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European Supervisory Authority Consumer Day ABI summary

The ABI attended the recent annual ESA Consumer Day held in London, where key conduct risks being considered at European level were debated. It was a useful opportunity to get an idea of the different approaches between the insurance, banking and asset management supervisors, as well as an indication of some of the direction of travel. 

Opening Remarks: Andrea Enria, Steven Maijoor and Gabriel Bernardino:

Key areas of concern raised in the context of insurance were mis-selling through non-advised sales, partly driven by poor management of conflicts of interest, misleading advertising, and lack of (standardised and comparable) information for consumers and investors. The aim is to ensure that existing legislation is implemented effectively.

EIOPA’s ongoing work includes:

  • Private-Placements by conglomerates in particular (bancassurance firms)
  • Solvency II (technical guidelines & stress testing)
  • Cross-selling (MiFID & IMD) 
  • Insurance PRIPs conflicts of interest rules (IMD 1.5)
  • PRIIPs (Regulatory Technical Standards)

Professor McCormick (London School of Economics) presented their Conduct Costs project, a project attempting to measure and rank banks on the basis of conduct behaviour, using measurable such as regulatory. The purpose is to attempt to find a way of restoring public trust in banks through disclosure and a comparative analysis.

Panel 1: Product Oversight & Governance: 

Whilst ostensibly a debate about product governance, this discussion gave participants a flavour of each of the ESAs’ views on product regulation in general, and covered product pre-approval, product intervention, pricing and the division of responsibility between manufacturer and distributor.

  • Product governance is seen as an attractive tool for regulators because responsibility falls on firms and their boards to ensure products conform with good governance principles.  Many references were made to ensuring products are designed and suitable for the “target group”. The ESAs published joint guidance on produce governance in November 2013.
  • There was little appetite for direct supervisory product approval, with Enria (EBA) recognising that that product oversight would be a challenge for supervisors. Bernardino (EIOPA) noted the governance principles underpinning Solvency II. He also commented that he would like to see “results”, by which he meant evidence of firms actually taking decisions not to take products to market, and threatened that if mis-selling continues, the product approval tool may need to be considered.
  • Maijoor (ESMA) felt regulators should be able to intervene when necessary and therefore maintain non-continuous product approval. However, product intervention was seen as a last resort and to be done only in exceptional cases.
  • On the division of responsibilities between providers and distributors, there was a clear difference in approach between ESMA & EIOPA.  Bernardino felt that there needed to be clear divisions of responsibility, whereas Maijoor felt that the financial sector could mirror the food retail sector where there is close alignment between manufacturers and distributors and where end retailers are much more concerned with their reputation.  He stressed that the separation of responsibilities was not necessary especially when the distributor was mainly working with the consumer/investor.     
  • On price regulation the ESAs also took different approaches.  Bernardino was not in favour of pricing controls, but was in favour of challenging fairness (e.g. “disproportionate” commission payments or claims ratios of 20%). However it was accepted that this responsibility lies with firms’ boards and senior management. EIOPA will be looking at the elements of costs and how fair they are for consumers. Maijoor noted that price regulation is not unheard of (e.g. competition authorities may intervene in pricing and costs). As costs/charges and commission payments are integral to the final price, regulators should be able to supervise costs. Enria felt that there should be oversight over costs to make sure an assessment is made when the cost is given to the consumer. Costs needed to be standardised to make it easier to compare. 

Future legislative work is outlined below:

  • Further detailed guidelines on the 8 product governance principles mentioned earlier will be published.
  • Conflict of Interests consultation on IMD 1.5 published on 21st May, with deadline of 22nd July.
  • PRIIPs Level 2 work, including detailed rules for transparency of costs and charges and for the disclosure of costs and charges. A call for industry experts to aid this work will be issued shortly.
  • IMD2 is expected to provide EIOPA with additional powers
  • Work on personal and occupational pensions

Panel 2: Behavioural economics/finance - Owain Service, Olivier Micol, Wijnand van de Beek, Giuseppe D’Agostino

An interesting discussion took place on how behavioural economics can apply to policymaking, but it is clear that it will take some time before it can be used in any effective way at EU level.

