DOC N: FINANCE 02-11 DATE ISSUED: June 2011 Reslutin n G20 Actin n Financial Cnsumer Prtectin Backgrund Financial services, their gvernance and their develpment, are particularly imprtant t cnsumers in the EU and US, wh rely n financial prducts and services t facilitate purchases, fr savings and investments and t insure against risk. Over the years, hwever, financial prducts, such as mrtgages, investments, credit cards, small lans and ther payment prducts, have becme mre cmplex and ptentially risky fr cnsumers. The rapid pace f innvatin in the market and the lng term nature f many transactins mean that cnsumers need prtectin at every level in rder t avid the cnsiderable risks that these services pse. The financial system als needs thse prtectins t insure its wn stability. The financial crisis f the last several years dramatically illustrates that weak cnsumer prtectins pse a significant risk t the wider ecnmy. In the wrds f Sheila Bair, the Chair f the US Federal Depsit Insurance Crpratin, There can n lnger be any dubt abut the link between prtecting cnsumers frm abusive prducts and practices and the safety and sundness f the financial system. 1 Similarly, the January 27, 2011 final reprt released by the Cngressinally mandated Financial Crisis Inquiry Cmmissin (FCIC) cncluded that the financial crisis was an avidable disaster caused by widespread failures in gvernment regulatin, excessive risk taking by Wall Street and crprate mismanagement. 2 TACD has previusly expressed its cncern at the slw effrt f bth gvernments and the financial industry t crrect the cntinuing market failures and recgnized the urgent need fr them t take actin n financial cnsumer prtectin, ntably in its reslutin f June 2009 3 and thrugh the subsequent 2010 Ljubljana declaratin n cnsumers and financial services, 4 t which it is a signatry. 1 Statement f Sheila C. Bair, Chairman f the Federal Depsit Insurance Crpratin, n Mdernizing Bank Supervisin and Regulatin befre the US Senate Cmmittee n Banking, Husing and Urban Affairs, March 19, 2009 2 FIN. CRISIS INQUIRY COMM N, THE FINANCIAL CRISIS INQUIRY REPORT: FINAL REPORT OF THE NATIONAL COMMISSION ON THE CAUSES OF THE FINANCIAL AND ECONOMIC CRISIS IN THE UNITED STATES xvii-xxv (2011), available at http://c0182732.cdn1.cludfiles.rackspaceclud.cm/fcic_final_reprt_full.pdf. 3 TACD reslutin n financial services regulatin June 2009 http://tacd.rg/index2.php?ptin=cm_dcman&task=dc_view&gid=214&itemid=40 4 Ljubljana declaratin n cnsumers and financial services, May 2010 http://tacd.rg/index2.php?ptin=cm_dcman&task=dc_view&gid=291&itemid=40
TACD is cntinuing its engagement in the field f cnsumer prtectin in financial services and will be hlding a ne-day cnference fr cnsumer rganizatins, gvernment and regulatr representatives, as well as ther stakehlders, in June 2011 in Brussels. The aim f the cnference is t evaluate the new initiatives in the field f financial sectr refrm and address the unreslved issues and urgent needs fr further actin. Building n these initiatives, Cnsumers Internatinal, the glbal federatin f cnsumer rganizatins, and its members launched a campaign in late 2010 calling n the Grup f 20 t take actin t imprve cnsumer prtectin in financial services. In Nvember 5 2010, G 20 leaders meeting in Suth Krea made the fllwing cmmitment in the Seul Actin Plan 6 : Enhancing cnsumer prtectin: We asked the Financial Stability Bard t wrk in cllabratin with the OECD and ther internatinal rganizatins t explre, and reprt back by the next summit, n ptins t advance cnsumer finance prtectin thrugh infrmed chice that includes disclsure, transparency and educatin; prtectin frm fraud, abuse and errrs; and recurse and advcacy. The FSB and OECD are due t present their reprt t G20 leaders at the summit in France in Nvember 2011. Additinally the G20 finance ministers at their meeting in February 2011 requested that the FSB and OECD develp cmmn principles n cnsumer prtectin in financial services. The French presidency f the G20 has als annunced that a high level cnference n cnsumer prtectin in financial services will be held in Octber 2011, the results f which wuld be expected t cntribute t the final reprt. Recmmendatins In the cntext f the discussins described abve, TACD calls n the gvernments f the US and EU t wrk with the FSB and OECD t implement the cmmitment made in the G20 Seul Actin Plan t reprt n ptins t enhance cnsumer prtectin in financial services. Specifically, the TACD urges the US and EU gvernments t cllabrate with the FSB and OECD t develp a strng set f recmmendatins drawing n thse listed belw 7 ; supprt their adptin at natinal and where apprpriate internatinal levels, and establish suitable prcesses t review their implementatin. 