received from the Central Credit Register, but it is silent on banks’ and BNB’s responsibilities with respect to bank secrecy in administering the Register. However, the Law on the Bulgarian National Bank (article 23) requires that all BNB employees observe “secrecy concerning negotiations, deals contracted, the amount of assets on customers’ deposits and their operations, the information received by the Bank, as well as any circumstances concerning the Bank’s and its customers’ activities which constitute professional, bank, commercial or another secrecy protected by law even after termination of their labour contract.” The Law on Credit Institutions includes similar requirements for BNB and banks (e.g. article 62). BNB’s Credit Register Division reports that it uses a secure online system, only a limited number of staff has access to the system, and logs are kept of access. Simultaneously, each bank has its own administrator who defines its access rules and procedures. The Commission for Personal Data Protection is in charge of supervising


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the activities and operations of private credit bureaus, including their security systems. The operating credit bureau reports that it has several levels of security, in conformity with the law and its international practices.

k. The law is silent on this subject matter. However, the Register and the private credit

bureau do not calculate credit scores. l. The law is silent on this subject matter. However, the current contents of the

Register’s reports do not include any information on the number of customer inquiries. Hence, no effect from comparison shopping would be included. However, while the private credit bureau’s report does not include a credit score, its report does include information on the number of inquiries. Hence, a bank or other credit provider could potentially evaluate such information negatively.

Recommendation When a consumer is asked to consent to sharing his/her personal data with a private credit bureau, the consumer should be provided with a brochure explaining the bureau’s data handling and sharing procedures in a simple way (diagram). The consumer should receive clear information on the pricing of a loan, including the credit risk premium that the consumer is charged and references to any information (credit history factors) obtained from the Central Credit Register or the private credit bureau. Disclosure of such information is important for educating consumers about the relationship between credit history and borrowing costs, and helping uncover errors in credit reports that did not result in rejected applications but higher borrowing costs. The Central Credit Register should red flag credit information under dispute. The institutions reporting to the private credit bureau should be required to flag or temporarily withdraw any disputed information. The reporting institutions providers should be obliged to resolve the disputed information within a certain period (e.g. seven days) or initiate an out-of-court settlement process. To avoid a potential negative evaluation by creditors, private credit bureaus should not include in their reports information on the number of inquiries made by an individual for credit, but only the number of rejected loan applications if desired. In this regard, consumers should be able to obtain individual loan pricing without submitting formal application for a loan. The credit scoring system (methodology) of the private credit bureau should be reviewed/ approved by the BNB and FSC, and its main features communicated to the public so that consumers are encouraged to engage in active credit history management.

Good Practice A.2 Preservation of Rights Participants of the credit reporting system (credit registers, reporting institutions and others) 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 provided under the applicable law or regulations;

b. Any duty to act with skill, care and diligence owed to a consumer in connection with the provision of the financial services or products; or

c. Any liability arising from the failure to exercise the degree of skill, care and diligence that may reasonably be expected of the participants in the provision of financial services.

Description The Law on Consumer Credit (article 11) provides that “The rights granted to consumers under this Law may not be limited. Any provision whereby the rights of consumers are excluded or limited in advance shall be null and void” and “Any waiver of rights granted to consumers under this Law shall be null and void.” However, this law only requires the keeping of bank secrecy by the CPC as controlling authority. The other banking laws and ordinances cited in section A.1, as well as the Law on Personal Data Protection, are silent on excluding or restricting liabilities and duties. The Consumer Protection Act (article 3) provides that “The rights granted to consumers under this Act may not be restricted. Any


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stipulation which excludes or restricts consumer rights a priori, shall be void.” However, bank secrecy and other confidential consumer data are not explicitly covered in the Consumer Protection Act, so it is not clear that this prohibition on excluding or restricting consumer rights is applicable to credit reporting. On the other hand, the law does cover professional diligence, noting that “A commercial practice, related to the supply of goods or services, shall be unfair if it is contrary to the requirements of professional diligence” (article 68d) and defining professional diligence as “the standard of special skill and care which a trader may be expected to possess and exercise towards a consumer, commensurate with honest market practices and/or the principle of good faith in the trader's field of activity.”

Recommendation Preservation of rights should be part of all relevant laws and mentioned in any other documents for consumers (such as brochures). Any restrictions of liabilities that arise under the law should be void. While the Law on Consumer Credit includes the necessary provision in article 11 declaring any restrictions or exclusions null and void, the other relevant laws could be strengthened by including similar language.

Good Practice A.3 Institutional Framework a. There should be a general consumer agency or specialized agency

responsible for implementing, overseeing and enforcing the protection of personal data.

b. The authority should monitor complaints, disputes, inquiries and have a register which lists the names of credit registers.

c. The authority should be able to conduct audits in credit registers, including regular reviews of data quality and completeness in credit registers.

d. The legal system should provide for a role for the private sector, including voluntary consumer protection organizations and self-regulatory organizations.

e. Where oversight and enforcement of credit register laws are the responsibility of several authorities, there should be clear rules for interagency consultation and cooperation. There should be regular meetings between experts in charge, located at different agencies.

f. Credit registers should have the duty to register or obtain a license from the regulator.

Description a. The Law on Personal Data Protection provides that the Commission for Personal Data Protection, as an independent government body, will ensure the protection of individuals in the processing and access of their personal data, as well as monitor the observance of the Law on Personal Data Protection. The Law further defines an “administrator” to be “any natural or legal person, or a central or local government authority which processes personal data” or “which determines by itself the type of personal data processed, and the purposes and means of processing.” The Commission must keep a register of personal data administrators and the personal data registers kept by them. Administrators are specifically tasked to ensure compliance with the Law. Ordinance No. 22 does not indicate a separate agency responsible for implementing, overseeing and enforcing the protection of personal data in the register. Ordinance No. 22 provides rules for collection, storage, use, and adjustment of information. In addition, BNB has internal rules and procedures, and the credit register is subject to BNB’s internal audit. In August 2008, the Credit Register Division was created within BNB’s Banking Policy Directorate and is responsible for the Register. b. The Law on Personal Data Protection (article 10) provides that the Commission for Personal Data Protection shall handle complaints against acts and actions of personal data administrators which infringe the rights of individuals under this law, as well as third parties' complaints in relation to their rights under this law. The Commission must maintain a register of such complaints. Individuals may bring a complaint to the Commission within 30 days of becoming aware of an infringement, but not more than one year from the occurrence of the infringement. The Commission must issue a decision within 30 days from the date when the matter was referred to it and may issue binding prescriptions, set a time limit to remedy the infringement, or impose an administrative penalty. Such decisions may be appealed to the Supreme Administrative Court within 14 days.


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c. BNB’s Central Credit Register is subject to oversight by BNB’s internal auditors, per BNB’s internal rules and procedures. Private credit bureaus are subject to annual external audits as well as supervision and/or audits by the Commission for Personal Data Protection. d. While Ordinance No. 22 is silent on a role of voluntary organizations with respect to confidentiality of information in a credit register or bureau, the Consumer Protection Act affirms that citizens may associate into consumer associations for the purpose of protection of the rights and interests of consumers. This law provides that consumer associations shall be entitled to “inform the control authorities of any cases in which the rights of consumers are violated.” However, with respect to court actions, the law entitles consumer associations to “approach the court on violations of the rights and interests of consumers in the cases and under the terms established by this Act” (article 169, emphasis added). Because bank secrecy or other confidential consumer data are not specifically covered in the Consumer Protection Act, it is not clear that a consumer association could address such cases in court. At the same time, the law provides that consumer associations “may bring an action for cessation or for prohibition of any acts or commercial practices which infringe on the collective interests of consumers” (article 186, emphasis added). e. Interagency consultation is not required by law. The Law on Personal Data Protection and Ordinance No. 22 are silent on inter-agency coordination and interaction (e.g. between BNB and the Commission for Personal Data Protection). f. The Central Credit Register was established by Ordinance No. 22, and no separate registration or license is required. Private credit bureaus are required to register and obtain a license from the Commission for Personal Data Protection.

Recommendation The annual reports of the private credit bureaus should be reviewed by the Commission for Personal Data Protection, BNB and FSC on a no objection basis. The annual reports of each credit bureau should be published on the bureau’s website and disseminated via financial institutions branches as part of a program on raising awareness and educating financial consumers about the credit bureaus’ activities and performance. The Commission for Personal Data Protection should publish, in a consolidated manner, information on the complaints concerning violation of personal data protection in financial services to inform and educate the public in the area of financial services. It is recommended that BNB and the Commission for Personal Data Protection consult and possibly sign a memorandum of understanding to ensure that the Central Credit Register meets all security requirements that the Commission oversees in private credit bureaus, and that systems of banks and credit bureaus meet the requirements under laws and regulations of both BNB and the Commission.

SECTION B


Good Practice B.1 Information Resources for Consumers Financial regulators should devise, publish and distribute information resources for consumers that seek to improve their knowledge of actively managing the credit report.

Description The law is silent on this, and the Central Credit Register is not actively involved in this. The websites of the Register and private credit bureaus do not include information for consumers on their rights, or procedures to obtain a copy of the information that the Register maintains on them. Nor is such information distributed through banks and other subscribers.

Recommendation The Central Credit Register, as a public institution, should have a clearly defined budget for raising awareness of the public about the importance of good credit history and its impact on the borrowing cost and access to finance. Also, the Central Credit Register and private credit bureaus should, in cooperation with the Commission for Personal Data Protection, inform and educate the public about possible threats regarding misuse of personal data in


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financial services and how to improve own personal data security in regards to personal finance. The websites of the Register and private credit bureaus should include information for consumers on their rights, as well as procedures to obtain a copy of the information that the Register or bureau maintains on them.

Good Practice B.2 Awareness of Credit Reporting In order to ensure that financial consumer protection and educational initiatives are appropriate, it is necessary to measure financial capability with large-scale surveys that are repeated periodically. These surveys should include questions on credit reporting and scoring.

Description Some consumer associations have conducted financial literacy surveys on an ad hoc basis, but such surveys are neither publicly available nor used in the elaboration or evaluation of consumer protection and educational initiatives. Neither BNB, nor CPC, nor other offices of the Government conduct regular financial literacy surveys.

Recommendation See recommendation B.1., and the general recommendations regarding a regular financial capability survey (e.g. Banking Section, Good Practice G.5).

Bulgaria Insurance Sector

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Bulgaria: Consumer Protection in the Insurance Sector

Overview The Bulgarian insurance market has grown rapidly in recent years, although the sector remains relatively underdeveloped. In 2007, Bulgaria was the 56th largest non-life market in the world, the 70th largest life market, and the 61st largest market overall. At end- 2007, there were 36 insurance companies registered: 17 life insurance companies and 19 non-life insurance companies. Total premium income of the Bulgarian insurance market in 2007 was over USD1 billion compared with USD364 million in 2003, a growth of almost 180 percent. In 2007, the insurance sector registered a growth in premiums of about 25% from 2006, with life premiums reaching USD153 million (an increase of 30 percent since 2006) and non-life premiums reaching USD 866 million (an increase of about 20 percent since 2006). In 2007, the real growth in premiums adjusted for inflation was 11 percent, or about 3.5 times higher than the average EU growth rate. The insurance industry continued to grow in 2008 at around 23 percent, the average growth rate of the industry over 2002-2007, with the life insurance segment advancing about 25 percent.

