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					Final Report – Member States




                An assessment of the extent of an identified
                need for simplified, standard financial
                services products
                    SANCO/2003/B4/001
                A report for the European Commission by:

                           Charles River Associates

                           1 Undershaft
                           London EC3A 8EE
                           United Kingdom

                           Rue de l’Abbaye 2
                           B-1000 Bruxelles
                           Belgium



                    December 2004                CRA No. D0-5003
                                                                                 Charles
                                                                                 River
                                                                                 Associates


Acknowledgments
During the course of this project we spoke to a wide variety of Government
bodies, regulators, trade associations and consumer bodies as well as industry
participants across the Member States of the European Union. We would like to
thank them for their extensive help in the preparation of this report.
We would also like to thank members of the European Commission’s Health and
Consumer Protection Directorate for their input and direction in writing this
report.




                   For further details on this report, please contact:
                           Tim Wilsdon and Kyla Malcolm
                              Charles River Associates
                                    1 Undershaft
                                London EC3A 8EE
                             Tel: +44 (0) 20 7664 3700

                                           Or

                                   Rainer Nitsche
                               Charles River Associates
                                  Rue de l’Abbaye 2
                                  B-1000 Bruxelles
                                       Belgium
                                 Tel: +32 2 627 1400




December 2004
Contents                                                                                                                                                Page




Section 1            Introduction to report on Member States............................................................................ 1
Section 2    Austria...................................................................................................................................... 2
  Summary .................................................................................................................................................. 2
  Sources of information................................................................................................................................ 6
  Development and characteristics of simplified products ........................................................................... 8
     Private pension plans ............................................................................................................................. 8
     Neue Zukunftsvorsorge (New Future Provision) .................................................................................12
  Alternative regulatory interventions .........................................................................................................17
     Provision of information.......................................................................................................................17
     Regulation of the sales and advice process .........................................................................................21
     Voluntary codes of conduct ..................................................................................................................25
  Balance between simplification and other forms of intervention ............................................................27
  Cross-border trade.....................................................................................................................................41
     Benefits ................................................................................................................................................41
     Barriers ................................................................................................................................................42
Section 3    Belgium ..................................................................................................................................45
  Summary ................................................................................................................................................45
  Sources of information..............................................................................................................................48
  Development and characteristics of simplified products .........................................................................50
     Basic banking service ...........................................................................................................................50
  Alternative regulatory interventions .........................................................................................................53
     Provision of information.......................................................................................................................53
     Regulation of the sales and advice process .........................................................................................55
     Voluntary codes of conduct ..................................................................................................................58
  Balance between simplification and other forms of intervention ............................................................60
  Cross-border trade.....................................................................................................................................76
     Benefits ................................................................................................................................................76
     Barriers ................................................................................................................................................76
Section 4    Denmark ................................................................................................................................79
  Summary ................................................................................................................................................79
  Sources of information..............................................................................................................................83
  Development and characteristics of simplified products .........................................................................84
  Alternative regulatory interventions .........................................................................................................85
     Provision of information.......................................................................................................................85
     Regulation of the sales and advice process .........................................................................................88
     Voluntary codes of conduct ..................................................................................................................90
  Balance between simplification and other forms of intervention ............................................................91
  Cross-border trade...................................................................................................................................103
     Benefits ..............................................................................................................................................105
     Barriers ..............................................................................................................................................106
Section 5    Finland .................................................................................................................................109
  Summary ..............................................................................................................................................109
  Sources of information............................................................................................................................114
  Development and characteristics of simplified products .......................................................................116
  Alternative regulatory interventions .......................................................................................................116
     SIVA Working Group..........................................................................................................................116
     Provision of information.....................................................................................................................119
     Regulation of the sales and advice process .......................................................................................122
     Voluntary codes of conduct ................................................................................................................127
  Balance between simplification and other forms of intervention ..........................................................130
  Cross-border trade...................................................................................................................................151
     Benefits ..............................................................................................................................................151
     Barriers ..............................................................................................................................................153



December 2004
Contents                                                                                                                                               Page


Section 6     France...................................................................................................................................160
  Summary ..............................................................................................................................................160
  Sources of information............................................................................................................................164
  Development and characteristics of simplified products .......................................................................166
     Service bancaire de base (Basic banking service).............................................................................166
     CODEVI, livret A and livret bleu .......................................................................................................168
     Livret d’épargne populaire (LEP)......................................................................................................171
     Plan d’épargne retraite populaire (PERP)........................................................................................173
  Alternative regulatory interventions .......................................................................................................177
     Provision of information.....................................................................................................................177
     Regulation of the sales and advice process .......................................................................................180
     Voluntary codes of conduct ................................................................................................................183
  Balance between simplification and other forms of intervention ..........................................................189
  Cross-border trade...................................................................................................................................204
     Benefits ..............................................................................................................................................205
     Barriers ..............................................................................................................................................205
Section 7     Germany ..............................................................................................................................207
  Summary ..............................................................................................................................................207
  Sources of information............................................................................................................................212
  Development and characteristics of simplified products .......................................................................213
     Riester pensions ..................................................................................................................................214
     AS Funds .............................................................................................................................................223
  Alternative regulatory interventions .......................................................................................................226
     Provision of information.....................................................................................................................227
     Regulation of the sales and advice process .......................................................................................234
     Voluntary codes of conduct ................................................................................................................237
  Balance between simplification and other forms of intervention ..........................................................238
  Cross-border trade...................................................................................................................................254
     Benefits ..............................................................................................................................................254
     Barriers ..............................................................................................................................................256
Section 8    Greece...................................................................................................................................259
  Summary ..............................................................................................................................................259
  Sources of information............................................................................................................................266
  Development and characteristics of simplified products .......................................................................267
  Alternative regulatory interventions .......................................................................................................267
     Provision of information.....................................................................................................................268
     Regulation of the sales and advice process .......................................................................................271
     Voluntary codes of conduct ................................................................................................................273
  Balance between simplification and other forms of intervention ..........................................................275
  Cross-border trade...................................................................................................................................283
     Benefits ..............................................................................................................................................283
     Barriers ..............................................................................................................................................284
Section 9     Ireland ..................................................................................................................................287
  Summary ..............................................................................................................................................287
  Sources of information............................................................................................................................291
  Development and characteristics of simplified products .......................................................................292
     Savermark ...........................................................................................................................................292
     Personal Pension - Personal Retirement Savings Accounts .............................................................296
     Simplified financial advice .................................................................................................................307
  Alternative regulatory interventions .......................................................................................................308
     Provision of information.....................................................................................................................308
     Regulation of the sales and advice process .......................................................................................314
     Voluntary codes of conduct ................................................................................................................316
  Balance between simplification and other forms of intervention ..........................................................318
  Cross-border trade...................................................................................................................................330
     Benefits ..............................................................................................................................................330



December 2004
Contents                                                                                                                                                  Page


        Barriers ..............................................................................................................................................330
Section 10 Italy.......................................................................................................................................333
  Summary ..............................................................................................................................................333
  Sources of information............................................................................................................................339
  Development and characteristics of simplified products .......................................................................340
     Basic banking service .........................................................................................................................341
     Open pension funds ............................................................................................................................345
  Alternative regulatory interventions .......................................................................................................348
     Provision of information.....................................................................................................................348
     Regulation of the sales and advice process .......................................................................................356
     Voluntary codes of conduct ................................................................................................................358
  Balance between simplification and other forms of intervention ..........................................................359
  Cross-border trade...................................................................................................................................368
     Benefits ..............................................................................................................................................368
     Barriers ..............................................................................................................................................369
Section 11 Luxembourg ........................................................................................................................372
  Summary ..............................................................................................................................................372
  Sources of information............................................................................................................................378
  Development and characteristics of simplified products .......................................................................380
     Complementary pensions ...................................................................................................................380
  Alternative regulatory interventions .......................................................................................................385
     Provision of information.....................................................................................................................385
     Regulation of the sales and advice process .......................................................................................387
     Voluntary codes of conduct ................................................................................................................389
  Balance between simplification and other forms of intervention ..........................................................390
  Cross-border trade...................................................................................................................................403
     Benefits ..............................................................................................................................................403
     Barriers ..............................................................................................................................................404
Section 12 Netherlands..........................................................................................................................407
  Summary ..............................................................................................................................................407
  Sources of information............................................................................................................................411
  Development and characteristics of simplified products .......................................................................412
     Covenant basic banking service.........................................................................................................413
  Alternative regulatory interventions .......................................................................................................415
     Provision of information.....................................................................................................................415
     Regulation of the sales and advice process .......................................................................................421
     Voluntary codes of conduct ................................................................................................................427
  Balance between simplification and other forms of intervention ..........................................................430
  Cross-border trade...................................................................................................................................447
     Benefits ..............................................................................................................................................447
     Barriers ..............................................................................................................................................447
Section 13 Portugal................................................................................................................................449
  Summary ..............................................................................................................................................449
  Sources of information............................................................................................................................452
  Development and characteristics of simplified products .......................................................................453
     Minimum banking service ..................................................................................................................454
     Personal retirement plan....................................................................................................................455
  Alternative regulatory interventions .......................................................................................................459
     Provision of information.....................................................................................................................460
     Regulation of the sales and advice process .......................................................................................464
     Voluntary codes of conduct ................................................................................................................466
  Balance between simplification and other forms of intervention ..........................................................467
  Cross-border trade...................................................................................................................................477
     Benefits ..............................................................................................................................................477
     Barriers ..............................................................................................................................................478



December 2004
Contents                                                                                                                                               Page


Section 14 Spain.....................................................................................................................................482
  Summary ..............................................................................................................................................482
  Sources of information............................................................................................................................485
  Development and characteristics of simplified products .......................................................................487
     Mortgages ...........................................................................................................................................487
  Alternative regulatory interventions .......................................................................................................493
     Provision of information.....................................................................................................................493
     Regulation of the sales and advice process .......................................................................................496
     Voluntary codes of conduct ................................................................................................................498
  Balance between simplification and other forms of intervention ..........................................................499
  Cross-border trade...................................................................................................................................511
     Benefits ..............................................................................................................................................511
     Barriers ..............................................................................................................................................511
Section 15 Sweden .................................................................................................................................515
  Summary ..............................................................................................................................................515
  Sources of information............................................................................................................................520
  Development and characteristics of simplified products .......................................................................521
     Premium pension system ....................................................................................................................521
  Alternative regulatory interventions .......................................................................................................529
     Provision of information.....................................................................................................................530
     Regulation of the sales and advice process .......................................................................................535
     Voluntary codes of conduct ................................................................................................................538
  Balance between simplification and other forms of intervention ..........................................................540
  Cross-border trade...................................................................................................................................555
     Barriers ..............................................................................................................................................555
Section 16 United Kingdom..................................................................................................................562
  Background to the development of simplified products in the UK .......................................................565
     Consumer detriment ...........................................................................................................................565
     CAT standards and Stakeholder pension ...........................................................................................566
     Cruickshank review of banking ..........................................................................................................568
     Sandler report.....................................................................................................................................569
  Characteristics of simplified products ....................................................................................................571
     Basic bank account.............................................................................................................................572
     CAT standard cash ISA ......................................................................................................................573
     Stakeholder pension............................................................................................................................574
     CAT standard equity ISA ....................................................................................................................575
     CAT standard insurance ISA..............................................................................................................577
     CAT standard mortgage .....................................................................................................................578
     Stakeholder Child Trust Fund ............................................................................................................579
     Smoothed investment ..........................................................................................................................580
     Basic advice regime............................................................................................................................581
     Impact of simplified products .............................................................................................................582
  Alternative regulatory interventions .......................................................................................................584
     Provision of information.....................................................................................................................584
     Regulation of the sales and advice process .......................................................................................587
     Voluntary codes of conduct ................................................................................................................588
  Cross-border trade...................................................................................................................................589
  Conclusion for the UK ............................................................................................................................590




December 2004
                                                                                                                                                                   Charles
                                                                                                                                                                   River
                                                                                                                                                                   Associates
Tables                                                                                                                                                  Page

Table 1: Simplified products in Austria...................................................................................................... 3
Table 2: Alternative regulatory interventions in Austria ......................................................................... 5
Table 3: Austrian primary regulators......................................................................................................... 7
Table 4: Characteristics of simplified product – Pension Investment Fund .......................................... 9
Table 5: Characteristics of simplified product – New Future Provision (ZV) products.....................12
Table 6: Regulation of the sales and advice process for investment products - disclosure and
qualification ................................................................................................................................................25
Table 7: Simplified products in Belgium ..................................................................................................45
Table 8: Alternative regulatory interventions in Belgium......................................................................47
Table 9: Belgian primary regulators .........................................................................................................50
Table 10: Characteristics of simplified product – Basic banking service .............................................51
Table 11: Regulation of the sales and advice process for investment products - disclosure and
qualification ................................................................................................................................................56
Table 12: Simplified products in Denmark ..............................................................................................81
Table 13: Alternative regulatory interventions in Denmark..................................................................83
Table 14: Danish primary regulators ........................................................................................................84
Table 15: Regulation of the sales and advice process for investment products - disclosure and
qualification ................................................................................................................................................89
Table 16: Simplified products in Finland ...............................................................................................110
Table 17: Alternative regulatory interventions in Finland...................................................................111
Table 18: Finnish primary regulators .....................................................................................................115
Table 19: Regulation of the sales and advice process for investment products - disclosure and
qualification ..............................................................................................................................................123
Table 20: Simplified products in France.................................................................................................160
Table 21: Alternative regulatory interventions in France ....................................................................163
Table 22: French primary regulators......................................................................................................165
Table 23: Characteristics of simplified product – Basic banking service ...........................................166
Table 24: Characteristics of simplified product – CODEVI ................................................................169
Table 25: Characteristics of simplified product - LEP .........................................................................171
Table 26: Characteristics of simplified product - Plan d’épargne retraite populaire (PERP).........173
Table 27: Regulation of the sales and advice process for investment products - disclosure and
qualification ..............................................................................................................................................181
Table 28: Simplified products in Germany ............................................................................................209
Table 29: Alternative regulatory interventions in Germany................................................................210
Table 30: German primary regulators....................................................................................................213
Table 31: Characteristics of simplified product – Riester products ....................................................215




          December 2004
Tables                                                                                                                                                 Page


Table 32: Characteristics of simplified product – AS Funds................................................................224
Table 33: Regulation of the sales and advice process for investment products - disclosure and
qualification ..............................................................................................................................................237
Table 34: Simplified products in Greece.................................................................................................259
Table 35: Alternative regulatory interventions in Greece ....................................................................265
Table 36: Greek primary regulators .......................................................................................................267
Table 37: Regulation of the sales and advice process for investment products – disclosure
and qualification ........................................................................................................................................271
Table 38: Simplified products in Ireland ................................................................................................288
Table 39: Alternative regulatory interventions in Ireland ...................................................................289
Table 40: Irish primary regulators..........................................................................................................291
Table 41: Characteristics of simplified product – Savermark (for cash based savings
accounts or collective investment schemes) ............................................................................................293
Table 42: Characteristics of simplified product - PRSA.......................................................................298
Table 43: Regulation of the sales and advice process for investment products – disclosure
and qualification ........................................................................................................................................316
Table 44: Simplified products in Italy.....................................................................................................334
Table 45: Alternative regulatory interventions in Italy ........................................................................338
Table 46: Italian primary regulators.......................................................................................................340
Table 47: Characteristics of simplified product – Basic banking service ...........................................342
Table 48: Characteristics of simplified product - Open pension funds...............................................346
Table 49: Regulation of the sales and advice process for investment products – disclosure
and qualification ........................................................................................................................................358
Table 50: Simplified products in Luxembourg ......................................................................................373
Table 51: Alternative regulatory interventions in Luxembourg..........................................................376
Table 52: Luxembourg primary regulators............................................................................................380
Table 53: Characteristic of simplified product - Complementary pensions.......................................381
Table 54: Regulation of the sales and advice process for investment products - disclosure and
qualification ..............................................................................................................................................388
Table 55: Simplified products in the Netherlands ................................................................................408
Table 56: Alternative regulatory interventions in the Netherlands.....................................................410
Table 57: Dutch primary regulators........................................................................................................412
Table 58: Characteristics of simplified product – Covenant basic banking service..........................413
Table 59: Regulation of the sales and advice process for investment products - disclosure and
qualification ..............................................................................................................................................424
Table 60: Simplified products in Portugal..............................................................................................449
Table 61: Alternative regulatory interventions in Portugal .................................................................451
Table 62: Portuguese primary regulators...............................................................................................453


December 2004
Tables                                                                                                                                                 Page


Table 63: Characteristics of simplified product – Minimum banking service ...................................454
Table 64: Characteristics of simplified product – PPR (Personal retirement plan)..........................456
Table 65: Regulation of the sales and advice process for investment products – disclosure
and qualification ........................................................................................................................................465
Table 66: Simplified products in Spain ...................................................................................................482
Table 67: Alternative regulatory interventions in Spain ......................................................................484
Table 68: Spanish primary regulators ....................................................................................................487
Table 69: Characteristics of simplified products - mortgages..............................................................488
Table 70: Regulation of the sales and advice process for investment products - disclosure and
qualification ..............................................................................................................................................496
Table 71: Simplified products in Sweden................................................................................................517
Table 72: Alternative regulatory interventions in Sweden ...................................................................518
Table 73: Swedish primary regulators ....................................................................................................521
Table 74: Characteristics of simplified product - Premium Pension System .....................................522
Table 75: Proportion of new entrants in default fund...........................................................................524
Table 76: Regulation of the sales and advice process for investment products - disclosure and
qualification ..............................................................................................................................................535
Table 77: Simplified products in the UK ................................................................................................562
Table 78: Alternative regulatory interventions in the UK....................................................................564
Table 79: Characteristics of simplified product – basic bank account ...............................................572
Table 80: Characteristics of simplified product – CAT standard cash ISA .......................................573
Table 81: Characteristics of simplified product – Stakeholder pension .............................................574
Table 82: Characteristics of simplified product – CAT standard equity ISA....................................575
Table 83: Characteristics of simplified product – CAT standard insurance ISA..............................577
Table 84: Characteristics of simplified product – CAT standard mortgage ......................................578
Table 85: Characteristics of simplified product – Stakeholder Child Trust Fund ............................580
Table 86: Characteristics of simplified product – Stakeholder smoothed investment fund.............580




December 2004
                                                                                                                                                    Charles
                                                                                                                                                    River
Figures                                                                                                                                 Page
                                                                                                                                                    Associates




Figure 1: Uptake of the Dankort................................................................................................................95
Figure 2: Percentage of mortgages that are fixed ..................................................................................491




December 2004
                                                                                                Charles
                                                                                                River
Introduction to report on Member States
                                                                                                Associates

Section 1        Introduction to report on Member States
1.1    The reports on the individual Member States should be read in conjunction with
       the main report which is published alongside them; especially the theoretical and
       methodological sections on which the whole report is based and which set out the
       framework for the analysis.

1.2    In particular, care should be taken to note the following:

       •   Comments sourced as interviews with a particular institution should not be
           taken to be the official view of that institution. Rather it reflects the personal
           view of the individual(s) being interviewed and as such should not be seen as
           an indication of the policy of the institution. Nonetheless, these individuals
           are clearly engaged in and with the financial services sector and hence there
           views are of vital importance.

       •   Tables expressing the alternative interventions should not be seen as
           exhaustive.

       •   Sections were written between February and November 2004. Since financial
           services markets are dynamic markets which change rapidly, the information
           contained in this report may become out of date and changes made in many
           markets may not necessarily be mentioned in all of them due to the timing of
           the writing.




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December 2004
                                                                                                  Charles
                                                                                                  River
Austria
                                                                                                  Associates

Section 2         Austria
Summary
2.1       In Austria, a number of studies carried out by the consumer association VKI
          (often on behalf of the Federal Ministry of Social Security, Generations and
          Consumer Protection) have found evidence of complexity and lack of product
          transparency, but there has been no recommendation to solve this by introducing
          simplified products.

2.2       Instead of product simplification, the focus in Austria is on information provision.
          However, there are signs that existing levels of information provision are not
          sufficient. One important finding of a recent VKI study on insurance products for
          pension saving was that it is very difficult for consumers to compare the different
          savings options with regard to estimated payout and guaranteed yield, which are
          judged to be two of the most important pieces of information for consumers.

2.3       The same study also found that in some areas although information provision is
          requested by law, most providers do not fulfil the information requirements set
          out in the Insurance Supervision Act.

2.4       We have categorised private pensions as being a simplified product.

2.5       In particular, a certification scheme has arisen out of pension provision legislation
          that results in some product simplification.      The certification schemes have
          resulted in the development of Pension Investment Funds (PIF) and recently
          introduced New Future Provision products (Neue Zukunftsvorsorge, ZV). We
          categorise both products as being simplified.

2.6       The explicit aim of PIFs is to provide a savings vehicle for old age provision, and
          we have classified this as a simplified product because rules were included
          placing restrictions on providers’ investment policies limiting the amount of risk
          consumers were exposed to. In addition, it stipulated flexibility regarding
          ensuring the consumer can change, stop or resume contributions.

2.7       The PIF (and the standardised complementary pension insurance, PZV) is seen as
          having “failed” due to very limited take up. This is thought to be due to the lack

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December 2004
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                                                                                                River
Austria
                                                                                                Associates

          of flexibility regarding switching between providers or access to money.
          Consequently, they are to be phased out and fully substituted by the ZV
          certificates, which include product standards that increase transparency and
          reduce complexity for consumers.

2.8       According to market participants, ZV products have successfully avoided the
          problems experienced in other markets (where government designed products
          have introduced further complexity to the market). Although ZV products were
          only introduced in January 2003 they are seen as successful. The level of sales in
          the last year have made these one of the most popular pension savings vehicles in
          the country.

Table 1: Simplified products in Austria

      Product list                                  Does Austria have simplified products?

      Basic deposit account with payment means                        No

      Cash based savings products on which                            No
      interest or other return is paid

      Credit or deferred debit card                                   No

      Private pension plans                           Yes (PIF in 1998, ZV products 2003)

      Motor insurance                                                 No

      Home insurance                                                  No

      Life assurance                                                  No

      Mortgage credit                                                 No

      Collective investment schemes                                   No

      Financial advice                                                No



2.9       During our interviews in Austria it became clear that market participants as well
          as consumer protection organisations and ministries agree that many financial
          services products in Austria are very simple and that transparent products already
          exist, e.g. current accounts, savings accounts, credit cards, motor insurance, and
          home insurance.



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                                                                                                Charles
                                                                                                River
Austria
                                                                                                Associates

2.10      For insurance products, this is partly due to the long history of product
          standardisation that Austria had until the mid-1990s. Until then, all product terms
          for insurance products had to be approved by the respective authority (third-party
          motor insurance is still standardised to a large extent by regulation on the extent
          of cover).

2.11      The legacy of this product regulation continues to this day.          The Austrian
          Insurance Association (VVO) publishes model contracts as recommendations for
          its members. These recommendations are block-exempted from the competition
          laws by the European Commission, although the VVO argued that in their view
          further product standardisation would be very likely to have anti-competitive
          effects and might violate EU competition laws.1

2.12      For life insurance contracts, the Financial Market Authority (FMA) continues to
          set the maximum interest rates that providers are allowed to promise their
          customers, we have classified this as standardisation rather than simplification
          because the system has been in force for a long time, is accepted by European
          legislation (Directive 2002/83/EC) and is motivated by a desire to regulate
          providers’ actuarial reserves in order to ensure financial stability rather than by
          the desire to reduce complexity for consumers.

2.13      For banking products, the standardisation of products has been driven by the
          simple functions these products have to fulfil and have evolved over time.

2.14      Recent statements from the president of the FMA suggest that there have been
          concerns about a lack of product transparency for consumers and resulting market
          failures, especially for pension products. In addition to the certification schemes
          for certain tax-privileged products described above, the FMA’s preferred
          approach is the regulation of information rather than product characteristics.

2.15      As far as self-regulation is concerned, the Association of Austrian Investment
          Companies (VÖIG) has introduced a voluntary code of conduct regulating the
          level and scope of information that should be provided by its members. For


1
       Interview with the VVO, 2nd June 2004.

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                                                                                                   River
Austria
                                                                                                   Associates

          mortgage credits, implementation of the European voluntary code of conduct on
          home loans started in 2003.

Table 2: Alternative regulatory interventions in Austria

                              Information           Regulation of sales       Voluntary codes of
                               provision               and advice                  conduct

Basic deposit account         Banking Act              Banking Act

Cash based savings            Banking Act              Banking Act
products

Credit or deferred
debit card

Private pension plans            Minimum           Information provision        VÖIG quality
                               transparency        rules of the respective        standards
                             standards being        product group apply
                                 prepared           (mainly investment
                                                           funds).

Motor insurance              Information on          Requirement that
                           contract terms (incl.    brokers must act in
                            way of payment,        the interest of clients.
                           cancellation rights).

Home insurance               Information on          Requirement that
                           contract terms (incl.    brokers must act in
                            way of payment,        the interest of clients.
                           cancellation rights).

Life assurance               Pre-contractual         Requirement that
                             information on         brokers must act in
                           contract terms and      the interest of clients.
                            offered services,
                           annual notification
                          about contract status.

Mortgage credit           Detailed information                                European voluntary
                          about contract terms,                                code of conduct
                            interest rates and
                            costs/ charges in
                           contract agreement.

Collective investment          Simplified          Know your customer,          VÖIG quality
schemes                   prospectus, including    seller must act in best        standards
                           disclosure of TER.      interest of consumer.

Financial advice                                       Brokers’ Act




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                                                                                                River
Austria
                                                                                                Associates

2.16      Providers of financial services products are generally not in favour of product
          simplification, but believe that competition should encourage providers to design
          differentiated products. However, they agreed that consumers must be adequately
          informed in order to make the right decision.

2.17      Furthermore, providers are concerned about frequent regulatory changes, which
          are likely to increase uncertainty for both consumers and producers. In addition,
          providers of investment funds pointed to an asymmetric regulatory treatment of
          investment and insurance products, which could lead to competitive distortions in
          the market for private pensions and should be corrected.

2.18      Generally, cross-border trade in financial products in Austria has been minimal
          and where it has occurred it has mainly taken the form of foreign providers setting
          up subsidiaries in the country rather than using the freedom to provide services.
          Interviewees expressed their strong belief that the Austrian market is relatively
          conservative and that consumers prefer national and/or local providers of banking
          and insurance products, reflecting the great importance of trust between
          consumers and providers or intermediaries for business relationships in financial
          services.

Sources of information
2.19      The information in this section came from a range of sources. These included
          publications from the following institutions (in addition to those interviewed
          listed below):

          •   Arbeiterkammern (Workers’ Chambers, AK);

          •   Austrian Ministry for Consumer Protection on insurance contracts in general
              and motor insurance in particular; and

          •   Various commercial banks.

2.20      Additionally, the press (e.g. www.die-wirtschaft.at.) was consulted.

2.21      Interviews were conducted with:



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                                                                                                             River
Austria
                                                                                                             Associates

          •   Bundesministerium           für      soziale      Sicherheit,      Generationen         und
              Konsumentenschutz (Federal Ministry of Social Security, Generations and
              Consumer Protection, BMSG);

          •   Raiffeisen Capital Management, an investment fund provider;

          •   Verein für Konsumenteninformation (Association for Consumer Information,
              VKI);

          •   Verband der Versicherungsunternehmen Österreichs (Austrian Insurance
              Association, VVO); and

          •   Vereinigung       österreichischer      Investmentgesellschaften        (Association      of
              Austrian Investment Companies, VÖIG).2

2.22      In addition, we received a written statement from the Wirtschaftskammer
          Österreich (Austrian Federal Economic Chamber) as the legal representative of
          the Austrian banking industry, reflecting the views of private, savings, co-
          operative and other banks. We also received written statements from the
          Finanzmarktaufsicht (Financial Market Authority, FMA).

2.23      The Financial Market Authority (FMA) is the relevant supervisory authority for
          all products concerned in this report. The Federal Ministry of Finance is
          responsible for product design for products with tax benefits.

Table 3: Austrian primary regulators

          Product list                                                Primary regulators

Banking products (including credit cards and                 Financial Market Authority (FMA) and
mortgages)                                                        Federal Ministry of Finance

Insurance products (both life and general)

Pensions

Investment products



2
       We conducted an interview with three representatives of Raiffeisen Capital Management, including
       the managing director Dr Mathias Bauer. Dr Bauer is also the president of VÖIG, the Association of
       Austrian Investment Companies. Therefore, he also spoke as a representative of the whole investment
       industry.

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                                                                                                                Associates

Financial advice



Development and characteristics of simplified products
2.24      The following section describes products that we classified as simplified. We
          highlight their characteristics, how they were developed and, where possible,
          assess the impact that they have had on the market.

Private pension plans
2.25      Both the Pension Investment Fund (PIF) and the Neue Zukunftsvorsorge (ZV
          products) have been categorised as simplified, although neither was explicitly
          aimed at reducing problems of complexity.

          Pension Investment Funds (PIF) 3

2.26      Pension Investment Funds (PIFs) have existed in Austria since 1998, when they
          were introduced through a government amendment of the Investment Fund Act,
          although it was only in 2000 that tax benefits were introduced for them.

2.27      The objective of PIFs is saving for retirement and in order to ensure such a long-
          term focus, providers must follow a specific investment policy laid out in the
          Investment Fund Act. PIFs are exempt from speculation and capital gains tax,
          although when the fund is transferred into an annuity an insurance tax of 2.5%
          must be paid.4 Since 1st January 2000, fund holders can claim the government
          premium to be added to their PIF contributions.

2.28      The following table summarises the product characteristics of Pension Investment
          Funds.




3
       Unless stated otherwise, this section is based on Prämienbegünstigte Pensionsvorsorge (§ 108a EstG
       1988, § 108b EstG 1988), Federal Ministry of Finance (Bundesministerium für Finanzen), 2004,
       paragraphs 1348-1352, available at
       http://www.bmf.gv.at/steuern/richtlinien/lstr/2002/401str1321.html.
4
       Private Vorsorge, Margit Handschmann and Thomas Eisenmenger for the Workers’ Chamber Vienna
       (Arbeiterkammer Wien), March 2002, available at
       http://wien.arbeiterkammer.at/pictures/importiert/Vorsorge.pdf.

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Table 4: Characteristics of simplified product – Pension Investment Fund5

Non-price characteristic                    More detail                     Explanation

Transactions                         Frequency of contributions    Monthly, contributions can be
                                                                       changed, stopped and
                                                                   resumed. Although switching
                                                                      providers is not allowed
                                                                          before maturity

Access                                   Use of investments          No access before 60 and an
                                                                     obligation to turn into life-
                                                                            long annuity

Asset allocation                        Diversification / risk        At least 30% invested in
                                                                    shares and securities, profit-
                                                                      sharing certificates and
                                                                           income bonds

                                                                    At least 30% invested in low-
                                                                            risk securities

                                                                    No warrants and investment
                                                                      in derivatives only for
                                                                         hedging reasons

                                      Location of investments       Up to 50% of the fund assets
                                                                    may be invested in securities
                                                                     of issuers with registered
                                                                     office outside of the EEA

Tax incentives                       Government premiums and         Government premiums of
                                          tax free payout.           9.5% on contributions (in
                                                                          2003), limited to
                                                                    contributions of up to €1000
                                                                              per year



          Transactions

2.29      Contributions into PIFs must be paid in regularly, usually monthly. However, it
          must be possible to change, stop and resume contributions. However, switching
          providers is not allowed before maturity.




5
       Federal Act on Investment Funds, section 23g (English translation available at
       http://www.voeig.at/voeig/voeighome.nsf/04b17a9c362af53dc1256c28003be97d/bd18971e81d00773
       c1256de20038896b/$FILE/_8aqckihpg64mk2ork41nms829dpr6asrkdlimst108pqmsp3j_.pdf.

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          Access

2.30      Access to funds is not allowed before maturity unless the value of the
          contributions is less than €9,300.6

2.31      At retirement the fund must be converted into a life-long annuity (which could be
          offered from a different provider to that chosen for the PIF).

2.32      It must be possible to change, stop and resume contributions.

          Switching

2.33      There is no switching and no withdrawal of capital possible prior to maturity, i.e.
          retirement. In fact, this has been identified as one of the main reasons of PIFs low
          success in the market.

          Asset allocation

2.34      The prospectus of a PIF must state that the fund is a pension provision vehicle and
          therefore follows a long-term investment policy. In the light of this there are a
          number of restrictions that are imposed on the investment allocation including:7

              •    At least 30% of the fund assets must be invested in shares and securities,
                   profit-sharing certificates and income bonds;

              •    At least 30% of the fund assets must be invested in low-risk securities, i.e.
                   bonds, cash deposit certificates, convertible bonds, mortgage bonds, local-
                   authority bonds and Austrian Federal Treasury bills;

              •    At least 50% of the fund assets may be invested in securities of issuers
                   with registered office inside the EEA;

              •    No dividend distribution;

              •    Warrants may not be acquired; and


6
       Private Vorsorge, Margit Handschmann and Thomas Eisenmenger for the Workers’ Chamber Vienna
       (Arbeiterkammer Wien), March 2002, available at
       http://wien.arbeiterkammer.at/pictures/importiert/Vorsorge.pdf.




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              •   Investment in derivatives is only allowed for hedging reasons.

2.35      Hence the restrictions impose both a minimum and a maximum on the equity
          components that are allowed within the product.

          Tax incentives

2.36      Contributions to PIFs are eligible for government premiums, which are exempt
          from income tax and determined as a percentage of the contributions made. The
          government premium is set at 5.5% of the contributions made plus the respective
          premium rate for building society savings (in 2003, the total premium was 9.5%).8
          The maximum contribution to PIFs for which premiums are granted is capped at
          €1,000 per year (i.e. the maximum premium in 2003 was €95). Policyholders are
          free to pay higher contributions than this, but only pension payments that stem
          from premium-favoured contributions will be tax exempt at payout.9

          Reason for categorising as simplified

2.37      PIF funds are classified as simplified because they have restrictions on the
          underlying investment resulting in a proportion being invested in safe assets. In
          addition, it is required that they are flexible, so that contributions can be changed,
          stopped and resumed.

          Impact of PIFs

2.38      Despite the associated tax benefits, PIFs were not very successful in the market.
          In 1998 assets of around €90 million were invested in PIFs, and while this
          increased to €130 million in 1999, it has since fallen back to close to the 1998
          level. The general opinion seems to be that this failure was mainly because the



7
       Federal Act on Investment Funds, sections 23c-e, (English translation available at
       http://www.voeig.at/voeig/voeighome.nsf/04b17a9c362af53dc1256c28003be97d/bd18971e81d00773
       c1256de20038896b/$FILE/_8aqckihpg64mk2ork41nms829dpr6asrkdlimst108pqmsp3j_.pdf).
8
    Prämienbegünstigte Pensionsvorsorge (§ 108a EstG 1988, § 108b EstG 1988), Austrian Ministry of
    Finance (Bundesministerium für Finanzen), 2004, paragraph 1327, available at
    http://www.bmf.gv.at/steuern/richtlinien/lstr/2002/401str1321.html; and “…Dass ma was hat, wann
    man was braucht”, Eva Pernt, Die Wirtschaft, available at http://www,die-
    wirtschaft.atireds3/page.php?P=4017.
9
    Prämienbegünstigte Pensionsvorsorge (§ 108a EstG 1988, § 108b EstG 1988), Federal Ministry of
    Finance (Bundesministerium für Finanzen), 2004, paragraphs 1328-1352, available at
    http://www.bmf.gv.at/steuern/richtlinien/lstr/2002/401str1321.html.

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          products was seen as inflexible and this was not outweighed by the tax
          advantages.10 In particular, PIFs do not allow policyholders to access their money
          or switch provider prior to retirement, which made the investment decision a final
          one for life. It was also thought that distributors sometimes even advised their
          clients against a PIF or a PZV because of this feature, although the incentives to
          sell these products were not different from those for other products.11

Neue Zukunftsvorsorge (New Future Provision)12
2.39      As a consequence of the perceived failure of PIFs, changes to the product
          requirements for state support of private pensions in August 2003.

2.40      The new products, Neue Zukunftsvorsorge, (ZV) were introduced as of 1 January
          2003. The principle tax benefits under the new system are similar to the benefits
          granted to PIFs, but the new regime includes some significant constraints on the
          characteristics of contracts that are eligible for government support.

2.41      The following table summarises the characteristics of ZV products.

Table 5: Characteristics of simplified product – New Future Provision (ZV) products

Non-price characteristic                        More detail                       Explanation

Access                                          Time frame               Withdrawal possible after 10
                                                                         years (but loss and repayment
                                                                                 of tax benefits)

                                            Use of investments             Obligation to turn into life-
                                                                          long annuity (otherwise loss
                                                                             and repayment of tax
                                                                                    benefits)

                                                 Switching                 Switching to other provider
                                                                           and/or product (insurance,
                                                                          fund) possible after 10 years

Contributions                                                            Providers must guarantee paid
                                                                              in contributions and



10
       This view was supported in interviews with the BMSG, the VÖIG and the VKI.
11
       This view was supported in interviews with the BMSG, the VÖIG and the VKI.
12
       Unless stated otherwise, this section is based on Prämienbegünstigte Zukunftsvorsorge (§ 108g EstG
       1988 bis § 108i EstG 1988), Austrian Federal Ministry of Finance (Bundesministerium für Finanzen),
       2004, available at http://www.bmf.gv.at/steuern/richtlinien/lstr/2002/411str1365.html.

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                                                                     government premiums

Asset allocation                       Location of investments       At least 40% of assets
                                                                   invested in stocks listed in
                                                                     countries with market
                                                                  capitalisation not exceeding
                                                                          30% of GDP

Tax incentives                        Government premiums and    Government premiums of 9%
                                           tax free payout.      (in 2004) on contributions up
                                                                   to maximum of €1,901 per
                                                                             year



          Access

2.42      After a minimum contract term of 10 years, the contract holder has several
          switching and/or withdrawal options:

          •   Withdrawal of the accrued capital (only possible if government premiums and
              taxes are paid back);

          •   Transfer of the accrued capital and premiums to another ZV contract from
              another provider;

          •   Transfer of the accrued capital and premiums to an insurance provider as a
              lump-sum payment into an already existing Complementary Pension
              Insurance (PZV);

          •   Transfer of the accrued capital and premiums to a credit institute in order to
              purchase shares in a Pension Investment Fund (an irrevocable payout plan
              must be concluded); and

          •   Transfer to an occupational pension pool of which the policyholder is already
              a member.

          Contributions

2.43      Providers must guarantee that at retirement, at least the contributions paid in must
          be available.   This condition applies for unit-linked insurance products and
          investment funds as well as for the other types of saving. Hence for these



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          products in particular, this provides an additional guarantee compared to what
          would be expected from similar funds outside the ZV.

          Asset allocation

2.44      According to the Austrian Income Act, ZV products must comply with the
          following investment provisions - providers must invest at least 40% of the
          contributions in stocks listed in countries with a market capitalisation not higher
          than 30% of GDP (effectively this meant Austria, Portugal and Greece prior to
          EU enlargement and Austria and all new East European Member States today).

2.45      All our interview participants pointed out that one (if not the primary) objective of
          the ZV product standards was the strengthening of the Austrian capital market, by
          requiring that at least 40% of all assets of ZV products must be invested in stocks
          listed in countries with a market capitalisation of not more than 30% of GDP.
          Effectively, this provides a strong incentive to invest in stocks listed at the Vienna
          stock exchange. The strengthening of the Austrian stock market was explicitly
          mentioned by the Ministry of Finance as one of the aims underlying the new ZV
          pension savings scheme.13

          Tax incentives

2.46      Contributions and capital gains are tax-exempt during the payment period and
          payout as a lifelong pension is tax exempt for payments arising out of premium-
          favoured contributions. There is no insurance tax levied on ZV contracts.

2.47      Under the ZV system, contributions to specific pension savings products are
          eligible for government premiums, which are set at 5.5% plus the premium rate
          granted to building society savings contract in the respective year (in 2003, the
          total premium was 9.5%14).




13
       BM Grasser präsentiert dritte Säule der Altersvorsorge: Staatliche Prämien, gute Verzinsung und
       KESt-Freiheit sollen Euro-Milliarden für den österreichischen Kapitalmarkt bringen..., press release of
       the Austrian Federal Ministry of Finance, available at
       http://www.bmf.gv.at/presse/archiv/2002/september/altersversorgung.htm.
14
       …Dass ma was hat, wann man was braucht, Eva Pernt, Die Wirtschaft, available at http://www.die-
       wirtschaft.atireds3/page.php?P=4017.

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2.48      Contrary to the old system of PIFs there is no longer a fixed maximum
          contribution to ZV products for which government premiums are paid. For 2004,
          the maximum contribution for which premiums will be paid is set at €1,901.15

          Reason for categorising as simplified

2.49      One of the significant changes to the ZV products compared to the PIF was that
          ZV products allow for switching. Where the PIF had locked consumers in until
          retirement, the ZV allows consumers to withdraw funds (although with the loss in
          tax benefits) and to switch to a different provider after 10 years. In addition, ZV
          products must grant a capital guarantee on all paid-in contributions and
          government premiums, thereby reducing the risk from the perspective of
          consumers.

          Impact of ZV products

2.50      Since their introduction in January 2003, ZV products have been very successful.
          For example, Raiffeisen Capital Management, an investment company with
          approximately 20% market share, sold about 12,000-15,000 ZV products in 2003,
          compared to less than 100 PIFs under the old scheme between 2000 and 2003.16
          According to the Austrian Ministry of Finance 280,138 ZV contracts were sold in
          2003 with a total value of €240 million, which makes ZV products one of the
          most popular pension savings vehicles in the country (and in their first year, they
          had around double the value of assets compared to PIFs).17

2.51      At the end of 2003, there were 25 insurance companies and five capital
          investment companies that offered ZV products. Almost 90% of all ZV contracts
          were sold by insurance companies. About 60% of the total ZV market volume are
          accounted for by the four largest providers (all insurance companies) and 86% by
          the largest ten providers (including two capital investment companies).




15
       Säule der Altersvorsorge, Federal Ministry of Finance, available at
       http://www.bmf.gv.at/Finanzmarkt/Altersvorsorge755/3SulederAltersvorsorge756/_start.htm.
16
       Interview with Raiffeisen Capital Management and the VÖIG, 1st June 2004.
17
       Säule der Altersvorsorge, Austrian Federal Ministry of Finance, available at
       http://www.bmf.gv.at/Finanzmarkt/Altersvorsorge755/3SulederAltersvorsorge756/_start.htm.

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2.52      The representatives of the Austrian fund industry that we spoke to expect that ZV
          products will have a substitution effect on traditional and unit-linked life
          insurance contracts as well as fund savings plans and maybe even traditional
          savings products such as savings books. However, they believe it is still too early
          to clearly identify such a substitution trend quantitatively.18

2.53      It is important to keep in mind that ZV products were not defined with the
          underlying aim of product simplification, but in order to promote private pension
          saving and make the old PIFs and PZV “sellable”,

            “For producers, products have become even more complex over the last few years (e.g.
            due to the capital guarantees required by the ZV system). However, the “manual” for
            consumers on how to use the product, i.e. the information provided, has become less
            complex and easier to understand. Also, economic journals and magazines regularly
            compare different ZV products and evaluate them with regard to risk, expected gains
            etc.”19

2.54      According to a study conducted by the VKI for the BMSG, a comparison of the
          different insurance products available for pension provision (life insurance with
          profit sharing, unit-linked life insurance and ZV products) is still very difficult
          due to the different design of products. Even within the same product group, e.g.
          traditional life insurance, differences in contract duration, surplus sharing and
          expected payout lead to a situation where it is very difficult for consumers to
          judge the offers of different providers.20

2.55      In the eyes of the Federal Ministry for Social Security, Generations and Consumer
          Protection (BMSG), the new ZV products have one important disadvantage,

            “As a standardised products, the products cannot – by definition – be the optimal
            product for all consumers.”21

2.56      The Austrian Insurance Association (VVO) has some concerns regarding the
          product design of ZV products, in particular concerning the requirement to invest
          40% of assets in stocks and the limitation to stocks listed in countries with a


18
       Interview with VÖIG, 1st June 2004.
19
       Interview with VÖIG, 1st June 2004.
20
       Versicherungsprodukte zur Pensionsvorsorge – Ein Vergleich anhand konkreter Vertragsabschlüsse,
       Verein für Konsumenteninformation, 2003.
21
       Interview with BMSG, 2nd June 2004.
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          market capitalisation rate below or equal to 30%. These requirements, combined
          with the capital guarantee, make the product cost intensive, e.g. due to hedging
          and software requirements.22

Alternative regulatory interventions
2.57      As already mentioned, product simplification has not been widely used in Austria.
          Instead, the focus is on alternative regulatory interventions to increase
          transparency for consumers and reduce the perceived complexity of products.

Provision of information
2.58      Information provision is used extensively in Austria as an alternative regulatory
          intervention to ensure that consumers are put in a position to understand the
          products they buy.

          Austrian Banking Act

2.59      For banking products (current accounts and savings deposits), the Austrian
          Banking Act specifies that consumers must be informed about the interest rates
          and charges applying to their specific product and any changes to these items.

2.60      Information provision requirements for current accounts and deposits accounts are
          set out in the Austrian Banking Act (Bankwesengesetz). Credit institutions are
          required to display information on the following items in branches:

          •   Interest rates on savings deposits;

          •   Fees charged for the provision of services in connection with deposits and for
              other services in the area of private banking;

          •   The effective annual interest rate for consumer credit, if necessary by citing
              illustrative examples;

          •   The annual interest rate, if necessary by way of illustrative examples, in case
              of a) delay of payment and b) overdraft of consumers current accounts;

          •   The general business terms and conditions; and


22
       Interview with VVO, 2nd June 2004.
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          •    Information on the guarantee facility and the investor compensation scheme to
               which the credit institution is a member and on the amount and scope of cover
               (pursuant to article 93, paragraphs 8 and 8a of the Banking Act).23

2.61      The Banking Act also regulates the information to be provided in consumer credit
          and consumer current account agreements.24

          Mortgage Banks Act

2.62      According to the Mortgage Banks Act, there are a wide range of requirements
          regarding the information that must be provided by those offering mortgages. The
          credit prospectus and application form must include all clauses regarding the form
          of payout of the credit, charges deducted by the bank, the size and due date of
          interest and other charges to be paid by the debtor, the starting date of
          amortisation and provisions for credit cancellation and redemption.25

2.63      Information provision for mortgage credits is also covered by the Austrian
          Banking Act. Any consumer credit agreement and therefore any mortgage credit
          agreement must include at least the following information:26

          •    The total credit burden (i.e. credit amount paid out plus borrowing costs), and
               information about other cost items not included in borrowing costs:

                   o Costs for payment of public levies and payments for insurance or
                        security to ensure repayment of the credit upon death, disablement,
                        illness or unemployment of the debtor beyond the total credit burden if
                        such insurance was not requested by the credit institution as a
                        necessary condition for granting the credit; and

                   o Costs related to non-performance of the debtor and the costs of a
                        transfer of instalments to be paid back or the administration of an



23
       Austrian Banking Act, article 35 (English translation by Christian Hausmaninger).
24
       Austrian Banking Act, article 34, paragraph 2 (English translation by Christian Hausmaninger).
25
       Mortgage Banks Act (Hypothekenbankgesetz), available at
       http://www.fma.gv.at/de/pdf/hypothek.pdf.
26
       Austrian Banking Act, article 33, paragraphs 2 and 7.

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                       account if these costs are not higher than those for consumer current
                       accounts.

          •    The effective annual interest rate “in a conspicuous place in the contract”;

          •    Reference to the publication of the interest rate applicable to delay of
               payment;

          •    If applicable, an interest adjustment clause. This clause must be linked to
               objective standards;

          •    Number, amounts and maturity of instalments for paying back the total
               burden; and

          •    In cases where an endowment and life insurance has been entered into
               together with the credit in order to secure the loan, reference must be made to
               the savings component. If the insurance sum exceeds the total credit burden or
               the term of the insurance contract exceeds the one of the credit, reference to
               this must be made too.

2.64      Any changes to the effective annual interest rate and the annual interest applicable
          to delayed payments must be communicated to the consumer in writing before the
          change takes effect.

          Minimum transparency standards for life and pension contracts

2.65      For private pension plans, the Financial Market Authority recently announced that
          it is going to define minimum transparency standards for occupational pension
          pools (“Pensionskassen”) and life insurance contracts. The exact contents of the
          minimum standards is still uncertain, but according to press releases the FMA
          plans to release guidelines on the regular provision of information of
          policyholders, e.g. about the investment strategy and the realised yield of their
          savings product. It must also be clarified which share of this is guaranteed and
          which is the profit-sharing part.27 In addition to the planned minimum standards,



27
       FMA press release of 27th October 2003, available at Press release of the Austrian Financial Market
       Authority, 27th October 2003, available at http://www.fma.gv.at/de/pdf/aussend1.pdf.

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          the general information requirements for life insurance and investment funds
          apply to private pension plans if the underlying product is a life insurance
          contract, unit-linked life insurance or a mutual fund.

          Insurance Supervision Act

2.66      The requirements for all types of insurance contracts (life, motor and home), are
          laid        out     in       the      Austrian        Insurance        Supervision         Act
          (Versicherungsaufsichtsgesetz), which calls for the following pre-information to
          be provided in writing (if it is not possible to supply this information to
          policyholders before signing the contract, it must be given when they receive the
          policy at the latest) – this largely represents the requirement of the third life
          directive:

          •      Name, address and legal form of the insurance provider;

          •      The law applicable to the contract;

          •      Name and address of the authority supervising the provider or another point of
              contact that the policyholder can address complaints to;

          •      Term/duration of the insurance contract;

          •      Way and duration of premium payments; and

          •      Circumstances under which the policyholder can annul the contract or exit
              from it.28

          Independent product testing

2.67      There are various product testing and advisory bodies in Austria. The Association
          for Consumer Information (VKI) publishes the magazine “Konsument” with
          detailed product tests in a variety of industries, including financial services. On its
          website, the VKI offers an information package on retail financial services
          products called “Ihr Geld” (“your money”), which covers banking and insurance


28
       Insurance Supervision Act (Versicherungsaufsichtsgesetz), paragraph 9a, available at
       http://www.fma.gv.at/en/pdf/vag_engl.pdf, also cited in Versicherungsprodukte zur Pensionsvorsorge
       – Ein Vergleich anhand konkreter Vertragsabschlüsse, Verein für Konsumenteninformation, 2003.

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          as well as pension savings products and allows the direct comparison of different
          product types with regard to general product characteristics, risks, expected yield
          etc.29 The VKI also offers consumers a computer tool to compare motor insurance
          tariffs of different providers, tailored to their specific situation.30

2.68      The VKI receives some financial funds from the government, but is mainly self-
          financed through subscriptions to “Konsument” and commissioned work. The
          “Konsument” has about 80,000 subscribers (all of them have access to the VKI
          online offer), about 5,000 copies are sold in retail outlets and another 2,000 copies
          are sent to institutional readers.

2.69      The Arbeiterkammer (workers’ chamber) regularly publishes tips on financial
          services products, e.g. current accounts and savings accounts.31 It has also
          published a detailed summary and description of savings products for old age
          provision, which included information on product characteristics, costs, associated
          risks and tax treatment.32

Regulation of the sales and advice process
2.70      In addition to the information provision requirements discussed in the previous
          section, regulation of the sales and advice process is also used in Austria as an
          alternative intervention to ensure a relatively high level of consumer information.

          Insurance Supervision Act and the Investment Fund Act

2.71      For unit-linked life insurance and investment funds, the Insurance Supervision
          Act and the Investment Fund Act require - in line with the European UCITS
          Directive – that providers and/or intermediaries have to understand the investment
          experience of a prospective customer, must provide all information necessary for


29
       Available from http://www.konsument.at/ihrgeld.
30
       KFZ-Haftpflicht“, Austrian Federal Ministry of Justice, office for consumer issues
       (Bundesministerium für Justiz, Büro für Konsumentenfragen), brochure February 2003.
31
       Tipps rund ums Girokonto, (Tips on savings accounts), Workers’ Chamber Vienna (Arbeiterkammer
       Wien), available at http://www.arbeiterkammer.at/www-400-IP-11671-AD-11663.html and
       information on savings accounts at http://www.arbeiterkammer.at/www-192-IP-2420.html.
32
       Private Vorsorge, Margit Handschmann and Thomas Eisenmenger for the Workers’ Chamber Vienna
       (Arbeiterkammer Wien), March 2002, available at
       http://wien.arbeiterkammer.at/pictures/importiert/Vorsorge.pdf.

