Memorandum submitted by the Financial
Services Consumer Panel
EXECUTIVE SUMMARY
The Financial Services Consumer Panel is pleased
to have this opportunity to inform the Select Committee about
issues of concern to financial services consumers arising from
EU initiatives. There are numerous challenges here, but we have
focused this submission on our key concerns.
Consumer representation: The European
Commission has criticised the lack of response from EU consumer
groups to discussion documents on financial services regulation.
The Consumer Panel organised a Conference of EU consumer groups
to find out why. The meeting concluded and advised the Commission
that most groups do not have the resources to be involved in debates
about EU financial services. We are therefore delighted to see
from the recent White Paper that the Commission proposes to establish
a permanent group of consumer representatives from across Europe
with a focus on financial services issues.
Evidence-based policy making: Despite
public protestations to the contrary, to date there seems to be
a frustrating "one size fits all" approach to EU policy-making.
This stems at least in part from the almost complete absence of
information available about how retail markets actually work in
individual Member States. The White Paper contains a positive
commitment to evidence-based policy-making in the future and we
look forward to seeing this carried forward.
Financial services policy 2005-10: Consumer
protection measures should not be considered a barrier to a single
market. Far greater use needs to be made of competition and other
powers to open up the markets, with greater emphasis placed on
post implementation evaluation and evidence-based policy-making.
Markets in Financial Instruments Directive:
MiFID contains far-reaching proposals affecting both wholesale
and retail issues. The impact on retail consumers of some of these
measures—and the extent of any benefit—is still unclear,
although ultimately the cost will be borne by consumers.
Mortgages: The Panel is broadly supportive
of any initiative which attempts to replicate the benefits enjoyed
by UK consumers and of the level of consumer protection available.
We are concerned however that any EU legislation in this area
could result in additional cost to the UK mortgage industry and
to consumers.
Asset management: We agree that there
is a need to ensure that the current legislative framework is
in place and working effectively before consideration is given
to further legislation in this area. We do however see an urgent
need for a revision of the simplified prospectus.
Better regulation: The Panel supports
the Commission's recent statements that all new financial legislation
should be subject to a cost/benefit analysis. As the costs of
regulation are largely met by consumers in higher fees and charges,
consumers have a vested interest in regulation providing value
for money. However the value may not always be tangible or easily
measured.
PRINCIPAL CONCERNS
Consumer Representation
When the Treasury Committee last considered
EU financial services the Head of Unit F1, DG Markt was prompted
to comment that ". . . enormous efforts were made to include
consumer and user representatives in the process and the Commission
should therefore not be blamed for the appalling lack of interest
shown by consumer organisations . . ."
In part as a response to DG Markt's comments,
the Panel held a Conference for consumer groups across the EU
in early November. Not only did this form the basis for a network
of financial services-focused consumer representatives, but Conference
delegates also agreed a resolution which we have since sent to
the Commission setting out the steps we believe the Commission
needs to take in order to address the issue of insufficient consumer
input to the policy-making process. A copy of the resolution is
attached as an appendix to this submission.
We agree that there is insufficient consumer
input into the EU policy-making process. The commendable steps
the Commission has taken to date, for example by establishing
FIN-USE, together with the firm commitment in the White Paper
to set up a permanent group of consumer representatives across
Europe, should go a long way in addressing the core Issues. In
addition one of the Lamfalussy Committees, CESR, has taken positive
measures to include consumers in policy debate by setting up "consumer
days" to discuss CESR proposals. The recent Retail Investor
Workshop in Valencia was both constructive and productive and
we expect to see real change coming from this initiative. We would
like to see other Lamfalussy bodies taking a similar approach.
It was clear at our Conference that many national
consumer organisations do not have the expertise within their
organisations to analyse often complex issues written in a language
other than the national one. We are not convinced that the periodic
newsletter referred to in the White Paper will provide enough
help in this area. It is also the case that consumer organisations
do not often have the luxury of specialist advisers. The Commission
must do more to improve the consultation process as it is vital
that the real needs of consumers are properly understood by policy
makers at all levels. Fundamental change is needed and the steps
set out in the resolution and the White Paper will help the Commission
to take this forward.
Evidence-based policy making
There is a remarkable lack of evidence about
the ways in which retail markets within the EU actually operate
and how well they meet consumer needs. This is a severe hindrance
to good policy-making which should always be evidence based. This
is a missed opportunity for the Commission which should be using
this information to focus its resources more effectively and to
learn from the experience of consumers of retail markets in individual
Member States. We hope that the commitment set out in the White
Paper will bring a new, rapid approach.
Financial services policy 2005-10
The Commission published its White Paper on
Financial Services Policy 2005-10 on 5 December. The Commission
has an ambitious agenda which we were pleased to see included
the implementation, enforcement and evaluation of existing legislation.
There is much to be learned from the experience of individual
Member States since the Financial Services Action Plan was first
drawn up and we regard post-implementation evaluation as a high
priority. Looking forward, the Commission's focus should be on
removing the remaining barriers to the integration of wholesale
markets. This would lead to, for example, greater freedom for
mortgage lenders and would pave the way for the more open and
economically efficient EU financial market envisaged by the Commission.
The Panel is not convinced however that there is currently a significant
demand amongst retail consumers for many cross-border financial
products or services. This might change over time, but consumers
would have to have confidence in the relevant regulatory regime
and a great deal of work would have to be done in areas such as
the provision of effective, consumer-tested pre-sale information
and acceptable advertising standards.
