Cicero Policy Briefer

Issue 17, October 2007

Retail market reform: what’s the big idea?

By Mark Twigg

In September the European Commission hosted its open hearing on what practical next steps can be taken in the development of Europe’s still fragmented market place for retail financial services. This issue of a single retail market is proving difficult to sort out. After nearly a decade of reform under the Financial Services Action Plan, pretty much all commentators accept that the retail market will continue to be fragmented along national lines for the foreseeable future—with barriers such as language often being cited as reasons why retail consumers won’t shop cross-border.

With cross-border trade making up less than 1 per cent of Europe’s retail financial services market it is easy to see why this view holds sway. However, with an increasing number of ‘mobile’ consumers who need access to cross-border financial services—frankly, people like me who travel a lot within the Union, or own holiday homes abroad, or who work in one country and live in another—there will inevitably be over time a demand-side push towards greater integration. But not quite yet, so it seems! (Though, can I make a personal plea for more progress on payment systems please? Why are consumers charged up to €60 to send and receive an international money transfer between two bank accounts within the same bank just because those accounts are in different Member States? Until we fix that problem, let us not pretend that we have a single market or that it is consumers who are dragging their feet.)

More consumer education?

It was not surprising that much of the day-long session was focused on the end user—that is, the retail consumer. In particular, what consumers can do for themselves within the increasingly important debate around financial education—more on that in next month’s edition. We do definitely need better educated consumers, but what the debate lacked was more detail on the responsibilities on firms. While the consumer experience at the point of sale (and issues of information asymmetry) will always be one of the key litmus tests for a properly functioning and efficient retail market, it must be remembered that firms undertake a whole host of activities before the product gets to the marketplace - which all impact on whether consumers can buy with confidence:

• How does senior management determine the strategic direction and guiding principles of the firm?
• How are those principles communicated to employees and put into practice?
• How do senior managers ensure the financial soundness of the firm (an issue which has come to the fore during the recent credit crunch)?
• To what extent does management invest adequately in back office operations, whether it be IT systems, regulatory compliance or indeed training and qualifications for sales and claims staff?
• Which products do they choose to offer, to which market segments do they target them and how are those products designed accordingly?
• How do they determine the mix of distribution channels, which distribution partners do they choose and how do they remunerate them? Do consumers enjoy access to impartial advice?
• How does the firm view its after-sales obligations to ensuring that customer’s receive ongoing satisfaction over a period of many years, and possibly decades?

In the UK this approach to managing consumer expectations across the product life cycle is referred to as ‘TCF’, or treating customers fairly. Whether one agrees with the FSA’s use of principles-based regulation in making sense of TCF is a separate issue; what is striking is that many of the issues above got little or no attention during September’s open hearing. What did get lots of attention were the perennial ‘red herrings’ which often rear their head in the course of EU policy debates.

28th regime: beware centralised product design!

A good example of such red herrings is the ongoing fascination with the '28th regime' which would see the creation of a standardised EU-wide product which could be sold more easily on a cross-border basis as a means of kickstarting the EU retail market. Surely, it is time we forgot about this issue and moved on to more constructive matters? Generally, the EU has steered clear of product design, on the grounds that creating standardised products, is a massive undertaking complicated by the varying needs of 27 different home markets. The UK's attempts at product regulation with the Sandler Stakeholder suite illustrate the dangers of asking civil servants to design what could potentially prove commercially unattractive client propositions. UCITS is an example of where a standardised product has successfully been attempted. But even here, reforms to the product features of the UCITS tend to lag behind innovation in the marketplace. Furthermore, UCITS was kickstarted over 20 years ago, before the current preference for sales regulation was firmly established. It is clear that these days there is little appetite within the Commission or Member States to change tack. Nor is it clear whether industry or consumers have much appetite either.

Better, more concise information?

Where there is an appetite to take further action, it is in redoubling efforts to make existing point-of-sale consumer protection more effective. Under the existing information requirements placed on firms consumers have pre-contractual information coming out of their ears, and it has been widely recognised for some time that little of that information is actually taken on board. The review of the rather ineffective simplified prospectus should help define more clearly what information firms need to produce, and how to provide it in a more consistent and understandable manner. If access to information—increasingly combined with education—is how we are to protect consumers in a more integrated market, then let’s channel our efforts into getting it right.

Mark Twigg can be contacted on +44 (0)20 7665 9537 or click here to email.

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