Is there a need to reform European financial supervision for the benefit of consumers?

The European Commission has recently closed its public consultation on the Operation of the European Supervisory Authorities (see the feedback statement here).

The supervision of financial firms in the EU is subject to a complex, multi layered system consisting of national and EU supervisory authorities that has became even more complex after the creation of the Banking Union. For us here most important are the European Supervisory Authorities (ESAs). The ESAs, the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA), the European Insurance and Occupational Pensions Authority (EIOPA) has been created in 2010 as a response to the financial crisis. Although they are primarily concerned with prudential supervision (ensuring that financial firms have enough capital to operate, that they are safely and soundly), consumer protection is also on the list of their objectives.

Consequently, the recently held consultation asked whether the current tasks and powers of the ESAs are sufficient to protect consumers and how they could be improved in this respect.

Many stakeholders found that the scope of ESAs' tasks and powers is adequate and should not be extended. Instead, they should use their existing powers more efficiently, and should be more aligned with the problems at national level. However, some stakeholders saw room for extending ESAs' powers, e.g. by giving ESAs more powers for consumer protect purposes, want to see more work in the financial innovation space, including on virtual currencies, or on financial education, cross-border protection, big data etc. Finally, some, like Better Finance, advocate for the overhaul of the current system of supervision by opting for a 'twin-peak' model instead of the current 'silo' approach. The argument is that the current ESAs prioritise prudential matters over consumer protection matters (see their press release here).

Learning from the experience of the UK, the twin peak model could be an interesting option. In the UK, the former Financial Services Authority, having both the mandates of prudential supervision and consumer protection, failed to properly balance its two limbs of supervision. Although it is said to have paid more attention to conduct matters, having too much to do resulted in a number of conduct failures causing significant detriment to consumers (PPI, payday loans, etc).  The creation of a separate consumer protection authority (the Financial Conduct Authority) has improved consumer protection standards and practice, and the approach so far seems to work well for the UK. However, we must admit, that although the solution of having only one supervisory authority for the entire EU financial market sounds appealing, it is a radical suggestion that requires, among others, substantial background research.

What do you think, is there a need for an EU Financial Consumer Protection Authority, and is it a viable solution?

The risks and benefits of automated financial advice

In December 2015 the three European Supervisory Authorities (ESAs) (the European Banking Authority, the European Securities and Markets Authority, and the European Insurance and Occupational Pensions Authority) issued a joint Discussion paper on automation in financial advice.

The ESAs have recognized that with increasing digitization of financial services, more and more financial institutions offer automated financial advice to their customers (also called 'robo-advice').Thus the Discussion paper is aimed at assessing what (if any) regulatory/supervisory action is required to enable consumers and firms to take advantage of the benefits and to mitigate the potential risks, of automated advice. The Discussion paper explains the concept of automated advice, and highlights the possible risks and benefits of this innovation.

Automated advice means that a recommendation to buy or sell financial products is generated by automated tools (typically websites using algorithms or decision trees) without (or with very limited) human intervention.

The ESAs believe that automated financial advice may be beneficial for consumers in terms of providing easy access to a quality service (free from behavioural biases, human error or poor judgment and reliant on a large volume of complex data) at a considerably lesser cost than traditional advice. However, they also recognize that automated advice may carry a great deal of danger. Importantly, consumers may find it more difficult to understand automated advice than traditional advice without a human interaction and being able to ask questions and seek clarifications; consumers may misunderstand the nature of the advice (they may receive general advice but believe that they have received personalized advice); consumers may end up with unsuitable advice because they do not understand how information is used by the automated tool and enter incorrect or incomplete data, or because of a failure in the automated tool itself. Finally, automated financial advice, as with any digital service, raises data protection issues.

The consultation period ended in March 2016. The Discussion paper generated great interest among the stakeholders and the ESAs have received many responses. BEUC welcomed the ESAs interest in automated financial advice, and considered the Discussion paper to be a well balanced discussion of the risks and benefits of automated advice. It has however highlighted that protecting consumers in this area will require new approaches, and that market outcomes may largely depend on the quality of algorithms used for guiding consumers through the advice process.

What do you think? Is automated advice more likely to benefit or to harm consumers?