Better together: Delivering Consumer Protection in Europe- Director General, Financial Conduct Derville Rowland

Speaking at the Joint European Supervisory Authorities Consumer Protection Day 2019, The Mansion House, Dublin.

Good afternoon, ladies and gentlemen.

You are all very welcome to Dublin.

It has been a pleasure to hear the contributions of our distinguished speakers – EIOPA chair Gabriel Bernardino, European Ombudsman Emily O’Reilly and Executive Director of the Federation of European Consumer Organisations, Klaus Mueller.

The 1950 Schuman declaration, which paved the way for the establishment of the European Union (EU), stated famously that: “Europe will not be made all at once, or according to a single plan. It will be built through concrete achievements which first create a de facto solidarity.”

The European System of Financial Supervision (ESFS) isn’t perhaps the most readily understood part of the European project. 

But it has helped ensure closer cooperation and exchange of information among national supervisors, facilitate the adoption of EU solutions to cross-border problems and advance the coherent interpretation and application of rules¹  - thereby helping to safeguard financial stability and protect consumers, performing a crucial public mission which matters to every European, young and old.

And in keeping with the spirit of Schuman, it is a project that must continue to evolve and continue to improve.

This is particularly true as we think of the growing complexity and pace of change of the financial services sector in today’s hyper-connected global world.

So today, I’d like to talk a little about the challenges ahead of us and how we need to be agile, particularly in areas such as fintech and sustainable finance. I will suggest that by holding true to our ideals, by deepening our collaboration as regulators and supervisors, and by being as responsive as we expect industry to be, we can meet the challenges posed in all of these areas in order to protect consumers.

I might begin with a word on Capital Markets Union.

The next wave of challenges

 We meet, of course, as the current European Commission’s five-year mandate draws to a close, with preparations under way for the appointment of the new Commission.
Financial services and financial markets have featured strongly in the legislative and regulatory agenda of the past five years.

We have seen some progress on Capital Markets Union, while the development of Banking Union also represented an important step in the institutional architecture of the EU.

But in a post Brexit Europe we need to do more and we need to continue to increase consumer and investor confidence to make informed investment decisions.  We should build on the momentum to offer consumers and investors high quality options and suitable choices to help them to provide for themselves and their families, both now and in to the future. We recognise the good intentions behind PRIIPs regulation, which seeks to tackle the problem of complex disclosure by introducing a short information document, which uses succinct and understandable language and visual indicators supporting the content of the document.²  We have also seen MiFID II bring better disclosure requirements for investors, focusing, in particular, on transparency of costs.³

Recognising the progress made but accepting more work is required, there is a real need to further simplify and improve the PRIIPS disclosures to support better informed consumer decisions, and we will hear more on this topic at the next panel discussion.
More importantly, consumers need to be confident that we can move swiftly to identify risks and reduce potential harm.  Given the rate of societal, technological and economic changes, the need to enhance consumer confidence that the regulatory framework is fit for purpose was never so great.  The ESAs’ next wave of policy initiatives should therefore be informed by risk analysis and evidence based approaches to identify potential risks and prevent harm for consumers.

As we move forward, increased agility is a challenge facing all regulators at national and European level and one to which we must all rise. Fintech and the increasing digitalisation of financial services wait for no man – and certainly not for any regulator.

Fintech and digitalisation

My father ran a small business in a rural town in the west of Ireland. I can vividly imagine the shock on his face if a customer were to have suggested using their mobile phone to pay for his wares. But things have moved rapidly since his days in business and for many people – particularly our young people – cash is seen as yesterday’s story.

Digital technologies are transforming retail financial services and the consumer journey. Our patterns of consumption of financial services are changing. At the same time, financial firms are in many cases reducing their high street presence.⁴

We’ve seen the rise of challengers to banks - of blockchain, crowdfunding and cryptocurrencies, of new trading and payment platforms, and more. Behind all of this, tools such as algorithms, decision trees and artificial intelligence are changing and, we hope, enhancing how financial services are being provided. 

According to one estimate, global investment in fintech companies hit almost $112 billion in 2018, up from less than $19 billion in 2013.⁵

It goes without saying that there are significant potential benefits for consumers. But there are also significant risks – both in the regulated and unregulated sectors. If technology-enabled innovation in financial services has the potential to benefit consumers in terms of cost, convenience and greater choice of financial products and services, there are also significant security, fraud and data protection risks.

