Recent study reveals surprising facts about automated financial advice

In September 2018 the EU supervisory authorities (ESAs)published a Joint Committee Report on the results of the monitoring exercise on ‘automation in financial advice that revealed surprising facts about automated financial advice in the EU.

Following the publication of a Discussion Paper on Automation in Financial Advice in 2015 and a Report in 2016 (on which we reported here) the ESAs  published the present follow up report on the evolution of automation in financial advice in the securities, banking and insurance sectors over the past two years. The report is based a survey with competent national authorities.

Surprisingly, the report shows that while the phenomenon of automation in financial advice (or 'robo-advice') seems to be slowly growing, the overall number of firms and customers using automated financial advise is still quite limited. In addition, while some new trends seem to emerge (such as the use of Big Data, chatbots for customer service and extension to a broader range of products) there seems to have been no substantial change to the overall market since the publication of the ESA Report in 2016. The Report identifies:

• cultural/psychological barriers as one of the main causes of lack of engagement, that can be traced back to low level financial literacy, and a lack of consumer trust and confidence in using digital tools;
• regulatory barriers such as the complexity of the applicable legislation (MiFID II/MIFIR, IDD, GDPR, PRIIPs) that pose special challenges for small, startup FinTech firms.

It therefore seems that the market for automated financial advice has not taken up, and that its full potential is yet to be explored. Given the above identifies barriers, one may wonder whether the time is not ripe for a shift to greater digitization in the financial sector or whether the regulatory environment needs to change both in terms of giving greater room for small Fintech firms to expand on the market, and in terms of the existing consumer protection tools. 

An end to high banking transfer charges in the EU?

On 28^th March, the EU Commission put forward a Proposal for a Regulation that will reduce charges for bank transfers in the European Union outside the euro area. This initiative is aiming at making the banking union ever closer, especially in retail banking where there have been fewer actions compared to prudential regulation.

Thanks to Regulation 924/2009 fees for cross-border payments in euros between euro area members have been equalised. However, the situation in non- euro zone EU countries is very different with consumers often paying expensive fees even for the transfer of small amounts of money. As mentioned in the press release for the Proposal, consumers in some instances were called to pay as much as 24 euro charges for the transfer of 10 euros, making it highly detrimental to consumers.

The proposed Regulation amends Regulation 924/2009 and aims at removing this perceived barrier to the single market by extending its scope to non-euro area Member States. It must be noted that the proposed regulation only covers transactions in euros and not in other currencies. Regulation 924/2009 offered the possibility to extend the regulation to other currencies, yet only Sweden has made used of that rule. Therefore, the Commission decided this was the time to introduce this measure as now euro payments are cheaper than they were in the past.

The effect of the Proposal is two-fold, as it harmonises cross-border banking charges as well as improving transparency. According to the Proposal charges for cross-border payments in euros will be the same as charges for national (non-euro) payments. This means that the transfer fees will be significantly lower if not nonexistent. Consumer will not be the only ones to benefit, as also businesses will be able to be more competitive to businesses operating in the euro area.

As for transparency, at present consumers are not able to compare options, especially when paying with a card where they are offered the option to pay either in the local currency or in their home currency. The Proposal tackles this issue by obliging payment service providers to offer the full cost of both options to consumers prior to the initiation of a payment transaction. Furthermore, recognising the constant technological advances in the field, the European Banking Authority (EBA) will develop regulatory technical standards on how payment service providers are to fulfill their transparency obligations as well as being able to place caps on such conversion charges.

The Proposal has been positively received by consumer organisations, as reported in a euractiv article .Indeed this is a positive development for EU consumers and should it be voted in the Parliament as it will have a tangible effect on their everyday transactions making them easier and cheaper and making the banking union ever closer.

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?