Launch of the Financial capability framewok for adults in the EU

We have reported earlier on the joint EU/OECD project on developing the Financial competence framework for adults in the European Union. On 11 January 2022 this framwork has been launched (see the recording of the event here).

The framework promotes a shared understanding of the financial competences adults need to make sound decisions on personal finance. It supports public policies, financial literacy programmes and educational materials to be developed by Member States, educational institutions, industry and individuals. It also supports the exchange of good practices by policy makers and stakeholders within the EU.

Aftre the launch of the framework, the focus is now on its uptake by relevant stakeholders. In parallel, the Commission and the OECD will start work on developing a similar financial competence framework for children and youth, which is expected next year.

The New EU Digital Finance Package: the Digital Finance Strategy

In addition to the new Action Plan on Capital Markets Union (see our report here),  on the very same day, the 24 September 2020, the EU Commission also presented its Digital Finance Package. This very board package consists of: 1) the Digital Finance Strategy; 2) the Retail Payments Strategy; 3) the legislative proposal for an EU regulatory framework for digital operational resilience and 4) the legislative proposals for crypto-assets.

The package aims to improve Europe's global competitiveness in financial services and products provision not only by boosting consumer choice but also by ensuring consumer protection and financial stability. With the coronavirus pandemic and the rise in the use of digital services more than before, these sorts of initiatives from the Commission are more than welcome. Embracing digital innovation should not only create consumer choice, but also widen access to financial services for consumers, increase business opportunities for firms, especially SMEs, and thus facilitate Europe’s economic recovery.

The package is complex and far reaching. The strategies are necessarily general providing high level overall strategic aims, but some of the legislative proposals are concrete and ground-breaking. Most importantly, the package of proposals has been drafted based on careful consultation and intensive cooperation with business stakeholders and consumer advocates through public consultations and the innovative Digital Finance Outreach programme of DG FISMA over the summer (on which we reported here) that enabled anyone interested to get involved in shaping the solutions. DG FISMA continues its public approach, it is now holding biweekly seminars on the Digital Finance Package and these are open for attendance for anyone interested (see here). The first seminar focused on the Digital Finance Strategy and so does this post.

The first and broadest element of the Digital Finance Package is the Digital Finance Strategy. It provides for the overall strategic objective to embrace digital innovation and the ways in which the more concrete proposals and the existing legislative framework fits within the picture. As the Commission rightly states: 'The future of finance is digital: consumers and businesses are more and more accessing financial services digitally, innovative market participants are deploying new technologies, and existing business models are changing.' To reflect this the strategy is focused around four key priority areas:

1) Tackle fragmentation in the Digital Single Market: this is the most general aim that intended to enable consumers to access financial services and products fully remotely. 

To this effect, on the one hand, the strategy recognizes that the key to achieving this is the fitness of onboarding process (the recruitment of new customers) for digital age for which a crucial element is the interoperability of digital identities. Digital identification of customers remotely will be enabled with a review of the current regulatory framework provided by Regulation (EU) No 910/2014 on electronic identification and trust services for electronic transaction. In addition to securing a framework for the development and use of digital identities, this regulation should also enable data sharing between providers to facilitate the advantages of open finance. Taking identification fully online also requires the strengthening of the anti-money laundering and terrorism financing legislation. 

The other aspect of having access to digital financial services and product is passporting of firms. Passporting enables consumers and businesses to have access to cross-border services provided by firms established and supervised in another Member State in line with commonly agreed rules.  Although passporting currently may work for mainstream providers, it does not seem to work well for fintech companies that comprise the bulk of the digital finance ecosystem. To overcome this, the Commission is planning a one-stop-shop licensing system for these firms that combined with passporting rules should help their operation throughout the EU. In addition, special passporting rules for areas of particular interest such as crowdfunding are also being considered. Finally, the Commission proposed the establishment of a new EU Digital Finance Platform to facilitate cooperation and communication between firms and supervisory authorities. 

2) Adapt the EU regulatory framework to facilitates digital innovation: this aim relates to the creation and the review of the existing regulatory framework to fit the requirements of digital age. Within this aim, the EU Commission presented a legislative proposal on crypto-assets and placed as a strategic aim  for a technology-neutral regulatory framework. It also pledges for clarifying the supervisory standards on the application of this legislative framework to artificial intelligence applications.  