1. Infrmatin design and disclsure Cnsumers shuld receive clear, sufficient, reliable, cmparable and timely infrmatin abut financial service prducts. Severe failure t meet these criteria shuld cause a cntract t be vidable. Cntracts must include clear up frnt pricing s that cnsumers 6 G-20 Seul Summit dcument, Actin Plan para 41, G 20 Seul. 2010 7 These recmmendatins draw n thse develped by Cnsumers Internatinal, which are utlined in their publicatin Safe, fair and cmpetitive markets in financial services: recmmendatins fr the G20 n the enhancement f cnsumer prtectin in financial services, March 2011. http://www.cnsumersinternatinal.rg/media/669348/cifinancialreprt2011.pdf 2
can appreciate the cst f the prduct befre becming bligated t pay. Financial service prviders shuld be respnsible fr testing the quality and cmprehensibility f the infrmatin prvided, with additinal audits cnducted by natinal regulatrs. Standard frmats (such as Key Infrmatin Dcuments) shuld be used fr the presentatin f infrmatin abut financial service prducts s that cnsumers can easily cmpare prducts. 2. Cntracts, charges and practices Many financial service prducts are nw s cmplex that cnsumers, regulatrs and even the financial service prviders themselves cannt understand them. This cmplexity needs t be managed and, if necessary, verly cmplex prducts shuld be kept ff the market. Regulatrs shuld intrduce a requirement f cmprehensibility and prhibit prducts that are nt cmprehensible. They shuld require the availability f simple standard financial service prducts, and key financial service prducts shuld be required t meet minimum standards f cnsumer prtectin. Cnflict f interest in the prvisin f advice and sale f financial services needs t be addressed. Cmmissins and related charges must be fair in amunt and be made transparent at an early stage. Financial advice t cnsumers shuld be subject t a fiduciary duty t act in the custmer s best interests.. Advisers shuld seek t minimize, apprpriately manage, and fully disclse any cnflicts f interest. Disclsure f cnflicts shuld ccur at a time that enables the cnsumer t make an infrmed chice amng advisers. Additinally, there shuld be prtectin against inapprpriate marketing methds. The fllwing practices shuld be cause fr apprpriate sanctins, including in the mst egregius cases, fr a cntract t be vidable: failure t gain the infrmed cnsent f the cnsumer unfair r unreasnable fees and csts charged t cnsumers and included in cnsumer cntracts fr financial services prducts clauses in financial service cntracts that result in cnsumers waiving cre cnsumer prtectins, and the sale f financial services that are unsuitable fr the cnsumer. 3. The structure and functins f natinal financial cnsumer prtectin bdies Under the UN guidelines fr cnsumer prtectin, all gvernments have a respnsibility t prtect and prmte cnsumer rights. 8 Gvernments shuld each establish a natinal bdy that has cnsumer prtectin as an explicit regulatry bjective with full authrity t investigate, halt and remedy vilatins f cnsumer prtectin law, including where necessary the right t define specific practices r prducts as unfair, deceptive r therwise illegal. The bdy shuld have effective regulatry pwer ver every financial institutin, prduct and prvider and, in respnse t a serius failure t abide by cnsumer prtectin rules, it shuld have the pwer t remve an institutin s license r, in respnse t lesser 8 UN Guidelines fr Cnsumer Prtectin Adpted 1985, expanded 1999, re-adpted in General Assembly decisin 54/449 ; UN 2003 3