Figure 9: Bulgarian Insurance Market Growth (2003-2007)

0100200300400500600700800900

1000

2003 2004 2005 2006 2007

USD

milli

ons

Life Premiums

Non-life Premiums

-50

-30

-10

10

30

50

2003 2004 2005 2006 2007

Life Premium Grow th Rates (%) Non-life Premium Grow th Rates (%)

Source: Axco Report, October 2008

Total assets of the insurance market have also increased in recent years, reaching over BGN1.2 billion or USD 800 million at end-2007. Total assets of the insurance industry have grown by 345 percent since 2003, with the life segment growing even faster (245 percent compared with 106 percent for the non-life segment). In 2007, life insurance assets’ annual growth rate was 28 percent, reaching a total of BGN 807 million at end-2007. Non-life insurance assets reached BGN 439 million at end-2007, increasing by 12 percent since 2006.


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Figure 10: Life and Non-life Insurance Assets (in million BGN, 2003-2007)

0

200

400

600800

1000

1200

1400

2003 2004 2005 2006 2007

Life Assets (BGN mn) Non-Life Assets (BGN mn)

Source: Axco Report, October 2008 Despite the industry’s growth in recent years, the development of Bulgaria’s insurance market lags behind other EU New Member States (NMS). Bulgaria remains behind other NMS both in terms of insurance penetration and density (premiums per capita). There is a low level of insurance penetration at 2.66 percent of GDP in 2007, although it increased from 1.92 percent in 2003. Insurance penetration is lower than the NMS average of 3 percent and the EU-15 average of 9.6 percent. With an insurance density of less than USD 140 in 2007, Bulgaria lags behind most of the NMS and the average of the EU-15 of USD 3668.

Figure 11: Insurance Penetration and Density in EU New Member States

Insurance Penetration (premiums/GDP, 2007) Insurance Density (premiums per capita in USD, 2007)

0200400600800

100012001400

Roman ia

Bulgaria

Lithua

niaLatv

ia

Estonia

Poland

Slovakia

Hungary

Czech

Rep.

Slovenia

Source: Swiss Re Sigma report, No 3/2008 The insurance market in Bulgaria is dominated by the non-life segment. In 2007 the non-life insurance market grew by about 20 percent relative to 2006 and its total premium income reached BGN 1,3 billion. During the first three quarters of 2008, the growth rate accelerated and was reported to be 23 percent. Despite the falling property rates, non-life premium volumes grew by an average of 20 percent annually over 2002-2007. Reasons for the growth of the non-life insurance market include an increase in foreign investment due to EU accession, increases in motor third-party liability rates to cover increases in indemnity limits, an expansion of the domestic mortgage and car leasing sectors, and an increase in the number of compulsory liability classes. The dominant product of the non-life insurance segment is auto insurance. In 2007, premium income for auto insurance products accounted for 69 percent of total non-life insurance products: 44 percent (BGN 564 million) for land vehicles, and 24 percent (BGN 310 million) for motor third-party liability

0123456

Rom

ania

Lith

uani

a

Latv

ia

Esto

nia

Bul

garia

Slo

vaki

a

Hun

gary

Pola

nd

Cze

ch R

epub

lic

Slo

veni

a

Total Insurance Life Insurance Non-life Insurance


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(MTPL). For end-2008 it is expected that insurance for land vehicles slightly increases its market share. The MTPL business line reported a loss of BGN 37 million in 2007. This trend has continued and the financial results for 2008 are expected to worsen. The FSC is requiring additional capital from the insurers affected by the losses. The second largest line of business in the non-life segment is property insurance (fire and natural perils), which accounted for 14 percent of non-life premiums in 2007 and so far has generated positive results.

Figure 12: Structure of Non-Life Insurance Premium Income by Product Premium Incomes (in million BGN, 2007) Market Shares (in percentage, October 2008)

Land vehicles,

563.8

Third party motor liability

, 309.6

Fire and natural perils insurance,

181.9

Others, 90

Other property damages,

59.5

Third party liability rest,

41.4

Accident insurance,

21.8

Land vehicles

49%Other

property damages

5%

Third party motor liability

22%

Accident insurance

2%Others

7%

Third party liability rest

3%

Fire and natural perils

insurance12%

Source: Financial Supervision Commission. The concentration in the non-life insurance market has been decreasing in the past years. The market share of the top four companies decreased from 57 percent in 2006 to 52 percent in 2007. This trend has continued in 2008 with the top four insurers accounting for 51 percent of the market by October. The market has been dominated for many years by three companies: Bulstrad, DZI General, and Allianz Bulgaria. The non-life insurance market is also majority foreign-owned. In 2007 companies with majority foreign ownership wrote 71 percent of non-life premiums (up from 46 percent in 2005).

The dominant product line in the life-insurance segment is life endowments. At end-2007, premium income from endowment insurance reached BGN 154 million, representing 61 percent of the market. By October 2008, life endowments maintained a similar share of the life insurance market, followed by unit linked products (7 percent) and accident insurance (11 percent).

Figure 13: Structure of Life Insurance Premium Incomes by Product Premium Incomes (in million BGN, 2007) Market Shares (in percentage, October 2008)

Unit linked life insurance,

26.6

term assurance ,

12.5

endow ment assurance,

154.3

pension insurance or

annuities, 17.4

Marriage and birth

insurance, 8.1

Permanent health

insurance, 2.4

Supplementary insurance,

8.9Accident

insurance, 21.4

Accident insurance

11%

Supplementary insurance

4%

term assurance

7%

Unit linked life insurance

7% endow ment assurance

60%

pension insurance or

annuities7%

Permanent health

insurance1%

Marriage and birth

insurance3%

Source: Financial Supervision Commission.


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The life insurance market is highly concentrated and mostly foreign-owned. There has been little change in market concentration over the last five years. The market share of the top four insurers decreased from 72 percent in 2006 to 65 percent in 2007 and slightly increased to 66 percent as of October 2008. In 2007 Allianz Bulgaria Life displaced DZI as the top life insurer. The top four insurance companies as of October 2008 are: Allianz Bulgaria Life with 24.2 percent of market share, Uniqa Life with 15 percent, DZI with 14.9 percent and AIG Life Bulgaria with 12.2 percent. Almost all insurers are foreign-owned, following the mergers and acquisitions since Bulgaria’s accession in the EU. In 2007 companies with majority foreign ownership wrote 97 percent of life market premiums (up from 63 percent in 2005).7 Legal Framework and Institutional Arrangements The followings are the key laws governing consumer protection in the insurance sector:

Insurance Code (effective 01 January 2006, most recently amended, 2007) Financial Supervision Commission Act (effective 01 March 2003, as amended 23

November 2007) Consumer Protection Act (effective 10 June 2006, as amended in 2008) Law on Distance Marketing of Financial Services (effective 01 January 2007) Ordinance No. 24 on the Compulsory Insurance Pursuant to Items 1 and 2 of Article 249 of

the Insurance Code and on the Procedure of Settlement of Claims for Compensation of Damages Caused to Motor Vehicles (effective 08 March 2006)

Ordinance No. 21 on the Own Funds and Solvency Margin of Insurers, Reinsurers and Health Insurance Companies (effective 16 March 2005)

The Financial Supervision Commission (FSC) is the supervisory agency of the insurance activity in Bulgaria. The agency was established in 2003 under the Financial Supervisory Commission Act. The FSC is responsible for supervising capital markets, insurance companies, insurance intermediaries, pension insurance companies, and voluntary health and unemployment insurance funds. With regards to insurance, the FSC is responsible for drafting insurance legislation, issuing regulations under the Insurance Code, issuing and revoking insurance and insurance broking licenses, and supervising insurance companies and intermediaries. Its current activity is determined by the Insurance Code, the Ordinance on Insurance Brokers and Insurance Agents, and the Ordinance on Compulsory Insurance. The Association of Bulgarian Insurers (ABI) is the professional association that represents the insurance companies. ABI has drafted a Code of Conduct for their members for future implementation. Key Recommendations The key recommendations regarding consumer protection in the insurance sector include:

There should be an institution that collects information on complaints from the entire financial sector in a centralized database. The preferred option would be the establishment of a financial ombudsman, but in the interim the CPC could establish a specialized

7 The ownership of the top four insurers is as follows: AIG Life majority owned by ALICO, Allianz Bulgaria Life by Allianz Bulgaria Holding, DZI by KBC, and Uniqa by Uniqa International. See Axco Report Bulgaria Life & Benefits Oct 2008.


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department for financial services, which would handle all consumer inquiries, complaints and disputes related to the financial sector, including insurance companies.

A code of conduct for the insurance industry should be implemented by ABI. The Insurance Code should incorporate a provision obliging insurance companies to notify

consumer in a timely manner before the renewal date for non-life policies, in case of material changes in the conditions of the contract or the intention of the insurer not to renew the contract.

The FSC should introduce a requirement to inform consumers on their right to freely choose the provider of any product independently. This could be done in the form of an acknowledgment statement that the buyer should sign.

The FSC should develop informational material about insurance products and make it accessible to consumers.

ABI should develop a format for key-facts statement and describe and explain the terms used, in order to help consumers make educated decisions when comparing products and facilitate their access to clear, simple and material information about financial products and services.

A 14-day cooling-off period should be incorporated in the Insurance Code for high pressure sales (e.g. telemarketing, multi level marketing) for any insurance product with a duration longer than 6 months.

The FSC should require a minimum standard for the training of agents. The standard should take into consideration the complexity of the products to be offered. The FSC should also require continued education for brokers and actuaries. The training program for agents and the exam for brokers should include a section on the importance of educating consumers on insurance products.

A minimal premium threshold for applying the Know Your Costumer requirements should be adopted and introduced by the FSC.

A revision of the capital and reserve requirements in MTPL should be considered. The insolvency fund guarantee for life companies is not recommended and should be

reverted. The requirement of sufficient capital in case of a catastrophic event or proof of appropriate reinsurance should be favored.

A stronger role of NGOs in the insurance sector should be encouraged. Consumer associations should review the published FSC decisions and make suggestions on improving the legal and regulatory framework for consumer protection in the insurance market. Consumer associations should produce surveys that compare products’ benefits and prices throughout the industry to help consumers with their decisions.

A baseline survey assessment on financial capability should be conducted to better identify the segments of the population that require particular attention and determine educational needs.


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Good Practices: Insurance Sector SECTION A


Good Practice A.1 Consumer Protection Regime The law should provide for clear rules on consumer protection in the area of insurance and there should be adequate institutional arrangements for the implementation and enforcement of consumer protection rules.

a. There should be specific legal provisions in the law, which create an effective regime for the protection of consumers of insurance services.

b. There should be either a general consumer agency or a specialized agency responsible for implementing, overseeing and enforcing consumer protection, as well as collecting and analyzing data (including complaints, disputes and inquiries).

c. The rules should prioritize a role for the private sector, including voluntary consumer protection organizations and self-regulatory organizations.

