European Commissioner Michel Barnier proposed today (3 July) new rules to dismantle shoddy practices amongst investment and insurance brokers in the financial sector, another building block in the EU's implementation of the global financial regulatory reform agreed by the G20.
The package of measures is designed to tackle low consumer confidence in financial products resulting from lack of transparency and conflicts of interest amongst salesmen, who sometimes sell inappropriate products to clients.
The new regulation would demand finance retailers to publish key information documents (KIDs) when selling complex packaged retail investment products (PRIPS) directly to the public.
New changes to the Insurance Mediation Directive will require insurance sellers to provide clearer information about the products they sell and be up front about any third party payments they receive – which can reveal conflicts of interest. That is supposed to protect consumers from fraud, no matter who sells them the products.
Consumer protection in the investment funds market will also be protected by tightening of the Undertakings for Collective Investments in Transferable Securities (UCITS) Directive.
Information documents will costs sector €171 million
The most far-reaching measure will be the introduction of the new KIDS, which will affect investments such as life insurance and pension products sold by fund managers, banks and insurers. Around €10 trillion is held in such investments at the moment throughout the EU.
The new documents must clearly set out the main features of the product sold, including an accurate assessment of risk to the consumer.
“The KIDs will make clear to every consumer whether or not they could lose money with a certain product and how complex the product is,” an EU official said.
The format of the new documents is designed to allow consumers to compare the benefits and risks of such products against others of the same nature, following a strict set of simple criteria.
Proposed changes to the insurance directive are designed to achieve similar levels of clarity in the sale of insurance, a market where 70% of products are sold without the appropriate levels of advice at the moment, according to Commission research.
It is estimated that introducing the KIDs will cost the finance sector a one-off hit of €171 million, with annual costs of around €14 million each year afterwards.
All three proposals will go to the Parliament and the Council for consideration under the co-decision procedure, with the KIDS set to be introduced by 2014, and the changes to the insurance directive and UCITS by 2015.
A joint statement welcoming the proposals was issued by the global Association of Investment Professionals (CFA), The European Federation of Financial Services Users (EuroFinuse), the Fédération Européenne des Conseils et Intermédiaires Financiers (FECIF) – which represents the interests of financial practitioners such as agents, brokers and consultants – the Association of International Life Offices (AILO), representing the interests of life assurance companies and the European Fund and Asset Management Association, representing the investment management industry.
The statement said that the proposals are essential in addressing crucial issues of investor protection and “the lack of a level playing field in the distribution of retail financial products across the European Union”.
“We fully support the overall aim of the PRIPs regulation to provide retail investors with comparable, standardised and understandable information on saving products,” it went on.
The group said that it is essential that the PRIPs regulation “covers the broadest range of investment products possible”, adding that one of the main challenges will be the format and content of disclosure documents. “The exercise is likely to be difficult, because of the diversity of retail investment products being covered. This is why CFA Institute, with the active support of EuroFinuse and FECIF, is leading a research project on the standardised presentation of costs in a Key Information Document (KID) for PRIPs, to be published in the Autumn,” the statement concluded.
A statement from Eurofinas, representing European consumer credit providers, welcomed the announcement as “a good starting point” and commended the Commission for proposing a regulatory framework that takes into account the differences between the various distribution channels as well as the complexity and nature of the various products distributed.
“A one-size-fits-all approach would have been based on the false assumption that all insurance intermediaries are in the same business, create the same risks and therefore should be subject to the same rules. This is inherently incorrect,” said Eurofinas’ director-general Tanguy van de Werve.
However the statement also regretted that the Commission had opted for what it described as “a minimum harmonisation approach”.
“Indeed, allowing Member States to adopt more stringent measures (goldplating) will generate regulatory inconsistencies and gaps across the EU,” it said.
“UCITS are a European branding and investment success story and banks play a key role via the safekeeping service that they provide,” said the European Banking Federation’s (EBF) chief executive, Guido Ravoet. “The EBF believes that the regulation presents an opportunity to reinforce the success of the UCITS brand while guaranteeing a high level of investor protection which is its hallmark,” Ravoet added.
These measures are intended as an ongoing exercise in restoring consumer confidence in the financial sector following the crisis.
During the crisis bad corporate governance, including external boards and overgenerous incentive schemes, pushed financial firms to take bets on the market to please their owners and get big bonuses (EurActiv 13/10/09).
A $65 billion Ponzi Scheme, perpetrated by stockbroker Bernard Madoff in the US, revealed how murky investor relations allowed financial scammers to get away with fraud.
- 2012-2014: Measures on PRIP protection, insurance directive and UCITS to be debated as part of co-decision procedure between Parliament and Council