abuses, impse penalties sufficient t discurage repetitin. The bdy shuld have sufficient funding and resurces t cnduct the tasks assigned t it. The bdy shuld be independent f the industry, free frm cnflicts f interest and include a balance f members with industry and cnsumer expertise and include staff with brad knwledge and expertise. It shuld be transparent and shuld clearly publicize ccasins where it has taken actin against specific practices and prducts r misleading financial prmtins either industry wide r against specific firms. Reputatinal regulatin shuld be initiated t allw cnsumers t chse prviders based n firms recrd f treating custmers fairly. There shuld be strng links with ther cnsumer prtectin bdies (including representatives f cnsumers) t ensure that experience and expertise in cnsumer prtectin is shared. Representatives f the cnsumer interest shuld be integrated int the gvernance f the sectr at natinal level. Cnsumer rganizatins shuld have a right t initiate a frmal prcedure at the cnsumer prtectin agency if they have arguments and cases fr a serius cnsumer detriment / prvider miscnduct aimed at a multitude f cnsumers. 4. Internatinal Trade Agreements Shuld nt Undermine Financial Regulatin Financial services strictures under the Wrld Trade Organizatin (WTO) and ther internatinal trade agreements culd undermine financial regulatin. Financial Transactin Taxes (FTT), capital cntrls, bans n risky financial services and size limits n banks are sme f the plicies at risk as prvisins f the WTO General Agreement n Trade in Services (GATS) prhibits whle categries f regulatin in cmmitted services sectrs. Unless WTO limits n nn-discriminatry financial regulatins are remved and/r a meaningful safeguard fr prudential measures is inserted, U.S. and EU gvernments shuld lead the G20 in halting further demands fr mre WTO financial services liberalizatin in the Dha Rund. 5. Redress and dispute reslutin systems Access t dispute reslutin and redress is ne f the eight cnsumer rights. Still, there is a serius risk that such systems are absent, nt acting independently and neutrally, r being verwhelmed by the sheer number f cmplaints relating t financial services. This underlines the imprtance f preventing cmplaints arising thrugh the intrductin f effective upstream cnsumer prtectin. Gvernments shuld ensure that cnsumers have access t adequate redress mechanisms, which are expeditius, fair, inexpensive and accessible. 9 Ideally, there shuld be ne clearly identifiable scheme fr redress per sectr. Cnsumers shuld be practively infrmed abut the availability f such a system. Gvernments shuld als prvide cllective redress mechanisms in rder t reduce the demand fr individual prceedings. Findings frm these redress mechanisms shuld be synthesized and reprted t regulatrs in rder t infrm future regulatin and enfrcement. 6. Prmting cmpetitin in financial services 9 UN Guidelines p cit. Art 32 4
The financial crisis led t a significant reductin in cmpetitin in the financial services sectr, which was already suffering frm a high level f market cncentratin. Cmpetitin is an imprtant cnsumer issue, and TACD strngly recmmends that the G20 take actin t prmte cmpetitin n terms that enhance cnsumer prtectin in financial services. The G20 shuld recgnize that it is cunterprductive t allw cmpetitin law t be verridden in the interests f financial stability, as it results in the creatin f even larger institutins and increases the prbability f taxpayers needing t prvide supprt in the future. In additin, steps t supprt financial institutins which are t big t fail can distrt cmpetitin. The G20 shuld therefre encurage member cuntries t instigate independent cmpetitin inquiries int the increases in cncentratin and reductin f cmpetitin caused by the financial crisis and recmmend that natinal gvernments apply public interest tests t the dispsal f their stakes in the banking sectr. This shuld include specific bjectives t make cmpetitin strnger after dispsal f the stakes s that sme f the increase in cncentratin is reversed. Additinally, t encurage new entrants, gvernments and regulatrs shuld take steps, such as thse pertaining t cmparability f prducts, prtability f accunt numbers and thers, t ease switching f accunts fr cnsumers. Finally, regulatrs shuld encurage reputatinal regulatin by publishing details f cmplaint numbers, cmpensatin and enfrcement actin s cnsumers can chse a prvider f retail financial prducts based n their track recrd. 