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          the consumer to take an informed decision, and must not recommend investment
          vehicles that are not in the interest of the consumer.33

2.72      According to the Insurance Supervision Act, there are some additional rules that
          sellers and/or providers must adhere to for unit-linked insurance products and
          investment funds, which are intended to increase consumer protection.

          •   Providers of investment funds are required to act in the best interest of
              consumers;

          •   For both unit-linked insurance and investment funds, providers must request
              information with respect to consumers’ previous knowledge of, and
              experience with, transactions that are to be the subject matter of the
              investment services provided, with respect to the consumers’ investment
              objectives and with respect to their financial situations to the extent necessary
              to safeguard the interests of the customers;

          •   Providers must supply all relevant information to consumers that is necessary
              for them to safeguard their interests given the respective nature and scope of
              investment (in particular policyholders must be made aware of the fact that
              past performance of investment funds does not allow conclusions about their
              future performance);

          •   Providers are not allowed to recommend an investment if this is not in line
              with the interest of the respective consumer. Also, any recommendation must
              not be motivated by the self-interest of providers, e.g. to influence share
              prices;

          •   For unit-linked insurance products, all information requirements applicable to
              the underlying investment funds must be fulfilled too; and

          •   Finally, consumers are entitled to claim compensation if any of the
              information requirements described above are violated.34



33
       The latest version of the Investment Fund Act, implementing the European UCITS directive, entered
       into force in February 2004.

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2.73      The Association for Consumer Information (VKI) would like to improve the
          information given during the sales process for investment funds since they argue
          that the Securities Supervision Act (Wertpapieraufsichtsgesetz), leads only to a
          superficial documentation of the process e.g. it must be recorded which topics
          were discussed, but not which “promises” the seller made. The VKI has suggested
          making a more detailed documentation of the sales conversation compulsory,
          including minimum information standards such as surrender values for life
          insurance products and a better standardisation of customer risk classes (those are
          perceived as rather “blurry” at the moment). This is seen as essential to make
          liability of advisers effective.35

          Broker’s Act

2.74      For insurance products, provisions on financial advice applicable to brokers are
          contained in the Brokers’ Act (Maklergesetz).36                  The Act defines brokers as
          intermediaries who are, through a contract, put in charge of acting as a broker
          between a provider and third parties, but are not put in charge of this permanently
          (contrary to e.g. tied agents who are permanently put in charge of arranging
          and/or selling insurance contracts for a provider).37

2.75      The Brokers’ Act stipulates that all brokers must preserve the interests of the
          providers of the products they sell (e.g. by communicating known risk factors to
          the provider). However, despite the fact that they work for both the provider and
          the customer, brokers of insurance products must mainly act in the interest of their
          customers.       This requirement covers general information provision and the
          following duties:

          •    Developing an adequate risk analysis and an adequate concept of coverage;




34
       Insurance Supervision Act (Versicherungsaufsichtsgesetz), paragraph 75, section 2, available at
       http://www.fma.gv.at/en/pdf/vag_engl.pdf, and Securities Supervision Act
       (Wertpapieraufsichtsgesetz), articles 13-15, available at http://www.fma.gv.at/en/pdf/securiti.pdf.
35
       Interview with VKI, 2nd June 2004.
36
       Information from the VVO, August 2004.
37
       Maklergesetz, available at
       http://portal.wko.at/wk/dok_detail_file.wk?AngID=1&DocID=247474&DstID=4081.

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          •   Assessment of the provider’s solvency based on the information available to
              an intermediary;

          •   Broking the best insurance protection possible in the respective case (this can
              be limited to certain geographic markets or insurance products if based on
              objectively justifiable reasons and if the intermediary informs the customer
              about this);

          •   Information about the legal transactions carried out for the customer, supply
              of a copy of the customer’s contract application if made in writing, supply of
              the insurance policy and the contract conditions it is based on, including the
              rules on determining the contributions;

          •   Examination of the insurance policy;

          •   Support of the customer before and after making a damages claim and
              ensuring that the customer meets all deadlines that apply; and

          •   Continuous examination of a customer’s existing insurance contracts and, if
              appropriate, recommending improvements to the existing contracts.

2.76      The following table summarises the regulation of the sales and advice process in
          Austria.




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Table 6: Regulation of the sales and advice process for investment products - disclosure
and qualification

                                          Life assurance, pensions and investment funds

Need for a fact find to               Yes for unit-linked life assurance and investment funds
understand the customer
Written record of advice given         No for life insurance, yes for mutual funds (general
                                      documentation of topics covered during sales process)
Disclosure of level of                    No for life assurance, Yes for investment funds
commission
Disclosure of turnover with                                    No
provider
Disclosure with whom                                           No
contractual relationship exist
Do legal professional                                          Yes
qualifications exist for
advisers?
Is there a publicly available                                  No
database of all advisers?



Voluntary codes of conduct
2.77      In Austria, voluntary standards have been adopted by the financial services
          industry with regard to mortgage credit (the implementation of the European
          voluntary code of conduct on home loans started in 2003) and with regard to
          investment funds (quality standards of the Association of Austrian Investment
          Companies, VÖIG). In addition, most trade associations have drafted model
          contract conditions as recommendations to their members.

          Code of conduct on home loans

2.78      Around 600 Austrian credit institutions or 90% of the total market have registered
          to participate in the code of conduct. By September 2002, 93% of these had
          implemented the code of conduct and it was anticipated that by March 2003, this
          would have risen to 100%.




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2.79      However, a further study found that the share of credit institutions actually
          complying with the code of conduct was significantly lower than suggested by the
          industry report, especially for the general product information.38

2.80      One concern that has been identified in Austria with the code of conduct regards
          the number of documents that consumers receive when buying a mortgage which
          has been the cause of consumer complaints.39

          Investment industry quality standards

2.81      The Austrian investment industry has defined “quality standards” as a measure of
          voluntary self-regulation that goes beyond the legal requirements. The objective
          of the quality standards is,

            “to maintain and promote the reputation of the Austrian investment fund industry
            nationally and internationally, to ensure a high standard of products and services and
            to ensure the highest possible transparency of investment funds offered by Austrian
            capital investment companies”.40

2.82      The standards have been in force since 1st January 2002 (with a transition period
          until 31st December 2002) and include various information provision requirements
          that aim at making products more transparent for consumers. They cover many of
          the UCITS requirements: 41




38
       Monitoring the Uptake and Effectiveness of Voluntary Code of Conduct on Pre-Contractual
       Information for Home Loans – Contract Reference No: B5-1000/02/000552, Presented by the Institute
       for Financial Services e.V, 17 June 2003, available from
       http://www.europa.eu.int/comm/consumers/cons_int/ fina_serv/loans/documents/survey_report.pdf
39
       European Agreement on a voluntary code of conduct on pre-contractual information for home loans,
       First Annual Progress Report on Implementation in the European Union by 30th September
       2002,European Banking Federation, European Savings Bank Group, European Association of
       Cooperative Banks, European Mortgage Federation and European Federation of Building Societies
       and Eurofinas,30th September 2002, available from
       http://www.europa.eu.int/comm/consumers/cons_int/fina_serv/loans/documents/ survey_report.pdf
40
       Qualitätsstandards der österreichischen Investmenfondsbranche – Juli 2003, Vereinigung
       Österreichischer Investmentgesellschaften, 2003, available at
       http://www.voeig.at/voeig/voeighome.nsf/04b17a9c362af53dc1256c28003be97d/5d2002f3f75b6e38c
       1256c6f0061786f/$FILE/_6a5qm2r39ei278srjehgmsp31e9i7682aelm6i81i60o36_.pdf.
41
       Qualitätsstandards der österreichischen Investmenfondsbranche – Juli 2003, Vereinigung
       Österreichischer Investmentgesellschaften, 2003, available at
       http://www.voeig.at/voeig/voeighome.nsf/04b17a9c362af53dc1256c28003be97d/5d2002f3f75b6e38c
       1256c6f0061786f/$FILE/_6a5qm2r39ei278srjehgmsp31e9i7682aelm6i81i60o36_.pdf.

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          •   Companies should follow an understandable and continuous information
              policy of investors, which allows them to get an “objective picture” of the
              development of their investments (the form and scope of such information is
              left for the firms to decide);

          •   Marketing documents must be written in a “consumer friendly form and
              language” and must point to the risks associated with the respective
              investment fund;

          •   Performance data can only be reported on a per annum basis and must be in
              accordance with international standards with regard to the calculation method,
              the choice of suitable benchmarks and an appropriate contemporary time
              period (1, 3 and 5 years or a multiple thereof as well as year-to-date and
              performance since the foundation of the fund);

          •   Every publication of performance data must contain the following warning:
              “Performance results of the past do not allow any conclusions about the future
              development of an investment fund.” In addition, the source of calculations
              must be provided and companies must point to the fact that issue and
              redemption costs are not considered. Companies agree to refrain from any
              performance promises and misleading performance comparisons in their
              advertisement; and

          •   All costs (issue, redemption and management fees) must be disclosed in a
              transparent way according to international standards.

Balance between simplification and other forms of intervention
          General points

2.83      In general, product simplification is not seen as a very promising tool in Austria.
          None of our interview partners expressed a strong preference for this form of
          intervention. Some trade associations even openly rejected it as potentially anti-
          competitive. Instead of product simplification, Austria seems to follow a strategy
          of information provision, regulation of the sales and advice process and voluntary
          self-regulation through trade associations.


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          Basic deposit account with payment means

2.84      The Austrian banking industry believes that current accounts are simple and
          transparent products. The level of differentiation that exists in the market reflects
          the needs of different consumer and target groups, e.g. youths.42

2.85      However, this might be changing.             Traditionally, current accounts were “all
          inclusive” products in Austria with a certain price irrespective of the number of
          transactions, services used etc. (Pauschalkonten). Today there is a shift to “mixed
          accounts” (Mischkonten) where banks charge customers per transaction and per
          service used. There is also a trend towards online accounts. It is argued that, due
          to the resulting increased product differentiation, it is becoming more and more
          difficult for consumers to compare prices for current accounts and to determine
          which product is best for them.43

2.86      Indeed, the Ministry of Social Security, Generations and Consumer Protection
          (BMSG) and the Association for Consumer Information (VKI) pointed out that
          there are some problems with complexity of current accounts. In the eyes of the
          BMSG, competition in this product market is not working: tariffs are too
          complex, there are enormous price differences (although Austrian banks claim
          that their fees are among the lowest in Europe), and switching providers usually
          leads to a lot of trouble with transfers, standing orders etc.44

2.87      According to the VKI, prices for an average current account consist of about 50-
          60 different fee items, which make the product very complex. There is no
          standardised terminology or account price information, but every bank labels its
          product information differently, which adds to the complexity. The VKI demands
          that a standardised price list should be developed.45 According to the BMSG, the



42
       Stellungnahme zum Fragebogen von Charles River Associates betreffend Standardisierte
       Finanzdienstleistungsprodukte und Verbraucherschutz, (Response to the questionnaire of Charles
       River Associates regarding standardised financial services products and consumer protection),
       Austrian Federal Economic Chamber (Wirtschaftskammer Österreich), 2004, supplied on behalf of the
       Austrian banking industry, p. 2.
43
       Interviews with BMSG and VKI, 2nd June 2004.
44
       Interview with BMSG, 2nd June 2004.
45
       Interview with VKI, 2nd June 2004.

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          former Austrian minister for consumer protection was very interested in this topic
          and even demanded a standardised “current account services list” at a press
          conference once, but the new minister has not pursued this initiative.46

2.88      The Austrian banking industry does not see differences in tariffs for current
          accounts as problematic. First, consumers always have the possibility to inform
          themselves about the different tariff structures. Second, differences in fees for
          current accounts are the result of intensive competition in this field, which should
          benefit consumers.        Regulation of tariffs would not only be against the
          competition laws, but would also abolish any price advantages for consumers that
          competition has led to.47

2.89      For the Ministry for Consumer Protection (BMSG), the most important issue with
          regard to current accounts is the access to such an account (without overdraft) for
          everybody. The BMSG actually sees this as a universal service obligation of
          banks. There is no regulation, self-regulation or industry recommendation on a
          current account for everyone in Austria, but the BMSG staff deal with problems
          in this area on a case-by-case basis and try to find a bank for each consumer that
          complains to them. Other ministries show only limited interest in this topic.48

2.90      Given the current trend towards online accounts, the BMSG is concerned that
          once consumers have switched to these currently very attractive accounts with
          zero transaction costs, banks could increase price, i.e. the current favourable
          pricing is seen as an attempt to provide (temporary) incentives for consumers to
          switch to online.49

2.91      Despite some concerns regarding the complexity of tariffs for current accounts,
          there is no perception in Austria that product simplification could help to
          overcome this issue.




46
       Interview with BMSG, 2nd June 2004.
47
       Letter from the WKO, 30th August 2004.
48
       Interview with BMSG, 2nd June 2004.
49
       Interview with BMSG, 2nd June 2004.

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          Cash based savings products on which interest or other return is paid

2.92      The general information requirements of credit institutions, which were discussed
          in the previous section, also apply to savings products offered by those credit
          institutions. In addition, for deposit accounts (savings books, savings certificates
          etc.), the annual interest rate in effect for the specific product and the
          administrative charges that can be imposed for services relating to the product
          must be clearly noted in a conspicuous place in the respective savings document
          and any change must be noted at the next presentation of the document at the
          banks.50

2.93      There is no perception in Austria that savings products are too complex.
          However, according to the Association for Consumer Information (VKI), savings
          books were traditionally free of charge in Austria, but now banks start charging
          for electronic savings books, unfortunately often without informing customers
          about these fees during the sales conversation. If consumers buy many electronic
          savings books the fees may lead to negative effective interest rates. The level and
          change of interest rates for savings books are not regulated by any objective
          rules.51

2.94      However, the BMSG would like to introduce a rule that if such savings products
          use variable interest rates, these should be linked to a market indicator and not set
          arbitrarily by the bank, which is possible at the moment.52

2.95      Nevertheless, none of our interview partners saw the need for simplification or
          other forms of intervention with regard to savings products.

          Credit or deferred debit cards

2.96      There is no specific regulation for credit or deferred debit cards in Austria. The
          Austrian banking industry believes that credit and deferred debit cards are simple




50
       Austrian Banking Act, article 32, paragraph 6 (English translation by Christian Hausmaninger).
51
       Interview with VKI, 2nd June 2004.
52
       Interview with BMSG, 2nd June 2004.

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          and transparent products.53 The Austrian credit card system is similar to the
          German one, meaning that the cards are used more as deferred debit than
          revolving credit cards. They usually do not include a revolving credit, but the total
          bill is automatically paid from the current account at the end of the month. Credit
          card providers follow the European directive and there are no problems in this
          area.54

2.97      The only problem that the VKI sees with credit cards is a lack of transparency
          with regard to their use abroad.

2.98      In the eyes of the BMSG, the main problem with respect to debit cards relates to
          theft and subsequent abuse of those cards.

2.99      There was no perceived need of simplification or other intervention in this product
          segment.

          Private pension plans

2.100     As has been described above in the PIF and ZV, Austria already has simplified
          pension products. However, despite these, the FMA recently announced that it
          would define minimum transparency standards for some private pension products.
          This initiative was driven by the recognition that de-regulation might lead to
          markets that are not transparent enough for consumers to make the best decisions,

            “A de-regulated market needs responsible consumers, but responsible consumers need
            transparent products and a transparent market.”55

2.101     The minimum transparency standards will mainly be aimed at occupational
          pension pools (“Pensionskassen”) and life insurance companies and will include
          guidelines on the regular provision of information of policyholders, e.g. about the
          investment strategy and the realised yield of their savings product. Also, it must


53
       Stellungnahme zum Fragebogen von Charles River Associates betreffend Standardisierte
       Finanzdienstleistungsprodukte und Verbraucherschutz, (Response to the questionnaire of Charles
       River Associates regarding standardised financial services products and consumer protection),
       Austrian Federal Economic Chamber (Wirtschaftskammer Österreich), 2004, supplied on behalf of the
       Austrian banking industry.
54
       Interviews with BMSG and VKI, 2nd June 2004.
55
       Press release of the Austrian Financial Market Authority, 27th October 2003, available at
       http://www.fma.gv.at/de/pdf/aussend1.pdf.

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          be clarified which share of this is guaranteed and which is the profit-sharing
          component. The FMA also argues that consumers should be made aware that
          guarantees involve costs, either directly through a fee or indirectly through lower
          expected profits.56

2.102     One area of concern that was raised by the Association of Austrian Investment
          Companies (VÖIG) was that regular changes in the regulation of private pension
          savings can lead to a loss of consumer and investor confidence. They argue that
          there is an important need for continuity when it comes to the regulation of
          financial services. Further, interviewees were sceptical that there would be
          responsible and informed consumers who decided which products to buy but
          rather argued that it is usually the adviser, seller, or agent who decides which
          product is sold to a certain consumer.57

2.103     A further concern stressed by representatives of Raiffeisen Capital Management
          and the VÖIG, was that complexity of ZV products arises because the system
          covers different product types that are regulated differently. In particular, fund
          providers feel that the different transparency and distribution rules for insurance
          providers and investment fund companies lead to distortions of competition and a
          disadvantage for fund providers. For example, insurance companies are not
          required to disclose their total expense ratio (TER) or to provide a simplified sales
          prospectus and the sales process is shorter than for the sale of investment funds.
          They argue that harmonisation of the regulation of different pension products,
          especially with regard to transparency provisions would be beneficial. However,
          they believe that such an initiative would have to be initiated at the European level
          since Austria usually follows the EU directives very closely.58

2.104     In general therefore there is no call for an additional simplified pension in Austria
          given the existing PIF and ZV products. However, it is clear that transparency of
          information can still be improved. In particular, standardisation of requirements


56
     Press release of the Austrian Financial Market Authority, 27th October 2003, available at
     http://www.fma.gv.at/de/pdf/aussend1.pdf.
57
     Interview with VÖIG, 1st June 2004.
58
     Interview with representatives of Raiffeisen Capital Management and the VÖIG, 1st June 2004.

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          between insurance based and investment fund based pensions was seen as an area
          where improvements could be beneficial.

          Motor insurance

2.105     In 1987, direct price regulation of third-party motor insurance was abolished in
          Austria. However, until mid-1994, all terms and conditions of third-party motor
          insurance contracts still had to be approved by the insurance supervisory
          authority. Since 1st September 1994, this has no longer been the case and
          providers are free to design contracts as they wish. For third-party insurance, the
          “Kraftfahrzeug-Haftpflichtversicherungsgesetz            1994”       (Third-Party      Motor
          Insurance Act of 1994) regulates minimum liability coverage and other rights and
          duties of providers and policyholders, e.g. with regard to when and how providers
          must be notified about a damage, which damages a provider must cover etc and
          hence the law already imposes considerable standardisation in Austria.                    The
          Third-Party Motor Insurance Act regulates the extent of cover of third-party
          motor insurance contracts and – according to the Austrian Insurance Association –
          leaves no room for additional standardisation.59 Since liberalisation, a variety of
          discounts and rebates has emerged but their number declined somewhat in 2002.60

2.106     There are no simplified third-party (Haftpflicht) or own-damage motor insurance
          (Kasko) contracts in Austria. However, most providers of third-party motor
          insurance still tend to follow the formerly compulsory bonus-malus (no claims
          bonus) contribution system according to which the value of premiums is
          determined by past damages claims.61

2.107     In accordance with the general consumer protection provisions set out in the
          Consumer Protection Act (Konsumentenschutzgesetz, KonSchG), premiums for
          third-party motor insurance can only be increased in line with the Austrian
          consumer price index (CPI) and each premium increase must be communicated to


59
     Letter from the VVO, dated 17th August 2004.
60
     KFZ-Haftpflicht, Austrian Federal Ministry of Justice, office for consumer issues (Bundesministerium
     für Justiz, Büro für Konsumentenfragen), brochure February 2003. The trend was also mentioned in
     interviews with the BMSG and the VVO, 2nd June 2004.



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          the customers. If providers want to increase the premium beyond the CPI increase,
          they must inform customers not only about the increase, but also about their
          cancellation right due to the premium increase (possible during the month
          following the premium increase).62

2.108     Competition in third-party motor insurance has intensified since liberalisation and
          the average premium payment is believed to have fallen. Stronger competition for
          third-party insurance has also led to more competition in own damages insurance
          as the two are usually sold together.63

2.109     In contrast to third-party motor insurance, which used to be heavily regulated until
          1994 and remains relatively standardised due to the regulation of the extent of
          cover, own-damage insurance for cars has always been unregulated in Austria.
          The Austrian Insurance Association (VVO) provides model contract terms as
          recommendations for its members that have a block exemption from the European
          Commission. Since providers generally still follow the traditional product design
          that existed prior to liberalisation for both third-party and own damages motor
          insurance, consumers can compare prices relatively easily.64 The Association for
          Consumer Information (VKI) believes that complexity of own damages motor
          insurance is higher than for the still somewhat regulated third-party insurance and
          that therefore comparisons for consumers are more difficult for own damages
          insurance than for third-party insurance for their cars.65

2.110     Given the considerable standardisation that already exists, the belief that
          competition is driving prices down and the view that prices can be easily
          compared, there is no perception that simplification or other intervention is
          necessary for motor insurance.



61
     KFZ-Haftpflicht, Austrian Federal Ministry of Justice, office for consumer issues (Bundesministerium
     für Justiz, Büro für Konsumentenfragen), brochure February 2003.
62
     Interview with BMSG, 2nd June 2004. See also Kraftfahrzeug-Haftpflichtversicherungsgesetz 1994,
     paragraphs 14a and 14b, available at http://www.fma.gv.at/de/pdf/khvg.pdf.
63
     Interview with VVO, 2nd June 2004.
64
     Interview with VVO, 2nd June 2004.
65
     Interview with VKI, 2nd June 2004.

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          Home insurance

2.111     The Austrian Insurance Association (VVO) believes that home contents insurance
          is a very simple product. In Austria, it is usually bundled with general third-party
          insurance and very popular (with about 98% market penetration). There is no
          regulation of the extent of cover in home insurance contracts and there are also no
          mandatory risks to be covered by all contracts.66 However, contracts are typically
          standardised since providers usually use the block-exempted model contract terms
          of the VVO as guidance. The model contract terms for home insurance include
          damages due to storm, but exclude flooding damages (although the provider can
          add those to individual contracts).67            Indeed, home contents and building
          insurance must include a fire insurance, which – according to article 83 of the
          Insurance Contract Act – must cover damages due to fire (including damages that
          follow from the putting out of the fire, the demolition or the clearing out of the
          home due to the fire) as well as damages due to explosion or lightning.68

2.112     The Association for Consumer Information (VKI) believes that there is a general
          problem in the insurance sector in that many providers do not clearly inform
          consumers about which risks are covered by their contracts and which are not.
          They argue that it is often difficult for consumers to get this information from the
          fine-print in the contract.69 However, there do not seem to be regulatory changes
          planned to solve this problem perceived by the consumer associations.

2.113     Despite some concerns expressed about exclusions, and partly given the high
          degree of standardisation, none of our interviewees expressed any concern
          regarding the complexity of home insurance contracts and a possible need for
          simplification.




66
     Letter of the VVO, dated 17th August 2004.
67
     Interview with VVO, 2nd June 2004. For the VVO model contract terms of home insurance, see
     Allgemeine Bedingungen für die Haushaltversicherung, version June 2001, Verband der
     Versicherungsunternehmen Österreichs, articles 2.2.1 and 2.2.6, available at http://www.vvo.at/.
68
     Information provided by the FMA on 20th September 2004.
69
     Interview with VKI, 2nd June 2004.

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          Life insurance

2.114     In Austria, the majority of life insurance contracts are in the form of traditional
          (capital) insurance. Although unit-linked insurance has grown in the last few
          years, it still only accounts for about 5% of total life insurers’ assets in Austria.
          According to some industry experts, the low share of unit-linked insurance is due
          to the fact that insurers, as well as distributors, “have a vested interest in
          traditional insurance”.70

2.115     Austrian life insurance contracts with profit sharing have one standardisation
          feature, namely the maximum guaranteed interest rate. As in Germany, and
          allowable under article 20 of the European directive on life insurance (Directive
          2002/83/EC), insurance law in Austria provides for a maximum interest rate that
          insurance providers are legally allowed to promise their clients. This regulated
          maximum interest rate is motivated by the concern that – due to competitive
          pressure – insurance providers might promise policyholders so high an interest
          rate that it jeopardises their ability to fulfil their obligations vis-à-vis
          policyholders.71

2.116     The maximum interest rate (Höchstzinssatz) is determined for each calendar year
          by the FMA based on 60% of the 10-year average of the secondary market yield
          (Sekundärmarktrendite, SMR), which is a weighted average of Austrian
          government bonds traded on the Vienna stock exchange. The maximum interest
          rate has important implications for providers’ actuarial reserves and thereby for
          the stability of financial markets as a whole. Since 1st January 2004, the maximum
          interest rate in Austria has been set at 2.75%; in 2003, it was 3.25%.72

2.117     Although they are in principle free to offer a lower guaranteed maximum interest
          rate, the majority of Austrian providers of capital life insurance contracts employ


70
     Unit-linked life insurance in western Europe: regaining momentum? Sigma Number 3/2003,
     publication by Swiss Re.
71
     Rendite und Transparenz von klassischen Lebensversicherungen – Eine Untersuchung aus der Sicht
     des Verbraucherschutzes, Thomas Haghofer, 2004, p. 5, presented at the Wilhelminenberg Gespräche,
     a conference on consumer protection in old age provision organised by the BMSG on 11th May 2004.




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          the maximum rate set by the FMA in order to remain competitive.73 This has in
          the past sometimes led to the perception that the FMA legally obliges providers to
          use the maximum interest rate, which is not the case.74

2.118     Austrian law gives consumers the right to purchase insurance contracts directly
          from the provider instead of from an intermediary (Direktionspolizze), but only
          very few consumers do this and providers are reluctant to circumvent their own
          distributors. Online sales play only a minor role for life insurance products.
          Further, the Association for Consumer Information (VKI) is generally not in
          favour of selling insurance products online because of information problems.75

2.119     One particular area of concern is that of transparency particularly regarding costs.
          The Austrian Insurance Association (VVO) believes that in general, costs of a life
          insurer are more complex than costs of investment fund companies, which makes
          transparency more difficult. Further, they do not believe that increased
          transparency requirements in the UK had any impact on consumers,

           “Experience has shown that for the individual consumer only actual, exemplary model
           calculations that show the respective parameters, i.e. the paid-in contributions and the
           final result, are really informative. All additional data only lead to uncertainty on the
           side of the consumer, but will not make an effective risk assessment possible.
           Moreover, cost factors of life insurance change during the contract term. Hence, one
           would have to inform about cost factors, their importance, effect and variability, i.e.
           about data relating to an insurance product that is based on business plans and cost
           plans of an insurance company. This requires a high sales advice effort, which
           necessarily leads to higher process. Incidentally, complete disclosure of costs of a
           company leads to less competition and thereby higher prices.76



72
     Versicherungsaufsicht – Berechnungsmethode des Höchstzinssatzes, Austrian Financial Market
     Authority (Finanzmarktaufsicht), 2004, available at
     http://www.fma.gv.at/de/_print/fma/service/nuetzlic/versiche/hoechstz.htm.
73
     Information provided by the FMA on 20th September 2004.
74
     Rendite und Transparenz von klassischen Lebensversicherungen – Eine Untersuchung aus der Sicht
     des Verbraucherschutzes, Thomas Haghofer, 2004, presented at the Wilhelminenberg Gespräche, a
     conference on consumer protection in old age provision organised by the BMSG on 11th May 2004. It
     is important to note that the maximum interest rate guaranteed by providers only relates to the savings
     share of premiums. The effective interest rate for the whole premium is lower than the guaranteed
     rate, but consumers are often not aware of this. The BMSG has suggested that, in order to solve this
     transparency problem, life insurance providers should be legally required to inform consumers about
     the “effective guaranteed interest rate” for their contracts, in a way that is similar to the rules already
     in place for consumer credits and savings contracts with building societies.
75
     Interview with VKI, 2nd June 2004.
76
     Interview with VVO, 2nd June 2004, and letter of the VVO, dated 17th August 2004.

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2.120     Some experts also hold that disclosure of distribution fees would not substantially
          increase price transparency for insurance products because there are many other
          types of transaction costs (e.g. insurance taxes, management costs, costs of asset
          management and taxes on paid out capital) that would still not be disclosed.
          Consumers are ultimately interested in three pieces of information: the gross
          premium they have to pay in; the expected amount of capital that will be paid out
          (given the specific tax treatment); and the level of risk associated with the
          product. If the paid out capital is expressed as a lump sum, this information will
          enable to consumers to not only compare different insurance products, but also
          compare insurance products with other savings instruments, e.g. investment fund
          savings plans.77

2.121     According to the Ministry for Consumer Protection (BMSG), there are no plans to
          introduce a total expense ratio (TER) for life insurers similar to that for
          investment funds. The BMSG does not see significant competition distortions due
          to the different transparency requirements since about one third of all life
          insurance contracts in Austria are sold by banks, which usually also sell
          investment funds.

2.122     Most life insurance contracts in Austria have front-end loaded pricing (although
          contrary to the German practice, Austrian contracts usually do not include a
          clause stating such “Zillmerung”, i.e. the practice is not made transparent to
          consumers), which leads to very low surrender values during the first years of the
          contract term. BMSG does not see this as very problematic, although they would
          welcome a general rule that the distribution costs must be allocated to at least 5
          years.78 Contrary to the BMSG, the Association for Consumer Information is
          concerned that the Zillmer method of allocating distribution cost to the first years
          of a contract term are a transparency problem for life insurance contracts.




77
     Transparenz von Altersvorsorgeprodukten in der Lebensversicherung, Thomas Url, 2004, presented at
     the Wilhelminenberg Gespräche, a conference on consumer protection in old age provision organised
     by the BMSG on 11th May 2004.
78
     Interview with BMSG, 2nd June 2004.

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2.123     In the light of these discussions it is important to note that the FMA announced
          that it would undertake specific steps to improve the situation, although there are
          no details available about this as yet.79

2.124     An additional concern identified by the BMSG is the lack of regulation regarding
          the sharing of profits with policyholders. Profit sharing is not legally required, but
          must be agreed in the life insurance contract. Consumers must be informed about
          the sources of the surplus sharing capital that is added to their contracts, about the
          calculation method, the scope and the timing of surplus sharing. However, there
          are no specific rules regarding the exact form, and type of, information providers
          must supply. The BMSG has criticised (based on the findings of a study
          conducted by the Association for Consumer Information, VKI, on behalf of the
          BMSG) the considerable heterogeneity of providers’ information about profit
          sharing and has requested that mandatory standards should be introduced.80

2.125     According to Austrian law, if they have agreed to offer profit sharing, providers
          must allow policyholders an “adequate” share of their profit. Although the FMA
          has the legal option to set a minimum share of surplus sharing, it has not done so
          in the past. It is typical to include profit sharing of “only” 85%, although the
          BMSG has requested that – similar to Germany – a legal minimum surplus
          sharing of 90% should be introduced.81

2.126     Overall, there are concerns with the transparency of cost information although
          some question how useful such information would actually be. Further, there are
          concerns about the information provided on the expected profit sharing. These
          concerns point mainly towards improved, standardised information and despite
          the concerns in the market there were no calls for simplified products.




79
     Interview with VKI, 2nd June 2004.
80
     Rendite und Transparenz von klassischen Lebensversicherungen – Eine Untersuchung aus der Sicht
     des Verbraucherschutzes, Thomas Haghofer, 2004, presented at the Wilhelminenberg Gespräche, a
     conference on consumer protection in old age provision organised by the BMSG on 11th May 2004.
81
     Rendite und Transparenz von klassischen Lebensversicherungen – Eine Untersuchung aus der Sicht
     des Verbraucherschutzes, Thomas Haghofer, 2004, presented at the Wilhelminenberg Gespräche, a
     conference on consumer protection in old age provision organised by the BMSG on 11th May 2004.

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          Mortgage credit

2.127     As has been described above, there are considerable requirements regarding
          information provision for mortgages. Further the Austrian Banking Act imposes
          additional requirements regarding product terms e.g. if interest rates are changed,
          instalments must be adjusted so that repayment is still possible within the
          originally agreed time period unless the debtor agrees to re-negotiate. Premature
          repayment of the loan must be possible, either entirely or partially. A period of
          notice may be agreed upon for premature repayment.82

2.128     One general problem with mortgage credits regards providers’ information about
          the effective interest rate. Usually mortgages start with a fixed interest rate that
          becomes variable after a few years. In their advertising, providers often inform
          consumers only about the effective interest rate during the fixed interest rate
          period, but do not take into account the likely variable interest rate, which often is
          significantly higher. It is thought by consumer representatives that this confuses
          consumers.83 Some providers also offer interest free mortgage credits, but charge
          up to 6% management fees annually, which the BMSG also sees as some form of
          mis-information.84 According to the VKI, banks sometimes even explicitly refuse
          to inform customers about the variable interest rate that is likely to be applied to
          their credit. The FMA has recognised this problem and has started thinking about
          possible remedies (probably in the context of the general Banking Act).85

2.129     Although there were some suggestions for how the Austrian mortgage market
          could be improved, these revolved around more transparent information for
          consumers. None of our interviewees expressed concern regarding the need for
          product simplification of mortgage credit products.




82
     Austrian Banking Act, article 33, paragraphs 6 and 8.
83
     Interviews with BMSG and VKI, 2nd June 2004.
84
     Interview with BMSG, 2nd June 2004.
85
     Interview with VKI, 2nd June 2004.

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          Collective investment schemes

2.130     The Austrian Investment Fund Act, incorporating the UCITS Directive, imposes a
          high transparency standard on investment fund providers. They have to provide
          customers with a simplified prospectus during the sales process and also need to
          disclose their TER. Both requirements were originally introduced as voluntary
          standards by the investment fund industry before they were required under
          European law, although they have been compulsory since 2004.86

2.131     As has been noted above, collective investment schemes in Austria have high
          levels of information provision and quality standards have been developed by the
          industry to improve information provision before the requirements of UCITS
          were necessary. Given the high level of information provision and regulation of
          the sales process for investment funds, and further given that investment funds
          were seen as standardised there was no perception that there was any need for
          additional simplification measures for this product type.

          Financial advice

2.132     Regulation of the sales and advice process is set down in various laws in Austria
          according to the product types and also to the type of intermediary. Most rules
          applicable to the different product types, also with regard to the qualification of
          intermediaries, have already been discussed above. These provisions are typically
          being extended rather than reduced and hence there was no suggestion that a
          simplified advice regime should be developed.

Cross-border trade
Benefits
2.133     Overall, cross-border trade in financial services has not been a significant factor in
          Austria to date. Interviews with financial regulators, trade associations and
          consumer groups did not identify any particular benefits that would occur due to




86
     In 2002, the Association of Austrian Investment Companies (VÖIG) made recommendations to its
     members with regard to a simplified prospectus and disclosure of the TER. In 2003 the
     recommendations became binding self-regulations and in 2004 they were adopted by the Financial
     Market Authority (FMA) and became mandatory. Source: Interview with VÖIG, 1st June 2004.

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          simplification or standardisation in terms of encouraging cross border activity in
          financial services.

Barriers
          Consumer preferences

2.134     With regard to banking products, the Austrian banking industry does not believe
          that stronger regulation and product simplification or standardisation would lead
          to more cross-border trade. According to the industry, there are strong ties
          between consumers and their local banks, which are not due to product
          complexity and consumers’ inability to shop around, but rather to the good access
          of local banks for individual transactions and to a relationship of mutual trust
          between consumers and the local banking staff. Trust is very important for bank
          transactions and is usually built up and deepened through direct personal contact
          between consumers and local staff.87 Since it takes time to build up trust between
          institutions and consumers this suggests that this would remain a barrier for those
          foreign providers who sought to physically locate in Austria, as well as those who
          entered using freedom to provide services.

          Lack of local market knowledge

2.135     According to the VVO, there are no foreign motor insurers on the Austrian
          market, with the exception of insurance for the car fleet business. The VVO
          attributes this to the fact that for the service provided by motor insurers (among
          other aspects of the service, they also take care of the registering of cars), a
          personal relationship with the sales agent and detailed knowledge about the local
          market are crucial, but difficult to provide for companies from abroad. More
          generally, the VVO characterised the Austrian market as extremely conservative,
          which is also one of the reasons why direct insurers have a market share of below
          one percent. Further they pointed out that in general, foreign providers usually set
          up subsidiaries in other EU countries instead of selling their products from their


87
     Stellungnahme zum Fragebogen von Charles River Associates betreffend Standardisierte
     Finanzdienstleistungsprodukte und Verbraucherschutz, (Response to the questionnaire of Charles
     River Associates regarding standardised financial services products and consumer protection),
     Austrian Federal Economic Chamber (Wirtschaftskammer Österreich), 2004, supplied on behalf of the
     Austrian banking industry.

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          home country to customers abroad, and there was no suggestion from the VVO
          that standardisation or simplification would reduce barriers to such establishment,

              “The internal market for insurance products fails because of a lack of demand and
              because of foreign providers’ lack of knowledge about local markets.” 88

2.136     In practice therefore it would appear that even if standardisation means providers
          understand one product that could be sold in the market, this does not necessarily
          help them to understand how consumers behave which may be the more important
          factor.       Indeed, given the variation in consumer preferences, although
          standardisation may make cross-border trade easier, it may not necessarily make it
          more successful.

          Legal and tax differences

2.137     In addition to the reasons above, the VVO sees two other obstacles to cross-
          border trade. Firstly, risks are different in different countries and secondly, the
          legal and regulatory environment differs significantly across EU Member States.89
          Hence simplified or standardised product terms would not overcome these barriers
          to trade.

2.138     Furthermore, the VÖIG pointed to the two main obstacles for cross-border trade
          in investment funds:

          •     Different national registration procedures, partly due to the different timing of
                implementation of new EU directives (Austria is usually one of the first
                countries to implement new rules, but other countries lag behind and can only
                deal with the Austrian “modern” product documentation with some delay);
                and

          •     National differences in the tax treatment of investment funds (in particular, it
                was noted that Germany had seen a significant increase in bureaucratic




88
     Interview with VVO, 2nd June 2004.
89
     Interview with VVO, 2nd June 2004.

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             requirements recently through the modernisation of the Investment Act and
             that this was proving to be a further barrier preventing cross-border trade).90

2.139     Therefore even if simplification or standardisation of product terms occurred,
          differences in tax would mean different products would be required for different
          countries and hence would bring limited advantages for providers seeking to
          exploit freedom of services or freedom of establishment.

          Product design

2.140     According to the VÖIG, international providers are not very interested in the
          future provision (ZV) products for private pension plans, mainly due to the
          products’ complexity from the producers’ perspective as they require a capital
          guarantee, and an indefinite or at least uncertain contract duration etc.91
          Potentially this suggests that if products were to be simplified or standardised then
          it may lead to more interest from foreign providers in offering certain products
          where it is believed that from the provider perspective complexity is preventing
          entry.




90
     Interview with VÖIG, 1st June 2004.
91
     Interview with VÖIG, 1st June 2004.




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                                                                                            Associates

Section 3       Belgium
Summary
3.1   Complexity of financial services was seen to be a problem in Belgium, although
      there is no recent report by the Government or regulators presenting any evidence
      that complexity of financial products was a major source of problems. Many of
      the products in Belgium are thought to be reasonably standardised across
      companies. Further simplified products have not been seen as a solution to
      complexity this and where simplified products have been identified this has not in
      fact been aimed primarily at overcoming complexity.

3.2   As shown in Table 7, Belgium has one product that we classify as “simplified”.

Table 7: Simplified products in Belgium

      Product list                               Does Belgium have simplified products?

      Basic deposit account with payment means            Basic banking service

      Cash based savings products on which                         No
      interest or other return is paid

      Credit or deferred debit card                                No

      Private pension plans                                        No

      Motor insurance                                              No

      Home insurance                                               No

      Life assurance                                               No

      Mortgage credit                                              No

      Collective investment schemes                                No

      Financial advice                                             No



3.3   The service bancaire de base (basic banking service) was introduced in 2003 with
      the primary goal of improving access to banking services. We categorise it as
      simplified because there are product constraints such as there being no credit
      facility for consumers and also because the charges are regulated.




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3.4      Nevertheless, problems resulting from the lack of transparency were identified
         particularly in mortgages and savings accounts despite regulations to ensure
         comparability.

3.5      A number of reasons were seen as causing complexity, including:

         •    Product differentiation by banks and insurance companies e.g. in the case of
              the regulated saving account,92

              “Banks have developed relatively divergent practices which has affected the
              comparability of conditions related to taking out such an account.”93

         •    The creation of joint, “bundled” or “mixed” products, like life insurance
              linked to investment funds (so-called “branche 23” products), which was
              thought to create complexity because of the non-transparent charges.94

3.6      There have been various different interventions to improve the functioning of the
         retail financial services sector.

3.7      The Belgian Bankers’ Association devised a recommendation on how to simplify
         and standardise the rules regulating the premiums of regulated saving accounts
         with the aim of increasing the transparency. This prompted a discussion with the
         Ministry of Finance and the Banking, Finance and Insurance Commission on the
         transparency of regulated saving accounts in general.95

3.8      In response to problems regarding non-transparency of tariffs for current
         accounts, the Government supported the development of a current account
         calculator, which allows price comparisons of different current accounts across
         banks on the Internet site of Test-Achats (a consumers product testing
         association).




92
      Interview with the Banking, Finance and Insurance Commission, 7th June 2004.
93
      Dépôt d’épargne: Simplifier les règles de fonctionnement en matière de primes, Febelfin Newsletter,
      July 2004, available at http://www.febelfin.be/downloads/febelfin02fr.pdf.
94
      Interview with Federation of Insurance and Finance Intermediaries, 6th July 2004.
95
      Dépôt d’épargne: Simplifier les règles de fonctionnement en matière de primes, Febelfin Newsletter,
      July 2004, available at http://www.febelfin.be/downloads/febelfin02fr.pdf.

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3.9       There are some general trends in the market that may lead to less variety and may
          therefore reduce that element of complexity driven by product differentiation.
          Banks are attempting to reduce the variety of products and product providers in
          the provision of UCITS and of mortgage credits. These initiatives are driven by
          cost considerations of the banks rather than by a perceived problem of
          complexity.96

3.10      Test-Achats developed a list of features for what they considered to be optimal
          home insurance contracts and they recommended that insurance companies
          include the features in order to receive Test-Achats’s label of quality. The
          descriptions were not sufficiently prescriptive for this to be seen as a standardised
          or simplified product against our criteria. Further, only one insurance company
          received the label and there were difficulties with Test-Achat’s involvement in the
          distribution of the product.

3.11      Table 8 shows the alternative regulatory interventions for products covered by our
          study.

Table 8: Alternative regulatory interventions in Belgium

                                   Information            Regulation of sales   Voluntary codes of
                                    provision                and advice             conduct

Basic deposit account         Interactive calculator                                Gentleman’s
with payment means             to compare annual                                 Agreement signed
                                  costs between                                  between banks and
                                   providers97                                      Ministry for
                                                                                Consumer Protection

Cash based savings
products on which
interest or other
return is paid

Credit or deferred
debit card

Private pension plans




96
       Interview with Belgian Finance Federation, 2nd July 2004.


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                                                                                              River
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                                                                                              Associates

Motor insurance                                                          BROCOM Code of
                                                                          Conduct, Code of
Home insurance                                                            Conduct from the
                                                                           Association of
Life assurance
                                                                              Insurers

Mortgage credit                                                           European Code of
                                                                            Conduct for
                                                                          mortgages by the
                                                                         European Mortgage
                                                                             Federation

Collective investment        Standardised
schemes                  document indicating
                         nature of investment
                         instruments required
                              since 1991

Financial advice                                                         BROCOM code of
                                                                            conduct



Sources of information
3.12   The information in this section came from a range of sources. These included
       publications from the following institutions (in addition to those interviewed
       listed below):

       •   Annual reports from the ombudsman for insurance;

       •   Centre de Recherche et d’Information des Organisations de Consommateurs
           (Consumer organisations’ centre for research and information, CRIOC);

       •   European Banking Federation;

       •   European Mortgage Federation;

       •   Febelfin (Fédération Financière Belge; Belgian Finance Federation – the
           Federation includes all credit institutions such as banks);

       •   Ministère des Finances (Ministry of Finance);

       •   Ombudsman for the financial sector;


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       •   Test-Achats (a Belgian consumer product testing association);

       •   Union Professionelle des Entreprises d’Assurances or Assuralia (Association
           of Insurers); and

       •   Websites of banks and insurance companies.

3.13   Additionally, the financial press (e.g. L’Echo) was consulted.

3.14   Interviews were conducted with:

       •   Commission Bancaire, Financière et des Assurances (Belgian Banking,
           Finance and Insurance Commission);

       •   Fédération Financière Belge (Belgian Finance Association);

       •   Feprabel (Fédération des Courtiers d’Assurances & Intermediairies Financiers
           de Belgique; Belgian Federation of Insurance and Finance Intermediaries);

       •   Service Public Fédérale Economie, P.M.E., Classes Moyennes et Energie
           (Belgian Ministry of Economics, Department of Handicrafts, Commerce,
           Freelance, Intellectual Professions and the Service Industry); and

       •   Union Professionelle des Entreprises d’Assurances (Belgian Association of
           Insurers).

3.15   The following table summarises the primary regulatory body responsible for the
       different products. After the merger of the l’Office de contrôle des assurances
       (OCA) and the Commission bancaire et financière (CBF) in January 2003, the
       Commission bancaire, financière et des assurance (CBFA; Belgian Banking,
       Finance and Insurance Commission) became the single authority responsible for
       all products covered in this study.




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Table 9: Belgian primary regulators

                      Product list                                      Primary regulator

Banking products (including credit cards and
mortgages)

Insurance products (both life and general)
                                                            Belgian Banking, Finance and Insurance
Pensions                                                                Commission

Investment products

Financial advice



Development and characteristics of simplified products
3.16      The following section describes products that we classified as simplified. We
          highlight their characteristics, how they were developed and, where possible,
          assess the impact that they have had on the market.

Basic banking service
3.17      Belgian regulators identified a need to regulate access to basic banking services.
          According to the Belgian Bankers’ Association, estimates for those excluded from
          basic banking services range from 40,000-100,000 people or 0.3%-0.9% of the
          Belgium population.98

3.18      Banks are obliged by the law of 24th March 2003 and the royal decree of 15th
          September 2003 to open a current account for consumers with basic payment and
          bank services for a maximum of €12 per year.99 A voluntary charter signed in
          1997 by 26 banks (Charte relative au service bancaire de base; Charter relating to
          a basic banking service) preceded the law.

3.19      According to the law if a bank refuses to open a bank account it must state its
          reasons clearly on a document that is passed to a mediation institution to verify



98
       Finance et Société, Avril 2004, Fédération Financière Belges, available at www.febelfin.be. The
       current population of Belgium is 10.3 million.
99
       Avis sur le service bancaire de base, Conseil de la Consommation (Council for Consumption advises
       the Ministry on consumer issues) available at
       http://mineco.fgov.be/protection_consumer/consumption.

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          whether the refusal is justified. The law specifies the following characteristics of
          the basic banking service described in Table 10 below.

Table 10: Characteristics of simplified product – Basic banking service

Non-price characteristic                         More detail                            Explanation

Transactions                             Frequency of contributions          36 withdrawals or transfers
                                                                                      per year

                                                Lack of credit              There is no credit facility on
                                                                                     the account

Access                                                                       All banks must provide this
                                                                              service unless there is an
                                                                              exceptional reason not to

Information provision                                                        Statements of account must
                                                                             be available electronically

Price characteristic                             More detail                            Explanation

Price                                                                      Must not exceed €12 annually

          Transactions

3.20      The basic banking service includes the following transactions:

          •   Withdrawal of money from the counter;

          •   Manual execution of transfers (except to the client’s own saving account);

          •   Management and closing of current accounts;

          •   36 manual (e.g. over the counter) withdrawals or transfers per year (if the
              customer does not have a card then 72 manual withdrawals are allowed); and

          •   The service may or may not include a debit card.100

3.21      In addition, there is no credit facility allowed on the account.




100
       Avis sur le service bancaire de base, Conseil de la Consommation, available at
       http://mineco.fgov.be/protection_consumer/consumption.

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          Access

3.22      All banks are obliged to provide a basic banking service for customers unless
          there is an exceptional reason to not do so. In these cases reasons must be given
          in writing.

          Information provision

3.23      The basic banking service requires that statements be available electronically or, if
          they are available manually, that they be available at least every two weeks.

          Price characteristics

3.24      The price must not exceed €12 per year which must cover the services described
          above.

          Reasons for categorising as simplified

3.25      We categorised the basic bank account as a simplified product because of the
          restrictions on product features such as the lack of credit facility which reduces
          the risk of running into debt. Further, the available transactions are specified and
          finally there is price regulation as prices must not exceed an annual €12 charge.

          Impact of the introduction of the basic banking service

3.26      It is difficult to judge the extent to which the basic banking service solved the
          problem of bank exclusion. Figures available relate to September and October
          2003 during which less than 500 basic bank accounts were opened.101 Moreover,
          bank exclusion is deemed by the banking industry to be the result of fear by
          consumers that assets may be seized rather than the result of banks refusing
          clients. This is because civil law states that amounts which may usually not be
          seized, such as the salary up to certain amount and social security payments, could
          be seized if they are held in a bank account. One solution to this problem has been
          to prevent seizure of these amounts for a month after their payment into the bank
          account.102



101
       Annual Report 2003, Belgian Bankers’ Association, available at http://www.abb-
       bvb.be/gen/downloads/jr2003fr.pdf.
102
       Annual Report 2003, Belgian Bankers’ Association, available at http://www.abb-
       bvb.be/gen/downloads/jr2003fr.pdf.

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Alternative regulatory interventions
3.27      Alternatives to product regulation include the regulation of information and of the
          sales and advice process as well as voluntary codes of conduct. Belgium has used
          a fairly balanced combination of all of these different approaches.

Provision of information
3.28      The focus on the regulation of information has not been as strong in Belgium as in
          some other Member States and there is no current discussion on how to structure
          information across sectors or categories of products.

          Current account calculator

3.29      Test-Achats complained about the difficulty of comparing tariffs for bank
          accounts because tariffs vary from bank to bank and depend on the customers’ use
          of bank services.103 Further, some banks introduced charges for cash withdrawals
          at electronic cashiers and ATMs sparking a public debate about charges for
          transactions.

3.30      In response to these pricing issues Test-Achats, together with the Minister for
          Consumer Protection, created a tool that allows consumers to compare the prices
          of current accounts of 30 banks in Belgium and 70 types of current accounts.104
          Consumers can fill in the exact services they would like to have such as Internet
          banking, telephone-banking or credit-cards and compare the annual charges.105

          Life insurance

3.31      A new royal decree has applied to life insurance since January 2004. The decree
          widens the information obligations of the insurers in line with the requirements of
          the Third Life Directive.

3.32      In addition, the charges for redeeming a policy can no longer be determined
          completely by the insurer. The charges may not be larger than €75 or a fixed


103
       A vue, pas à vie! Budget et Droits, Test-Achats, May-June 2004 – N. 174.
104
       Similar tools have also been developed by individual providers (although typically only for their own
       products rather than for comparison).
105
       Compte à vue: notre nouveau module de calcul, Budget et Droits, Test-Achats, Juillet/Août 2004 – N.
       175.
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          percentage of the value of the redemption value: 5% if the redemption takes place
          at least five years before the end of the contract, 4% if is four years before the end
          of the contract etc.106

3.33      Further, for “branche 23” products (insurance with an investment element), the
          decree created so-called “fonds cantonnés” where the insurer distributes a fixed
          percentage of the profits whereas previously customers did not know what
          proportion of the profit they would receive. The investments concerned are
          invested separately from the other shares managed by the firm.

