European Consumer Commissioner
DECO Seminar on Financial Services and Consumer Interest
Lisbon, 27 April 2009
It is my pleasure to be here with you in Lisbon today and to congratulate DECO on its 35 years of service to Portuguese consumers. In the past year, our citizens have been thrown headlong into a financial and economic crisis of very serious proportions.
We are currently faced with great challenges and a global economic paradigm shift. Previous established assumptions about the role of regulation, the transparency and accountability of markets, and the management of risk are being challenged. Europe is at the forefront of the response, with comprehensive and unprecedented efforts to overhaul the supervisory and regulatory architecture of financial markets.
To succeed, the next generation of retail financial services policies must not only fix businesses' problems, but must also tackle consumer markets. Because recovery in financial services will only fully take root when the reform of "Wall Street" is matched by the proper regulation of "Main Street".
As I have said many times, trust is the currency in the new service economy. But, in Financial Services, consumer trust is currently devalued and at an all-time low. By addressing consumer needs we can ensure that markets work for people, and are seen to do so.
But we must not confuse protection with protectionism. Well-functioning and open markets are still the best possible mechanism to deliver the best value to consumers. Low cost phones or low cost travel are testament that liberalized markets have delivered and continue to deliver. Healthy and dynamic financial markets enable ordinary people to lift up their eyes to a better future. To live in decent homes; to exercise real choices; to learn, to build and to grow.
But to deliver true value to consumers, markets must be made to abide by certain principles that preserve competition on the merits and protect consumers from deception and abuse. There are issues of concern in retail financial markets that in fact pre-date the crisis. They relate to the growing violation in the past decade of tried and tested golden principles of consumer policy: transparent information, enforceable fairness, comparability and choices and, very importantly, the regulation of risk.
Laws and principles are only as good as their enforcement. Enforcement means putting a clear and accountable body in charge of the detection of problems and the application of the law. For citizens, trust will be renewed not by what is said, but by what is done. Given that we are now dealing with peoples homes and savings, real outcomes, are what ultimately count.
Consumers now operate in a world that is more open, more online and more global. They also operate in markets that are increasingly complex and increasingly risky. Nowhere is this more apparent than in retail financial markets where informed choice is a difficult reality in a market with a bewildering array of complex products. These are sold in either an avalanche or a tiny trickle of information, without transparent pricing or fees, and often with little or inadequate advice.
It is normal that in dynamic and innovative markets, consumers bear some of the responsibility for the larger availability of choice. This is why education, and in our case at hand, financial education is, and will remain a key part of our policies. However, education is an essential but not sufficient response to this new reality.
Consumers should not be asked to bear all the possible risks attached to a transaction. Because they are often ill-prepared to assess and handle many of these risks, the result is markets that undermine consumer trust and produce less than optimal outcomes. In the market of goods, we already have well established principles of risk management. For instance, we do not allow consumers to incur the risk of being poisoned or electrocuted. Consumer protection rules forbid putting unsafe and toxic goods on the market. It is now time we start addressing the issue of high-risk services and practices that may not kill consumers but can cause them significant and unexpected economic damage – including the loss of their homes or savings.
Consumer Policy Principles
What are the established consumer policy principles that we must now transpose to the market of retail services?
First, European legislation already establishes that marketing must be fair, must not mislead and must not put undue pressure on the prospective customer.
Too often, commercial communications are based on a misrepresentation of the service and even of a misrepresentation by the trader of the consumer's true needs. In very competitive markets, attractive offers sometimes turn out to be a trap. The misselling of financial products at retail has cost citizens a fortune in the current crisis.
Second, consumers must have at the time of transaction complete and relevant information about the service they are getting and its likely true cost to them.
Information must be understandable to the consumer and it must include complete information on the cost of the service and of the risks attached to the service. The cost of expensive contingencies such as late payment, early reimbursement, the use of cashiers, or the change in market conditions must be highlighted.
Third, the commercial practices in the delivery of the service must be fair and transparent.
This includes ensuring that charges and fees are proportional to the cost of a service so that the true cost of service is not 'hidden' in obscure adjacent overcharges.
Fourth, consumers must have real choice.
Consumers must have the choice to switch to the services that are most interesting for them without being unduly locked in 'packages' or long term contracts. Choice also implies information that is tractable and comparable.
Finally, consumers should make choices within an acceptable spectrum of risk . Regulators have a responsibility to ensure that consumers understand the risk landscape and are not exposed to services or products that bring more risk than they can cope with.