3) Create a European financial data space to facilitate data driven innovation: this dimension is connected to the European strategy for data and aims to facilitate access to data and data sharing within the EU, creating broader access to public and private data and real time data sharing. As part of these efforts, the Commission aims to set up a common financial data space through a number of more specific measures: promote innovative IT tools to promote supervision and promote business to business data sharing in EU financial sector and beyond. It is important to note that this open finance initiative is not going follow the UK's approach in mandating data sharing for firms (see our report here). Participation will be voluntary.  The Commission will therefore propose legislation on a broader open finance framework that will build on the upcoming initiative focusing on data access, including the upcoming Data Act, and the Digital Services Act. Finally, the Commission is also reviewing its competition approach and the upcoming review of PSD2 is also going to be part of this framework.  

4) Address new challenges and risks that come with digital innovation: with this aim, the EU Commission aims to work on future-proofing EU prudential and conduct supervision and regulation that should be fit to address both traditional firms as well as new entrants, especially technology companies that are increasingly present on financial markets. The objective will be proportionate regulation and supervision, based on the principle of “same activity, same risk, same rules” and pay particular attention to the risks of significant operators.

Capital Markets Union: the future lies with the better advised consumer-investor

On the 24^th of September, the European Commission revealed its new plans for the Capital Markets Union (here and here). With the post-coronavirus recovery in mind, the European Commission suggested a 16-point Action Plan. The Action Plan highlights the struggles that many businesses face in order to stay solvent in the medium and long term. When it comes to consumers, the new Action Plan intends to increase consumer choice regarding savings and investments, which involves better information and better overall protection. The European Commission also makes the case for market-based pension systems, in order to meet ‘the challenges posed by Europe’s ageing population’. 

In particular, the Action Plan highlights that while Europe has one of the highest saving rates in the world, the level of individual investment remains low. In order to increase individual investment, the EU Commission promises to increase trust in capital markets by improving financial literacy. Additionally, the Action Plan highlights the importance of harmonizing disclosure duties on investment products so as to increase comparability of similar products that are currently covered by different legislation. In this sense, the Commission promises to assess whether it can introduce a requirement for Member States to promote educational measures in relation to responsible and long-term investing. Understandable information also plays a central role in the Commission’s plan of attracting more individual investors. In particular, the Commission stresses that although there are already duties in place that impose the disclosure of financial information, the documents produced under those rules are considered ‘long, complex, difficult to understand, misleading and inconsistent’. Additionally, these documents may result in information overload. In this context, the Commission distinguishes between the sophisticated investor – who does not need as much information – and the inexperienced investor – who needs more information. The Commission commits to looking into the applicable legislation and amend it so as to guarantee that consumers receive ‘clear and comparable product information’.

Additionally, the Commission promises to improve the regime applicable to retail investment, to guarantee that an individual investor benefits from, among other aspects, bias-free advice. The importance of transparent information and bias-free financial advice cannot be understated. Financial advisers must be obliged to disclose their own interest in the sale of a given financial product. As BEUC also highlights here, biased financial advice has resulted in considerable financial losses to consumers all over Europe in recent years (see, for example, the case of Banco Espírito Santo in Portugal). In this regard, the Commission acknowledges financial advisors’ role as gatekeepers of the financial system. As a specific point of action, the Commission promises to work towards the harmonization of the threshold of professional qualification of financial advisors, in order to increase consumers’ trust in their advice.

AG opinion in VKI v TVP Treuhand (C 272/18) - a test case for the Amazon judgment

Last week, a seemingly very technical opinion has been delivered in a case concerning the transparency of a choice-of-law clause included in a fiduciary contract to be concluded by non-professional investors with an investment firm, Verein für Konsumenteninformation (VKI) vs

TVP Treuhand- und Verwaltungsgesellschaft für Publikumsfonds mbH & Co. KG (C-272/18) The case was triggered by an action brought about by VKI, seeking to obtain an injunction prohibiting the defendant to use the choice-of-law clause in the contracts it concludes with non-professional investors.

From the point of view of consumer protection, the case poses two main questions: 

1. Does the Rome I Regulation, including its rules concerning consumer contracts, apply to contracts of the type at stake?
2. If it does, is the choice-of-law clause unfair for failing to comply with transparency requirements and hence misleading the consumers as to their legal position?