3.34      According to Test-Achats, these information requirements are not sufficient.
          Although a limit has been set for the cost of exiting life insurance policies,
          insurance companies are not forced to state the height of the entry charges for all
          life insurance products. Moreover they believe that insurance companies should
          clearly distinguish between premiums paid for different elements of life insurance
          because the consumer does not know which part of the premium is for investing
          in capital and which part is for coverage in case of death.107

3.35      One of the objectives of the new decree was to create the same information
          requirements for insurance funds as for investment funds that are sold by banks.
          According to Test-Achats, this objective has not yet been reached.108

          Investment funds

3.36      The ‘l’arrêté royal du 5 août 1991 relative á la gestion de fortune et au conseil en
          placement’ or royal decree of 5th August 1991 governing investment funds obliges
          companies offering investment products to hand out a standardised document
          indicating clearly the nature of the investment instruments and the types of risks




106
       Art. 29 , paragraph 2 of the Arrêté royal relatif à l'activité d'assurance sur la vie (Royal Decree relating
       to life insurance). Available from http://www.just.fgov.be/index_fr.htm.
107
       Les assurés mieux informés, Budgets et Droits, Juillet/Août 2004 - N. 175.
108
       Les assurés mieux informés, Budgets et Droits, Juillet/Août 2004 – N. 175.

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          associated with the instrument by indicating the risk class to which the product
          belongs.109

3.37      The Banking, Finance and Insurance Commission established global risk groups
          for investment funds which are determined by the monthly volatility of the stocks,
          annualised over a period of six years. Under the UCITS Directive this will have to
          be developed in order to compare it to a representative benchmark.

Regulation of the sales and advice process
          Insurance intermediaries

3.38      Currently, only the distribution of insurance is regulated in Belgian law, and
          across financial services the regulation is far from being homogeneous.
          Distinctions are made between insurance intermediaries, and those working for
          credit establishments and investment establishments.

3.39      The activities of intermediaries active on the Belgian retail financial product
          market are described in a study of intermediaries in the finance and insurance
          sector in Belgium,

            “The study has brought to light a number of problems concerning the absence of a
            legal status for the intermediaries in the banking sector and investment and also
            concerning the rapprochement between the banking and financial sector and the
            insurance sector.” 110

3.40      With a view to regulatory developments in the UK and the Netherlands the study
          recommends extending a number of clauses from the law of the 27th March 1995
          concerning insurance intermediaries to intermediaries working for credit and
          investment institutions.

3.41      According to our industry interviewees, insurance intermediaries are strictly
          regulated in Belgium.111 The law distinguishes between different types of


109
       Instruments de placements, ABB Aspects et Documents 215, July 2002, available at www.abb-bvb.be.
       The provision of information for investment funds is regulated in the Circular OPC 1/97, Information
       des investisseur en parts d’OPC, available at http://www.cbfa.be/fr/cs/icb/circ/pdf/uci_1_97.pdf
110
       Etude sur l’intermédiation en matière financières, 15 Octobre 2002, Commission bancaire et
       financière (CBF) & Office de Contrôle des Assurances (OCA), now CBFA.
111
       Interview with the Association of Insurance and Finance Intermediaries, 6th July 2004 and with the
       Association of Insurers, 7th June 2004.

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          categories      of    intermediaries,      namely     courtiers    d’assurance    (insurance
          brokers/middlemen) and agents d’assurance (insurance agents).

3.42      Insurance companies consider that brokers are their customers.                    The direct
          purchase of insurance is not as popular as in the Netherlands or UK. The market
          share of direct insurance companies is less than 3% in Belgium and the market
          share of banks in non-life insurance is low; 60% of all individual life insurance is
          sold through banks.112

3.43      According to the interview with the Association of Insurers, Belgian consumers
          rely to a great extent on intermediaries,

            “The public is willing to rely blindly on intermediaries to simplify… and insurance
            companies regard brokers as their customers.”113

3.44      Table 11 sets out the regulation of the sales and advice process.

Table 11: Regulation of the sales and advice process for investment products -
disclosure and qualification

                                                  Life assurance, pensions and mutual funds

Need for a fact find to                                                 No
understand the customer
Written record of advice given                                         No
Disclosure of level of                                                  No
commission
Disclosure of turnover with              Yes (insurance brokers must disclose if companies account for
provider                                                 more than 5% of turnover)114
Disclosure with whom                                      Yes, for insurance brokers only
contractual relationship exist
Do legal professional                     Yes, but insurance intermediaries face stricter controls than
qualifications exist for                                         bank agents115
advisers?
Is there a publicly available                               Yes, for insurance brokers.
database of all advisers?




112
       Interview with Association of Insurers, 7th June 2004.
113
       Interview with Association of Insurers, 7th June 2004.
114
       This is part of the BROCOM code described below.

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3.45      Belgium has not historically required the need for a fact find to understand the
          customer. There is currently no obligation for written advice or the disclosure of
          commissions.116 The Association of Insurers notes that in the past the commission
          was usually tied to the premium. Nowadays, commissions of intermediaries are
          not as easily comparable because they depend on several factors such the division
          of work between insurance companies and intermediaries.117 The Association of
          Insurers also noted that,

            “Market studies have shown that price is not the primary concern for consumers but
            rather the reliability. It is not the commission fee, which is important. For example,
            Dutch companies have sent advertisements to consumers showing them the cost-savings
            when switching, yet Belgian consumers have not switched. But this has caused soft
            pressure on insurance companies.”118

3.46      Brokers need to display a document showing the percentage of companies with
          whom they work and tied agents need to state with whom they work. These
          information requirements are laid down in article 2 of the law of 27th March 1995
          relative to the intermediation and distribution of insurance.119

3.47      According to the law of 27th March 1995, all insurance intermediaries must be
          registered at the Banking, Finance and Insurance Commission hence this aspect of
          the Insurance Mediation Directive has already been in place for some time.
          Insurance intermediaries may only register if they can prove their professional
          competence and honour. For example, insurance intermediaries must have passed
          certain tests and not have a record of violating financial law. The law also
          prohibits insurance enterprises from accepting contracts concluded by
          intermediaries and from offering agency contracts to agents not inscribed at the
          Banking, Finance and Insurance Commission.




115
       Interview with the Association of Insurance and Finance Intermediaries, 6th July 2004.
116
       Interview with the Federation of Insurance and Finance Intermediaries, 6th July 2004. These
       aspects will change with the implementation of the Insurance Mediation Directive.
117
       Interview with the Association of Insurers, 7th June 2004.
118
       Interview with the Association of Insurers, 7th June 2004.
119
       Règles de conduite de l’intermédiare en assurances, publication by the Federation for Insurance and
       Finance Intermediaries, available at www.feprabel.be.

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3.48      Bank agents, which have a contractual relationship with the bank, do not have to
          register with the Banking, Finance and Insurance Commission.120 Intermediaries
          working for credit establishments do not have a proper legal status, making
          consumer protection difficult.121          Hence the Banking, Finance and Insurance
          Commission supervises bank agents indirectly through the monitoring of banks.

Voluntary codes of conduct
3.49      The most important voluntary standard in banking is the Gentleman’s agreement
          of 6th February 2004 between the Ministry of Economics and the Ministry of
          Consumer Protection and the Belgian Bankers’ Association because it resolves
          the much-discussed problem of tariffs for current accounts. The BROCOM code
          of conduct between insurance companies and insurance intermediaries takes up
          the information requirements for insurance brokers laid down in the law of 27th
          March 1995 (modified by the law of 11th April 1999) and further aims to ensure
          the integrity, loyalty and honour of its members.

          Gentleman’s Agreement of the 6th February 2004

3.50      In response to the announcement of an increase in certain banking tariffs, the
          Belgian Bankers’ Association, the Minister of Economics, and the Minister of
          Consumer Protection struck an agreement that on the one hand no new legislative
          initiative would be taken during the rest of the legislative period, and on the other
          hand banks would agree to certain conditions including that:

          •    Bank clients may withdraw cash free of charge a reasonable number of times
              from their bank accounts in the framework of a global management of
              accounts;

          •    Access to information concerning tariffs and a comparison between tariffs will
              be simplified;




120
       Interview with the Banking, Finance and Insurance Commission, 7th June 2004.
121
       Etude sur l’intermédiation en matière financières, 15th Octobre 2002, Commission bancaire et
       financière (CBF) & Office de Contrôle des Assurances (OCA), now CBFA.

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          •   The mobility of bank clients will be increased due to a simplification of
              administrative charges and a transparent and reasonable pricing system;

          •   The parties will engage themselves in promoting the functioning of the basic
              banking service;

          •   The parties realise that the payment system must be made more efficient; and

          •   The public authorities will support the developments by the European Union
              while taking into account the competitive position of Belgian banks.122

3.51      It is clear therefore that the main focus of this agreement is on information, and
          making information more simple and accessible rather than on fundamental
          regulation of product terms.

         Association of Insurers’ Code of conduct

3.52      The “Règles de conduite de l’entreprise d’assurances” (rules of conduct for
          insurance companies), effective in 1999 by the Association of Insurers, sets up
          obligations towards consumers, intermediaries, competitors and public authorities
          which insurance companies should fulfil.123

3.53      Regarding information provision for consumers, the code prohibits all
          exaggeration and ambiguity. The insurance company is also obliged to provide its
          services within a reasonable delay in case of an accident. Moreover,
          discrimination that is not based on objective criteria is prohibited by the code and
          insurance companies vow to motivate consumers towards taking preventative
          measures.

         BROCOM code of conduct

3.54      According to the BROCOM code of conduct, advisers must indicate the extent to
          which they are tied to certain companies for insurance products. All insurance
          brokers need to display a document showing the percentage of sales from the


122
      Tarification des paiements & mobilité des clients, Finance et Société, Avril 2004, Fédération
      Financière Belges, available at www.febelfin.be.
123
      Règles de conduite de l’entreprise d’assurances, available at
      http://www.assuralia.be/fr/publication/commande/pdf/b6089_fr.pdf

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          principal companies with whom they work. Insurance intermediaries who have
          signed the code of conduct receive the BROCOM quality label. The code of
          conduct further ensures that there is a single ombudsman for complaints
          concerning all insurance intermediaries.124 This code takes up the informational
          requirements of the insurance law.

          European Code of Conduct for mortgages

3.55      Over 36 credit institutions, representing over 90% of the market, have signed the
          European Code of Conduct for mortgages, which requires signatories to hand out
          a structured information leaflet, the ESIS (European Standardised Information
          Sheet).125 However, the Federation of Insurance and Finance Intermediaries
          argues that the leaflet contains complicated tables that even they find difficult to
          understand.126

Balance between simplification and other forms of intervention
3.56      Simplification has not been widely used as a solution for the complexity of
          financial services in Belgium. Instead interviewees indicated that a focus on more
          transparency was required.             Areas particularly mentioned included current
          accounts where progress has been made with the current account calculator, the
          determination of the premium for the regulated saving account which is seen as
          confusing, and the taxation of life assurance.

          General points

3.57      An interesting development in Belgium is a move by the industry towards
          reducing the number of products. For example KBC, one of the large Belgian
          banks, has declared that it intends to move from its wide range of products
          because management costs are too high and similarly AXA and AGF (two other



124
       Interview with the Federation of Insurance and Financial Intermediaries, 6th July 2004.
125
      European Agreement on a voluntary code of conduct on pre-contractual information for home loans,
      First Annual Progress Report on Implementation in the European Union by 30th September 2002,
      European Banking Federation, European Savings Bank Group, European Association of Cooperative
      Banks, European Mortgage Federation and European Federation of Building Societies and
      Eurofinas,30th September 2002, available from
      http://www.europa.eu.int/comm/consumers/cons_int/fina_serv/loans/documents/survey_report.pdf.
126
       Interview with the Federation of Insurance and Finance Intermediaries, 6th July 2004.

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          banks operating in the Belgian market) are following the trend of reducing the
          product range.127 This suggests that concerns regarding the potential for product
          proliferation to drive complexity are likely to be limited as the market itself
          prevents unnecessary proliferation.

          Basic deposit account with payment means

3.58      As highlighted above, there already exists a basic banking service in Belgium.
          Further, the comparison of banking charges has recently become much easier
          following the development of the current account comparison tool by Test-Achats
          and Minister for Consumer Protection.                The only areas of concern that was
          highlighted in Belgium was the lack of switching and the possible implications for
          other products sold by banks,128

            “Banks force loyalty on their consumers, for example in the case of mortgage credits.
            In practice, the advantages of a potential borrower owning a current account at the
            lending bank creates a captive clientele which is not reactive to increases in tariffs
            related to current accounts and the services related to such an account. Moreover,
            other practical obstacles discourage consumers to change banks, for example the
            changing of the bank account number, communication to third persons, closure
            charges, closing procedures etc. An inquiry by CRIOC in November 1998 noted that
            59% of those questioned have never changed their bank for basic bank services.”129

3.59      However number portability is not regarded as a viable alternative by the Belgian
          Finance Federation,

            “Number portability unnecessarily overburdens the Belgian system of payments.
            Account-number portability brings with it considerable delays, a risk of errors and
            higher costs. Moreover it would imply investing millions of Euros which would,
            especially with regard to the current competition in Europe, imply an unquestionable
            disadvantage for Belgian banks.”

3.60      Switching concerns are, however, being addressed, as Belgian banks conducted a
          feasibility study to install a service facilitating switching for consumers as
          introduced in the Netherlands and the United Kingdom.130 The study resulted in


127
       Interview with the Association of Insurers, 9th June 2004.
128
       According to the Association of Insurance and Finance Intermediaries, consumers are regularly
       offered accident insurance with their current accounts. Most consumers do not understand the
       insurance. The procedure to exit the insurance is complicated and costly and the structure of charges is
       complex.
129
       Les retraits payants aux distributeurs de billets, Du Côté des Consommateurs, 15th November 2003,
       N. 145, available at www.crioc.be.
130
       Banque et Société, published by the ABB, June 2003, available at www.abb.be.
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          the recommendation for banks to offer a “dossier personnel de mobilité bancaire”
          (personal mobility / switching registration form) from October 2004 in order to
          help bank clients to switch current accounts for the lowest possible cost. The
          dossier contains a list of instructions, a checklist, and an example of a letter to
          communicate to debtors. According to Febelfin, Belgium does not intend to
          follow the costly procedure of the Netherlands where the former bank forwards
          payment orders to the new bank.131

3.61      Given that there is a simplified product in the form of a basic banking service, that
          comparability has recently been made easier, and that switching concerns are
          being addressed, there seems no need for an additional simplified product in
          current accounts in Belgium.

          Cash based saving products on which interest or other return is paid

3.62      A regulated savings account exists in Belgium, which is a standardised tax
          privileged account.132 The main area of standardisation is in the interest rate
          applied, which, in order for it to be tax-exempt, must meet certain requirements
          including a maximum basic interest rate which is fixed according to a royal
          decree.133 In addition, a premium can be added providing it does not exceed 50%
          of the maximum basic interest rate. The premium can take the form of a growth
          premium or a loyalty premium but these two premiums may not be added:

          •    The loyalty premium applies for all savings which remain in the account for at
               least 12 consecutive months; whereas

          •    The growth premium applies for all new contributions that remain in the
               account for at least six months.

3.63      Further, the total interest rate (consisting of the basic interest rate plus the
          premium) is awarded once a year with the dates for calculating interest rates



131
      Finance et Société, publication from Febelfin, Belgian Finance Federation, July 2004.
132
       Instruments de placements, Aspects et Documents 215, Association Belge des Banques (Belgian
       Finance Federation).
133
       The basic interest rate can be changed at any time in accordance with the evolution of the (“loyer de
       l’argent”) money interest rate on international markets. However, changes have been rare.

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          determined according to a royal decree. Contributions yield an interest rate from
          the day after the contribution has been placed on the account and savings
          withdrawn from the account stop yielding interest seven days before the
          withdrawal. Typically the returns would comprise a base interest rate of 1.5-
          1.75% and either a growth premium of 0.5% to 2% or a loyalty premium up to
          1.35%.134

3.64      According to Test-Achats,

            “The regulated saving-account is a simple product: there are no complex formalities;
            no extra charge and the money can be withdrawn at all times.”135

3.65      However, we have not categorised the regulated saving account as simplified
          because the only real constraints on the product relate to price regulation. Further,
          it seems to be the price regulation that causes the most confusion about the
          regulated saving account.          In particular, consumers complain that the basic
          interest rate can be changed at any time and the growth and loyalty premiums are
          one-off payments that occur after a specified length of time. Thus, due to the
          discrete nature of these payments the effective interest rate is lower unless money
          is withdrawn after exactly the specified period.

3.66      In addition, advertisements and intermediaries often suggest that the growth and
          loyalty premiums can be added to calculate the total interest rate, which is
          prohibited by law.136 Moreover, banks have different interpretations of the loyalty
          and growth interest rates.

3.67      Nonetheless, there are more regulated saving accounts than inhabitants in the
          Belgium (17.4 million accounts compared to a population of 10.3 million).137




134
       Épargner pour sa retraite: Stratégie de placements, Tests-Achats, November 2002, available at
       http://www.test-achats.be/map/src/163011/year/2002/month/11/magazine/2.htm. Interview with the
       Banking, Finance and Insurance Commission, 7th June 2004.
135
       Épargner pour sa retraite: Stratégie de placements, Tests-Achats, November 2002, available at
       http://www.test-achats.be/map/src/163011/year/2002/month/11/magazine/2.htm.
136
       Interview with the Banking, Finance and Insurance Commission, 7th June 2004.
137
       Interview with the Banking, Finance and Insurance Commission, 7th June 2004.

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3.68      Given the existence of a standardised product, and given that market participants
          did not believe that there were significant problems with the cash based savings
          market, there was no identified need in the country for simplified, standard cash
          based savings products.

          Credit or deferred debit cards

3.69      According to the Belgian Finance Federation, the card system in Belgium is a
          sophisticated system: Proton (a chip which must be charged before it can be used
          for payments), direct debit, deferred debit and credit cards exist. Although there
          are not currently major issues of over-indebtedness, it is starting to become a
          problem.138

3.70      It is perceived by industry participants that there is more trust in direct debit cards
          because of the pin code.139 Credit and deferred debit cards require a signature only
          and are perceived as less secure by both traders and consumers (in case the credit
          card is stolen).140 For payments above €500, the identity of the credit card holder
          is first verified before the payment is accepted.

3.71      Generally we did not identify a need for a simplified credit card product in
          Belgium because credit cards were viewed as being uncomplicated products.

          Private pension plans

3.72      The pension system in Belgium consists of state pensions, complementary
          occupational pensions (group insurance and pension funds) and private pensions
          or savings for old age. The first pillar provides for 60-65% of the salary for most
          retirees. Moreover, it is compulsory for all employees, civil servants and the self-
          employed to belong to one of the State pension schemes.141 Company pensions




138
       Interview with the Banking, Finance and Insurance Commission, 7th June 2004.
139
       Interview with the Belgian Finance Federation, 2nd July 2004.
140
       Interview with the Belgian Finance Federation, 2nd July 2004.
141
       Study on pension schemes of the Member States of the European Union, Internal Market Directorate
       General, European Commission, May 2000, Markt2005/99-ENRev2.

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          are underdeveloped because they were mainly for white-collar workers in the past.
          However, this is due to change with the Vandenbroucke law of December 2003.142

3.73      According to the Association of Insurers, there are no pension products in
          Belgium like the Riester pension products in Germany. Third pillar pensions
          consist mainly of life insurance and épargne-pension (saving-pensions) products,
          described below.

3.74      The tax-exempted complementary pension was created by the royal decree of 22nd
          December 1986 installing l’épargne-pension (saving-pension) plans that aim at
          encouraging private saving for retirement. Every person between 18 and 64 can
          invest a maximum of €600 in a saving-pension plan and deduct the investments
          from the tax declaration. The reduction in tax depends on the income and can be
          as high as 30-40%.

3.75      Several conditions were tied to declaring a pension product as a savings-pension
          plan in the past. Previously these placed restrictions on the investment of funds
          such that certain proportions had to invested in Belgian shares or bonds.
          However, these restrictions have been changed since May 2004 to refer to euro
          denominated shares.143 The restrictions only referred to the location of the
          investment rather than placing limits on the type of investments made such as by
          limiting equities.

3.76      We did not classify savings-pension products as simplified because of several
          reasons. The terms and conditions of these pension products depend on the
          insurance company or bank under which the policy is taken out rather than being
          standardised across the industry. Product features such as charges or switching
          between policies are not regulated, and there are no other consumer protection
          features.144 Further, the rationale behind regulating the location of the investment




142
       Interview with the Association of Insurers, 7th June 2004.
143
       The conditions with regard to the savings- pension product are mentioned in the Code des Impôts sur
       les Revenus (code for income taxes), Art. 145/11. Available at
       http://www.assuralia.be/fr/pdf/syllabusRVG.pdf.
144
       Interview with Association of Insurance and Finance Intermediaries, 6th July 2004.

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          regarded the promotion of national capital markets rather than the reduction of
          complexity or consumer protection.

3.77      In December 2003, the Vandenbroucke law was created to increase second pillar
          pension schemes. The law allows for sector pensions and aims at making it
          preferable for employees to put contributions from salaries straight into a personal
          pension scheme. However, one problem identified with the existing group pension
          is that the policyholder loses his built-up savings when moving to another
          employer. Moreover, policyholders need to go through their employers to reach
          their insurance, implying also that information is not given directly to the
          policyholders. Both features are due to change with the Vandenbroucke law.

3.78      According to the Banking, Finance and Insurance Commission, there is little
          fiscal room for encouraging complementary or third-pillar pensions because
          money needed for existing pensions as they are paid out of current taxes.
          Moreover, the Belgium government is heavily indebted.145

3.79      Our interviewees did not identify a problem of complexity regarding pension
          products. Possible reasons include the fact that participation in the first pillar is
          obligatory and the availability of the savings-pension product.

          Motor insurance

3.80      The motor insurance market has considerable standardisation in Belgium.

3.81      Since 1st February 2003, consumers who have been denied motor insurance from
          three different companies or were proposed a tariff five times as high as the tariff
          for the “best conditions” (les meilleurs conditions) have been able to turn to the
          Bureau de tarification (tariff office). The tariff office fixes the premium and
          conditions for motor insurance for those who were refused motor insurance in the
          market place and selects an insurance company to cover the risk.146




145
       Interview with the Banking, Finance and Insurance Commission, 7th June 2004.
146
       Assureur Info.Numéro 8, 26th February 2004, available at
       http://www.assuralia.be/fr/sector/annual_report/assurinfo03.pdf.

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3.82      Prior to 1st February 2002, the calculation of no-claims bonuses across all
          insurance companies was fixed according to the same system, the so-called bonus-
          malus system. Since the liberalisation of the system, companies can determine
          their no-claims bonus according to their own system. Some market participants
          believe that this new system may make switching more costly as there is no
          longer a standardised scale for risks. Nevertheless, market participants expect
          increased price competition to lead to less competition in terms of product
          differentiation and lower prices in the long run.

3.83      According to the industry, liberalisation of the bonus-malus system has led to
          lower premiums for safer drivers.147 However, the Association of Insurers and the
          Federation for Insurance and Finance Intermediaries pointed out that risky drivers,
          for example young drivers, might be priced out of the system.148 According to
          Test-Achats, there have not been substantial modifications for riskier drivers.149

3.84      The compulsory third-party liability insurance contains a standardised contract
          (apart from the fact that since the bonus-malus system was abolished the price is
          taken out of the contract) and is regarded as being easy to compare.150

3.85      Nevertheless, Test-Achats note that consumers face difficulties finding third party
          insurance at a reasonable price. This must be seen in the light of the fact that the
          compulsory third party insurance must have cover for unlimited damages for
          material and corporal damages (except in the case of explosion). Indeed, a
          particular feature of Belgium and Luxembourg motor insurance is the absence of a
          limit for the coverage of material and corporal damage for obligatory third person
          insurance. Conversely, Spain only allows a maximum limit of €100,000 for




147
       Interview with the Association of Insurers, 7th June 2004.
148
       Interview with the Association of Insurance and Finance Intermediaries, 6th July 2004.
149
       Les meilleurs tariffs du moment, Budget & Droits, Test-Achats, Juillet/Août 2004.
150
       Les meilleurs tariffs du moment, Budget & Droits, Test-Achats, Juillet/Août 2004.



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          damages to materials.151 According to studies by the Federation of Insurance and
          Finance Intermediaries, the average consumer is not aware of this.152

3.86      Among the difficulties listed by Test-Achats is the restrictiveness of access
          conditions, the absence of a list of what drives the premium and of a list of
          insurance tariffs. Moreover, the law leaves it to the insurance companies to decide
          whether to cancel a contract after an accident.153

3.87      According to the Association of Insurers, there has been an increase in pricing
          complexity since the abolition of the bonus-malus system and the ensuing move
          from a fixed system to a free system of premiums.154 The Association of
          Insurance and Finance Intermediaries agreed that prohibiting the bonus-malus
          system works against in the opposite direction of creating a simplified product.155
          However, the general impression was that automobile insurance was relatively
          standardised in Belgium and given that coverage is maintained through the tariff
          office, there was no identified need for a simplified motor insurance product.

          Home insurance

3.88      More than 95% of families in Belgium take out home insurance, although home
          insurance is not compulsory by law and there are no standardised contracts.
          Nevertheless, all household insurance products usually have a minimum content.
          The 1998 Royal Decree stipulates that companies need to provide simplified
          formulas for calculating the appraisal value.156

3.89      One development of note in home insurance was the attempt by Test-Achats to
          specify product characteristics that should be met in a product. They were of the
          view that the majority of home insurance contracts (‘l’assurance globale



151
       Couvertures en RC Auto au sein de l’UE, Conseil des Bureaux, Paris, 13 avril 2004. We received the
       document from the Association of Insurance and Finance Intermediaries.
152
       Interview with the Association of Insurance and Finance Intermediaries, 6th July 2004 and with the
       Association of Insurers, 7th June 2004.
153
       Qui sommes-nous, Test-Achats, available at www.test-achats.be.
154
      . Interview with Trade Association of Insurers, 7th June 2004.
155
       Interview with the Association of Insurance and Finance Intermediaries, 6th July 2004.
156
       Interview with Trade Association of Insurers, 7th June 2004.

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          habitation’) do not cover all risks sufficiently and hence they drew up a list of
          responsibilities, which it should fulfil to protect consumers sufficiently which
          included:

          •   Coverage of natural catastrophes;

          •   Obligation to pay to consumers after a determined period of time the amount
              which is unquestionably due; and

          •   A premium which is affordable and takes into account the quality of the
              coverage.

3.90      Although Test-Achats placed conditions on product coverage they were not
          thought to be sufficiently prescriptive to categorise the product as standardised
          even though the coverage of natural catastrophes could be a useful indicator for
          consumer protection.

3.91      In addition, the approach of Test-Achats has not been widely taken up in Belgium.
          Indeed, SMAP (ETHIAS since 3rd December 2003) was the first and only
          insurance company to receive the “logo de conformité” (conformity quality mark)
          from Tests-Achats.157

3.92      Furthermore, Test-Achats faced criticism of its promotion of their product since in
          2002 it sent out an email to its members promoting this product from SMAP. The
          Commercial Court of Brussels found that Tests-Achats acted as an intermediary
          but did not respect the legal obligations of intermediaries and hence it was
          prohibited from continuing its activities if it did not conform to the legal
          requirements of intermediaries.158

3.93      Despite the concerns of Test-Achats regarding product coverage, given that there
          is a very high take up of home insurance, there is no indication that any concerns
          about exclusions are actually preventing consumers from taking out insurance.


157
       Un logo Test-Achats pour le SMAP, Ethias, 20th February 2000, available at
       http://www.ethias.be/fr/cpresse2.go?id=5.
158
       Although the decision was later partially changed to condemn only some actions by Test- Achats
       according to the interview with the Banking, Finance and Insurance Commission, 7th June 2004.

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          Further, interviewees did not identify a need for a simplified product, partly as
          home insurance appears to be reasonably standardised in Belgium.

          Life insurance

3.94      According to the regulation of life assurance law of 1992 (Règlement vie),
          insurance companies must mention in a clear and transparent manner that profit
          forecasts are not guaranteed and that profits fluctuate depending on the economic
          situation and the results of the company. Article 18 of the law stipulates that the
          contract must mention the extent to which the contract gives a right of profit
          participation.159

3.95      The royal decree of 30th April 1999 obliges insurance companies to communicate
          annually the sum of the benefits due to profit participation and mention the
          conditions which need to be fulfilled in order to benefit from profit participation
          in the next period.160

3.96      Life assurance, especially unit-linked policies are popular products in Belgium -
          premium income from unit-linked business has more than doubled in Belgium
          since 1997 whereas the average annual growth of non-linked premiums was
          negligible. The popularity of unit-linked life insurance products is due to several
          reasons including that charges for equity funds in Belgium are the lowest in
          Europe.161 Moreover, many consumers choose life insurance in general because of
          tax reasons. Ordinary life insurance contracts give the right to a reduction of
          taxable income up to a maximum sum of €1,170 per person per year .

3.97      There are constraints on the maximum interest rate that companies may guarantee
          which is currently set at 3.75%. In Belgium this upper bound is rarely changed




159
       Les assurances sur la vie, René Van Gompel, Association of Insurers, 2003, available at
       http://www.assuralia.be/fr/pdf/syllabusRVG.pdf.
160
       Les assurances sur la vie, René Van Gompel, Association of Insurers, 2003, available at
       http://www.assuralia.be/fr/pdf/syllabusRVG.pdf.
161
       Unit-linked life insurance in western Europe: regaining momentum? Sigma Number 3/2003,
       publication by Swiss Re

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          (every 15 years). Given the fall in interest rates most insurance companies now
          offer 2.75% to 3.25%.162

3.98      From the point of view of the insurance industry the maximum interest rate that
          companies can guarantee matters because the rate is deemed to be a psychological
          minimum limit. Many companies do not like to be the first to offer a lower
          interest rate. Moreover, the maximum has been used as a minimum in other
          contexts: The new legislation on sector pensions schemes, the Vandenbrouck law,
          states that 3.75% is the minimum interest rate on sector pensions. According to
          the Association of Insurers, the best solution would be to set a lower minimum
          ceiling. The second best solution would be to abolish the rate. Nevertheless,

              “The positive side of the high maximum interest rate is that the public tends to think
              that life insurance is more secure than saving through banking products.”163

3.99      Despite the existence of guaranteed life insurance and the fact that most
          companies offer interest rates near the legal maximum, the following issues of
          complexity have been identified during our interviews and background research:

          •     The risk premium in case of death and the investment premium of the life
                insurance product are not separated, reducing transparency.164

          •     Another factor complicating life insurance in Belgium is the fact that the
                “droits de succession” (succession rights) is different in the Brussels, Flanders
                and Wallonia parts of Belgium, which makes explaining the product
                complicated for intermediaries.

          •     The tax regime is characterised by granting a reduction of taxes for the
                premium paid and the taxation of the pension at a later stage. According to
                Test-Achats, this system is not transparent because financial intermediaries or
                sellers use tax advantages too often as a marketing device by masking the
                taxation of capital later on. Test-Achats demands a simplification of the tax




162
       Taux Garanti, Budget & Droits, Juillet/Août 2004, Test-Achat.
163
       Interview with the Association of Insurers, 7th June 2004.
164
       Interview with the Association of Insurance and Finance Intermediaries, 6th July 2004.

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            system for long-term saving and a suppression of the dissonance between
            saving pensions (funds and insurance-pensions) and individual life insurance.

        •   There is no protection of consumers against loss if an insurance company goes
            bankrupt. According to the Association of Insurers, this is not deemed to be a
            problem,

            “There is no experience with bankruptcies by Belgian insurance companies.
            However, Belgian companies are required by law to not be making a loss in any of
            their product lines.”165

        •   With the majority of life insurance destined for saving-pensions, consumer
            associations complain that it is often impossible to determine the real rate of
            return of savings. According to Test-Achats, insurers should be obliged to
            communicate, at a minimum, the mathematically understandable return as
            well as all the costs included in the premium.

3.100   Regarding the profit participation, Test-Achats notes that the share is often
        determined in an arbitrary manner and the company returns but a small share of
        their results to the consumer. Test-Achats believes that profit participation should
        become genuine profit sharing. Insurers should be obliged to distribute a
        percentage minimum (for example they suggest 95%) of their profits.

3.101   The above results indicate that a problem of complexity regarding life insurance
        exists in Belgium. However, the popularity and strong rise in premium income of
        life insurance companies compared to other European countries, indicates that
        complexity has not deterred consumers from buying life insurance products.
        Hence, the need for a simplified product in order to encourage purchase does not
        appear very strong and improving transparency through better information could
        be an alternative. In particular, the suggestion that investment based life insurance
        contracts should specify what proportion of premiums (or charges) is going to
        providing the life insurance cover and what is for investment may be useful. This
        would enable clearer comparison between the “bundled” investment based life
        insurance with “unbundled” separate investments in term assurance and
        investment funds.



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         Mortgage credit

3.102    Advertisements and information for mortgage credit are regulated in the law of 4th
         August 1992 concerning mortgage credit.166 According to the law the lender is
         obliged to hand out a pre-contractual information leaflet (“prospectus”) to the
         consumer indicating the following information in a “legible, visible and
         unambiguous way”: 167

           •   A complete list of prices for all available credit options (fixed and variable
               interest rate loans and their respective methods of reimbursement). In case of
               variable interest rate loans the conditions for the revision of the interest rate
               such as the frequency and the maximum fluctuation margin must be stated.
               This can be done on a different sheet to prevent companies from having to
               reprint their prospectus each time the tariffs are changed;

           •   Possible reduction offered and their conditions;

           •   Insurance policies which must be signed to benefit from a certain interest
               rate;

           •   The charges for the creation of the mortgage package and the expertise, the
               indemnity for the reinvestment; and168

           •   The date from which the prospectus is valid.

3.103    Additionally, the law states that the real interest rate must be used instead of the
         nominal interest rates.169 The law of 4th August 1992 does not provide for a right




165
      Interview with the Association of Insurers, 7th June 2004
166
      Law of August 4th 1992 on mortgage credit and its royal decree of 11th January and 5th February 1993.
167
      Tarifs: c’est de nouveau la jungle, Test-Achats, Budgets et Droits March 2002, available at
      http://www.test-achats.be/map/src/166931.htm.
168
      The lender does not have a legal obligation to disclose the existence and amount of any commission to
      be paid to the intermediary. However article 13 of the law of 4th August 1992 provides that no
      compensation other than early repayment charges and charges for the supplying of capital or
      negotiation commission, whatever the denomination, form or beneficiary, may be charged to the credit
      applicant or borrower. “The Protection of the Mortgage Borrower in the European Union”, European
      Mortgage Federation, November 2003. We received the document during the interview with the
      European Mortgage Federation.

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         of withdrawal. If the borrower wished to terminate the contract early, it will be at
         his cost (subject to the restrictions laid down in the law of 4th August 1992).

3.104    However, Article 26 of the law of 4th August 1992 states that consumers have the
         right to repay the mortgage at any time. The lender may demand compensation in
         case of complete or partial early repayment. The charge must be based on the
         remainder of the outstanding debt and at the mortgage interest rate.170

3.105    A database exists where all consumer and mortgage credit contracts are registered.
         Lenders must consult this database before granting mortgages.171

3.106    Consumer associations have complained about the transparency of information
         and charges for mortgages. Test-Achats sent people to 32 different offices of nine
         mortgage credit institutions to test the transparency of charges and information on
         mortgage loans. Despite further inquiries, only five out of 32 agencies handed out
         a leaflet with the correct tariffs.

3.107    According to Test-Achats, most financial institutions do not see mortgages as an
         end in themselves but rather as an opportunity to sell extra products such as a
         current account, savings account, credit cards, and insurance for the remaining
         loan or car and house insurance.172 Moreover, the interest rate proposed by certain
         lenders decreases to the extent that the client accepts these supplementary
         products. Certain agencies refused to state the interest rate if, for example, the
         client did not agree to take out additional insurance such as home insurance or
         insurance covering the outstanding debt.


169
      European Agreement on a voluntary code of conduct on pre-contractual information for home loans,
      First Annual Progress Report on Implementation in the European Union by 30th September 2002,
      European Banking Federation, European Savings Bank Group, European Association of Cooperative
      Banks, European Mortgage Federation and European Federation of Building Societies and Eurofinas,
      30th September 2002, available from
      http://www.europa.eu.int/comm/consumers/cons_int/fina_serv/loans/documents/survey_report.pdf
170
      The Protection of the Mortgage Borrower in the European Union, European Mortgage Federation,
      November 2003. We received the document during the interview with the European Mortgage
      Federation.
171
      Interview with the Banking, Finance and Insurance Commission, 7th June 2004.
172
      It is illegal to force consumer to buy additional insurance from the same institution, but credit
      institutions can oblige consumers to buy insurance from another institution but legal to bundle
      (Interview with the Association of Insurers, 7th June 2004, Brussels).

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3.108    Test-Achats would like to see that the client receives a copy of the contract before
         signing so that the client can go through the clauses carefully. Lawyers employed
         at Test-Achats read through the clauses of the mortgage contracts and pointed out
         that these were often written in incomprehensible jargon. Test-Achats urges
         financial institutions to make these contracts more transparent,

           “The Belgian market for mortgage loans resembles more an oriental market where the
           whole world is obliged to bargain to find a good deal. The consumer is proposed
           arbitrary and opaque tariffs.”173

3.109    The Belgian consumer associations CRIOC and Test-Achats have noted a
         problem of complexity for mortgages. Despite the regulatory requirements to
         provide a prospectus, and despite the fact that 90% of mortgage providers have
         signed up to the European code of conduct on home loans, consumers are not
         believed to be able to compare different mortgage offerings, partly because not all
         providers give the appropriate information. Given this, it seems that there is a
         need for the current provisions to be adhered to more closely such that consumers
         are more able to compare the offerings from different providers, but that there was
         no identified need for a simplified mortgage product.

         Collective investment schemes

3.110    The two main issues with regard to complexity concern the wide range of
         products and implicit costs involved in investment funds. There was a slight
         concern that there was beginning to be a problem of product proliferation with
         both too many different kinds of funds (e.g. telecom stocks in southern Italy) and
         too many providers. However, there have been recent attempts to reduce the
         number due to cost concerns by banks suggesting that competitive forces may
         prevent unnecessary proliferation in Belgium.174

3.111    Investment funds in Belgium were seen to be standardised products (partly due to
         the UCITS Directives) and there was no identified need by market participants for
         a simplified product.




173
      Tarif hypothecaires: quelle jungle! Budget & Droits N. 161, Mars-Avril 2002.
174
      Interview with Belgian Finance Federation, 2nd July 2004.

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         Financial advice

3.112    Complexity in the distribution channel has been noted because of the difference in
         regulation of insurance intermediaries and bank agents. Possible solutions include
         the creation of a legal status for independent bank agents and raising the
         regulatory demands for bank intermediaries to that of insurance intermediaries.

3.113    Financial advice has not been as developed in Belgium as in other countries
         although the implementation of the Insurance Mediation Directive will impose
         additional regulatory constraints. The main concerns in Belgium seemed to focus
         on the differential requirements of different intermediaries and hence it seems as
         though the pressure on financial advice is to increase regulation rather than reduce
         requirements for financial advice. For this reason, there was no identified need
         for simplified financial advice.

Cross-border trade
Benefits
3.114    Interview participants did not mention any specific benefits of cross-border trade
         through freedom of establishment or freedom of services resulting from
         simplification or standardisation of products.               However, where economic
         advantages are available, cross border trade already exists e.g. it was noted that
         there was already cross-border provision of investment funds from Luxembourg
         to Belgian consumers. This represents an important outflow of premiums for life
         insurance to Luxembourg based companies which have a subsidiary in Belgium.

Barriers
3.115    A lack of consumer trust was mentioned as a key barrier to cross-border trade
         because consumers prefer domestic providers because of their physical presence
         and they are familiar with the consumer protection standard.175 It was not thought
         that either simplifying or standardising products would reduce these barriers due
         to preferences for physical presence.




175
      Interview with the Banking, Finance and Insurance Commission, 7th June 2004.

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         Consumer protection

3.116    The Belgium Banking, Finance and Insurance Commission noted that standards of
         consumer protection were of importance. Further they expressed concern that
         even if simplification or standardisation of products helped to facilitate cross
         border trade, there could be a danger of consumer protection standards being
         reduced which would not ultimately be of benefit to the consumer.

         Tax

3.117    One of the main areas that was mentioned as a barrier to cross-border trade was a
         lack of harmonisation of taxes.

3.118    According to the Belgium Association of Insurers, tax advantages prevent cross-
         border trade because the tax advantages of life insurance are only realised if the
         products are bought from Belgian insurance companies.176 The Association of
         Insurance and Finance Intermediaries also maintains that there should be
         harmonisation of tax advantages for life insurance on a European level to increase
         cross-border trade.177

3.119    Another barrier to trade regarding taxes is that Belgian legislation (Article 145-1,
         Code des impôts sur le revenues, Code of income tax) allows Belgian citizens to
         pay less income tax based on the amount of repayments of mortgage loans for
         construction, purchase or improvements of dwellings located in Belgium.
         However, tax reductions are conditional on the mortgage loan being insured
         against death with an insurance company established in Belgium. The
         Commission considers that acts as an obstacle to the freedom to provide services
         in violation of Article 49 of the EC Treaty.178 It was not thought that barriers to
         trade driven by tax differences would be impacted by standardisation or
         simplification.       Hence only if simplification or standardisation of products
         occurred at the same time as, or after, standardisation of tax regimes would


176
      Interview with the Association of Insurers, 7th June 2004.
177
      Interview with Association of Insurance and Finance Intermediaries, 6th July 2004.
178
      Financial services: Commission sends reasoned opinion to Belgium over discriminatory tax regime,
      6th March 2000, DG Internal Market, available at
      http://www.europa.eu.int/comm/internal_market/en/finances/infr/2k-222.htm.

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         consumers be willing to purchase across borders. Further, these differences mean
         that providers seeking to enter markets through freedom of services or freedom of
         establishment would still need to understand, and design products around, the
         complexities of the local tax regime despite simplified or standardised products.

         Distribution

3.120    Another issue slowing down cross-border trade is linked to access to distribution.
         In particular, it was noted by the Association of Insurance and Finance
         Intermediaries that in Belgium the direct purchase of insurance is not as popular
         as in the Netherlands or the UK.179               Marketing is also perceived to be less
         aggressive e.g. there is no cold calling and no mailing of advertisements. Given
         the dependence on intermediaries, it is thought that it is important for foreign
         companies to access this network and that if they fail to do this, insurance
         products from foreign providers will not be sold.180 Standardisation of products
         would not therefore be likely to impact cross-border trade if access to distribution
         is a cause of the lack of such trade. Further, no market participant indicated that
         standardised or simplified products would ease access to distribution.




179
      Interview with Association of Insurance and Finance Intermediaries, 6th July 2004.
180
      Interview with Association of Insurers, 7th June 2004.




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Section 4          Denmark
Summary
4.1      Complexity has been identified as an issue in the Danish retail financial services
         market, and various measures have been introduced to tackle it, including the
         development of standardised products.

4.2      In particular we have identified standardisation for home insurance, for a savings
         account (a child trust fund) and for a payment card (the Dankort).181

4.3      In the 1980s the ‘family basic insurance’ product was created. This is a
         standardised home insurance product, focusing on the level of coverage that
         should be expected from any home insurance product. This was created through
         lengthy negotiation between the consumer association and the insurance trade
         association.

4.4      This product has not been categorised as simplified but has brought
         standardisation on a comprehensive level of cover. However, industry participants
         argue the product is in fact seen as particularly complex and may even be
         impeding simpler products entering the market.

4.5      Furthermore, although this product was developed during the 1980s and updated
         in the late 1990s, no further products have been developed. The Consumer
         Agency argues that,

           “There has not been much political will to regulate at the product level, as this could
           reduce innovation”182

4.6      The Dankort is a payment card which was developed by the Government and the
         banking industry to encourage consumers to stop using cheques and to use
         payment cards instead. To do this, they created a single brand – the Dankort –
         which was widely accepted and had no charge for use in shops.                                This




181
      As the child trust fund was not a product included in the EC product definition we have focused on the
      home insurance product and the Dankort.
182
      Interview with the Danish Consumer Agency, 28th May 2004.

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          standardisation has been seen as beneficial in encouraging take-up of card based
          rather than cheque based transactions.

4.7       Again, we have categorised this as standardisation rather than simplification. In
          this case, the final products used by the consumer (bank accounts or credit and
          debit cards facilities) have no product simplification.

4.8       In many product markets it is felt that there is not a problem of market failure
          resulting from complexity that would be sufficient to warrant product regulation.
          A good example of this is the mortgage market, where it has been said that
          Denmark has one of the simplest markets in the world,

            “The Danish System is remarkably simple and efficient”183

4.9       Similarly, for bank accounts, the Danish Bankers Association commented that,

            “Banking products are all basically the same so we have not really had this
            discussion”184

4.10      However, there is some evidence that complexity in the Danish market could be
          increasing. Even in the mortgage market there is a recognition that new products
          are being introduced making this more complex.

4.11      In the pensions market, the Government is set on a course of free market reform
          allowing a greater variety of products to emerge. Whilst this benefits consumers
          as they are given a greater choice, and can choose a product that more closely
          suits their needs, it also increases the possibility of consumer confusion.

4.12      However, at the same time it is felt to be important to allow consumers to make
          choices that are appropriate for them and to allow liberalised markets to work.
          The Danish Financial Supervisory Authority report that

            “The Government is saying everybody should choose for themselves”185




183
       Is it done better in Denmark? Professor Jack Guttentag, July 2002 http://www.mtgprofessor.com
       /A%20-%20Type%20of%20Loan%20Provider/is_it_done_better_in_denmark.htm
184
       Interview with Danish Bankers Association, 28th May 2004.
185
       Interview with the Danish FSA, 27th May, 2004.

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Table 12: Simplified products in Denmark

Product list                                                       Does Denmark have simplified
                                                                           products?

Basic deposit account with payment means                                             No

Cash based savings products on which interest
                                                                                     No
or other return is paid

Credit or deferred debit card                                                        No

Private pension plans                                                                No

Motor insurance                                                                      No

Home insurance                                                                       No

Life assurance                                                                       No

Mortgage credit                                                                      No

Collective investment schemes                                                        No

Financial advice                                                                     No



4.13     In practice, Denmark has also used a range of other regulatory tools to make
         market work better. This has focused on information provision and more recently
         on the provision of advice. The Danish Consumer Agency (who were previously
         in charge of financial services) view the financial services market as having four
         major areas: pensions; bank accounts; insurance; and mortgages. They comment,

           “In all four areas it is possible to find problems, but in all four it’s also possible to find
           initiatives to tackle these”186

4.14     There is a large amount of information available to consumers in Denmark to help
         them overcome these problems, though there have been concerns raised by many
         industry participants that there could be information overload. Even from a
         regulator’s perspective, the Danish Financial Supervisory Authority admit that,

           “There is too much information – nobody reads it all”187




186
      Interview with the Danish Consumer Agency, 28th May 2004.
187
      Interview with the Danish FSA, 27th May 2004.

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4.15      The Danish Consumer Agency is currently undertaking a major study to look at
          transparency from the consumers’ perspective, with the four financial products
          they identify above being examined alongside around seventy others products
          from various markets. The results from this study were not available to be
          considered for this study but should be available in Autumn 2004.

4.16      In recent years, the Government has been focusing on the provision of advice.
          The intention is that good advice should be available to aid consumers in making
          their choices. Most advisers are authorised through institutions, and consumers
          can complain to one of many complaint boards if they feel that the advice that
          they received was bad with the cost of this only around €15.

4.17      However, there are products where there remains a real concern over complexity.
          Even the Danish Insurance Association agreed that insurance products are
          perceived as complex,

            “It is seen as a general problem that insurance policies are complex – it’s hard to
            understand what’s included and what’s not”188

4.18      From the perspective of those representing consumers, there remains an
          enthusiasm for the simplification of products to help consumers choose a product
          that is appropriate for them. However, it is felt that this is now the role of the
          regulator to create such products.189




188
       Interview with the Danish Insurance Association, 27th May 2004.
189
       Interview with the Danish Consumer Council, 17th June 2004.

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Table 13: Alternative regulatory interventions in Denmark

                   Information provision    Regulation of sales      Voluntary codes of
                                               and advice                 conduct
Basic deposit                                                          Danish Bankers
                                            Executive order on
account with        Comparative Tables                                  Association’s
                                           good business practise
payment means                                                         recommendations
Cash based
savings
                                                                       Danish Bankers
products on                                 Executive order on
                    Comparative Tables                                  Association’s
which interest                             good business practise
                                                                      recommendations
or other return
is paid
Credit or
                                            Executive order on
deferred debit      Comparative Tables
                                           good business practise
card
Private pension                             Executive order on
plans                                      good business practise
Motor                                       Executive order on      Insurance code of good
                    Comparative Tables
insurance                                  good business practise         counselling
Home                                        Executive order on      Insurance code of good
                    Comparative Tables
insurance                                  good business practise         counselling
                                            Executive order on      Insurance code of good
Life assurance
                                           good business practise         counselling
                                            Executive order on       European voluntary
Mortgage credit     Comparative Tables
                                           good business practise     home loan code
Collective
                                            Executive order on
investment
                                           good business practise
schemes
Financial                                                           Guide for best practice
advice                                                              in consumer relations



Sources of information
4.19   The information in this section came from a range of sources. Sources included
       publications from the following organisations (in addition to those interviewed
       listed below):

       •     The Danish Government;

       •    The Danish Ministry of Economic and Business Affairs; and Association
            annual report 2003

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       •   Mercer Oliver Wyman..

4.20   In addition, press releases and news stories in the press were also examined.

4.21   Interviews were conducted with:

       •   Danish Consumer Council (the independent consumer organisation);

       •   Finansrådet (Danish Bankers Association, DBA);

       •   Finanstilsynet (Danish Financial Supervisory Authority, Danish FSA);

       •   Forbrugerstyrelsen (the Danish Consumer Agency (the Government
           department responsible for consumer affairs));

       •   Forsikring & Pension (F&P) (Danish Insurance Association); and

       •   Investerings Forenings Rådet (Federation of Danish Investment Associations).

4.22   Table 14 below shows the regulators responsible for the various products in
       Denmark.

Table 14: Danish primary regulators

                Product List                                Primary regulators

Banking Products (including credit cards and     Danish FSA (everything but credit cards)
mortgages)                                     Danish Consumer Ombudsman (credit cards)

Insurance Products (both life and general)

Pensions                                                       Danish FSA

Investment Products

Financial Advice



Development and characteristics of simplified products
4.23   Denmark has no products that we have categorised as simplified products.




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Alternative regulatory interventions
4.24   Denmark has developed a range of measures to protect consumers of financial
       products instead of designing simplified products.

Provision of information
4.25   Although information provision is generally seen as having a positive impact on
       the functioning of the market, in Denmark a problem identified by many industry
       participants was the over-provision of information. The financial regulators are
       currently reviewing this problem of overload, and hope to tackle it in 2005.

4.26   There are two reason given why this is seen as a serious problem:

       •   Consumers who are given too much information don’t read any of it and may
           make bad decisions; and

       •   Providers who give consumers large amounts of information may then
           consider that this fulfils their duties to inform the consumer – and may not
           then seek to truly engage the consumer, to assist them in making their
           decisions.

4.27   The Danish Consumer Agency however states that all the information given to
       consumers is useful if given at the right time and used in the right way. They
       remark that having too much information is better than having too little, and that
       the information is not meant to be used in isolation, but should be combined with
       targeted financial advice.

       Comparative tables

4.28   The market has developed a number of comparative tables arguably making
       regulatory intervention unnecessary. On the website www.mybanker.dk there is a
       host of information to help consumers choose the best financial products for them.
       The website began in 2000 and is a private sector initiative and covers credit cards
       and bank accounts (as well as loans), and contains comprehensive tables to allow
       consumers to make comparisons between rival products.

4.29   These tables give the rate of interest for around 50 different products for a sample
       transaction e.g. for credit cards this is a loan of 15,000 kr. The results can be
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          presented before or after tax, and several products have links leading to extra
          information.

4.30      This is an example of how the private sector is itself innovating to tackle the
          problem of complexity. In addition, comparative tables of savings accounts and of
          fees for banking transactions have been published in the Danish newspapers.
          Some market participants argue that there is no need for significant action on the
          part of regulators when the market itself is adapting to solve the problem.

