Tuesday, 2 July 2013

Are KIDs going to be relevant when they are finally adopted?

The summer holiday season has not yet started for the EU institutions (even if it might have begun for some of the authors of this blog). Last week the European Council reached an agreement on the new rules that would protect consumers when they enter into PRIP contracts - for packaged retail investment products (such as, for example, investment funds, life insurance policies). The EU institutions want to increase the transparency of such contracts, in order to strengthen consumer trust in the financial market. It only took 1 year for the European Council to agree on the rules proposed by the European Commission. (see our earlier post: Investing consumers should be treated...) Since this type of financial contracts is often quite complex in its drafting, consumers are often unable to understand what they are agreeing to when they conclude such a contract. Not only would they then have difficulties in assessing the contractual risks but also they may not be able to effectively compare offers of different companies, when trying to choose the best one for them. New rules would require certain key information (such as the nature and features of the product, costs and risks profile, performance information, whether it is possible to lose capital) to be given to consumers in a specific, uniform format and content. In order not to overburden consumers, only such key information would be contained in these documents (KIDs). Additionally, Member States would need to guarantee an effective right of redress to consumers. The legislative process on these rules will continue in the European Parliament now. (Council sets out its position on transparency rules for investment products)
Coincidentally, most of the authors of this blog have just listened to a presentation on the risks of financial services by Sothi Rachagan, president of the International Association of Consumer Law, given as an opening speech of the Association's bi-annual conference, in Sydney. One of the points that was raised in the presentation was that regardless the measures that we would take to inform or educate consumers about the risks of financial products, consumers would still not be able to protect themselves from them. The complicity of financial products and information on them (even if simplified) is just too overwhelming even for the well educated consumers. It was suggested that instead of further regulating mandated disclosure, other regulatory measures should be taken in order to protect consumers (e.g., limits could be set on the amounts that could be invested/ borrowed by consumers depending on their financial situation). The readers may wonder whether by the time KIDs are adopted in Europe, they would be seen as a pre-historic measure of consumer protection.

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