Description a. The Insurance Code in Article 2 states that its objective is not only to establish conditions for the development of a stable and efficient insurance market, but also to ensure protection of the interests of insurance consumers. The main objective of the Financial Supervision Commission (FSC) according to article 11 in Chapter 3 of the Financial Supervision Commission Act is to protect the interests of the insured persons. There is a specialized directorate for licensing and consumer protection within the FSC’s Insurance Division. The directorate is responsible for implementing, overseeing and enforcing consumer protection, and collecting and analyzing complaints. The number of complaints is published in their annual report. During 2007, 460 complaints were submitted to the FSC and in 2008 there have been 814 complaints. The consumer’s complaints that are not resolved by the insurers are treated by the consumer protection directorate. The decisions of the FSC are not binding for the insurers. If there is a clear breach of the Insurance Code, the FSC imposes a sanction. The consumer always has the right to go to court if unsatisfied with the decision of the insurer. b. The Consumer Protection Act (as amended in November 2008) defines the role of the Consumer Protection Commission (CPC) as the agency with the mandate to protect fundamental consumer rights (article 1). The CPC’s focus for insurance complaints is on unfair contractual terms and sales practices. In 2008, the enforcement of the provisions on misleading and comparative advertising was transferred from the CPC to the Commission for the Protection of Competition. In practice the CPC transfers to the FSC all complaints received about the insurance industry. c. The Consumer Protection Act provides for the creation of consumer associations in article 167. There is limited funding through State subsidies (annually 25,000 Euros) and a supplementary budget from the Ministry of Economy and Energy. To qualify for funding, consumer associations have to be exclusive, independent and registered as non-profit organizations (Consumer Protection Act, article 168). To be considered as representative, consumer associations should take effective public action for protection of consumer interests, and have offices in at least one third of the regions in Bulgaria (article 170).

Recommendation a. No recommendation. b. There should be an institution that collects information on complaints from the entire financial sector in a centralized database. A stronger role of the CPC together with the development of the required resources and infrastructure on insurance complaints should be evaluated. The CPC could establish a specialized financial services department that is in charge of this database among other functions related to consumer protection. This


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department could later be transformed into a separate financial sector ombudsman. A centralized complaints database would allow the consumer protection agency (CPC or ombudsman) coordinate activities with the financial supervisors, especially if systematic problems are detected in the entire financial sector. c. The funding for consumer associations should be increased for them to play a more active role in financial consumer protection.

Good Practice A.2 Contracts There should be a specialized insurance contracts section in the general insurance or contracts law, or ideally a separate Insurance Contracts Act. This should specify the information exchange and disclosure requirements specific to the insurance sector, the basic rights of the insurer and policyholder and allow for any asymmetries of negotiating power or access to information.

Description Chapter 18 of the Insurance Code is dedicated to insurance contracts. Article 185 states the information that an insurer should provide the insured before the contract is signed, such as:

All technical aspects of the insurance, like sum insured, premium amount, exclusions, profit participation, cash values, etc.

For products with investments, information on the type and characteristics of the investment funds, possible tax implications and the fees charged.

Procedures for out-of-court settlement of disputes between the parties to the insurance contract, as well as conditions under which unilateral termination of the contract can take place.

Information about the agent or broker if the contract was processed using an intermediary.

In addition, the insured should be informed of any changes in the general conditions and any law that could affect the contract. Policyholders should also be informed annually, by the insurer, of the cash value and any other financial aspect of the policy. Article 186 requires that the general terms of the contract be provided to the consumer by the insurer as part of the contractual information given to the consumer. General conditions should be sent together with the application form. The general terms should be available at any time to the insured.


Good Practice A.3 Codes of Conduct for Insurers a. There should be a principles-based code of conduct for insurers that is

devised in consultation with the industry and relevant consumer protection associations, and is monitored and enforced by a statutory agency.

b. Insurers should publicize the statutory code to the general public through appropriate means.

c. The statutory code should be limited to good business conduct principles, and augmented by voluntary codes on matters specific to the product or channel concerned.

d. The operation of voluntary codes should be monitored by a statutory agency, and its Annual Report should comment on the operation of those codes.

Description There is no requirement for insurers to have a code of conduct. Some insurance companies have adopted internal codes of conduct for different employees of the company that take into account the nature of the particular activity, like a code of conduct for agents, a code of conduct for management, etc. The Association of Bulgarian Insurers (ABI) has drafted a Code of Conduct for their members for future implementation.


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Recommendation The ABI draft code of conduct should be reviewed and approved by the members of the Association. ABI should enforce the members’ compliance with the approved code of conduct.. A mandatory code of conduct for the insurance industry would not only benefit the consumers but also improve the image of the industry. The code of conduct should be published and be part of the application form. The FSC should monitor its compliance and impose fines in case of violations to the code of conduct. The right to supervise the compliance with the code of conduct will enhance the ability of the FSC to issue binding resolutions to disputes that violate the code of conduct. Consumer associations should also be encouraged to monitor the compliance with the code and highlight cases where insurers fail to comply.

Good Practice A.4 Other Institutional Arrangements a. There should be a balance between prudential supervision and consumer

protection. b. The judicial system should provide credibility to the enforcement of the

rules on financial consumer protection. c. The media and consumer associations should play an active role in

promoting financial consumer protection.

Description a. The FSC’s Insurance Division is divided into three directorates: (i) Licensing and consumers protection, (ii) Inspection and supervision, and (iii) Regulatory policy and research. The Directorate for Inspection and Supervision focuses on prudential supervision. The Insurance Code has strong provisions on this matter. The requirements of professional qualifications for the actuaries, as well as the direct reporting obligation of the chief actuary on the technical reserves and solvency requirements, adds protection to the system. In addition, the FSC’s commitment to prudential supervision is evident in Article 65 of the Insurance Code when discussing MTPL. Violations of the requirements imposed by prudential regulations are sanctioned and the indications of the FSC are binding. The Directorate for Licensing and Consumers Protection is the specialized department responsible for implementing, overseeing and enforcing consumer protection. It is also responsible for collecting and analyzing complaints. The consumer complaints that are not resolved by the insurers are treated by this Directorate. The decisions of the FSC are not binding for the insurers. If there is a clear breach of the Insurance Code the FSC imposes a sanction. The consumer always has the right to go to court if unsatisfied with the decision of the insurer. b. Article 317 of the Insurance Code grants the FSC the authority to fine managers and supervisory board members for providing erroneous information to the FSC, thus adding personal accountability to the system. Cases handled by the court take one to five years to be settled. c. The NGOs’ involvement in the insurance area is not strong, probably due to the need for specialized technical expertise, the lack of financial resources and the requirements to be considered representative and participate in the National Consumer Protection Council. However, on more than one occasion, the NGOs, the FSC and the press have worked together to protect consumer rights on specific issues.

Recommendation a. The ultimate consumer protection is the solvency of the companies that would allow them to fulfill their obligations. A revision of capital and reserve requirements in MTPL needs attention. b. c. Consumer associations should be encouraged to be more involved in insurance. On the one hand, the government should increase its financing support. On the other hand, consumer associations should increase their transparency and publish an annual report on their activities regarding consumer protection. Consumer associations should also conduct trend analysis of inquiries, complaints and disputes submitted by consumers, as well as


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review the published FSC decisions and make suggestions on ways to improve the legal and regulatory framework on consumer protection for insurance companies.

Good Practice A.5 Linked Products and Bundling Clauses Whenever an insurer contracts with a merchant or credit grantor (including banks and leasing companies) as a distribution channel for its contracts, no bundling (including enforcing adhesion to what is legally a single contract), tying or other exclusionary dealings should take place without the consumer being advised and able to opt out

Description It is common practice to insure loans. The insurance product is offered with a preferred insurer usually belonging to the same financial group as the bank.

Recommendation The FSC should introduce the requirement to inform consumers about their right to freely choose a provider for any product independently. This could be done in the form of an acknowledgment statement for the buyer’s signature. In addition, tariffs on credit insurance should be presented to customers of standard loan types. NGOs should engage in researching standardized quotes of insurance for different loan durations and amounts and provide the public with these comparisons.

SECTION B

DISCLOSURE & SALES PRACTICES

Good Practice B.1 Sales Practices a. Insurers should be held responsible for product-related information

provided to consumers by their agents (i.e. those intermediaries acting for the insurer).

b. Consumers should be made aware of whether the intermediary selling them an insurance contract (known as a policy) is acting for them or for the insurer (i.e. in the latter case they have an agency agreement with the insurer).

c. If the intermediary is a broker (i.e. acting on behalf of the consumer) then the consumer should be advised at the time of initial contact with the intermediary if commission will be paid by the underwriting insurer. The consumer should have the right to require disclosure of the commission and other costs paid to an intermediary for long term savings contracts. The consumer should always be advised of the amount of commission paid on single premium investment contracts.

d. An intermediary should not be allowed to identically fill broking and agency roles for a given general class of insurance (i.e. life and disability, health, general insurance, credit insurance).

e. Sanctions, including meaningful fines and, in the case of intermediaries, loss of license, should apply for breach of any of the above provisions.

Description The intermediation activity is regulated by the Insurance Code, which transposes the EU Directive on Insurance Mediation. Brokers and agents are licensed and supervised by the FSC. The FSC website publishes a list of licensed brokers and agents. In the case of severe violations, the FSC may revoke or suspend the intermediary’s license. Article 167 of the Insurance Code requires intermediaries to maintain professional liability insurance. The same requirement applies for agents unless the insurance company for which they sell assumes in writing the liability of the agent. Article 177 of the Insurance Code requires the broker and agent to disclose the company or companies he or she is working for or other financial interests that he or she might have in insurance companies.



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Good Practice B.2 Advertising and Sales Materials a. Insurers should make sure that their advertising and sales materials and

procedures do not mislead customers. Regulatory limits should be placed on investment returns used in life insurance value projections.

b. Insurers should be legally responsible for all statements made in marketing and sales materials they produce related to their products.

c. All marketing and sales materials should be easy to read and easy to understand by the average person.

Description The CPC is responsible for overseeing unfair commercial practices against consumers. The Law on the Protection of Competition issued in November 2008 transferred the responsibility for enforcing provisions on misleading and comparative advertising from the CPC to the Commission for the Protection of Competition. Article 32 of the Law provides that the advertiser and the advertising agency shall be held liable for misleading and unpermitted comparative advertising. Moreover, the authority may impose pecuniary sanctions and fines for infringements to the Law, which may be up to BGN 50,000 (article 102). However, misleading advertising of financial products is not uncommon.

Recommendation Advertising for insurance products should be closely monitored to ensure that is not misleading or untrue. In addition, there should be regulatory limits on investment returns used in life insurance value projections for advertising and sales materials.

Good Practice B.3 Know Your Customer The sales intermediary or officer should be required to obtain sufficient information about the consumer to ensure an appropriate product is offered. Formal ‘fact finds’ should be specified for long term savings and investment products and should be retained and available for inspection for a reasonable number of years.

Description Article 177 of the Insurance Code requires the intermediary to obtain sufficient information about the customer to ensure that the proper product is offered. This information about the consumers’ needs should be well documented and kept for future reference and inspection. The FSC may require proof of the analysis of the consumer’s needs for an audit.

Recommendation As mass distribution channels of smaller amount insurance products enter the market, KYC could become a complex topic. Most countries have adopted a minimal insurance premium threshold above which this requirement is applicable. The FSC should also implement this practice.

Good Practice B.4 Cooling-off Period There should be a reasonable cooling-off period associated with any traditional investment or long term life savings contract, after the policy information is delivered, to deal with possible high pressure selling and mis-selling.

Description The Insurance Code in article 237 requires a cooling-off period of 30 days for any life insurance product with a duration of longer than six months. The Consumer Protection Act in article 55 indicates a cooling-off period of 14 days for distance contracts. The Distance Marketing of Financial Services Act indicates a cooling-off period of 30 days for distance contracts on life insurance.

