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Commission proposes legislation to improve consumer protection in financial services
The financial crisis has become a crisis of consumer confidence. Lack of transparency, low awareness of risks, and poor handling of conflicts of interest have meant that consumers across the EU have been repeatedly sold investment and insurance products that were not right for them. Consumers have had their faith in the financial sector shaken. In addition, existing legislation has not developed fast enough to reflect the growing complexity of financial services.
Only by taking steps to tackle these shortcomings can low consumer confidence be tackled, laying strong foundations for growth in the EU. Strong, well-regulated retail markets that place the best interests of consumers at their heart are necessary for consumer confidence and economic growth in the medium and longer term. That is why today, the Commission has presented a legislative package that raises standards and removes loopholes for the benefit of consumers. Specifically, the package proposes new, consumer-friendly standards for information about investments, raises standards for advice, and tightens certain rules on investment funds to ensure their safety.
Internal Market and Services Commissioner Michel Barnier said: "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."
Key elements of the package
The package is composed of three legislative proposals: 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 (currently governed by the Directive on Undertakings for Collective Investment in Transferable Securities (UCITS).
Packaged retail investment products (PRIPS)
The Commission's PRIPS proposal improves the quality of information that is provided to consumers when considering investments. Investment products are complex and it can be difficult to compare them or fully grasp the risks involved.
The consequences of taking unexpected risks and facing consequent losses can be devastating for consumers, given that investments often form the backbone of a consumer's life savings. Given an EU retail investment market of up to 10 trillion euro, buying wrong or unsuitable products can quickly become a major problem.
The Commission proposal aims to inform consumers in a format easy to understand by introducing a new, innovative standard for product information, one that is short and plain-speaking, and thus far more consumer-friendly. This document is called the 'Key Information Document' (KID). The proposal foresees that every manufacturer of investment products (e.g. investment fund managers, insurers, banks) will have to produce such a document for each investment product.
Each KID will provide information on the product's main features, as well as the risks and costs associated with the investment in that product. Information on risks will be as straight-forward and comparable as possible, without over-simplifying often complex products. The KID will make clear to every consumer whether or not they could lose money with a certain product and how complex the product is.
The KIDs will follow a common standard as regards structure, content, and presentation. In this way, consumers will be able to use the document to compare different investment products and ultimately choose the product that best suits their needs.
The products for which a KID will be required include all types of investment funds, insurance-based investments and retail structured products, in addition to private pensions.
Insurance Mediation Directive (IMD) Revision
The Commission is proposing a revision of the IMD, which currently regulates selling practices for all insurance products, from general insurance products such as motor and household insurance to those containing investment elements. Consumers are often not aware of the risks associated with the purchase of insurance cover. Whilst accurate professional advice is crucial for insurance sales, recent surveys1 show that more than 70% of insurance products are sold without appropriate advice. The current EU legislation does not deal in detail with the sale of insurance products, rules differ across Member States, and apply solely to intermediaries.
The goal of the Commission's proposal is to upgrade consumer protection in the insurance sector by creating common standards across insurance sales and ensuring proper advice. It will do so by improving transparency and establishing a level playing field for insurance sales by intermediaries and sales by insurance undertakings. To achieve this, the following changes are proposed:
The same level of consumer protection will apply, regardless of the channel through which consumers purchase an insurance product. Whether a consumer purchases a product directly from an insurance undertaking or indirectly from an intermediary (e.g. an agent or a broker), the consumer will receive the same level of protection. This does not exist today as the current IMD only covers sales provided by intermediaries.
Consumers will be provided in advance with clear information about the professional status of the person selling the insurance product. Rules will be introduced to address more effectively the risks of conflict of interest, including disclosure of the remuneration received by sellers of insurance products.
Insurance product sales will have to be accompanied by honest, professional advice.
It will be easier for intermediaries to operate cross-border, thus promoting the emergence of a real internal market in insurance services.
Undertakings for Collective Investment in Transferable Securities (UCITS) V
The original UCITS Directive created the internal market for investment funds in Europe. The current EU legislation for investment funds (the UCITS Directive) has been the basis for an integrated market facilitating the cross-border offer of collective investment funds. Managing almost €6 trillion in assets2, UCITS have proved successful and are widely used by European retail investors. UCITS are also regularly sold to investors outside the EU where they are valued due to their high level of investor protection.
The Commission's proposed amendments to the current UCITS rules are based on the experience from the financial crisis, so as to continue to ensure the safety of investors and the integrity of the market. In particular, the proposal will ensure that the UCITS brand remains trustworthy by ensuring that the depositary's (the asset-keeping entity) duties and liability are clear and uniform across the EU3.
Today's proposal addresses three areas:
a precise definition of the tasks and liabilities of all depositaries acting on behalf of a UCITS fund;
clear rules on the remuneration of UCITS managers: the way they are remunerated should not encourage excessive risk-taking. Remuneration policy will be better linked with the long-term interest of investors and the achievement of the investment objectives of the UCITS; and
a common approach to how core breaches of the UCITS legal framework are sanctioned, introducing common standards on the levels of administrative fines so as to ensure they always exceed potential benefits derived from the violation of provisions.
Aviva survey on consumer attitudes: http://www.aviva.com/customers/consumer-attitudes-survey/;
DG SANCO research on behavioural economics: http://ec.europa.eu/consumers/dyna/conference/economics_en.htm
The principal UCITS rule is that all assets of a UCITS fund must be entrusted to a depositary.