  • Owain gave an overview of the Cabinet Office and HMT’s work on behavioural economics to date, with real-life examples ranging from incentivising people to pay Council tax to auto-enrolment. Behavioural economics focuses on how consumers behave rather than how we want them to behave, which therefore leads to adjustments in policy design.
  • Providing more information, greater disclosure and even financial education does not necessarily change consumer behaviour.  Instead standardisation and the simplification of information can change the outcomes for consumers.
  • Consumer Behaviour: Consumers systematically undermine risk; With complex products - consumers are not able to learn from mistakes and place heavy reliance on advice; Consumers are not adept at weighing up long term advantages over short term gain; Consumers rarely shop around (only 30%) with 2/3 only looking at one other provider.
  • On the PRIIPs KID, it is important to keep it simple and clarify what the key information is to help consumers make the right decision.  Regulators are currently considering how best to communicate risk and reward to consumers, and consumer testing is a vital part of this.

Panel 3: Cross- selling - Verena Ross (ESMA)

This speech provided some clarification as to the detriment regulators are seeking to address, but raised many concerns around the room on the far-reaching consequences of some of the proposed remedies.

Definition of cross-selling was set out where two or more products (including services) are sold as part of the same package.  This can be done in several ways; in a bundled product - where products can be offered and sold separately - or by tying products together - where two or more services or products are imposed on the consumer.  A typical example is an insurance product sold with a mortgage or a loan.

Whilst she acknowledged the benefits of grouping products together, including; financial benefits, better conditions, convenience for the customer and wider access to products, regulatory concerns include: 

  • Packaged selling can limit consumer choice. A representative from Test Achats also mentioned that this can also limit consumer switching.
  • Consumers are unable to effectively process the information they are provided at the point of sale, as they are focusing on the primary product. Pre-ticked boxes can have this effect. Also providing the add-on at the end of the sales process.
  • Consumers may be sold unnecessary products as they may already be covered by another policy already (dual insurance).
  • Consumers risk paying more for the package than they would pay if they shopped around for the separate elements individually.
  • There may be a lack of understanding of the true absolute cost of secondary product.
  • Remuneration structures can get staff to push the secondary product when it is not beneficial for the consumer.
  • Contract barriers can limit the consumer from being able to cancel elements of the package.
  • Consumers withdrawing from the market because of bad experiences.

Potential regulatory actions include:

  • Providing clear and simple pricing information in a prominent manner
  • Getting rid of default opt-ins
  • Deferred opt-in with a time cap (potentially similar to FCA’s suggested remedy for the GAP insurance market)

A Joint ESA consultation will be published in Q3, setting out draft guidelines on how to make consumers aware of risks involved and how to assess the suitability of the product for the consumer.

Panel 4: Financial innovation

Whilst a representative from the telematics industry was present at this debate, it focused mainly on investment products, and on how to regulate “complex” products. 

  • Jean-Paul Servais (Belgian financial regulator, FSMA), talked about Belgium's 2011 ban on the sale of certain complex products in 2011, following which the sale of complex products reduced by three times. He was in favour of harmonised guidelines for product innovation.
  • Jacques Anselem (Allianz telematics) described the positive impact of the blackbox technology developed in several EU Member States over recent years.
  • Monique Goyens (European consumer association BEUC) called for simplified and standardised information (not necessarily products but standardisation and layout) but did call for regulators to take the step of banning complex products if detrimental to consumers. She expressed concern about the lack of innovation in the area of financial advice. Michelle Smyth from Which? Also recommended that the IT software underpinning any innovations needs to be robust. 
  • Dan Waters from ICI Global called for greater engagement with younger investors and savers.

For more information, read a summary by Insurance Europe (pdf 120kB).

Last updated 01/07/2016