Banks, insurers and agents face tougher and costlier mandatory standards for informing customers about financial products they intend to buy, the European Union's executive said on Friday. The 27-country bloc is anxious to encourage people to save for their retirement as people live longer and state pensions become less generous.
The European Commission said in a consultation paper on Friday there are several key market failings. "Retail investor confidence has collapsed following the financial crisis," the executive body said. "Financial services in general have a very poor track record in explaining themselves to retail investors in terms that retail investors can understand," it added.
The Commission has powers to propose draft laws and said it would make proposals next year that would cost the industry millions of euros to comply with. The consultation covers packaged retail investment products (PRIPs) which it defines as retail investment funds, closed and open-ended funds, structured products, unit-linked insurance contracts and derivatives products.
The planned changes will not cover pensions, directive holdings in stocks and bonds, simple deposits or products whose total returns are set in advance. A study for the Commission accompanying the consultation estimates the one-off cost for the financial services industry of tightening PRIPs rules at 350 million to 550 million euros, with annual on-going costs of 110 million-220 million euros.
There is no intention to harmonise PRIPs themselves, only the scope of products covered by tougher, mandatory standardised customer information rules. The Commission said pre-contractual information should follow the example set by mutual funds where key details are limited to two sides of A4 paper to avoid overload.
The UK Association of Independent Financial Advisers (AIFA) said the consultation indicated that wholesale changes were planned that will cause British advisers to struggle with aspects such as the standardised disclosure form that will detail how an adviser is paid. "I fear it could also add substantially to the costs of the industry overall," said AIFA director of policy Andrew Strange.
CONSUMER PROTECTION Tougher rules for selling PRIPs will be covered in reviews of two existing EU laws: the markets in financial instruments directive (MiFID) and the insurance mediation directive (IMD). The Commission launched a separate consultation on IMD with draft legislative changes due by the end of 2011.
This consultation looks at whether insurance brokers should be forced to reveal to customers the commission they receive from insurers for selling their general insurance products. Regulators in the United States and across Europe, mindful of failures to protect investors from the financial crisis, are putting in place stricter consumer protection rules.
Britain, which has seen several scandals such as pensions mis-selling and the near-collapse of Equitable Life insurer, will introduce a tougher regime from January 2013. Its retail distribution review will ban financial services companies from paying commission to so-called independent financial advisers to push customers to buy specific products.
Financial advisors will also have to be better trained but industry is fighting a rearguard battle. The Financial Services Authority denied this week its board had discussed scrapping the measure which will cost the industry an estimated 1.7 billion pounds to introduce.