As we are more and more expected to take control of our financial affairs e.g. to save for our retirement or to take up a mortgage loan to finance our house, financial decision-making is increasingly becoming part of our lives. Yet, at the same time, financial products are becoming overly complex, markets too diverse, and our financial decisions ever more important. Given the importance of these decisions, many of us would decide to get help from a financial adviser rather than to making an independent decision. We tend to trust financial advisers, trust that they are going to select the right product for us, the one that is the best fit for our needs and preferences. But are we really getting the right product? The financial mis-selling scandals suggest that we are not.
Unfortunately, mis-selling scandals because of bad advice are too common in Europe. Many of these scandals will be (too) familiar to our readers, such as the PPI scandal in the UK, the foreign currency loans in several Member States e.g. Spain, Greece, Hungary, Poland, or risky investment products in e.g. Belgium (see the map of major mis-selling scandals, including videos of testimonies here). More recently financial advice also got the attention of EU law-makers. In June 2018 the EU Parliament published a series of five studies on Mis-selling of Financial Products: 1) Marketing, Sale and Distribution, 2) Subordinated Debt and Self-Placement, 3) Consumer Credit, 4) Mortgage Credit, and 5) Compensation of Investors in Belgium. These studies pointed out the weaknesses in the current EU regulatory framework and its enforcement. In addition, in April 2018 the EU Commission published a study on the Distribution of retail investment products across the EU, concluding that consumers face significant challenges in making informed decisions (see our report here).
In the light of the above, BEUC launched a campaign for a real change in the financial advice sector. A change that needs to affect: sales incentives, regulatory framework and supervision and enforcement.
- Mis-alignment of sales incentives is a real problem in the financial advice sector. Commissions create a conflict of interest, steering advisors in a direction of offering risky products instead of acting in the best interest of consumers.
- According to BEUC, the current, patchy legal framework is not fit for purpose. As we know, the majority of legislative instruments, especially those adopted in the aftermath of the financial crisis, will regulate at least some aspect of financial advice. However, this approach creates inconsistency, for example, the regulation of issues like independence and qualifications are approached differently in various instruments, without even having common definitions of what they are referring to.
- Finally, many of the current rules is difficult to enforce, for example, the requirement in MiFID2 that the investment meets the needs of the consumer.
To improve the financial advise sector, BEUC suggests to:
- ban commissions;
- create common definitions and rules for advisors, rules that set standards of professionalism and that are easy to comply with;
- better enforcement, enforcement coordinated by the EU supervisors (EBA, ESMA and EIOPA) and adequate powers of national supervisors.
Whilst it is not specially raised, it could be implied that that the above aims would be the best achieved by a separate, independent act such as a Directive on Financial Advice. What do you think? Is there a need for a systematic approach? Is it viable to regulate financial advice independently from the underlying product that it relates to?