Memorandum submitted by Which?
1. Consumers' Association (CA) is an independent,
not-for-profit consumer organisation with around 700,000 members.
It is the largest consumer organisation in Europe. Entirely independent
of government and industry, we are funded through the sale of
our Which? range of consumer magazines and books. We campaign
on a wide range of issues of importance to consumers, including,
food, health, retail and financial services.
2. In this submission, we have restricted
our comments to the following issues:
Perceived benefits of an integrated
single market to consumers.
A framework for assessing EC regulation
and financial market integration.
EU policymaking process.
Implementation of EU legislation.
Representing the consumer interest.
3. The Financial Services Committee (FSC)
report on Financial Integration (FSC 4156/04) states that;
"Financial integration can be described
as the absence of obstacles to significant cross border activities
and to economic agents in their access to or in their ability
to supply financial services and products, in particular in respect
to their geographic location. The overall objective of the single
market is to remove all public policy/ regulatory obstacles to
the free movement of goods, services, persons and capital".
4. The FSC report goes on to list a number
of benefits of a single market including: increased competition,
product innovation and diversification, wider choice for consumers;
greater liquidity and depth of financial markets leading to better
access to capital and lower transaction costs; and opportunities
for exploiting economies of scale.
5. CA's view is that there are considerable
potential benefits to be gained for retail consumers, including
UK consumers, from an integrated single marketif managed
properly. However, European Union (EU) consumers face considerable
risks and detriment if integration is implemented badly.
A FRAMEWORK FOR
ASSESSING EC REGULATION
6. We are working to persuade EU policymakers
that if they wish to identify areas where integration can benefit
consumers it would be more productive to deconstruct the product/
service distribution chain for financial products into three broad
stages or phases:
(i) Wholesale market functions eg stock exchanges,
capital and bond markets etc;
(ii) Product "manufacturing" eg
fund management, risk management, clearing and settlement operations,
(ii) Retail/distribution to end-user, where
along with prudential and legal protection, consumer protection
measures are particularly important.
7. CA believes that these functional classifications
should be accompanied by assessment of the public policy issues
eg tax policy/subsidies for indigenous providers/competition policy
etc. These classifications would then give a more accurate and
pragmatic understanding of where the potential benefits from the
creation of a single market for consumers may be derived. It would
also give the opportunity to take stock of progress on integration
measured against the Financial Services Action Plan (FSAP) and
other benchmarks; identify the critical regulatory, legal, cultural
and market barriers to that single market developing; and identify
new initiatives, statutory or self regulatory, for promoting sensible
integration or existing regulatory barriers which can be removed
8. The objective should be to produce a
"strategy grid" which identifies and collates at each
of the phases for all the major product sectors being evaluated
the barriers to integration; the relevant European Commission
(EC) and national legislation and regulation pertaining to each
of the stages; and proposals for enhancing integration. Even within
member states, "innovation" has been producer/supply-side
driven, not demand led, but it would be wrong to assume that this
supply side impetus would work on a cross-border retail basis
due to consumer confidence factors. Market integration initiatives
should be pragmatic and be directed at facilitating integration
at wholesale and manufacturing phases.
9. We firmly believe that there are considerable
potential benefits for consumers from integration at the wholesale
and product manufacturing stages of the supply chain through economies
of scale, better risk management and so on. However, we see little
latent consumer demand for cross border business-to-consumer selling
of financial services products.
10. Removing barriers which are perceived
to hinder business-to-consumer selling may appear to be attractive
from a conventional economic theory perspective, but it is too
simplistic to assume that liberalisation and integration of markets
through removing what are perceived as barriers to cross border
activities will necessarily feed through to the end-user as benefits.
We know this from experience in the UK that the market does not
always deliver. The concern CA has is that unless this drive for
liberalisation and integration by EU policymakers is tempered
with a reality check, we risk having similar scandals to those
we have seen in the UK writ large on a pan-EU scale.
11. Consumer confidence is critical if there
is to be any chance of a consumer led single market developing
which truly improves consumer utility as opposed to simply increasing
the number of products on offer. Consumers are not homogenous,
this applies within member states and more so within the EU generally.