Given what behavioural science teaches us about the importance of frictions in the decision making process that allow consumers an opportunity to pause before they purchase, we need to ask whether it is appropriate that a consumer purchase a complex and potentially life-changing product in a one-click process.

There are more basic issues too, such as the actual products being offered – products like binary options which are no more an investment than betting on a horse.  The European Securities and Markets Authority’s (ESMA’s)  work to protect consumers from binary options and Contracts for Difference is a shining example of the European Supervisory Authorities (ESAs)  and national competent authorities (NCAs) working together to better protect consumers from risky products often sold online and across borders.

We also need to think about how many firms truly prioritise consumer needs rather than business outcomes in designing their products and digital journeys. Consumer disclosure, complaints and claims handling practices may be underdeveloped in immature or emerging firms. And if these issues pose challenges for regulated entities, the risks to consumers are arguably even greater in unregulated sectors.

On top of all of this, there is the reality that the increased provision of digitised services may have the unintended consequence of increasing, rather than reducing, financial exclusion. There is little point taking pride in a highly advanced financial services industry if the result is that vulnerable consumers get left behind.

As the ecosystem evolves at pace and becomes increasingly complex, these and other questions present real challenges to regulators and supervisors. While it is inevitable that consumer and investor protection issues will arise that could not have reasonably been foreseen or that may be the result of fraud, criminal conduct or human error, the onus on us collectively is to ensure our regulatory and supervisory frameworks are kept under continuous review, that we are alive to emerging issues, and have the capacity to respond accordingly.

In the fintech sector in particular, the “move fast and break things” entrepreneurial motto must be met by the appropriate regulatory response to safeguard stability and protect consumers. Let me say that the Central Bank’s aspiration is for a trustworthy and resilient financial services system that sustainably serves the needs of the wider economy and its customers.

And, for that to happen, we need to develop adaptive legal and regulatory frameworks that are capable of harnessing the innovation for the benefit of consumers while also managing the associated risks. And, given the cross-border phenomena and the rapid pace of innovation, we need to move fast at EU level - but not so fast that we dispense with the meticulous work required to analyse the emerging risks and to design the right response to protect consumers.

Further Supervisory Convergence

The Central Bank of Ireland strongly supports moves towards enhanced supervisory convergence However, as regulators we should be clear that this combination of increasing mandate, greater complexity and a degree of uncertainty as to how markets are going to evolve, means we have to adopt an increasingly rigorous, risk-based approach to where we devote our finite resources.

As a result of the reform package, the ESAs will now be empowered to undertake in-depth thematic reviews of market conduct, developing retail risk indicators to identify potential causes of consumer harm; look at the development of costs and charges of retail financial services and products in Member States and carry out mystery shopping – all welcome developments.

Significantly, the power to ban or restrict products has now been extended to one year after two periods of six-month measures. In the case of the European Banking Authority (EBA), the scope is expanded to explicitly include the Consumer Credit Directive and the Payment Accounts Directive which will allow it to look at consumer issues across a range of activities including lending practices.

In addition, the supervisory convergence toolkit has been strengthened to give the ESAs stronger peer review powers and to oblige them to develop and maintain an up-to-date handbook on the supervision of financial institutions in the Union which sets out best practices. The ESAs can also establish coordination groups in which all NCAs must participate to promote supervisory convergence and identify best practices.

In the case of convergence, we need to learn from each other how we are undertaking our supervisory work in order to develop a common supervisory approach to EU-wide supervision priorities.

Environmentally Sustainable Financial Products

Importantly, the ESA review has given the ESAs a new mandate to take account of sustainable business models and the integration of environmental, social and governance related factors in carrying out their tasks.

How are consumers to know whether the firms in which they choose to invest are, in fact, sustainable? How are they to know the extent to which environmental risks could affect their financial choices? How are they to assess how climate change might impact on the profitability of their investments?  And what assurances can they be given that firms that claim to be pursuing an environmentally friendly strategy are actually doing so?

Our work on sustainable finance in the ESAs grapples with these kind of issues by completing the taxonomy and disclosure requirements for investors. In this way, we work to support making European sustainable finance a reality. For if consumers are empowered to make an informed choice to buy sustainable products, we will have taken another important step on the road to tackling the urgent problem of climate change.

The importance of culture

In dealing with all of the above challenges, I have focused mainly on what regulators and supervisors should do.  In doing so, I should stress three points.