As to the first question, the AG concludes that neither of the exclusionary rules possibly relevant to the case leads to attracting the case outside the sphere of application of the Regulation. More in detail, the case does not concern the functioning of a legal person (excluded under art 1.2.e); it also does not concern contractual obligations related to the provision of services exclusively in a country different than the consumer's country of residence. The latter exclusion (art 5.4.b), the AG claims, must be interpreted strictly and autonomously - ie not on the basis of a possibly relevant national rule. Given that some of the services rendered under the contract were to be performed in the consumer's country of residence, this exclusion does not apply according to the AG. 

If the Regulation applies, then the choice of law clause is only of limited impact - according to article 6.2. of the Rome Regulation, choice of law in consumer contracts cannot deprive consumers of the protection offered by mandatory rules of law in the country where the consumer has their habitual residence. In so far as a choice of law clause purports to determine exclusively which rules apply to the contract, the Court has declared in its Amazon decision, such clause is misleading and unfair under Directive 93/13 (UCTD). According to AG Øe, the Court's previous finding is applicable to this case and, hence, the clause is unfair. 

The Amazon case, one should say, was welcomed by consumer advocates but is also object of criticism - inter alia, by Øe's colleague Hogan -, thus it will be interesting to see how the Court will respond to this question as it may indicate whether it intends to stand by its previous findings or reconsider/restrict them. 

The role of consumers in supporting sustainable finance

The EU Commission recently took up the task of joining international efforts (the UN 2030 Agenda and Sustainable Development Goals, and the Paris Climate Agreement) in taking due account of environmental (ie. climate change mitigation and natural disasters) and social considerations (inequality, inclusiveness, and investment in local communities) in investment decision-making, with an aim of leading to increased investments in longer-term and sustainable activities- this process is generally referred to as ‘sustainable finance’.

In order to integrate sustainable finance into its law and policy making, the EU Commission established a High Level Expert Group on Sustainable Finance in 2016 and based on their recommendations adopted the Action Plan: Financing Sustainable Growth in March 2018.

The Action Plan sets out an ambitious plan to transform the EU economy into a greener, more resilient and circular system that will reduce its environmental footprint and address existing inequalities. This entails a holistic transformation of the relationship of the economic agents i.e. public and private institutions, small and large businesses and consumers with the environment.

The primary aim is to orientate capital flows to a more sustainable economy.  To this end, the EU Commission first proposes to clarify what is meant by ‘sustainable’ finance via the creation of EU taxonomy of sustainable activities; than building on the taxonomy, to develop standards and labels for sustainable financial product. Businesses are encouraged to design their business models and to develop strategies and technologies that support the long term effects of their investment. Investment fund managers will be obliged to take sustainability considerations into account when acting in the best interest of their clients, and to inform the end investors about the impact of sustainability considerations on their decision and the investors exposure to sustainability risk, for example, climate related risks. The EU Commission also considers factoring in sustainability risks into calculating capital adequacy of banks and insurance companies. The final really interesting addition is a ‘sustainability benchmark’ that will properly measure the performance of sustainable investments. While benchmarks play a central role in the formation of prices of financial instruments (see our report here), the current benchmarks are not designed to reflect on sustainability considerations.

Following the Action Plan in May 2018 the EU Commission adopted a package of measures implementing several key actions laid down in the Action Plan: 1) To create a unified system of classification of sustainable activities it adopted the Proposal for a regulation; 2) To introduce disclosure obligations of investment fund managers it proposed a Regulation amending Directive 2016/2341; 3) Finally, to create a new category of low carbon and positive carbon impact benchmarks it proposed a Regulation amending the Benchmark Regulation.

Naturally, most of the measures set out in the Action Plan are designed to be addressed by private and public businesses. However, the EU Commission has also seen consumers as part of the picture. So what are the role consumers in channelling financial assets towards a sustainable growth?

Well, just as businesses, consumers can also consider the sustainability of their investment decisions. To this end, the above mentioned taxonomy of sustainable activities and labeling of financial products as sustainable could help consumers in their decision making. These are however not specially designed consumer information tools. It seems that the EU Commission did not envisaged independent decision making by consumers. The Action Plan only foresees the regulation of financial advice for investment and insurance products. The Commission (perhaps rightly) assumes that we will not be able to make smart investment decisions on sustainability considerations without financial advice. Do you agree with this approach? Are we incapable to make independent decisions on complex matters such as the sustainability of investment?