CA are of the firm view that regulation and consumer protection
must be tailored where necessary to the specific characteristics
of consumers in the individual member states unless the level
of consumer protection can be harmonised to a sufficiently high
12. Proponents of liberalisation and the
removing of perceived barriers to integration, argue that these
measures will lead to greater choice and competition to the benefit
consumersbut more choice per se does not lead to
greater benefits for consumers. What does matter to consumers
is not the number of products on offer, but the quality of the
choice. From the experience of UK consumers, there are at least
30,000 financial products on the market.
In certain sectors such as pensions, investment and long term
savings, the proliferation of choice has led to intense competition
for distribution which pushes up costs to consumers, encourages
confusion marketing and so on.
13. Consumer confidence is the key to the
establishment of a consumer focused single market, not liberalisation
for the sake of it. EU policymakers are not the only institutions
guilty of this industry centric approach and faith in liberalisation
and integration; however given the importance of EU legislation
to UK consumers, it is imperative that the consumer interest is
factored into the policymaking process. It is important to note
that it is unclear whether consumers actually need, or even want,
the extension of choice implicit in the drive for a single market.
UK national regulators and government departments must be on their
guard against unintended consequences of this drive for liberalisation.
14. The euro has provided additional opportunities
for consumers in the "first wave" countries,
however, the biggest barrier to the development of a single market
in financial services is likely to be the lack of consumer confidence
15. UK consumers are much less confident
than other EU citizens about buying financial services cross-border.
Only 18% of UK consumers would be equally or more confident about
buying financial services cross-border, compared with the EU average
(29%). This lack of confidence is not explained by the UK's non-participation
in the euro, since in Denmarkalso outside the eurozoneconsumers
are much more confident (36%).
16. A European Commission survey on consumer
attitudes to financial services in 2002 showed that consumers
are deterred from exploiting potential opportunities to shop cross-border
for financial services by a lack of information, language problems,
and the level of risk. Consumers are often unaware of the rights
that they do have, for example in relation to information and
cooling-off periods, under their own national law, let alone those
under the laws of other Member States. This reinforces the case
for the harmonisation of EU consumer legislation at a high level
17. We therefore urge caution in the desire
to remove perceived barriers to competition. Care must be taken
not to undermine consumer protection and confidence in financial
services. Until such time as there are high and equivalent levels
of consumer protection and efficient methods for resolving cross-border
disputes (and, as the Lamfalussy Committee noted, there are not),
the "country of destination" approach to regulation
and redress should be retained. Consumers are more comfortable
with the redress mechanisms within their own country, particularly
when dealing with unfamiliar companies.
18. As we know, consumer confidence and
trust in the UK financial services industry has been seriously
damaged by a litany of scandals. This has not only affected consumers
but the wider national economic interest, for example, the blow
to confidence is one of the main reasons many consumers are not
providing enough for a decent retirement income.
19. The "country of origin" and
"maximum harmonisation" approach to EU regulation risks
"regulatory arbitrage" where firms seek out member states
with lower standards of regulation leading over time to the lowest
common denominator of regulation becoming the norm. The impact
of a major financial scandal involving a "foreign" financial
firm operating from a jurisdiction with a lower level of consumer
protection on consumer confidence, damaging the reputation of
the EU would be significant.
20. It would be a pity if the very real
benefits to consumers from integration at wholesale and manufacturing
stages were undermined by ill-judged forced integration at the
retail stage of the supply chain.
21. Identifying the barriers to a single
retail market is not a simple processthe barriers are complex,
consumers and individual markets are not homogenous. But it is
difficult to identify solutions to overcome those barriers due
to the absence of meaningful comparative studies of individual
markets (see below).
22. CA favours "country of destination"
and "minimum harmonisation" approach to regulation.
However, we would stress that this primarily precautionary as
CA does not of course suggest that the supervising bodies in other
Member States operate to lower standards than our own, but they
are for UK consumers, largely unknown quantities, and a certain
degree of caution may be necessary until there is more public
information on, and understanding of, the way in which they work.
It may well be that "country of origin" combined with
core standards would be a perfectly suitable and proportionate
mechanism for ensuring the level of consumer protection needed
to maintain the confidence necessary for a functioning integrated
market. But it is difficult to know what these core standards
should be, or the real risks of regulatory arbitrage without this
assessment of the relevant regulatory systems.