4.31      The DBA has also made it easier for customers to access information about
          banks’ charges for their standard services. A common price information function
          is now published on the web.190 This gives a detailed breakdown of charges and
          allows customers to make a comparison between banks.

4.32      This has been developed further by the DBA when it recommended that banks
          publish their interest rates on loans and deposits on their websites.

4.33      The Danish Insurance Association’s website has tables covering motor and home
          insurance – this is know as the insurance magnifying glass. These were
          established as it was perceived that,

            “It was difficult for consumers to choose between firms”191

4.34      It is hard to analyse the effect that these tables have had on the market, but the
          Danish Insurance Associations’ tables have been getting about 10,000 visits per
          week.

4.35      Although there has been pressure to extend this to life insurance this has so far
          been resisted by the industry.

          Key figures of pension companies192
4.36      Pension companies have presented eleven key figures in their accounts since
          1996, thought these were primarily aimed at improving communication between


190
       Available on www.finansnettet.dk under the heading “Bank Charges” e.g.
       http://beta.mybanker.dk/gebyr/index.html?design=FI
191
       Interview with Danish Insurance Association, 27th May 2004.
192
       This section is based on the Pension Market Council’s 1999 Report.

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       the pension companies’ managements, boards of directors and committees of
       representatives. These are readily available on the Danish FSA website and cover
       the return and costs of various pension schemes, allowing consumers to compare
       and rank providers.

4.37   In 1998, to make the key figures easier to use, the Pension Market Council
       (Pensionsmarkedsrådet) recommended that a list of the key figures be prepared,
       grouping the companies by comparability.                   They also recommended that
       information be given about the relevance of the individual key figures to the
       individual groups of members and companies.

4.38   This was discussed by the industry and resulted in the list of key figures prepared
       by the industry being supplemented with additional information for the
       interpretation of the pension companies’ key figures.

4.39   According to evidence from the Danish Insurance Association,

          “The Pension Market Council has not in its recent report recommended that standard
          information should be prepared. Instead the Council suggests that the pension
          institutions are given the legal opportunity to give less but easier understandable
          information. Standard policy information is not a solution to information overload as
          long as the statutory information requirements are not reduced.”

       Transparency in insurance provision193

4.40   In relation to section 31 of the Act on Insurance Provision, Danish financial
       undertakings need to meet a number of requirements in terms of presenting clear
       information to customers when providing them with insurance. In June 2001, the
       Danish Parliament adopted an amendment to the Act. The amendment required
       that, in addition to the need to transparently display prices, firms must also present
       written information to customers covering matters such as their insurance cover
       and the term of the policy, in addition to information about the customer’s rights,
       including his right to complain.

4.41   The Danish Financial Supervisory Authority and the Danish Ombudsman for
       Consumer Affairs have published a set of guidelines for the bonus projections of
       life insurance companies and for the pension savings projections of banks.




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          Projections must be based on realistic and reasonable assumptions, for instance
          with due regard to costs, and the assumptions pertaining to economic factors like
          inflation, interest rates; and the special Danish rate of pension investment returns
          tax must be the same. If other assumptions are used, this must be specified.
          Changes in the deposit rates offered by companies are allowed only if the factors
          mentioned above have developed in a different way to that assumed in the
          projection.

4.42      With respect to commission, the amendment states that if the financial
          undertaking receives commission or other compensation as a result of the scheme
          it must clearly inform the customer of this. In addition, the company must notify
          the customer of his right to access to information about the scale of such
          commission.

Regulation of the sales and advice process
4.43      There is increasing focus on the regulation of the advice process in Denmark. In
          particular the Executive Order of Good Business Practice has brought in a number
          of new regulatory constraints.




193
       This section is based on the 2001 Annual Report of the Danish Bankers Association.

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Table 15: Regulation of the sales and advice process for investment products -
disclosure and qualification

                                                         Life assurance, pensions and investment
                                                                          funds

Need for a fact find to understand the                                        Yes
customer
Written record of advice given                                                No
Disclosure of level of commission                                             Yes
Disclosure of turnover with provider                                          Yes
Disclosure with whom contractual                                              Yes
relationship exist
Do legal professional qualifications exist for                                No
advisers?
Is there a publicly available database of all                                 No
advisers?



4.44      The Danish FSA’s executive order on good business practice for financial
          undertakings194 sets out rules for firms to obey when giving advice on financial
          products to customers. Much of this is general, and simply states that the advice
          should be based on the customers needs,

            “Advice shall take into consideration the interest of the customer and provide the
            customer with a good basis for making decisions. Advice shall be relevant, correct and
            complete. The financial undertaking shall provide information on the risks relevant to
            the consumer.”

4.45      Although it is possible that regulation of the product (through, for example, the
          development of simplified products) will replace regulation of advice, opponents
          of product regulation argue that it will simply be added to the regulation of
          advice, increasing the regulatory burden.

4.46      Remarks made by the Consumer Council tended to agree with this view; they
          commented that the introduction of more simplified products would not reduce
          the amount of advice needed. However, the way the regulation of advice is
          structured in Denmark tends to refute this theory. It states,


194
       Executive Order on Good Business Practice for Financial Undertakings, No. 604 of
       26/06/2003.

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          “A financial undertaking may offer products with standardised information with little
          or no associated individual advice. In this event the financial undertaking shall draw
          special attention to those limitations.”

Voluntary codes of conduct
Code of practice for the financial sector195
4.47   The Government plans to design guidelines for best practice in the financial sector
       in Denmark. The Government has reiterated the importance of involving
       businesses and the Consumer Council in this work. Hence the guidelines already
       developed by the business and consumer organisations with the Consumer
       Ombudsman will act as the basis for the new code of practice. If business groups
       and the Consumer Council are able to agree on new measures, these too will be
       included in the bill for the new general code of practice.

4.48   The new executive order on best practice in the financial sector contain a number
       of general rules covering such issues as contracts, consulting and management of
       conflicts of interest. In addition, however, it also includes special rules aimed
       exclusively at banks, insurance companies and credit institutions. An executive
       order concerning best practices to cover the financial sector in its entirety was
       issued on 1st June 2003.

       Banking code

4.49   The DBA has issued several recommendations to members on how they should
       treat customers. On bank account switching they state that banks can charge a fee
       for switching accounts, but only if the switching involves work by the bank, and
       the amount charged must be fair. They report that bank account switching has not
       been a major issue in Denmark the way it has been in other countries, and this can
       be attributed at least in some part to these voluntary standards.

4.50   However, the Consumer Agency do identify switching as a bigger issue than the
       DBA. Nonetheless they comment that switching has improved and that consumers
       no longer need to wait until the end of the year to switch as they had to
       previously. They comment that switching is not high profile as people tend to
       trust their local banks and view them more as friends than service providers.



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          Insurance code of good counselling

4.51      The insurance sector has a code of good counselling that sets out the relationship
          between consumers and insurance companies.

          The European voluntary home loan code

4.52      Credit institutions in Denmark do comply with the European voluntary home loan
          code. Denmark performed well in terms of organisations offering the European
          Standardised Information Sheet (ESIS) when an offer of a mortgage was made
          however consumers were not given this when shopping around.

4.53      This was thought to be due to the very special circumstances in Denmark. As the
          market is highly regulated, there is no variation in interest rates between
          providers. There is therefore little shopping around. The market does not provide
          personalised non-binding offers but rather standardised information.196

Balance between simplification and other forms of intervention
4.54      In Denmark, the focus of regulatory attention is on appropriate information
          provision and appropriate advice. Any regulation needs to be balanced against
          making consumers take decisions for themselves and allowing liberalised markets
          to develop.

          General points

4.55      Interviewees raised several points regarding the effectiveness of simplified
          products compared to other measures.

4.56      As noted previously, the problem of information overload is a high profile one in
          Denmark. This is an obvious drawback for alternatives to simplified products, as
          many tend to involve giving the consumer more and more information to assist
          them in making their decisions.




195
       This is based upon Denmark’s New Consumer Policy, The Danish Government, April 2003.
196
       Monitoring the Uptake and Effectiveness of Voluntary Code of Conduct on Pre-Contractual
       Information for Home Loans – Contract Reference No: B5-1000/02/000552, Presented by the Institute
       for Financial Services e.V, 17 June 2003, available from
       http://www.europa.eu.int/comm/consumers/cons_int/ fina_serv/loans/documents/survey_report.pdf
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4.57   In Denmark it is thought that there is a limit to how much information consumers
       can take before they start to just ignore it. Hence, market participants argued that
       relying too much on information provision could well be counter-productive as
       consumers disregard essential information as it is lost among a huge pile of only
       vaguely relevant documentation.

4.58   Nonetheless, the Danish Insurance Association report that since they established
       their online comparative tables they have been getting about 10,000 visits per
       week. This indicates that consumers are using the tables and actively seeking
       more information.

4.59   However, strong arguments in favour of product simplification were presented by
       the Consumer Council. They Consumer Council argued that the development of
       simplified products could make alternative regulatory interventions obsolete.
       They argued that simplified products are a cheaper, and more effective, means of
       tackling market failure than measures such as these tables.

4.60   It was also argued that currently it is tough for consumers to compare, for
       example, motor insurance policies. Although these tables allow consumers to
       compare prices easily, the differences between products in terms of their non-
       price characteristics make full and effective comparisons difficult. Simplified
       products could standardise these other features to some extent, and therefore make
       products more comparable and aid consumers in their decision-making.

4.61   As outlined below with the example of the Dankort, it has been suggested that
       simplified products can play a useful role in new markets. Here consumers are
       more vulnerable as they have little experience of the product to fall back on, and
       this can create wariness that restricts the uptake of the new product. By creating a
       badge that consumer trust, simplified products can simultaneously protect
       consumers and encourage them to use the new product. It should, however, be
       noted that the industry regulator and the trade associations did not agree with this
       opinion.




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       Basic deposit account with payment means

4.62   Even from the consumers’ perspective, the Danish Consumer Council admitted
       that there is no need for simplified products in the banking market, as firms have
       to a large extent developed simple products of their own accord.

4.63   Banks are obliged to offer bank accounts for those who want them. There is no
       particular concern regarding access to banking services.

4.64   There was therefore no identified need for a simplified bank account product in
       Denmark.

       Cash based savings products on which interest or other return is paid

4.65   It was suggested by market participants that a standardised product has been
       developed in the cash based savings product market in Denmark – the Child
       Saving Account. However, it is unclear to what extent this product was designed
       to tackle identified complexities in the market, as opposed to simply being the
       result of a political desire to encourage people to save for their children.

4.66   The general consensus is that this child saving market works well, and people are
       satisfied with it. These products have been in existence in Denmark for over 30
       years, and aim to encourage parents to save for their children. In addition to some
       standardisation of product terms, they also do feature a high degree of tax
       exemption. Parents can save up to 3,000Kr per year in these accounts, and over
       the course of 12 years they can pay in up to 36,000Kr.

4.67   Children cannot withdraw the cash until they are at least 18 years old. The money
       can be invested in equity, bonds or whatever type of asset the parent wishes. It is
       understood that banks do not make much money on the product, but offer it
       because it is expected of them. Hence, it plays more the role of a loss leader –
       banks make money on the other products individuals buy with it.

4.68   Poorer savers do not receive any help with their contributions, and there is a
       general consensus that the market is competitive and works well.

4.69   Leaving children’s saving to one side, cash based saving product were seen as
       relatively straightforward. Consumers could easily compare product terms and

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       based on complaints there was no evidence that there were problems in this
       market.

4.70   Again, even the Consumer Council noted that banking products have evolved to
       be very simple with little need for Government intervention to try and increase
       standardisation.

       Credit or deferred credit cards

4.71   The problem of encouraging card-based payment has long been effectively
       tackled in Denmark through the Dankort, which is a very simple payment card
       that exists in Denmark – it is available in pure form - which is not a credit card,
       but is also available in conjunction with Visa for example, and these cards do
       offer a credit facility. As of 2002 there were 3.3 million Dankort in circulation, of
       which 1.9 million were combined Dankort/Visa. It initially didn’t cost anything to
       use (which was prescribed in law), and this is one of the reasons why the card has
       been very popular. The card is seen as a great success – it has been described as a
       national jewel.

4.72   Another reason for its great popularity among consumers is that it benefits from a
       high degree of protection and it is almost impossible to lose money on it as
       customers are insured if it is used to steal money from them.

4.73   However, just because the card is extremely popular amongst consumers does not
       automatically make it a good product in a wider economic sense. Other effects,
       such as those on competition and innovation, need to be considered as these affect
       long-term welfare.

4.74   The Dankort was initially pushed by the banks themselves, who wanted to reduce
       consumers’ use of cheques since the latter are costly to process – it was not
       designed primarily to aid consumers in a complex market. Figure 1 below seems
       to indicate that this initiative was successful – the rise in the use of the Dankort
       has been accompanied by a steady decline in the use of cheques.




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Figure 1: Uptake of the Dankort


                                                                                     Dankort       Cheques

                                      500

                                      450

                                      400
   Number of Transactions (Million)




                                      350

                                      300

                                      250

                                      200

                                      150

                                      100

                                      50

                                       0
                                            1990      1991     1992      1993     1994      1995     1996      1997     1998    1999   2000



                                       Source: “Pengeinstitutternes åbne infrastruktur”, Finansanalyse nr. 13, September 2001




4.75                                   Nonetheless, the dominance of the Dankort is now starting to wane; the payment
                                       card market is currently undergoing a lot of change, with a host of new products
                                       being developed.

4.76                                   As part of this market evolution, the Government wanted the card to evolve by
                                       adopting new chip technology, but the banks argued that this was not possible
                                       under the regime in which they were not able to charge customers. They argued
                                       that the effective price cap at zero stifled innovation of the Dankort, as it did not
                                       allow them to earn a return on any investment they made in developing the
                                       product.

4.77                                   It appears that the Government has listened to these concerns as recent changes
                                       have been made that allow banks to charge 0.5Kr per transaction and, in response
                                       according to the banks, chips have recently been introduced. This fee level has
                                       been fixed until at least 2010. One concern was that if the costs of the card could
                                       not be recouped from those who use them, then they may be passed onto
                                       consumers who do not use the card through price rises elsewhere.

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4.78      The Consumer Council were not in favour of allowing charging, but did not fight
          vigorously against it as they realised that banks needed to earn a return to
          compensate them for introducing the new chip technology – especially since this
          was seen as benefiting consumers.

4.79      It has been argued that the Dankort played a useful role in the market when it was
          in its early stages of development, when consumers has little experience of
          payment cards and were wary about them. Since the offered such good protection
          consumers felt safer and it encouraged rapid take-up. Now the market is more
          developed, and consumers are experienced, the Dankort can make way for newer,
          more innovative products developed by the marketplace which consumers are
          now equipped to deal with. This argument emphasises the educative role played
          by the Dankort.

4.80      Although standardisation of the payment card appears to have had beneficial
          impact on the market, there does not appear to be any reason to impose product
          regulation regarding credit or deferred debit cards.

          Private pension plans197

4.81      All Danish citizens that have lived in the country for a minimum of 3 years and
          that are aged 65 receive the national pension, and are entitled to take it abroad. In
          addition to this, Danes have to make contributions to the labour market
          supplementary pension scheme that is compulsory for all Danish employees
          working nine or more hours per week.

4.82      This has resulted in the great majority of Danes being members of occupational
          schemes provided by life insurance companies with 82% of full-time employees
          aged between 15 and 59 paying contributions to a labour market pension scheme.

4.83      Occupational schemes started out as relatively simple schemes with most of the
          terms fixed by collective agreement. Due to member demand and political




197
       This section draws largely on A Pension System According to the World Bank – Development
       of the Danish Pension System from 1980 to 2002, by Christoffer Green-Pedersen.

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          pressure the schemes are becoming increasingly complex making it possible for
          the individual to adjust the offering to their needs.198

4.84      Recently the Danish Government liberalised the investments in occupational
          schemes, and from 2005 the contributors can choose between different investment
          profiles, or move some components of their savings to other pension funds, banks
          etc. In the past individuals would have joined the scheme associated to their
          profession; they will now be able to join the scheme that offers them the most
          attractive terms.

4.85      There is an open question as to how many consumers will choose to take up this
          new freedom and whether this will encourage the development of an advice
          market to help them make this decision.

4.86      In addition to occupational pensions, there are individual private pension saving
          plans set up with banks, insurance companies or pension institutions. About 1.1
          million individuals pay contributions to schemes of this kind.199

4.87      These pensions are either rate (or annuity pension schemes) or capital pensions
          schemes. Rate pensions pay out in several instalments upon retirement, while
          capital pensions pay out in a lump sum. Some participants argued that this
          represented a form of standardisation in itself, however, this appears to have more
          to do with a definition that is useful for tax purposes, rather than simplifying the
          choice for consumers.

4.88      Therefore, there is already some standardisation of pension provision in Denmark.
          To facilitate greater choice new freedoms have already been introduced into the
          pension system with an inevitable increase in complexity. The degree to which
          consumers are able to use this freedom will determine whether simplification is
          required.




198
       Based on evidence submitted by the Danish Insurance Association.
199
       National strategy report on the Danish pension system, Ministry of Social Affairs,2002.

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          Motor insurance

4.89      According to the Danish Consumer Agency, motor insurance features a relatively
          high degree of price variation, which is an indication of a market not working as
          competitively as they might like. This could be as a result of complexities that
          impede consumers from comparing effectively between products and making the
          best decisions about which products to buy.

4.90      The Danish Consumer Council identified motor insurance as a market where they
          would like to see a simplified product developed. They argued that it could play a
          very useful role here in helping to ensure that consumers are able to shop around
          and buy the most suitable product.

          Home insurance

4.91      Although, home insurance for a building is not compulsory by legislation, almost
          all contracts concerning loans in buildings (mortgage credit) include a provision
          saying that the owner of the building is obliged to take out an insurance policy
          covering the risk of fire.

4.92      Holders of a fire insurance policy are obliged to pay a tax of 20 DKK. (€2.75) to a
          fund, which pays compensation for damages caused by flood and pays costs to re-
          establish private forests fallen by storm.

4.93      The “Family Basic Insurance” dates back to the 1980s, and is a joint project
          between the Danish Consumer Council and the Danish Insurance Association (the
          Government has not been involved in its development). It has been described as a
          pilot which,

            “Tried to un-complicate home insurance so that everyone can compare between
            companies”200

4.94      However, it is generally agreed that this did not result in simplification of the
          product terms. The Family Basic Insurance,

            “is as a standardised product, not a simplified product.”201



200
       Interview with the Danish Consumer Agency, 28th May 2004.
201
       Based on evidence submitted by the Danish Insurance Association.

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4.95      The insurance covered standard items that a typical family would expect their
          insurance to contain such as theft and fire, though consumers can add additional
          cover to it, and recently companies have been making their own additions to it.
          Any additions must, however, be clearly underlined to the consumer. The idea
          behind the product was to define a minimum level of cover, as it was felt that
          comparison of different products offering different levels of coverage and
          exclusions was difficult for consumers.

4.96      The process of development was a lengthy one, the Danish Consumer Council and
          the Danish Insurance Association took a number of years of negotiation to finalise
          the details. Indeed this lengthy process is one of the reasons suggested to us as to
          why no one has considered a follow up product in, for example, motor insurance,
          because of the amount of time and effort it took to get the home insurance product
          off the ground.

4.97      Whether or not this product has been a success is a topic of debate, the Danish
          Consumer Council estimated that this product now has around 50% of the market,
          whilst the Insurance Association estimated it at nearer 85%. The Danish
          Consumer Agency described how, although there are price variations within this
          product, the degree of these variations is significantly less than in say motor
          insurance. This may which give some weak indication that the product has made
          home insurance more competitive (although looking at the level of prices would
          be a better guide to competitiveness). Overall the industry felt that,

            “It has had an impact on the market”202

4.98      On the other hand, the regulator was less convinced,

            “Its wasn’t a big success… you couldn’t really use it… the problem is that nobody has
            the same apartment”203

4.99      Further, the Family Basic Insurance product was also seen as an impediment to
          competition on coverage and it was argued that its existence made it difficult to




202
       Interview with the Danish Insurance Association, 27th May 2004.
203
       Interview with the Danish FSA, 27th May, 2004.

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         introduce simplified products. This has resulted in some people getting too much
         coverage and other getting too little.

4.100    The Insurance Association admitted that in order for the product to be appropriate
         for a wide range of people the product may have resulted in too much coverage –
         people are insured for things that they do not need to be insured for. They argue
         that people are not the same, they are not standardised and it would not be
         possible for them all to be catered for with a standardised product.

4.101    The Consumer Council support the product as they feel it benefits consumers, and
         would like it to be extended to other insurance markets. However, they comment
         that this would have to be pursued by the regulator, as there is not the will for the
         council or trade associations to produce it through independent action. They also
         note that it would not be much use in the banking market, as this market has to
         some extent evolved simple products independently.204

4.102    On the question of the effect of simplified products on innovation, the Consumer
         Council comment that they are,

           “Not sure if it will reduce innovation as providers can still produce non-standardised
           products”205

4.103    It is also worth noting that there is now a wide range of alternative home
         insurance products that providers have developed, suggesting that the market is
         beginning to move beyond this standard. This does appear to support the view that
         the Family Basic Insurance product has adversely affected innovation.

         Life insurance

4.104    The Danish Consumer Council argued that simplified products could play a useful
         role in the life insurance market, along with the other insurance markets. They
         made the point that in insurance markets it is hard for consumers to compare
         product because of the myriad of important features that vary between products.




204
      The Danish FSA was formed in 1988 and is now responsible for the supervision of the majority
      of the financial services sector.
205
      Interview with the Danish Consumer Council, 17th June 2004.

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4.105    There is currently considerable pressure on the insurance trade association to
         develop the successful Insurance magnifying glass – that covers motor and home
         insurance – to include life insurance products.

4.106    However, this is being resisted by the industry who argue that comparative tables
         can help as they allow you to compare some features across products, but they are
         not a panacea as inevitably not all variations are captured and there is still a lot of
         work for consumers to do in comparing products.

         Mortgage credit

4.107    It is generally agreed, as noted earlier, that the Danish mortgage market has a high
         level of standardisation. All mortgage loans are guaranteed by mortgage bonds.
         Credit institutions are restricted by law to fund their lending by issuing these
         bonds with a profile matching the repayment of the loan portfolio. The Danish
         FSA noted that mortgages are,

           “Very standardised”206

4.108    Historically, mortgages have been long-term fixed rate annuity products.207
         Shopping around for a mortgage is very easy, the interest rate is the bond yield on
         the day the terms are locked ensuring that consumers can focus entirely on the
         bank’s mark-up. Competition tends to result in a common level, so effectively
         interest rates are fully determined by the bond market.

4.109    On a given day all borrowers pay the same rate for the same type of loan, and
         there is no complicated array of charges. All borrowers in Denmark pay the same
         upfront fees: 0.1% of the loan amount plus a fixed charge.

4.110    Denmark is beginning to see increasing product differentiation; recently there has
         been a shift from the traditional long-term fixed rate mortgage loan towards
         variable rate loans (notably with annual adjustment) and, most recently, loans
         with payment of interest only for a certain period. Consumers therefore have the



206
      Interview with Danish FSA, 27th May 2004.
207
      Danish report taken from Study on the Financial Integration of European Mortgage Markets, Mercer
      Oliver Wyman, October 2003.

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         choice whether to opt for the comparatively cheaper variable rate/ interest-only
         loans, or the fixed rate long-term loans that gives them full knowledge of their
         long-term financial commitments.

4.111    However, most lenders currently offer a common standardised range of products
         focusing on:

         •     Up to 30 year fixed rate DKK dominated amortisation mortgages; and

         •     Variable rate DKK and Euro dominated products with frequency of rate
               adjustments between one and ten years.

4.112    Specialised mortgage institutions have almost ceased to exist, the vast majority
         having merged with commercial banks, and this lack of brokers is thought to be
         due to the existing standardisation.208 Hence consumer are far more likely to use
         bank branches along with real estate agents which form a one stop “financial
         services shop” and provide the bulk of distribution.

4.113    In recent years, there has been increasing differentiation, for example, Realkredit
         Denmark’s Flexplan allows a more flexible mortgage plan. There are also changes
         to regulation to allow more flexible repayments (known as bullet repayment).
         However, there is currently little concern over the level of differentiation.

4.114    The Danish Bankers Association and the Danish FSA supported the view that
         mortgages in Denmark are simple. In a market such as this, with such a simple
         product, there is no need for a simplified product.

         Collective investment schemes

4.115    Even the Federation of Danish Investment Associations had to admit that some
         consumers find,

             “All investment products complex”209




208
      Danish report taken from Study on the Financial Integration of European Mortgage Markets, Mercer
      Oliver Wyman, October 2003.
209
      Interview with Federation of Danish Investment Associations, 28th May 2004.

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4.116   However, they insist that there is a high standard of information through the
        written material provided to consumers and what is available on the internet. They
        also argued that there is a high degree of transparency when buying financial
        products through a bank, as the charges are clear. The bank’s commission is set
        out clearly and presented up front.

4.117   Denmark already has constraints on the types of product charges that can be used.
        Unlike other countries that are regulating to enforce level loaded products
        (effectively cross-subsidising the costs of acquisition of new customers by
        existing customers) this is not possible in Denmark. The cost of acquisition has to
        fall on the new member of the scheme, as do any exit costs.

4.118   Because of this, they argue, there is no need for a simplified product as existing
        measures are believed to already be sufficient. It is also likely that investors in
        collective investment schemes are likely to be wealthier, more informed
        individuals who are more capable of making good decisions and less in need of
        Government protection.

        Financial advice

4.119   As noted earlier, there have recently been new guidelines introduced governing
        the issuing of financial advice, which cover the nature of the advice, its content
        and any disclosures of conflicts of interest that the adviser may have
        (incorporating the restriction of European directives).

4.120   When the possibility of a simplified advice product was discussed with market
        participants, they didn’t understand how this could be done and what form it
        would take. Generally it was accepted that the current regulatory regime
        surrounding advice – that is, the rules governing best business practice – is the
        best way to protect consumers of this product.

Cross-border trade
4.121   Interviewees in Denmark are among the most positive when it comes to the
        prospects for cross-border trade in financial services and the Danish Government
        is taking a number of proactive steps to facilitate cross-border trade.


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4.122    In Denmark it was recognised that increasingly consumers are making cross-
         border purchases – for example over the Internet or while on holiday abroad. It is
         also acknowledged that this has created a need for consumers and companies to be
         able to obtain independent advice and clear information from an easily accessible
         source. For example, consumers may wish to know about the complaints
         procedures for products purchased from another country; or they may wish to
         know about the applicable consumer regulations when shopping on an online
         store based abroad.210

4.123    It is for this reason that the Government established an EU Information Office at
         the national consumer centre, Forbrugernes Hus in early 2004. This acts to
         coordinate consumer complaints about products purchased in other EU Member
         States. The Office also provides details of EU consumer standards via the
         Consumer Portal.211

4.124    The Danish Government is aiming to make it easier for consumers to make their
         voices heard when making complaints about products purchased abroad. Denmark
         is involved in a network cooperation set up as a pilot project between the
         European authorities responsible for complaints procedures in the individual
         countries. The Government is attempting to make the network cooperation
         permanent in order to allow Danish consumers to have their cross-border
         complaints dealt with in a simple manner.212

4.125    Equally, there are a number of examples of new entrants into the Danish market
         who have successfully taken market share suggesting, that cross-border trade
         through establishment and provision of services, at least in the Scandinavian area,
         is likely to become a significant issue.




210
      Denmark’s new Consumer Policy, The Danish Government, April 2003.
211
      Denmark’s new Consumer Policy, The Danish Government, April 2003.
212
      Denmark’s new Consumer Policy, The Danish Government, April 2003.

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Benefits
         Increasing consumer confidence

4.126    The Danish Consumer Council has identified an important benefit for cross-
         border trade caused by simplified or standardised products. They believe that
         such products could play a key role in building consumer confidence. They argue
         that consumers are naturally more inclined to trust domestic providers more than
         foreign providers, as they have a long experience of dealing with them, and they
         know who to contact and what to do in the event of any problems. However, they
         argued that if EU-wide simplified products were developed, consumers would
         recognise the product they were buying and would know that they were benefiting
         from a strong degree of protection, and would therefore worry less about the
         country of origin of the product they were buying.

4.127    Equally, as new entrants from other Member States would be providing a
         standardised product, this was seen as potentially increasing cross-border trade
         through freedom of establishment or the provision of services.

4.128    In response to the view that products differ widely across Europe to reflect
         consumer preferences, the Danish Consumer Council commented that there are
         also a number products that are very similar everywhere. For example, they noted
         that home insurance requirements are fairly standard – consumers want protection
         from fire, burglary etc. Whilst they recognise that the differences in laws across
         countries is an issue, they argue that it is not a prohibitive one, but caution that
         complaints procedures must be improved to operate across borders.213

4.129    The Consumer Agency was far more positive towards the effect of simplification
         on cross-border trade. They point to the example of Skandia bank (a Swedish
         Bank selling into Denmark), who now have around 300,000 customers, where
         entry has occurred through offering a simpler pricing structure, i.e. no transaction
         charges versus the traditional products with multiple fees. They use this to counter
         the argument that cross-border trade in financial services can never happen, and
         trying to encourage it is a pointless exercise doomed to fail.


213
      Interview with the Danish Consumer Council, 17th June 2004.

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4.130    They believe that standardisation or simplification could help boost cross-border
         trade. They argue that as more and more people begin to use Internet banking,
         consumers will not be concerned which country it is based in since it makes no
         difference,

           “Standardised products would be an aid as they would be something that consumers
           would see and recognise and trust, so it would give them more confidence in cross
           border transactions”214

4.131    The products that they identify as being the ones where simplified products could
         have their biggest impact are pensions and mortgages, followed by insurance
         products. However, clearly cross-border trade has developed in banking products
         without any form of simplification or standardisation to promote it.

Barriers
         Differing consumer needs

4.132    The Danish Insurance Association noted that a good product in one country is not
         necessarily a good product in another, but rather that products have to be tailored
         to local needs. Hence although standardised products may aid the comparison of
         products across Member States for consumers, or lower the cost of entering a
         Member States by reducing the information costs for providers, it would result in
         consumers not getting a product they wanted and hence would be unlikely to be
         successful.

4.133    As an illustration, it was noted that it could be the case that in Denmark, the car
         owner chooses where a car gets repaired after an accident whereas in Sweden the
         insurance company would make this choice. Furthermore, the Danish Insurance
         Association remarked that in Denmark they are far more interested in,

           “Transparency, not simplification”215




214
      Interview with the Danish Consumer Agency, 28th May 2004.
215
      Interview with Danish Insurance Association, 27th May 2004.



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         Marketing rules216

4.134    Marketing rules are seen as imposing a barrier to cross-border trade by the Danish
         Government. In particular, they note that firms see it as too expensive and
         cumbersome to produce specific marketing for each individual country so that it
         complies with specific national rules - although the growth of the Internet has to
         some extent begun to tackle this problem. However, the Government is working
         towards the introduction of common rules in the EU on marketing to tackle these
         issues.

         Tax and legal regulations

4.135    The Danish Bankers Association see no theoretical reason why one day there
         cannot be a lot of cross-border trade in financial products. However, for practical
         reasons, they believe this to be extremely difficult at the moment because of
         differences in legislation, exchange rate fluctuations and tax differences. In
         particular, they noted that when saving for a pension, tax exemptions are not
         available if this is purchased from abroad. Since tax privileges are, for many
         people, the major incentive to save for a pension this suggests that consumers
         purchasing products from other countries is unlikely regardless of the level of
         simplification or standardisation and similarly providers when operating under
         freedom of establishment or services would still need to take tax arrangement into
         account in designing products. They commented that,

           “It can’t be harmonised in my lifetime”217

4.136    The Danish Insurance Association is equally sceptical of the role that simplified
         products could play. They commented that everything differs across national
         boundaries, even in nearby Sweden with products needing to comply with local
         laws, language and traditions.218




216
      Much of this is drawn from Denmark’s new Consumer Policy, The Danish Government, April
      2003.
217
      Interview with DBA, 28th May 2004.
218
      Interview with Danish Insurance Association, 27th May 2004.

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4.137    The Danish FSA agreed with this sceptical viewpoint, arguing that cross-border
         trade in financial services was not possible because of the different tax systems
         and that simplification or standardisation of product features would not change
         this.219




219
      Interview with the Danish FSA, 27th May, 2004.



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Section 5          Finland
Summary
5.1       Most retail financial products available in Finland have not been identified
          directly as overly complex for consumers. The areas where there was most
          concern over complexity were insurance products and much of this complexity
          was said to be due to tax,

           “If complexity exists it is driven by tax. Tax benefits are the real problem in the market
           and simplification would not be able to solve this problem. The issues in the Finnish
           market are domestic in nature and international involvement would not be able to solve
           the problems.”220

5.2       Indeed, there was recently a very significant review of the financial services
          market undertaken by the SIVA Working Group. This found that simplification
          of the tax structure would be extremely beneficial and suggested simplification.
          However, this was politically difficult to achieve as it involved either increasing
          tax privileges for some products (with a corresponding cost) or removing tax
          privileges on products that had traditionally benefited from them.

5.3       As is clear from Table 16 below, Finland does not have any products that we have
          classified as simplified.




220
      Interview with FMoF, 29th June 2004.

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Table 16: Simplified products in Finland

        Product list                                        Does Finland have simplified products?

        Basic deposit account with payment means                                  No

        Cash based savings products on which                                      No
        interest or other return is paid

        Credit or deferred debit card                                             No

        Private pension plans                                                     No

        Motor insurance                                                           No

        Home insurance                                                            No

        Life assurance                                                            No

        Mortgage credit                                                           No

        Collective investment schemes                                             No

        Financial advice                                                          No




5.4       The most common view echoed in all interviews was that consumer education and
          better, clearer information were the tools to improve the functioning of the
          market. This was thought likely to increase in importance as products became
          more complex. In general, financial market interventions have concentrated on
          increasing information and making it better and more accessible to consumers,

           “Extensive marketing by banks has been of some concern as investment funds have
           been offered as direct alternatives to traditional bank accounts. Adequate and accurate
           advertising and marketing is therefore key to financial markets operation. As products
           are getting more complex it is important to educate the providers and financial advisers
           about the characteristics of the products they are offering.”221




221
      Interview with FFSA, 29th June 2004.

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5.5       In the light of this, there has been considerable focus on improving information
          provision across all of the product areas, but a recognition that this can still be
          improved,

           “There is a clear need to make insurance and financial markets more transparent and
           clear statements of risks and charges to consumers are needed. Annual reports should
           explain more information on the risks of operation and what fees are paid. There
           should be more transparency on guarantees, political risk, solvency requirements.”222

5.6       There is a clear understanding that this should focus on better quality information
          that consumers can use rather than simply presenting them with more information.

5.7       As shown in

5.8       Table 17 in addition to information provision, Finland uses voluntary codes
          extensively. These are thought to work effectively since there is strong degree of
          co-operation between different bodies in the financial services industry in Finland,

           “If guidelines are not being followed by a particular product provider, we raise this
           issue with them and they always co-operate afterwards.” 223

5.9       Across all those interviewed, there was agreement that this had resulted in high
          levels of consumer protection and there was no evidence that providers were
          designing products that would be against the interest of consumers.

Table 17: Alternative regulatory interventions in Finland

                       Information provision       Regulation of sales and       Voluntary codes of
                                                           advice                     conduct
Basic deposit
                                                     Consumer protection            Good Banking
account with
                                                           Law                        practice
payment means
Cash based
savings products
                                                     Consumer protection            Good Banking
on which
                                                           Law                        practice
interest or other
return is paid




222
      Interview with FMSAH, 28th June 2004.
223
      Interview with FFSA, 29th June 2004.

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Credit or
                                                                                  Good Banking
deferred debit
                                                                                    practice
card
                                                  Guidelines on marketing
                                                  life and private pension
                                                     insurance products
                       Insurance ombudsman        Insurance Contracts Act
Private pension                                                                   Code of Good
                         product and price
plans                                              Insurance Companies          Insurance Practice
                            comparisons
                                                           Act
                                                    Consumer protection
                                                          Law
                                                  Insurance Contracts Act
                                                       Motor Liability
                       Insurance ombudsman             Insurance Act
                                                                                  Code of Good
Motor insurance          product and price         Insurance Companies          Insurance Practice
                            comparisons                    Act
                                                    Consumer Protection
                                                          Law
                                                  Insurance Contracts Act
                       Insurance Ombudsman         Insurance Companies
                                                                                  Code of Good
Home insurance            product and price                Act
                                                                                Insurance Practice
                            comparisons
                                                    Consumer Protection
                                                          Law


                                                  Guidelines on marketing
                                                  life and private pension
                                                     insurance products
                       Insurance ombudsman
                                                    Insurance Contracts           Code of Good
Life assurance           product and price
                                                           Act224               Insurance Practice
                            comparisons
                                                   Insurance Companies
                                                           Act
                                                    Consumer Protection
                                                          Law
                                                                                European code of
Mortgage credit                                                                 conduct on home
                                                                                     loans
Collective
                         Monthly report on       Guidelines on investment     FMFA Code of Good
investment
                              funds                      services                 Conduct
schemes


224
      Additionally (19.05.2004/419) Act on Changing the Insurance Companies Act, implemented
      2002/83/EC.

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                                                      Guidelines on investment            Code of Good
Financial advice
                                                              services                      Conduct



5.10      Actual consumer protection legislation is very broad and only gives general
          guidelines. Laws are expected to be followed according to the spirit of the
          regulation rather than taken into account literally.

5.11      Against this background, concern was expressed regarding whether the use of
          product simplification or standardisation might do more harm than good in
          Finland.

5.12      In the banking sector in particular, there was a significant concern that simplifying
          products would lead to a decline in the high standards of service that had
          developed particularly with regards to the use of technology and electronic
          payment means.

5.13      There was also a concern about whether regulators were best placed to design
          products that were suitable for consumers,

            “The industry is free to design a simple product if it so chooses. This, however, needs to
            be driven by the market, not by the regulators.”225

            “I am uncomfortable with creating products, such as the unit-linked products, which
            make it easier for consumers to lose money.”226

5.14      Home insurance and life insurance were the only product areas in which some of
          the interviewees were willing to consider the introduction of simplified products.
          In home insurance it was believed that standardisation and simplification might be
          able to help product comparisons if introduced alongside existing products and
          standards.




225
       Interview with FMoF, 29th June 2004.
226
       Interview with FMSAH, 28th June 2004.

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5.15      In life insurance we found conflicting opinion regarding the value of
          simplification. Life insurance products were considered as some of the most
          complex products in the markets and some participants welcomed simplification
          as an approach to tackle the particular difficulties consumers have with unit-
          linked products. However, generally, tax was seen as the particular driver for
          complexity in long-term savings products.

5.16      Other product areas, for example such as investment funds, have already
          experienced some standardisation. Whilst the charges themselves can vary, the
          structure of charges for UCITS funds is uniform.          However, we have not
          classified this as simplification as the standardisation only involves one aspect of
          the product’s complete package.

5.17      When considering whether simplified products were likely to impact cross-border
          trade, market participants were highly sceptical, and held the particular view that
          lower standards of consumer protection offered elsewhere would be likely to
          prevent such trade from being significant.

5.18      Interestingly, there was a concern that trade could introduce products of lower
          quality which consumer would find difficult to differentiate from domestic
          products and this might result in lower quality products being sold more widely.
          This suggests that should cross-border trade increase, this may present an
          argument for minimum product standards (rather than the other way round).

Sources of information
5.19      The information in this section comes from a range of sources. These included
          publications from the following institutions (in addition to those interviewed
          listed below):

          •   Helsingin Yliopisto (The University of Helsinki Research);

          •   Kuluttajatutkimuskeskus (National Consumer Research Centre);

          •   Kuluttajavirasto (The Consumer Agency & Ombudsman Bureau);

          •   Pörssiäätiö Ry (Finnish Foundation for Share Promotion);
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          •   Suomen Pankki (Bank of Finland); and

          •   Vakuutusneuvonta (Consumer Insurance and Ombudsman Bureau).

5.20      We also consulted the financial press (Helsingin Sanomat (National Daily
          Broadsheet) and general media in order to get a wider picture and alternative
          viewpoints.

5.21      Interviews were conducted with:

          •   Kuluttajaliitto (Finnish Consumers’ Association, FCA);

          •   Sosiaali ja Terveysministeriö (Ministry of Social Affairs & Health, FMSAH);

          •   Suomen Pankkiyhdistys (Finnish Bankers’ Association, FBA);

          •   Suomen Sijoitus Rahasto Yhdistys Ry (Finnish Association of Investment
              Funds, FAIF);

          •   Rahoitustarkastus (Finnish Financial Supervision Authority, FFSA);

          •   Vakuutusvalvonta (Insurance Supervisory Authority, FISA);

          •   Valtionvarainministeriö (Ministry of Finance, FMoF); and

          •   Vakuutusyhtiöiden Keskusliitto (Federation of Finnish Insurance Companies,
              FFIC).

5.22      Table 18 below shows the regulators responsible for the various products in
          Finland.

Table 18: Finnish primary regulators

          Product list                                           Primary regulator

          Banking Products (including credit cards     Rahoitustarkastus (Financial Supervision
          and mortgages)                                              Authority)

          Insurance Products (both life and general)   Vakuutusvalvonta (Insurance Supervisory
                                                        Authority – subordinate to Ministry of
                                                              Social Affairs & Health)

          Pensions                                     Vakuutusvalvonta (Insurance Supervisory

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                                                            Authority – subordinate to Ministry of
                                                                  Social Affairs & Health)

          Investment Products                              Rahoitustarkastus (Financial Supervision
                                                                          Authority)

          Financial Advice                                 Rahoitustarkastus (Financial Supervision
                                                                          Authority)



Development and characteristics of simplified products
5.23      Finland has no products that we have categorised as simplified products.

Alternative regulatory interventions
5.24      Finland has had a particular focus on information provision to consumers.
          Consumer protection has been approached from a legislative perspective and
          significant co-operation between industry bodies has ensured an environment
          where consumer protection is high up on the agenda.

5.25      Before we examine the different measures that have been used in Finland to
          improve the functioning of the retail financial services markets, we first examine a
          recent review of the financial services sector which provides important
          background on the areas which are considered to be of most concern in the
          financial services sector in Finland and provides a useful input into our
          assessment of the need for simplified standard products.

SIVA Working Group
5.26      One of the most significant developments in recent years in Finland was the
          establishment of the SIVA Working Group (henceforth SIVA).227                    This was
          chaired by the Bank Governor, Matti Louekoski, and was set up by the Ministry
          of Finance and the Ministry Social Affairs and Health to evaluate whether there
          was a need for new legislation in the financial services industry to address
          emerging issues with competing long-term savings products (including bank



227
       Mutually Competing Savings Products, Final Report by the Siva Working Group, (Keskenään
       Kilpailevat Säästötuotteet, SIVA-Työryhmän Muistio) The Siva Working Group (2003), Finnish
       Ministry of Finance. Available from www.vm.fi/julkaisut

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          deposits, investment funds and life insurance products). The SIVA report was a
          unique review of financial advice and product markets in Finland. Its scope and
          extent was considered ambitious due to implications on taxation of savings
          products. The final report was published in December 2003 representing the
          culmination of work over a two year period.

5.27      The main aims of SIVA were to examine whether:

          •   The legislation in the competing savings products industries was preventing
              competition;

          •   The terms of Finnish financial service providers were in line with international
              service providers; and

          •   Consumers were able to compare prices in a reliable manner.

5.28      There were a range of recommendations made in the SIVA report including:
          making switching easier; increasing financial information; and creating a level
          playing field for different long-term savings products with regard to tax treatment.
          Regarding the latter of these, the SIVA Group proposed the enactment of a new
          Act on Long Term Saving (henceforth LTS). The LTS Act was to create the legal
          basis for providing alternative means of saving, to which tax incentives could be
          attached. The grounds for granting tax incentives would be enacted in tax
          legislation.

5.29      The current position in Finland is that certain insurance products have tax
          advantages that are not available to either investment funds or bank deposits.
          SIVA recommended that tax incentives should be equalised across products. This
          would have meant giving tax benefits for all long term savings products (or
          alternatively taking tax benefits away from the existing tax privileged
          products).228

5.30      Other proposals included in the SIVA report:


228
       However, removing tax benefits from traditionally tax advantaged products was not considered
       to be politically possible.
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          •   Co-ordination of bodies responsible for consumer complaints on different
              products (FFSA and FISA);

          •   Provision of adequate information on annual costs, risks and other relevant
              information to consumers, in a way that allowed price comparisons.                            In
              particular, SIVA proposed that the LTS Act would regulate and unify
              information provision to consumers;229

          •   Ensuring customers receive information of the fluctuation of the value of the
              product they have purchased during the contract period;

          •   Responsibility of the supply of information provision. The saver should be
              given the basic information (particularly on the annual costs of savings
              products and total costs). It was considered that equal competition and
              customer protection require that products which are identical from an
              investment point of view are subject to similar obligations to provide
              information; and

          •   Right to switch service providers without extra costs during a saving period
              (e.g. after one year lock-in). Completely free switching was not considered
              beneficial to consumers, as the companies would need to increase the costs in
              order to cover themselves against the switching risk.                   However, contract
              conditions could include a fixed-term waiver of the right of termination of the
              contract. The proposed maximum period was five years.

5.31      These proposals were widely supported by the review bodies that SIVA consulted
          on the proposals (consumer bodies, service providers, research institutes).230


229
    This included: the key contractual information and limitations; the length and scope of the
    contract; information of switching between providers; information on possible lock-in period; costs of
    switching; information on cancellation of the contract; regular expenses incurred for the management
    of the fund; two practical examples of the costs; if the service provider charges separate fees for single
    services, their cost structure; is the service provider charging expenses on behalf of another service
    provider; risk warning, if there exists a risk to the capital investment (i.e. not only on the returns); if
    the contract promises a guaranteed return, information on this; if consumer is given historical
    information on past returns, the information should be from over 5-year time period; if required,
    information that the deposit guarantee scheme does not apply; tax treatment of the returns on the
    investment.
230
    Detailed Summary of the Responses to SIVA Working Group Proposals, Ministry of Finance,
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          Indeed when the FMoF canvassed market participants for support of the
          proposals, out of 50 respondents only 2 disagreed with the recommendations.

5.32      However, despite the wide support that was canvassed, the recommendations of
          SIVA have not been taken forward. It is believed that one of the main reasons for
          this was the cost of increasing the range of products with tax benefits (in
          particular in the short-run). Furthermore, there was a view that the Government
          believed that the statutory pension system was comprehensive enough to cover the
          population and the proposals would mean subsidising the private system from
          government funds, which could prove very expensive (and would be seen as
          giving tax benefits to voluntary private pension funds which would primarily
          benefit the rich). There were also some concerns that the private system might
          crowd-out the currently extensive statutory system and ultimately leave many
          vulnerable people worse off.231

5.33      Since the final consultation there has not been any further discussion whether the
          proposals could be taken forward through other routes or whether alternative
          means for promoting long term saving and product comparability could be
          implemented.

5.34      Interestingly, although SIVA covered many of the same issues and concerns as
          the Sandler Report, the simplification of products was never considered by SIVA.
          Instead the primary concern and issue that was thought to be driving complexity
          in financial services was the lack of a level playing field between different types
          of products particularly with regard to tax.

Provision of information
5.35      The primary concern regarding the provision of information does not appear to be
          one of quantity but rather of the quality of information provided. There is a lot of
          information available for price comparisons from web sites and fund brochures.
          Indeed caution was indicated with regarding to additional burdens of information,



       17th March 2004, available from http://www.vm.fi/tiedostot/pdf/fi/70542.pdf.
231
       These views were expressed at multiple interviews in Finland, 28th-30th June 2004.

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             “There is almost too much information, which can actually make the product more
            complex.”232

5.36      In general, however, there was a view that improved information was one of the
          best ways to improve the functioning of the financial services market and would
          dominate the use of simplified products,

            “The FFSA view is to encourage better (rather than more) information to consumers
            and believes that this is a better way to ensure consumer protection rather than through
            product simplification. It is not obvious what is a simplified product, customers have
            different needs and need simplification in different aspects of their financial
            transactions.”233

5.37      In July 2003 a new law came into effect regarding the FFSA’s need to provide
          information to customers and a new role with respect to consumer education. The
          FFSA intends to take this forward mainly through the use of their internet site.
          The website will include an explanation about the main characteristics of the most
          common financial products, the usual services provided with the associated risks,
          what customers should know about the product or provider, how to compare
          prices, contract types and what should be understood before purchase, what is and
          is not under supervision, details on the FFSA and other regulators, and additional
          information that could be considered useful to the consumer.234

          Comparative information

5.38      The Consumer Insurance Ombudsman Bureau (CIOB) is frequently used by
          consumers and is responsible for comparing products. The industry and the CIOB
          have had a good relationship and strong co-operation is common in the Finnish
          industry. The CIOB has an extensive website depicting typical scenarios that
          might arise with insurance problems and complaints.                    In addition, there are
          frequent price comparisons across the industry.235 They compare insurance both in
          terms of price and cover and in all cases list the products offered by major


232
       Interview with the FAIF, 28th June 2004.
233
       Interview with FFSA, 29th June 2004.
234
       Based on information from the interview with FFSA, 29th June 2004.
235
       The website of the Finnish Consumer Insurance Ombudsman Bureau and the Finnish Insurance
       Complaints Board: www.vakuutusneuvonta.fi. Insurance comparisons are accessible at
       www.vakuutusneuvonta.fi/Vakuvert/vertailu.htm.

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          insurers. The website is very comprehensive and updated regularly and amongst
          other things covers:

          •   Life insurance - comparison of major providers in terms of their internet
              services.

          •   Pension insurance - comparison of costs and contract terms (e.g. whether the
              investment can be transferred, without cost or at all, from traditional insurance
              to unit-linked insurance and vice versa). They also list companies in terms of
              average returns over the past 3 years. The different product features are
              compared in separate tables.

          •   Home insurance - list of all providers and whether they offer particular
              components of home insurance. Information on the annual costs and any
              excess and costs of supplementary cover are also displayed.

          •   Motor insurance - comprehensive listing by provider of which components are
              included (e.g. moose/damage/fire insurance), annual costs, excess amounts,
              who is eligible, discounts and bonus calculations.

5.39      Furthermore, the consumer bodies and the ombudsmen offer comparison services
          and information, which is easily accessible from the internet or over the phone.
          For example, the investment fund monthly report is available on the stock
          exchange website and covers all of the Finnish registered funds as well as any
          foreign funds that want to be included in it. While it is primarily available
          through the internet, consumers can also obtain hard copies of it as well.236

5.40      The report shows management fees, returns for six and twelve month periods and
          annual data, net subscription amount, redemption and subscription fees, portfolio
          managers name and experience and minimum investment. In addition to this
          information the report also groups the funds according to their origins and type
          (e.g. money market, global equity etc.).




236
       Based on information from the interview with the FAIF, 28th June 2004.

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          Simplified prospectus

5.41      New investment funds legislation has attempted to improve the information
          provided to investors. This incorporates UCITS Directives 2001/107/EC and
          2001/108/EC into Finnish regulation and were fully implemented in the national
          legislation in April 2004. The directives superseded earlier less extensive Finnish
          investment funds regulations.237

          Information during the sales process

5.42      The 1995 Insurance Contracts Act (543/1994) strengthened consumer’s position
          by stating that the insurance company should give adequate information prior to
          the signing of the contract.          This went further than European life insurance
          directives. The duty of disclosure is not fulfilled by mere delivery of policy
          terms.     The insurance provider is required to provide consumers with all
          information necessary to enable the consumer to assess his or her financial needs.
          In addition, all major exclusions must also be pointed out to the consumers. The
          Act states that if the company is found guilty of misleading the consumer by
          failing to provide all necessary information, the insurance holds as it was
          perceived to hold by the consumer when taking out the insurance, i.e. the mere
          delivery of policy terms does not fulfil the duty of disclosure. The information is
          provided in both a generalised leaflet as well as in a personalised information
          leaflets.238

Regulation of the sales and advice process
5.43      In Finland, independent financial advisers and investment advisers have not
          previously been supervised by the FFSA. However, this will change due to the
          implementation of the MiFID.




