In response to the financial crisis and following several recent mis-selling scandals and a recognition that products are becoming more complex, there has been increased focus on consumer protection in financial services by both regulators and policymakers.
We have seen a raft of recent initiatives which seek to achieve this aim in a number of ways, for example, through focusing on the point of sale, using improved disclosure or other conduct of business requirements, or by intervening in the product itself.
At the international level, the October 2011 G20 High-Level Principles on Financial Consumer Protection, developed by an OECD Task Force, set out common principles that countries should adopt in order to strengthen consumer protection. IOSCO’s February 2012 Consultation on Suitability requirements for Complex Financial Products recommends common principles in the face of increasing complexity in financial products.
In the EU, the proposals follow other initiatives which seek to advance the consumer protection agenda. Notably, the recent MIFID II proposals aim to promote greater independence in services for consumers through introducing structural changes to the remuneration of portfolio managers and independent investment advisers, while the Markets in Financial Instruments Regulation (MIFIR) introduces ‘product banning’ powers for national regulators and ESMA.
As noted earlier in the briefing, the PRIPs KID follows the introduction of the UCITS KIID, which became mandatory for sales of all UCITS by 1 July this year.
Deloitte’s September 2011 Product Intervention briefing provides an overview of some recent national initiatives regarding product intervention. Deloitte’s April 2012 Product Governance report analyses the effect of product governance regulatory initiatives on the UK market and the rest of Europe. In terms of disclosure, some national initiatives take the UCITS KIID further.
For example, the Netherlands, Germany and France have already extended UCITS KIID requirements to non-UCITS. Outside the EU, Switzerland imposes KIIDs on foreign UCITS and non-UCITS, with Swiss specific information to be added, and Norway accepts KIIDs.
We can only expect policymakers’ and regulators’ focus on consumer protection to continue. However, considering the multiple ways in which this can be achieved and the multiple regulations which apply across products, a form of harmonisation and consistency will be important to ensure changes meet their objectives while avoiding undue burden on firms.
The proposals will pass to the European Parliament and to the Council for negotiation and adoption. Assuming both sets of negotiations are concluded within 2013, which may be an ambitious timetable, IMD II and PRIPs could be applicable from 2015.
While this may still seem a long way off, there are things which firms can and should be doing now in preparation for these changes. As we wait for some of the details to be filled in, firms can begin addressing the strategic aspects of the proposals and assessing their capabilities, products and processes.