Financial services companies must make sure their customers understand what they are letting themselves in for when they sign up for mortgages, consumer loans and other products, under new OECD guidelines, entitled Good practices on financial education and awareness relating to credit, which are designed to avoid a repeat of the sub-prime mortgage crisis and ensuing credit crunch that sent the world economy into recession.

"Even in the absence of the crisis, developments in financial markets, demographics, economic and policy changes all point to the importance of financial education and enhanced financial consumer protection,” said André Laboul, Head of the Financial Affairs Division of the OECD.

“Surveys of financial literacy continue to show that consumers in virtually every country lack adequate financial backgrounds or understanding and that they underestimate their needs for education in the financial area."

The guidelines recommend that governments should make it a legal obligation for financial services to provide clear language in all mortgage agreements, and that these are standard and comparable across all mortgage providers. 

Lenders should, for instance, be required to display prominently a summary of key terms and conditions of a loan, and explain the implications of missing a payment deadline. This should include: the loan amount and interest rate; any fee and charge (including broker fees); the number of installments; the amount of payments and when they are due; the total amount repayable and the total cost of credit.

Lenders should also be made legally responsible for checking customers' credit needs and whether they will be able to meet their payments.

Governments, meanwhile, should do their bit to better protect consumers and help them understand credit and other complex financial products. This means informing people of their rights and responsibilities, working to clamp down on fraud and unethical practices and promoting fair pricing of credit products through the development of independent credit bureaus.

"The recommendations address a central issue that has been largely and surprisingly overlooked in discussions on the resolution to the crisis, namely the protection and empowerment of consumers in an increasingly complex and volatile financial environment," Mr Laboul said.

Visit www.oecd.org/daf/financialeducation for more on the OECD's work on financial education.

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