Select Committee on Treasury Written Evidence

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.

    —  Self-regulation.

    —  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".[5]

  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 market—if managed properly. However, European Union (EU) consumers face considerable risks and detriment if integration is implemented badly.


  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, etc; and

    (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 safely.

  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 level.

  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 consumers—but 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.[6] 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,[7] however, the biggest barrier to the development of a single market in financial services is likely to be the lack of consumer confidence and trust.

  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 Denmark—also outside the eurozone—consumers 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 of protection.

  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 process—the 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.[8] 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 products—including 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, brand opinions;

    —  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 etc.

  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 single market.

  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 practice.

  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 a directive.

  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-regulation—ie. 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.[9] The four groups consisted of 88 representatives in total (Insurance and pensions—20, Securities—26, Banking—23, Asset Management—19). There was one dedicated consumer representative on the expert banking group—none on any of the other expert groups, so out of the 88 involved only one was a consumer representative.[10]

  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 generally.

  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.

September 2004

5   Financial Services Committee (FSC) Report on Financial Integration, FSC 4156/04, para 5. Back

6   CA estimated there were 30,000 products on the market five years ago-the figure is likely to have increased since then. Back

7   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

8   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

9   For more information on the groups, please see the EC website on the work: Back

10   From Consumers' Association. CA was the one consumer representative feeding into the report. Back

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