237
       The Investment Options for Investment Funds to Increase, Finnish Ministry of Justice available from.
       http://www.finlex.fi/uutisarkisto/index.php. This follows on from Financial supervision guideline No.
       201.2; AUTHORITY J. No. 22/269/99; Issued 16.3.1999; Supersedes guideline 201.2. ; J. No.
       2/548/94, 7.6.1994; Effective from 1st May 1999.
238
       Insurance Providers Must Give Enough Information when Selling Insurance, CIOB, Press Release,
       16th January 2001. Additionally, see Insurance Contracts Act (543/1994), 28th June 1994.

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Table 19: Regulation of the sales and advice process for investment products -
disclosure and qualification

                                                   Life assurance, pensions and investment
                                                                    funds

Need for a fact find to understand the                         Under preparation
customer
Written record of advice given                                        No
Disclosure of level of commission                               Not specifically
Disclosure of turnover with provider                                  No
Disclosure with whom contractual                                      Yes
relationship exist
Do legal professional qualifications exist for                        No
advisers?
Is there a publicly available database of all                         No
advisers?



5.44      Recently, however, there seems to have been a reluctance of consumers in Finland
          to engage with a detailed advice process and the FFSA has received complaints
          from some consumers saying that banks and insurance providers are asking too
          many personal questions when assessing the customer’s financial needs. The
          concern about this is that it could lead some consumers to opt for service
          providers who conduct less extensive surveys, which could then lead to a
          reduction in consumer protection. It is likely that this is due to unfamiliarity with
          the advice process.

5.45      There are some basic rules that should be common across providers, e.g. the
          Know Your Customer principle and some background on the adviser’s services
          (e.g. the particular expertise he or she has in a particular market), but the FFSA
          indicated that it was difficult to see how this problem could be improved other
          than through consumer education.




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5.46      Despite the lack of supervision by either the FFSA or FISA, there have been
          guidelines regarding investment services.239 This states that an investment
          services undertaking must provide its customer with information concerning
          investment services, the fees and other charges to be collected, as well as such
          information concerning the securities concerned that may have a significant effect
          on the customers’ decision-making, unless this is clearly unnecessary due to the
          nature of the investment service or other circumstances. This obligation does not
          however apply if the customer is a professional investor.240

5.47      The information concerning the fees and other charges to be collected must be
          presented so clearly that the customer has no difficulties in finding out all the fees
          that will be collected. If the investment services undertaking is entitled to a fee or
          other charge on the basis of an agreement concluded with a third party for trades
          executed on behalf of the customer (e.g. a fee return arrangement or soft
          commissions), the investment services undertaking must inform the customer of
          such an arrangement.              An investment services undertaking must inform its
          customers about the extent of protection by the investor compensation fund that is
          applied to the trades envisaged, what cover is offered, or if there is no
          compensation, as well as any material changes in this information.

          Consumer protection act

5.48      The Finnish Consumer Protection Act is considered as providing comprehensive
          cover and complementing the Insurance Contracts Act. It applies to the
          intermediation, provision, sale and other marketing of commodities to consumers.
          Whilst banning misleading information and marketing, the Act also rules that
          marketing cannot use any methods which are contrary to good practice or



239
       Guidelines on practices to be applied in the provision of investment services. Financial supervision
       Guideline No 201.7; AUTHORITY Dnro 11/268/98; Issued 25th November 1998; Supersedes guideline 203.1;
       Dnro 1/544/94, 14th .January 1994; Valid from 1st January 1999.
240
       If the customer is a professional investor, the implications of this status must also be explained,
       particularly with regard to which provisions of legislation would therefore not apply. Furthermore, if
       the customer declares himself to be professional investor, but this is clearly not true on the basis of the
       information provided by the customer or other circumstances, the investment services undertaking
       must not consider the customer to be a professional investor in accordance with the due diligence
       requirement.

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          otherwise inappropriate. The Act also notes that a trader may not use a contract
          condition that can be deemed unreasonable from the consumer’s point of view,
          considering the price and other relevant factors. The key provision of the Act, in
          terms of relevance to financial services provision, states that any contract between
          consumers and traders must be interpreted to the consumers advantage, if it was
          drawn up in advance and without the consumers influence in it, or if its
          significance is in any way unclear.

5.49      The Consumer Protection Act along with Insurance Contracts Act, whilst perhaps
          sounding somewhat unspecific in their exact provisions, are thought to provide
          comprehensive and effective cover to consumers. This is because the Acts are
          intended to be interpreted (which is also the case in practice) according to the
          spirit of the law rather than according to the exact literal meaning.

          Insurance remuneration

5.50      The FFIC raised the role of insurance brokers as an area of concern,

            “The Insurance Brokers Act does not work as well as it should. Insurance Brokers
            should assist consumers as specialist, independent advisors. However, current
            remuneration practices, commission paid by insurance companies, causes sometimes
            problems.”241

5.51      The number of insurance brokers in Finland is growing, but the volume of
          business done through brokers is still relatively small at around 10% of the 2003
          premium income.242 Recently there have been worries that the independence of
          insurance brokers is jeopardised if their charges are not completely transparent to
          customers. According to the law consumers have the right to know how the
          brokers are paid but unless consumers proactively ask for the information, the
          brokers have no obligation to disclose it.

5.52      In April 2001, the Supreme Administrative Court decided that consumers would
          be better off if remuneration was a direct transaction between the consumer and
          the broker because this would mean that consumers would no longer be liable to


241
       Interview with FFIC, 30th June 2004.
242
       Review of Finnish Insurance in 2003, Federation of Finnish Insurance Companies, 2004.

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          insurance premium tax which is 22% and payable if insurance providers pay
          commission to brokers. On the 29th October 2002, the Court’s decision in mind,
          FFIC issued a recommendation to its members to make non-life broker
          remuneration the direct responsibility of the contractor, i.e. the consumer. The
          Finnish Competition Authority replied in April 2004243 and informed FFIC that
          the recommendation was anti-competitive. This came as a big surprise to the
          FFIC as Norwegian and Swedish competition authorities have already approved
          similar recommendations.244

5.53      The intermediaries directive will be brought into Finnish law and a working group
          at the FMSAH on insurance mediation has been set up to look at the available
          options for the insurance brokers’ market. At the moment the proposals are being
          consulted on but the draft proposals suggest compulsory disclosure of commission
          and FMSAH are optimistic that this will improve the situation. The FFIC has
          responded to the working group’s consultation and it believes that making sure
          brokers are paid directly by customers best ensures their independence and has
          recommended that insurance mediators could only call themselves independent
          intermediaries if they get payment directly from the customer,245

            “Commission has an impact in Finland. It maybe that brokers recommend the
            companies that pay the highest commission in the life sector. It might be better if the
            brokers were paid for by the consumer and not by the product providers, as this
            practice creates a conflict of interest between the service participants. It is unclear for
            whom the brokers work for, are they primarily there for the customer or just selling
            agents for the providers?”246

5.54      In the UK, moving to a remuneration system in which consumers pay advisers
          direct was rejected partly on the grounds of consumer reluctance to do and
          preferences for remuneration to be paid through commission. It could nonetheless


243
       Finnish Competition Authority Response: Dnr. 1128/67/2002, 22nd .April 2004.
244
       FFIC Unsatisfied with the Finnish Competition Authority Decision on Recommendation on Broker
       Remuneration, FFIC Press Release, 23rd April 2004, available from
       http://www.vakes.fi/svk/suomi/index.jsp?cid=svk_fi_tied040423.
245
       Statement Concerning Legislation on Insurance Mediation (No. STM009:00/2003) Statement from
       the Federation of Finnish Insurance Companies (15.06.2004), available from
       http://www.vakes.fi/svk/suomi/index.jsp?cid=svk_fi_tied20021029.
246
       Interview with FFIC, 30th June 2004.

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          be the case that since broker activity is relatively new and small in scope in
          Finnish markets, making customers responsible for broker compensation could be
          successful. Consumers might be more willing to agree to pay up-front fees for
          brokers if it does not involve changing remuneration structures. However, there
          was already a suggestion from market participants that many Finnish consumers
          would refuse to pay for brokers having already become used to paying for advice
          through premiums.

Voluntary codes of conduct
5.55      In some circumstances, the FFSA may issue guidelines rather than regulations on
          certain issues. Whilst these may not have the full weight of legislative law, it is
          clear that in Finland these guidelines are normally considered as being very
          similar to regulation.       Hence if the FFSA discovers that a company is not
          following the guidelines, the company will be contacted and asked to enforce the
          them in a similar manner to when there are regulations to be enforced. When the
          FFSA has issued guidelines for securities marketing therefore, generally all
          companies have followed them. In part, this links back to the generally very good
          co-operation between different market participants in the financial services
          sector.247

          Good Banking Practice

5.56      The Good Banking Practice code is applied to FBA members and is being updated
          at the moment. When it was designed, it was discussed with the consumer
          authorities to ensure that interpretation of various details was appropriate
          (especially relating to the right to have not only a bank account which was the
          case in the past, but also the additional payment services).248 The Consumer
          Association regards the banking code as giving consumers a very good level of
          protection.249




247
       Section drawn from the interview with the FFSA, 29th June 2004.
248
       Interview with FBA, 29th June 2004.
249
       Interview with FCA, 30th June 2004.

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5.57      It is a voluntary code that is followed by all members of the FBA.250 There are a
          number of recommendations made in the code regarding banking operations
          including that:

          •   The bank should be aware of the customer’s wider financial circumstances
              and know his customer (verify identity);

          •   The bank opens an account to anyone regardless of their credit rating (only
              when there is serious suspicion that the account will be used for criminal
              activity should the bank refuse);

          •   The bank should make sure all personnel are properly trained and all activities
              are supervised;

          •   When giving credit or loans the bank should take the customer’s financial
              security in account as well as his ability to service the debt; and

          •   When offering investment services (e.g. investment funds) banks should give
              customers all the information that can be seen as relevant for the customer to
              reach a decision whether to invest or to redeem a previous investment.

5.58      Regarding customer relations the code makes the following recommendations:

          •   Customers should be allowed to choose any services the bank generally offers;

          •   Banks need to inform customers of price changes well before they come into
              force;

          •   Advertising and marketing needs to be appropriate and not misleading; and

          •   Banks should organise complaints procedures and a mechanism with which to
              respond to customer feedback and should respond to any complaints within a
              reasonable time.




250
       Interview with the FBA, 29th June 2004.

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       FAIF codes

5.59      Similarly, the FAIF has some codes of conduct that members must comply with.
          This includes information disclosure requirements which are greater than those in
          legislation and corporate governance issues. Fund managers disclose that they
          conform to the standards – this is done at the provider level and applies to all
          funds.

5.60      In terms of information provision, the FAIF recommends that the following
          should be reported regarding performance figures:

          •   Tacking error;

          •   Standard deviation;

          •   Total expense ratio;

          •   Portfolio turnover rate; and

          •   Any intermediation charges (as a percentage of value).

5.61      Further, they also give formulas according to which the above should be
          calculated. In addition, the FAIF has also published a recommendation for the
          investment brochure summary which gives all the essential information to the
          consumer in a concise and a clear manner. The recommended summary should
          include:

          •   All costs (as a percentage of value);

          •   Redemption and subscription fees (as a percentage of value); and

          •   Risks (with further recommendations on how these should be reported).

       Implementation of the voluntary European code of conduct on home loans

5.62      Finnish providers have chosen to implement the European code of conduct on
          home loans. The National Consumer Research Centre examined pre-contractual
          information provision for housing loan customers in Finland by sending out
          “ghost” consumers to 30 different bank branches, and found that the information

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          and service provided was relatively uniform and that particularly the big
          conglomerates gave extensive information and guidance. In an EU wide
          comparison of implementation of the Code, Finland was the only country where
          in 100% of the tests consumers were given both general and personalised
          information. However, it was noted that there were certain inaccuracies in the
          provided information and providers did not always disclose whether the Code was
          available at the institution.251

Balance between simplification and other forms of intervention
5.63      In this section, we consider the various products and interventions that have
          already occurred in the market and establish whether there is any indication of a
          market failure that has been identified that participants believe could best be
          solved through the use of simplified products.

5.64      Finland has not experienced any simplification and has concentrated on creating a
          functioning market through legislative and regulatory interventions and voluntary
          participation by the industry. Simplification has not been seen necessary as other
          interventions have ensured a functioning market and high level of consumer
          protection and inclusion in the market.             Alternatives to simplification were
          considered better in nearly all product categories. Some standardisation was
          cautiously welcomed in home insurance and there were few conflicting views
          about simplification in terms of life assurance, which was considered as one of the
          most complex product areas for consumers when compared with other products
          available in the Finnish markets. However, complexities regarding life assurance
          were largely considered to be tax driven.

5.65      Before we examine the individual products we first consider some of the overall
          views regarding the use of simplified, standard products.




251
       Monitoring the Uptake and the Effectiveness of the Voluntary Code of Conduct on Pre-Contractual
       Information for Home Loans, Lehtinen, A-R. & Leskinen, J. Working Paper No. 78. National
       Consumer Research Centre, 2003.

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          General points

5.66      There were a number of issues that were raised as relevant for all products in
          considering the need for simplified products: co-operation and extensive
          consumer protection built into legislation, the absence of a relevant customer base
          who were not already protected through the welfare state and an objection to the
          design of products by regulators rather than markets.

5.67       Co-operation between trade associations, regulators and consumer bodies is very
          well established in Finland and when there are new developments in the market
          all sectors are always involved from the beginning both in design and
          implementation phases. For example, some of the codes that are developed by the
          associations are discussed in detail with consumer bodies or authorities. Indeed
          the FCA believes that,

             “providers listen more to Consumers Bodies in Finland compared to southern Europe,
            although obviously there are times when the interests of different organisations are in
            conflict… However, in general co-operation between the consumer bodies and the
            industry is better in Finland than elsewhere in Europe.”252

5.68      In particular, it is believed that this high level of co-operation has meant that the
          market has created an environment in which mis-selling is not profitable,

            “Banks know that customer disappointments will cost them money, they are behaving in
            relation to the advice given”253

5.69      Further, Finland has a very comprehensive insurance contract law and strict
          information provision obligations for providers. If the insurance provider does
          not disclose all information, then the contract is valid in the form the consumer
          understood it to be (Insurance Contract Act, Section 5).

5.70      It was therefore believed that the high level of co-operation between market
          participants would prevent the problems of complexity and other market failures
          from developing in a way they had in other locations.




252
       Interview with FCA, 30th June 2004.
253
       Interview with FAIF, 28th June 2004.

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5.71      An underlying question that was raised in the Finnish discussions was whether the
          customer base for whom the Sandler products were designed in the UK existed in
          Finland. It was understood that Sandler products were designed for low income
          people. However, in Finland, it was argued that if people were not saving and
          buying financial products it was because they could not afford to rather than due
          to complexity.254

5.72      When comparing the Sandler report to the SIVA proposal, it was noted that the
          SIVA report came from the perspective that additional products were not needed
          as they would contradict social security products and indeed would be
          unnecessary because of welfare provision. Rather it was aimed at looking at
          consumer protection and comparing long-term saving,

            “The first priority should be to ensure people save enough, simplicity should only come
            second. The Sandler finding that people do not save because financial products are
            complicated is not robust…If the aim is to protect consumers and provide minimum
            income either in sickness or in old-age it is not clear whether simplified products are
            the best intervention. Financial products are complicated matters. People do not
            understand them. People do not buy financial products because they do not have
            money, not because the products are complicated. The majority of people would say
            that Sandler type products are unnecessary as the social security will take care of you.”
            255



5.73      Furthermore, there was an objection in principal to regulatory design of products
          arguing instead that if there was a need for simplified products that the market
          would lead to such products being designed,

            “Is there anything that the legislator can do about simplified products? The market
            will design products if there is a need, but the legislative requirements [to design
            products] is unclear… The industry is free to design a simple product if it so chooses.
            This, however, needs to be driven by the market, not by the regulators.”256

            “It is not obvious why the EU should be involved in designing products, markets should
            be allowed to do them at their own pace. Regulators should not get involved in
            designing products. In particular, the role of the EU is to design the market
            environment so there are competitive products and complete markets. The EU has
            nothing to do with social policy therefore it should not have power regarding changing




254
       Interview with FMSAH, 28th June 2004.
255
       Interview with FMSAH, 28th June 2004.
256
       Interview with FMoF, 29th June 2004.

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            savings or encouraging saving. Developments towards simplified products imply that
            the EU wants to get involved in designing social policy.”257

            “the role of regulators is to given general principles and providers should be free to act
            within them”258

            “A major disadvantage would increased work load for the providers and the regulators
            to make sure that the product met the regulations.“259

5.74      There was also a particular concern about designing products with investment
          risk.

5.75      In addition there were also concerns regarding the form that any simplification or
          standardisation might take.           Some participants were worried that simplified
          products would mean that all providers would have the same product.260
          Furthermore, limiting the level of prices was seen as something that would be
          highly undesirable,

            “The regulation of price structure is preferable to price level regulation, unless it
            concerns a specific product aimed at a specific sector of the market (like tax deductibles
            for the elderly or disadvantaged).”261

5.76      In general, market participants believed that ensuring adequate and correct
          information provision would be of greater benefit than simplification which
          typically was not seen as bringing any benefits to the market,

            “Advice and information obligations are already very high in investment services
            provision. It might not be harmful to simplify products, as long as it was done in
            addition to rather than instead of modifying existing product ranges, and it could well
            be one way to approach consumer protection issues in the Finnish market. Benefits
            from simplification would include a clear product range for customers and, indirectly,
            promotion of customer awareness of investment opportunities and characteristics of
            different products. A major disadvantage would be increased work load for the
            providers and the regulators. It would be equally important to maintain product
            variation even after establishing simplified products.”262




257
       Interview with FMSAH, 28th June 2004.
258
       Interview with FFSA, 29th June 2004.
259
       Interview with FFSA, 29th June 2004.
260
       Interview with FFSA, 29th June 2004.
261
       Interview with FFSA, 29th June 2004.
262
       Interview with FFSA, 29th June 2004.

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5.77      Finally, there was a concern that simplified products could represent a solution to
          a problem that they do not have,

            “Financial services providers already compete with each other in term of their
            products, the product itself, there is no additional need to regulate or standardise
            products as product competition keeps the market in check. Financial products are
            always complex but the Finnish products are not as complex as for example in the UK
            and they are not so complex that they need regulation. The market structure in Finland
            is different to that of UK, and therefore there is not a similar need for
            simplification.”263

          Basic deposit account with payment means

5.78      The vast majority of Finns have a bank account.264 Furthermore, Finland is
          believed to be a world leader in the use of technology in banking and in the
          efficiency of banking systems. Basic banking services are not considered to be
          complex and there are no concerns that complexity is preventing sections of
          society from accessing banking services,

            “Practically everyone has a bank account. Only people who are unable to conduct their
            daily affairs independently and require a guardian to organise their affairs don’t have
            an account. Similarly, sometimes wife or a husband might share an account for
            convenience but in practice everyone has a bank account.”265

5.79      There have been legislative requirements (through the Act on Banks and Credit
          Institutions) that everyone in Finland has a right to a bank account and this has
          been extended such that everyone also has a right to some form of payment card
          and the ability to pay bills from their account. However, this is not designed as a
          special bank account, but rather is the same as other current account products that
          are used. Banks must open an account for consumers unless there is a specific
          reason for them not to do so. Where there is a reason, e.g. criminal record or a
          very bad credit rating, consumers must be told the reason for refusal.

5.80      The use of different payment instruments in Finland is much more automated and
          electronic based than many other European countries. For example, Finland has




263
       Interview with FFIC, 30th June 2004.
264
       Interview with FBA and FMoF, 29th June 2004.
265
       Interview with FBA, 29th June 2004.

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          the smallest cash stock in the EU15 relative to GDP.266 Online banking became
          popular already in 1998, when Finland became one of the first countries in the
          world (alongside Norway and Denmark) to start offering banking services through
          the internet.267

5.81      A survey by the Finnish Bankers’ Association indicated that over 57% of
          consumer paid their bills in the internet, 18% at an ATM, 10% by direct Debit,
          1% over the phone, 6% with a payment service envelope and only 8% by visiting
          a bank branch.268 Cheques have been obsolete for many years and Finland has
          now the highest number of electronic transactions per capita in the EU (230 per
          year), which is seen to demonstrate the highly developed state of Finnish
          banking.269     The number of ATM’s per head of population is the largest in
          Europe. Cash withdrawals in Finland (48 per inhabitant per year) are well above
          the EU average (22).270

5.82      Furthermore, internet banking has become popular and banks have increasingly
          begun directing customers towards internet services and automated services
          through their pricing policy with the result that banks have made their operations
          very effective by doing this. Indeed a FMoF official noted that,

             “I have not visited a bank branch in this Millennium and there is no general need for
            the average customers to do that regularly. This has been welcomed as costs have gone
            down, however, some people, especially the elderly, can find automated operations very
            difficult.”271

5.83      Bank charges are the area which consumers complain about most. This is partly
          because prices used to be zero for transactions (with costs paid for out of the



266
       Payment systems and instruments in Finnish Financial Markets, H Paunonen, Financial markets
       department, 2002, Bank of Finland.
267
       Electronic Finance: Reshaping the Financial Landscape Around the World, Stijn Claessens, Tom
       Glaessner, Daniela Klingebiel, Federal Reserve Bank of New York Presentation, September 2000.
268
       Banking Technology in Finland, Finnish Bankers’ Association, January 2004, p.8. Latest figures from
       interview with FBA, 29th June 2004.
269
       Blue Book, European Central Bank, 2003 (figures relate to 2001).
270
       Banking Technology in Finland, Finnish Bankers’ Association, January 2004.
271
       Interview with FMoF, 29th June 2004.

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          margin between deposits and loans), but have now moved to transaction based
          pricing.

5.84      FBA noted that whilst they receive some complaints regarding comparability of
          banking services, generally basic deposit accounts with payments means are
          relatively simple products. Products are very similar but banks set their own price
          and own pricing structure which is driven by competition. Comparing the list
          price is not sometimes sufficient both because there is a selection of services that
          a consumer will require for banking but also because the list price may not hold as
          some consumers may get better rates if they keep their whole portfolio with the
          bank. Nonetheless, comparisons of typical costs for consumers are done by
          consumers associations.272

5.85      Indeed a concern relating to comparability of deposit accounts was expressed by
          the Ministry of Finance,

            “There is a need to make charges more transparent.”273

5.86      The FCA on the other hand does not believes that the comparison of banking
          products is difficult and indeed thinks that these products are much more
          straightforward than other products even with regard to pricing,

            “Banking services are relatively simple, costs are very easy to work out especially when
            using ATMs. People know the exact cost of the regular banking transactions, but there
            can be confusion about the costs of services which are not used so often… everyone
            knows that using the internet for transactions is the cheapest” 274

5.87      Overall therefore, there were no significant concerns with bank accounts with
          payment means in Finland that would be addressed by simplification and
          standardisation of products. Practically all consumers already have bank accounts
          with payment means and there is a requirement for banks to open accounts unless
          there is a very good reason not to do so. If anything, additional information




272
       Interview with FBA, 29th June 2004.
273
       Interview with FMoF, 29th June 2004.
274
       Interview with FCA, 30th June 2004.

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          regarding costs of banking may be useful, but even this is thought to be available
          for consumers and is not of as much concern compared to other products.

          Cash based savings products on which interest or other return is paid

5.88      Cash based savings products are believed to be extremely simple and well
          understood by consumers,

            “they are well known and easy to use”275

5.89      Interest is usually linked to the ECB rate and hence is typically very transparent.
          Furthermore, the deposit guarantee system provides additional support to
          consumers such that,

            “Consumers feel very safe”276.

5.90      Indeed, at no stage in any of the interviews was there any suggestion that the
          market for cash based savings products was anything but simple and
          straightforward already. Hence there was no suggestion that there was a need for
          simplified products in this area.

          Credit or deferred debit cards

5.91      The use of payment cards in Finland is high in comparison to other Member
          States. In 2002 the number of debit and credit card payments per capita in
          Finland was 94, while the corresponding figure in the EU was 45 on average.277
          (This partly reflects the lack of cheques in the Finnish market place, 0.2
          transactions per inhabitant, compared with the EU average of 23 in 2002).
          Indeed, over the past 20 years the use of combination cards (i.e. credit, debit and
          e-money cards on the same physical card) has become extremely popular.

5.92      Recently, the National Consumer Research Centre found that it was often difficult
          to get a full picture of the options open to the consumer. In particular, they
          emphasised the complexity of some of the information provided by the credit card



275
       Interview with FBA, 29th June 2004.
276
       Interview with FBA, 29th June 2004.
277
       Payment and Securities Settlement Systems in the European Union, ECB Bluebook, April 2004.

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          companies and difficulties in interpreting the available information. They called
          for simplification of available information, more frequent updating available
          information and increased training for credit advisers. 278

5.93      Regarding the potential for price complexity (which has been the main complaint
          with credit cards elsewhere), it was noted that providers of credit cards (and
          indeed providers of all credit) must inform consumers of the todellinen
          vuosikorko or ‘real annual interest rate’. The calculation for this is standardised
          in Finland so it was believed that it would not be possible to have the same rate
          stated but different actual costs incurred as is the concern in some Member States,
          for example, the UK. Concerns over price complexity were therefore limited,279

            “in comparison to other products credit cards are not at all complicated, everyone
            knows how much it costs and it is very easy to find out about costs.”280

5.94      Furthermore, it was noted that there is already considerable simplification and
          standardisation in credit cards through the international payment card schemes
          such as Visa and MasterCard and therefore difficult to envisage what a more
          standardised scheme would look like.281

5.95      In summary therefore, there was no scope for simplification of credit cards
          identified and it is interesting that Finnish market participants see these products
          as already highly standardised through the actions of the international card
          networks. Further there was not considered to be a need for simplification of
          pricing.

          Private pension plans

5.96      Finland has extensive welfare provision and the view in Finland is that the
          statutory system is good enough to support people in their old age. Because of
          this, the private pension market has not developed as much as in other countries


278
       Overview of the Consumer Credit Market, Peura-Kapanen, L. Working Paper, No. 82, National
       Consumer Research Centre, 2004
279
       Interview with FBA, 29th June 2004.
280
       Interview with FCA, 30th June 2004.
281
       Interview with FBA, 29th June 2004.

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          and this was also thought to imply that a private pension market was not as
          necessary in Finland as in other countries,

            “Statutory provision means simplified products are not needed…People have got used
            to the statutory system, which works well and are worried that a private system would
            erode the state provision.”282

5.97      However the Consumer Insurance Ombudsman Bureau highlighted that
          consumers taking out private pension-insurance policies have not always been
          aware of their nature as long-term savings instruments,

            “It has become apparent that not all consumers have had the required understanding
            or ability to bear the risks associated with stock market fluctuations. Unit-linked
            pensions policies have been cashed in once the value has dropped, for example, by a
            quarter. On top of this the consumer has have had to pay the release penalties imposed
            on early cashing-in. When planning to take out a pensions insurance policy, consumers
            should carefully consider whether the traditional or the unit-linked policy is the
            appropriate product.” 283

5.98      Nonetheless there seemed a pervasive concern in Finland that making private
          savings through a personal pension would lead to a fall in their own state
          entitlement. Indeed, this seemed to be a concern both at the individual level, that
          individual savings would lead to a reduction in the individual state pension, but
          also at a national level that encouraging private pensions in general would
          threaten the existence of the generous state system.

5.99      The Finnish pension system consists of several tiers. The state pension provides
          the minimum level of income for people without occupational pensions or whose
          occupational pension is low. The first pillar consists of statutory occupational
          pension schemes and the second pillar consists of voluntary occupational
          schemes. The third pillar pensions are administered by life assurance companies
          and taxed as income. However, statutory pensions have not traditionally had any
          cap which had made them relatively generous. Private pensions have got to a




282
       Interview with FMSAH, 28th June 2004.
283
       Consumer Feedback from Insurance Based Savings Products, CIOB, Press Release 1st September
       2002.

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          slower start in Finland due to government placing no ceiling on first-pillar
          pension benefits284.

5.100     There was a concern, however, that in reality the ageing population may mean
          that supporting the welfare state would be impossible and people needed to be
          encouraged to access alternative savings instruments.

5.101     The primary reason for the limited private pensions market in Finland is therefore
          not seen to be complexity of the product, but rather is the generous provision of
          benefits by the State, which reduces the need for private savings.                          In
          consequences, there was not believed to be a need for a simplified pension
          product.

         Motor insurance

5.102     The compulsory Motor Liability Insurance (Liikennevakuutus) is often topped-up
          with Voluntary Motor Insurance (Kaskovakuutus) which covers the liable party’s
          vehicle.    The compulsory insurance provides fairly comprehensive cover
          compared to other Member States as it covers the liable party in an accident as
          well.

5.103     Prices vary between the providers, but the product is more or less the same across
          suppliers. It is a combination product that can be chosen to cover aspects the
          motorist believes relevant (e.g. fire insurance, reindeer-insurance etc.).              The
          names of the voluntary motor insurances vary (e.g. big-kasko, wide-kasko, widest-
          kasko for the highest level of insurance cover, whereas mini-kasko, narrow-kasko
          and half-kasko signify the products with a smaller scope), the products vary from
          firm to firm and include slightly different provisions. The classification is not
          compulsory and is used within firm, so that a consumer will know when shopping
          for the right product what kind of level of coverage she is looking at. It does not
          facilitate inter-firm price comparisons as laaja-kasko (wide-kasko) and iso-kasko




284
      Insurance and Private Pensions Compendium for Emerging Economies, Book 2, Part 2:1 d, Private
      Pensions: Regulatory Issues, Jean-Jacques Gollier, OECD, 2000.

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          (big-kasko) can be composed of different services across firms. Although it does
          clearly signal the relative level of cover to be expected.

5.104     The Consumer Ombudsman Bureau compared different motor insurance policies
          (2002 and again in 2004) mainly on their cover and price, and found in both
          instances significant variation in the product characteristics. They also found
          making price comparisons sometimes difficult, but did not call for any action
          from the industry and did not suggest the need for a simplified product.285

5.105     Regulations in the Motor Liability Insurance Contract Act state that premiums
          shall be within reasonable distance from the costs. This is supervised by FISA
          and premiums are believed to be close to cost.286

5.106     The only problem identified in Finland regarding motor insurance was that many
          consumers did not know whether they are covered for driving internationally. It
          was believed that this could be best solved by companies giving clearer
          information on the terms of the insurance.287

5.107     There was no concern raised about complexity of motor insurance,

           “I am not aware of any particular complaints in the motor insurance market related to
           product complexity or inability of consumers to understand the products.”288

5.108     Hence there was no identification by any of the Finnish market participants
          regarding the need for a simplified product in motor insurance.




285
      New Price Comparison of Wide Kasko Motor Insurance, CIOB Press Release, 25th May 2002 and
      Price Comparison of Wide Kasko Motor Insurance CIOB Press Release, 10th June 2004.
286
      Indeed until about five years ago insurance premiums were thought to be too low. This was because
      prices had been regulated by FMSAH and any surplus from premiums had to be returned back to
      policy-holders in the form of lower premiums the next year. When deregulation occurred it happened
      just after a surplus had been returned and so premiums were very low and companies were then afraid
      to raise the charged premiums to true risk premium levels. Source: Interview with FISA, 28th June
      2004.
287
      Interview with FCA, 30th June 2004.
288
      Interview with FISA, 28th June 2004.

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         Home insurance

5.109     Finnish home insurance has no compulsory aspects and is not a condition for
          mortgage or a home loan. The home insurance consists of three layers: a)
          buildings and contents insurance; b) legal expenses insurance; and c) liability
          insurance. These layers are always the same, providing a form of structural
          standardisation.289

5.110     There are not thought to be overwhelming concerns about the coverage of home
          insurance,

            “In general it could be said that Finnish home insurance is very comprehensive”290

5.111     The FFIC noted that in the past there has been considerable standardisation of
          insurance conditions in Finland,

           “Until the early 1980s there were standard policy conditions used for home insurance
           (and others such as accident), but because of competition legislation this was
           abolished.”291

5.112     However, it was thought that companies now preferred to compete rather than co-
          operate and the practice of using standard policy conditions was abolished
          although some standardisation remains in the policy conditions for legal expenses
          and liability insurance.

5.113     However, the Consumer Insurance Ombudsman Bureau has expressed unease
          about the introduction of new ‘narrow-scope’ products. These ‘narrow’ products
          were mainly offered by foreign providers. Their worry was that the consumers
          might not realise the difference in the cover between the new products, carrying
          still the same name, and the old products,

           “Consumer Insurance Ombudsman Bureau believes that Finnish home-, motor- and
           travel-insurance are currently relatively comprehensive. However, the Bureau is
           concerned of the recent product proliferation in the sense that insurances covering only
           the “edges” of the traditional insurances have become increasingly more common. It
           also appears as if the need for coverage is sometimes exaggerated artificially. The price



289
      Interview with FFIC, 30th June 2004.
290
      Interview with FISA, 28th June 2004.
291
      Interview with FFIC, 30th June 2004.

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           can be relatively high and it can be represented as a monthly payment which can leave
           the customer unaware of the true annual cost.” … “The Consumer Insurance
           Ombudsman Bureau has proposed to the insurance companies that guidelines should
           be drawn for all transactions involving insurance sales. This could be, for example, a
           code of good conduct.” 292

5.114     It is interesting to note that the CIOB suggested a code of good conduct rather
          than a simplified product as the best method to improve this situation.

5.115     However, both the FCA and the FISA suggested that a standard product could be
          of use,

           “Having a standard product here [in home insurance] would help comparisons but I
           am not aware of any developments towards that direction…Having a standard is
           important rather than simplifying…this would give the consumer the ability to
           compare”293

5.116     Although FISA also expressed some concerns about potential problems of doing
          this,

           “It is possible that competition authorities might be concerned about these kind of
           developments. At the moment the starting point is that regulation is free and companies
           should be free to develop their own products with no restrictions.”

5.117     Furthermore, the FCA seemed to imagine a standard product primarily in relation
          to information provision, suggesting that a standard for home insurance would
          need clear terms and to explain what is covered. They also noted that a standard
          policy would not necessarily be better than having clear information.

5.118     There was therefore some recognition from some market participants that there
          could be a need for a standardised, although not necessarily simplified, home
          insurance product, although some concern that this could represent a retrograde
          step from a competition perspective.

         Life insurance

5.119     Investment based life insurance is seen as one of the most complex in the market
          place and is seen as having increased in complexity due to the development of



292
      Ombudsman Worried about the Introduction of Narrow-Scope Products in the Insurance industry,
      Press Release 24th January 2000.
293
      Interview with FISA, 28th June 2004.

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          unit linked products. Of all life insurance products 89% have a guarantee,
          ,however, unit-linked products have been increasing in number and developing
          more and more rapidly (over 1997-2000, the average annual real growth rate of
          unit-linked premiums was over 140% as opposed to around 10% for traditional
          policies). This growth has largely been fuelled by bank assurers. However, unit-
          linked assets account for only about 15% of life assurers’ total assets, non-linked
          assets taking by far the largest share.294 The danger that is perceived with these
          products, previously relatively uncommon in the Finnish markets, is that
          consumers do not necessarily understand how they work and especially, how the
          unit-linked investment return of the insurance policy develops,295

           “Comparing different insurance is very complex regarding the benefits for
           consumers.”296

            “it might be useful to have simplified products if there were minimum guarantees in the
           products. In addition, the 60% threshold for equities set out by the Sandler Report is far
           too high. Unit-linked products are undesirable as they transfer risk away from the
           providers to the consumer.”297

5.120     Indeed, the Consumer Agency & Ombudsman (Kuluttajavirasto) Annual review
          2001 note the increase in cases where an ageing individual had been offered unit-
          linked life insurance policies and investment fund investments,

           “Life insurance policies and investment fund investments are complex products and
           differ from conventional bank accounts in several respects. When the policies are
           targeted at ageing individuals it is questionable how well such an individual can assess
           the benefits of these investments” 298

5.121     In Finland, much of the complexity of life insurance products is thought to be due
          to the tax regime,




294
      Unit-linked life insurance in western Europe: regaining momentum? Sigma Number 3/2003,
      publication by Swiss Re
295
      Interview with FISA, 28th June 2004.
296
      Interview with FCA, 30th June 2004.
297
      Interview with FMSAH, 28th June 2004.
298
      Annual Review, Consumer Agency & Ombudsman, 2001. Available at
      http://www.kuluttajavirasto.fi/user/loadFile.asp?id=3936

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           “Insurance linked products are the most complicated products available in the Finnish
           market. Part of this complication is created by the linking of tax advantages to the
           products.”299

5.122     Given this, it is thought that simplification would not be able to solve this
          problem. Further, it indicates that the issues in the Finnish market are domestic in
          nature and international involvement would not be able to solve the problems.

5.123     Consumer protection is seen as very strong due to legislation and regulatory
          interventions, in particular through the Finnish Insurance Contract Act (renewed
          in 1994), which is perceived to be very comprehensive and provide a good level
          of consumer protection. Indeed, if the insurance provider does not disclose all
          information, then the contract is valid in the form the consumer understood it to
          be. 300 Indeed, partly because of this, there is a view that Finnish providers tend to
          think long term when designing products and are thought by market participants
          to be unlikely to design products that do not meet the needs of consumers.

5.124     There were conflicting views on the need for a simplified product, with the FFSA
          comparing life insurance with the UCITS directive,

           “It might be useful to have something similar on the insurance side, some
           standardisation would be good.”301

5.125     However, the FFIC in contrast believed that,

           “Financial services providers already compete with each other in term of their
           products, the product itself, there is no additional need to regulate or standardise
           products as product competition keeps the market in check.”302

         Mortgage credit

5.126     Home loans in Finland are seen as quite simple and there has been no discussion
          about a need to make major changes to the market place such as through
          simplification. The vast majority of mortgages (96%) have variable rates for



299
      Interview with FFSA, 29th June 2004.
300
      Interviews with FFIC and FISA, 28th and 30th June 2004, and Section 5 of the Insurance Contract
      Act.
301
      Interview with FFSA, 30th June 2004.
302
      Interview with FFIC, 30th June 2004.

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          which legislation ensures that consumers can always choose to change their loan
          and there would be no penalties for repaying early. Redemption fees are allowed
          for mortgages in which the interest rate is fixed for three or more years. Indeed it
          was noted that Finland did not have any of the restrictions that the Consumer
          credit directive is aimed at improving. 303

5.127     Most loans, are linked to Euribor or the prime bank rate. Consumers are able to
          negotiate on the loan and it is becoming common for consumers to observe lower
          rates elsewhere, seek additional offers and then ask their existing bank to offer
          them a better deal. Typically rates are linked to the Euribor 12 month rate with a
          1% margin, or today more often 0.7-0.8% margin, and indeed the FCA believes
          that prices are competitive,

           “Interest rates used to be higher on house loans 10-15 years ago, but now Finnish
           mortgages are one of the lowest, and lower than in Germany.”304

5.128     On a range of loan products, including housing loans, banks are required to
          display an example of the interest rate that would apply. For mortgages they
          display the real annual interest rate and would also typically give the total amount
          that would be repaid. Any repayment charges or other fees would be included in
          the annual rate to consumers giving a full picture of the cost of the product. Rates
          applying would be given in advance and it would be typical in Finland for the
          mortgage papers to be available pre-sale so that people can take them home and
          look at them before signing them. It would be unusual to sign as soon as the offer
          is presented to the consumer.             Furthermore, offers are often made over the
          internet.

5.129     One concerns expressed is that the impact of interest rate movements are not
          always understood very well. However, the market seems to have responded to
          this with providers stress testing the mortgages by asking consumers whether they
          would be able to repay the loans if the interest rate increased by 3 or 4% points. It


303
      Interviews with FMoF and FBA, 29th June 2004. However, if the loan is for more than around
      €20,000 and the rate is fixed for more than 3 years, then the bank has the right to ask for the interest
      that would have been paid, although consumers are still able to exit the product.
304
      Interview with FCA, 30th June 2004.
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          was also noted that discussions in Finland usually start with the estimates of how
          much consumers could afford to repay rather than starting with how much they
          wish to borrow as in the UK.305

5.130     An additional area of concern – that of access – has also been addressed. Special
          loan insurance arrangements exist, which are only open to groups otherwise
          potentially excluded from the market for financial products. For example, the
          ASP housing loan is only available to first time buyers aged 18 and 30 years at the
          beginning of the agreement period. The consumer commits to save towards a
          goal and the bank, once the goal has been achieved, to grant a loan towards the
          purchase of a house. The part of the interest rate above 4.5% is subsidised by
          70%.306

5.131     The main concern that remains seems to be one regarding the range of different
          components to a mortgage,

           ”There are a lot of problems with banking and loans products. House buying often
           requires several transactions and loan products can be complicated to understand in
           terms of the payment terms, collateral terms and associated risks.”307

5.132     However, mortgages already follow the voluntary European code of conduct on
          home loans in Finland. Furthermore, since providers are required to also provide
          the information (key facts) sheet it was unclear to the FBA whether they could be
          made simpler,

           “Mortgages are working well and loans are easily changed by consumers”308




305
      Based on interview with FBA and FCA, 29th and 30th June 2004.
306
      Consumer Insurance Ombudsman Bureau. Information available at:
      http://www.kuluttajavirasto.fi/user_nf/default.asp?site=34&tmf=6470&lmf=6481&id=7354&mode=r
      eaddoc. A similar scheme is provided through the Housing Fund of Finland, which also offers
      subsidised interest rate arrangements for individuals purchasing rental accommodation from local
      authorities. Source: Right to Occupancy Home Loans, Ministry of Environment Memorandum,
      http://www.ymparisto.fi/download.asp?contentid=7048, 1st October 2003 The Housing Fund of
      Finland (Valtion Asuntorahasto – ARA) http://www.ara.fi
307
      Interview with FFSA, 29th June 2004.
308
      Interview with FBA, 29th June 2004.

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5.133     Hence the home loan market was seen as competitive and one in which consumers
          did not find products to be unduly complex. There was therefore no identified
          need for a simplified product.

         Collective investment schemes

5.134     Collective investment schemes were not seen as complex products in Finland,
          particularly in the light of the various UCITS Directives,

              “UCITS is a simplified product”309

              “The basic UCITS fund is not very complicated”310

              “The investment funds market is not yet that complicated …funds are well managed and
              prices are low compared to the rest of Europe. Fund performance is also one of the best
              in Europe”311

5.135     Indeed, around 500,000 households have invested in investment funds and around
          half of those make monthly contributions. The sector is growing rapidly from €22
          billion to €26 billion already this year and it is one of the fastest growing in
          Europe.312

5.136     Furthermore, Finnish investment funds already have some built in simplification
          in the sense that the price structure can only consist of three types of fees are
          permitted. The FFSA argues that this makes the structure very transparent and
          although the levels are not regulated, competition is trusted to resolve the majority
          of consumer protection issues that could arise.313

5.137     The following three types of fee can be applied to Investment Funds:

          •     Subscription fee – around 0-1% with the maximum around 2%;




309
      Interview with FAIF, 28th June 2004.
310
      Interview with FFSA, 29th June 2004.
311
      Interview with FAIF, 28th June 2004.
312
      Based on the interview with FAIF, 28th June 2004. See also Mutual Funds and Investment Firms in
      Finland, Pylkkonen, Bank of Finland Studies, 2003.
313
      Based on the interview with FFSA, 29th June 2004.

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          •     Annual management fee – varies according to the fund investment, but around
                1.5%; and

          •     Redemption fee – these are usually only applied on very short term
                investments.314

5.138     The annual management fee covers all expenses – there are no other charges that
          can be made to the fund, which FAIF believes to be simpler than other
          countries.315

5.139     In general, the UCITS Directive was judged a relative success. However, it was
          questioned whether UCITS could be described as a harmonised product. This was
          because whilst the basic framework of the investment policy and the management
          of the assets has been harmonised, the legal form and contract differs between
          Member States. Indeed, the applicability of the UCITS model elsewhere was
          contrasted for other products. For example, bank accounts do not have a similar
          structure and harmonisation would not necessarily work because what is
          purchased is the legal framework with a bank account and not the layer of owning
          the underlying assets which is where UCITS has brought cross-border
          standardisation,316

              “UCITS legislation is so young it is hard to say whether more could be done to improve
              it, but at the moment it could be said that it is OK. It would be difficult to make
              investment funds more simple than they are already. It could be that consumers do not
              understand exactly what UCITS is, but it may be seen as a signal of quality and
              regulation and hence appeal to the public. The signal can then be interpreted as
              signifying standardisation and simplicity. However, there is a danger that UCITS could
              be interpreted as a safety badge which would lift the decision making responsibility,
              which ultimately always lies with the consumer, off the consumer .”317

5.140     Given the view that the products are already simple, market participants believed
          that information provision was the key areas for improvement.



314
      Based on the interview with FAIF, 28th June 2004.
315
      For example, with distribution costs, these have to be made out of the management fees from the
      management company rather than from the fund itself.
316
      Based on the interview with FMoF, 29th June 2004.
317
      Interview with FAIF, 28th June 2004.

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5.141     One area of potential concern was brought up by FAIF regarding a potential need
          for guarantees,

           “Risk averse customers might need simple products e.g. funds with guaranteed capital
           in them or guaranteed yields.”318

5.142     In contrast, however, the FCA thought,

           “It is impossible to have a standard fund – we have a free market…It is impossible to
           have a particular investment fund recommended.”319

5.143     There has also been a concern that the risks involved in investment funds are not
          fully understood. As a response to an enquiry by the Ministry of Finance for
          comments on draft legislation, the consumer ombudsman has raised concerns over
          the lack of understanding of risks associated with investment funds and other non-
          deposit investments.       It emphasised the need to provide the consumer with
          adequate and simple information of the risks and features of the investment
          products prior to signing the contract. This is particularly relevant due to the
          relative youth of Finnish investment markets and consequently the lack of
          experience of Finnish investors.

5.144     In general, other than the potential need for some form of guaranteed product
          (which could be inconsistent with a investment fund in which the value is directly
          linked to the value of the underlying investment), there was no identified need for
          a simplified investment fund in Finland on the primary grounds that the products
          are already sufficiently simple.

         Financial advice

5.145     Historically financial advice has not been regulated by the FFSA, although this
          will change following the implementation of the ISD2.320                         Indeed the
          requirements of the ISD2 are thought to be sufficient going forward,




318
      Interview with FAIF, 28th June 2004.
319
      Interview with FCA, 30th June 2004.
320
      Insurance Brokers Act (251/1993) already regulates independent financial advisers.

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           “There should be minimum requirements on who may give investment advice, but this is
           coming through ISD2 and more than that is not required.[…]The advisory role is more
           important in the future – ISD2 already has enough product regulation”321

5.146     The FFSA voiced concerns in the interview about the concept of simplifying
          financial advice,

           “Simplifying financial advice is difficult as the definition of financial advice is
           somewhat problematic. Basic advice is simple, disclosing risks, contract period etc. It is
           only after the consumer has received the core advice that the real job of financial
           advice really begins and the questions ‘why is this particular product suitable for a
           particular consumer (or why should the consumer invest in one particular class of
           products)’ and ‘why should a consumer purchase the product from a particular
           provider’ cannot be answered through any prospectus or information provision
           requirements.”322

5.147     It is important to note that what is described as basic advice above was explained
          in terms of information provision, but the core advice relates to the specific
          circumstances of the individual. Furthermore, the FFSA indicated that,

           “advisers can not advise if they don’t know the needs of the customer”323

5.148     Hence the view in Finland was that simplified financial advice could not really
          exist since it was questionable whether it would be advice at all.

Cross-border trade
Benefits
5.149     There were a small number of areas where market participants in Finland believed
          that standardisation and simplification could bring benefits and indeed had
          already begun to do so.

5.150     The UCITS Directive is believed to have had a positive impact on cross-border
          trade. There are around 1000 foreign funds in Finland although it is thought that
          these are mainly invested in by institutions.324 However, despite the positive




321
      Interview with FAIF, 28th June 2004.
322
      Interview with FFSA, 29th June 2004.
323
      Interview with FFSA, 29th June 2004.
324
      Based on evidence from the interview with FAIF who indicated that data on the retail / institutional
      split was unavailable.

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          impact, it was not clear that it was UCITS per se that had encouraged cross border
          trade,

           “It is hard to believe that UCITS was the driver of the market – hard to say that
           regulation drove the market.”325

5.151     Instead it was believed that the large players across Europe who were already
          operating cross-border were typically desiring more integration and wanting to
          operate across the EU and hence were attempting to drive the regulation.

5.152     A second area where cross-border trade was seen to have been successful was
          between some of the Nordic countries (Finland, Norway and Sweden). It was
          clear that this was due to a number of reasons, of which the similarities of
          products was one.

5.153     The existence of major financial institutions operating across the Nordic area and
          being seen to be located in all of these countries was one of the major drivers of
          this. That is, consumers would not perceive such trade to be cross-border as they
          would recognise the provider as being located in their own domestic market.
          Nonetheless such companies are clearly in a position to design a product,
          particularly investment funds, in one country and then sell it across other
          countries. It was also thought possible that standardised products may lead to
          more mergers across the EU,

                   “We might see more mergers with standardised products but it takes time.”326

5.154     As well as having brands that operate across countries, it was also very clear that
          similarities of the countries, often shared histories and similar approaches to
          regulation and legal structures were vital in this success. Indeed it is recognised
          that the mergers that had occurred across the Nordic region was partly driven by
          the similarity of legislation.327




325
      Interview with FAIF, 28th June 2004.
326
      Interview with FCA, 30th June 2004.
327
      Drawn from the interview with FCA, 30th June 2004.

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Barriers
5.155     There are a number of barriers to cross-border trade that were identified and were
          in most cases seen to be of more significance than variation in product
          characteristics. Therefore, simplification or standardisation of products was seen
          as unlikely to encourage cross-border activity unless these more substantial
          barriers were addressed at the same time. In comparison to other countries, issues
          of lowering standards were of greater concern than elsewhere.

        Product design

5.156     One of the biggest concerns that was expressed in interviews in Finland regarding
          the use of standardised products across the EU was that far from improving the
          functioning of the financial services markets, such products would be detrimental
          through actually lowering the product standards in comparison to those seen in
          Finland.

5.157     This issue mainly applied in two fields. Firstly, market participants in Finland
          believe that aspects of regulation such as that regarding consumer protection is
          much stronger in Finland in comparison to other countries and that standardisation
          and simplification of products across the EU would inevitably lead to the erosion
          of the standards that currently exist in Finland. Secondly, it was clear that Finnish
          representatives believed that some aspects of the Finnish financial services sector
          should be seen as “best in class” and that standardisation would again adversely
          impact the financial services market.

5.158     Indeed, these concerns were expressed in relation to insurance contracts where
          there was concern that standardisation and harmonisation in the market for
          financial services across the EU would involve the risk that Finland would have to
          lower its high standards of consumer safeguards to conform with other member
          countries, who were generally seen as much more lax with consumer protection,

           “The Finnish insurance contract law is very comprehensive and provides better cover
           than the equivalent European Acts. Since the contract law varies across the borders, it
           would seem that harmonisation of the law would be required or alternatively the EU
           would need to impose a Directive that would over rule national legislation. There is a



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           worry in Finland that this might lead to weakening of the protection provided to
           Finnish customers”328

5.159     Furthermore, consumer protection and the complaints system was believed to
          constrain product design in Finland and was generally well regarded. There
          would, therefore, be concerns for consumers with regards to the different
          consumer protection that might apply from different Member States.

5.160     With regard to product standards, there was a particular concern that
          harmonisation in the banking arena would be detrimental if it led to a regression
          of payment standards. Finland, along with Sweden, has a much greater level of
          automation in their payment system and has a greater use of electronic
          transactions compared to other Member States.

5.161     Similarly, in the insurance field the FFIC noted that foreign providers who have
          entered the market have tended to provide products which are narrower in scope
          compared to the products that Finns are used to. While the difficulty in observing
          the difference could be seen as a reason for simplification and standardisation, the
          concern expressed was that any product standard that was developed on an EU
          basis would be narrower in scope compared to existing Finnish products. In turn
          there was a concern that Finnish consumers could be tempted to purchase an “EU
          simplified product” assuming that they would receive the same cover that they
          were used to, and only discover that this was not the case at the point of needing
          to claim in which case it would be too late. There is also an additional worry that
          this will in turn encourage Finnish providers to reduce the cover on the products
          they offer,

           “There are some worries that the practice of offering narrower products will spread to
           Finnish providers from abroad”.329

         Welfare systems

5.162     Differences in the welfare systems were identified in Finland as a significant
          barrier to cross-border trade. One of the reasons for this was that the provisions


328
      Interview with FMoF, 29th June 2004.
329
      Interview with FFIC, 30th June 2004.

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          of the welfare state determine the extent to which consumers require a product at
          all and also typically interact with the level of provision that is required by
          consumers.