Recommendation The 14 days cooling-off period should be incorporated in the Insurance Code for high pressure sales of any insurance product with duration longer than six months. High pressure channels include telemarketing, multi level marketing, etc.

Good Practice B.5 Key Facts Document A Key Facts Document should be attached to all sales and contractual documents, disclosing the key factors of the insurance product or services in large print.


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Description Insurance companies are required to provide key information of their products to the consumers together with the insurance policy, as indicated by the Insurance Code (see A2). However, there are no standardized formats that would provide the key facts of basic standard insurance products to the consumers.

Recommendation The ABI should prepare Key Facts Statements for basic insurance products in formats that are easy to read and easy to understand for the average consumer, and that allow the consumer compare offers by different providers. The FSC should review these formats and the consumer associations should comment on them. The FSC should also publish on its webpage a description of the meaning of each of the main terms used in the Key Facts Statements to help consumers make an educated decision when comparing products.

Good Practice B.6 Professional Competence a. Sales personnel and intermediaries selling and advising on insurance

contracts should have sufficient qualifications and competence, depending on the complexities of the products they sell.

b. Educational requirements for intermediaries selling long-term savings and investment insurance products should be specified, or at least approved, by the regulator or supervisor.

Description Brokers need to pass an exam determined by the FSC before they can be licensed. All insurance companies are responsible for the knowledge and training of their agents, as stipulated by the Insurance Code. The FSC supervises the compliance with the training requirement and can audit the training material and activities carried out by the insurer.

Recommendation A minimum standard for the training of agents should be required by the FSC. The standard should take into consideration the complexity of the products to be offered. Continued education for brokers and actuaries should be required by the FSC.

Good Practice B.7 Regulatory Status Disclosure a. In all of its advertising, whether by print, television, radio or otherwise,

an insurer should disclose: (a) that it is regulated and (b) the name and address of the regulator.

b. All insurance intermediaries should be licensed and proof of licensing should be readily available to the general public, including through the internet.

Description Insurance activity and mediation is regulated, and only licensed companies and intermediaries can participate in this activity. The FSC imposes monetary fines for the insurance companies or intermediaries operating without holding the proper license. The Insurance Code provides that a person which does not have a license to perform activities as an insurer (or as a reinsurer), may not use the word insurance (or reinsurance) or derivatives of it with regard to their name, advertising or other activities (articles 11 and 24). In the case of intermediaries, the Insurance Code states that a person who has not been entered into the respective Registry of the FSC may not use in its name, advertising or different activity words meaning performance of insurance or reinsurance intermediation (art. 152)

Recommendation FSC should also require that insurers disclose their regulatory status in all their advertising. Insurance intermediaries should be required to have proof of licensing readily available to the general public.

Good Practice B.8 Disclosure of Financial Situation a. The regulator or supervisor should publish annual public reports on the

development, health, strength and penetration of the insurance sector either as a special report or as part of the disclosure and accountability requirements under the law governing it.


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b. Insurers should be required to disclose their financial information to enable the general public to form an opinion with regards to the financial viability of the institution.

c. If credible claims paying ability ratings are not available, the regulator or supervisor should periodically publish sufficient information on each insurer for an informed commentator or intermediary to form a view of the insurer’s relative financial strength.

Description The Insurance Code authorizes the FSC to obtain detailed information from insurers. The FSC publishes periodic financial information of the insurance sector. All insurers are required to publish their audited annual financial statements.

Recommendation No recommendation. SECTION C


Good Practice C.1 Customer Account Handling a. The customer should receive periodic statements of the value of their

policy in the case of insurance savings and investment contracts. For life insurance (which covers both risk coverage and investment), the customer should receive statements on the portion of the premium used for risk cover vs. investment.

b. For traditional savings contracts, this should be provided annually, however, more frequent statements should be produced for investment-linked contracts.

c. Customers should have a means to dispute the accuracy of the transactions recorded in the statement within a stipulated period of time.

d. Insurers should be required to disclose the cash value of a traditional savings or investment contract upon demand and within a reasonable time. In addition, a table showing projected cash values should be provided at the time of delivery of the initial contract and at the time of any subsequent adjustments. The customer should be advised of the assumptions made when preparing the projected cash value of the policy. Alternatively, the projection could be prepared with 0% expected return in order to clearly illustrate the effect of fees.

e. Customers should be provided with renewal notices a reasonable number of days before the renewal date for non-life policies. If an insurer does not wish to renew a contract it should provide a reasonable notice period.

f. Claims should not be deniable or adjustable if non disclosure is discovered at the time of the claim but is immaterial to the proximate cause of the claim. In such cases, the claim may be adjusted for any premium shortfall or inability to recover reinsurance.

g. Insurers should have the right to cancel a policy at any time (other than after a claim has occurred – see above) if material non disclosure can be established.

Description a-d. Chapter 18 of the Insurance Code is dedicated to insurance contracts. Article 185 (2) requires that the insurer provide the insured all technical relevant information of the policy on an annual basis.. e. There are no provisions with respect to providing a reasonable amount of time before the renewal date for non-life policies in case of material changes in the conditions of the contract or the intention of the insurer not to renew the contract. f. Article 189 specifies the adjustments that the insurer can apply to the claim payment, amount of premium or sum insured related to the undisclosed facts or erroneous facts provided at contract initiation.


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g. Article 189 (1) grants the insurer the right to unilaterally terminate the contract if material non-disclosure can be established.

Recommendation a-d. No recommendation. e. The Insurance Code should incorporate a provision with respect to providing reasonable amount of time before the renewal date for non-life policies in case of material changes in the conditions of the contract or if the insurer does not intend to renew the contract f-g. No recommendation.

SECTION D

PRIVACY & DATA PROTECTION

Good Practice D.1 Confidentiality and Security of Customers’ Information Customers have a right to expect that their financial transactions are kept confidential. The law should require insurers to guarantee that they protect the confidentiality and security of personal data, against any anticipated threats or hazards to the security or integrity of such information, and against unauthorized access.

Description The Insurance Code in Article 93 states the confidential character of the information obtained during the insurance activity. In Article 94 the Insurance Code states that all information acquired by insurance companies may be disclosed by employees, agents, brokers and reinsurers to third parties only after obtaining written consent of the person to whom the information refers. The exception applies, inter alia, to information for insurance fraud prevention systems, national security provisions, court decisions.


SECTON E


Good Practice E.1 Internal Dispute Settlement a. The supervisory agency should require an internal avenue for claim and

dispute resolution practices by the insurer. b. Insurers should designate employees to handle retail policyholder

complaints. c. The insurer should inform its customers of the internal procedures on

dispute resolution. d. The regulator or supervisor should oversee whether insurers comply

with their internal procedures on consumer protection rules.

Description The Insurance Code in Chapter 9 (article 104) requires an insurer to establish rules for procedures on the handling of insurance claims as well as instructions for consumers on how to submit complaints to the insurer. The procedures shall guarantee the consumers’ rights to swift, transparent and fair settlement of their claims, thus, tackling the main source of consumer complaints in insurance. These rules are to be submitted to the FSC for approval. The FSC has the authority to request the removal of procedures or terms that are in contradiction with the law as well as in cases where the consumers’ rights have been restricted unreasonably.


Good Practice E.2 Formal Dispute Settlement Mechanisms a. A system should be in place to allow consumers to seek affordable and

efficient third-party recourse, which could be an ombudsman or tribunal, in the event the complaint with the insurer is not resolved to their satisfaction in accordance with internal procedures.

b. The role of an ombudsman or equivalent institution vis-à-vis consumer complaints should be made known to the public.

c. The ombudsman or equivalent institution’s impartiality and


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independence from the appointing authority and industry should be assured.

d. The enforcement mechanism of the decisions of the ombudsman or equivalent institution and binding nature of the decision on banks should be established and publicized.

Description Consumer complaints that are unresolved by the insurer are treated by the consumer protection directorate of the FSC. The decisions of the FSC are binding for the insurers if there is a clear breach of the Insurance Code. On all other cases, the FSC can only issue a recommendation or refer to the court. The consumer always has the right to go to court if unsatisfied with the resolution of the FSC. The CPC focuses on financial services of unfair contractual terms and currently refers complaints received from the insurance industry to the FSC. The complexity of disputes in the area of financial services makes expertise knowledge a necessity of the business. The FSC is doing a good job of resolving the disputes that do not reach agreement between the consumers and the insurers. There were 772 disputes as of October 2008 handled by the FSC, an increment of already 70 percent compared with 2007. This number will continue to grow as consumers begin to get more familiar with their rights and more complex products are offered.

Recommendation There should be a clear institutional framework for dealing with customer complaints in the entire financial system, especially considering that, as the insurance market grows, the number of inquiries and complaints would also grow and it would be more difficult for the FSC to handle them effectively. The most preferred option would be establishing a financial ombudsman, but as an interim the CPC could be strengthened to handle complaints of the entire financial sector, including insurance. For additional recommendations on dispute resolution mechanisms, see Volume I.

SECTION F

GUARANTEE SCHEMES AND INSOLVENCY

Good Practice F.1 Guarantee Schemes and Insolvency a. With the exception of schemes covering mandatory insurances,

guarantee schemes are not to be encouraged for insurance because of the opaque nature of the industry and the scope for moral hazard. Strong governance and supervision are better alternatives.

b. Nominal defendant arrangements should be in place for mandatory insurances such as motor third party liability insurance.

c. Assets covering life insurance mathematical reserves and investment contract policy liabilities should be segregated or at the very least earmarked, and long-term policyholders should have preferential access to such assets in the event of a winding-up.

Description a,b. The National Bureau of Bulgarian Motor Insurers and the Guarantee Fund have been established by the Insurance Code in full compliance with the corresponding EU directive. The Insurance Code was amended in September 2007 to require the establishment of a Security Fund to cover claims against insolvent companies not only in MTPL but also in the obligatory accident insurance for passengers using public transport and in life insurance. The Security Fund is managed by the existing Guarantee Fund. c. The assets backing up the mathematical reserves of endowments or other types of long term policies containing investments of the insured are not segregated from the general insurance undertaking’s assets. The endowments’ backed assets are earmarked and policyholders have a preferred treatment in case of insolvency as indicated in Article 136 of the Insurance Code.

Recommendation a,b The insolvency fund guarantee for life insurance companies is not recommended and should be reverted. The requirement of sufficient capital in case of a catastrophic event or proof of appropriate reinsurance should be favored.


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c. The segregation of assets is recommended for unit linked products to provide additional protection to consumers.

SECTION G


Good Practice G.1 Information Resources for Consumers a. Consumers, especially the most vulnerable, should have access to

sufficient resources to enable them to understand the financial products and services available to them.

b. Financial regulators should seek to improve consumer awareness of financial products and services by devising, publishing and distributing independent information on the costs, risks and benefits of such products and services.

c. Non-governmental organizations should be encouraged to provide consumer awareness programs to the public regarding financial products and services.

Description Annually the FSC provides a financial services course, several weeks long, for high school students. In addition, the FSC‘s and ABI’s websites provide some educational material. The authorities and the insurance industry are in agreement that consumer financial education is important. Due to the complexity of the insurance business, it is particularly important to gain at least a basic understanding of the concept of insurance and its main components: premiums, exclusions, coverage, etc. The FSC organized a couple of informational events about the insurance sector in the past two years: a Seminar on Development and Conduct of Consumer Protection Policy in the Insurance Market in 2006, and the Pan-European Insurance conference in 2007. Both events had the participation of representatives of government authorities, the insurance industry and consumer associations.