Let me now detail how we are working to re-establish these basic consumer policy principles in retail financial markets.
Consumer Policy in Retail Financial Markets
The European Union is actively conducting a regulatory overview of financial markets and its supervision.
At retail level, it is proposing this month a Communication on Packaged Retail Investment Products that sets the roadmap to harmonize and improve the mandatory disclosures and sales practices for packaged retail investment products. The requirements will be applied horizontally to all forms of packaged retail investment products, eliminating loopholes and gaps. This is a very welcome initiative of my fellow Commissioner Charlie McCreevy.
Many citizens have lost substantial amounts of their savings and retirement nest eggs in the past year and a half. Although investments in financial markets come with the risk of a loss, it seems that many people had risk exposures that were much higher than they expected. Part of the problem is the possible inability by consumers to properly assess the information that they are given about their investment products. This is why the European Commission is working to harmonize pre-contractual information so that a single set of relevant and recognizable information is presented to consumers for a wide variety of products is important.
The information provided must include not only a description of the product and a true representation of its cost. It must also provide a fair and unambiguous indication of its risk. Many individual investors had their attention directed to information on the past performance of investment products. They haven now learnt the hard way that past performance is NOT a valid indicator of risk. The consumer must be given the really relevant information to find the product that best fits the personal needs.
This format for pre-contractual information will be put into practice for the first time when the Standard European Consumer Credit Information sheet attached to the new Consumer Credit Directive is implemented. I need not recall how difficult it was for the European Commission to obtain this most basic measure of consumer information but the uphill battle is illustrative of the pressures that we must be prepared to face when attempting to regulate retail financial sector.
I want to signal that I am particularly concerned about citizens having been misled to purchase investment products that were misrepresented to them or that were not suitable to their investment needs. Although there is already European legislation governing the advice to retail investors for certain investment products, it is unclear that the principles of this legislation have been followed and enforced. We must reinforce the requirements for independent and objective advice to retail investors and we must enforce the law.
The next Commission should take a long hard look at the commercial marketing of investment products to individual investors. I also invite you and other leading consumer organisations, to look into this issue and to operate as a watchdog against unfair commercial practices in the retail financial sector.
This brings us to Credit and mortgages, which have also turned out to be riskier enterprises than originally foreseen. One must not doubt the benefits of a financial market that provides access to credit to a large number of citizens. This access to finance is what makes our markets open, efficient and democratic. But here again, consumers have been exposed to types of mortgages with potential consequences that were not correctly evaluated. Interest rate risk and/or currency risk were in some cases grossly underestimated and possibly misrepresented to the consumer by the intermediary seller.
The Commission is planning to establish principles for responsible lending and borrowing. It will address the information to be provided to the individual lender, the responsibilities of the credit intermediates in terms of incentives and fees disclosure and the issue of objective and independent advice. As in the field of investment, we will work hard to impose the rules that are needed for consumers to be able to safely and confidently operate in this environment. The European Commission will host a public hearing on responsible lending and borrowing which will take place in July. The results will be made public in the autumn.
I would now like to mention an important point. I think more work needs to be done in the regulatory management of risk at retail level. In an attempt to limit the overall risk in the financial system, the European Commission is already examining the existing guarantee schemes in banking, securities and insurance with the purpose of reinforcing their funding and enlarging their scope. But debate is also needed on whether we need to cap the risks that are admissible on a market to individuals.
For instance, we currently allow people to effectively gamble with their retirement funds with a risk of enormous economic hardship. In some places, people are allowed to gamble with their homes. In the market of goods, we do not tolerate the possibility of extreme damage to consumers. We do not rely on the good faith of the traders and the alleged vigilance of consumers but require that a regulator guarantees a satisfactory degree of safety. Doesn't the regulator have similar responsibilities in the market of retail financial services? I believe we must limit the risk in retail financial markets and exclude certain 'toxic' credit products from its retail shelves.
The financial losses experienced by many European citizens are a dramatic expression of a system that was not sufficiently protecting consumers. But in fact the symptoms of malfunction were already present in the retail financial sector well before the crisis.
The retail finance sector inquiry by the European Commission already pointed a couple of years ago to an opaque structure of fees and questionable commercial practices such as the contractual tying of products. I had a survey made of banking fees through the websites of banking providers. Our contractors found in over two-thirds of cases that they were unable to disentangle the structure of bank tariffs in order to ascertain the true cost of a service. If experts are unable to understand the fee structure, what chance is there for the ordinary consumer?