23. We are generally concerned at the approach
to policy formulation at EC level where decisions are being taken
in the absence of meaningful information or assessments of retail
financial markets in member states.
24. As a priority, comprehensive comparative
studies of individual member state retail financial markets are
needed covering the following aspects:
market analysis of productsincluding
design, charging structures etc;
delivery and distribution channels,
face-to-face, direct selling, advice/ execution only;
cultural studies focusing on consumer
skills, literacy, attitudes and behaviour, confidence and trust,
descriptive assessments of regulation,
legislation and redress;
realistic measurement of existing
cross border activity and potential cross border activity; and
public policy issues such as tax
policy, subsidies for indigenous providers, competition policy
25. Without this form of comparative assessment,
it is difficult to see how informed policy formulation can take
place that promotes a single market without undermining consumer
protection. Pushing for this form of comprehensive analysis should
be a priority for Financial Services Authority and the Treasury.
26. Much is made of self-regulation and
codes of practice as an efficient way of encouraging integration.
CA supports the declaration made by EU consumer organisations
at Lund in April 2001 that the basic needs of consumers such as
economic and legal protection and safety requirements should be
assured by legislation and not by other forms of regulation. We
believe that any form of regulation must meet certain essential
basic criteria, including efficacy, democratic legitimacy, consumer
confidence, and coherence and consistency in the context of the
27. CA recognises that self-regulation and
co-regulation have the potential to protect consumers in certain
circumstances. Self-regulation can offer improved protection beyond
what the law requires. Self-regulation and codes of practice can
be effective for governing relationships between market practitioners
at the wholesale and manufacturing stages.
28. It can be more flexible and quicker
to adapt to changing market conditions than primary legislation,
but it can only do so if it is well-devised and effectively enforced.
The European Mortgage Code is a particular concern.
29. In our view, only schemes with good
coverage of the relevant market, mandatory compliance with agreed
rules, the involvement of stakeholders in drawing up and monitoring
the terms of schemes and effective enforcement mechanisms can
fulfil the potential of self-regulation to protect consumers.
Schemes which meet these criteria are, however, likely to be neither
particularly quick (the involvement of stakeholders takes time)
or cheap (for example, the costs of adequate monitoring).
30. One of the key concerns that have been
raised by industry representatives is that the UK national regulators
"gold-plate" EU directives when they are being implemented
in the UK.
31. It is difficult to get to the truth
of this claim as this would involve trawling through EU directives
and other regulations, comparing the original intention of those
directives/ regulation with the regulations implemented by the
UK's national regulators. We have not been able to do this across
the board therefore it is difficult to judge whether these claims
about gold-plating are valid criticisms of an over-eager approach
by UK national regulators.
32. Some of the critics of the UK regulators
have contrasted the "size" of UK regulations (in terms
of number of pages or words) with the size of the initial directives
and, where the UK regulation is "bigger" in terms of
number of pages or words, have drawn the conclusion that UK regulators
have been gold-plating those directives.
33. CA does not think that this is necessarily
a valid method for establishing whether gold-plating is occurring.
For example, UK national regulators may have issued detailed guidance
or clarification on how the directive is to be interpreted, it
is difficult to say. Many of the EU directives are constructed
in the form of high level principles espoused in the articles
and it is perfectly valid for national regulators to be more precise
in spelling out how those principles should be interpreted in
34. It would be wrong to draw the conclusion
therefore that simply because a national legislation/regulation
is bigger than the corresponding directive this must mean that
gold-plating has occurred and that UK firms face tougher or more
intrusive regulation. The overall effect may be the same. It may
well be that UK regulators are being more efficient and conscientious
in ensuring that the intention of a directive is implemented in
practice than other member state national regulators. UK regulators
being more conscientious is clearly not the same as gold-plating
35. The real issue is whether UK regulators
are guilty of over-regulating ie the size of legislation or number
of words is not important, but whether UK industry faces tougher
or more interventionist regulation over and above that intended
by the EC directives. In the financial services field, we cannot
think of any clear example where the FSA (or any other national
regulator) could be accused of actual over-regulationie.
introducing a higher degree of consumer protection than intended
by original directives.