Recommendation Several studies have shown that the most effective way to educate consumers is when they are interested in purchasing a particular product. For instance, when reaching retirement age people are interested in retirement products; or when buying a mortgage and realizing the need for life insurance protection, consumers will look for information on life insurance products, etc. Thus training material should especially be available at those moments. Further development of informational resources should be encouraged. For example, ABI or FSC could develop a glossary of all insurance terminology to be published on its website. A free toll number that would be available to address financial questions should also be considered by the FSC. The training program for agents and the exam for brokers should include a section on the importance of educating consumers on insurance products. The role of NGOs is important and financial resources for educational work should be allocated.

Good Practice G.2 Measuring Financial Capability a. Policymakers, industry and advocates should understand the financial

capability of various market segments, particularly those most vulnerable to abuse.

b. 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, the financial capability of consumers should be measured periodically by way of large-scale market research that gets repeated from time to time.

For these purposes, the term “financial capability of consumers” means the ability to manage money, keep track of finances, plan ahead, choose appropriate financial products and services and stay informed about financial matters.


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Description The government, the FSC, the industry, NGOs and the press are all in agreement that the public needs to be educated in financial matters. The current level of financial knowledge and awareness in the public is judged by all stakeholders to be insufficient.

Recommendation To better determine the needs of training and to identify the segments of the population that require particular attention, a baseline survey assessment on financial capability should be conducted.

Bulgaria Pensions Sector

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Bulgaria: Consumer Protection in the Pensions Sector

Overview Bulgaria reached the final stage of a three-pillar pension system with the introduction of mandatory private pensions. There are two types of mandatory private pension funds: (i) professional pension funds, providing early retirement pensions for employees in specified hazardous occupations; and (ii) universal pension funds, providing supplementary pensions for all other workers born after December 31, 1959. Mandatory private pensions were introduced on January 1, 2001 when the funding of early retirement pensions for employees in specified hazardous occupations was transferred from the National Social Security Institute to authorized private funds. The scope of mandatory pensions was extended on January 1, 2002, when all workers born after 31 December 1959 were required to divert social security contributions equivalent to 2 percent of wages to universal pension funds. The contribution rate was increased to 5 percent between 2003 and 2007. The voluntary pension system was introduced in 1994, but has existed in its present form only since 2002. Private pensions are managed by pension insurance companies that are strictly regulated and supervised by the FSC. Pension insurance companies are joint stock companies that manage pension funds and the basis for their establishment is regulated by the Social Insurance Code. In recent years, the number of pension insurance companies has not changed considerably. Since 2002, only two new companies have obtained a license to manage pension funds. As of December 2008, there are 10 pension insurance companies. Membership in the pension funds has increased rapidly since 2003, particularly in the mandatory universal pension funds. At September 2008, membership for the mandatory universal funds reached 2,768,862, increasing 72 percent relative to 2003 and 5 percent relative to 2007. Coverage of the population by the mandatory universal funds increased from 49 percent of the labor force in 2003 to 75 percent in 2007. Membership for the mandatory professional funds is low with 217,315 participants, representing only 6 percent of total membership in pension funds by September 2008. Participation in the voluntary pension funds system is also low. Membership in the voluntary pension funds reached 606,569 participants, increasing 18 percent relative to 2003. Only 17 percent of the working population participates in voluntary pension funds.

Figure 14: Pension Funds’ Membership

(Number of participants, 2003-2008)

0

500000

1000000

1500000

2000000

2500000

3000000

2003 2004 2005 2006 2007 Sep-08

Universal Pension FundsVoluntary Pension Funds

Source: FSC


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Assets under management of pension funds have grown rapidly in recent years, although Bulgaria lags behind other CEE countries. Assets under management of pension funds have grown at an average rate of 46 percent per year between 2003 and 2007. Their size relative to GDP increased from 1.5 percent in 2003 to 4 percent in 2007. This level is similar to that of Slovakia, but lower than countries like Estonia, Croatia or Poland.

Figure 15: Pension Funds’ Assets in European Countries (as percentage of GDP, 2007)

02468

101214

Lithu

ania

Russia

Latvi

a

Bulgari

a

Turkey

Slovak R

epub

lic

Estonia

Hunga

ry

Croatia

Poland

Source: National authorities, OECD

Mandatory universal pension funds have driven growth in the pensions sector. The net asset value of the mandatory universal pension funds has increased tremendously since 2003, reaching BGN 1.4 billion in September 2008. This level represented an increase of 16 percent relative to end-2007 and 444 percent relative to end-2004. On average, the value of an individual universal pension fund account is BGN 513. Regarding mandatory professional pension funds, they reached BGN 389 million in September 2008, which represented an increase of 93 percent relative to end-2004. After a period of expansion, voluntary pension funds have slowed their growth in 2008. The net asset value reached BGN 678 million in 2007, an increase of 108 percent relative to 2004. However, the financial crisis is affecting the growth of the assets of voluntary pension funds. From end-2007 to September 2008, assets of voluntary pension funds have decreased by 16 percent. On average, the value of an individual voluntary pension fund account is BGN 942.

Figure 16: Pension Funds’ Net Assets under Management (in million BGN, 2003-2008)

0200400600800

1000120014001600

2003 2004 2005 2006 2007 Sep-08


Source: FSC

The mandatory universal pension funds are more conservative than voluntary pension funds in their investments. Stronger investment restrictions apply to the mandatory universal pension funds than to the voluntary pension funds. At end-September 2008, mandatory universal pension funds invested


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about 24 percent of their assets in bank deposits (up from 16 percent in 2007), 25 percent in debt securities issued or guaranteed by EU Member States or their central banks (up from 19 percent in 2007), 24 percent in corporate bonds (up from 13 percent in 2007), and 21 percent in equities (down from 28 percent in 2007). Voluntary pension funds invested about 30 percent in equities (down from 32 percent in 2007), 15 percent in bank deposits (down from 17 percent in 2007), 23 percent in corporate bonds (up from 9 percent in 2007), and 20 percent in debt securities issued or guaranteed by EU members states (similar to 2007). Due to the financial crisis, the pension funds started investing more heavily in corporate bonds and less in equities.

Figure 17: Structure of Investment Portfolio of Private Pension Funds

(in percentage, September 2008)

Mandatory Universal Funds Voluntary Funds

Debt securities issued or

guaranteed by EU member-s tates

or by their central banks25.01%

Corporate bonds23.92%

Inves tment property2.03%

Bank depos its23.99%

Shares , rights and units

20.66%Mortgage bonds

2.30%

Municipal bonds2.09%

Inves tment property8.04%

Bank depos its15.34%

Municipal bonds0.91%

Corporate bonds23.04%

Mortgage bonds3.21%

Debt securities , is sued or

guaranteed by EU member-s tates ,o ther

s tates or by theircentral banks

19.90%

Shares , rights and units29.57%

Source: FSC Performance of the pension funds has been high in recent years, however, increased market volatility has impacted returns in 2008. The annualized weighted average rate of return for 24 months for the mandatory universal pension funds dropped from 13 percent in September 2007 to 2 percent in September 2008. Voluntary pension funds suffered a similar decrease in their rate of return.. Further deterioration of returns is expected in the next months.8 The exceptional return achieved in 2007 was mainly the result of an increased exposure to local equities, which rose to a record high in October 2007. However, the SOFIX Index lost nearly 50 percent by September 2008, and 81 percent by end-2008.

8 Pension funds are required to achieve a minimum rate of investment return, which is calculated every quarter on the basis of the previous two years' investment performance. The minimum investment return is 60% of the weighted average return of all pension funds or 3% less than the average return, whichever is the smallest. The minimum investment return is expressed in terms of the difference between unit values at the beginning and end of the 24-month review period


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Figure 18: Nominal and Real Return Rates of Pension Funds (in percentage, 2003-2007)

0

5

10

15

20

25

2003 2004 2005 2006 2007


02

46

810

1214

2003 2004 2005 2006 2007

Source: IMF

The pension funds market is highly concentrated, particularly for the voluntary pension funds. In the voluntary pension funds market, the four largest pension funds account for 86 percent of the market, with Allianz Bulgaria having the largest market share with 52 percent. The four largest universal pension funds account for 81 percent of the market, with Doverie being the largest player with 37 percent of market share.

Figure 19: Market Share of Pension Funds by Net Asset Value (in percentage, September 2008)

Mandatory Universal Funds Voluntary Funds

UPF "TOPLINA"0,36%

UPF "CCB - SILA"4,23%

"ING UPF"9,85%

ZUPF "ALLIANZ BULGARIA"

21,87%

"LUKOIL GARANT-BULGARIA - UPF"

4,16%"UPF - FUTURE"

1,51%

UPF "DSK - RODINA"8,60%

UPF "SAGLASIE"11,96%

UPF "DOVERIE"37,47%

VP F "TOP LINA"0.31%

"VP F - BUDESHTE"

1.07%

"LUKOIL GARANT-BULGARIA - VP F"

6.68%

VP F "CCB - SILA"1.81%

"ING VP F"9.97%

VP F "ALLIANZ BULGARIA"

52.01%

VP F "DSK - RODINA"

7.94%

"SAGLASIE"3.68% VP F "DOVERIE"

16.53%

Source: FSC The cost of switching pension funds is high relative to the average size of assets, although the FSC is planning to reduce fees. In the case of mandatory universal pension funds, the fee of BGN 20 is around 4 percent of the value of an average individual pension fund account (BGN 513). Members are allowed to change mandatory universal pension funds two years after joining their first fund and one year after transferring from another fund. However, fund transfers are discouraged by some provisions of the Social Insurance Code (e.g. setting up a switching fee) which intend to prevent "churning". It is planned that the exit fee for switching after less than two years' membership will be reduced from BGN 20 (USD 15) to BGN 10 (USD 8) and there will be no exit fee for switches after the 2-year period has elapsed. With regards to voluntary pension funds, the SIC allows employees to transfer between pension funds not more than once a year. In order to promote competition between pension funds, the FSC is planning to abolish minimum membership periods and allow members to switch between funds at will. The fees are relatively high compared with similar systems throughout the world with only Turkey and the Czech Republic having higher administrative fees (IMF Working Paper WP/8/268).