Markets in Financial Instruments Directive
The impact of the Markets in Financial Instruments
Directive seems to have grown significantly during its period
of development and the implications of the implementation of the
final measures are still not absolutely clear to us. The Panel's
principal concern about MiFID to date has now been alleviated
following the announcement of the exclusion of generic advice
from the definition of "investment advice" in the Directive.
There are other measures where retail consumers could be disadvantaged,
however. For example, the provisions relating to best execution
will not we understand necessarily result in the best deal for
consumers; and we will be looking closely at the FSA's forthcoming
Consultation Paper setting out a MiFID-compliant revision of the
existing requirements imposed on regulated firms In relation to
advertising. The substantial costs of the extensive changes arising
from MiFID will, of course, be borne ultimately by the consumer.
Mortgages
The Panel was fully supportive of the introduction
of the regime covering the sale of mortgages in the UK. It believes
this has been an important step in ensuring consumers are protected
during what is often the most significant purchase they are likely
to make. The Panel is therefore encouraged that the Commission
is seeking to ensure other EU consumers benefit from mortgage
regulation. That said, the Panel is concerned that any EU legislation
in this area could result in additional cost to the UK mortgage
industry, at a time when it has only recently absorbed significant
costs associated with the new regime in the UK. However, the Panel
is broadly supportive of any initiative which attempts to replicate
the benefits enjoyed by UK consumers both in terms of the diversity
and innovative nature of the UK market, and of the level of consumer
protection available.
The Panel does not see the single market becoming
a reality by means of consumers buying their homes with finance
provided by a lender in another Member State. It therefore doubts
there will be significant demand for cross-border sales of mortgage
products There may be some niche markets—second homes abroad
for example—but the market will overwhelmingly from the
consumer's perspective remain a national one.
The Panel believes the route to a more integrated
EU market lies in harmonising funding arrangements allowing greater
freedom for lenders, which will result in the creation of more
diverse products becoming available across Europe. It also believes
that a more consistent approach to valuations, early repayment
charges, credit worthiness checks, and the relaxation of other
legal constraints will play a much more significant role in promoting
an integrated market. The Panel does not believe that consumer
protection measures alone can achieve the stated aims of the Green
Paper. Indeed in isolation such measures are likely to have little
effect. For example, the Panel fails to see how the introduction
of a compulsory standardised information sheet can facilitate
cross-border sales. Consumers need appropriate information at
the right time in the mortgage buying process. But in view of
the diversity of local arrangements the correct way to address
this is to ensure each member state requires suitable pre-sale
information which accurately reflects the local market and is
not constrained by EU requirements which may not be appropriate
in every case.
The Panel believes that the right way to achieve
the stated objective in the Green Paper is first to address the
restrictions in wholesale funding of mortgages and other legal
constraints which exist in some member states. Opening up such
restricted markets to more innovative products will have an obvious
and direct benefit for consumers.
Asset management
The Panel supports the Commission's overall
approach to the enhancement of the EU framework for investment
funds. We do however have two main concerns:
— The simplified prospectus does not
meet consumer needs and should be improved. Both regulators and
policy-makers must recognise the need to test all disclosure documents
such as the prospectus on real consumers active in the financial
markets. The level of understanding of the recipients of these
documents is the true indicator of their effectiveness. The simplified
prospectus falls short of what is required.
— There are risks to consumers in the
changes introduced in UCITS III, where there is a real possibility
of confusion. Amongst consumers of investment products the UCITS
term is becoming known and understood and this is something that
could be built on now. But there is a need to distinguish between
pre and post UCITS III products, where the risks could be significantly
different.
The Green Paper on Investment Funds opened up
the discussion on alternative investment markets and substitute
products. Consumer protection is an issue if the retail mass market
is to be opened up to investments such as hedge funds. It is generally
accepted that products of this type tend to be complex and opaque,
making risk assessment more difficult for consumers and even for
their advisers.
Better regulation
Of course the Panel supports "better regulation"
both on a national and EU-wide basis. We are pleased that there
seems to be an acceptance that all new EU financial legislation
should be subject to a cost/benefit analysis. As the costs of
regulation are largely met by consumers in higher fees and charges,
consumers have a vested interest in regulation providing value
for money. However the value may not always be tangible or easily
measured. For example it is clear that regulation—if it
is seen to be effective by consumers—increases their confidence
in the industry as a whole. The Panel does not wish to see regulatory
requirements in financial services swept aside on simplistic cost
grounds alone.
Whatever the regulatory approach, however, the
Panel supports effective regulation that is robustly enforced.
Conclusion
The Panel believes that the overall objectives
set out in the recent White Paper deserve support, as do a great
many of the financial services initiatives we have seen over the
past few years. An argument that existing national standards are
"best practice" is not in itself a sustainable position
in the long term, although we will continue to work with others
in identifying areas where UK consumers could be disadvantaged.
But the Commission must do more to facilitate effective participation
by consumer groups in the consultation process and we will be
taking a close interest in the development of the consumer group
referred to in the White Paper. We are looking forward to a positive
response from the Commission to the other points raised in the
Conference resolution. We also believe that evidence-based policy-making
is the only sensible way forward and we have called for this on
many occasions. We are glad that the Commission has taken this
on board.
John Howard, Chairman
Financial Services Consumer Panel
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