Given that financial advice is seen as having a central role in the EU Commissions regulatory approach, we may wonder whether sufficient safeguards are taken into account against mis-selling of sustainable financial products (see our report here). Prior to providing financial advice, the advisers are obliged to assess the consumers risk appetite and investment objectives, including their alignment with sustainability (i.e. environmental, social and business governance factors). However, without proper safeguards consumers may be offered more risky or more expensive sustainable products to invest than they would expect. The EU Commission must make sure that appropriate safeguards are in place, that only those consumers willing to pay more for a moral satisfaction of investing into sustainable projects  are being offered such products, and that these products conform to the individual consumers risk appetite. This is a factor that should be taken into account in formulating the amended rules for MiFiD 2 and Insurance Distribution Directive (IDD) (on which the EU Commission is currently working on).

The other aspect that could be taken into in formulating the rules and policy approach is account is whether consumers need sustainable products, whether there is demand for them. European states are likely to be divided on this aspect. In some Member States consumers may be willing to investment in more risky or more expensive products to support the causes they believe in, whereas in other Member States consumers will only care about the price of the product and the security of their investment. Probably the higher the living standard is the more consumers are inclined to pay attention at sustainability goals. Should the EU Commission direct its activities towards Member States where consumers are more receptive to sustainable finance, or is the phrase ‘think global, act local’ equally applicable here?

Finally, it strikes me that the current approach is somewhat limited to certain investment products, to those provided by investment firms (regulated under MiFID2) and insurance distributors (regulated under the IDD). Any wider effort of engaging (or at least attempting to) on sustainability goals is not attempted.  We are not for example expected to choose our bank based on their ethical policy or the pension fund that we pay into. Should the EU Commission have a more systematic approach, make a wider appeal to sustainable finance that goes be beyond amending the MiFID 2 and the IDD?

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?

Is Big Data harmful to our financial well-being?

On the 15 of March a Joint Committee of the European Supervisory Authorities - ESAs (consisting of the European Banking Authority-EBA, the European Securities and Markets Authority- ESMA and the European Insurance and Occupational Pensions Authority-EIOPA) published their final report on the impact of Big Data on our financial well-being. The overall conclusion of the report is that the potential benefits outweigh the risks posed by Big Data.

Big Data is a flow of data from our daily online activities that is collected and processed with highly sophisticated IT tools. This may include information from our social media presence, internet browsing history, smart phone signals or data generated by using a payment card. Connecting information from various sources enables financial firms to offer tailored financial products and services to  us, their customers. 

Financial firms are increasingly reliant on Big Data. This this is like to increase in the future with the fast developing Fintech sector that developed exactly with the aim to compete with traditional firms  by providing better suited products to consumers. Fintech is likely to develop faster in the future due to regulatory initiatives such as Open Banking in the UK (see our report here) that mandates banks to share their customer information with Fintech firms upon the consumer's request.

The advantages of Big Data are undeniable. First and foremost, Big Data enables firms to personalized financial products to meet the needs of their customers. Big Data opened the door for innovative, tailored financial products that would not be previously available from mainstream financial providers. This is largely because Big Data enables financial firms to connect non-financial information derived e.g. from our Facebook activity with financial information about our savings to create a better picture about our savings and investment habits, and than to tailor their offer in line with our habits. Secondly, Big Data also enables firms to design their provision of information in a way that can be useful to consumers. For example, the insurance company is able to provide the consumers with a warning that the insurance policy does not cover a parachute jump, which the person recently announced on social media. Finally, the use of Big Data can result in cheaper products for consumers. For example, inexperienced drivers could benefit from lower insurance premiums if they are able to prove that they are driving responsibly. This can be done by installing a telematics device in their cars that will enable insurance companies to check and analyse their driving habits.

The use of Big Data also carries risks. The primary risk is that Big Data is misinterpreted. For example, movements of a doctor that works night shifts could be interpreted as a indication of an unhealthy lifestyle, and as a result a consumer may be denied access to financial services for example a loan. Secondly, consumers may be overloaded with information about various, highly specific products that are difficult to compare and they may end up with a product that is not the best match to their needs. Thirdly, consumers may be also overwhelmed with targeted offers and may end up buying a product that they do not really need. Finally, as every data, Big Data is also vulnerable to cyber attacks.