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The pension funds system is still in the early phases with the first mandatory universal pension funds retirement annuities expected in 2018. The payout phase of the system will only evolve in the upcoming years when participants attain retirement age and have accumulated sufficient assets to qualify for an annuity pay out. Legal Framework and Institutional Arrangements The key laws governing consumer protection in the pensions sector are the following:

Social Insurance Code (effective 01 January 2000, as amended 23 December 2008) Financial Supervision Commission Act (effective 01 March 2003, as amended 29 July

2008) Consumer Protection Act (effective 10 June 2006, as amended in 2008) Ordinance No. 3 on the way and manner for switching participation and transfer of the

accumulated resources of an insured person from one supplementary pension fund to another respective fund, managed by another pension insurance company (effective 01 January 2004, last amended 2006)

Ordinance No. 33 on Individual Applications for Participation in a Supplementary Compulsory Pension Insurance Fund (effective 19 September 2006)

Ordinance on the Boards of Trustees of Supplementary Mandatory Pension Funds and the Advisory Boards of Supplementary Voluntary Pension Funds (effective 01 March 2005)

The Financial Supervision Commission (FSC) is the supervisory agency of the private pension insurance activity in Bulgaria. It was created in 2003 through the Financial Supervision Commission Act. The Social Insurance Supervision Division of the FSC is responsible for the licensing and financial supervision of pension insurance companies, the issuance of regulations under the Social Insurance Code (SIC) and the approval of pension fund rules. The Social Insurance Division comprises two directorates, responsible for: (i) Regulatory regimes and risk evaluation, and (ii) Inspection and financial supervision. The amendments of the SIC from August 2003 brought voluntary pensions within its scope. The title of the code was amended from Mandatory Social Insurance Code to Social Insurance Code, and the Supplementary Voluntary Pension Insurance Act, originally passed in 1999, was repealed. The SIC was amended on 9 February 2006 to abolish the long-standing requirement for mandatory and voluntary pension funds to hold a specified percentage of their assets in government bonds (originally 50% for mandatory funds and 30% for voluntary funds). The amendment act also widened the range of permitted investments and removed restrictions on the percentage of pension fund assets which could be invested in EU and EEA states from 1 January 2007. Key Recommendations

There should be an institution that collects information on complaints from the entire financial sector in a centralized database. The preferred option would be the establishment of a financial ombudsman, but in the interim the CPC could establish a specialized department for financial services, which would handle consumer protection issues related to the financial sector, including pension insurance companies.

The BASPSC should ensure that all its members comply with the Association’s code of ethics and provide consumers with easy access to the code. The FSC and consumer associations should also monitor the compliance with the code.

The SIC should require that each pension insurance company establish a complaints handling procedure.

The BASPSC should prepare Key Facts Statements for basic pension products in formats that are easy to read, easy to understand and allow for comparison for the average consumer. The FSC should review these formats.


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The FSC should require the following disclosure in clear simple language: (i) there is no guarantee of return and that the consumer could even lose the principal, and (ii) a measure of historical volatility of the funds’ returns as compared with the market average.

The word “guarantee” in the case of providing an average market return guarantee should be avoided to prevent misinterpretations leading to the wrong understanding of a minimum return guarantee.

The information of the daily valuation of the 2nd pillar pension funds for the consumer has limited value as the availability of the funds is restricted for several years. A longer period valuation would be more appropriate. The 3rd pillar valuation should include the tax penalty if applicable.

The current administrative fee charged should be lowered to be aligned with international levels. Further, to encourage competition, funds switching should be permitted on an annual basis free of charge.

Training of the agents should be required by the SIC. The FSC should suggest or approve the syllabus. Pension insurance companies should accept in writing the liability of their agents in relation to the sales activity.

The SIC should explicitly state the legal responsibility of the pension insurance companies on the sales and marketing materials.

Multi funds should be introduced. Depending on the life cycle of the pension system participants a default allocation of the funds should be introduced. The participant however would still have the choice to opt out of that default allocation, except in the last 5 years before retirement and only for the 2nd pillar. For this case, the funds should be required to be allocated to a “risk free” fund.

Statements should be delivered to the pension participants on a quarterly basis. The use of the internet should allow participants at any time to obtain a printout of their last quarterly statement. FSC should require the inclusion of risk-adjusted returns in the statements.

The SIC should require from the pension insurance companies the establishment of a complaints handling procedure.

The introduction of a formal ombudsman or an equivalent fast and effective recourse mechanism to resolve disputes should be considered. This will be particularly important when the pay out phase starts since it is precisely in the selection of the pay out benefit that consumer complaints and disputes tend to arise.

Raising awareness of the risk elements inherent in the pension funds and their purpose in relation to other financial products is necessary. Education focus on the long term character of the investments and the pension objectives is necessary. A strong warning to the public using the 3rd pillar as an investment tool rather than as a source of saving for their retirement should be issued.

FSC and professional associations should develop informational material about pensions and make it accessible to consumers.

A baseline survey assessment on financial capability should be conducted to better identify the segments of the population that require particular attention and determine training needs.


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Good Practices: Pensions Sector SECTION A


Good Practice A.1 Consumer Protection Regime The legal system should recognize and provide for clear rules on consumer protection in the area of private pensions and there should be adequate institutional arrangements for the implementation and enforcement of consumer protection rules.

a. There should be specific legal provisions in the law which creates an effective regime for the protection of consumers who deal with pension entities.

b. There should be a general consumer agency or specialized agency responsible for the implementation, oversight and enforcement of consumer protection, and data collection and analysis (including complaints, disputes and inquiries).

c. The legal system should provide a role for the private sector, including voluntary consumer protection organizations and self-regulatory organizations.

Description a. The Social Insurance Code (SIC) in Article 120b states that the state shall exercise effective regulation and control over the activities of the participants in the supplier side of the 2nd and 3rd pillar pension funds for the purpose of protecting the interests of the insured persons and pensioners. The supervision has been delegated to the Financial Supervision Commission (FSC). The FSC operates under the SIC and the Financial Supervision Commission Act. The main objective of the FSC, according to article 11 of the Financial Supervision Commission Act, is to protect the interests of the insured persons. Within the FSC, the Pension Division is divided into two directorates. Under the Directorate of Supervision operates the department in charge of administrative measures and complaints procedures. The Department for administrative measures and complaints procedures is the specialized agency responsible for implementing, overseeing and enforcing consumer protection. The FSC is also responsible for collecting and analyzing complaints. These complaints are published in their annual report. During 2008 the FSC received 170 complaints. The consumers’ complaints that are not resolved by the pension insurance companies are taken care of by the department on administrative measures and complaints procedures. The decisions of the FSC are binding on the insurers if there is a clear breach of the SIC. On all other cases the FSC can only issue a recommendation or refer to the court. The consumer always has the right to go to court if unsatisfied with the resolution of the FSC. b. The Consumer Protection Act (as amended in November 2008) defines the role of the Consumer Protection Commission (CPC) as the agency with the mandate to protect the fundamental consumer rights established in article 1 of the Act. The CPC focuses on pension complaints, unfair contractual terms and until recently, misleading advertisement –this responsibility was transferred to the Commission for the Protection of Competition in 2008. In practice, the CPC transfers to the FSC all complaints received about the pension industry. A board of trustees, consisting of members representing the participants of the pension fund, must be formed as required by the SIC in Article 155. The Board of Trustees represents the interests of the persons insured in the funds. This board meets on a quarterly basis and acts as an advisor to the pension company to discuss all aspects relevant to the proper operation of the fund, consumer’s complaints or court processes, and


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other topics related to the fund. c. The Consumer Protection Act defines the creation of consumer associations in article 167. There is limited funding through State subsidies (annually 25,000 Euros) and additional funds of the Ministry of Economy and Energy. To qualify for funding, under Article 168 of the CPA, consumer associations have to be exclusive, independent and registered as non-profit organizations (Consumer Protection Act, article 168). To be considered as representative, consumer associations should take effective public action for protection of consumer interests, and have offices in at least one third of the regions in Bulgaria (article 170).

Recommendation a. No recommendation. b. There should be an institution that collects information on complaints from the entire financial sector in a centralized database. A stronger role of the CPC together with the development of the required resources and infrastructure on pension complaints should be evaluated. The CPC could establish a specialized financial services department that is in charge of this database among other functions related to consumer protection. This department could later be transformed into a separate financial sector ombudsman. A centralized complaints database would allow the consumer protection agency (CPC or ombudsman) coordinate activities with the financial supervisors, especially if systematic problems are detected in the entire financial sector. A less preferred option would be the creation of a centralized directorate within the FSC for consumer complaints and consumer protection issues regarding all the financial segments supervised by the FSC, and consequently the transfer of responsibilities from the CPC to the FSC for those financial segments. However, as the pensions sector grows, the level of inquiries, complaints and disputes to be received by the FSC could be difficult to handle. c. The funding for consumer associations should be increased for them to play a more active role in financial consumer protection.

Good Practice A.2 Other Institutional Arrangements a. The judicial system must provide credibility to the enforcement of the

rules on consumer protection. b. The media and consumer associations ought to play an active role in

promoting consumer protection.

Description a. The 2nd and 3rd pillar activity is highly regulated. Violations of regulations are monitored and enforced by the FSC. The SIC (article 344) grants the FSC the authority to apply coercive administrative measures to the pension companies and their management. In severe cases these measures can include license revocation or removal of a person from a managerial function. b. The NGO’s involvement in the pension area is not strong, probably due to the need for specialized technical expertise and the lack of financial resources. The financial crisis with its negative financial impact on the funds has attracted the attention of the Press and strong coverage is present


Good Practice A.3 Codes of Conduct for Pension Entities a. There should be a principles-based code of conduct for pension entities

that is devised in consultation with the industry and relevant consumer protection associations, and is monitored and enforced as a last resort by a statutory agency.

b. Pension entities should publicize the statutory code to the general public through appropriate means.

c. The statutory code should be limited to good business conduct principles. It should be augmented by voluntary codes on matters specific to the product or channel concerned.


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d. 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.

Description The Bulgarian Association of Supplementary Pension Security Companies (BASPSC) has established a code of ethics. Currently all pension insurance companies are members of the Association and as members shall abide by the code of ethics.

Recommendation The BASPSC should ensure that all its members comply with the code of ethics and provide consumers with easy access to the code. The FSC should require that every pension insurance company abide by a code of conduct or code of ethics, and should monitor whether the insurer complies with the code. Consumer associations should also be encouraged to monitor the compliance with the code and highlight cases where insurers fail to comply.

SECTION B


Good Practice B.1 General Practices a. There should be disclosure principles that cover the consumer’s

relationship with the pension entity in all three stages of such relationships: pre-sale, point of sale, and post-sale.

b. There should be clear rules on solicitation and issuance of pension products.

c. The information available and provided to the consumer should clearly inform the consumer of the choice of accounts, products and services.

d. The pension entity should be legally responsible for all statements made in marketing and sales materials related to their products.

Description a-b. The SIC (article 237) contains detailed provisions on the information that an insurer should provide the consumer before selling a pension product and while the contract is in force. The information includes fees and deductions, methods and procedures for payment, and termination provisions. c. Currently there is only one type of pension fund that a pension entity can provide to the consumer, which removes any choice. d. The CPC indicates that the pension insurance company is ultimately responsible for the sales and marketing materials. The SIC does not have an explicit provision on this liability.

Recommendation a-b. No recommendation. c. In the future, when multi funds are introduced, regulations regarding the choice of funds should be included d. The SIC should explicitly state the legal responsibility of the pension insurance companies about the sales and marketing material.

Good Practice B.2 Advertising and Sales Materials a. Pension entities should ensure that their advertising and sales materials

and procedures do not mislead the customers. b. All marketing and sales materials should be easy to read and understand

by the average person.

Description There are provisions about advertising and sales materials in the SIC (article 123) that prohibit the advertisement of non-existing products or services, as well as the presentation of future returns on any pension fund’s sales material and concealed or vaguely formulated material facts. According to article 31 of the Requirements regarding the advertisement and written information materials, approved by the Deputy Chairperson of the FSC, the internal control unit of the pension insurance company is obliged to supervise all advertisement and information materials of the company. Before publication, each material must be signed by


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the head of the internal control unit and the executive director of the company. Disclosure of negative returns is not required. The disclosure of the volatility of the funds offered is not required.

Recommendation Disclosure on the possibility of negative yields is recommended. Disclosure of the volatility in understandable terms for the consumers is recommended.

Good Practice B.3 Key Facts Document A Key Facts Document should be presented by the pension entity before the employee signs a contract, disclosing the key factors of the pension scheme and its services.

