Tuesday, 17 July 2018

Mis-selling of financial products: is there a need for a systematic approach?

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?


  1. To that list of mis-selling scandals you might add the indexation scandal in Iceland. Probably the most extensive one in terms of "per capita".

    Historically 80-90% of consumer and housing credit in Iceland has been indexed, some to foreign exchange rates but most of it to the consumer price index (CPI).
    As confirmed by courts in 2010 the former was illegal and the latter, although materially legal, was implemented in breach of the information disclosure requirements of the CCD by omitting the indexation component from the calculated cost of credit.

    While it may not come as a huge surprise that some traders were offering credit agreements with unlawful terms, what makes it a scandal (or should) is how these cases have been dealt with by the courts.

    FX: After having invalidated the unlawful FX-indexation clauses the Supreme court went on and decided to punish, not the offending traders but the consumers concerned, by replacing the interest rate clauses with much higher interest rates. Not only in breach of the UCTD (cf. CJEU in Océano etc.) but also blatantly refusing all demands to apply it. The consumers are left wondering what they did wrong to justify such treatment.

    CPI: Not only did the Supreme Court of Iceland refuse to interpret domestic law in accordance with a preliminary interpretation of the CCD given by the EFTA court, but even argued that the domestic law was in such direct opposition to the CCD that it left no room for any interpretation that might remedy the situation. Thereby leaving not the offending traders liable but the state i.e. taxpayers, including the consumers concerned. The taxpayers are left wondering why they should be held liable for unfair practices of traders.

    It seems the authors of the EU consumer protection rules never imagined a situation where consumers would not just need protection from unfair traders, but also from unfair courts working against them by protecting the offending traders in a mass-harm situation.

    Perhaps what we need from Brussels is not more rules to protect consumers from unfair traders but rather from an unfair and captured system of "justice"?

  2. Many thanks for this insightful comment and for the interesting suggestion. Improving the effectiveness of the enforcement of consumer protection rules certainly needs more work. I wonder how could the justice system be made more ‘consumer friendly’? How could your suggestion be operationalised in practice?

  3. Good question, how do we fix a broken court system?

    Simplest would be to replace the incompetent judges with competent ones that have sufficient knowledge and skill to work on consumer protection issues. As you might imagine this is easier said than done since judges are the only working class to enjoy constitutional protection of employment.

    Perhaps a more proportional approach would be to offer some judges to a "training camp" focusing on consumer protection while making it a procedural requirement that only judges who have received such training can be considered competent to handle such cases.

    Any other ideas?