Banque du Liban OECD BDL Conference on

Banque du Liban OECD / BDL Conference on Financial Education The Role of Government & Central Bank in the Financial Education Process Dr Amine Awad Executive Director, Lebanon’s Banking Control Commission Member of the Higher Banking Council Coordinator of Basel II Implementation and Enhancement Task Force Beirut October 21 st, 2010

Outline - Introduction - The Supervisory Preventive Measures for “Consumer Protection” - An Example of Educational Document “The Consumer’s Advocate” - BCC Guide to Mutual Funds 2

Introduction U. S. On June 30, 2010, the U. S. House of Representatives passed the “Dodd Frank Wall Street Reform and Consumer Protection Act”. On July 15, 2010, the U. S. Senate passed this Act. In August 2010, President Obama signed this Act. This legislation is a sweeping reaction to perceived regulatory failings revealed by the most severe financial crisis since the Great Depression. The Legislation is intended to restructure significantly the regulatory framework of the U. S. Financial System. A significant portion of this Act is devoted to measures specifically intended to protect Consumers and Investors. 3

Introduction (Cont. ) France - In France, the Governement put Mr Jacques Delmas – Marsalet in charge of making a survey on the marketing process of Financial Instruments (including Insurance programs); he issued a report, which was adopted by the “Comité Consultatif du Secteur Financier – CCSF” in May 2006; this new regulation complement the previous regulation of April 2004. The report focus on the following major points: * Ensure more relevant information on Financial Products and Services (including: fees, risks, stress scenarios, …) * Provide the right advice * Educate the “Financial Instruments” potential clients 4 -

Introduction (Cont. ) Lebanon In Lebanon, the B. D. L. published a regulation “Basic Circular No 124”, on May 17, 2010 entitled: “Transparency in the Loan Processes” This circular concerns mainly the relationship between the Retail Customers and their Banks or Financial Institutions. The three parts of this new regulation cover: * The general framework of the Advertisement * The legal framework of the Agreement * The minimum information to be included in the Statement of account 5

The Supervisory Preventive Measures for “Consumer Protection” In addition to its role of supervision of the procedures and processes in Banks and Financial Institutions, (As per Article 26 of the BDL Circular), the Banking Control Commission (B. C. C. ) is in the process of issuing a series of “Brochures”, each one related to a category of financial transactions, that help the Customers of Banks and F. I’s to understand the risks underlying these operations, in order to make the right choice, thus avoiding unnecessary losses and legal conflicts with their Bankers. These brochures, once validated, will be published (in the 3 languages: Arabic, French and English) and distributed complimentary at the counters of Banks and F. I. ’s 6

An Example of Educational Document How to explain to the Customers of Banks and F. I. ’s the risks underlying “Mutual Funds”. 7

The Consumer’s Advocate Guide To Mutual Funds 8

BCC Guide to Mutual Funds What is a Mutual Fund ? 9

What is a Mutual Fund? A Mutual Fund is a company that pools money from investors and makes investment in cash and securities such as stocks and bonds. Investors who buy shares of a Mutual Fund are shareholders. Their primary financial interest would be “the return of investment” ( i. e. principal and return on investment) dividend and interest. Mutual Funds are usually divided into three types: * Stocks (Equity) * Bonds (Fixed Income) * Money Market (Cash and Quasi – Cash Placements) * Hybrid Funds, that invest in both stocks and bonds (Balanced Funds). 10

BCC Guide to Mutual Funds Why invest in Mutual Funds? Diversification Professional Management Variety Liquidity Low Fees 11

BCC Guide to Mutual Funds What are the different types of Mutual Funds? Equity Funds Money Market Funds Bond Funds Balanced Funds Guaranteed or Protected Funds 12

BCC Guide to Mutual Funds Who should invest in Mutual Funds? Almost everybody can, but you should know the answers to some key questions to decide in which category of Risk / Return you fit 13

Who should invest in Mutual Funds? Almost everybody can, but you should know the answers to some key questions to decide in which category you fit: 1 - What type of investor you are? A- Consumer B- Investor C- Sophisticated Investor 2 - What is your risk tolerance or appetite? A- Low B- Moderate C- High 3 - Are you ready to accept loss? A- No B- Slightly C- Yes 14

Who should invest in Mutual Funds? (Cont. ) 4 - Do you borrow to invest? A- No B- Maybe C- Yes 5 - What is your income level? A- Low B- Moderate C- High 6 - What is your personal status? A- >4 dependents B- Up to 4 dependents C- Single 7 - How old are you? A- >50 Years B-35 – 50 Years C- <35 Years 8 - Do you believe in luck? A- Never B- Sometimes C- Always etc… Give 1 point to answer “A” , 2 points to answer “B” and 3 points to answer “C”. 15

Who should invest in Mutual Funds? (Cont. ) * Results: To which category of Risk/Return you belong? Points Risk / Return Less than 12 Low 13 to 17 Moderate More than 18 High 16

Risk/Return Very High Aggressive Growth Stock Funds High Growth Stock Funds Growth & Income Stock Moderate to High Balanced Funds Moderate to Low Long-term Bond Funds Short & Intermediate-term Low Bond Money Market Funds Very Low Objectives Max. Current Income & Protection of Capital High Current Income & Capital Growth High Capital Growth 17 Max. Capital Growth

BCC Guide to Mutual Funds What information you should consult? The Prospectus is the most valuable document that contains among other information the followings: Investment Objective Fees & Expenses Investment Strategy Past Performance Risk & Reward 18

BCC Guide to Mutual Funds Protect Yourself Do… Check for yourself that the fund is licensed by the Regulator (B. D. L. ) Ask as many questions as you want so you are satisfied, it’s your money! Make sure you will know which fund is right for you Read carefully the Prospectus 19

BCC Guide to Mutual Funds Protect Yourself DON’…T Sign any document before you have read it. Remember, Style was never a Substitute for Substance, so read it carefully Confuse information with advice. 20

BCC Guide to Mutual Funds The Banking Control Commission requires Banks and Financial Institutions (F. I. ’s) to provide the public with all available information needed in order to judge the best investment that suit each one of them. The regulation require Banks and F. I. ’s to be Honest, Competent and Financially Sound. The BCC does not guarantee or recommend any fund, firm or advisor or tell you whether a particular investment is right for you. 21

E – Mail: amawad@bccl. gov. lb 22