The economic consequences of these practices are not as spectacular as the financial losses and hardship seen in the past year. But the negative consequences on trust and efficiency of small scale but pervasive abuse and overcharge should not be underestimated. I have instructed my services to examine this situation in-depth and I will publish a report over the summer on the pricing structures and commercial practices in retail banking. Consumers have the right not to be held up by their banks.
Exceptional times –exceptional measures?
In addition to these wider and deeper structural problems, we are currently facing exceptional issues. The number of consumers at risk of bankruptcy or of foreclosure is mounting. How best can Member States respond to these issues? Some banks have offered their clients "repayment holidays", postponing repayments for a given period of time. I would like to ask other European banks which have not yet taken such measures to consider appropriate moves in that direction. The European Commission, under the lead of my fellow Commissioner Charlie McCreevy, will contribute to establish best practices fro pre-foreclosure arrangements aimed at avoiding the necessity of foreclosure whenever possible.
I have laid out the principles that must govern consumer protection in retail financial markets and I have highlighted where decisive regulatory action in needed. But it is not enough to improve the regulation of retail financial services. To ensure it all works we must ensure that the regulations we have are enforced. For this we need the right regulatory oversight in place and a commitment by national regulators that they will step up their efforts to apply the law. A great deal of effort is going in to modernising the supervision of "Wall Street". I think a similar discussion is needed on the best way to supervise retail markets on "Main Street".
We can learn some lessons on how trust has previously been restored to consumer markets. In some particularly risky sectors such as food, we have separated the regulatory oversight of retail markets from the regulatory oversight of the producers. This has produced bodies that are accountable only to consumers and whose main job is to ensure that the interest of consumers is respected. This issue is being debated on both sides of the Atlantic. But I think as part of the wider debate for the future, we must consider whether such a regulatory model is needed in financial markets - with a single regulator in charge of supervising the sale to consumers of all retail financial products.
As for enforcement, the European Commission must work with our Member States to ensure the highest standards for enforcement. The next Commission should usefully explore a more effective oversight in the implementation of consumer law, for instance by strengthening the resources, scope and efficacy of the Consumer Protection Cooperation network. Ultimately national regulators need to be held accountable for persistent violations of Community consumer protection law.
The current financial crisis has exposed the extremely high level of risk that was taken by citizens in their financial dealings. Some of this risk was exceptional and unforeseeable. But some was easy to identify and might not have been properly communicated or understood by individual investors.
Although some risk and transaction complexity is inevitable with an increase in access and choice, some of it is the result of a lax application of basic consumer protection principles:
My particular job as EU Consumer Commissioner is to fight to ensure that in every debate on financial issues and regulatory processes moves forward at EU level the consumer's voice is fully heard.
There are 3 issues where, as Consumer Commissioner, I intend to work on as a priority.
First, I will continue to work closely with Charlie Mc Creevy to address the way investment products are designed, described and marketed to consumers in retail. I will also focus on ensuring that new proposals in relation to the sale of credit and mortgages meet the high standards of modern consumer policy. I intend to be very active in these two fundamental proposals for consumers.
Second, I intend to strengthen the strict rules and enforcement on the misselling of retail investment products. There are clear indications that the laws that are meant to protect consumers were insufficient and may have been repeatedly violated.
Third, I am already working on an in-depth study on at banking fees and charges to consumers which appear to be unfairly hitting consumers. I will publish a report this summer.
Finally, on safety and risk management, we must use the solid experience of consumer policy to urgently launch the following debates:
First, we need to start with regulators a new debate on the correct balance of risk and reward on Main Street. It seems that in recent years, risk has been significantly outsourced to unwary consumers. The question is what amount of risk and toxic products are we willing to tolerate in retail financial market?
Second, we need a serious discussion on the regulatory oversight structure that is needed to generate accountability to consumers and to ensure consumer protection principles are consistently implemented across retail markets.
It is clear that the return to confidence will not happen without consumers. Retail financial service providers will need to work as hard to earn the trust of consumers in the future, as they have done to win their custom in the past. This will mean tackling a culture of deliberate complexity, excessive pass-on of risk, excessive fees and poor advice. And a huge amount of work to be done to rebuild a retail financial services market that is fit for purpose, open for business and focussed on consumers.
Good decisions can end bad crises.
I will do everything in my power to make that happen.