The BEUC study on "Financial Supervision in the EU - A consumer perspective" was made public on their website on Wednesday 18 May 2011. The study gives an overview of how consumer protection fits into financial supervision in the EU. Consisting of a main report, defining consumer protection, exploring elements of non-prudential supervision and outlining structures of financial supervision, and an Annex document providing details on national supervisory structures and consumer protection, it is the fruit of cooperation from Member State financial supervisors and authorities to whom the authors of the report, iff are grateful.

The report highlights the possible tension and weakened ability to achieve consumer protection that may result from potential conflicts of interests between different supervisory mandates, and includes recommendations such the creation of Financial Consumer Protection Agencies in all Member States, dedicated to monitoring and ensuring beneficial consumer outcomes in financial services locally.

Executive Summary

1. The financial crisis has largely been attributed to a failure in effective bank supervision. Consumers may be seen as the true victims of the crisis, in that they have been burdened with irresponsible credit, they lost their money through bad advice and inappropriate investment products and then, as taxpayers, had to help rescue the banking system. This has created a new awareness of the role of consumer protection in financial services and of the role of the state in financial supervision.

The European Consumers’ Organisation BEUC has commissioned the institute for financial services (iff) to assess existing consumer protection through the law and practice of financial supervision and to provide ideas and recommendations for an improved representation of consumer interests in the future. The present study is based on official statements, literature and an empirical survey of financial supervisors and consumer organisations in all EU Member States. Its findings have taken the form of a Main Report and an Annex document called “Country Reports” containing details on national financial supervision structures and activities. The research shows that all consumer organisations and most supervisors, whether motivated by the imperatives of their own statutory function or by own commitment, see consumer protection as an integral part of a future strengthened supervisory regime. Overall, existing supervisory practice is seen as unsatisfactory at both national and international level. This is partly attributed to existing conflicts of interests within the supervisory framework itself, and partly to lack of competence or adequate means of intervention, including the unequal distribution of supervisory resources.

2. A lack of clarity in the definition of consumer protection generates a wide range of opinions and proposals. Some identify consumer with (general) investor protection in financial services or focus solely on securities and assets, placing less emphasis on credit, insurance and payment services, and working on the assumption that improved prudential supervision would suffice to safeguard consumer protection. Where consumers are seen purely as the users of products available in the market, the protection of the market and the provision of information to consumers, together with consumer education, are seen as the remedies needed. Consumer protection is focussed onto the legal aspects of consumer policy including the protection against conflicts of interest and mis-selling as well as consumer information and consumer education, to the extent that it entails a legal right to information. The enforcement of consumer rights to transparency and information, as well as to legal minimum standards in products and servicing, should therefore be central to financial supervision in the future as it relates to consumer protection. The institutional design of consumer-related financial supervision needs to be adapted to national diversity in terms of population size, the resources available and the prevailing legal and ethical traditions.

3. Clearly defined consumer protection in financial services must address conflicts of interest between prudential regulation and central bank functions, as well as those existing between consumer protection and prudential regulation. A significant number of countries now favour a separation of prudential supervision from supervision in the form of rules setting appropriate market behaviour on the part of banks, including consumer protection rules. This is in line with the growing importance of conduct-of-business supervision in areas of finance beyond the securities sector, in which those rules were originally conceived. However, alongside the potential need for greater convergence in conduct-of-business supervision in Europe, there is a need to develop concepts and techniques applicable to the supervision of commercial practices in order to address potential unfairness and for supervisors to assist financial regulators through the identification of potential problem areas in the markets for financial products. The report does not prescribe an institutional design; it instead calls for the creation of firewalls to ensure effective supervisory outcomes in terms of consumer protection, the supervision of the money supply and the safety of financial institutions.

4. In order to address the problems which arise when public administrations intervene in matters of private law, the report examines a number of examples where “private attorney general” functions, public inquiries and research into malpractice and its social consequences (e.g. overindebtedness, foreclosures, poverty in old age), the law is enforced and financial information is provided by:

• Establishing an active role for financial supervision in general consumer information and education;
• Providing public agencies with adequate powers enabling them to enforce private law; and
• Rendering compliance with private consumer rights a public duty.

5. The report proposes a three-peak supervisory model, distinguishing between central bank functions in the money market and the money system, micro-prudential supervision to achieve the safety of financial institutions, and behavioural supervision, which we refer to as customer protection. This last pillar of the model comprises the supervision of consumer protection and forms the basis of the report’s proposal that Financial Consumer Protection Agencies (FCPA) should be established.

Three pillar system of supervision

Furthermore, this proposal is in line with the general features of well-functioning regulatory and supervisory structures established by the IMF. It thus takes account of the need to ensure that all objectives (i.e. consumer protection goals) are assigned to a specific agency, that there is an internally consistent set of objectives (so that synergies can be achieved and internal conflicts avoided or kept transparent), and that there should be formal mechanisms to deal with any conflicts that arise.

6. A Financial Consumer Protection Agency (FCPA) should

• be created in each country,
• be co-ordinated at EU-level,
• be solely responsible for consumer protection,
• have at least two subdivisions: banking and insurance.
• include all “banking and insurance businesses”, irrespective of whether they qualify as banks or insurance companies.
• oversee all financial services offered within the market they supervise, irrespective of whether they originate from a national or a supplier based outside their jurisdiction
• focus on the social effects of financial services in retail banking and insurance.
• have an integrated supervisory function to cover linked products.
• form part of a three-peaks system of supervision and create firewalls both to avoid internal conflicts of interest and to exclude any form of inappropriate intervention by providers.
• be staffed and equipped in proportion to market size, level of complaints and the providers within that market.
• be effectively evaluated.
• have effective enforcement mechanisms under both administrative and private law, as appropriate.
• have specific authority to deal with empirically verifiable consumer problems.
• work to inspire confidence among existing consumer networks operating in the area of financial services by supporting their work and benefiting from their knowledge of and expertise in problems involving financial services for consumers.

It would fall to the FCPAs to enforce consumer rights under both administrative and private law. They would have a duty to accomplish the supervision of the sale and subsequent servicing of financial products to enforce consumer rights through administrative, individual and collective mechanisms, to conduct inquiries and research, to advise on financial regulation and to provide and co-ordinate best practice in financial information and education based on close links with consumers and knowledge of the problems they are encountering in this area. The FCPA thus calls for financial supervision to involve close collaboration with consumer organisations. The financial crisis has dramatically highlighted the need for information flow and for dialogue between stakeholders in financial services (financial market authorities, consumer organisations and other relevant market participants), and has demonstrated the need for supervisors within the EU to cooperate more closely. The FCPAs would be a major element of this new institutional dialogue and provide a national and international forum for the exchange of information between stakeholders. Its existence would benefit all organisations dedicated to consumer protection.

• iff-BEUC Financial Supervision - Main Report (2011)
  (3284462 Bytes)
• iff-BEUC Financial Supervision - Annex Country Reports (2011)
  (1973058 Bytes)