Yesterday the European Commission presented a new legislative package that is supposed to restore consumers' faith in the financial services. It is an ambitious undertaking, no doubt, taking into account the consumer experience of the last few years with one financial crisis following another and big financial companies failing to provide much needed security and reliability. Many consumers found themselves in financial troubles due to wrong information or financial advice they had received, which often led them to invest in unsuitable for them financial products. To prevent this from happening again, an action at a European level was deemed to be necessary.
"In the aftermath of the biggest financial crisis in recent memory, the financial sector must place consumers at its heart. Retail products must be safer, information standards must become clearer, and those selling products must always be subject to the highest standards. That is why we have adopted a package solely dedicated to consumers, so that they can choose financial products based on clear and sound information and professional advice which puts the consumer's interests first." said Internal Market and Services Commissioner Michel Barnier (Commission proposes legislation to improve consumer protection in financial services)
And so, the European Commission presented three new documents: a proposal for a regulation on key information documents for packaged retail investment products (PRIPS), a revision of the Insurance Mediation Directive (IMD), and a proposal to boost protection for those who buy investment funds which is governed by the Directive on Undertakings for Collective Investment in Transferable Securities (UCITS). The first two of these documents are especially relevant for consumer protection so let's take a closer look at them.
Anyone who ever tried to make an investment knows that financial products are, ehm, complex (this really is too mildly put). In order for consumers to understand what they may expect from a given financial product and what risks they are taking on themselves the information provided to them has to be more transparent and comprehensive. This proposal aims at improving quality of such information by introducing a new, innovative standard for product information. It is intended to be short, plain-speaking and consumer-friendly. Every investment product (investment funds, insurance-based investments, retail structured products, private pensions, etc.) will need to have such a document attached to it. I just love the new name for it: KID - Key Information Document. Let's be honest, most of us have a childlike approach to financial matters - lots of faith in things ending up right even if we climb that highest (financial) tree branch without any security. Each KID will convey information on the product's main features, risks and costs associated with the investment in the product. The intention is to make it clear to consumers whether they can lose money on that product and to show them its complexity. Consumers will easily be able to compare KIDs of different investment products since they will follow the same structure, content, presentation. More information on this proposal may be found here.
Another matter that often leaves consumers flabbergasted is the risks associated with taking an insurance cover. Most often taking an insurance is seen as purchasing more security, without realising that it may also endanger consumers' interests. Anyone who studied law knows that insurance law is not a thing to trifle with, but consumers often remain blissfully unaware of its complexity. The EC aims at revising the IMD which regulates selling practices for all insurance products. Currently, the Directive applies only in cases when insurance was bought through an intermediary, but the revision aims at giving the same level of protection to consumers regardless of the character of the person they had purchased the insurance from. Moreover, sellers of insurance will need to inform consumers of their professional character, links to the insurance company as well as reveal their remuneration for selling an insurance cover. Most importantly, a professional, honest advice will have to be given to consumers interested in purchase of insurance products. Currently, more than 70% of insurance products are sold without appropriate advice. More information on this document may be found here.
How do consumers choose their financial products?