Consumers must be made aware of implications of signing up for mortgages, loans and other financial products, and the pitfalls of defaulting on payments, says the Organisation for Economic Co-Operation and Development (OECD).
The organisation says that tough guidelines are necessary to avoid a repeat of the subprime mortgage crisis and the ensuing financial problems that proved the catalyst for a wide reaching recession.
In its 'Good practices on financial education and awareness relating to credit' report, the OECD recommends that governments make it a legal requirement for financial services to provide clear language in all mortgage agreements. Furthermore, these descriptions should be comparable across providers.
"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," said André Laboul, head of the Financial Affairs Division at the OECD.
Under the recommendations, lenders would be required to display a summary of key terms and conditions of a loan in a prominent position, while also explaining the ramifications of not keeping to the agreed payment schedule.
Important details such as the amount of repayments, any fees or charges and the total amount payable should be made clear before any financial product is bought by a consumer.
The Government should also help consumers to better understand their financial rights and responsibilities, as well as clamping down in fraud and unethical practices, the OECD said.
"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 added.
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