36. One of the most striking aspects is
the absence in the EU institutions of mechanisms for representing
the consumer interest throughout the policymaking process. The
report of the Four Expert Groups which assessed progress in implementing
the FSAP was characteristic.
The four groups consisted of 88 representatives in total (Insurance
and pensions20, Securities26, Banking23,
Asset Management19). There was one dedicated consumer representative
on the expert banking groupnone on any of the other expert
groups, so out of the 88 involved only one was a consumer representative.
37. This is not to say that all these committees
and groups should be staffed by token representatives, but we
certainly felt that more could have been done to increase the
consumer representation on the groups.
38. More importantly, representing the consumer
interest is more than consumer representation on committees. Representing
the consumer interest is about ensuring that the models used for
evaluating the benefits of an integrated market are consumer focused
and not industry centric.
39. Much more could be done to represent
the consumer interest within the EU. We recommend that a standing
financial consumer panel be established to advise the Commission
policymakers on the impact of legislation on consumers (similar
to the FS Consumer Panel).
40. The European Commission should be urged
to adopt a more evidence-based approach to EU financial services
policy development. More comprehensive comparative studies of
individual member states' retail financial markets are needed,
including market analysis of products. There is also a need for
cultural studies focusing on consumer skills, attitudes and behaviour.
41. A review of member states' implementation
of current EU financial services legislation, regulation and redress
is also needed so that discussions about minimum and maximum harmonisation
can take place on the basis of objective information. Meanwhile,
minimum harmonisation should be retained, to ensure consumer confidence
in markets generally.
42. A thorough overhaul of the Lamfalussy
process, which is due to be reviewed in 2004-05, is essential.
The current procedure seriously reduces public accountability
and effectively excludes consumers from discussions on the completion
of the single market in financial services. Baron Lamfalussy has
himself criticised proposals to extend the process to retail banking
and insurance issues.
43. CA would welcome an initiative in the
UK Presidency to promote a debate on innovation in retail financial
services in the single market, in the context of EU competitiveness.
Rather than look at the "progress" of the FSAP, this
could look at how far the single market in financial services
is developing, and to what extent it is delivering for consumers
and meeting their expectations. Issues arising should include
information for consumers, redress, market supervision, and problems
of access and exclusion. We would be glad to participate.
44. CA would like to see a similar initiative
in the field of private pension planning and provision in the
single market. A debate at Community level could help to improve
understanding of opportunities and pitfalls, and promote best
practice. Again, CA would be glad to take part.
45. CA would also welcome further initiatives
to promote FIN-NET, the financial services complaints network
of competent alternative dispute resolution bodies that meet the
requirements set out in a Commission Recommendation, and awareness
of it. As well as providing redress for individuals, effective
redress mechanisms systems also promote confidence in markets
46. The Mortgage Forum Group, convened by
the Commission and involving business and consumers, is due to
report in 2004. Commission legislative proposals may follow and
may be on the agenda during the UK Presidency. There is increasing
recognition that the voluntary European Mortgage Code is not working,
and that EU legislative action will be needed in areas such as
information, protection and redress if there is to be a single
market in mortgages from which consumers can benefit. We urge
the UK to help to bring this about.
5 Financial Services Committee (FSC) Report on Financial
Integration, FSC 4156/04, para 5. Back
CA estimated there were 30,000 products on the market five years
ago-the figure is likely to have increased since then. Back
For UK consumers the opportunities to shop cross-border for financial
services within the EU are in any case constrained at present
by the risks posed by currency fluctuations between Sterling and
the euro, subject of course to restating that CA is neutral on
the principle of UK participation in economic and monetary union. Back
Directives may be minimum or maximum. A minimum directive is one
under which Member States may, if they wish, keep or introduce
rules (including on consumer protection) in their own country
that are over and above those set out in the directive. Under
a maximum directive, Member States cannot keep or introduce rules
in their own country that are over and above those set out in
the directive. Maximum harmonisation does not mean the highest
level of protection for consumers. In fact, maximum harmonisation,
by setting a ceiling, may prevent Member States from maintaining
all of their existing consumer protection. Back
For more information on the groups, please see the EC website
on the work: http://www.europa.eu.int/comm/internal-market/en/finances/actionplan/stocktaking.htm Back
From Consumers' Association. CA was the one consumer representative
feeding into the report. Back