“Review of the Consumer Protection Code: securing customers’ interests” - Remarks by Gerry Cross, Director of Financial Regulation – Policy & Risk at Insurance Ireland - KPMG Briefing Session

Good afternoon

I am very pleased that we can be together today to discuss the ongoing review of the Central Bank’s Consumer Protection Code (“the Code”). My thanks to Insurance Ireland and to KPMG for arranging this opportunity for engagement.

The Code plays a central role in ensuring that the financial system and its participant firms operate in a way that secures the best interests of the consumers and users of the products and services that it provides. Achieving this goal is at the heart of the Central Bank’s mandate.

Macroeconomic context

The current economic backdrop is complex and uncertain. Russia’s war against Ukraine, the energy crisis, inflation and the monetary policy response to tackle it, the risk of recession, the state of labour markets and supply chains have created an uncertain economic path.

In 2022, the Irish economy grew by 8.2 per cent as measured by Modified Domestic Demand (MDD).¹ While still challenging, a continuing domestic resilience shapes the near-term outlook for the Irish economy, with MDD growth in 2023 currently forecasted at 3.1 per cent. The Irish labour market continues to perform well, with the unemployment rate forecast to remain roughly stable at 4.4 per cent in 2023.

Ireland has a highly developed financial services sector which plays an important role in the provision of funding and financial services to households and businesses across the economy, both domestically and internationally.

From a consumer standpoint, the Irish financial system has extensive scale and reach at both a retail and SME level. Key services include the provision of over 5.6 million current accounts and 8.7 million insurance policies, and the processing of over 2.6 billion payment transactions annually (with a total value of €9.26 trillion). Financial services firms are also central to the funding of the economy, providing €101 billion in credit to households and €22 billion in credit to SMEs.

At the Central Bank, we remain focused on ensuring that the financial system and firms operate to support the interests of consumers and users as they cope with the challenges that arise, and on ensuring the system itself remains robust and stable.

Recent developments in the global financial markets remind us of the uncertainties and challenges we face. We are closely monitoring these developments and working both with domestic stakeholders and with our colleagues in European institutions and authorities to assess the risks and the rapidly evolving situation.

As President Lagarde mentioned in her statement on 19 March, it is important to note that the euro area banking sector is resilient, with strong capital and liquidity positions. The same applies in Ireland. As President Lagarde said, the policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed and to preserve the smooth transmission of monetary policy.²

Reviewing the Code

The Consumer Protection Code was first introduced in 2006 – establishing a strong set of standards and expectations for how firms should treat their customers. We have continued to update it since, ensuring it remained fit for purpose over time.

The Code has served consumers well. It has underpinned a number of significant developments in consumer protection including our unprecedented intervention in relation to tracker mortgages; the securing of policy-holders interests in the area of business interruption insurance during the Covid-19 lockdowns; and the implementation in those cases of the principle that a determination in relation to one customer’s proper treatment, must be applied to others in relevantly similar circumstances.

But the Code has to continue to evolve to reflect learnings from previous interventions and to respond to the rapidly changing financial services landscape including the shift towards digitalisation.

Reflecting our strategic theme to be ‘open and engaged’, we published a Discussion Paper on the Review of the Code last October. Our related engagement around the Discussion Paper supports our goal to engage all stakeholders in an open dialogue on the key topical and emerging issues relating to consumer protection, so as to inform our future policy direction on the revision of the Code.

Just last week, we published our proposed Consultation Paper on rules and guidance for implementing the new Individual Accountability Framework in Ireland. While there is strong coherence and mutual reinforcement between the new IAF Framework and the Code, today I want to focus specifically on our work on the Code.

A key focus of our Discussion Paper is the concept of securing customers’ best interests. We view the securing of customers’ best interests as having two critical components:

Firstly, effectively functioning markets providing choice and availability

Consumer interests continue to be best served through effectively functioning financial services markets, providing appropriate levels of availability and choice, from sustainable, resilient, well-run, consumer-focused firms, who act in their customers’ best interests.

Well-functioning markets are characterised by high quality regulation, transparency and appropriate levels of competition supported by innovation, a flow of new entrants (along with orderly exits) and ease of switching between products and providers.

High quality regulation underpins the effective functioning of markets through proportionate requirements that support innovation and change, ensuring that market failures are addressed. Such market failures can arise from power-, resource- and information-asymmetries between firms and their customers, amongst other aspects,.        

Secondly, firms acting in their customers’ best interests

Given its fundamental importance, a key focus of our engagement with you, and other stakeholders, is developing and sharing a full understanding of the nature of the obligation or duty that the Code embodies. 

In the Discussion Paper, we have sought to explore what this means, and indeed does not mean.