5.163     This will clearly interact with product design issues particularly with pensions
          since the likely size of individual pension provision may differ between Member
          States.

5.164     This will also be of concern with financial advice, since understanding the
          provisions of the welfare state will be crucial in determining the extent to which
          consumers should undertake individual saving for retirement. Simplification or
          standardisation were not seen as lowering these substantial barriers to cross-
          border trade.

        Legal and contractual differences

5.165     Particularly in insurance markets, variations in insurance contracts and the legal
          systems were seen as a specific hindrance to effective cross-border trade.

5.166     Market participants in Finland believe that the basis for financial market activities
          always lies with underlying legislation and welfare provision. For example, given
          the Finnish home insurance consists of three layers: buildings and contents
          insurance; legal expense insurance; and liability insurance, the FFIC did not see
          how the structure could be reconciled without first harmonising the foundation,

           “The latter two [legal expense insurance and liability insurance] build on the
           underlying national legislation and the legal aid structure which differ greatly among
           the EU countries. Similarly, insurance type and coverage are strongly correlated with
           national conditions. For example Finland requires insurance specifically covering
           damages from extreme cold weather whereas in other areas earthquake cover or flood
           insurance have a higher significance. It would be impossible to include all these
           characteristics in a harmonised insurance contract for a product that was sold across
           borders. If consumers saw a product that covered risks that they didn’t face, it would
           confuse them and make contracts much longer”330

5.167     Furthermore it was discussed whether some form of EU wide contract could be
          applied across the EU such that providers or consumers could choose whether to
          operate under an EU contract rather than one from a particular Member State.




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          There was a very significant concern expressed that having an EU contract
          alongside domestic contracts would increase confusion rather than decrease it and
          would lead to consumer detriment as consumers would not understand the
          difference between them,

           “Contract law would need to be harmonised before any product simplification could be
           attempted. If there would be EU-level contract law alongside the national laws it might
           be difficult for consumers to understand which law was better for them. It would be
           highly unlikely that contract laws could ever be harmonised across the EU as the
           countries with more extensive protection would not be willing to accept a reduced
           cover…How would consumers know whether European contract law was better than
           national law – this would make things more complicated and would not enhance
           consumer trust.”331

5.168     Hence the idea of an EU contract was seen as bringing additional regulatory
          complexity rather than reducing this and could potentially lower the potential for
          cross-border activity.

         Tax differences

5.169     Tax differences are perceived as a clear barrier to cross-border trade. In some
          cases this is linked to specific conditions of the product and the tax advantage.
          For example with pensions, it is typically necessary to have allowable earnings in
          the Member State in order to obtain the tax advantages.

5.170     In Finland, however, it is clear that tax differences were of concern not only
          between Member States on a product by product basis, but also between different
          products domestically. Hence Finnish market participants saw tax as a barrier to
          competition domestically that was only an even greater barrier across the EU,

           “In the investment funds sector several special investment funds have been moving
           across to the UCITS side and cross-border trade has increased. In terms of cross-
           border trade, standardising products will not be enough as significant tax differences
           will remain between countries. Another form of simplification could be to include tax
           benefits on products other than pensions.”332

5.171     Clearly, this barriers applies primarily to consumers purchasing from other
          Member States. However, to the degree that providers entering still require to


330
      Interview with FFIC, 30th June 2004.
331
      Interview with FFIC, 30th June 2004.


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          design products that meet the tax rules in a particular Member State,
          standardisation of other product features is unlikely on its own to increase cross-
          border activity.

         Transactions costs and service

5.172     Some market participants believed that there would be more scope for cross-
          border trade in life insurance products compared to other products. Partly this
          was because of the transactions costs involved and the relatively small gains that
          were thought to be available from cross-border trade on other products,

           “With bank accounts taxation and legislation is different in each country. Although
           bank account taxation, taxation on savings, has been an issue in development at EU
           level and a lot of progress has been made, accounts are still national products for daily
           use. In the euro area the interest rate is the same so what would be the point of getting
           an account for daily use from somewhere else?”333

           “With big value purchases like mortgages, Finnish consumers would not easily buy
           across borders. Competition is already strong in Finland and there is a strong name
           and branches and familiarity with the provider. Similarly in banking there would need
           to be a big difference between prices. Economies of scale in banking are more about
           outsourcing opportunities rather than needing to have big banks across Europe. This
           outsourcing is more likely to occur with investment products when a distributor buys in
           the investment fund rather than in banking when the account itself is what is being
           sold.”334

5.173     However, it was also the case that for the non-life insurance products, the issue of
          service was of importance and hence the threshold to be overcome in order to buy
          for example home insurance from abroad was thought to be significantly higher
          than for life insurance. This is partly due to the uncertainties in the settlement
          process if a dispute between the provider and the policy-holder were to arise.
          Equally, claims with non-life products can arise with relatively high frequency,
          which means that the process needs to be easy to complete. By contrast, the
          majority of life-insurance contracts have investment underlying them and could




332
      Interview with the FFSA, 29th June 2004.
333
      Interview with FBA, 29th June 2004.
334
      Interview with FBA, 29th June 2004.

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          therefore be based elsewhere as long as there is certainty that it can be redeemed
          at the end of the contract period.335

5.174     Therefore if standardisation is to have a material impact on cross-border activity,
          it might be best applied to life insurance products.

         Language

5.175     The FCA highlighted language as one of the biggest barriers for cross-border
          trade beyond Nordic countries,

           “Markets are still very national. It is not easy to come to small markets where a
           different language is needed. In the future it may be easier when the Finnish are more
           used to English. Standardisation could lead to more entry. It might be easier for
           Swedish banks (for example Swedish Handelsbanken has penetrated the market)
           because of cultural similarities, but less easy for those from central, eastern and
           southern Europe. They would need the Finnish language and an understanding of
           customs. For international transactions, language is an issue, it is easy when contracts
           are in Finnish, but less easy when they are not in Finnish. Language is definitely a
           barrier.”336

5.176     Similarly there was evidence that linguistic barriers were considered to be a big
          cost from the supply side when entering Finland.337

5.177     Furthermore, the issue of language representing a barrier to trade was seen as of
          particular concern for smaller countries,

           “A simplified product might help in creating a common market, it would not, however,
           solve the language barrier. Finland is a small market and other EU providers might
           feel it is not significant enough to bother with the work required to provide translations
           and advice for Finnish consumers.”338

5.178     Standardisation and simplification do not lower the barrier of language. However,
          it does not seem credible that this barrier alone means that there can not be any
          returns to using standardisation to encourage cross-border trade.




335
      Drawn from the interview with FISA. Although it should be noted that dealing with a difficult process
      based in another country may not be entirely desirable for the beneficiaries of life insurance policies
      and hence concerns about this may represent a similar barrier to trade.
336
      Interview with the FCA, 30th June 2004.
337
      Based on evidence from FEFSI highlighted by the FAIF, 28th June 2004.
338
      Interview with FFSA, 29th June 2004.

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         Consumer preferences

5.179     There is a very strong view in Finland that consumers prefer domestic providers
          and that there is therefore a “home bias” in product choice. The existence of
          “home bias” is evidenced by a recently published survey of consumer preferences
          conducted by the FFIC. Nine out of ten respondents to the survey believed that
          compulsory insurance was always best purchased from domestic providers.339
          Most interviewees also expressed reservations about the likelihood of cross-
          border trade because of this,

           “Cross-border trade could be successful in Nordic countries as consumers are familiar
           with the big providers operating across borders and cultural differences are minimal.
           In general, it might be difficult to really know your customers when dealing across
           borders. Similarly, Finnish people have high levels of trust in domestic financial
           services and service standard expectations are high. They might be reluctant to trust a
           foreign company unless there were stringent guarantees of service reliability. Foreign
           companies might need to use Finnish financial advisers because of language and
           cultural issues.” 340

           “Finnish people would never buy from Southern European countries, the standards are
           known to be too low. Finnish consumers would only buy from abroad if products that
           were offered were a lot cheaper. Simplicity would not be a factor in decision making. It
           is hard to imagine that any provider could do this as margins are already low… partly
           [there is a] belief that Finnish standards and customer protection are a lot higher than
           elsewhere in Europe. Even Nordea [a big Nordic conglomerate operating across the
           whole of Scandinavia] lost some of its Finnish customers after it merged with a Swedish
           bank, due to consumers not being willing to put their money in ‘foreign’ hands. Finnish
           banking and other financial services have a record of being reliable and consumer
           friendly, why would a consumer then go and try their luck on a country’s products they
           are not completely familiar with? The Finnish system is also considered to be very fair
           and there just isn’t the same level of trust on service provision from elsewhere.”341

5.180     Furthermore, the habits of consumers in different markets were perceived to vary
          too much in terms of different risk and product preferences to allow for a single
          product that would be the same across borders,

           “Once consumers get used to certain types of products, they tend to stick with them.
           Cross-border trade could be significantly hindered by customer loyalty towards
           familiar products and providers. There would always be the few who are interested in
           foreign products but the vast majority of Finns would only be interested in Finnish
           products.”


339
      Insurance Survey 2004, FFIC, available at
      http://www.vakes.fi/svk/suomi/vakuutusala/tutkimukset/vakuutustutkimus2004.pdf.
340
      Interview with FFSA, 29th June 2004.
341
      Interview with FMoF, 29th June 2004

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Section 6          France
Summary
6.1      Complexity of financial services is not seen to be a problem by industry
         participants and regulatory institutions in France. However, the Association for
         the Defence of Consumers pointed out that consumer associations in France have
         received increasing requests for advice regarding financial products, especially for
         insurance, credit and mortgage products which may be indicative of an emerging
         problem of complexity. Moreover, the Authority for the Financial Markets and the
         Bank of France stated that problems of complexity will increase as more and more
         consumers start to buy sophisticated products.342

6.2      Few countries researched had an equivalent range of regulated and popular saving
         products as France. This reflects a long history of product regulation, which is in
         part aimed at increasing savings, and hence there is considerable standardisation
         in many products. Tax advantages and additional consumer protection criteria are
         attached to a number of saving and mortgage products in France, which have led
         to the creation of simplified products as shown in Table 20 below.

Table 20: Simplified products in France

Product list                                               Does France have a simplified product?

Basic deposit account with payment means                    Service bancaire de base (basic banking
                                                                           service)

Cash based savings products on which interest                  CODEVI (account for industrial
                                                         development), Livret A (bank book A), livret
or other return is paid
                                                                   bleu (blue bank book)

                                                          Livret d’épargne populaire (people’s saving
                                                                           booklet)

Credit or deferred debit card                                                   No

Private pension plans                                      Plan d’épargne retraite populaire (people’s
                                                                      pension saving plan)



342
      Interview with the Bank of France, 21st June 2004 and interview with the Authority for the Financial
      Markets, 15th July 2004.

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Motor insurance                                                              No

Home insurance                                                               No

Life assurance                                                               No

Mortgage credit                                                              No

Collective investment schemes                                                No

Financial advice                                                             No




6.3      The basic banking service is aimed at reducing the problem of financial exclusion
         in France. It has been categorised as simplified because of the access conditions
         in which anyone who does not have a bank account can open a basic banking
         service. Further there are no restrictions on payments other than the number of
         cheques that can be used. Price regulation is also imposed in the form that there
         can be no explicit charges on the account.

6.4      Simplified saving products include the CODEVI (account for industrial
         development343), livret A (bank book A), the livret bleu (blue bank book) and the
         livret d’épargne populaire (LEP or people’s saving booklet). We classified these
         as simplified products for several reasons. Access conditions are set such that
         consumers can withdraw savings at all times. In addition, the minimum amount
         needed to open one of the saving accounts is low, and in some cases there are no
         charges e.g. for saving accounts (livret A’s) offered by the French postal service.
         There is also price regulation as all products pay the same interest rate, fixed by a
         commission set up for this purpose, and the interest rate is calculated on the same
         day for all products.

6.5      A simplified complementary pension product, the plan d’épargne retraite
         populaire (PERP or people’s pension saving plan) was created by the Law


343
      The aim was that the funds from the CODEVI would be used for industrial development, although this
      does not have any bearing on the consumer for whom it purely represents a savings account.

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         Number 2003-775 of 21st August 2003 (Loi portant réforme des retraites; law
         regarding the reform of pensions).344 The PERP was classified as a simplified
         product because the investment policy is regulated, ensuring that consumers are
         protected from buying products that are too risky. In particular, there is a
         lifestyling requirement in which assets are moved from risky to low risk assets as
         individuals approach retirement. Additionally, charges for switching between
         product providers are capped and providers must inform consumers by handing
         out an information certificate.

6.6      Regulation is sometimes regarded as causing complexity but the popularity of the
         products, often tied to tax advantages, appears to outweigh the administrative
         costs for companies. However, it is also the case that regulation has actually
         brought about simplified products.345 Hence there are few complaints from the
         industry regarding product regulation. For example, in the case of the PEL, banks
         have to ascertain how savings are spent but the opening of a PEL account draws
         customers to the bank.346

6.7      There appears to be a polarised situation regarding the degree to which price
         competition is working effectively in France.                   In some product markets,
         standardisation and the fact that the product features are strictly regulated means
         that competition has not taken place in the scope of the product, but rather
         competition is thought to have taken place mainly on the price. In other markets,
         prices have been regulated focusing competition on the other components of
         product terms.

6.8      Looking beyond product regulation in France there are a range of alternative
         regulatory interventions that could meet the same objectives of empowering retail
         consumers. The priority has been to increase information provision in banking
         products, but due to concerns of developing complexity in other product markets


344
      Loi N. 2003-775 of 21st August 2003 Loi portant réforme des retraites (Law regarding the reform of
      the pension), 21st August 2003, available at
      http://www.legifrance.gouv.fr/texteconsolide/SSEAEM.htm.
345
      Interview with the Bank of France, 21st June 2004.


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         (and the implementation of the Insurance Mediation Directive), there has also
         been a focus on improving the sales and advice regimes. Table 21 summarises the
         alternative regulatory interventions existing in France.

Table 21: Alternative regulatory interventions in France

                                       Information          Regulation of sales   Voluntary codes of
                                        provision              and advice             conduct

          Basic deposit
          account with                                                               Bank Charter
          payment means

          Cash based savings
          products on which
                                                                                     Bank Charter
          interest or other
          return is paid

          Credit or deferred
                                                                                     Bank Charter
          debit card

          Private pension             Information
          plans                     provisions in the
                                   Law of 21st August
                                   2003 which created
                                       the PERP.

          Motor insurance
                                                                                     Association of
          Home insurance                                                           Insurers’ Code of
                                                                                       Conduct
          Life assurance

          Mortgage credit                                                          European Code of
                                                                                    Conduct by the
                                        Mortgage                                  European Mortgage
                                        prospectus                                    Federation,

                                                                                     Quality label

          Collective                                                               Association for
          investment schemes                                                          Financial
                                                                                  Management ethical
                                                                                        rules

          Financial Advice                                                        Bank Charter, Code
                                                                                     of conduct for
                                                                                  investment advisers



346
      Interview with the French Bankers’ Federation, 21st June 2004.

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6.9      Despite the various regulatory interventions, there are nonetheless some
         remaining concerns regarding the functioning of some of the product markets. In
         particular, there are issues with the degree to which how well information
         provision is working and concerns about the comparability of a number of
         products including life insurance.

6.10     Overall, however, given the number of simplified products that already exist in
         France, complexity has not been perceived as a factor limiting the amount of
         savings or investments made by consumers. Consequently, it is not surprising that
         there have been few recent attempts to simplify products as a solution,

             “There are a lot of consumer protection laws in France, a powerful central bank, and
             the market is very stable. There is no complexity problem in retail financial products.
             Several simple products exist. Our consumers are not waiting for the introduction of a
             simplified product and for us consumer protection implies the provision of
             information.”347

Sources of information
6.11     The information in this section came from a range of sources. These included
         publications from the following institutions (in addition to those interviewed
         listed below):

         •     Banque de France (Bank of France);

         •     INC (National Consumer Institute); and

         •     Que Choisir (Association of French Consumers).

6.12     In order to obtain a wider picture of the situation, the financial press and
         magazines (e.g. Investir) for investment advice were consulted as well.

6.13     Interviews were conducted with:

         •     Autorité des Marchés Financiers (Financial Market Authorities);

         •     Commission de contrôle des assurances, des mutuelles et des institutions de
               prévoyance (Commission for the Control of Insurance);




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          •   Confédération Logement et Cadre de Vie (CLCV or Association for the
              Defence of Consumers);

          •   Direction Générale de la Concurrence, de la Consommation et de la
              Répression des Fraudes (Directorate General for the Repression of Fraud,
              Competition and the Protection of Consumers – DGCCRF henceforth);

          •   Fédération Bancaire Française (French Bankers’ Federation);

          •    Fédération Française des Sociétés des Assurances (Association of Insurers);
              and

          •    Ministère Délégué aux petites et moyennes entreprises, au commerce, à
               l'artisanat, aux professions libérales et à la consommation (Ministry of
               Economics, Department for Small and Medium Firms, Commerce, Artisan,
               Liberal Professions and Consumers).

6.14      In August 2003 the Financial Securities Act provided for a reform of the
          supervisory authorities. The Commission des Opérations de Bourse (COB), the
          Conseil des Marchés Financiers (CMF) and the Conseil de Discipline de la
          Gestion Financière (CDGF) were merged into a single authority, the Financial
          Markets Authority, with significant status and powers.

6.15      In addition, the Commission de Contrôle des Assurances (CCA) and the
          Commission de Contrôle des Mutuelles et des Institutions de Prévoyance
          (CCMIP) were merged into the Commission for the Control of Insurance.348 Table
          22 gives an overview of the supervisory bodies in France.

Table 22: French primary regulators

Product List                                                                Regulators
Banking products (including credit cards and                            Banking Commission
mortgages)



347
       Interview with the French Bankers’ Federation, 21st June 2004.
348
       Modernising the supervisory authorities, Financial Services Authority, available at
       http://www.finances.gouv.fr/presse/dossiers_de_presse/ministre/securite_financiere/f3-1ang.pdf

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Insurance products (both life and general)                    Commission for the Control of Insurance

Pensions                                                     Financial Markets Authority, Banking
                                                           Commission, Commission for the Control of
                                                                          Insurance

Investment products                                                 Financial Markets Authority

Financial advice                                                    Financial Markets Authority



Development and characteristics of simplified products
6.16      The following section describes products that we classified as simplified. We
          highlight their characteristics, how they were developed and, where possible,
          assess the impact that they have had on the market.

Service bancaire de base (Basic banking service)
6.17      Article 58 of the 1984 banking law foresees that every citizen has a right to a
          basic bank account and this is regulated in article L 321-1 of the monetary and
          financial code.349 The decree number 2001-45 of 17th January 2001 regarding the
          application of article L-321-1 of the monetary and financial code defines the basic
          banking service.350 The main features of the basic bank account are shown in
          Table 23.

Table 23: Characteristics of simplified product – Basic banking service

Non-price characteristic                             Detail                          Explanation

Transactions                             Frequency of contributions           No limit on the number of
                                                                              transactions (bank counter
                                                                             and otherwise) but only two
                                                                             cheques allowed per month

Access                                          Type of access               All persons have a right to a
                                                                              basic bank account but the
                                                                             bank account is reserved for
                                                                            those who do not have a bank


349
       Le droit au compte, Bank of France, available at http://www.banque-france.fr/fr/info/
       main.htm?menu2=menu_m1.htm&page=collect/5.htm.
350
       Le droit au compte, Bank of France, available at http://www.banque-france.fr/fr/info/
       main.htm?menu2=menu_m1.htm&page=collect/5.htm.


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                                                                            account

Information provision                                                Monthly statement of
                                                                    account, one change of
                                                                   address allowed per year

Price characteristic                         Detail                      Explanation

Charges                                                            No explicit charges can be
                                                                    imposed on the account



         Transactions

6.18     There is no limit on the number of transactions allowed by the basic banking
         service. The service includes operations at the counter, cashing of cheques (only
         two cheques per month are allowed), bank and post transfers, deposits and the
         withdrawal of money at the counter of the bank and a bank card with automated
         payment means.

         Access

6.19     All French citizens have a right to a current account. Nevertheless, the law
         stipulates that consumers have to declare on their honour that they do not already
         have a bank account at another bank in order to have access to the basic banking
         service.

6.20     The consumer can demand the basic banking service from a credit establishment
         of his choice or at the French postal service. In the case of refusal, the person can
         contact the Bank of France, who designates a bank or the French postal service to
         open an account.

         Information provision

6.21     The basic banking service includes a monthly statement of account sent to the
         home address, one change of address per year and the ability to find out the
         outstanding balance of the current account from a distance. A closure of the
         current account necessitates a written explanation to the customer and the Bank of
         France. The law on the basic banking service stipulates that a minimum delay of
         45 days must be allowed for the customer.


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          Price characteristics

6.22      The basic banking service is free of charge.

          Reasons for categorising as simplified

6.23      The basic banking service was categorised as a simplified product because it
          imposes constraints on the product (it is free of charge and the number of the
          transactions such as the number of cheques are regulated). The main objective of
          the basic banking service has been one of access rather than comparability as
          effectively this has removed price competition as a factor in the choice of bank
          accounts.

          Impact

6.24      The impact of the basic bank account is difficult to judge as we could not uncover
          statistics on the number of persons who have taken out a basic bank account.
          However, 5 million consumers are still counted as being excluded from banking
          services according to the newspaper “Le Monde”.351                     This is all the more
          surprising given that welfare benefits in France are automated.

CODEVI, livret A and livret bleu
6.25      The simplicity and attractiveness of the following short-term savings products
          described in this section derives from the same fixed interest rate that is offered
          across all products and their fiscal treatment. Table 24 describes the
          characteristics of the simplified cash-based products CODEVI, livret A and livret
          bleu.352 The livret A can only be obtained at the Caisse d’épargne and the French
          postal service and the livret bleu can only be obtained at the Caisse de Crédit
          Mutuel. Their equivalent, the CODEVI, is offered by all commercial banks.
          However the regulation of all three products is similar, hence they are described
          together in this section.


351
       M.Borloo au chevet de l’exclusion bancaire, Le Monde, 29th June 2004.
352
       The short-term saving products are regulated according to the following articles: Livret A: 5,6,8 and
       10 of the Code monétair et financier (Finance and Monetary Code); Livret Bleu: Art L.221-1 to L221-
       6 and 221-11 and 221-12 of Finance and Monetary Code; and Codévi: Art. L 221-27 and L221-28 of
       the Finance and Monetary Code in Fiscalité et réglementation, available at
       http://www.lesclesdelabanque.fr.

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Table 24: Characteristics of simplified product – CODEVI

Non-price characteristic                          Detail                        Explanation

Access                                         Time frame               Savings can be accessed at all
                                                                                   times.

Investment                                Minimum / maximum                  Minimum €15.24353
                                           contribution levels
                                                                              Maximum €4,600

Price characteristic                              Detail                        Explanation

Level of price/charges/yield                                                 Yes – interest rate is
                                                                                  regulated

Tax incentives                                                                       Yes



          Access

6.26      Savings can be accessed at all times subject to the following limits. For the livret
          A, a maximum of €800 can be withdrawn from the counter and a maximum of
          €500 from ATMs. In the case of the livret bleu, consumers receive a bankcard
          from the Caisses de Crédit Mutuel, which they can use to withdraw cash from
          ATMs. Depending on when the amounts are withdrawn consumers lose their
          interest payments. The reason is that the interest rate is calculated every 15 days,
          on the 1st and on the 16th of each month. Amounts withdrawn no longer produce
          any interest on the 1st and the 16th preceding the withdrawal.

          Investment

6.27      The maximum for tax-free contributions is set at €4,600. According to the
          official gateway to the French civil service, a CODEVI can in general be opened
          with an amount of €15.24. This contrasts with the maximum contribution is fixed
          at €15,300 and the minimum is fixed at €1.50 for the livret A and the livret bleu.




353
       €1.50 is the minimum amount required to open a CODEVI at the French postal bank. Source:
       http://www.lapostefinance.fr/index/epargne/livrets/codevi.html?jrunsessionid=HEmAsIrUspY35Snm
       LPR-wR9h. According to the official gateway to the French civil service, a CODEVI can be opened
       with an amount of €15.24. http://vosdroits.service-public.fr/particuliers/ARBO/FXEPA103.html.

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          Level of yield

6.28      The interest rate of the CODEVI, livret A and livret bleu is regulated by the
          “comité consultative des taux reglementés” (consultative committee for interest
          rate regulation) who gives its opinion regarding the interest rate level, taking into
          account the evolution of the consumer price index and the interest rate of the
          market. In the past the Ministry of Economics set the interest rate. Since May
          2004, the interest rate has been regulated to closely follow market interest rates by
          the consultative committee for interest rate regulation.

          Tax incentives

6.29      The interest rate revenue is excluded from tax and social deductions.

          Reasons for categorising as simplified

6.30      The CODEVI, livret A and livret bleu were classified as simplified products for a
          number of reasons. Access is regulated such that although some limits apply to
          the amount of money that can be withdrawn, the products are relatively flexible,
          implying that consumers do not need to commit themselves to saving a fixed
          amount. Further, the regulator fixes the interest rate across these products as well
          as the date on which the interest rate is calculated is the same across all products.

          Impact

6.31      The impact of the CODEVI, livret A and livret bleu are difficult to estimate.
          However, market participants confirmed that the products are popular in France.
          In March 2004 a total of €111.8 billion were deposited in the livret A’s, €15.6
          billion in livret bleus and €44.2 billion in CODEVIs.354 We were unable to find
          any evidence on whether the popularity of the regulated saving products in France
          led to less alternative product development.




354
       Tableau 16, Comptes sur livret, Number 125 Bulletin of the Bank of France, May 2004. Document
       provided by the Bank of France.

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Livret d’épargne populaire (LEP)
6.32      The livret d’épargne populaire (LEP) is another regulated saving product that we
          have defined as simplified. All banks as well as the public treasury sell the LEP.
          Table 25 explains the various features of the LEP.

Table 25: Characteristics of simplified product - LEP

Non-price characteristic                        More detail                       Explanation

Access                                        Type of access             Only for low-income persons

Investment                                 Minimum / maximum                     Minimum €30
                                            contribution levels
                                                                               Maximum €7,700

Information provision                                                                  Yes

Price characteristic                            More detail                       Explanation

Level of price/charges/yield                                                   Yes – interest rate is
                                                                          regulated, bonus only results
                                                                          if the savings are kept in the
                                                                              account longer than a
                                                                           specified amount of time or
                                                                                inflation increases.

Tax incentives                                                                         Yes



          Access

6.33      According to Article L 221-13 C of the Code monétaire et financier (finance and
          monetary code), the LEP was created to,

            “Help those persons with modest income to invest their savings under conditions that
            allows them to maintain the purchasing power.”355

6.34      The LEP is reserved for persons who have no taxable income or an income tax
          lower than €684 per year.

6.35      The savings can be withdrawn at all times.




355
       La Rénumération de l’épargne bancaire, Fiche E 29/4-02, 2002, INC (National Consumer Institute),
       available at http://www.inc60.fr.

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          Investment

6.36      A minimum payment of €30 is needed to open a LEP saving account. Total
          contributions are limited to a maximum of €7,700.

          Information provision

6.37      If transactions were made on the LEP in the last month, the customer receives a
          statement of account. Similar to the livret A, livret bleu and CODEVI, the
          customer receives a bankcard that permits him to withdraw money but does not
          have a checking function.

          Level of yield

6.38      The interest rate of the LEP is currently regulated at 4.25%. In addition to the
          interest rate, the LEP pays out a premium. The premium results when the
          purchasing power of the deposit is no longer maintained (inflation is higher than
          the interest rate) or if the deposit is kept in the account for six consecutive
          months.356

          Tax incentives

6.39      The interest rate revenue of the LEP is tax exempt.

          Reason for categorising as simplified

6.40      We classified the LEP as a simplified product because flexibility to withdraw
          money is maintained, low minimum levels of contributions ensure access to the
          product for those on low incomes and consumers are guaranteed a certain interest
          rate across all products.

          Impact

6.41      At the end of March 2004, €54.4 billion was saved in LEP’s and they appear to
          have been relatively successful.357 However, it is impossible to judge whether it




356
       La Rénumération de l’épargne bancaire, Fiche E 29/4-02, 2002, INC (French Consumers’
       Association), available at http://www.inc60.fr.
357
       Tableau 16, Comptes sur livret, Number 125 Bulletin of the Bank of France, May 2004. Document
       provided by the Bank of France.

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          has had wider benefits in terms of educating and making these consumers aware
          of other financial services products.

Plan d’épargne retraite populaire (PERP)
6.42      The “plan d’épargne retraite populaire”(PERP), a complementary pension scheme
          with tax incentives was created by the Law on the Reform of the Pensions in April
          2004. According to the Government, the PERP is a,

            “New savings product that benefits from an attractive fiscal treatment, which offers to
            all households the possibility to acquire an additional pension with transparent and
            secure conditions especially adopted for a long-term savings product.”358

6.43      As identified above, the PERP not only has tax advantages but also has elements
          of product design which are aimed at improving transparency.                            It is also
          interesting to note that these were seen as particularly important because of the
          long term nature of the savings product.

6.44      In addition to the PERP, complementary pensions have been established
          according to the Madelin law. They are intended to increase pensions for non-
          salaried workers (artists, liberal professions, self-employed) and are similar to
          PERPs in nearly all respects. The only difference is the tax deductibility, which is
          greater for Madelin contracts.359

6.45      Table 26 describes the characteristics of the PERP in more detail.

Table 26: Characteristics of simplified product - Plan d’épargne retraite populaire (PERP)

Non-price characteristic                          More detail                         Explanation

Access                                        Use of investments              Obligation to turn into life-
                                                                                     long annuity

                                                    Bequest                   Option exists to bequest an
                                                                             income annuity to the spouse
                                                                               or to children in form of
                                                                                 education payments




358
       Le plan d’épargne populaire: un nouvel instrument d’épargne attractif pour la retraite des Francais,
       April 2004, available from http://www.retraites.gouv.fr/article596.html.
359
       Details available from http://www.loi-madelin.com.

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Investment                          Minimum / maximum               No maximum but tax
                                       contributions                 deductions limited

Asset allocation                          Lifestyling            Division between risky and
                                                                 non-risky assets depends on
                                                                 the number of years before
                                                                         retirement

Information provision                                                       Yes

Price characteristic                     More detail                    Explanation

Level and structure               Annual management charge         Limited at 1% of funds

                                     Contribution charge            No more than 5% of
                                                                       contributions

                                 Switching cost and conditions    Charges limited at 5% and
                                                                   can only be levied if the
                                                                    consumer stayed with
                                                                 insurance company for less
                                                                        than ten years

Tax incentives                                                              Yes



         Access

6.46     Under a PERP pension plan, contributions are locked in until retirement and can
         be accessed before the age of retirement only in the case of invalidity,
         unemployment and judicial liquidations.

6.47     Savings must be turned into an annuity. In the case of death, an option exists to
         bequest savings to a spouse in the form of an annuity or to children for
         educational purposes.

         Investment

6.48     There are no defined maximum contributions although the amount that can be
         deducted from taxable income is limited to 10% of net income. Minimum
         amounts needed to open an account and monthly contributions depend on the
         company with whom the contract is signed.




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          Asset allocation

6.49      The division of investments between risky and low-risk assets is regulated and
          depends on the time until retirement. For example, if the time to retirement is
          between 10 and 20 years, 40% of the savings must be invested in low-risk assets.
          In the two years before the liquidations of the rights, at least 90% of the capital
          must be invested in guaranteed assets.

          Information provision

6.50      All participants of a PERP scheme receive the annual report from a surveillance
          committee of the PERP.

          Structure of prices

6.51      General charges for a PERP may not exceed 5% on the incoming and outgoing
          payments and 1% of the funds per year. Each subscriber to a PERP has the right
          to an individual transfer if he is not satisfied with the plan of the chosen at the
          beginning. The penalties for transfers are limited to 5% of the savings and may
          not be levied after ten years with the same insurer.                 In case of a multi-
          compartment contract, arbitrage between funds is payable and the fee lies between
          0.5% and 1% of the amount transferred.360

          Tax incentives

6.52      The contributions paid for the pension product (up to 10% of income) are tax
          deductible up to a limit of €23,700 of the amount which is tax deductible.361 The
          annuity income is taxed at the usual rate after deductions of 10% and 20% (except
          for the case of life assurances where pensions are taxed at a fraction which
          depends on the age of the beneficiary at the moment he receives his first
          payment).362

6.53      For consumers in high tax brackets the tax savings represent an important saving
          aspect because nearly 50% of the contributions are reimbursed in the form of tax


360
       Le Perp: tout nouveau, tout beau, Investir Magazine, June 2004.
361
       Perp: pas vraiment pour tout le monde, 60 Millions de Consommateurs, Number 384, June 2004.
362
       Le Perp: tout nouveau, tout beau, Investir Magazine, June 2004.

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          savings. However for persons in lower tax brackets the fiscal advantages are not
          decisive and for persons in the medium bracket a longer study of their financial
          situation is needed to determine whether the fiscal advantages outweigh the
          restraint of having their capital locked in.363

          Other features

6.54      Despite being an individual pension product, the PERP is supervised by a
          ‘Groupement d’épargne retraite populaire’ (GERP), which is a non-profit seeking
          organisation. This is a supplementary security factor for savers as the investments
          are not in the hands of one insurer. In the case of deceit or mismanagement, the
          GERP has the right to change the insurer.

          Reasons for categorising as simplified

6.55      The PERP was classified as a simplified product because of several constraints on
          product terms. The investment policy is regulated, ensuring that risk
          characteristics of the product are standardised. Charges are regulated across all
          products, facilitating a comparison. Additionally, as charges for switching are
          capped, consumers are protected from being locked in by product providers.

          Impact

6.56      Currently, evidence as to the success of the product differs and at the time of
          writing it is too early to assess the popularity and take-up of the product. Early
          indications of whether the product is seen as complex should be approached
          cautiously; according to the Financial Markets Authority, the PERP is a simple
          annuity product with a capital guarantee, although it may be difficult to
          understand because it is a new investment product.364

6.57      However, it is an unusual product for French consumers because the savings are
          locked in until the time of retirement. It is likely therefore that it will take
          consumers time to become comfortable with products of this type as evidenced by




363
       Le plan d’épargne retraite populaire, CCF Société anonyme au capital publication, June 2004, France.
364
       Interview with the Financial Markets Authority, 15th July 2004.

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          criticism by Syndicat national unifié des impôts (National Union of Taxes). In
          particular there has been concern regarding the lack of access to the money.

6.58      Further, the Association for the Defence of Consumers believes that very few
          consumers have taken up the product so far,

            “The product has not been tested yet. The public is far away from a savings product
            because you first have to convince people about the product and in the case of the
            PERP the consumer is not convinced yet. Consumers need more assurance before they
            buy these kind of long-term products. French consumers are used to saving through a
            PEL and mainly rely on company pensions.”365

6.59      Other criticisms’ regarding the PERP has been the complicated administrative
          procedure. For example, the PERP scheme prescribes that each group of contracts
          is financially independently managed and that contracts must be ring-fenced
          (supervised by GERP). This makes risk management more costly. Nevertheless,
          for the time being the product is considered to be a success by the insurance
          industry.366

Alternative regulatory interventions
6.60      Before considering the need for additional simplified, standard products, it is
          important to consider whether alternative regulatory interventions have been used
          in France and the degree to which these meet the same objectives.

6.61      Recent alternative regulatory interventions in France have revolved mainly around
          the necessity to provide current account holders with a contract and sufficient
          information. Regulation has also focused on the sales and advice process in
          France through the creation of the status of the financial investment adviser.

Provision of information
6.62      In terms of the provision of information, there were a number of important rules
          for banking, life insurance and collective investment schemes. Although there is
          evidence of private sector information through websites, specialised press and




365
       Interview with the Association for the Defence of the Consumer, 26th July 2004.
366
       Interview with the French Association of Insurers, 26th July 2004.

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          product testing, this did not seem to be of particular importance (such that it needs
          to be taken into account in the regulatory regime).

          Insurance law

6.63      The disclosure for life insurance products in France is set out in the insurance law,
          articles 122-4.     Based on interview assessment this does not appear to go
          significantly beyond the requirements of the Third Life Directive.

6.64      In the case of life insurance the consumer benefits from a delay of 30 days (the
          maximum permitted under the Third Life Directive) to cancel the contract from
          the date the first payment is foreseen after signing. The contract must mention this
          possibility and include a letter to act on this. If an option for redemption of the
          policy exists, the contract must include the redemption value of the policy for the
          first eight years at the minimum.367

6.65      In addition, the recent Financial Security Act also contained provisions for
          information of life insurance policyholders that bring them in line with the
          requirements of the Third Life Directive.

          Investment funds

6.66      Regarding the implementation of UCITS in France, minimal changes were
          required to the existing legislation because many of the Directive’s requirements
          already exist under French law.368 Our interviewees, who generally had a positive
          view of investment fund products in France, supported this view. Moreover, an
          amending financial security law was adopted into the French legislation on 1st
          August 2003 in order to adopt the monetary and financial code.

6.67      The only issues under the Management Directive included whether to increase the
          minimum share capital requirements, to increase permissible activities of
          management companies and the need for a simplified prospectus. Those regarding


367
       Codes des Assurances, available at
       http://www.legifrance.gouv.fr/html/codes_traduits/mpa.htm#Standard%20contract%20documents
       and Les mentions obligatoires, Commission de Contrôles des Assurance (Commission for the Control
       of Insurance), available at http://www.cca.gouv.fr/info/Les_mentions_obligatoires/020303.
368
       UCITS III - Status of Implementation in Europe, Ernst and Young, September 2003.

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          the Product Directive included legislation which needs to be implemented to
          allow for index-tracking funds and the requisite investment restriction levels
          which are to be applied in France as well as general financial derivative issues
          such as leverage restrictions or global exposure calculations.369

6.68      In addition, the Financial Markets Authority has defined five large risk categories:
          investment funds that follow to a large extent the stock markets; investment funds
          investing in bonds; funds investing in the monetary market; diversified funds; and
          investment funds which guarantee a certain return.370

6.69      Besides regulatory interventions, several other sources of information exist in
          France, described in more detail below.

          Information provision regarding mortgages

6.70      Article L312-1 of the consumer law assures the information and the protection of
          consumers who take out a mortgage. All credits except loans less than three
          months, and including both consumer loans and mortgages are regulated by the
          consumer law - in livre III “Endettement” (book three on indebtedness).371 These
          dispositions are destined to protect the (weaker) consumer and cover information
          provision such as advertisements and credit contracts. Information is guaranteed
          through a prospectus, which must be sent free of charge. Mortgage offers are valid
          for a month and the consumer may not send back a signed copy before ten days
          have passed. The linking of other services to the granting of mortgage services is
          prohibited in France.372

6.71      The offer must contain all necessary information such as the date, conditions and
          provisions of the loan, a table indicating the dates, numbers and the increase in the
          amortisation. The table must also indicate the division between amortisation of


369
       UCITS III - Status of Implementation in Europe, Ernst and Young, September 2003
370
       Les documents d’information diffusées par les SICAV, Financial Markets Authority, available at
       http://www.amf-france.org/styles/default/documents/general/5089_1.pdf.
371
       See Legifrance for an English translation of the Code de la Consommation:
       http://www.legifrance.gouv.fr/html/codes_traduits/liste.htm.
372
       See Legifrance for an English translation of the Code de la Consommation:
       http://www.legifrance.gouv.fr/html/codes_traduits/liste.htm.
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          capital and interest rates, sum and total cost of the credit and the interest rate. The
          initial contract should also include a detailed amortisation table for the dates of
          payment, with an indication of the TEG (taux effective global – global interest
          rate) and the cost of credit calculated over each date of payment to occur. 373

6.72      The consumer law includes a specific restriction concerning loans advertisements
          made by persons who do not have an official address in the country.374 This may
          be a barrier to trade for foreign companies.

Regulation of the sales and advice process
6.73      There is increasing reliance on the regulation of the sales and advice process in
          France. Indeed, this has undergone considerable changes in recent years. The
          requirements are described in detail below.




373
       Le crédit immobilier, Ministry of Finance, August 2001, available at
       http://www.minefi.gouv.fr/DGCCRF/04_dossiers/consommation/ficonso/b21.htm.
374
       The Protection of the Mortgage Borrower in the European Union, European Mortgage Federation,
       November 2003. We received the document from the European Mortgage Federation.




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Table 27: Regulation of the sales and advice process for investment products -
disclosure and qualification

                                                               Life assurance, pensions and mutual
                                                                             funds375

Need for a fact find to understand the                     Yes (for financial investment advisers as well
customer                                                             as for investment firms)376
Written record of advice given                                                    No
Disclosure of level of commission                              Yes (for financial investment adviser)
Disclosure of turnover with provider                                              No
Disclosure with whom contractual relationship                Yes (for financial investment advisers)377
exist
Do legal professional qualifications exist for                                    Yes
advisers?
Is there a publicly available database of all                 Yes (for financial investment advisers)
advisers?



6.74      The Financial Security Act of 1st August 2003 (law number 2003-706) created a
          chapter in the Finance and Monetary Code, which introduces a strict framework
          for advice.378 Amongst other things, the act created the status of an independent
          investment adviser for the first time since this activity had not previously been
          regulated. The chapter prescribes that financial organisations must make sure that
          recruited staff for advice services fulfil obligations regarding their age, integrity
          and professional competence. The law further states that consumers have a
          withdrawal period of 14 days.379




375
       The information in the table is based on the interview with the Financial Markets Authority, 15th July
       2004.
376
       According to the Insurance Mediation Directive, to advise on insurance products intermediaries are
       required to understand the needs of their customers.
377
       According to the Insurance Mediation Directive, intermediaries must disclose contractual ties when
       advising on insurance products.
378
       Financial Security Act, available at:
       www.legifrance.gouv.fr/WAspad/Visu?cid=24549&indice=1&table= CONSOLIDE&ligneDeb=1.
379
       Démarchage bancaire et financier: quelques measures pour y voir plus clair, Association for the
       Defence of the Consumer, 26th September 2003.

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6.75      The status of the ‘conseiller en investissement financières’ (CIF) or financial
          investment adviser was created by the Financial Security Act in line with the
          Insurance Mediation Directive. The law defines the act of intermediation as,

              “Any non-solicited contact, by whatever means (internet, telephone), with a person or
              legal entity, with the aim of obtaining an agreement.”380

6.76      The activities of a CIF include the realisation of bank operations on financial
          instruments and services related to investments. This covers all investment
          products and hence would include collective investment schemes as well as
          insurance based investment products and pensions. Legislators have opted for a
          principle of semi-regulation and have given the responsibility to professional
          organisations to register CIF’s and to pass the list to the Financial Markets
          Authority. The Financial Markets Authority is responsible for laying down the
          agreement criteria of the professional associations and for ensuring that advisers
          obtain a license that must be renewed every two years. Furthermore the Financial
          Markets Authority has the power of sanctions concerning the CIF’s in case of
          violations of rules. If however the CIF is tied to a financial establishment, he falls
          under the regulation of the latter.381

6.77      Hence, the control of financial advisers is done by several different methods:

          •     Rules established by the Financial Markets Authority by a decree
                (professional liability insurance, description of rules of conduct);

          •     A list of agreed professional associations who are charged with controlling
                access to the profession and adhesion to code of conduct; and

          •     Sanctions imposed by the Financial Markets Authority.

6.78      Banks have a formalised internal procedure to control the sales process and ensure
          that the general suitability of products for consumers is determined, e.g. internal



380
       Rapport d’activité 2003, Fédération Bancaire Française, (French Bankers’ Association), available at
       www.fbf.fr.
381
       Conseiller en investissement financiers, Financial Markets Authority, 31st March 2004,available at
       http://www.amf-france.org/styles/default/default.asp.

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          bank directives exist to prevent the sale of certain products such as options or
          hedge funds if the savings of the investor do not pass a certain limit.382

Voluntary codes of conduct
6.79      Codes of conduct are less prevalent in France than in some other countries
          because independent brokers are not an important distribution channel. However,
          professional codes of conduct exist for insurance and investment companies, e.g.
          97% of the life assurance companies and 70% of the non-life assurance companies
          are members of the Association of Insurers and subscribe to their code of conduct
          described below.383

          Loi mesures urgentes à caractère économiques et financier (Murcef law) and bank
          charter

6.80      The Murcef law from 11th December 2001 was a response to pressure from
          consumer associations regarding the lack of disclosure on tariffs for current
          accounts. Other reasons for the introduction of the Murcef law include:

            •    The development of package offers – as some consumers felt obliged to buy
                 a bundle of different products; and

            •    The fact that the relationship between banks and clients was not
                 formalised.384

6.81      The main concern in banking was that the banking act of 1984, in which general
          cost information had to be made public, did not fulfil its purposes.385 Hence, in
          France specific rules that apply to banking accounts do not exist.386 The
          Parliament voted on the introduction of the Murcef law in December 2001 in
          order to increase transparency in the relation between banks and their clients. The
          law states that banks are obliged to hand to every new consumer a written contract



382
       Interview with the Financial Markets Authority, 15th July 2004.
383
       Interview with the Association of Insurers, 26th July 2004.
384
       Interview with the DGCCRF, 23rd June 2004.
385
       Article 7 of the Decree of 24th July 1984, available at http://vosdroits.serive-public.fr.
386
       Interview with the Bank of France, 23rd June 2004.

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          explaining the rights and duties of both bank and consumer in terms of costs and
          services rendered.387 However the “arrête ministeriel” (ministerial decree) was not
          passed and hence the law was suspended. In its place the Minister of Economy
          and Finance demanded that banks sign a charter taking up the conventions of the
          Murcef law. The bank charter signed between the French Bankers’ Association,
          BNP-Paribas and the French postal service on 9th January 2003 is meant to replace
          the law.

6.82      In the charter, banks committed to:

          •   Drafting formal current account agreements with their individual customers
              (so-called “conventions”);

          •   Sending existing bank customers a document once a year informing them
              about price changes;388

          •   Increasing price transparency; and

          •   Providing a free service for resolving disputes out of court.

6.83      For example, the charter obliges banks to communicate price changes in written
          form to consumers three months before their application. If the customer does not
          reply within two months of the notice, the price change is considered as accepted.
          According to the French Bankers’ Federation, four million agreements have
          already been signed and the number is growing as new accounts are opened and
          existing clients make use of their right.389

6.84      Two differences exist between the charter and the Murcef law:

          •   Consumers need to ask for a contract instead of banks being obliged to hand
              one out; and


387
       Interview with the Bank of France, 23rd June 2004.
388
       Interview with the DGCCRF, 23rd June 2003.
389
       Rapport d’activité 2003 (Annual Report 2003), Fédération Bancaire Francaise (French Bankers’
       Federation), available at http://www.fbf.fr/Web/internet/content_europe.nsf/(WebPageList)/
       management+report+2003/$File/FBF_management-report_2003.pdf.

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          •   Banks that do not adhere to their promises will not face any sanctions.

6.85      However consumer associations do not believe that the charter will replace the
          law sufficiently and would prefer to see the law being enacted.390 Presumably this
          is because before consumers are provided with the information, they may not be
          aware that they are missing out on having some information.

6.86      Customers have shown limited interest in signing a contract because of several
          reasons. Firstly, consumers already benefit from the charter’s general terms and
          conditions that apply to everyone, especially conditions regarding price
          transparency and the free mediation service. Secondly, around half of the banks’
          customers already have a contractual relationship with their bank and are satisfied.
          Thirdly, some consumers prefer to maintain an informal and flexible relationship
          with their banker.391

6.87      However, the INC checked some 52 conventions given to consumers by banks.
          The study found that none of the banks has respected the charter and handed all
          the promised information to the consumer.392                  Therefore, a simplified or
          standardised product that made this information compulsory would not be result
          in duplicative regulation.

          Association of Insurers Code of Conduct

6.88      At the general shareholders’ meeting held in June 24th 2003, the Association of
          Insurers adopted a code of professional conduct for insurance companies. The
          code set out some twenty obligations most of which were regarded as the best
          practice approaches that had been already undertaken by the industry for many
          years. These obligations cover all types of insurance and attest to the industry’s
          commitment to provide quality service.393



390
       Les banques ne tiennent pas parole, 60 millions de consommateurs, October 2003.
391
       Rapport d’activité 2003, Fédération Bancaire Francaise (French Bankers’ Federation), available at
       http://www.fbf.fr/Web/internet/content_europe.nsf/(WebPageList)/management+report+2003/$File/F
       BF_management-report_2003.pdf.
392
       Taken from www.inc60.fr.
393
      Interview with the Association of Insurers, 26th July 2004.

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          Certification for the quality of mortgage credits

6.89      The label “Quality-Credit” was created in 1997 by consumer organisations,
          administrators and professionals from the credit sector. The certifying
          organisation, Qualité France, is an independent organisation. The label concerns
          the mode of production (“les modes de production”) and the management of the
          credit’s profit margin (“credits bénéficiares”) of the labelled product proposed by
          the credit institute. The label certifies the quality of the information regarding
          proposed financial products. The label ensures the following:394

          •   Diffusion of up-dated information for underwriters;

          •   Personalised simulation of the financing plan of the project;

          •   At the time of raising the credit, the borrower can make a choice regarding the
              registered bank address for direct debit and income;

          •   Contact person for the whole duration of the contract;

          •   Amicable management of payments, ensured in a personalised manner; and

          •   Guarantee of the credit establishment to respect the mediation procedure of
              the ASF regarding litigation.

          Code of conduct for insurance advisers

6.90      The ‘Fédération Française des Courtiers d’Assurances’ (French Association of
          Insurance Brokers) has set up a code of conduct for its members. The code defines
          obligations for the broker towards his customers such as that the remuneration of
          the broker may not influence the quality of the service and that the broker must
          present the best contract from the point of view of his customer.395




394
      Qualité Credits, see http://www.asf-france.com/COMM/Menucomm/consomenu.htm.
395
       Code Morale (Moral Code), available at http://www.annufinance.com/cgi-bin/annuaire_financier/
       jump2.cgi?ID=908.

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          Code of conduct for investment companies

6.91      In France, the management of UCITS is carried out within a very varied legal and
          organisational framework. The French Association for Financial Management
                                                                                                     396
          (l'Association Française de la Gestion Financière) has ethical rules in place.
          The code covers issues regarding information provision and confidentiality of
          consumer information. In addition, it covers competence, care and diligence to
          identify the interest of the investor, aims to prevent all conflicts of interest and
          providers agree to manage the investments in an autonomous, independent and
          transparent way. All members of the French Association for Financial
          Management abide by the code of conduct.

          European Code of Conduct for mortgages

6.92      According to the First Annual Progress Report on Implementation of the
          European Code of Conduct in the European Union, nine credit institutions in
          France have registered for the European Code of Conduct for mortgages,
          representing 30% of the national market by 30th September 2002.397 However,
          further registrations are expected, which is likely to bring the coverage up to 50-
          55% of the market. According to this report, it seems likely that the percentage of
          credit institutions registering will not exceed this percentage if the French
          government does not respond to the official requests made by the French Bankers’
          Federation in September 2002 that the ESIS (European Standardised Information
          Sheet) be considered as equivalent to the “offre préalable” (preliminary offer).398
          This illustrates the difficulty associated with agreeing European wide standards.