Description Article 237 of the SIC includes detailed provisions on the key information that should be provided to the consumer at the moment of signature, such as fees and deductions, methods and procedures for payment, and termination provisions. However, there is no standardized format that would provide the key facts of the pension product to the consumers.

Recommendation The BASPSC should prepare Key Facts Statements for basic pension products in formats that are easy to read and easy to understand for the average consumer, and that allow the consumer compare offers by different providers. The FSC should review these formats and the consumer associations should comment on them. The FSC should also publish on its webpage a description of the meaning of each of the main terms used in the Key Facts Statements to help consumers make an educated decision when comparing products.

Good Practice B.4 Special Disclosures a. Pension entities should disclose information about the products they

offer including investment options, risks and benefits, fees and charges, restrictions on transfers, fraud protection over accounts, and fees on the closure of an account.

b. Clients should also be provided with meaningful, written information on essential terms of the agreement with the pension entity.

c. The consumer should be notified of planned fee changes within a reasonable period of time prior to the date of change.

d. Pension entities should inform the consumer up-front with the nature of any guarantee arrangements covering the pension products.

e. Customers should be informed up-front on the time, manner and process of disputing information on statements and transactions.

Description a. The SIC requires extensive disclosure of investment options, risks and benefits, fees and charges, restrictions on transfers, fraud protection over accounts, and fees on the closure of an account. The SIC also prohibits the presentation of future returns on any pension funds sales material. Disclosure of possible losses of the principal is not required. Neither the estimated nor the historical amount of volatility of the funds offered is required to be presented. b. The information that is required by the SIC is provided in a meaningful way on an annual basis. A daily valuation of the funds is available on the web page of the pension company and the association. c. Fee changes have to be approved by the FSC. The SIC has put caps on those fees. On the 2nd pillar the industry is charging the maximum amount allowed and on the 3rd pillar different fees are being charged. These administrative fees are relatively high compared to similar systems throughout the world. Only Turkey and the Czech Republic have higher administrative fees. d. There is an average market return guarantee of the pension funds for the 2nd pillar.


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e. Currently there is no provision in the SIC for providing information and setting up a dispute handling procedure. Some companies however have established such a procedure.

Recommendation a. The FSC should require disclosure of the following key facts of the funds in clear, simple language :

There is no guarantee of return and the consumer could even lose the principal; The amount of fund volatility as compared to the market average.

b. The daily valuation of the 2nd pillar pension funds for the consumer has limited value as the availability of the funds is restricted for several years. A longer period valuation would be more appropriate. The 3rd pillar valuation should include the tax penalty if applicable. c. The current administrative fee charged should be lowered to be in alignment with international levels. Further, to encourage competition, the switching of funds should be permitted on an annual basis free of charge. d. The word “guarantee”, when referring to providing an average market return guarantee, should be avoided to prevent misinterpretations leading to the wrong understanding of a minimum return guarantee. e. The SIC should require, from pension insurance companies, the establishment of a complaints handling procedure.

Good Practice B.5 Professional Competence Marketing personnel and officers selling and approving transactions should have sufficient qualifications and competence, depending on the complexities of the products they sell.

Description The SIC does not require agents to be trained, however some companies do offer training programs for their agents. The draft amendments to the SIC prepared by the FSC include provisions on training requirements for agents. The liability of agents is not stated in the SIC.

Recommendation Training of the agents should be required by the SIC. The FSC should suggest or approve the syllabus. Pension insurance companies should be responsible for the liability of their agents during the sales activity and it should be documented in writing.

Good Practice B.6 Know Your Customer Pension entities should examine important characteristics of the customer such as their age and financial position before recommending a particular pension product.

Description The 2nd and 3rd pillar pensions currently offer only one pension fund and thus do not examine a customer's characteristics before making a recommendation. The FSC and the BASPSC have prepared a draft law for the amendment of the SIC, which introduces multiple funds.

Recommendation Multiple funds should be introduced as the pension system develops further, thus offering choices for the customers within the same pension company. The ability to choose should be encouraged but the customer should be guided and protected from uneducated choices. Depending on the life cycle of the pension system participants, a default allocation of the funds should be introduced. The participant however would still have the choice to opt out of the default allocation, with the exception of the last 5 years before retirement and only for the 2nd pillar. Considering the universal character and objectives of the 2nd pillar to supplement basic pension income, it is recommended that 5 years before retirement age a mandatory allocation of the funds to a “risk free” fund should be mandated.

Good Practice B.7 Contracts


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There should be consistent contracts for pension products and the contents of a contract should be read by the customer or explained to the customer before it is signed.

Description Contracts are tightly regulated by the SIC, leaving limited space for legal variations. Since 2004 the FSC operates a call centre to answer questions related to contracts in the 2nd and 3rd pillar.


Good Practice B.8 Cooling-off Period There should be a reasonable cooling-off period associated with any voluntary pension product.

Description The current products in the market do not require a cooling-off period.

Recommendation For the selection of the pay-out benefit, a cooling-off period should be considered as a means to provide a participant with additional flexibility. There should also be an evaluation of the effects of this practice on investment decisions.

SECTION C


Good Practice C.1 a. There should be a timely delivery of periodic statements and alerts pertaining to each account, at a frequency and in the form agreed between the customer and pension entity.

b. Customers should receive a regular streamlined statement of their account that provides comprehensive details of account activity, in an easy-to-read format, to make reconciliation easy for the customer.

c. Customers should have a means to dispute the accuracy of the transactions recorded in the statement within a stipulated period of time.

d. When customers sign up for paperless statements, the pension entity should ensure that the consumer is able to read and understand the online statements.

Description a. The SIC requires that statements are offered to the customer on an annual basis, free of charge. Customers also have the right to request additional statements at any time. and have internet access to check the valuation of their funds on a daily basis. b. The FSC requires a streamlined statement that includes, in an easy to-read format, the main parameters of the pension fund. The FSC also requires that net returns be reported but does not recommend or require that risk-adjusted returns be disclosed. c. The SIC does not require a pension company to establish a procedure to dispute the accuracy of a statement. Some companies however have established such a procedure and can respond to inquiries within 20 days. d. The SIC establishes a requirement to provide the customer with paper statements. In addition, the webpage of pension insurance companies provide access to further information on the pension funds.

Recommendation a. Statements should be produced and sent to the pension participants on a quarterly basis. The use of the internet should allow participants at any time to obtain a printout of their last quarterly statement. b. The FSC should recommend that customer statements include an estimate of risk-adjusted returns of the investments. c. The SIC should require the pension insurance companies to establish an easy procedure to dispute the accuracy of statements.


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d. No recommendation.

SECTION D


Good Practice D.1 Confidentiality and Security of Customers’ Information Customers of pension entities have a right to expect that their financial activities will be private from federal government scrutiny and anyone else. The law should require pension entities to ensure that they protect the confidentiality and security of 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.

Description The social and universal characteristics of the 2nd and 3rd pillar pensions require that pension companies maintain the same strict security provisions on safeguarding the data of the participants as the social security or internal revenue institutes. There is a requirement that a proper information system be used as well as an appropriate IT platform, and proper procedures in handling data.


Good Practice D.2

Sharing Customer’s Information a. Pension entities should inform the consumer of third-party dealings

that require sharing customers’ information. b. Pension entities should explain how they use and share customers

personal information Pension entities should be obliged not to sell or share account or personal information to outside companies that use the information only for telemarketing or direct mail marketing.

c. The law should allow a customer to stop or "opt out" of certain information sharing and the pension entities should inform the customers of their options.

d. The law should prohibit the disclosure of customers’ information by third parties.

Description Article 123h of the SIC states that pension companies, their sales agents and other individuals authorized by them shall not provide third parties with information they have regarding insured persons, pensioners, their survivors and insurers, with the exception of cases regulated by law. Pension companies have included the option to allow the company to share data among affiliate companies for the purpose of providing additional services like insurance. This option has to be explicitly chosen by the participant.


Good Practice D.3 Permitted Disclosures a. The law should state specific procedures and exceptions concerning the

release of customer financial records to government authorities. b. The law should provide for penalties for breach of secrecy laws.

Description See Good Practice D.1


SECTON E


Good Practice E.1 Internal Dispute Settlement a. An internal avenue for claim and dispute resolution practices within the

pension entity should be required by the supervisory agency. b. Pension entities should provide designated employees available to

consumers for inquiries and complaints. c. Pension entities should inform their customers of the internal procedures


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on dispute resolution. d. The regulator or supervisor should provide oversight on whether pension

entities comply with their internal procedures on consumer protection rules.

Description The SIC does not require the pension company to establish a procedure on dispute handling and resolution. Some companies have established such a procedure and can respond to inquiries within 20 days.

Recommendation The FSC should require the pension company to establish a procedure on dispute handling and resolution. This could follow the model of the provisions established in the Insurance Code.

Good Practice E.2 Formal Dispute Settlement Mechanisms A system should be in place that allows consumers to seek third-party recourse in the event that they cannot resolve an issue with the pension entity.

Description Consumer complaints that are not resolved by the pension insurance companies are treated by the Department of administrative measures and procedural complaints of the FSC. The decisions of the FSC are binding for the insurers if there is a clear breach of the SIC. On all other cases the FSC can only issue a recommendation or refer to the court. The consumer always has the right to go to court if unsatisfied with the resolution of the FSC. See also Good Practice A.1.

Recommendation The introduction of a financial ombudsman or an equivalent fast and effective recourse mechanism to resolve disputes should be considered. This will be particularly important when the pay out phase starts, since it is precisely in the selection of the pay out benefit that consumer complaints and disputes tend to arise. Another option would be to establish a specialized financial services department within the CPC that deals with complaints and other functions related to consumer protection. This department could later be transformed into an ombudsman. A less preferred option would be the creation of a centralized directorate within the FSC for consumer complaints and consumer protection issues regarding all the financial segments supervised by the FSC, and consequently the responsibilities on consumer protection for those financial segments should be transferred from the CPC to the FSC. For additional recommendations on dispute resolution mechanisms, see Volume I.

SECTION F

GUARANTEE SCHEMES AND SAFETY PROVISIONS

Good Practice F.1 Guarantee and compensation schemes are less common in the pensions sector than in banking and insurance. There are more likely to be broader fiduciary duties and custodian arrangements to ensure the safety of assets.

a. There should be a basic requirement in the law that pension entities should seek to safeguard pension fund assets.

b. There should be adequate depository or custodian arrangements in place to ensure that assets are safeguarded.

Description a. Article 126 of the SIC requires that the assets of the pension fund be managed with the care of a prudent person in observance of the principles of reliability, liquidity, profitability and diversification with the best interest of the insured person(s) in mind. b. As part of the licensing process to operate as a pension insurance company, the SIC requires that the pension insurance company sign a contract with a custodian bank to ensure that the assets are safeguarded. The terms of the contract are to be presented to the FSC to supervise compliance with the requirements of such a contract as stated in article 123b of the SIC. Article 123a of the SIC requires that the custodian bank be regulated by the BNB and fully licensed to perform the custodian activities as indicated in the custodian contract. Article 123 of the SIC requires that the assets of the funds be segregated from the pension


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company’s assets and kept in a custodian bank.

Recommendation No recommendation. SECTION G


Good Practice G.1 Financial Education through the Media a. Press and broadcast media should be encouraged to actively cover

issues related to retail financial products. b. Regulators and/or industry associations should provide sufficient

information to the press and broadcast media to facilitate the analysis of issues related to financial products and services.

