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Speech: Towards a new virtuous cycle in consumer protection in insurance, 13.3.14
Consumer protection as we know it today is a recent phenomenon. In today’s society, consumer satisfaction is taken as the best guarantee for any company’s continuity. “Rule number one” in the financial sector business should be: the consumer should be at the heart of the provider’s business, not the other way round. That’s a clear prerequisite for being trusted by the consumer. Trust is an essential element of society and a major determinant of economic success. Trust affects how the legal system works, which affects the economy, due to its overall effect on transaction costs. This is key for a modern economy.
EIOPA’s work on consumer protection has two main dimensions:
The first objective is at the centre of the Solvency II project and I believe it will be a major development from a policyholder protection perspective.
Regarding the second objective, our agenda is focused on ensuring a paradigm shift towards much better transparency for consumers and reinforced fairness in selling practices. For this, we need further certainty on the EU regulatory framework. Projects like IMD2 and PRIPS need to be finalised in order to set new improved standards for transparency and selling practices in the insurance market at an EU level.
But these two main dimensions of consumer protection are interrelated, and conduct and consumer risks need to be fully taken into account within insurer’s overall governance systems... The insurance market needs to learn the lessons from the miss-selling cases that occurred in the past in the different countries and reflect on the huge reputational and financial consequences stemming from the unacceptable misconduct behaviour of some financial institutions.
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Interview with PRIMM (Romania), 14.3.14
Which are the main consumer trends throughout Europe at this moment? How was the consumer’s perception about insurance products affected by the financial crisis?
The main consumer trend is the lack of or misleading disclosure of information and poor advice given to consumers. This could potentially lead to the mis-selling of in particular life products such as unit-linked ones. Mystery shopping was in some cases the method of choice for investigating whether essential information on insurance contracts was disclosed.
In a report published by EIOPA about training standards used by the insurance industry in different European countries it is revealed that Member States have considerably different approaches. What is your opinion on this matter and how does it influence customer care and consumer protection?
The reason we have very different national approaches at present is that this derives historically out of the “minimum harmonisation” approach envisaged in the Insurance Mediation Directive (IMD1). The legislation was reluctant to impose a higher level of harmonisation and this left it to Member States to determine at national level what “knowledge and ability” means. By listing, in our Report, what we considered good supervisory practice in the area of knowledge and ability requirements for distributors of insurance products, we are seeking to promote more convergence amongst national authorities in this area. One practical initiative should be to include in the different exam levels some material about the concept of risk and the role of insurance mitigating risk.
Does consumer protection begin when selling an insurance product? Are misinforming and lack of transparency issues throughout the industry? What can there be done, from a supervisory point of view, to have a better informed client about his rights and obligations from the beginning?
I would start by saying that I think consumer protection begins even earlier than the sale, as insurance undertakings need already to be thinking about the needs of consumers when they are designing products. We have done some initial thinking already jointly with the European Supervisory Authorities for the banking and securities sectors on this. Consumer protections then moves on to sales processes – to ensure customers get quality advice that is motivated by the interests and needs of the customer. Here the focus has to be on removing or managing conflicts of interest. It also needs to be on ensuring those selling know and understand their customer’s needs, and the products they have to offer, as I just outlined under the previous question. Next comes transparency for the customer about what is being proposed: tackling poor quality information and getting rid of unnecessary jargon or overly legalistic information is a crucial measure across all areas of the financial services. Different approaches might be needed for different products: for the more complex ones, we are already starting work on standardised key information documents (KIDs) to improve information and comparisons. For simpler products, issues might be different, warranting a different approach. Much better disclosure should help customers’ understanding where they stand, but of course it is not a magic bullet. It will be important too to ensure customers are aware in general of their rights when making complaints and seeking redress at the national level. Recent European legislation on alternative dispute resolution could well help here, as also steps on collective protection schemes when things go wrong.
What rules are to be enforced in order to enhance consumer protection throughout Europe? Which types of products are the most customer “unfriendly” and need to be addressed in the near future?
There are of course many rules aimed at consumer protection, at national and European level, and the proper enforcement of these is a crucial step. EIOPA was created in part to help improve this situation, to ensure consumers throughout Europe can be confident of strong consumer protection measures and the enforcement of these. More is also coming, as I have already mentioned in these answers. For instance, rules on transparency and sales will be tightened, and more will be done on financial literacy. The responsibilities of those designing products for the consumer market also become increasingly important. This points to a further area of focus for supervisors and regulators: product oversight and governance and even product intervention. Financial innovation is important in building products suited to consumer needs, but it also can lead to complex products that are not well suited to most consumers. Some of these are very complex, niche products that are not suited for almost any consumer. There are debates underway at the European level on ensuring supervisors always have the powers to intervene when needed, the ultimate ‘backstop’ to protect consumers. This shows how central consumer protection is now to regulatory thinking.