7. Measures t prmte stability and safety f cnsumers depsits and investments The financial crisis dramatically highlighted hw new banking practices are expsing cnsumers t enrmus risk. Rather than manage risk, the structure and practices f the financial services sectr magnified risks t a level that threatened the cllapse f the sectr itself. TACD urges the US and EU t supprt a G20 leader agreement t use leverage cntrl t reduce risky activity rather than starve cnsumers and businesses f access t credit. These measures shuld be cmplemented with the use f nn-perating hlding cmpany (NOHC) structures t address cntagin and cunterparty risk directly, including maintaining demarcatin between investment banking and retail banking reducing risk f crss-cntaminatin thrugh legal separatin f peratins. Living wills fr financial entities shuld be intrduced and shuld cntain prvisins fr the treatment f custmers s that financial institutins can fail withut causing catastrphic damage t cnsumers r the ecnmy. Credit ratings agencies shuld be liable fr the validity f their analyses and shuld be answerable t prudential supervisrs. In particular it is necessary t purge the cnflicts f interest between the carrying ut f analyses by these agencies and the subsequent public reprts n the ne hand, and, n the ther, payment by financial services prviders fr an evaluatin which will have an impact n the value f thse same businesses. The agencies need t mve mre t a rle f independent auditing as is custmary fr businesses in many jurisdictins, s that the auditrs themselves have a public respnsibility fr the validity f their reprts. 5
Greater transparency and accuntability in financial transactins will als help t reduce risk. Actins shuld include develping systems t assess cnsumers capacity t take n financial cmmitments, giving cnsumers access t risk data regarding individual financial service prviders and ensuring that lan assignees shuld be liable fr the practice f the riginal credit granter. Depsit prtectin schemes shuld prvide cver fr each separate brand and create a seamless transitin f essential banking services with cnsumers maintaining access t depsits used fr transactinal banking. Any payment frm the prtectin scheme regarding depsits held in savings accunts shuld be made within seven days. Measures shuld als be intrduced t prvide flexible cver fr temprary high balances. And inslvency prcedures shuld be refrmed s that the rank f creditrs is changed t put depsitrs at the tp. 8. Access t basic financial services and the rle f new frms f service Universal access t free r affrdable basic financial services shuld be a specific aim f gvernment plicy n financial services. New innvatins and technlgies are already making great strides in this area, increasing access but als raising new challenges fr cnsumer prtectin. Gvernments shuld seek t encurage innvatin in safe, effective, lw cst methds fr banking inclusin whilst supprting the develpment f cnsumer prtectin. With regard t the imprtant issue f remittances, the EU and US shuld supprt G20 develpment f the General Principle n Remittances (2007) with a view t intrducing a strnger cnsumer rientatin, with cnsumer prtectin as a primary bjective. 9. Cnclusin: nging internatinal c-peratin n financial cnsumer prtectin including reviews f implementatin There is nw an urgent need fr strnger internatinal c-peratin n financial cnsumer prtectin. The financial crisis shwed that weak cnsumer prtectin in ne cuntry can pse a risk t ther cuntries and the glbal dimensin f financial services means that financial market cnduct regulatrs arund the wrld nw face similar issues and challenges. The G20 shuld therefre supprt the establishment f a permanent internatinal rganizatin t enable natinal financial cnsumer prtectin bdies t cmpare ntes, share gd practice and develp minimum internatinal standards and guidelines based n the recmmendatins in this reprt, and review their implementatin. The new rganizatin shuld have cnsultative status with ther internatinal financial regulatry bdies and actively c-perate with these rganizatins and cnsumer rganizatins in the develpment f research, institutinal capacity, guidelines and agreements, fraud mnitring and scrutiny f industry practices. The new rganizatin shuld have a netwrk structure with representatives frm natinal financial cnsumer prtectin bdies and the resurces t establish a Secretariat. An independent cnsumer panel shuld als be established made up f representatives frm independent cnsumer rganizatins with cmpetence in financial cnsumer prtectin t mnitr advise and challenge the wrk f the rganizatin. 6