The reasonably circumspect, the
gullible and the plain stupid
Consumer protection under the Unfair Commercial Practices
Directive and the financial services industry
Willem van Boom
April 2013
Main points
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Regulation of B2C commercial practices in financial services
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The UCP Directive does not perform well on any of these issues; it
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Must balance ‘individual responsibility’ against societal need for systemic stability
Has to respond to local needs, situations and practices
Must be in line with the maturity of the market
Must be flexible to respond to new developments
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Relies largely on the ‘informed choice-making’ homo economicus model
Neglects not only the gullible and plain stupid but also the homo heuristicus
Erroneously assumes maximum harmonisation strikes the proper balance
Stifles rather than nourishes innovation in consumer protection in financial services
Therefore, the exclusion of financial services from the maximum
harmonisation scope of the Directive was a wise decision; maintaining it is
even wiser
Structure of my talk
1. Main features of the UCP Directive
2. Some examples of dubious practices in financial services that illustrate the
need for
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Balancing ‘individual responsibility’ against societal need for systemic stability
Responsiveness to local needs, situations and practices
Consistency with degree of maturity
∂ of the market
Flexibility to respond to new developments
3. Why the UCP Directive’s framework does not always suffice
4. Why leaving leeway to member states is the best option
5. The 2013 Review by the European Commission
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1. Main features of the UCP Directive
Directive 2005/29/EC
of 11 May 2005 (OJ L
149/22) (Unfair
Commercial Practices
Directive)
Consumer Protection
from Unfair Trading
Regulations 2008
(the CPRs)
S.213 Enterprise Act
2002: FCA is
designated enforcer
General UCP framework
General clause (art. 5)
practices (1) contrary to professional diligence
that (2) distort transactional decision-making
process of average consumer
Misleading practices
(art. 6-7)
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Actions
Omissions
(eg, untruths,
framing)
(omitting material
information)
Aggressive
practices
(art. 8-9)
Black list – practices deemed unfair
(Annex I)
General UCP framework
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Practice: any B2C act,
omission, communication,
etcetera, connected with
economic motives
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Before contract conduct (eg.,
Incomprehensible or
ambiguous general contract
terms)
After sales conduct (eg.,
switching barriers,
aggressive debt collection)
General clause (art. 5)
practices (1) contrary to professional diligence
that (2) distort transactional decision-making
process of average consumer
Misleading practices
(art. 6-7)
∂
Actions
Omissions
(eg, untruths,
framing)
(omitting material
information)
Aggressive
practices
(art. 8-9)
Black list – practices deemed unfair
(Annex I)
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Unfair = practice ‘contrary to the
requirements of professional
diligence’ which materially distort
or are likely to materially distort
the economic behaviour of the
average (targeted) consumer
with regard to a product or
service
Misleading actions and
omissions: false, deceptive,
omitting material information,
etc.
Aggressive: by harassment,
coercion, or undue influence,
has potential for significantly
impairing freedom of choice or
conduct
General UCP framework
General clause (art. 5)
practices (1) contrary to professional diligence
that (2) distort transactional decision-making
process of average consumer
Misleading practices
(art. 6-7)
∂
Actions
Omissions
(eg, untruths,
framing)
(omitting material
information)
Aggressive
practices
(art. 8-9)
Black list – practices deemed unfair
(Annex I)
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General UCP framework
Annex: practices deemed unfair
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Eg., bait advertising, bait &
switch, promotional pyramid
schemes
Eg., “Requiring a consumer who
wishes to claim on an insurance
policy to produce documents
which could not reasonably be
considered relevant as to
whether the claim was valid, or
failing systematically to respond
to pertinent correspondence, in
order to dissuade a consumer
from exercising his contractual
rights”
General clause (art. 5)
practices (1) contrary to professional diligence
that (2) distort transactional decision-making
process of average consumer
Misleading practices
(art. 6-7)
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Actions
Omissions
(eg, untruths,
framing)
(omitting material
information)
Aggressive
practices
(art. 8-9)
Black list – practices deemed unfair
(Annex I)
• The average consumer, who is reasonably well informed and
reasonably observant and circumspect as interpreted by the
European Court of Justice
• The average consumer test is not a statistical test but a normative
test by national court/authorities
• Particular groups of vulnerable consumers (elderly, children) are