396
       Professional Ethics Code, adopted 11th June 2001, available at www.afg.fr.
397
       European Agreement on a voluntary code of conduct on pre-contractual information for home loans,
       First Annual Progress Report on Implementation in the European Union by 30th September 2002,
       European Banking Federation, European Savings Bank Group, European Association of Cooperative
       Banks, European Mortgage Federation and European Federation of Building Societies and Eurofinas,
       30th September 2002, available from
       http://www.europa.eu.int/comm/consumers/cons_int/fina_serv/loans/documents/survey_report.pdf
398
       European Agreement on a voluntary code of conduct on pre-contractual information for home loans,
       First Annual Progress Report on Implementation in the European Union by 30th September 2002,
       European Banking Federation, European Savings Bank Group, European Association of Cooperative
       Banks, European Mortgage Federation and European Federation of Building Societies and Eurofinas,
       30th September 2002, available from
       http://www.europa.eu.int/comm/consumers/cons_int/fina_serv/loans/documents/survey_report.pdf
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          Other sources of information

6.93      The internet site, Les clés de la banque, is an educational website composed
          essentially of an encyclopaedia with more than 400 pages which represent the
          main themes of banks and money. The language is easily understandable and the
          information provision relates to concrete situations.399

6.94      Good press coverage for certain financial products can be an alternative to
          regulation of information. For example, investment funds are very popular in
          France and there is a very good coverage of investment funds by the financial
          press such as Votre argent, Le revenue, Investir and La vie financière.400

6.95      Consumer associations are interested in publishing quality benchmarks. In fact,
          the Paris Association of lawyers wanted to create a prize for the most transparent
          insurance contract and market the event through the media but only two insurance
          companies participated. Rather than focusing on quality benchmarks, the French
          banking and insurance industry is more interested in performance criteria such as
          “Best Investment Fund of the Year”.401

6.96      Consumers can rely to a certain extent on the existence of tests and tables for
          comparison produced by consumer associations for products that they find
          complex. As more than 18 different consumer organisations exist in France it is
          difficult to gauge the importance of product testing in France by comparing the
          number of subscribers with those existing in other countries. The two largest
          associations, Association for the Defence of Consumers and UFC-Que choisir
          publish magazines, however these magazines do not specialise in testing of
          financial and insurance products.




399
       Rapport d’activité 2003, Fédération Bancaire Française (French Bankers’ Federation), available at
       www.fbf.fr.
400
       Interview with the DGCCRF, 23rd June 2004.
401
       Interview with the DGCCRF, 23rd June 2004.

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Balance between simplification and other forms of intervention
6.97      We did not identify a need for simplified products during the background research
          or our interviews. The French retail financial and insurance market features a
          plethora of regulated products, which are relatively simple from the point of view
          of the consumer.

6.98      However, the Financial Markets Authority as well as the Association for the
          Defence of Consumers expects problems of complexity to increase in the future as
          more and more consumers are turning away from traditional products to more
          risky products. However, this trend may develop slowly given the comments of
          the Association for the Defence of Consumers,

            “People with low savings rates do not like risk. Generally, there is a risk averse
            attitude among French consumers.”402

6.99      Based on the interview programme therefore it seemed unlikely that there was a
          need for additional simplified products in France at present.

          General comments

6.100     Although all interviewees acknowledged that financial products are complex, only
          the Association for the Defence of Consumers identified a problem of complexity
          for credit and mortgage products, insurances and – despite the existence of
          relatively    standardised       products     –    saving     products.      Simplification    or
          standardisation of products was not seen as a possible solution. Instead, market
          participants believed that information provision and the sales and advice process
          should be improved.

6.101     According to the insurance industry,

            “It is not the desire of companies to create complex products. Complexity is often the
            result of regulations and is also inherent to financial products. There are two solutions
            to complexity: a standardised products can be offered alongside market products,
            which is rubberstamped as in the UK. However this would be going back 15 years as
            the EU has since then tried to lift re-approval of Governments before certain products
            can be offered. The second solution is to improve the advice.”403


402
       Interview with the Association for the Defence of Consumers, 26th July 2004.
403
       Interview with the Association of Insurance Companies, 26th July 2004.
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         Financial scandals: mis-selling of Bénéfic investment products

6.102    To obtain a more objective view of the problem of complexity we also looked at
         past financial scandals. One example is the advertisement of Bénéfic products, of
         which some 300,000 were bought.404 The product promised a minimal
         performance of 23% in three years consisting of an annual return of 7.14% if the
         CAC40 (French stock market index) remained stable or increased.

6.103    However, if the index decreased, the added value of the Bénéfic product would be
         23% less the percentage decrease of the index. In other words, even if the index
         decreases up to 23% in three years, the investor does not lose anything.405 The
         advertisement for the product consisted of a four-page flyer, stating on the front
         page that the product guarantees a sure win, even if the CAC40 drops.

6.104    The vital information regarding the consequences of a drop larger than 23% was
         marked only with a small star on the front page and written in small print on one
         of the next pages. There is a court case on this issue at the moment and, according
         to the DGCCRF, the key question is whether the court will term this kind of
         advertising “publicité trompeuse” (misleading advertisement).406

6.105    As a result of the sharp decline of the CAC40 index, more than 7,800 complaints
         regarding this product have been registered at Association Française pour les
         usagers de banques AFUB (French association for bank usage).407 The general
         view is that the main problem was the quality of information given to consumers
         rather than the investment product itself.408




404
      Comment j’ai perdu 36% de mon capital, Investir Magazine, June 2004.
405
      Comment j’ai perdu 36% de mon capital, Investir Magazine, June 2004.
406
      Interview with the DGCCRF, 23rd June 2004.
407
      After the maximum height of 7,000 points was reached in September 2000, the CAC40 decreased
      constantly until it started to stabilize in March 2003. At the time the article was written in June 2004,
      the CAC40 was at 3,663 points.
408
      Comment j’ai perdu 36% de mon capital, Investir Magazine, June 2004.

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         Distorted competition in the insurance industry

6.106    Another area of concern that was brought up during the interviews is the allegedly
         distorted competition in the insurance industry. For example, by the act of 2nd July
         1990 La Poste (the French postal service) is licensed to distribute insurance
         products through its vast network. In addition to the advantages due to its public
         nature, the French postal service benefits from a preferential tax treatment that
         may distort competition.

6.107    To the extent that this reflects tax privileges, this is not a problem that
         standardised or simplified products would be able to address.

6.108    In the light of this, the Association of Insurers, the French Banking Federation and
         the Federation of Insurance and Reinsurance Brokers have filed a formal
         complaint with the European Commission. Additionally, the Association of
         Insurers joined representatives of insurance intermediaries opposing the extension
         of the French Postal Services’ into the market for motor and comprehensive
         homeowners insurance.409

6.109    We now examine each of the products in turn to establish whether there are
         concerns about complexity that can be improved through the use of simplified
         products, whether alternative regulatory interventions have improved the
         functioning of the market or whether the products are seen as working effectively.

         Basic deposit account with payment means

6.110    Regarding banking products there is no issue of complexity due to the fact that
         banks offer products that are already strictly regulated in France. Research by the
         “Observatoir Ireq” in June 2003 found that six out of ten French consumers value
         the efforts of banks, and three out of four consider that it is easy to find the price
         of an operation when they need it.410




409
      French insurance in 2002, the Association of Insurers, available at www.ffsa.fr.
410
      Rapport d’activité 2003, Fédération Bancaire Francaise (French Bankers’ Federation) available at
      http://www.fbf.fr/Web/internet/content_europe.nsf/(WebPageList)/management+report+2003?Open.

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6.111    Nevertheless, according the KPMG Study “Banking beyond borders”, only 50%
         of consumers in France agreed to the statement “Banking in my country is good
         and I am happy with the system as it is” compared to an average of 57% found in
         the study.411

6.112    Competition between credit institutions on some products takes place on the price
         of product and additional services offered instead of on the form of the product
         because of the many regulated standards that apply to the offering of products
         such as the prohibition to remunerate side accounts. This was mentioned contrary
         to the situation in the UK where competition has taken place in the scope of the
         product.412

6.113    According to the DGCCRF, financial exclusion has been a constant preoccupation
         of the French Government, leading to a series of measures to ease the pressure of
         excluded consumers, such as through the introduction of the basic banking service
         and the right to a bank account.413 People without a bank account can open an
         account through the Bank of France’s right to an account. In practice many open a
         postal saving account (livret A) which is then used as a substitute bank account.414

6.114    According to the Banking Commission, 60 million current accounts exist in
         France. With a population of 60.4 million and assuming one current account per
         person, this would imply that 99% of the French population has a current
         account.415 However, assuming one current account per person is unrealistic
         because many households share a current account, people may own more than one
         current account and people included in the population figure such as children do
         not need a bank account. According to the newspaper “Le Monde”, France has 5



411
      Banking beyond borders: will European consumers buy it? KPMG, 2004, available from
      http://www.kpmg.ie/industries/fs/banking/bankingsurvey.pdf
412
      Interview with the Bank of France, 23rd June 2004.
413
      Interview with the DGCCRF, 23rd June 2004.
414
      Interview with the DGCCRF, 23rd June 2004.
415
      Rapport d’activités 2003, French Bankers’ Federation available at
      http://www.fbf.fr/Web/internet/content_ europe.nsf/(WebPageList)/management+report+2003?Open
      and CIA Worldfactbook.

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         million excluded bank customers.416 Furthermore, this is despite the fact that
         welfare and social security payments are automated and paid straight into bank
         accounts.

6.115    It should be noted that the French system is peculiar regarding current accounts
         because the law forbids banks to offer interest on current accounts. In exchange
         for the absence of interest rates on current accounts banks offer free cheques.
         However, banks such as Cortals and Caixa-Bank France (a subsidiary of Caixa
         Holding in Spain) have taken cases to court for the right to pay interest on
         accounts in exchange for the possibility to charge for payment of cheques.417

6.116    Additionally the absence of interest bearing accounts is not seen to be a problem
         because if the consumer wants to have a product with an interest rate yield, there
         are enough saving products to choose from.418 The reason behind prohibiting
         interest bearing current accounts is that the government wanted to encourage
         long-term saving and to ensure that people put their money into more productive
         savings.419

6.117    A basic bank account product already exists in France and hence there was no
         perceived need for additional simplification or standardisation. However, despite
         this there are estimated to be 5 million people who do not have a bank account.
         This illustrates one of the significant issues underlying simplified products,
         namely that reducing the information asymmetry may not change the underlying
         nature of demand. Indeed this indicates that simplifying or standardising products
         alone is insufficient to ensure they are taken out.




416
      M.Borloo au chevet de l’exclusion bancaire, Le Monde, Tuesday 29th June 2004.
417
      Indeed the Court of Justice recently found in favour of Caixa-Bank France on the grounds that this
      restricted freedom of establishment since it prevented access to the French market, Case C-442/02 of
      5th October 2004, available from www.curia.eu.int.
418
      Interview with the Association for the Defence of the Consumer, 26th July 2004.
419
      Interview with the French Bankers’ Federation, 21st June 2004.

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         Cash based saving product on which interest or other return is paid

6.118    Besides the “simplified” saving accounts, several employee saving schemes exist
         in France. Since August 2000 the French government approved a proposal to
         introduce a law, which will allow employees to subscribe to a new voluntary tax-
         favoured savings vehicle, the plan partenarial d’épargne salariale volontaire
         (voluntary partnership saving plan or PPESVs), in addition to the already existing
         plan d’épargne entreprise (company saving plan or PEE). The new PPESV allows
         employees to transfer accumulated savings without penalty to a new employer.
         Employee and employer contributions can be made over a period of 10 years (5
         years for a PEE) at the end of which all capital will be paid out tax-free. The
         accumulated capital is meant for several uses such as supplementing retirement
         income, paying for further education of children, purchase of a house and setting
         up a business.

6.119    We did not identify a need for a simplified product alongside existing products
         such as CODEVI, livret A and livret bleu, as well as the PEL, as these are already
         considered to be straightforward and standardised, cash-based saving products for
         households.

         Credit or deferred debit cards

6.120    As a result of the free usage of cheques in France, no specific incentives exist for
         consumers to use a debit card. Indeed, 2003 was the first year in which payments
         by card exceeded payments with cheques. This is despite the fact that credit cards
         were developed in the 1980s to compete with cheques but hardly have a credit
         function.420

6.121    Usury regulation (caps on interest rates) applies to five or six different products in
         France. The Bank of France automatically recalculates the caps every five or six
         months. Raising interest rates above this limit is regarded as being a criminal
         offence in France. Foreign banks view the usury regulation as an obstacle to




420
      Interview with the Ministry of Economics, 21st June 2004.

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         provision of credit in France. In fact, this is believed to be one of the reasons why
         the French market is regarded as being difficult to enter.421

6.122    According to the Association for the Defence of the Consumer, there are two
         problems with regard to credit cards: the revolving credit is very expensive and
         consumers do not understand how to handle it; and debt. There are 1.3 million
         consumers in France falling under the law treating over indebtness and 4.8 million
         consumers that have a “fichier negative” (have not paid for their bills three times
         per month).422

6.123    Although the consumer association indicate that this is a problem of complexity, it
         rather seems to reflect a problem of consumers becoming over extended in their
         borrowing a problem to which simplification or standardisation would offer no
         solution (indeed could exacerbate the problem if it led to more people using the
         revolving credit function).

         Private pension plans

6.124    According to the DGCCRF and the Association for the Defence of Consumers,
         the concept of pension products is quite new in France. Although a few closed
         products have been available for a while for certain categories of people such as
         civil servants and teachers, the idea of open-to-everyone pension products exists
         only since August 2003.423 The law of 21st August 2003 has created two types of
         products: individual (PERPs) and corporate (PERCOs) pension products.

6.125    Due to the compulsory participation in the first and second pillar pension schemes
         the market for third pillar pensions may be relatively small for some time.424
         Further, there is already an existing simplified product in this area and hence the
         need for an additional one will depend on the impact of the PERP.



421
      Interview with the French Bankers’ Federation, 21st June 2004.
422
      Interview with the Association for the Defence of Consumers, 26th July 2004.
423
      Interview with the Association for the Defence of Consumers, 26th July 2004 and the DGCCRF, 23rd
      June 2004.
424
      Study on pension schemes of the Member States of the European Union, Internal Market Directorate-
      General, May 2000.

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         Motor insurance

6.126    Motor insurance companies are obliged to provide third-person liability insurance.
         In case insurance companies refuse to provide insurance, consumers can contact
         the “Bureau Central de Tarification” (Central Office of Price Setting), who
         obliges the insurance company to offer insurance and determines the contribution
         consumers have to pay to the insurance company.425

6.127    According to the insurance industry, automobile insurance is simple from the
         point of view of the consumer because insurance companies use inter-company
         agreements to settle claims,

           “The efficacy of these agreements and their value to policyholders is reflected in the
           low number of consumer complaints and the even lower number of actual disputes.”426

6.128    French insurance companies apply the bonus-malus (no claims) system. In this
         system the discount for having made no claims on the policy is determined
         according to a formula set by the Government and the industry i.e. the bonus-
         malus system only fixes the coefficient of the premium but not the initial premium
         itself, which may be set freely by insurance companies. In a decision on 7th
         September 2004, the European Court of Justice judged that the bonus-malus
         system in France may continue to be applied.427

6.129    According to the Association of Insurers, the French market is known to be one of
         the most competitive ones in Europe. 428 The system allows a trade off between
         solidarity and responsibility by allowing more than 90% of the insured to have a
         bonus (5% reduction of the coefficient of the monthly payments).429




425
      Refus d’asssurances: recours au bureau central de tarification, available at http://vosdroits.service-
      public.fr/particuliers/ARBO/FXASS125.html?&n=Assurance&l=NX03&n=Assurance%20des%20v%
      C3%A9hicules&l=NXASS102&n=R%C3%A9siliation%20et%20refus%20d'assurance&l=NXASS19
426
      French Insurance in 2002, French Association of Insurers, available at www.ffsa.fr.
427
      See the judgements from the European Commission C-346/02 and C-347/02 available from
      http://curia.eu.int/jurisp/cgi-bin/form.pl?lang=en.
428
      Interview with the Association of Insurers, 26th July 2004.
429
      Le point sur le bonus-malus, Assurance Automobile, FFSA Info, Assureur, N. 26, 21 Avril 2004.

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6.130    All interviewees indicated that motor insurance is relatively standardised and that
         there is no need for a simplified motor insurance product. Further given that there
         already exists an “insurer of last resort” there is little indication of a market failure
         regarding access.

         Home insurance

6.131    Home insurance is compulsory and there is already a degree of standardisation as
         it must cover the risk of flooding, storm and terrorism.430 In fact, the French
         Government supplements available private insurance capacities in case of terrorist
         attacks.431 According to the Association of Insurers, it is important that the state
         creates a basis covering natural disasters and terrorist attacks on which insurance
         companies can build.432

6.132    Moreover, the debate in France is not about the complexity of financial products
         but about the renewal of insurance. Currently consumers cannot cancel their
         insurance in the last two months before the contract expires because it is
         automatically renewed. A law is being discussed in 2004 to oblige insurance
         companies to inform consumers in advance about switching possibilities.433
         Standardisation of contract terms could be another way of addressing this
         problem.

6.133    Although a problem of switching has been identified, an alternative solution has
         been identified to improve this making any form of simplification or
         standardisation appear unnecessary.

         Life insurance

6.134    A unit-linked life insurance contract must be of at least eight year’s duration in
         order to qualify for tax relief. Up to €4,600 is fully tax deductible and reduced
         rates apply beyond this. Unit-linked policies are also popular because taxes only



430
      Interview with the Association of Insurers, 26th July 2004.
431
      Interview with the Association of Insurers, 26th July 2004.
432
      Interview with the Association of Insurers, 26th July 2004.
433
      Interview with the Ministry of Economics, 21st June 2004.

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         apply when benefits are paid. For other life insurances taxes apply throughout the
         life of the policy.434

6.135    Surrender fees for life insurance are not very common in France and the dominant
         distribution channel for life insurance is thought to be through bancassurance
         (banks which set up their own insurance product or who distribute life insurance
         products).435

6.136    According to the Financial Market Authorities, the up-front fees for life insurance
         in France appear to be clear and no overall problem of complexity for life
         insurance exists.436 The Association for the Defence of the Consumer, however,
         disagreed,

           “The main problem is the choice of products for consumers because contracts are not
           standardised and guarantees differ. There is a deficit of offer for advice. Consumers
           should be able to go with their investment profile to several companies and compare the
           offers but consumers do not have the time to compare offers. The information
           permitting consumers to choose is not standardised. However, there is also a difference
           between knowing how to inform and wanting to inform.”437

6.137    Life insurance products with a minimum guaranteed interest rate are regulated by
         article A-132-1 of the insurance law. The interest rate has to be below 75% of the
         average interest rate of Government bonds.438 The insurance law obliges
         companies offering with-profit life insurance to pay out at least 85% of their
         investment profits and 90% of their operating income.

6.138    Until the beginning of the 1990s life insurance was tax exempted with respect to
         income tax. For contracts concluded after September 1995, premiums are no




434
      Unit-linked life insurance in western Europe: regaining momentum? Sigma Number 3/2003,
      publication by Swiss Re.
435
      Unit-linked life insurance in western Europe: regaining momentum? Sigma Number 3/2003,
      publication by Swiss Re.
436
      Interview with the Financial Markets Authority, 15th June 2004.
437
      Interview with the Association for the Defence of Consumers, 26th July 2004.
438
      La rémunération de l’épargne, Fiche E 29/4-02, INC Hebdo, France available at www.60inc.fr.

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         longer tax deductible. Lump sum benefits are tax-deductible if the duration of the
         life insurance is longer than 8 years and in the event of death.439

6.139    Life insurance products do not appear to be very standardised according to the
         Association for the Defence of Consumers and the Commissariat for the Control
         of Insurance who deems that there is a lot of diversity in the market for life
         insurances in France.

6.140    Simplification or standardisation was not mentioned as a solution by interviewees
         who favoured information and the sales and advice process being improved.
         However, given the inherent complexity of the underlying product, there is at least
         cause to doubt whether additional information will lead to this market working
         effectively and simplification or standardisation may offer an attractive way
         forward.

         Mortgage credit

6.141    Some mortgage products such as reverse mortgages do not exist in France i.e.
         there is currently no way to get credit on the basis of a property for which the
         initial loan has been repaid.440 The Treasury is currently conducting a study on
         equity-release and reverse mortgages to find out how these products work and it is
         expected that by the end of the year banks will offer them.441 This could be an
         opportunity to build in additional consumer protection into these products in order
         to avoid some of the problems that have been observed with these products in
         other countries.

6.142    France is among the countries with the lowest adjusted price for mortgages among
         the eight European countries examined by the study. This could suggest that the
         market is working effectively. However, according to the study on the financial
         integration of European mortgage markets by Mercer Oliver Wyman, mortgage
         products in France yield low returns on a stand-alone level, reflecting cross-


439
      Treatment with regard to insurance tax, Annex 1 to doc.VIE4022(02/04), Allianz
      Lebensversicherungs-AG Tax Department, 23rd March 2004.
440
      Interview with the Ministry of Economics, 21st June 2004.


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         subsidies within banks from other products.442 Although this may have
         implications regarding cross-border trade in mortgages, it is difficult to see how
         their simplification or standardisation would impact this.

6.143    It should also be noted that consumer protection in French mortgage market is
         ensured through strict regulation of early repayment fees. The fees are capped by
         law at the lesser of 6 months interest or 3% of the capital repaid. Fees are allowed
         on fixed rate mortgages only and are not permitted for prepayment due to death,
         involuntary unemployment or professional relocation.443

6.144    Although this represents standardisation we have not characterised it as
         simplification because it does not reduce the complexity regarding the product
         features but simply places limits on excessive interest rates facilitating consumer
         protection.

6.145    In addition to mortgage products, France also has savings products that are linked
         to access to mortgages. These are the plan d’épargne logement (PEL or saving
         plan for housing purposes) and the compte d’épargne logement (CEL or account
         for housing purposes).444 Although there is no obligation to make use of the
         mortgage option after the saving phase of the product, the main aim of the
         products seems to be to reduce the uncertainty associated with obtaining a
         mortgage. However, because the products bundle together savings accounts and
         access to mortgages, we do not categorised them as a simplified savings account,
         but rather see them as aiding the functioning of the mortgage market (yet they are
         clearly not mortgages).

6.146    The main constraint in the product is that the savings are not accessible within
         four years for the PEL and 18 months for the CEL if tax advantages and


441
      Interview with the Ministry of Economics, 21st June 2004.
442
      Study on the Financial Integration of European Mortgage Markets, Mercer Oliver Wyman, October
      2003.
443
      Study on the Financial Integration of European Mortgage Markets, Mercer Oliver Wyman, October
      2003.
444
      The CEL is comparable to the PEL and is regulated in Art.R315-1 to R315-22 of the Code de la
      construction et de l’habitation (Code for construction and habitation).
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         preferential savings rates are to be achieved. In the case of the PEL, if after four
         years the consumer does not have an immediate need for a mortgage, the contract
         can be extended to a maximum of ten years and further the rights to a loan
         acquired on the PEL can be transferred to other members of the family. In
         addition, there must be minimum contributions to gain access to the loans as well
         as a regulated interest rate.

6.147    The products have existed in France for many years and are thought to be popular
         with consumers and product providers, although it is thought that much of their
         popularity is due to the tax privileges.

6.148    According to our interview partners there is no problem regarding complexity for
         mortgages in France, although the Association for the Defence of Consumers
         noted that mortgages are indeed complicated products for consumers. A possible
         reason for this could be the widespread popularity of the PEL. The direct subsidy
         inherent in the PEL product allows mortgages to be offered to a wider range of
         borrowers thus widening access to the mortgage product.445 However there is a
         possible drawback because the PEL may have prevented other mortgage products
         from being created. Moreover, information requirements at the pre-contractual
         stage are extensive in France and the written offer to be given to the consumer is,

           “especially stringent and detailed”.446

         Collective investment schemes

6.149    Individuals who are resident in France can invest up to €132,000 for a single
         person, or up to €264,000 for a couple, into a plan d’épargne action (PEA) or
         personal equity plan, which was created in 1992.447




445
      Study on the Financial Integration of European Mortgage Markets, Mercer Oliver Wyman, October
      2003.
446
      The Protection of the Mortgage Borrower in the European Union, European Mortgage Federation,
      November 2003. The European Mortgage Federation gave us the document.
447
      A FEFSI Survey: Taxation of UCITS, The Principles, 2004 update, Fédération Européenne de Fonds
      et Sociétés d’Investissement, available at http://www.fefsi.org/Unrestricted_Area/frameset.htm.

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6.150    The savings must be invested in French shares as well as in SICAV (Société
         d’Investissement à capital variable ; unit trust) or FCP (fonds commun de
         placement; investment funds) which respect the minimum investment ration in
         eligible securities. After 1st January 2005, the saving may be in EC shares and EC
         savings and SICAV and FCP will be able to be from any country of the EC.

6.151    The personal equity plan allows tax free capitalisation of all savings products
         invested : dividends, capital gains and tax credits which are paid in cash. Social
         taxes are withheld at the end of the contract or on withdrawals. The rate of social
         taxes varies and depends on the time the accumulated proceeds accrued.

6.152    The contract is entered into for a period of 8 years. Nevertheless, after the fifth
         year, tax-free withdrawals are possible.

6.153    We did not classify the personal equity plan as a simplified product because no
         additional product constraints exist which aim at protecting the consumer, it
         purely represents a tax privileged product.

6.154    According to the Association for the Defence of Consumers, there is no linking of
         investment and credit products in France and investment products are deemed to
         be transparent.448 The DGCCRF also mentioned that information regarding
         investment funds is widely available and investment funds are very popular
         products in France.449

6.155    Regulation with regard to hedge funds is very strict in France. It is not possible to
         sell hedge funds to retail investors.450 However, funds of hedge funds can be sold
         to investors. The Financial Markets Authority is working on allowing “direct”
         sales of “hedge funds” under certain conditions. Also, several special types of
         funds require a minimum investment, not a minimum savings level, and these
         funds are almost exclusively bought by institutions.451


448
      Interview with the Association for the Defence of Consumers, 26th July 2004.
449
      Interview with the DGCCRF, 23rd June 2004.
450
      Interview with the Financial Market Authority, 15th June 2004.
451
      Interview with the Financial Market Authority, 15th June 2004.
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6.156    A problem of complexity was not be identified for collective investments,
         although concerns were raised that problems of complexity will increase as
         French consumers will start to demand more risky and exotic products.

         Financial advice

6.157    The study regarding financial intermediaries in view of irregular practices
         recognises the growing complexity of financial services.452 This complexity has
         been brought about by the imagination of finance professionals, the opening of
         new markets and deregulation.

6.158    The study focuses on the risks facing financial advisers (rather than the risk of bad
         advice for consumers) that may force them to act dishonourably. For example, the
         inattentive intermediary may become the victim of dishonest clients, the
         intermediary himself may be careless or lax internal controls of intermediaries
         may exist.

6.159    According to the Fédération Française des Courtiers d’Assurances (French
         Federation of Insurance brokers), insurance products in Italy, Germany, Spain and
         Belgium are distributed by one or two intermediaries (brokers or insurance
         agents). The variety of different distribution networks is deemed to be a French
         speciality. The Financial Markets Authority regulates French intermediaries with
         regard to their qualification and education, although this has only been a recent
         development.

6.160    Despite the variety of different distribution networks that exist in France, our
         interviewees and background research did not identify complexity in advice to be
         a problem. However, mis-selling scandals such as the selling of the French postal
         services’ Bénéfic products were identified as a problem of a lack of information
         rather than a problem of complexity for financial advice.




452
      L’Etude sur les intermédiaires financiers face aux pratiques irrégulières: ou sons les risques
      aujourd’hui? Commission de Marchés Financiers, February 2002, available at http://www.amf-
      france.org/styles/default/documents/general/5009_1.pdf.

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6.161    Given the relatively new regime for financial advice, there is no evidence that the
         level of regulatory scrutiny is inconsistent with the pre-existing simplified
         products. However, given the level of simplification, the trade-off between the
         regulation of advice and the regulation of the product would need to be monitored
         in order to prevent excessive costs and resulting financial exclusion.

Cross-border trade
6.162    There is thought to be very limited potential for cross-border trade from
         standardisation or simplification for most financial products in France at least
         from the consumer side,

           “The general public would not go out and buy products cross-border.”453

6.163    However, there is frustration regarding the degree to which products can be traded
         across borders with this varying considerably between markets,

           “Axa (a French insurance company) wanted to export a long-term savings products
           with very attractive features and which had been very successful in Belgium, to Spain.
           Because of the regulation, a completely new product had to be created for Spain.”454

6.164    This suggests that for cultural and regulatory reasons there are regional trading
         blocks in the EU within which cross border trade is already being seen, but
         between which cross border trade is seen as much more difficult.

6.165    However, from the provider’s perspective, the considerable amount of price
         regulation that is observed in France could represent a substantial barrier to cross-
         border trade through freedom of establishment and freedom of services by
         reducing the likely returns to providers.             In addition, new entrants have to
         compete with products that can only be offered through tax preferred channels
         such as La Poste.




453
      Interview with the Bank of France, 23rd June 2004.
454
      Interview with the French Banking Federation, 21st June 2004.

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Benefits
6.166    Interviews in France were unusual in identifying that it was possible to gain from
         EU wide products through the ability to create a “26th regime” and to use EU
         regulation rather than using Directives,

           “We would end up with 25 different simplified products and not a unified European
           product. It needs to be done through a regulation.”455

6.167    Instead, market participants preferred the concept of a “26th regime” which would
         consist of a European self-standing legal scheme defining a general type of
         product regulation, and hence products could be traded across borders using
         European regulations and standards whilst maintaining domestic standards. The
         products would only need to be adapted to the local market without regulatory
         constraints. This would also allow companies to rationalise their offer because
         they would only need to create one product for the European market.456 This may
         suggest that only if a 26th regime is designed could material benefits of simplified
         or standardised products arise.

6.168    Furthermore, some participants noted that branding is an important factor for
         cross-border trade. For example, in credit cards, products like Amex and Visa are
         trusted around the world.457 Hence is could be possible that developing
         standardised products with a consistent brand across all countries could have
         equally beneficial impacts.

Barriers
         Consumer protection

6.169    Interview participants believed that there is a comparatively good level of
         consumer protection in France. Hence French consumers are conscious of the fact
         that they may not receive the same level of consumer protection when they are
         buying non-French products. Moreover, this may suggest that French consumers
         would not trust foreign providers entering the French market even with simplified


455
      Interview with the Association of Insurers, 26th July 2004.
456
      Interview with the Association of Insurers, 26th July 2004.


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         or standardised products due to concerns of consumer protection standards. It was
         noted therefore, that there would be a requirement for information provision to
         improve, in order that consumers do not mistakenly purchase products that they
         do not understand.458

         Regulatory structures

6.170    A major reason for the lack of cross-border trade was identified by interviewees
         as the high level of regulation in France. In particular, the high level of
         information required could be a factor deterring foreign providers to sell their
         products in France. Although on the face of it a higher regulatory standard could
         benefit French providers offering services in other countries, since consumers are
         ill-equipped to assess regulatory regimes this is unlikely to be the case.

6.171    This suggests that standardisation of information provision across the EU may
         offer benefits in terms of reducing barriers to cross-border trade. Further, one
         market participant indicated that an additional factor preventing cross-border trade
         is that foreign producers may not wish to supply products, e.g. the PEL, because
         they are complicated to administer.

         Language

6.172    Language is seen as another barrier to trade. For example, French consumers go to
         Luxembourg because they understand the language and hence are able to
         understand the product. This supports the view that there may be potential for
         regional markets within the EU based on linguistic ability e.g. France, Belgium,
         Luxembourg. It was thought that the introduction of a simplified product would
         not lower the barrier to trade that is due to different languages in Europe.459
         However, given the experience of cross-border trade beyond financial services
         markets, it seems unlikely that language barriers would negate any advantages due
         to simplification or standardisation.



457
      Interview with the French Banking Federation, 21st June 2004.
458
      Interview with the DGCCRF, 23rd June 2004.
459
      Interview with the French Banking Federation, 21st June 2004.

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Section 7          Germany
Summary
7.1      There is a general consensus that consumers’ understanding of financial services
         issues is far from optimal in Germany. Consumer associations are also concerned
         that some products, especially traditional with-profits life insurance, are not
         sufficiently transparent.        However, the introduction of simplified products is
         generally not seen as a potential remedy for this problem and would not be
         supported by most of our interviewees.

7.2      In Germany, the main approach to solving the problem of asymmetric information
         and complexity of financial services products has been to focus on information
         requirements and (at least for investment funds) the regulation of the sales and
         advice process. There are considerable numbers of product standards and trade
         associations also provide model conditions for contracts as guidance for many
         financial services products. These have a very long tradition in Germany, with
         the aim of reducing the cost for individual providers to develop new contracts and
         ensuring their compliance with regulation. No major changes with regard to
         product regulation have happened in the past that have been explicitly driven by
         the desire to reduce complexity.460

7.3      In the German insurance sector, the opposite of product standardisation has
         occurred over the last decade. Until 1994, all insurance contract terms and tariffs
         had to be approved by the supervisory authority, leading to effectively
         standardised products. Liberalisation since 1994 has led to product differentiation
         and more product variety for consumers. This increase in product variety was
         viewed very positively by the government, regulatory authorities, trade
         associations and consumer organisations. However, consumer associations have




460
      Note however that, for example, the model conditions of the Association of German Banks, which
      have been in use since 1912, were fundamentally reviewed at the beginning of the 1990s with an
      explicit focus on transparency. A market study was undertaken to test consumers’ understanding of
      the new conditions prior to their release. (Information received from the BdB, letter dated 12th August
      2004.)

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      also expressed concern that the abolition of product authorisation has led to a
      reduction of transparency and consumer sovereignty.

7.4   The market for private pensions has recently seen the introduction of product
      standards that we have classified as simplified, namely “Riester” products.
      Although the ultimate aim of their introduction was to provide an incentive for
      private saving to complement state pensions, several requirements have to be met
      within Riester products that can be seen as simplification including measures to
      increase product transparency, reduce complexity and allow consumers to switch
      between products and providers.

7.5   It is widely acknowledged that Riester products have not been very successful in
      the market so far. This is generally attributed to the fact that despite some
      standardisation and simplification, aspects of complexity remain.       All of the
      organisations we spoke to during the course of this study argued that complexity
      in claiming government benefits for consumers and the lack of incentives to sell
      the products were the main factors preventing a greater uptake of Riester
      products.   Recently, the German parliament agreed changes to the Riester
      standards that are aimed at overcoming these problems. However, consumer
      organisations are concerned that in the course of reforming the criteria, the level
      of consumer protection will be reduced.

7.6   In the investment fund sector, the simplified product of Altersvorsorge
      Sondervermögen Fonds (Old Age Provision Special Assets Funds or AS Funds)
      exists. Again, the main motivation for the introduction of AS Funds was not to
      reduce complexity, but to create an investment fund product that was designed for
      old age provision, i.e. with a long-term investment policy and a reduced level of
      risk for investors. Providers have to comply with various investment policy
      requirements in order to be allowed to call their product an “AS Fund”. A large
      part of these requirements have the effect of ensuring a transparent investment
      strategy to be followed by providers and transparency regarding costs and
      possibilities of switching. Hence, we classify AS Funds as simplified products.



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7.7   However, AS Funds achieved only limited success in the market. This is said to
      be due to the lack of tax benefits for these products. The result is that they have
      played only a very minor, and in recent years decreasing, role in the market.

7.8   For life insurance, one regulatory intervention that was originally for the purpose
      of prudential restrictions has become important in marketing products to
      consumers and brings product standardisation. The Financial Supervisory
      Authority sets a maximum interest rate that insurance providers are allowed to
      guarantee their customers. In practice, most providers choose to guarantee this
      rate, which makes this element of product terms similar. However, this regulation
      of product characteristics has been in existence for a very long time and was not
      motivated by any complexity or transparency considerations. Instead, the main
      aim of the maximum interest rate seems to be to prevent insurance providers from
      “over-bidding” each other and over-promising the returns they could guarantee,
      thereby endangering the financial stability of themselves and the insurance in
      general. Hence, we classify this product regulation as standardisation rather than
      simplification.

7.9   There are some other products in Germany that are very simple and to some
      extent standardised, but which we do not consider to be simplified as defined for
      the purpose of this study. For motor insurance and home insurance, the still
      relatively high level of standardisation (despite a broad range of different tariffs)
      stems from the fact that only recently has the market been liberalised after a long
      period of compulsory product standardisation through an approval requirement. In
      the banking sector, current accounts and savings products are generally seen as
      very simple and standardised products, with this driven mainly by product
      evolution over time.

Table 28: Simplified products in Germany

      Product list                               Does Germany have simplified products?

      Basic deposit account with payment means                      No

      Cash based savings products on which                          No
      interest or other return is paid


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          Credit or deferred debit card                                              No

          Private pension plans                                              Riester pensions

          Motor insurance                                                            No

          Home insurance                                                             No

          Life assurance                                                             No

          Mortgage credit                                                            No

          Collective investment schemes                                          AS Funds

          Financial advice                                                           No



7.10      As already mentioned, the main focus of German consumer protection policy in
          financial services is on the provision of information. For investment funds, the
          sales and advice process is also regulated. For insurance products, the
          implementation of the European Insurance Mediation Directive is imminent.461
          For all financial products covered in this study there are a variety of measures that
          have been taken with regard to information provision, ranging from compulsory
          and voluntary information disclosure standards and codes of conduct, to state-
          financed independent product testing and provider ombudsmen systems. In
          addition, all relevant trade associations provide model conditions for products and
          contracts to their members, but those are not binding and individual contracts can
          differ from the recommendations (although they rarely do).

Table 29: Alternative regulatory interventions in Germany

                                                           Regulation of sales and          Voluntary codes
                           Information provision
                                                                   advice                     of conduct

Basic deposit              Prices and interest rates
account with                displayed in branches
payment means


461
       The directive will have to be implemented by 1st January 2005. However, there is still disagreement
       about certain issues in Germany, e.g. regarding responsibilities for the register of intermediaries and
       regarding the professional qualifications of intermediaries. There are government plans to implement
       the directive through two pieces of legislation, one dealing with professional liability and advisory
       duties and a second one dealing with the supervision of intermediaries. However, no draft bills were
       publicly available at the time of writing.

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Cash based            Prices and interest rates
savings products       displayed in branches
on which interest
or other return is
paid

Credit or
deferred debit
card

Private pension         Information provision      Regulation of sales and
plans                   rules of the respective     advice process for the
                     product group apply (life    respective product group
                        insurance, investment     applies (currently mainly
                       funds etc). Information        investment funds)
                      requirements for Riester
                         contracts (especially
                     information necessary for
                         claim of government
                       support must be given)

Motor insurance       Insurance Supervision
                        Act and Insurance
                           Contract Act

Home insurance        Insurance Supervision
                        Act and Insurance
                          Contract Act

Life assurance        Insurance Supervision
                        Act and Insurance
                          Contract Act

Mortgage credit         German civil code                                         EU code of
                                                                                conduct on home
                                                                                     loans

Collective            Securities Trading Act        Requirement to assess          BVI code
investment             and Investment Act         experience / knowledge of
schemes                                             consumer during sales
                                                  process, seller must act in
                                                   best interest of consumer

Financial advice                                   Regulation of respective
                                                      products applies




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Sources of information
7.11   The information in this section came from a range of sources. These included
       publications from the following institutions (in addition to those interviewed
       listed below):

       •   Deutsches Institut für Altersvorsorge, DIA (German Institute for Old Age
           Provision);

       •   Regional consumer associations, e.g. in Brandenburg and North Rhine
           Westphalia;

       •   Various Government ministries e.g. Ministry of Justice; and

       •   Websites of various banks.

7.12   In addition, the financial press (e.g. Finanztest, Stiftung Warentest, Financial
       Times Deutschland, Focus Online) was consulted.

7.13   Interviews were conducted with:

       •   Bundesanstalt    für   Finanzdienstleistungsaufsicht    (Federal   Financial
           Supervisory Authority, BaFin);

       •   Bundesministerium der Finanzen (Federal Ministry of Finance, BMF);

       •   Bundesministerium für Verbraucherschutz, Ernährung und Landwirtschaft
           (Federal Ministry for Consumer Protection, Food and Agriculture, BMVEL);

       •   Bundesverband deutscher Banken (Association of German Banks, BdB);

       •   Bundesverband Investment und Asset Management (Federal Association of
           Investment and Asset Management, BVI);

       •   Deutscher Sparkassen- und Giroverband (German Savings Bank Association,
           DSGV);

       •   Gesamtverband der deutschen Versicherungswirtschaft (German Insurance
           Association, GDV);

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       •   Verband der Privaten Bausparkassen (Association of Private Building
           Societies);

       •   Verband Deutscher Hypothekenbanken (Association of German Mortgage
           Banks, VDH); and

       •   Verbraucherzentrale Bundesverband (Federal Association of Consumer
           Organisations, vzbv).

7.14   In addition to these interviews, we received a written statement from
       Bundesverband der Deutschen Volksbanken und Raiffeisenbanken (Federal
       Association of German Co-operative and Raiffeisen Banks, BVR).

7.15   The Federal Financial Supervisory Authority (BaFin) is the relevant regulatory
       authority for the providers of all products concerned in this report. The Federal
       Ministry of Finance is responsible for product design for products with tax
       benefits.

Table 30: German primary regulators

Product list                                                 Primary regulators

Banking products (including credit cards and
mortgages)

Insurance products (both life and general)
                                                 Federal Financial Supervisory Authority
Pensions                                          (BaFin), Federal Ministry of Finance

Investment products

Financial advice



Development and characteristics of simplified products
7.16   The following section describes products that we classified as simplified. We
       highlight their characteristics, how they were developed and, where possible,
       assess the impact that they have had on the market.




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Riester pensions
7.17      Riester products were introduced on 1 January 2002, when the German “Act on
          the      Certification        of      Old-Age          Provision        Savings        Contracts”
          (Altersvorsorgeverträge-Zertifizierungsgesetz, AltZertG) was introduced.462

7.18      Riester products must be certified by BaFin as being in accordance with the list of
          criteria set out in the law. Although this law explicitly says that the certification
          process does not check for product and/or provider quality and reliability, the
          Federal Association of Consumer Organisations (vzbv) believes that the Riester
          certificate signals to consumers that the product will provide a certain minimum
          standard of consumer protection. Indeed, a recent survey found that about one-
          quarter of German consumers believe that, during the certification process, BaFin
          at least considers the reliability of the provider. A significant share of respondents
          also believed that BaFin checks whether product costs exceed a certain limit or
          whether the product guarantees a certain yield.463

7.19      Riester products can take various forms in terms of the underlying investments
          including bank savings plans, life insurance contracts (including unit linked
          insurance), and investment funds. The main aim of the Riester scheme is to
          encourage private pension savings.

7.20      The table below summarises the characteristics of Riester products (some of these
          characteristics will be altered by recently passed legislative changes).




462
       Riester products are named after the former Federal Minister of Economics and Labour and are
       private pension products that benefit from certain government premiums and tax deductions. The
       AltZertG is part of the Altersvermögensgesetz (AVMG, Act on Old Age Capital). Note that Riester
       contracts can be included as private pension plans, but also as occupational pensions. According to the
       German Institute for Old Age Provision (Deutsches Institut für Altersvorsorge), about 52% of the
       Riester contracts taken out before January 2004 were private contracts and 48% were occupational
       pensions. (DIA-Rentenbarometer – Riester-Rente stagniert, Deutsches Institut für Altersvorsorge,
       press release of 4 March 2004, available at http://www.dia-vorsorge.de/downloads/pm000027a.doc).
463
       Vorsorgender Verbraucherschutz in der privaten Altersvorsorge – Schlussbericht, Verbraucherzentrale
       Bundesverband e.V., Berlin, 2003.



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Table 31: Characteristics of simplified product – Riester products464

Non-price characteristic                        More detail                         Explanation

Access                                      Use of investments               No access before 60 and an
                                                                            obligation to purchase a life-
                                                                           long annuity (to retain tax and
                                                                               Government benefits)

                                                   Bequest                For bank or investment funds,
                                                                            Government premiums and
                                                                          tax benefits must be paid back
                                                                             in the case of a bequest.

Contributions                           Frequency of contributions          Regular payments (usually
                                                                             monthly out of salary).

                                           Minimum / maximum               Minimum annual contribution
                                              contributions                   depending on income in
                                                                           previous year (currently 2%),
                                                                               maximum contribution
                                                                           capped at level of maximum
                                                                              tax deduction (currently
                                                                                     €1,050).

                                             Guarantee of value           Providers must give guarantee
                                                                               on paid-in capital at
                                                                                   retirement.

Switching                                   Cost and conditions               Right to switch to other
                                                                             products and/or providers
                                                                            with three months’ notice is
                                                                                    mandatory.

Information provision                                                       Additional pre-contractual
                                                                            disclosure of costs making
                                                                               information about the
                                                                              underlying investment
                                                                           portfolio, and the investment
                                                                          strategy followed mandatory).



464
      Much of the detail in this section comes from: Gesetz über die Zertifizierung von
      Altersvorsorgeverträgen (AltZertG, latest amendment per law of 15th December 2003), article 1.1,
      paragraph 7, available at http://www.bafin.de/gesetze/altzertg.htm (note that the version available at
      this link already includes the changes applicable to Riester products as of 1st January 2005);
      Checkliste zur Riester-Rente, Federal Ministry of Health and Social Security, available at
      http://www.bmgs.bund.de/downloads/ Checkliste_riester-rente.pdf; Informationen zur Riester-Rente -
      Änderungen ab 2005, Federal Ministry for Health and Social Security, available at
      http://www.bmgs.bund.de/downloads/RiesterRente2005.pdf; Förderung der zusätzlichen
      Altersvorsorge (Riester-Rente), Bundesministerium für Gesundheit und Soziale Sicherung, available
      at http://www.bmgs.bund.de/deu/gra/themen/rente/4738.cfm; and the GDV website at
      http://www.gdv.de/presseservice/12956.htm.

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Price characteristic                          More detail                  Explanation

Structure of costs                                                    Distribution cost must be
                                                                     spread over 10 years (to be
                                                                            reduced to 5).

Tax incentives                                                       Yes, and certain individuals
                                                                    can also receive Government
                                                                               support



          Access

7.21      As is common with many pension products, access to funds is prevented until the
          policyholder reaches the age of 60 or retires.

7.22      Although up to 20% (increasing to 30% in 2005) of the fund can be paid out as a
          lump sum, the rest must take the form of life-long annuity payments. In addition,
          part of the contract must be paid into pension insurance that ensures that annuity
          payments will continue after the policyholder reaches the age of 85.

7.23      The bequest possibilities of Riester products are limited to the extent that if the
          capital paid into a bank or fund savings plan is bequeathed, all government
          premiums and possible tax benefits that the original policyholder received must be
          paid back.465 Capital paid into an insurance-based Riester contract cannot be
          bequeathed, but insurance contracts may (but do not have to) include widows’ or
          orphans’ insurance, which determines their (indirect) bequest possibilities.

          Contributions

7.24      Reflecting the objective of the Riester scheme to encourage private pension
          savings, the Act on the Certification of Old-Age Provision Savings Contracts
          requires that during the saving phase of the contract, the policyholder must pay
          regular voluntary contributions into their Riester contract. Policyholders must
          contribute at least 2% of their previous year’s income (increasing to 4% by 2008)
          into their Riester contracts.




465
       German Income Tax Act (Einkommensteuergesetz), article 93.

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7.25   The maximum annual contribution is also regulated under the Riester scheme. In
       2004, it is set at €1,050 per year and will increase gradually to €2,100 as of 2008.

7.26   The Act on the Certification of Old-Age Provision Savings Contracts does not
       include any specific regulation with regard to the investment strategy to be
       followed by providers of Riester products. However, providers must guarantee
       that at retirement, at least the contributions paid in must be available. This
       condition applies for unit linked insurance products and investment funds as well
       as for the other types of saving. Hence for these products in particular, this
       provides an additional guarantee compared to that which would be expected from
       similar funds outside the Riester framework.

       Switching

7.27   The ability to switch funds was seen as a very important element in the
       development of the Riester product. Therefore rules are in place to allow for
       switching with 3 months’ notice. Policyholders can either transfer the accrued
       capital to another Riester contract with the same provider, to a Riester contract
       with a different provider or withdraw the accrued capital (although this involves
       losing the tax advantages).

       Information provision

7.28   The Riester legislation specifies pre-contractual information requirements to be
       complied with by the provider that are beyond the requirements imposed for life
       insurance products generally:

       •   Providers must inform consumers about the level and timing of deductions for
           acquisition and distribution costs associated with the contract, the costs for
           management of the accumulated capital, and the costs that will be levied for
           transferring the accumulated capital to another Riester product and/or another
           provider of a Riester product; and

       •   Providers must disclose the address of the certifying authority (i.e. BaFin), the
           certification number of the respective product, the date of certification and a
           disclaimer that the certification process only checked the product’s eligibility

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           for tax support under the Riester scheme, and did not involve any quality
           check of the product or the provider nor any legal review of the contract
           terms.

7.29   If these information requirements are not met, the consumer has the right to exit
       the contract within one month after the first payment.

7.30   In addition to the pre-contractual information that must be supplied, providers
       must inform their clients annually about the use of their contributions, the capital
       accrued under the contract, the acquisition and distribution costs retained,
       management costs for the accrued capital, the realised gains and to what extent
       ethical, social and ecological issues were taken into account in the use of the
       contribution payments. As of 2005, providers will also have to inform customers
       about the investment portfolio underlying the respective Riester product and the
       investment strategy that is being followed.

       Structure of costs

7.31   Linked to the concern to improve the terms faced by consumers when they switch
       products, restrictions were placed on the timing of costs. In particular, acquisition
       and distribution costs for Riester products must be spread over at least ten years in
       equal sums (soon to be reduced to five years), unless they are deducted as a
       percentage from the client’s contributions. This has the effect that consumers
       receive better terms when switching out of a product in the early years compared
       to the situation in the absence of this restriction.

       Tax incentives

7.32   Tax incentives for Riester products are highly complex, consisting of two
       components: government premiums and possible tax deductions. Both elements
       are being phased in over several years, and the level will be increased every two
       years until 2008 by which time there will be a total annual tax deduction of
       €2,100. For individual Riester pensions, only individuals who are mandatory
       members of the state pension scheme as well as civil servants, judges and soldiers




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          (or their spouses) are eligible for government support - and hence likely to be
          interested in buying Riester products.466

7.33      The Federal Association of Consumer Organisations (vzbv) pointed out that the
          support system for Riester products is highly complex and confusing for
          consumers.

          Reason for categorising as simplified

7.34      The introduction of the Riester scheme was mainly motivated by the desire to
          promote private pension savings, and to this end much of the legislation has been
          aimed at increasing transparency and consumer protection.

7.35      One of the developments that were seen as significant was to allow switching of
          funds between products and providers. Secondly, Riester products have rules on
          the spreading of distribution costs which act as a consumer protection measure by
          improving conditions for those who choose to switch in the early years of the
          product. This is beyond the general disclosure requirements for life insurance
          products. Thirdly, Riester pensions have guarantees such that the final value must
          be at least equal to the contributions paid in. Since this requirement applies to
          investment funds and unit linked insurance as well as other underlying fund
          choices, this acts as an additional consumer protection measure for consumers
          bringing simplification. Further, the vzbv sees the current Riester certificate as an
          indicator for consumers that the product fulfils certain minimum standards and
          provides an adequate level of consumer protection.467

          Impact

7.36      Despite the government support and tax advantages they enjoy, Riester products
          have not been very successful in the market. According to the German Institute
          for Old Age Provision (Deutsches Institut für Altersvorsorge, DIA), the number of
          private Riester contracts fell from 3.1 million in January 2003 to 2.9 million in



466
       Förderung der zusätzlichen Altersvorsorge (Riester-Rente), Bundesministerium für Gesundheit und
       Soziale Sicherung, available at http://www.bmgs.bund.de/deu/gra/themen/rente/4738.cfm.
467
       Information provided by vzbv on 9th September 2004.

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          January 2004 (although the number of occupational Riester contracts increased
          from 2 million to 2.7 million over the same time period). Overall, not even 20%
          of all individuals who are eligible for Riester support have taken out a policy and
          only 10% of the people interviewed for the DIA study said they would take out a
          contract in the future.468

7.37      Although we have categorised Riester products as simplified, it is clear that the
          changes made have not eliminated complexity. Indeed, according to surveys by
          the vzbv, consumers see Riester products as,

            “highly complicated”.469

7.38      The overwhelming majority of Riester products that are actually sold are
          insurance contracts. Banks and investment companies are reluctant to spend much
          time selling Riester products because they see them as too complex and costly.470
          In particular, given the limits of maximum contributions, the value of Riester
          pensions are low value making them relatively unattractive for both providers and
          intermediaries. For intermediaries the requirement to spread distribution costs
          over 10 years reduces the commissions of intermediaries and is thought to reduce
          the incentive for them to sell Riester products (especially for insurance
          intermediaries who usually receive their commissions up-front). In addition, tax
          issues are thought to complicate the sales process.