It is vital that customers’ interests are secured at all stages of their relationship with their financial service provider. This means that a firm’s management must look at the relationship through the lens of the consumer, as well as from the perspective of the firm’s owners. The obligations owed to both should be held in effective balance, which is achieved by a business model and practices that are centred on the interests of the customer.

While it is required that firms act in the best interests of their customers, it is also important for firms to seek to deliver a reasonable return for their shareholders based on a sustainable, resilient business model.

It requires that firms ensure that customer interests are not disregarded or compromised in the interests of shareholders – something we have seen occur from recent experience. It is a question of maintaining both perspectives in equilibrium – by ensuring that business models and practices are centred on customers’ interests, while being sustainably profitable.

This brings me to a key question at the heart of our discussion on the Code Review.

How should business model imperatives be aligned with customers’ interests?

We see that a well-functioning financial system with effective competition between firms is necessary to ensure that consumers have an appropriate range of services available to them.

At the same time, we see that financial firms must place the best interests of their customers at the centre of their business model and their decisions.

Are these two imperatives at odds with each other?

If we want to see strong and effective competition between firms, don’t we need to allow firms to focus primarily on the needs of the business – while not unduly infringing consumers’ rights?

Or, if the primary objective is to secure the best interests of customers, doesn’t that mean that we have to ‘soft pedal’ on the objective of competition in markets? For example, wouldn’t this objective require firms to explain to their customers that they can get a better deal elsewhere, thus undermining the competition dynamic within the market?

Despite first appearances, there is no conundrum here. The two imperatives are not only consistent and coherent, they are also – understood correctly – mutually supporting and reinforcing.

I think there are three aspects which will help to understand the relationship between these two sought outcomes.

The first is alignment of the business model with the interests of customers. This requires that a firm’s business model is, what we might describe as being fully ‘on the level’. That is transparently and effectively orienting commercial interests with customers’ best interests. More specifically this includes that:

-       the business delivers on the reasonable expectations of customers;

-       there is high quality transparency including on pricing related matters;

-       the customer is meaningfully able to exercise choices to switch or exit;

-       the customer is adequately supported through changes linked to financial services transformation including the move to digital distribution of products and services; and

-       the business responds appropriately to customers’ frailties and patterns of behaviour.

The second aspect is consumer-focus in firms’ ‘decision-making’. Firms’ decision-making should always be aligned with committedly securing the customer’s interests.

In the context of an appropriately consumer-focused culture, a firm’s decision-making process will include careful consideration of impacts on customers (including vulnerable consumers). In particular, the firm will be asking itself the questions “Are we doing what is right by our customers? Or are we letting extraneous considerations cloud our perspective in that regard?”. I will come back to some examples of this difference shortly.

The third aspect is the importance of the responsibility that rests with consumers to take appropriate steps to secure their own interests.

A market system relies on decision-making by participants. So, subject to all of the obligations that are placed on financial firms to act in their best interests, consumers are still expected to make their own decisions as to what products and services they wish to purchase, how they plan to secure their ongoing financial wellbeing, and for example whether it would be in their interests to switch product or providers at a particular time.

Guidance on securing customers’ interests

One of the changes that we plan to introduce under the Code Review is introducing guidance as to how firms’ can be confident that they are getting it right when seeking to secure their customers’ interests.

In the Discussion Paper we have outlined some of the aspects that might be included in such guidance. These include:

-       Firms targeting a sustainable, reasonable return on capital over an appropriate time horizon have the greatest likelihood of complying with the best interests obligation;

-       Alignment of services and products with the legitimate and reasonable expectations of customers is key to securing best interests;

-       Firms must not take undue advantage of customer behaviour or habits to the benefit of the firm and/or at the cost of the customer;

-       Asymmetries (of resource, information and expertise) should be identified and recognised, and deployed to the benefit of customers;

-       Where failures or weaknesses are identified in the treatment of one customer or a group of customers, an impact assessment should be undertaken so that issues are addressed for all customers in a similar position.

And, as highlighted by the work the Central Bank undertook during COVID on business interruption insurance:

-   a high level of contractual clarity must be available to customers. Where material ambiguity arises, this must be interpreted in favour of customers.

In seeking to explore the concept of acting in customers’ best interest further, I think it is useful to consider some real life and current examples of the application of this obligation:

Pricing practices

What does acting in the best interests of customers mean in the context of pricing?

A well-regulated, open market-based financial system is designed to facilitate the formation of fair and reasonable prices. Firms make commercial decisions in relation to pricing which reflect multiple factors – including competition, the costs to the firm of providing products (cost of funds, operating costs etc.), risk considerations, business strategy, and the need to build financial resilience through capital and liquidity buffers.

Against this backdrop what is the role for regulation? This aspect has been given detailed consideration in our recent work in the area of differential pricing by insurers.

