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.

CARRP - not a fish, but: a credit agreement relating to residential property

As we are all waiting for the European institutions to come back from their holiday and pick up where they left unresolved consumer law matters, certain problems will have to wait longer than others. In September there was supposed to be a vote in the European Parliament on the European directive on credit agreements relating to residential property (CARRP), but the news agencies inform that the vote was delayed until December 10. (Vote on European mortgage regulation delayed for three months) The proposal for this Directive was issued by the European Commission in March of 2011. (Mortgages: better protection for European consumers) In the coming months the European institutions will have more time, therefore, to discuss the provisions of this draft Directive.

If you have not yet heard of the CARRP and its goals, you should know that the CARRP is supposed to regulate more strictly advertising of mortgage credit, making sure that consumers do not get false expectations regarding the cost of the credit or its availability. Moreover, it would strengthen the supervision and regulation over institutions issuing mortgage credit as well as credit intermediaries. Another goal of the CARRP is to improve the information that is being given to consumers on mortgage credits (e.g., by creating a credit database), as well as to personalise it (through a European Standardised Information Sheet - ESIS). Consumers should also benefit from a harmonised annual percentage rate of charge. 

Last month the European Banking Industry Committee (EBIC) gave its opinion on the draft. One of its criticism is that the draft suggests that the Directive shall not apply to credit agreements in the form of overdraft facilities only where the consumer agrees to be exempted from the provisions of the Directive. However, the already binding Consumer Credit Directive gives mandatory consumer protection in cases of overdraft facilities, which pursuant to EBIC should lead to the exclusion of such credit agreements from the scope of application of the CARRP as a rule. One of the positively assessed elements of the CARRP is the introduction of more (and more clear) rules on what explanations should be given by lenders to consumers.

Investing consumers should be treated like/with (cross out inapplicable word) KIDs

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.

PRIPS

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.

IMD

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?

Consumer Protection in Financial Services: two sides of the same coin

On 2nd and 3rd July the European Coalition for Responsible Credit held its international stakeholder conference ‘Financial Services Providers and Consumer Protection - Two Worlds?’ at Hamburg. The symposium, gathered consumer organisations, financial service providers, policy makers, academics and politicians to discuss current issues in retail markets for financial services in Europe and elsewhere. Issues that were discussed include national reports on consumer credit and banking, a comparison of bankruptcy laws, bank reporting on responsible lending, financial literacy, and consumer information overload.

Whenever you as an academic researcher get the chance to attend this type of events straightforward you get the flavor of the progressive nature of consumer credit law in various European legal systems. Which basically have increasingly developed into a combination of private and public regulation, attributable to the fact, that, through mandatory law it combines economic (transparent, competitive market) and social concerns (such as social consequences of over-indebtedness) in a private law setting. Hence, a balancing act between stimulating financial services and safeguarding economic interests of consumers.

The panel on ‘information overload at the point of sale‘ conformed by Sarah Linch(European Commission), Prof. Geraint Howells(Uni. Manchester), Dr. Bernhard Dychhoff (VW Financial Services) explored quite interesting topics through their presentations. The lectures in this panel touched upon the provision of ‘adequate explanations’ related to credit. This duty encapsulated in article 5(6) European Consumer Credit Directive apparently aims at enhancing contractual fairness between contracting parties. At the same moment, the article may provide an opportunity to empower consumers in their contracting position. Since has been introduced as flexible element in the Directive it will provide a range of possible options for a Member States regarding implementation.

The panelists agreed with the need of consumer testing as regards of ‘Standard European Consumer Credit Information’ (Annex II of the Directive), which also regulates the form in which specific information must be conveyed to consumers in the pre-contractual stage. Such standardisation of information apparently aims at avoiding information overload and at maintaining or allowing the comparability of different offers. As a result the suggestion to focus on duties to disclose a summary or short-form contract in plain language, highlighting rather than hiding key terms seems less meddlesome than one might suspect.

Nevertheless, standardization may not necessarily help consumers directly nor level the playing field for them; for example, if they fail to use or understand the information provided. The ideal of transparency, though laudable, may lead to an increase in information, yet not necessarily facilitate accessibility and simplicity. At the bottom line, in striving for simplicity it must be borne in mind that borrowers are heterogeneous in their preferences and concerns.