Given the risks and benefits, the impact of Big Data on our financial well-being is largely dependent on us, on our digital footprint. Firstly on what sort of digital medium we are present, and secondly, what conscious steps we take in making decisions on the information we share. The ESAs warn us that  firms are obliged to inform us on what sort of data they collect about us and how they store it, and that we need to make sure that we understand how our data may be used. However, the recent application of the new GDPR (see our report here) and the many privacy notices we received in recent days reminded us on just how many spaces we are present, and just how many companies store our personal information, many of which we do not even remember signing up for. We were also asked to review our privacy settings, seemingly placing us in driving seat in deciding on the information we are willing to share. But how can we decide on ticking one box rather than the other without knowing the full implications of our decision? For example, a doctor doing frequent night shift may never find out that his/her loan was refused because of misinterpreted information, even is he/she does, he/she might be unaware on just how many occasions he/she agreed to share his/her location, and where he/she needs to go now to turn these settings off. Is control over our Big Data illusionary? Will Big Date be harmful to our financial well-being without this control? What do you think?

Addressing financial innovation: the Action Plan on FinTech

On 8 March 2018 the EU Commission adopted the FinTech Action Plan: for a more competitive and innovative European financial sector, following a Public consultation (on which we reported here). The Action Plan aims towards a future-proof regulatory framework by creating favourable regulatory environment for the flourishing of FinTech services and products throughout the EU.  This initiative fits well with parallel efforts to create the Digital Single Market and the Capital Markets Union.

Although the use of technology in the provision of financial services and creation of financial products is ever increasing, the existing (large) discrepancies between Member States in the regulatory framework under which FinTech firms operate had not been ameliorated. Some Member States like the UK have adopted tailored approach to some, arguably most common, FinTech services and products (such as peer-to-peer lending and crowdfunding) and created a 'Regulatory Sandbox' to subject selected FinTech firms to the existing regulatory environment. The majority of Member States however does not have special  rules and regulatory/supervisory approach to these firms and their products and services are being subject to general rules designed for  'traditional' services and products. The discrepancies in regulatory approaches (from setting up a FinTech firm to offering products and services and supervising their operations) is an obstacle for the development of Single Market in this sector.

In the Action Plan the EU Commission addressed the above regulatory discrepancies in various ways. Most importantly, the Commission invites the European Supervisory Authorities to map the current authorising and licensing approaches applicable for FinTech firms in contemplation of creating a European Passporting Regime for these firms (by analogy to the regime currently applicable to bank). It also aims to review the suitability of the existing regulatory framework, including setting up an expert group to identify regulatory obstacles for FinTech (call for applications is open). Finally, the Commission will set up an EU FinTech Law where European and national authorities will receive training and education on technology enabled solutions.

While there is no doubt FinTech services and products may be hugely beneficial for consumers, making their transactions easier and enabling access to personalization of products and services (see some benefits here), FinTech carries a great deal of risk ranging from cybersecurity and data protection risks to the potential of unsuitable transactional decisions and the placement of dangerous products on the market. Although the Acton Plan does intent to facilitate a high level of consumer protection, it does not take into account the nature of consumer markets as such. As most European instruments, this initiative is heavily focused on raising the competitiveness of the EU and in providing choice for consumers. A systematic approach to consumer protection is absent. From a consumer protection point of view, the approach of the Action Plan is partial, addressing for example, the problems of informed decisions on retail investors,  and a danger from creating and marketing harmful products in some forms of speculative investments (crypto-assets).

Nevertheless, the initiative should be welcomed. Technology enabled services and products are a reality that should be addressed sooner rather than later. However, in reviewing the exiting EU regulatory framework and in creating and EU regulatory/supervisory approach, it is imperative to keep consumer interests and the true protection of consumers at the forefront of the initiatives. To this effect, perhaps it is time to conceptualize what is meant by a 'high level of consumer protection' and to follow it up systematically in addressing the protection of consumers on EU markets, including EU financial markets.

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.

The new rules on financial benchmarks: are consumers adequately protected?

