Retail Financial Services

On March 2nd, the European Commission held a conference on the Green Paper on Retail Financial Services. 

By Michael Wilson

03 Mar 2016

Olle Ludvigsson (S&D, SE) the European Parliament rapporteur for the Green Paper on retail financial services, gave the opening address and said that he finds it fascinating to work in this innovative and fast-changing filed. New services and business models are introduced on a weekly basis and the services available have changed rapidly over the last years. However, this also provides challenges in regulation which needs to keep pace and be future proofed. He said that he would like to better understand the trends and what the retail financial services market will look like in both the near and long-term. The Commission Green Paper was the right path forward. Some argue that it is too early to look forward as some legislation still needs to be implemented. He disagreed with this and noted that the Green Paper was very timely for three reasons:

  • If new legislation is to work well in a fast changing market, it is essential to be active now – Level II measures must be fit and proper. National implementation must also be followed and real world problems and opportunities must be examined. A dynamic approach to policy making is essential.
  • Although a lot has been done, a lot remains to be done – there is no real single market in retail financial services. There remain 28 national markets and cross-border activity remains the exception. This is bad for the overall market. Some progress has been made on payments and consumer protection, but beyond this, the situation is bleak.
  • The digitalisation of the industry is opening new opportunities. Digitalisation could help tear down cross border barriers.

He then said that building a stronger EU level capacity of data collection and analysis is very important as information is required for legislation. He stressed that more has to be done on identification problems to make ID work. Coordinated action is essential and the implementation of anti-money laundering rules must be fine-tuned in this respect. A level playing field is essential. Legislation must be as technologically neutral as possible. It is not for politicians to decide who wins in this market. It is up to consumers to make this decision. He also called for a balance between the non-euro and euro Member States. The integrity of the single market must be protected in this regard. He then stressed the importance of inclusion. People must have access to services. He noted in this respect that the new payments legislation will give everyone a right to a basic bank account.

Feedback from the social media campaign #MyMoneyEU and early report on the responses to the consultation

Olivier Salles, Head of Unit, Retail financial services and payments, European Commission, explained that 18 people put videos on twitter and most of these were done by consumers. Some 80 000 views were registered. The consultation will come to an end on March 18th. On the consultation, he noted that so far, 180 contributions had been received, but a large amount of contributions are expected over the next few weeks. Mostly, contributions have been received from citizens and consumers and less from public bodies and financial institutions. Of the contributions received, there were no negative comments.

He then shared a wide range of replies received including a video. One strong message was that it should be easier to engage in cross-border shopping. Another key message is the need for a single market with the same rules applying across the EU. Many call for greater transparency in foreign exchange fees. He accepted that many of the issues raised concern the 3 percent of citizens who have moved across the EU. However, the Commission is also looking at problems that exist within a single Member State. He then said that a key question for the conference would be what the market should look like in ten years’ time.

Session 1: How can consumers access the best deals in the EU?

Sophie in ‘t Veld (ALDE, NL), chaired the panel and began by saying that for a change, the EU is talking about a positive subject and the future. This process has to be consumer and SME driven, but the key element for this is trust. This requires regulation and harmonisation. It also requires trust within the EU as a political entity and an internal market where people can invest, innovate and work. If Europe wants to be the hub of retail finance, it must prove that it is a good place to invest in with open borders. This is the key message. She called for ambition and noted that the Member States are the ones that usually block this as the Member States seek to protect their national champions, which are not always the engines of innovation. There is innovation already. The question is does Europe want to be the place where the retail finance Ubers of the world settle down. She appealed to national politicians to show that Europe can be a place of innovation.

Alban Aucoin, Head of Public Affairs, Crédit Agricole group EBF and EACB Committees Member, noted that simplification, harmonisation and stabilisation of the regulatory environment are essential. Banks want to sell their products cross-border. Anything that would facilitate this would be welcome. It is practically impossible to see financial services products across borders as contract law and consumer law of the host country applies. As contract and consumer laws differ across the EU, this represents a major barrier. Exporting the same financial services across the EU would involve compliance with 28 national laws and would be in essence impossible. The Rome I regulation prevents this. In addition, the national laws can be very unstable and change rapidly. Managing changing laws within a single country is difficult, but in more than one, it is almost impossible. A 29th regime is not enough to resolve this. Setting up local entities in second Member States allows a bank to work cross border. Setting up local bank subsidies is in reality, the only way to work across borders.

He then said that digitalisation is not a magic wand that will facilitate the situation, but it could help. Banks are already highly digitalised. Digitalisation is an ongoing evolution for the banking industry. However, it cannot alone overcome the statutory obstacles as even online banks have to set up national subsidiaries. He also stressed that customers should remain at the heart of the bank strategy. French customers prefer access to a personal advisor. Banking is based on trust. It is essential to safeguard this trust. He then called for the same regulation to apply to the same products. He also agreed that the ID chain has to be protected. Current and future legislation should be adjusted to the digital market reality. He noted that secure and inter-operable EID solutions that apply across the EU would be of great assistance. He also called for a way to investigate a safe space where businesses can investigate new products without immediately having all regulatory rules applying.

