This is because policymakers continue to adopt cosmetic measures without tackling the source of problems: artificial complexity, unfair commercial practices, exclusion of vulnerable groups for basic services as well as a lack of social corporate responsibility and of the involvement of public authorities. Based on this sobering assessment, Finance Watch lays out in the blueprint “Towards inclusive, safe and sustainable financial services for consumers” its vision for a financial market that serves all consumer at its best.
WHERE ARE THE PROBLEMS AND WHY?
Consumers are poorly served by the financial sector
Unless we prefer to live on a desert island, it is impossible to lead a normal life in our modern society without a minimum provision of financial services for getting our salary or pension, making payments, being protected against risks, saving for a rainy day or for retirement, and maybe even buying a house.
But unfortunately, not all consumers have access to them. The financial sector refuses to either fully or partly offer services to the most vulnerable groups such as disabled, low income or unhealthy people as well as migrants, which leads to their exclusion from society. On the pretext of digital transformation, the financial sector is closing many branches and local offices, and thus excluding even more consumers such as the elderly and ‘digital disconnected’ people.
The financial sector also serves the vast majority of consumers very poorly. Year after year, it remains the lowest rated sector by consumers, all products and services included. The yearly Consumer Scoreboard published by the European Commission attests to the lack of consumer confidence throughout the European Union, regardless of the financial service involved.
Competition impeded by artificial complexity and unfair commercial practices
While the basic needs of the vast majority of consumers are relatively simple and have not really changed over time, the supply of financial services has become increasingly complex.
This ranges from opaque pricing, fees and charges, products with complex features, bundled and tied products, packages that include services we do not need, to unfair terms and conditions.
Consumers are usually not in a strong position to negotiate individually the offers and contracts proposed to them. The conditions offered to them are most often on a ‘take it or leave it’ basis.
There is no justification for the current complexity, all it does is restrict competition. It is time to debunk the statements on the so-called intrinsic complexity of financial products. The only purpose of artificial complexity is to make it difficult for consumers to understand the product features and their pricing, and thus to compare them with other similar products.
Insights from behavioural economics increasingly show that when faced with complexity, consumers do not behave rationally as predicted by standard economic theory.
The sector counts on the inertia of consumers. Many remain loyal to their bank or insurance company for too long, sometimes more than 30 years. The switching mechanisms, when they exist, are not easy to use, but rather often costly and could lead to errors. And at the end, most consumers wonder if it is really better elsewhere.
Lack of social corporate responsibility
Financial institutions consider that financial services, including basic ones, are pure commercial products. They only select the consumers they are interested in and can terminate the contracts unilaterally even where consumers are not at fault. Some institutions have even built their business model on the abuse of the vulnerability of consumers by offering them basic products at exorbitant rates and unfair conditions. Very few financial institutions have addressed the issue of social responsibility.
The way the financial industry remunerates the so-called financial advisors is another cause of distortion of the retail financial services market. Few consumers are aware that these advisers are primarily sellers acting rather in their own interest than in the interest of consumers.
Lack of Public Authorities’ involvement
Consumer protection remains the poor relative of financial supervision. The ongoing reform of the European system of financial supervision is a missed opportunity to separate consumer protection from prudential supervision. The priority seems to be to ensure that the financial sector remains profitable, even if it is at the expense of consumers.
Public authorities are easing conscience by offering consumers financial education programs which have not proved to be efficient. They also focus too much on transparency legislation that is not appropriate for changing the design of financial products, as well as the behaviour of the sector, nor for addressing “behavioural economic” issues.
WHAT SHOULD BE DONE?
Guaranteed access to a minimum basket of financial products
The financial industry as a whole should fulfil its responsibility to serve the needs of citizens by offering suitable basic financial services.
The obligation laid down in the Payment Account Directive to provide a basic current account to any unbanked consumer who wishes to have one is a first step in the right direction.
Additional products should be considered as being part of a minimum basket at affordable, fair and transparent conditions:
- basic health, home and motor insurance;
- loans for important expenditures such as buying a house or a car;
- basic savings and investment products which might be relevant in the context of pensions.
Financial inclusion for all should be a key priority of the upcoming European Commission.
Let’s go back to simplicity
Solely relying on transparency and information disclosure is insufficient to address the market failures persisting in retail finance. Consumers need access to simple and standardised products, with default options.
Simple products could serve the majority of disengaged consumers in the retail finance market, while keeping options for consumers who are willing to look beyond this default product. These products would not only improve financial inclusion by providing a standard fall-back option, but also serve as a benchmark for other products, challenging the sector to deliver a better deal. Examples of good practices can be found in many countries. The inclusion of the default option in the pan-European pension product proposal is a welcome attempt to help consumers make simple choices.
More and more consumers want to know what is done with their money. It is also key that they can choose products on the basis of their environmental, social and governance preferences.
Establishing clear rules for simple and sustainable financial products should be a priority of the next European Commission.
In-depth sectoral analysis of the retail financial industry
In terms of consumer protection policy, the public authorities have most often adopted a piecemeal approach, i.e. regulating financial product by financial product. They lack the comprehensive view that can explain why the retail financial services market does not deliver properly.
It is time to make a comprehensive analysis at European level of the whole retail financial services market regarding its size, the nature of institutions, their business models, distribution channels and remuneration. Then the best market conditions to serve all consumers need to be created.