Description During the introduction of the 2nd and 3rd pillar system, a great deal of information was provided to the public. However the public awareness and knowledge is limited according to several surveys carried out by the pension insurance companies and the BASPSC. The average value of an individual 2nd pillar account, seven years after the introduction of the system, is still small (approximately 250 Euro). Also, the payout phase or the time when participants will gain access to the funds will only begin in 2018. These two factors might explain the lack of interest by the population in getting more involved with the system. However, as the pension funds approach the payout phase, greater involvement of the press and the participants is expected. The recent financial crisis, which resulted in some funds in the third pillar losing as much as 50 percent during 2008, has drawn the attention of participants, the FSC and the media. The complaints received by pension insurance companies and the FSC indicated a lack of awareness of possible negative returns on investments in the fund as well as of the risk and volatility elements of such investments. The lack of knowledge is particularly high among older participants. The FSC and the industry are responding with additional disclosure requirements on the sales and reporting materials. There is also important involvement from the media.

Recommendation Full disclosure of the risk elements inherent in the pension funds is necessary. A focus on education concerning the long term aspect of investments and pension objectives is necessary. A strong warning to the public using the 3rd pillar as an investment tool rather than as a source of saving for their retirement should be issued.

Good Practice G.2 Information Resources for Consumers a. The government and regulators should devise, publish and distribute

information resources for consumers that seek to improve consumer awareness and knowledge.

b. Public education on consumer awareness in the area of pensions by non governmental organizations should be encouraged.

c. The government should develop a strategy for including financial education as part of the general education curriculum.

Description The government, the FSC, the industry, NGOs and the press are all in agreement that the public needs to be educated in financial matters. The current level of financial knowledge and awareness in the public is judged by all stakeholders to be insufficient. The elaboration of informational material on pensions is stipulated in the FSC strategy and it is planned to be developed by the end of 2009.

Recommendation a. Several studies have shown that the most effective way to educate consumers is when they are interested in purchasing a particular product. For instance, when reaching retirement age, people are interested in retirement products, thus training material should be readily available for these occasions. b. The FSC and the industry should provide educational material on pensions c. To better determine the current needs of financial education and to identify the segments of the population that require particular attention, a baseline survey assessment on financial capability should be conducted.

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Annex 1: Legal and Institutional Framework

Key Laws Code of Civil Procedures Commercial Act Law on Obligations and Contracts (1950, as last amended in 1996) Consumer Protection Act (effective 10 June 2006, as last amended in 2008) Law on Personal Data Protection (effective 1 January 2002, as last amended in 2006) Law on Consumer Credit (effective 1 October 2006, as last amended in 2008) Law on Credit Institutions (effective 1 January 2007, as last amended in 2009) Law on the Bulgarian National Bank (effective 5 June 1997, as last amended in 2007) Law on Distance Marketing of Financial Services (effective 1 January 2007) Law on Funds Transfers, Electronic Payment Instruments and Payment Systems (effective 8 October 2005, as last amended in 2008) Law on Bank Deposit Guaranty (effective 15 April 1998, as last amended in November 2008) Law on Bank Bankruptcy Law against Market Abuse with Financial Instruments Law on the Measures against Money Laundering Cooperatives Act (1999) Markets in Financial Instruments Act (2007) Financial Supervision Commission Act (effective 01 March 2003, as last amended in 23 November 2007) Law on the Public Offering of Securities (1999, as amended) Insurance Code (effective 01 January 2006, as last amended in 2007) Social Insurance Code (effective 01 January 2000, as last amended in December 2008) Ordinance No. 3 on Funds Transfers and Payment Systems (29 September 2005, as last amended in 2008) Ordinance No. 16 on Electronic Payment Instruments (effective 29 September 2005) Ordinance No. 22 on the Central Credit Register of Banks (effective 16 July 1998, as last amended in 2007) 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. 25 on the Regulation of Activities of Investment Companies and Common Funds Ordinance No. 26 on the Requirements for the Activities of Management Companies Ordinance No. 38 on the Requirements for the Activities of Investment Intermediaries Ordinance No. 21 on the Own Funds and Solvency Margin of Insurers, Reinsurers and Health Insurance Companies (effective 16 March 2005) Ordinance No. 24 on the Compulsory Insurance Pursuant to Items 1 and 2 of Article 249 of the Insurance Code and on the Procedure of Settlement of Claims for Compensation of Damages Caused to Motor Vehicles (effective 08 March 2006) Ordinance No. 3 on the way and manner for switching participation and transfer of the accumulated resources of an insured person from one supplementary pension fund to another respective fund, managed by another pension insurance company (effective 01 January 2004, as last amended in 2006) Ordinance No. 33 on Individual Applications for Participation in a Supplementary Compulsory Pension Insurance Fund (effective 19 September 2006)

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Ordinance on the Boards of Trustees of Supplementary Mandatory Pension Funds and the Advisory Boards of Supplementary Voluntary Pension Funds (effective 01 March 2005) Institutions Under the Consumer Protection Act, the Ministry of Economy and Energy is the main administrative body, responsible for carrying out and coordinating state policy for consumer protection and integrating consumer concerns into the other sectoral and horizontal policies. The Ministry of Economy and Energy also conducts the work of the National Council for Consumer Protection and co-ordinates the activities of other administrative bodies having impact on consumer protection. The Commission on Consumer Protection (CPC) has the general responsibility for protecting consumers and investors from unfair and deceptive business practices, according to the Consumer Protection Act. It is also responsible for enforcement of the Law on Consumer Credit. The CPC was also responsible for enforcing provisions on misleading and unauthorized comparative advertising regarding financial and other services until December 2008, where this responsibility was transferred to the Commission for the Protection of Competition. In addition, the CPC administers and organizes the conciliation committees for out-of-court settlement of consumer disputes, including for financial services. 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 Consumer Protection Act also grants local authorities responsibility to provide information to consumers regarding the methods of sale and consumer guarantees and claims for compensation. However municipalities are not active in consumer protection in financial services. The Commission for the Protection of Competition has been granted responsibilities to apply the rules concerning misleading and comparative advertising for all institutions, including financial entities. These new responsibilities are in force since December 2008, according to the new Law on Protection of Competition. The Commission for Personal Data Protection ensures maintenance of the privacy of personal information. The Bulgarian National Bank (BNB) is in charge of regulating and supervising banks. According to the last amendments of the Law on Credit Institutions, non-bank credit institutions are required to register with BNB and are subject to its supervision. The BNB has developed and maintained the Central Credit Register, which includes data on customers’ loans with banks. According to the last amendments of the Law on Credit Institutions, the Register has expanded its scope to include data from non-bank credit institutions. The Financial Supervision Commission supervises the securities markets as well as insurance and private pensions. The Bulgarian Deposit Insurance Fund is a legal entity established under the Law on Bank Deposit Guaranty. In addition to being in charge of the deposit insurance system, the Fund is responsible for protecting creditors' interests and controlling trustees' activities under the Law on Bank Bankruptcy.

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The Bulgarian Stock Exchange in Sofia is the registered stock exchange in Bulgaria. The Central Depository, A. D. acts as the independent central depository and sets regulations for professional participants on record-keeping, accounting etc. Regarding professional associations, the Association of Banks in Bulgaria (ABB) represents the banks, the Bulgarian Association of Leasing (BAL) covers the leasing companies. The Bulgarian Association of Cooperative Credit Organizations is representative of cooperative financial organizations and international organizations for microcredit development, and is also a self-regulatory organization. There are two main professional associations in the securities markets, the Bulgarian Association of Licensed Investment Brokers (BALIP) and the Bulgarian Association of Asset Management Companies (BAAMC). The Association of Bulgarian Insurers (ABI) represents the insurance companies and the Bulgarian Association of Supplementary Pension Security Companies (BASPSC) works for the private pension companies. Bulgaria has ten consumer associations which receive funding from the State and the Ministry of Economy and Energy. Two consumer associations support the interests of financial consumers, the Federation of Consumers and the Bulgarian National Consumer Association, but both are limited in the extent of their activity regarding financial services and products for Bulgarian consumers. A European Consumer Centre opened in Bulgaria in February 2008 as part of the European Consumer Centres Network (ECC-Net) but it does not focus on financial services. As of November 2008, no Bulgarian institution was a member of FIN-NET, the network of alternative dispute resolution schemes of the EU Member States (plus Iceland, Liechtenstein and Norway) used for disputes between financial institutions and consumers.

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Annex 2: EU Directives on Consumer Protection in Financial Services and Applicable Bulgarian Legislation CELEX Reference

EU Directive Supervisory Agency

Bulgarian Law

3 2008 L 0048 Directive on Consumer Credit, 2008/48/EC, repealing Directive 87/102/EEC CPC Law on Consumer Credit 3 2006 L 0048 Directive on Capital Requirements for Credit Institutions 2006/48/EC BNB Law on Credit Institutions 3 1993 L 0013 Directive on Unfair Terms in Consumer Contracts, 1993/13/EEC CPC Law on Consumer Protection

Code of Civil Procedure 3 2005 L 0029 Directive concerning Unfair Business-to-Consumer Commercial Practices in

the Internal Market, 2005/29/EC CPC Law on Consumer Protection

3 1998 L 0027 Directive on Injunctions for the Protection of Consumer Interests, 1998/27/EC

CPC Law on Consumer Protection, Code of Civil Procedure

3 1994 L 0019 Directive on Deposit Guarantee Schemes, 1994/19/EC BNB Bank Deposit Guaranty Law 3 1997 L 0009 Directive on Investor Compensation Schemes, 1997/9/EC FSC The Public Offering of Securities Act 3 2007 L 0064 Directive on Payment Services, 2007/64/EC BNB Law on Funds Transfers, Electronic Payment Instruments and

Payment Systems 3 1995 L 0046 Directive on the Protection of Individuals with regard to the Processing of

Personal Data, 1995/46/EC Commission for

Personal Data Protection

Law for Protection of Personal Data

3 1997 L 0007 Directive on Protection of Consumers in Respect of Distance Contracts, 1997/7/EEC

CPC Law on Consumer Protection Law on Distance Marketing of Financial Services Code of Civil Procedure

3 2002 L 0065 Directive on the Distance Marketing of Financial Services, 2002/65/EC CPC Law on Distance Marketing of Financial Services 3 2006 L 0114 Directive on Misleading and Comparative Advertising, 2006/114/EEC CPC Law on Consumer Protection 3 1985 L 0611 Directive on UCITS 1985/611/EEC, as amended FSC The Public Offering of Securities Act 3 2004 L 0109 Directive on Transparency, 2004/109/EC FSC The Public Offering of Securities Act

Measures against Market Abuse with Financial Instruments 3 2004 L 0072 Directive on Market Abuse, 2004/72/EC FSC Measures against Market Abuse with Financial Instruments 3 2004 L 0039 Directive on Markets in Financial Instruments, 2004/39/EC (MiFID) FSC Markets in Financial Instruments Act

The Public Offering of Securities Act Measures against Market Abuse with Financial Instruments Ordinance no. 38 on requirements for activities of investment intermediaries

3 2002 L 0083 3 1992 L 0049

Directive on Life Insurance, 2002/83/EC Directive on Non-Life Insurance, 1992/49/EEC

FSC Insurance Code

3 2002 L 0092 Directive on Insurance Mediation 2002/92/EC FSC Insurance Code