Starting with 1 January 2018 the new Regulation on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds (known as the EU Benchmarks Regulation) that entered into force 30 June 2016 (see our earlier report here) is applicable in Member States. The regulation responded to the serious abuses of the regulatory gap in forming financial benchmarks, the most well known being the manipulation of Libor (London Interbank Offered Rate).

Libor is a benchmark that reflects the rate of interest a bank is willing to lend to another bank. It has a significant consumer dimension given that it influences the formation of the prices of consumer loans. The scandal therefore concerned EU consumer and mortgage loan consumers, the most affected being those with variable rate mortgage loans.

What happened in the Libor scandal? Every day a group of the largest banks submitted their interest rates for 10 different currencies and 15 different lengths of loans to the largest benchmark administrator, Thomson Reuters that would average out the submitted rates (see for more here) and publish the average as Libor. Importantly, the rates submitted were estimates that the banks are willing to lend at, and were not based on actual transactions. Subsequent investigations showed that the traders involved colluded by submitting false rates to benefit their institution and themselves. The scandal triggered heavy fines for the banks and criminal sanctions for the traders involved. Some US  based businesses also sued for damages. As far as I know, consumers so far remained (largely) uncompensated. Given the difficulties in proving the damages sustained (see for more here), consumers are likely to be better off with regulatory redress (like in the case of PPI in the UK) that has not happened yet.

The new rules aim to regulate governance and control over the benchmark formation process by improving the quality of data used by benchmark administrators insisting that benchmarks reflect economic realities, and ensuring that the data submitters are subject to adequate control, especially that they avoid any conflict of interest. In addition to these general requirements aiming to secure the safety and reliability of benchmarks, the new rules specially address consumer protection concerns by using the most common EU consumer protection tool, the provision of information.

Consumer protection rules are laid down in Title IV titled 'Transparency and consumer protection'. The key addition of the section is that firms are required to publish a benchmark statement with information specified in Article 27. The benchmark statement should define the economic reality measured by the benchmark and circumstances under which the measurement may be unreliable; identify the elements that are subject to discretion; provide notice of possible factors that may necessitate changes or the cessation of the benchmark and advise that the change may have impact on the financial contract. In addition to these rules, Article 58 of the EU Benchmark regulation amends the 2008/48/EC Consumer Credit Directive and the 2014/17/EU Mortgage Credit Directive in a way to mandate the provision of information on benchmarks. Consumer credit and mortgage firms will be obliged to inform consumers of the name of the benchmark, the administrator and the potential implications of the benchmark on the consumer. these provisions are applicable from 1 July 2018.

Although the recognition of consumer protection concerns should be applauded in such an important regulatory instrument, my impression is that  the special consumer protection rules, the one section devoted to consumer protection, do little to actually protect consumers. I wonder how consumers will understand the complex financial terminologies of benchmarks and how they will assess the associated risks of uncertainties for example of the circumstances under which measurement of economic realities reflected in benchmarks become unreliable, and what can they do even if they would understand the implications of the use of selected benchmarks. We can therefore only hope that the rest of the regulatory instrument setting out the actual process of benchmark formation will make benchmarks sufficiently safe and stable for everyone, including us, consumers.

DG FISMA published a report on national responses to the financial crisis

Our readers may be interested in the recently published report by DG Financial Stability, Financial Services and Capital Markets Union (FISMA) titled: Coping with the international financial crisis at the national level in a European context Impact and financial sector policy responses in 2008 – 2015

The comprehensive report is about national responses to the financial crisis. It focuses on those Member States that encountered the most reforms following the crisis: Hungary, Latvia, Romania, Greece, Ireland, Portugal, Spain, and Cyprus. The further  twelve Member States at least once received a country specific recommendation for their financial sector: Belgium, Bulgaria, Denmark, Germany, Croatia, Italy, Malta, the Netherlands, Austria, Slovenia, Sweden and the United Kingdom. The rest of the Member States, Czech Republic, Estonia, France, Lithuania, Luxembourg, Poland, Slovakia, and Finland are outside the scope of the report, and are only used for comparative purposes.

Although the report primarily tackles the macro aspects of the post-crisis changes, it provides valuable insights into the reforms designed to protect consumers such as measures responding to foreign currency lending in affected Member States, and national initiatives in reforming personal insolvency laws. It is therefore an interesting read for everyone interested in EU financial consumer protection and financial consumer law.