Towards the creation of the EU Financial Consumer Protection Agency?

A couple of months ago we reported on the results of the public consultation on the Operation of the European Supervisory Authorities (ESAs), and mentioned that civil sector representatives (Better Finance) advocated a complete overhaul of the existing system of EU financial supervision as opposed to partial improvements in the interest of consumers. This voice has now become lauder, and several representatives, including BEUC has joined their forced to request this reform. Today they posted an Open Letter to the EU Commission on the Proposal for the EU financial supervisory reform.

In this letter they explain that the current supervisory framework is not adequate to effectively protect consumers. Consumer protection comes as the last objective of the ESAs enjoying low priority as compared to other objectives. This low priority is evidenced for example by a failure to ever use one of their most significant powers, a power to temporarily prohibit the use of dangerous financial products. The letter also highlights that the ESAs has also failed to adequately coordinate national supervisory authorities, and that consequently consumer protection, or conduct of business supervision is neglected in some Member States.

In order to priorities consumer protection, the letter advocates the move towards a 'twin peak' model in the EU, that is, a towards a creation of a separate supervisory authority that would be in charge to control the ways in which financial firms conduct business with their customers. This separation of the consumer protection objective from other supervisory objectives (the 'twin peak' model) is already working well in some EU countries like the UK and Belgium, and outside the EU, for example, in the US. The letter therefore urges the EU Commission to reconsider its current approach to keeping the regulatory/supervisory structure as it is, and to give thought, and preferably action, to the 'twin peak' model.

Importantly, in addition to raising the importance, the letter also sets out a basic strategic plan for moving towards the new model. Phase 1 would include a clear separation of consumer protection mandate from other mandates of the existing ESAs, by reforming the Consumer Protection Divisions of these authorities and in phase 2, these would then be merged into a newly created  single authority, the EU Financial Consumer Protection Agency. The letter addressed other important questions such as funding, governance and mandate.

Is a single supervisory authority for consumer protection viable in the EU, or could consumers be just as effectively protected by prioritizing the consumer protection objective of the existing authorities? What do you think?

EU Commission announces measures for completing the Banking Union

As announced by President Juncker in his State of the Union Address the EU Commission issued a Communication on the measures it will take for the completion of the banking union. The banking union is seen by the Commission as essential for the good functioning of the Economic and Monetary Union (EMU) and its ambitious goal is for the banking union to be completed by 2019. For that purpose, a range of initiatives were announced. This post will focus on the two developments which are more relevant for consumer law which are: the measures on the European Deposit Insurance Scheme (EDIS) and on reducing the level of non-performing loans (NPLs). 

EDIS is a key component for the Banking Union as it will ensure that all depositors in the EU enjoy the same level of protection and the banking system will be more resilient against future crises. Unfortunately, though the Proposal for EDIS was brought in November 2015, the negotiations between the EU Parliament and the Council have been brought to a halt as there is limited political consensus. In order to address the concerns voiced during the negotiations, the EU Commission suggests that EDIS will be introduced more gradually, taking into account the progress made on risk reduction. In the first re-insurance phase, EDIS would provide only liquidity coverage and no loss coverage. Also, the move to the second phase of co-insurance would not be automatic but only when certain conditions, such as the level of Non-Performing Loans, would be satisfied. Furthermore, measures would be taken to enhance cooperation between national deposit guarantee schemes, national authorities, the Single Resolution Board and the European Banking Authority. The Commission is keen to achieve progress in negotiations aiming to adopt the proposal in 2018.

As for Non-Performing Loans (NPLs), while their level has fallen, they continue to present an important systemic risk and the EU Commission takes a holistic approach in tackling the problem of existing NPLs as well as taking steps to ensure they do not build up again in the future. Part of that is regulating Asset Management Companies, developing secondary markets for NPLs and enhancing the protection of secured creditors. Another measure that might prove interesting also for legal scientists is that of increased transparency on NPLs in Europe as more data will be available and comparable, making it possible to examine the NPLs market in different jurisdictions and on an EU level.

The completion of the Banking Union would be a positive development also for EU consumers and hopefully serve to avoid a repetition of the recent financial crisis. Do you think the new measures announced are a step in the right direction? Please share your view in the comments.

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?