Firstly, we cannot lose sight of the importance of prudential matters as the soundness of financial institutions is critical to consumer protection and to consumer confidence, particularly in a system where there is significant importing and exporting of financial services to consumers.

Nor should we lose sight of the long-standing consumer issues that are a feature of financial services old and new, such as excessive fees, inducement arrangements or mis-selling of products. 

Thirdly, in suggesting what we need to do as regulators, this is not to absolve firms of their responsibilities. And the issue of culture is central in that regard.

Here and abroad, poor, lacking or corrosive organisational culture in financial services is widely accepted as a key root cause of the major conduct failings that have occurred within the industry in recent history.

These cultural failings have had severe consequences - for customers and shareholders and, also, in the case of the crisis, for the stability of the financial system as a whole.

When it comes to consumer protection, the Central Bank is keen to ensure that Member States can feel that their citizens are properly protected in their financial dealings wherever they are in the EU. That is why we are focusing on the conduct and culture of firms. And that is why our 2019-2021 Strategic Plan commits to elevating the regulation of the behaviour of regulated firms and the operation of financial markets in order to protect consumers and investors across the retail and wholesale sectors.

Next month, the Central Bank expects to publish the final report of our Tracker Mortgage Examination, the largest consumer protection review we have ever undertaken. By the time we conclude the Examination, lenders will have paid more than €665 million in redress and compensation to more than 40,000 retail customers who were overcharged on their mortgages. Last month, we announced the first outcome from our enforcement investigations in to the tracker mortgage scandal. Retail bank PTSB was fined €21 million – the largest fine we have ever imposed and the largest in Irish corporate history.

Last year we carried out a thematic review of UCITS performance fees to establish whether investors’ interests were protected when it comes to the calculation and payment of performance fees.⁶ This year, we are continuing our review of all Irish domiciled UCITS funds that report to be actively managed to determine if they are potentially index tracking.⁷ ‘Closet indexing’ poses a risk to investors that the fund manager may be charging the investor for pursuing an active strategy while in fact implementing a passive strategy.  We do not consider it reasonable to charge investors for a Michelin dinner and then serve them a McDonald’s meal deal.

Conclusion

In concluding, let me say that the Central Bank’s aspiration is for a trustworthy and resilient financial services system that sustainably serves the needs of the wider economy and its customers.
The key elements of an effective financial regulation framework include comprehensive and enforceable legislation, intrusive risk-based supervision, robust enforcement action that holds firms and individuals accountable, and powers of redress when consumers have suffered detriment.

In our interconnected world, these are best delivered in a joined-up way. The examples I have cited demonstrate how the ESAs and the NCAs are increasingly working better together to deliver consumer and investor protection in Europe.
Shared ideals and deeper collaboration will be central if we are to succeed in our future work.

And one final quality, of course: patience.

Jean Monnet was, of course, one of the principal architects of the European project.  
As students of European history will know, Monnet was also a businessman who entered the family brandy business in Cognac where he would learn about the importance of this patiently produced commodity.

As Strobe Talbott has observed, the experience taught Monnet “to respect consistency of method and the importance of proper sequence in a complex process; hanging the vines on meticulously laid out trellises, fermenting the juices of grapes for weeks, distilling them twice, then storing the final product in neatly arrayed oak casks in dark cellars for anywhere from two years to five decades or more.”⁸

I like to think of the work of the ESAs in that way – complex, meticulous and sometimes time-consuming, but ultimately delivering a very precious blend of financial stability and consumer protection of which Monnet would be proud.

Thank you.

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Notes

1. See Report from the Commission to the European Parliament and the Council on the operation of the European Supervisory Authorities (ESAs) and the European System of Financial Supervision (ESFS) {SWD(2014) 261 final} available here”.

2. The Packaged Retail and Insurance-based Investment Products (PRIIPS) regulation.

3. The Markets in Financial Instruments Directive (MiFID) II.

4. https://www.ecb.europa.eu/pub/financial-stability/fsr/html/ecb.fsr201905~266e856634.en.html#toc27

5.  https://assets.kpmg/content/dam/kpmg/xx/pdf/2019/02/the-pulse-of-fintech-2018.pdf

6.  https://www.centralbank.ie/news/article/review-ucits-performance-fees-highlights-instances-non-compliance

7.  https://www.centralbank.ie/news/article/'the-supervision-of-conduct-in-the-funds-market'-colm-kincaid

8.  https://www.nytimes.com/2014/02/08/opinion/what-would-jean-monnet-have-done.html