gauged according to the average∂ member of their group
• The UCP Directive seems to protect the average homo economicus,
not the gullible, inattentive, uninterested or distracted homo
heuristicus
Maximum harmonization
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Level playing field and internal market rhetoric
More restrictive national rules banned
Breadth of scope is enormous
national courts & agencies need to apply the general standard case-by-case;
supplementing Black List is prohibited
• Eg., generic prohibition of bundling products is not allowed (ECJ 2009; 2010)
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Exceptions
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UCPD is without prejudice to contract law (art. 3 (1))
Specific EU rules on UCPs have priority (art. 3 (4))
MS may impose more restrictive rules on financial services (art. 3 (9))
Financial services exception up for review
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2. Some examples of dubious practices in financial services
Payment Protection Insurance
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PPI seems to be a particular UK ‘problem’
Most complained over financial product
Number of (successful) claims on PPI low compared to other types of
insurance
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Agressive marketing (over-the-counter & bundled sales)
Commission driven sales
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Consumers do not consider the need for the product
About half of them don’t even know they have/had one
Dissuasive claims handling; broad coverage exceptions
Interventions:
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OFT fining for unfair practices
Competition Commission Order for restructuring product and commercial
practices (unbundling sales process)
Dutch “stock lease” products
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1990s retail product; no specific regulations in place
Aggressively marketed, targetting (also) less educated &
less affluent classes
For as little as €20 per month, the impecunious could
profit from the stock boom and build equity in a short
period (2, 5 yrs.)
None of the products clearly communicated concepts
such as ‘borrowing’, ‘loan’ or ‘risk of residual debt’ but
emphasised ‘profit’ and ‘saving’
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Inherently dangerous product (borrowing money to ‘lease’
stock), only viable under the assumption of continuously
rising stock value
Millions of policies sold; billions in debt incurred
Interventions: steady increase of regulation standardising
information and marketing methods
Supreme Court: UCP ‘average consumer’ would read
carefully, see through the sales talk and be aware of the
risks
Other examples
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Long-term equity building endowment policies
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Recent German research show that most of these policies do not reach
maturity since consumers mostly opt for early termination
Structural mismatch between product features and needs?
Why do we have them? Marketing methods (eg., bundling with mortgages)
and barriers to exit/switch by restrictive & ambiguous contract terms
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‘Pyramid schemes’ – unsustainable product based on perpetual
recruitment of participants (eg Ponzi scheme)
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A product which probably only becomes viable when using UCPs
Completely banned in various countries
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3. Why the UCP Directive’s framework does not always suffice
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The ‘success’ of an unfair commercial practice is a reciprocal process:
it takes two to tango
Real consumers sometimes perform below the standard of the ‘average
consumer’
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Across Europe, around half of consumers (52%) tend to take the first
product they see when obtaining a current bank account or credit card
(Eurobarometer 2012/373)
Real consumers can be intellectually lazy, inert, uninterested, gullible,
∂ with ‘back against the wall’, less
plain stupid but also: underprivileged
resilient or lacking ability to defer gratification
There is limited opportunity for learning from mistakes
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Some products you only buy once
56% of individuals who own a financial product have not purchased any of
these within the last five years (Eurobarometer 2012/373)
Example: development of Dutch home owners’ mortgage types
Interest only
Unit-lined equity investment basis
Equity savings basis (with profits
endowment)
Life insurance basis
Non-linear capital & interest
repayment
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Lineair capital repayment
other
Then: 1990s ‘cowboy’ banks started handing out easy mortgage loans, enticing
consumers to ride the ever higher waves of property price increases
Intricate bundling of products, driven by undisclosed commission-basis
Influencing ‘average consumers’ with financial products is more subtle than the
‘informed choice’ paradigm can address
The ‘greed button’ is easily pressed – no matter how average you are
The systemic consequences can be enormous – calling for more drastic
intervention than the UCP framework offers