Christiane Muyldermans, European Retail Financial Forum and Counsel Regulatory Affairs, KBC, spoke about the common project of the European Retail Financial Forum, which wants to bring together stakeholders to see how the market can progress. Access to financial services begins with access to a simple account. This is key. Payment services on a centralised platform are not simple. It is still hindered by local and legal restrictions. A bank based in the Eurozone seeking to offer cross-border services such as SEPA credit transfers, or collection of cheques and bills of exchange and so-on, without a physical presence in other Member States, still requires an IBAN and a BIC allocated by SWIFT. There remain issues with the use of non-domestic IBANs. The ISO standard 13616 is mandatory and defines that the first two letters of an IBAN will always be the country code of the country servicing the account. The credit institution in question was thus unable to provide these simple cross-border services. She called for a European IBAN starting EU.

Christophe Nijdam, Secretary General, Finance Watch, noted that, 20 years ago, some Belgian institutions were more than happy to open accounts in Luxembourg for their clients. It seems more difficult to have cross-border sales now. There are some public interest questions raised by the Green Paper. Distance selling makes it more difficult for buyers and sellers to interact and without this personal relationship, trust can only be built over time. This may explain why cross-border sales are very low. The best policies will be those that improve trust in the long-term. It is also important to see what channels could boost cross-border sales. Online products could help in this respect, although digital delivery can also dramatically increase the risk of miss-selling. An over-reliance on remote scoring and mechanical risk assessment tools could lead to large losses, he warned. In addition, digital delivery could exclude some consumers. It is also more difficult for customers to get redress across borders if something goes wrong. He noted that the Commission is aware of this problem and called for action on this.

He then stressed that innovation must not lead to increased concentration within the market. There must be no reduction in diversity of business models in the sector. He called for the Commission to encourage simplification and standardisation for all basic retail financial services to make all products more comparable. Harmonisation of regulation and supervision could also be used to combat pay-day lending. Extending the use of KIDs to all retail financial services products could also help and clear information on rates and fees in currency transactions could also help. He also noted that extreme price competition can lead to poor services including bad advice, opacity, predatory practices and unsustainable business models. He then noted that the EU GSIBs enjoy unfair subsidiaries that smaller banks do not have. Regulators must be aware of this problem. These issues can be addressed through consumer protection and banking regulation. He then made a series of suggestions. End-users benefit most from new products if supervisors can prevent detrimental effects before it happens. Pre-approval for new financial products could help achieve this. A financial product labelling system could thus help. The cost of product approval could be weighed against having simpler and safer products. It would also help to restore trust.

Sophie in ‘t Veld (ALDE, NL) noted that, if Member States disregard rules in some areas, how can they be trusted to apply them in other areas. She accepted that a lot of work is required on risk and consumer protection. Without this, nothing will be achieved. However, not having cross-border activity also represents a risk to consumers as they are locked into a national market. Everyone likes the internal market in the EU, but national politicians remain stubborn in breaking down national barriers.

A representative of Reseau Financite said that increasing access to financial products is very important, but there must be a guarantee on the quality of products.  This is very important on the credit side. 

A member of the audience noted the need to adopt an EU IBAN code to create a single market. There is now a choice to separate or to create a truly united Europe. There should be a single European market.

A representative of the European Federation of Financial Services Users said that the retail financial services market is the worst rated market in the EU. One major problem is the lack of portability and transferability.

A representative of Reseau asked what priority is on access to basic financial services.

Christiane Muyldermans responded by saying that everything starts with a bank account. Banks want to service their clients from centralised platforms, but this cannot be done.

Christophe Nijdam said that everything must be kept simple. In terms of inclusion, it is essential that everyone has access to a bank account. Without a bank account, people cannot work. There is a new bank account in France called the Compte Nickel that anyone can open within 15 minutes. This provides an IBAN and a debit card. This is just a simple innovation that creates access.

Alban Aucoin argued that SEPA has nothing to do with cross-border financial services. This is usually a purely national service. On simple standardised bank accounts, he said that it is already included in the payments legislation. Savings accounts differ as the main obstacle is actually whether people have enough money to save. He then argued that standardisation can be an obstacle to innovation.

A representative of the Consumer Credit Association, UK, noted that four different markets are involved, insurance, investment, money transfer and credit. If credit is involved, lenders need to be able to get their money back and this is very difficult across borders. It makes no commercial sense for this to happen at the moment.

A representative of the Association of Family Associations asked if VAT rules could be used as an inspiration for the tax issue.

A representative of International Personal Finance asked about risk assessment and noted that quality of databases differ across the EU. Could there be harmonisation of this in the EU? What about languages?

A representative of the Swedish Bankers Association raised the issue of the anti-money laundering legislation which makes it difficult for banks to have clients in other countries.

A representative of a French bank noted that everyone would benefit from a competitive single market. Language can be a problem.

Alban Aucoin noted that VAT is a European tax and this effort was made over many years and the system works. On data harmonisation, he noted that a lot of data is already standardised due to prudential requirements. He then said that language is a real issue. Contracts and websites and advisors all need to be able to be in different languages. This can be a nightmare. The solution used by the banks to get around this is to set up subsidiaries in different countries. The harmonisation of ID documents would be greatly helpful.

Christophe Nijdam argued that the last innovation in retail banking was the ATM. Standardisation is not an obstacle to transparency. On the database and credit scoring, he said that the best way to reduce credit risk is to know the customer.

Christiane Muyldermans noted that languages are a problem. There are 157 languages in Brussels alone. In the European area, language is a problem that can be overcome. She then said that an EU IBAN code would be very helpful. This is a low-hanging fruit.                                           

Sophie in ‘t Veld (ALDE, NL) concluded that it is clear that there is a challenge, but this should be embraced. The EU has the solutions it requires and she thus expressed her optimism that solutions can be found. 

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