Differential pricing

That work made clear that, while the Central Bank does not have a role in price-setting, we do have a role to intervene where there is a legal basis to do so, where we see evidence of pricing practices that are based on unfair, discriminatory, or hidden practices which seek to take advantage of customer behaviours..

Our work last year on differential pricing was primarily focussed on the unfair practice of ‘price walking’ in the insurance market - the practice whereby higher premiums were charged for some consumers on the basis of no more than their loyalty to the existing relationship.  This showed that firms’ engaged in this practice were not acting so as to secure their customers’ interests. In particular by taking advantage of consumer behaviours, so as to apply a pricing approach which was covert, and not aligned with what customers would reasonably expect, their approach was not in line with their responsibilities.

Taking advantage in this way of customers’ propensity to stick with their provider to apply differential pricing is an example of a situation where firms’ should ask themselves what are the assumptions and drivers underlying our approach here and are they well aligned with our responsibility to secure the interests of our customers and potential customers.

We introduced rules and guidance making clear that such practices were not acceptable. We are currently carrying out an analysis of how this is being implemented by firms and a report will be published in early 2024.

Bank account migration

Another recent example of where the requirement to act in customers’ best interests came into play was in the context of the departure of two retail banks and the consequent need for the migration of a large number of current accounts from the departing banks to those remaining. This was, and continues to be an exercise of unprecedented scale.

It has been crucially important to the situation of hundreds of thousands of account holders, as well as to the reputation of and credibility of the system, that not only do all of the firms involved fulfil their obligations to ensure that their customers’ – and potential customers’ - interests are protected, but that they do so in a joined-up manner so that the system as a whole functions well to secure those interests.

Our engagement with the banks – individually and collectively – has been and continues to be strongly grounded in their obligation to secure customers’ and potential customers’ best interests, including ensuring that those customers needing additional support receive that. This has been recognised by firms.³ While the work to manage the migration of customers’ accounts is ongoing and progress has been positive⁴, it is important that a strong focus on securing customers’ interests continues to govern this work.

Notifications by banks of changes to basic retail service provision

I have touched already on the rapid changes we are seeing in financial services – the move to digital technologies is a prime example of this.

Digitalisation and innovation bring efficiencies and cost savings for firms and increased choice and convenience for consumers. But for some, access and choice could be diminished.

For example, in the provision of retail banking services there has been a trend, aligned with increased digitalisation, towards reduced physical presence through closure of branches and the withdrawal of cash services within branches.

In approaching this challenging issue in its many aspects, it is clear there is a requirement under the Code that firms take full account of the interests of their customers.

This issue was considered by the Government’s Retail Banking Review of last year. The Review observes that: “Until customers are ready for a complete transition to digital or remote services, digital transformation needs to be balanced with appropriate preservation of in-person banking services.”⁵

The Retail Banking Review Report contains a detailed recommendation for Code amendments concerning the issue of branch closures or significant service alterations.  These include the preparation of robust assessments that examine the impact on customers, the suitability of alternative service provision, and the plans for ensuring that customers, especially at-risk customers, can avail of alternative services.

These assessments should be board approved, shared with the Central Bank and made public. It is recommended that the minimum notice period required should be increased to four months for significant banking service changes (e.g. going cashless) and to six months for branch closures and credit institutions leaving the market. Impact assessments should be undertaken after transition to address any significant issues that may have arisen from a consumer perspective.

As part of our current review of the Code, we will address the implementation of this recommendation which has much resonance with the requirement to secure customers’ best interests. We will of course be engaging with the relevant banks regarding expectations for the handling of any such alterations in the meantime.

Selling investment futures to retail investors

Another practical example of how firms can proactively act in the best interests of their customers is their consideration of risks identified in relation to a product or service which is similar to others the firm provides.

In such cases, firms should be using their understanding and experience of one product to better protect customers accessing similar products. For example, in 2019 the Central Bank put in place restrictions on the sale of contracts for difference (CFDs) to retail investors to address significant concerns about the risk to investors from these products. It is clear that if there were other products with similar relevant features or aspects, acting in their customers’ best interests will require firms to implement similar controls and restrictions.

Firms should never be waiting for the Central Bank to intervene before they take the necessary steps to effectively protect their customers’ best interests.

Conclusion

Significant transformation is taking place in financial services, impacting consumers.

Consumer interests continue to be best served through effectively functioning financial services markets, providing appropriate levels of availability and choice, from sustainable, resilient, well-run, consumer-focused firms, who act in their customers’ best interests.

In reviewing the Code we are focused on driving better outcomes for consumers by ensuring that firms have a consumer focus as they evolve their business models and processes through digital transformation.

A high quality engagement with a wide range of stakeholders is essential to optimal outcomes on the Code Review and, relatedly, to the success of the Irish financial system in supporting consumers, investors and the economy in the future.

In that vein, I thank you for your time and look forward now to our panel discussion.