Now: legislative framework of full transparency of agent commissions, c.a.r.,
unbundling of products, and effectively a prohibition of interest only mortgages
• In financial services, subtle commercial practices can be linked with product
and market features (eg, credence goods and intransparent markets)
• Therefore, national regulators need to go beyond the ‘informed choice
paradigm’
• By weighing and balancing various considerations
Cf. relevant aspects to balance by FCA
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Differences in consumer risk appetite, experience and expertise
Consumer needs for timely provision of information and advice that is accurate and fit for
purpose
An appropriate ‘level of care’ provided by service providers having regard to the degree of risk
involved and the capabilities of the consumers in question
the differing expectations that consumers may have in relation to different products
the needs of different consumers for information that enables them to make informed choices
the general principle that consumers should take responsibility for their decisions
the ease of access to services for consumers in socially or economically deprived areas
switching ease
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Therefore, sectoral rules:
• May do more for the gullible and plain stupid consumer
• May do more to address local consequences of consumer inertia and
disinterest
• By varying from “informed choicemaking paradigm” to intervention in
“access to products”
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Within “informed choicemaking paradigm”
• Eg., communication and promotion of financial products needs to be clear, fair and
not misleading (eg., avoiding small print, misnomers)
• Eg., mandatory use of standardised concepts (eg., APR) and presentations (eg., key
facts illustrations)
• Eg., mandatory use of wealth warnings, eg. “Your home may be repossessed if you
do not keep up repayments on your mortgage.” (MCOB 3.6.13)
• Eg., mandatory disclosure of agent remuneration arrangements
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Within intervention in ‘access to products’
• Prohibition of doorstep selling of financial products, telemarketing etc.
• Interest rate caps for consumer credit
• Outright bans on products because they are always pushed by using UCPs (eg.,
pyramid schemes) or feed on deprivation (eg., pay day loans)
• As a result, the “informed choice” paradigm is valuable but may not be
sufficient
• UCP framework stresses ‘individual responsibility’ through informed
choice-making
• However, it does not address specific needs for systemic stability
• In many consumers, the ‘blind greed’ button is easily pressed – risking
systemic instabilities
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• The UCP framework is built on open-textured
standards to be applied
on case-by-case basis (Black List is exhaustive)
• The exhaustive Black List obstructs flexibility to respond to new
developments
• Whereas stability of some financial products may be better served by
standardised rules
• The need for such standardisation depends on national setting and
institutional framework
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4. Why leaving leeway to member states is the best option
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What is relevant for one market may not be relevant for others
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Stark differences in maturation of markets between EU15 and NMS12
• Eg., 27-28% of Romanian/Bulgarian consumers have a current account (Eurobarometer
2012/373)
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Consistent lack of cross-border competition: 94% of consumers have never
purchased financial products in other MS, 80% would not consider buying a
financial product in another EU country
Different
markets,
different needs:
The Netherlands
needs a standard
notification period of
3 months for
announcing new
interest rates at end
of fixed rate period
to avoid UCP of late
notification
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5. The 2013 Review by the European Commission
EC Report
March 2013
“The results of the investigation conducted in the
areas of financial services (…) indicate that it would
not be appropriate to [have full harmonisation in
financial services UCPs]. The main reasons are:
• the higher financial risk in respect of financial
services (…) (as compared to other goods and
services);
• the particular inexperience of consumers in these
areas (combined with a lack of transparency (…)
of financial
∂ operations);
• particular vulnerabilities found (…) that make
consumers susceptible to both promotional
practices and pressure;
• the experience of the competent financial
enforcement bodies with a nationally grown
system;
• and finally the functioning and the stability of the
financial markets as such.”
Conclusions
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The conclusions of the Commission are in line with findings
The Commission’s reasoning, however, seems at odds with the
Directive’s ‘informed choice’ paradigm
The ‘informed choice’ paradigm is∂not sufficient to warrant correct
functioning of B2C markets in financial services
Further regulatory policies are to be designed at national level,
addressing local needs and situations