EU To Strengthen Consumer Protection In Financial Services

by Ulrika Lomas, LawAndTax-News.com, Brussels

15 July 2010

The European Commission (EC) has proposed changes to existing European rules to further improve protection for bank account holders and retail investors, and has launched a public consultation on options to improve protection for insurance policy holders, including the possibility of setting up insurance guarantee schemes.

Since 1994, a directive has ensured that all European Union (EU) member states have in place a safety net for bank account holders. If a bank is closed down, national deposit guarantee schemes are to reimburse account holders of the bank up to a certain coverage level. However, as shortcomings were detected in existing schemes during the financial crisis after 2008, the EC has now come forward with a proposal to fully amend the existing directive.

The key elements of the proposal include a confirmation of the previously-temporary upgrade in the coverage level to EUR100,000 (USD126,000) by the end of this year. This means that 95% of all bank account holders in the EU will get all their savings back if their bank fails. Coverage will also now extend to small, medium and large companies, as well as all currencies.

Bank account holders will be reimbursed within seven days, and there will be less bureaucracy involved in reclaiming deposits. For example, if a depositor lives in Portugal and has an account at a failing bank whose headquarters are based in Sweden, the Portuguese scheme would repay the depositor on its own initiative. The Swedish scheme would then reimburse the Portuguese scheme. At present, all correspondence has to be done via the scheme of the country where the bank's headquarters are located.

In addition, since 1997, the investor compensation scheme directive has protected investors who use investment services in Europe by providing compensation in cases where an investment firm is unable to return assets belonging to an investor. This might occur for example where there is fraud or negligence at a firm or where there are errors or problems in the firm's systems.

However, in recent years, the EC says that it has received numerous complaints about the 1997 directive's application in some member states. These complaints have concerned issues such as schemes having insufficient funding, or lengthy delays in paying out claims. It is, therefore, making proposals intended to ensure that the rules on investor protection are more efficient and that there is a level playing field concerning the type of financial instruments that are protected.

The key elements of these proposals are an increase in the current minimum level of compensation for investors from EUR20,000 to EUR50,000; and arrangements for faster payouts from the several years that it can now take, to a maximum of 9 months after the investment firm’s failure (to allow competent authorities to investigate the case and determine the positions of individual investors).

Investors are to receive clearer and more extensive information about the extent to which their assets are covered. The EC proposes that cover will be extended to when, for example, an investment firm uses a third party custodian to hold the client's assets and the third party defaults without returning the invested assets; and when unit holders in investment funds suffer loss if there is a failure of a depositary or a sub-custodian of the fund.

Most of the deposit guarantee improvements could come in effect by 2012 and 2013, with the investor compensation improvements in place by the end of 2012. They would apply in all EU member states as well as in Norway, Iceland and Liechtenstein, once incorporated in the European Economic Area Agreement.

Finally, the EC has issued a consultative paper on insurance guarantee schemes (IGS), which provide last-resort protection to consumers when insurers are unable to fulfil their contract commitment; offering protection against the risk that claims will not be met if an insurance company is closed down.

As opposed to the banking and securities sectors, there is presently no European legislation on guarantee schemes in the insurance sector. Currently, 12 member states operate one or more IGS which cover life and/or non-life insurance policies. They not only vary in terms of protection and eligibility, but also on when they are to intervene or how they are to be funded.

In the paper, the EC sets out different options to ensure a fair and comprehensive level of consumer protection in the EU, as well as to guard against the need for taxpayers to foot the bill in case an insurance company should collapse. In particular, it proposes introducing a directive to ensure insurance guarantee schemes exist in all member states and comply with a minimum set of requirements. All interested parties are invited to submit their comments and further input by November 30, 2010.

The Internal Market and Services Commissioner, Michel Barnier, said: "The adoption of this package marks the Commission's latest endeavour to bring transparency and responsibility to Europe's financial system in order to prevent and manage future crises. European consumers need reassurance that their savings, investments or insurance policies are protected no matter where in Europe they are based. To make this a reality, I now call upon the European Parliament and the Council to make rapid progress in approving the package."

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