7.39      For consumers, the procedure of applying for the government benefits is very
          complicated (individuals must apply each year), and only a small share of all
          holders of a Riester pension actually claim them.471 Further, the Association of



468
       DIA-Rentenbarometer – Riester-Rente stagniert, Deutsches Institut für Altersvorsorge, press release
       of 4th March 2004, available at http://www.dia-vorsorge.de/downloads/pm000027a.doc.
469
       Erfahrungen mit der Riester-Rente in der Beratungspraxis, Barbara Sternberger-Frey, in:
       Thesenpapiere zur Konferenz am 4. November 2003 in Berlin – Riester-Rente: Top oder Flop? –
       Anforderungen an eine zukunftsfähige Altersvorsorge, available at
       http://www.vzbv.de/mediapics/thesenpapiere_tagung_riester_11_03.pdf.
470
       Interviews with GDV, BdB and vzbv, 10th May 2004.
471
       According to statements from Allianz, the largest insurer in Germany, only 50% of all customers with
       a Riester contract applied for the tax benefits in 2003 and 50% of those did not manage to correctly
       fill out the corresponding forms when they tried for the first time (see Allianz Leben: Riester-Rente
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          German Banks (BdB) believes that the main problem with regard to Riester is a
          general need to inform consumers more about the importance of private pension
          saving and about how Riester products can help to solve the problem of old age
          provision.472 The Federal Association of Consumer Organisations (vzbv) also
          mentioned that consumers see it as a drawback that Riester products can only be
          accessed and (for insurance products) bequeathed with limitations.473

7.40      Consumer associations have suggested that Riester products be made more
          transparent by using standardised templates for all Riester products. They suggest
          that information be provided on the following regardless of the underlying
          investment type:

          •    Information about the investment risk, volatility and risk of loss when the
              contract is cancelled prior to maturity;

          •    Flexibility of the contract (whether one-off payments are possible, and
              whether contributions can be adjusted);

          •    The extent to which cost increases are possible during the contract term; and

          •    A standardised presentation of costs with three given interest rates (e.g. 3%,
              5% and 7%) as well as the cost ratio (total cost divided by transferred capital
              excluding costs).

7.41      They also suggest that additional information should be provided depending on
          the product type:

          •    Bank savings plans- reference interest rate and margin;

          •    Traditional insurance or capitalisation products- guaranteed interest rate and
              other guarantees like guaranteed pension factors;




       bleibt ein Ladenhüter, Financial Times Deutschland, 28 January 2004, available at
       http://www.ftd.de/ub/fi/1074926714994.html.
472
       Interview with BdB, 10th May 2004.
473
       Interview with vzbv, 10th May 2004.

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          •   Unit-linked insurance- information on whether policyholders can choose
              funds or stocks individually or if these are managed by provider, pension
              guarantee, list of funds with information about investment category and
              internal costs; and

          •   Investment fund saving plans- free management, imposed structures according
              to age, one-fund solution, individual fund or stock selection, list of funds with
              information about investment category and internal costs.474

7.42      BaFin considered developing comparative tables for Riester products similar to
          the ones suggested by consumer associations, however, it abandoned these plans
          because there were concerns that adding even more information material would
          lead to an information overload and cause more confusion rather than
          enlightenment among consumers. Indeed, providers of Riester products are not in
          favour of additional information requirements, given the already high degree of
          complexity of Riester products.475 Further, BaFin believes that costs alone are not
          the decisive factor for the assessment of a product.476

7.43      Given the poor take-up of Riester products, a number of changes have been made
          to the product standards. These have been aimed at reducing the complexity of
          products for both consumer and provider. Complexity for consumers will be
          reduced by allowing providers to claim the government support on their behalf;
          and complexity for providers will be reduced by lowering the number of Riester
          certification criteria. However, according to the vzbv, the changes to the original
          Riester criteria are mainly aimed at reducing complexity from the perspective of
          producers and they believe that the planned reduction of criteria will lead to a




474
       Transparenzerhöhung bei Riester-Produkten – Gemeinsames Diskussionspapier des
       Verbraucherzentrale Bundesverband (vzbv) und der Stiftung Warentest, Stiftung Warentest and
       Verbraucherzentrale Bundesverband, 30. October 2003, available at
       http://www.vzbv.de/mediapics/transparenzerhoehung_vzbv_stiwa.pdf.
475
       Information provided by Mr. Wolfgang Scholl, Verbraucherzentrale Bundesverband (email 4th May
       2004) and interview with GDV, 10th May 2004.
476
       Interview with BaFin, 11th May 2004.

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          reduction in consumer protection. Instead they believe that the changes should
          have focused on reducing the complexity due to tax.477

7.44      As well as the increased rates for lump sums and the shorter time period over
          which distribution costs must be repaid, the other main changes focus on
          information. Providers will need to inform consumers about their options with
          regard to different investment strategies, the structure of the investment portfolio
          and the risk potential of the product, increasing the transparency of the products.
          Providers will also have to provide consumers with a simulation of the
          development        of    their    capital    using     different     interest    rate    scenarios
          (“Normzinsberechnungen”), which should increase the ability of consumers to
          compare different products.

7.45      Further, it is believed by many that this requirement may lead to Riester pensions
          being made compulsory in the future (indeed making the scheme compulsory had
          been one of the initial plans to begin with).478

AS Funds
7.46      Altersvorsorge-Sondervermögen Funds or AS Funds (Old Age Provision Special
          Assets Funds) have been available since April 1998.479 Although they are
          described as being linked to retirement and they were motivated by the requests of
          the investment fund industry to be allowed to offer a fund-based pension savings
          product as competition for the traditionally very popular life insurance products,
          they do not actually have to be used only as a retirement plan and hence we have
          categorised it within collective investment schemes.480



477
       Information received from vzbv, 9th September 2004.
478
       Unisextarife sind das Ende der freiwilligen Riesterrente –Quersubventionierung der erste Schritt zur
       privaten Pflichrente (Unisex tariffs are the end of the voluntary Riester pension – cross-subsidisation
       the first step towards an obligatory private pension), Deutsches Institut für Altersvorsorge, press
       release of 28th April 2004, available at http://www.dia-vorsorge.de/downloads/pm000032a.doc. There
       were also hints that Riester might become obligatory in the future during our interviews with the BMF
       on 19th May 2004 and the DSGV on 21st May 2004.
479
       Taken from www.manager-magazin.de/geld/rente/0,2828,druck-140061,00.html.
480
       Altersvorsorge-Sondervermögen: AS-Fonds, Zeitschrift für Verbraucheraufklärung, available at
       http://verbraucherschutz.wtal.de/as-fonds.htm. The product requirements for AS Funds are specified
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7.47      The table below summarises the characteristics of AS Funds.

Table 32: Characteristics of simplified product – AS Funds

 Non-price characteristic                        More detail                          Explanation

 Transactions                            Frequency of contributions            Regular contributions are
                                                                                   legally required

 Access                                           Time frame                    Withdrawals are always
                                                                              possible. With savings plan,
                                                                                  cancellation possible
                                                                              quarterly or monthly in case
                                                                              of unemployment/invalidity

                                              Use of investments             Provider must offer option of
                                                                                   annuity payout

 Switching                                   Cost and conditions               Transfer of fund shares to
                                                                               other funds free of charge
                                                                                 after three-quarters of
                                                                                      contract term

 Asset allocation                            Diversification / risk           Restrictions on proportions
                                                                              invested in real estate and
                                                                                        equities



          Transactions

7.48      Providers of AS Funds must offer consumers an option of choosing a regular
          savings plan with a contract term of at least 18 years or until the policyholder
          reaches the age of 60 (in order that the AS Fund could be seen as a potential route
          for saving for retirement). Consumers do not have to choose this option, but if
          they do, they agree to make contributions at least once a year.

          Switching

7.49      Consumers have the right to transfer their assets into other funds offered by their
          existing provider. Indeed, once three-quarters of the contract term have elapsed,



       in the German Investment Act, articles 87-90. The Investment Act was passed on 15 December 2003
       and entered into force on 1 January 2004. Prior to that, the rules regarding AS Funds had been laid out
       in the Act on Capital Asset Companies (Gesetz über Kapitalanlagegesellschaften), available at
       http://www.bafin.de/cgi-
       bin/bafin.pl?sprache=0&verz=04_$R$echtliche_Grundlagen_amp_Verlautbarungen*02_$G$esetze&
       nofr=1&site=0&filter=&ntick=0.

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       providers must not charge any costs for such a conversion. Policyholders have the
       right to cancel their savings plan quarterly with three months’ notice (with four
       weeks’ notice at the end of the calendar month if the policyholder has become
       unemployed or invalid after conclusion of the contract).

       Asset allocation

7.50   There are a number of investment restrictions imposed on AS Funds:

       •   Dividends may not be distributed;

       •   Only up to 30% of the fund assets may be invested in real estate funds;

       •   The share of equities is limited to a maximum of 75%;

       •   The combined share of real estate funds and equities must be at least 51% (i.e.
           at least 21% must be invested in equities), which means that the share of
           fixed-interest investments (e.g. savings certificates and bonds) may not exceed
           49%;

       •   Derivatives may only be purchased for hedging reasons;

       •   Currency risks may only apply to up to 30% of the fund assets; and

       •   The fund must not be issued for a limited period of time.

7.51   Despite the long-term focus, the contract application form and the sales
       prospectus of an AS Fund must highlight that the provider cannot guarantee the
       payback of a certain amount of money. This “non-guarantee statement” does not
       apply if the AS Fund is bought as a certified Riester product (since Riester
       products must provide a capital guarantee).

7.52   Payout of AS Funds is not regulated, but providers must offer consumers the
       option of converting the fund into an annuity at the end of the term.

7.53   The regulation of AS Funds does not include any provisions beyond the usual
       information provision rules applicable to all investment funds.



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          Reasons for categorising as simplified

7.54      The primary reason that AS Funds have been categorised as simplified is that they
          impose considerable restrictions on the asset allocation underlying the fund. In
          particular there is both a minimum and a maximum proportion that must be
          invested in equities.        Both of these could be seen as representing consumer
          protection measures if it is believed that equities will outperform other
          investments over the long run and hence there should be some equities in the
          fund, but equities are more risky and hence there should not be too much invested
          in equities. In addition, the asset allocation limits other risks such as currency
          risks and risks associated with the use of derivatives.

          Impact of AS Funds

7.55      As already mentioned, AS Funds can be used within a Riester pension provided
          that the policyholder fulfils the Riester criteria and has received Riester
          certification from the BaFin. If AS Funds are not certified as Riester products,
          there are no tax benefits associated with them. The fund industry sees this as the
          main reason for the fact that demand for AS Funds has never been very strong and
          that the funds have only played a minor role since their introduction in 1998.481 In
          fact, over recent years both the number of AS Funds and the value of assets in
          them have fallen.482

Alternative regulatory interventions
7.56      As already mentioned, product simplification is generally not seen as a potential
          remedy for poor consumer knowledge with regard to financial services products.


481
       Investment 2004 – Daten, Fakten, Entwicklungen, Bundesverband Investment und Asset
       Management, 2004, p. 48, available at http://www.bvi.de/downloads/jb_2004_v2.pdf. The view was
       also confirmed during our interview with BVI, 10th June 2004.
482
       On 31st May 2004, there were 34 registered AS Funds available compared to 47 at the end of 2001.
       Total fund assets held by AS Funds stood at €1,759.3 million at the end of 2003 (2001: €2,805
       million), representing 0.4% of total assets held by all retail funds in Germany. Sources: Übersicht der
       Altersvorsorge-Sondervermögen (AS-Fonds), Bundesverband Investment und Asset Management, 31
       May 2004, available at http://www.bvi.de/downloads/lias0504.pdf; information provided by vzbv; and
       Investment 2004 – Daten, Fakten, Entwicklungen, Bundesverband Investment und Asset
       Management, 2004, available at http://www.bvi.de/downloads/jb_2004_v2.pdf; and “Investment 2001
       – Daten, Fakten, Entwicklungen”, Bundesverband Investment und Asset Management, 2002, available
       at http://www.bvi.de/downloads/CORE-4WXJRQjb_2001.pdf.

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          Instead, the focus is on alternative regulatory interventions, and mainly on
          information provision requirements. The following sections provide more detail
          on the alternatives to product simplification that have been chosen in Germany to
          address the problem of product complexity.

Provision of information
7.57      In Germany, information provision is generally seen as the best way to ensure
          consumer protection in financial services,

            “It is important that providers have to inform sufficiently about yields and costs. This is
            the best consumer protection.”483

          Banking requirements

7.58      For banking products, providers must disclose prices and general business
          principles in their branches and provide clients with a detailed breakdown of costs
          upon request. There are also rules on what information providers must provide in
          their contracts (costs, interest rates etc).

7.59      Providers of banking products believe that the best way to protect consumers is to
          enable them to make informed decisions and assess the potential consequences of
          their behaviour,

            “For many years, [private banks in Germany] have pursued an overall consumer
            protection concept, which has put their relation with retail clients on a new base. This
            concept is constantly adjusted to the changing legal framework, but also to changing
            client needs. It is based on the “three pillars”: pre-purchase information; transparent
            contract design; and out-of-court arbitration. It is founded on the belief that it is not
            necessary to have excessive consumer protection laws in order to protect banking
            clients from the economic consequences of their autonomously taken decisions, but that
            personal responsibility cannot be risk-free.”

            “Appropriate means and instruments of consumer protection policy are: consumer
            information to ensure market transparency; consumer education in order to encourage
            majority and independent power of judgment; and consumer protection in order to
            prevent economic discrimination.”484




483
       Alle Anlagen möglich, interview with Christine Scheel in: Finanztest No. 2/2004. The comment was
       made in regard to pensions.
484
       Banken und Verbraucher – Das verbraucherpolitische Konzept der privaten Banken, Bundesverband
       deutscher Banken, 2003, available at http://www.bdb.de/download/broschueren/03-01-15-Banken-
       und_Verbraucher.pdf.

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7.60      As a result of both the regulator’s and the banks’ views, no explicit simplification
          measures have been imposed on products in the German banking sector so far.
          Banks are free to set their prices, but must disclose them. According to a decision
          of the German Federal Court, clients have the right to request a detailed
          breakdown of costs and interests from their bank.485 All fees that banks charge
          must be set in accordance with the general principle of “equitable discretion”.486
          This pricing principle is also included in the standard general business rules of the
          Association of German Banks.487

          German Civil Code and Act on Mortgage Banks

7.61      German mortgage banks are regulated by the Act on Mortgage Banks
          (Hypothekenbankgesetz). If mortgage credits are provided by other (private)
          banks, those are regulated by the Banking Act (Kreditwesengesetz). The mortgage
          product itself is regulated by the German Civil Code.488

7.62      According to article 492 of the German Civil Code, mortgage credit contracts
          must be concluded in writing, the borrower must receive a copy of the contract
          and the contract must include the following information:489

          •    The net credit amount and the maximum credit limit if applicable;

          •    The method and way of repayment or, if there is no agreement on this issue,
               clarification of the method and way of contract termination;




485
       Geldfalle Girokonto…, Verbraucherzentralen Baden-Württemberg, Bayern, Brandenburg,
       Niedersachen, Nordrhein-Westfalen, Sachsen, available at http://www.vz-
       nrw.de/UNIQ1083227571197522865/doc264B.html.
486
       According to §315 of the German Civil Code, services or service charges set by one party to a
       transaction must be set in equitable discretion, i.e. taking the interests of the other party into account
       (see http://www.ratgeberrecht.de/normen/BGB/norm/P315.html)
487
       Muster für Allgemeine Geschäftsbedingungen (as of 1 April 2002), Bundesverband Deutscher
       Banken, available at http://www.bdb.de/pic/artikelpic/052004/ge0405_re_AGB.pdf.
488
       Interview with BaFin, 11th May 2004.
489
       Bürgerliches Gesetzbuch, §492, paragraph 1, available at www.juris.de. Note that for non-mortgage
       credits, also the total amount to be paid back by the borrower (including interest and other costs) must
       be mentioned unless no such maximum is intended by the contract parties.

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          •    The interest rate and all other costs of the credit (to be mentioned separately if
               their size is known, otherwise to be mentioned in general), including any
               distribution costs that the borrower may have to pay for;

          •    The effective annual interest rate or, if variable interest rate or possible
               adjustment of the interest rate agreed upon, the effective annual interest rate at
               the beginning of the contract term; it must also be mentioned when price-
               influencing factors can be changed and how additional costs, for example due
               to delayed repayment, will be taken into account;490 and

          •    The costs of possible additional insurance contracts that are tied to the credit.

7.63      According to the Ministry of Consumer Protection (BMVEL), there can be
          problems with the calculation of the effective annual interest rate when mortgage
          credit is combined with a savings plan (Bausparplan).                      They suggested that
          providers can use these additional product parts to “polish” the effective interest
          rate (“Schönrechnen”) and would be in favour of changing the price regulations so
          that providers are forced to disclose their “real” effective interest rate.491
          However, several banking associations rejected this claim noting that regulation
          explicitly states which costs may be included in the calculation of effective
          interest rates and which cannot be included. This rules out the possibility of
          “polishing” the interest rate.492

7.64      Cancellation rights are also regulated in the Civil Code. For contracts with a
          variable interest rate, cancellation is always possible at three months’ notice. For
          fixed-interest contracts, it is more restricted. Ordinarily, cancellation is possible at


490
       The calculation of the effective annual interest rate is regulated by article 6 of the Regulation on the
       Quotation of Prices. According to this regulation, the determination of the effective annual interest
       rate should include all costs to be borne by the borrower including possible distribution costs although
       this excludes: costs of non-compliance; costs of cash transfers to repay the debt; membership fees for
       associations that are not a result of the credit agreement, but nevertheless impact the conditions; cost
       of insurance. Source: Preisangabenverordnung (PAngV), available at
       http://transpatent.com/gesetze/pangv.html#6.
491
       Interview with BMVEL, 10th May 2004.
492
       Information received from BdB (letter dated 12th August) and email from the Verband der Privaten
       Bausparkassen of 16th August 2004 which referred to the rules on the quotation of prices for credit
       contracts available at http://transpatent.com/gesetze/pangv.html#6.
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          the end of the fixed-interest period (if this period ends before the end of the loan
          contract) but in any case after ten years. Extraordinary cancellation during a
          fixed-interest period is possible in case of a legitimate interest, e.g. when the
          associated property is sold. In such a case, a cancellation period of six months
          must be respected and a cancellation fee paid to compensate the lender.493

          Investment Act and Securities Trading Act

7.65      Information provision and code of conduct rules for providers and intermediaries
          of investment funds (and other securities) are specified in the Securities Trading
          Act (Wertpapierhandelsgesetz) and the new Investment Act, which has been in
          force since 1st January 2004 (implementing the European UCITS Directive).

7.66      While the Investment Act contains general pre-contractual information
          requirements, the Securities Trading Act specifies rules of disclosure and conduct
          for securities service companies, i.e. companies involved in the selling and trading
          of securities, including investment funds.494 BaFin has published a directive that
          explains these requirements in more detail. For example, securities service
          companies have to inform clients about all costs that the latter will have to pay
          and about possible kick-back and softing agreements that the company has
          concluded with other investment companies. The directive also specifies that
          clients cannot renounce their right to be informed about product and risk
          characteristics of their chosen investment products, but that companies must at
          least offer this information. For investment funds, the information provided
          should cover the composition of the fund assets, the investment strategy followed
          by the fund, the use of fund earnings, issue costs (surcharge etc), the stock price




493
       Bürgerliches Gesetzbuch, §492, paragraph 1, available at www.juris.de; “The Protection of the
       Mortgage Borrowerin the European Union”, European Mortgage Federation; and interview with
       VDH, 1st July 2004.
494
       Securities Trading Act, available at http://www.bafin.de/cgi-bin/bafin.pl?sprache=0&verz=04
       _$R$echtliche _Grundlagen_amp_Verlautbarungen*02_$G$esetze&nofr=1&site=0&filter=&ntick=0.

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          risk and the evaluation method.495 All information must be “correct, complete,
          unambiguous as well as structured and designed in an appropriate way”.496

          Insurance Supervision Act and Insurance Contract Act

7.67      Pre-contractual information provision requirements are in place for all insurance
          products,      and    are specified        in    Versicherungsaufsichtsgesetz,           (Insurance
          Supervision Act) and Versicherungsvertragsgesetz (Insurance Contract Act).
          Additional disclosure requirements apply to life insurance providers during the
          contract term (annual status notifications). Amendments to these acts are in line
          with the requirements of the Third Life Directive with regard to information
          provision.

7.68      A fundamental review of the Insurance Contract Act is planned to be passed in
          2006 and take effect in 2008.

7.69      With regard to insurance products, the information that must be provided to
          consumers for all insurance types before the contract is signed is set out in the
          Insurance Supervision Act.             In general, all information must be supplied in
          writing, must be clearly formulated and organised and phrased in German or the
          mother tongue of the respective consumer.497 In line with European legislation,
          personalised information must be provided on a number of issues as well as
          changes to conditions of the contract.

7.70      German law allows for the possibility that providers do not supply the required
          pre-contractual information before the contract is signed.                       In such a case,
          consumers have the right to exit the contract within 14 days after receiving the



495
       Note that the directive describes for each group of securities products (e.g. stocks, futures etc.)
       specifically which aspects must be covered in order to fulfill the information requirements. Since this
       study is limited to investment funds, we do not describe the requirements for other securities in detail.
496
      Richtlinie gemäß §35 Abs. 6 des Gesetzes über den Wertpapierhandel (WpHG) zu Konkretisierung der
      §§ 31 und 32 WpHG für das Kommissionsgeschäft, den Eigenhandel für andere und das
      Vermittlungsgeschäft der Wertpapierdienstleistungunternehmen vom 23. August 2001, Bundesanstalt
      für Finanzdienstleistungsaufsicht, available at http://www.bafin.de/richtlinien/rl01_01.htm.
497
       Insurance Supervision Act, article 10a, paragraph 2, available at http://www.bafin.de/cgi-
       bin/bafin.pl?verz=04_$R$echtliche_Grundlagen_amp_Verlautbarungen*02_$G$esetze&sprache=0&
       ntick=0&nofr=1&site=0&filter=v.

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          policy documents and providers must inform consumers about this right.
          According to a recent ruling of the German Federal Court, it is crucial that
          providers point out to consumers that this annulment must be made in writing. In
          the specific case, an insurance provider did not point out that the annulment had to
          be made in writing and the Court decided that the company had to pay back the
          contributions the customer had paid with interest.498

7.71      According to the vzbv the provision of pre-contractual information “ex post” is
          typical in Germany. The vzbv is concerned about this as it allows providers to
          evade the pre-contractual information provision requirements. Hence, the vzbv
          considers the usual level of pre-contractual information provision for insurance
          products in Germany as “insufficient”.499

7.72      Providers must also inform policyholders annually about the surplus sharing.500
          However, there are no legal requirements as to what these mandatory “surplus
          sharing status notifications” should look like, which has been criticised by
          consumer associations and product testing organisations. Consumer associations
          and Stiftung Warentest, recently tested the surplus sharing status notifications of
          61 providers and came to the conclusion that companies do not inform clients
          adequately, but often provide confusing and obscure information.501 Consumer
          associations have suggested a standardisation of the status notifications, which
          would help consumers to understand better the status of their contract, what they
          would lose if they cancelled it and would thereby bring them into a better position
          to assess the value of the contract to them.

7.73      An expert commission into insurance by the Ministry of Justice (BMJ) recently
          published its final report and recommended improving transparency and



498
       Notausgang für schlecht Informierte“, Finanztest No. 7/2004.
499
       Information provided by vzbv, 9th September 2004.
500
       Insurance Supervision Act, Article 10a, paragraph 1 and Annex D, section 2, available at
       http://www.bafin.de/cgi-bin/bafin.pl?verz=04_$R$echtliche_Grundlagen_amp_Verlautbarungen*02_
       $G$esetze&sprache=0&ntick=0&nofr=1&site=0&filter=v. Note that the surplus sharing requirement
       only applies to contract concluded since 1995, for older contracts this was only a recommendation.
501
       Sparen im Nebel, Finanztest No. 4/2004..

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          information       requirements      rather    than    focusing      on    specifying     product
          characteristics. The main reason for this was that it leaves providers with the
          freedom to determine product characteristics themselves.502 The recommendations
          call for more stringent information provision requirements for insurance products
          in order to increase transparency for consumers. The planned reform of the
          Insurance Contract Act is intended to implement, but also go beyond, the
          requirements set out in the Insurance Mediation Directive and is likely to
          strengthen pre-contractual information requirements.

7.74      The requirements regarding pre-contractual information provision applicable to
          investment funds and securities trading in general are set out in the Investment
          Act and the Securities Trading Act (Wertpapierhandelsgesetz, WpHG).

7.75      In addition, and partly also in response to the regulatory requirements regarding
          information provision, all trade associations of financial services products have
          published brochures and books to inform consumers about the products on offer
          and about the financial market in general.503

          Product testing

7.76      Independent product testing has a very long tradition in Germany. In 1964, the
          German parliament approved the foundation of an independent product-testing
          organisation, “Stiftung Warentest” (“Foundation Product Test”). The underlying
          aim was to achieve more market transparency for consumers and enable them to
          make well-informed purchase decisions with the help of neutral product quality
          assessments. In 1991, a magazine exclusively dedicated to financial services was




502
       Two exceptions to this rule are invalidity insurance and complementary, for which the report includes
       some comments regarding product characteristics. (Interview with GDV, 10th May 2004. See also
       Abschlussbericht der Kommission zur Reform des Versicherungsvertragsrechts vom 19 April 2004,
       available at http://www.bmj.bund.de/media/archive/647.pdf.)
503
       See e.g. publications of the German Insurance Association GDV at http://www.gdv.de/
       verbraucherservice/index.html and consumer publications of the Association of German Banks at
       http://www.bdb.de/broschueren/index.asp?channel=241010&ttyp=4&tid=0#verbraucherrecht.

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          launched, “Finanztest”. In its first year of publication, an average of 230,000
          copies were sold per month and circulation has now increased to 300,000.504

7.77      In 2002, “Stiftung Warentest” did 31 tests related to savings and investments and
          24 related to insurance products. In a survey done in January 2000, 96% of the
          respondents had heard of the organisation.505 The results of test carried out by
          “Stiftung Warentest” are generally accepted in Germany. Product providers even
          use test results in the advertising.

Regulation of the sales and advice process
7.78      With regard to the regulation of financial advisers, for banking staff the general
          professional training requirements of banks apply. The same holds true for
          investment fund intermediaries employed by banks. There is no special training
          needed to become an independent financial adviser in Germany. However,
          financial advisers who broker and/or sell investment products fall under the
          definition of financial services providers as defined in the German Banking Act
          (Kreditwesengesetz). In order to be allowed to work in Germany, they need to be
          authorised by the Federal Financial Supervisory Authority (BaFin). Before
          granting the authorisation, BaFin examines the professional capabilities of the
          applicants and their reliability.506

7.79      The use of intermediaries for both life insurance and investment funds is fairly
          common in Germany. The majority of life insurance products (around 80%) are
          sold by agents tied exclusively to one provider, who are currently not regulated by
          any law.507 In 1997, the German parliament suggested that financial advisers
          should be regulated, including through the use of qualification standards and a


504
       Stiftung Warentest – Ein Rückblick 1964-2002, Hans –Dieter Lösenbeck, April 2002, and
       http://www.warentest.de/pls/sw/sw.main?p_knr=5004099563054920040726200051&p_E0=60&p_inf
       o=p_datei:medien/finanztest.htm.
505
       Stiftung Warentest – Ein Rückblick 1964-2002, Hans –Dieter Lösenbeck, April 2002.
506
       Kreditwesengesetz, articles 1a) and 32, available at http://www.bafin.de/cgi-
       bin/bafin.pl?sprache=0&verz=04_$R$echtliche_Grundlagen_amp_Verlautbarungen*02_$G$esetze&
       nofr=1&site=0&filter=&ntick=0.
507
       Estimates based on interview with GDV, 10th May 2004. Independent brokers and agents with
       multiple ties are estimated as having 15% market share.

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          register for both financial services and insurance intermediaries. However, this
          initiative was not successful.508

7.80      Currently, there appears to be no specific regulation of the sales and advice
          process for insurance products beyond the respective pre-contractual information
          requirements. This will however change with the planned reform of the Insurance
          Contract Act and the implementation of the Insurance Mediation Directive. For
          example, as of 2005, the sales process for insurance products will have to be
          documented unless the consumer agrees to renounce this right.509 In addition,
          insurance intermediaries will have to act in the interest of their clients and enquire
          as to the interests and savings objectives of their clients before selling a product to
          them.510 Qualification standards and a national register for insurance
          intermediaries will also be brought in.511

7.81      For investment funds and securities trading in general, the Securities Trading Act
          regulates the sales process, e.g. by requiring investment companies and
          intermediaries to enquire about clients’ experience with, and knowledge about,
          investment products, to take this experience into account when making investment
          recommendations, and generally to act in the interest of their clients. Again the
          use of tied agents is prevalent with 64% of new investment funds sold through
          banks (including savings banks) and 18% through insurance companies. Around
          14% are sold through independent intermediaries.

7.82      Clients should be asked about their investment objectives (short-term or long-
          term, single or continuous contributions and/or withdrawal, level of risk
          adversity), their experience with the different investment products (in theory and



508
       Compare Entwurf eines Gesetzes zur Ausübung der Tätigkeit als Finanzdienstleistungsvermittler und
       als Versicherungsvermittler sowie zur Einrichtung eines Beirats beim Bundesaufsichtsamt für
       Kreditwesen, Deutscher Bundestag, printed matter 13/2724 of 29th January 1998.
509
       Interview with GDV, 10th May 2004.
510
       Abschlussbericht der Kommission zur Reform des Versicherungsvertragsrechts vom 19. April 2004,
       available at http://www.bmj.bund.de/media/archive/647.pdf.
511
       Abschlussbericht der Kommission zur Reform des Versicherungsvertragsrechts vom 19. April 2004,
       available at http://www.bmj.bund.de/media/archive/647.pdf.

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          practice) and their financial situation (e.g. if the investment will be financed by
          borrowing).

7.83      When executing transactions on behalf of their clients, investment companies
          must consider the results of this background information enquiry. They must also
          – to the extent possible – act in the best interest of their clients. Transaction
          orders that are not in line with the interests of a client may only be forwarded
          and/or executed after the risks have been pointed out to the client. Also,
          investment companies are obliged to attempt to achieve the best price possible for
          their clients.512

7.84      In a fundamental decision in 1993, the so-called “bond decision”, the German
          High Court confirmed the obligation of securities services companies to provide
          advice that is appropriate given the respective client’s past investment experience
          and investment objectives (investor-appropriate advice) and given the respective
          characteristics of investment products recommended to the client (object-
          appropriate advice).513 Other court rulings have confirmed that any advice must be
          provided in a form that is understandable for the client.514

7.85      The Federal Financial Supervisory Authority (BaFin) sees the requirement that
          fund providers and intermediaries always need to act in the interest of clients as
          the most important consumer protection provision in the Securities Trading Act.




512
       Richtlinie gemäß §35 Abs. 6 des Gesetzes über den Wertpapierhandel (WpHG) zu Konkretisierung
       der §§ 31 und 32 WpHG für das Kommissionsgeschäft, den Eigenhandel für andere und das
       Vermittlungsgeschäft der Wertpapierdienstleistungunternehmen vom 23. August 2001, Bundesanstalt
       für Finanzdienstleistungsaufsicht, available at http://www.bafin.de/richtlinien/rl01_01.htm.
513
       In this case, a bank had recommended a highly speculative Australian bond to a conservative,
       traditionally risk-averse investor who subsequently lost all her money. The High Court ruled that the
       bank had violated its advisory obligations by not informing the client properly about the risk
       associated with the investment vehicle (Bundesgerichtshof, decision of 6 July 1993, NJW 1993, 2433,
       available at http;//www.jura.uni-passau.de/ifl/bgb/bgh/e33.htm).
514
       See e.g. discussion of a ruling of the local court of Hamburg-Altona of 5 June 2003 in the online
       edition of the journal “Verbraucher und Recht” (consumer and law), available at http://www.vur-
       online.de/entscheidung/39.html.

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7.86      According to the Association of German Banks, all banks have compliance
          departments or compliance advisers that monitor their compliance with the rules
          laid out in the Investment Act and the Securities Trading Act.515

7.87      As indicated in the table below, German regulations covering the sales and advice
          process currently mainly exist for securities trading, but this will change as of
          2005 with the implementation of the Insurance Mediation Directive.

Table 33: Regulation of the sales and advice process for investment products -
disclosure and qualification

                                             Life assurance, pensions and investment funds

Need for a fact-find to understand the         Yes for investment funds; currently no for life
customer                                                        insurance
Written record of advice given                 No for investment funds; currently no for life
                                                                insurance
Disclosure of level of commission            No for life insurance in general, but yes for Riester
                                                     products; yes for investment funds
Disclosure of turnover with provider                                 No
Disclosure with whom contractual                                     No
relationship exist
Do legal professional qualifications          Currently not, but authorisation requirement for
exist for advisers?                                financial services advisers by BaFin
Is there a publicly available database of                       Currently not
all advisers?



Voluntary codes of conduct
7.88      The European code of conduct on home loans has been implemented in Germany.
          In addition to the conduct rules specified in the Securities Trading Act, the
          German Association of Investment and Asset Management (BVI) has drafted a
          code of conduct to be applied by its members.

          European code of conduct on home loans

7.89      The German banking industry has implemented the European-wide voluntary
          code of conduct for pre-contractual information provision. The Association of


515
       Interview with BdB, 10th May 2004.

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          German Mortgage Banks (VDH) and the Association of Private Building
          Societies have published brochures that contain the general product information
          required by the code of conduct.516

          BVI code

7.90      In addition to the regulatory code of conduct set out in the Securities Trading Act,
          the Association of Investment and Asset Management (BVI) has drawn up a code
          of conduct for its members. The most important conduct standards with regard to
          consumer protection are the requirements that investment companies should act
          only in the interest of investment fund share holders and that investment
          companies        should    inform     consumers       clearly,    comprehensively       and
          understandably about their products in order to ensure adequate and professional
          advertising and customer care. The code also includes rules regarding the
          treatment of soft commissions: any non-cash benefits that the investment
          company receives in connection with transactions carried out on behalf of its
          clients are only acceptable if they are used in the interest of investors. Companies
          should mention their intention to accept such non-cash benefits in their sales
          prospectus.517

Balance between simplification and other forms of intervention
7.91      As already mentioned, there are very few simplified products in Germany. There
          are a few examples of product simplification that were introduced in the last few
          years (AS Funds, Riester products), but neither of them were primarily motivated
          by a desire to reduce product complexity for consumers. Instead, the promotion of
          individual saving for retirement was the main driver.

7.92      There is a general awareness that some financial products are likely to be
          relatively complex and difficult to understand for consumers. However, there is
          no general perception that simplified products would be a good way to solve this



516
       Immobilienfinanzierung transparent gemacht, Verband Deutscher Hypothekenbanken, available at
       http://www.hypverband.de/hypverband/attachments/verband_publ_brimmotransp.pdf.
517
       Wohlverhaltensregeln, BVI Bundesverband Investment und Asset Management e.V., 31 October
       2002, available at http://www.bvi.de/downloads/wvr_bro_150104.pdf.

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          problem. For example, during our interview with the German Ministry of Finance,
          there was some scepticism regarding the use of simplified products.518 Most of the
          trade associations we spoke to were opposed to the introduction of simplified
          products. By contrast, the Federal Association of Consumer Organisations
          maintains that the current Riester certification criteria ensure a high level of
          consumer protection because consumers can be sure that the products fulfil a
          certain minimum standard.519 With the exception of insurance products falling
          under the scope of Riester regulation, the German insurance sector has in the last
          decade developed in the opposite direction to product standardisation and
          simplification i.e. has been focused on increasing product differentiation.

          General points

7.93      Although there is limited simplification in Germany, standardisation of products
          is very common. In banking, standardisation is achieved through general business
          conditions that are developed by the different banking associations (private banks,
          co-operative banks and savings banks) and applied by basically all banks that are
          members of the respective associations. The standards are usually developed as
          recommendations to members and must be cleared by the competition authorities.
          The associations regularly update their standard business and product conditions
          in accordance with relevant court decisions and regulatory changes.520

7.94      The main approach to overcoming potential complexity problems has been
          through information provision, although even this is now beginning to be of
          concern. During our interview, BaFin expressed some reluctance with regard to
          imposing additional information requirements on providers. BaFin sees its task as
          being responsible for the stability of the whole financial services market and
          would consequently like to avoid too high a burden on providers, which would
          ultimately lead to higher prices for consumers and might not be very helpful to
          consumers given the risk of information overload. Also, BaFin holds that



518
       Interview with BMF, 19th May 2004.
519
       Information provided by the vzbv on 9th September 2004.
520
       Interview with BdB, 10th May 2004.

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          consumers should take at least some responsibility for being informed about
          financial products,

            “Can’t we expect from people on high incomes that they understand financial
            products? … Somebody who is able to buy a house for €300,000 can be expected to
            inform himself about his options and risks.”521

7.95      In the eyes of the Ministry of Consumer Protection (BMVEL), information
          disclosure and advisory requirements for banks and insurance companies and/or
          sales agents are the most important tools to protect consumers, although they
          believe that one can still speak of “financial illiteracy” in Germany. The BMVEL
          believes that it would be necessary to provide basic financial education in
          schools.522 This view was supported by most other interview partners, e.g. the
          German Insurance Association (GDV), the Federal Association of Consumer
          Organisations (vzbv) and the Association of German Banks (BdB).

7.96      Furthermore, the GDV expressed concern about the growing number of
          information disclosure requirements at the European level, which they do not
          believe to be very well co-ordinated. It is often unclear how new rules relate to old
          requirements (are they identical or not, do providers have to inform consumers
          about both issues even though they are very similar etc.). A simplification and
          consolidation of the information requirements would be welcomed.523

7.97      The GDV also pointed out that in the context of information provision, the
          problem of information overload might arise. They noted a decision of the
          German Federal Court (9th May 2001) which stated that there could be a point
          where a provider cannot make a product more transparent and understandable for
          a customer, but where the customer would have to consult an independent source
          for advice.524 The GDV thinks that the information standardisation measures
          proposed by consumer associations are too complex and standardised numbers on
          costs etc will not help anybody because consumers are not interested,


521
       Interview with BaFin, 11th May 2004.
522
       Interview with BMVEL, 10th May 2004.
523
       Interview with GDV, 10th May 2004.

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            “The two main questions for consumers are: “How much do I have to pay in?” and
            “How much will I get paid out?”525

7.98      However, the Federal Association of Consumer Organisations (vzbv) pointed out
          that, since the final amount that is paid out for with-profits life insurance contracts
          depends primarily on the surplus sharing, which cannot be guaranteed, consumers
          can never be fully informed about what they will get paid out. According to the
          vzbv, the only fixed item are costs. This is why the vzbv is in favour of model
          calculations with fixed yield scenarios in order to show the potential development
          of capital paid into with-profits life insurance contracts.526

          Basic deposit account with payment means

7.99      There are no simplified basic deposit accounts with payment means in Germany,
          but all of the interviewees we met pointed out that the German “Girokonto”
          (current account) is already a very simple product.

7.100     According to the Association of German Banks, client retention is relatively high
          for current accounts, although switching is usually facilitated by the new bank that
          typically takes care of setting up new standing orders, informing creditors etc.527
          This could indicate that consumers are generally satisfied with their choice of
          bank and do not want to switch. However, the Federal Association of Consumer
          Organisations (vzbv) pointed out that client retention could also be due to
          consumer inertia, consumers’ lack of knowledge about alternatives and
          accommodativeness. They also argue that it often takes too long to cancel an
          account and open a new one.528

7.101     One issue that was mentioned during several interviews was access to current
          account for everyone. In the mid-1990s, a public discussion arose in Germany
          about the situation of people who got into financial trouble and therefore did not



524
       Interview with GDV, 10th May 2004.
525
       Interview with GDV, 10th May 2004.
526
       Information provided by vzbv on 9th September 2004
527
       Interview with the BdB in Berlin on 10 May 2004.
528
       Information provided by the vzbv, 9 September 2004.

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         get access to banking services because banks rejected them as clients. As a
         consequence, the Central Credit Committee (Zentraler Kreditausschuss, ZKA), an
         organisation of the major associations of the German credit industry,
         recommended in 1995 the establishment of “current accounts for everyone”.
         According to this industry recommendation, banks should in principle provide any
         client with a basic current account that allows receiving credits, receipts and
         withdrawals of cash and bank transfers, although banks do not have to grant an
         overdraft credit for such accounts.529

7.102    However, consumer associations claim that many banks still reject clients
         unreasonably. While the ZKA recommendation states that a negative listing in the
         SCHUFA register, (which collects information about consumers with negative
         bank and credit ratings) should not be sufficient to reject a client for a “basic”
         account with no overdraft, many banks still use SCHUFA listings as an argument
         to reject account applications.530

7.103    A review undertaken by the German Government in 2000 came to the conclusion
         that the “current account for everyone” recommendation has contributed to a
         reduction of the number of citizens without a bank account.531 According to
         estimates, there are about 500,000 people without a current account,532 but – as


529
      Banken und Verbraucher – Das verbraucherpolitische Konzept der privaten Banken, Bundesverband
      deutscher Banken, 2003, pp. 40-41, available at http://www.bdb.de/download/broschueren/03-01-15-
      Banken-und_Verbraucher.pdf.
530
      Girokonto für Jedermann: Banken kommen Kreditausschuss-Empfehlung nicht nach,
      Verbraucherzentralen Bundesverband, press release of 9th December 2003, available at
      http://www.vzbv.de/go/presse/329/. See also „Banken grenzen Kunden aus“, Finanztest No. 7/2004, p.
      26. See also “Recht auf ein Girokonto und Erhalt von Girokonten”, Arbeitsgemeinschaft
      Schuldnerberatung der Verbände, 2nd April 2004; and “Bericht der Bundesregierung zur Umsetzung
      der Empfehlungen des Zentralen Kreditausschusses zum Girokonto für jedermann“, Deutscher
      Bundestag, Drucksache 15/2500, 11 February 2004, p. 5.
531
      Banken und Verbraucher – Das verbraucherpolitische Konzept der privaten Banken, Bundesverband
      deutscher Banken, 2003, pp. 40-41, available at http://www.bdb.de/download/broschueren/03-01-15-
      Banken-und_Verbraucher.pdf.
532
      This estimate was made by the working group of debtor advice of the associations
      (Arbeitsgemeinschaft Schuldnerberatung der Verbände) and mentioned (but not confirmed) in the
      latest communication of the German government to the Parliament on the issue of a current account
      for everyone: “Bericht der Bundesregierung zur Umsetzung der Empfehlungen des Zentralen
      kreditausschusses zum Girokonto für jedermann“, Deutscher Bundestag, Drucksache 15/2500, 11
      February 2004, p. 3.

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         the Association of German Banks pointed out – not all of them would necessarily
         want one, for example because they may not want to disclose information about
         their financial situation or may share a current account with their spouse and are
         happy with a joint account.533

7.104    Nonetheless, the German Government argues that banking associations should
         make arbitration procedures (to which consumers can complain if their application
         for a current account is rejected) more consumer-friendly in order to reduce the
         burden on consumer associations to deal with this issue. In addition, they would
         welcome more transparency in the rejection procedures, e.g. by written
         documentation of the reasons for rejection and publication of the reasons by the
         arbitration boards (in anonymous form).534

7.105    Given the already highly simple products available for basic deposit accounts with
         payment means, none of the institutions we interviewed felt that the introduction
         of simplified products would be necessary or add any value.                   It was also
         mentioned that it is unclear how this could solve the problem of access to a
         current account given that the products are already so simple and transparent.

         Cash based savings products on which interest or other return is paid

7.106    There are no simplified cash based savings products, but savings products are
         generally seen as very simple and transparent.

7.107    Savings books are one of the most popular savings products in Germany although
         they offer relatively low yields. Banking associations attribute this to the
         simplicity of the products and the long tradition they have in Germany.
         Consumers especially like the transparent statements of savings books (current
         amount and all past transactions are recorded in one book), the fact that there are
         no hidden costs, that there is an agreed guaranteed interest rates (which can be
         changed by the bank, but the consumer then has a cancellation right) and that



533
      Interview with BdB, 10th May 2004.
534
      Bericht der Bundesregierung zur Umsetzung der Empfehlungen des Zentralen kreditausschusses zum
      Girokonto für jedermann, Deutscher Bundestag, Drucksache 15/2500, 11 February 2004.

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         savings books do not require a minimum savings amount.535 Saving deposits also
         have long standing product regulation defined in the “Regulation on Accounting
         of Credit Institutes and Financial Services Institutes” (Verordnung über die
         Rechnungslegung           der    Kreditinstitute       und     Finanzdienstleistungsinstitute,
                         536
         RechKredV).

7.108    In the past, there have sometimes been problems with the transparency of interest
         rate adjustments for savings books and, in particular, bank savings plans.
         However, a recent ruling of the German Federal High Court is likely to improve
         the situation in this regard. Currently, many savings contracts – especially bank
         savings plans – include clauses according to which the respective bank is free to
         change the level of interest rates. In a decision in February 2004, the Court ruled
         that such a clause is void and that interest rate adjustments are only valid if the
         customer can follow where and why rates were changed. Only clauses on regular
         interest rate adjustments based on a reference rate are allowed. The Court has not
         decided yet which reference rates should be used, but consumer associations
         expect that such a reference rate will be based on the money market interest rate
         and the current yield.537

7.109    Given that existing savings accounts were already seen as very simple, there was
         no identified need for a simplified cash based savings account.

         Credit or deferred debit cards

7.110    There is no specific product regulation on credit and deferred debit cards in
         Germany. The law applicable to credit cards is mainly based on agency principles



535
      Interviews with BdB, 10th May 2004, and with DSGV, 21st May 2004.
536
      This regulation includes restrictions such as requiring the dispatch of a certificate, commonly a
      savings book; they are not intended for payment transactions; with limited exceptions they are only
      held by private persons or charitable organisations; they have a cancellation notice period of at least
      three months (withdrawals without cancellation are restricted to €2,000 per month. The last restriction
      is due to the impact on capital requirements for banks. Source: “Verordnung über die
      Rechnungslegung der Kreditinstitute und Finanzdienstleistungsinstitute (Kreditinstituts-
      Rechnungslegungsvorschrift – RechKredV)” available at
      http://www.bafin.de/verordnungen/ba/rechkrev.htm
537
      Wann die Bank zahlen muss, Finanztest, 17th August 2004, available at http://www.warentest.de/
      pls/sw/SW$NAV.Startup?p_KNr=0&p_E1=2&p_E2=0&p_E3=80&p_E4=0&p_Inh=I:1199672.

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         and the law on general terms and conditions. The products offered by the two
         main networks of credit cards in Germany (MasterCard and Visa) are very
         similar.538

7.111    It is important to note that the concept of revolving credit for credit cards is not as
         widely known in Germany as it is in other countries (only about 5% of all German
         credit cards have revolving credit). Credit cards in Germany are usually used in a
         way similar to debit cards with the whole bill being debited to the current account
         automatically every month. The difference between credit card concepts in
         Germany and other countries is mainly due to the popularity of overdrafts for
         current accounts in Germany which are seen as more flexible than credit cards.
         There is usually cheap overdraft available on the current account, up to a certain
         limit that depends on the regular income.539

7.112    There were no problems identified with regard to the product design of credit or
         deferred debit cards. However, the Federal Association of Consumer
         Organisations raised concerns about indebtedness due to an increasing demand for
         revolving credit and abuse of credit and debit cards.540

7.113    All institutions we interviewed did not see a need for intervention in the market
         for credit cards and there was no identified need for introducing simplified
         products.

         Private pension plans

7.114    As has been noted earlier in this chapter, Riester pensions have been categorised
         as simplified pensions. Despite this, complexity remains and hence there have
         been a number of changes put forward to improve the Riester products. Given the
         presence of a simplified product and the changes being made, there were no calls
         for an additional simplified pension product, although further changes to Riester
         products were suggested as noted above.



538
      Interview with DSGV, 21st May 2004, and letter from the DSGV, dated 2nd September 2004.
539
      Interview with BdB, 10th May 2004.
540
      Information received from vzbv on 9th September 2004.

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         Motor insurance

7.115    Compulsory third-party motor insurance is still regulated in Germany by the
         Compulsory         Insurance       Act     (Pflichtversicherungsgesetz,          which      includes
         specifications for minimum coverage541). The maximum duration of insurance
         contracts, as specified in the Insurance Contract Act, is generally 5 years542, but
         motor insurance contracts are usually signed on an annual basis, so the average
         consumer can change providers once a year. There are also extraordinary
         cancellation rights after damages have occurred.543

7.116    One particular feature of German motor insurance is that providers are obliged to
         provide compensation for the time when the car cannot be used after an accident
         or other damage (Nutzungsausfall). A recent decision by the German Federal
         Court confirmed this duty, although it should be noted that this is due to a
         particularity of German tort law.544

7.117    Since liberalisation, a variety of new tariff structures have emerged.                         As is
         common in other countries, premiums depend on a range of factors. Given the
         variety of motor insurance tariffs, many organisations and magazines offer either
         automatic comparison engines online (e.g. Finance Scout 24) or an in-depth
         personalised       assessment       and     insurance      recommendation          (e.g.    Stiftung
         Warentest).545

7.118    Despite the high level of differentiation for motor insurance, there is a general
         perception that this is a positive development and that no intervention is
         necessary. The Ministry of Finance shares this view, although it added that there


541
      Gesetz über die Pflichtversicherung für Kraftfahrzeughalter, available at http://www.bafin.de/cgi-
      bin/bafin.pl?verz=04_$R$echtliche_Grundlagen_amp_Verlautbarungen*02_$G$esetze&sprache=0&
      ntick=0&nofr=1&site=0&filter=v.
542
      Article 8, paragraph 3. There are plans to reduce this to 3 years in the current review of the Insurance
      Contract Law, which is expected to be passed in 2006 and come into force in 2008.
543
      Interview with GDV, 10th May 2004.
544
      Interview with BMF, 19th May 2004 and information from vzbv.
545
      FinanceScout24, available at http://www.financescout24.de/mobil/index.do?refid=affili_kfz&site
      =1711&ref=180385&affmt=b23&affmn=23 and “Autoversicherung - Teurer Anfang”, test No. 5,



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         is very limited empirical evidence on this issue.546 The German Insurance
         Association believes that the market for motor insurance works well (damage
         insurance in general is usually not seen as a big problem). Consumers do not seem
         to have problems with the more complex products, but have enjoyed lower rates
         and various discounts as a result. Switching between different providers is quite
         common and tariff comparisons are widely available.547

7.119    However, the Federal Association of Consumer Organisations (vzbv) believes that
         in general, liberalisation of the German insurance market and the abolition of the
         product authorisation requirement have reduced transparency and consumer
         sovereignty.548 Nonetheless, BaFin thinks that consumers have benefited from
         deregulation of motor insurance, which has led to significant price reductions.549

7.120    There were no problems identified with regard to motor insurance and no call for
         a simplified motor insurance product.

         Home insurance

7.121    Home insurance contracts in Germany are seen as fairly comprehensive, although
         cover it typically subject to some restrictions and only available if inhabitants did
         not act negligently.550 In general, German insurance contracts do not apply an “all
         risk” model, but the “named perils” approach. This means that only risks that are
         explicitly mentioned in the contract are covered and many other risks are left with
         the consumer.551

7.122    As already explained, the general trend in Germany is to move from the regulation
         of insurance product characteristics to freedom of product design and greater



      May 2004, available at http://www.warentest.de/pls/sw/SW$NAV.Startup?p_KNr=50041926513264
      20040507110848&p_E1=0&p_E2=0&p_E3=10&p_E4=0&p_Inh=I:1173489&p_Bez=frei.
546
      Interview with BMF, 19th May 2004.
547
      Interview with GDV, 10th May 2004.
548
      Information provided by vzbv on 9th September 2004.
549
      Interview with BaFin, 11th May 2004.
550
      Schutz der sieben Sachen, Finanztest No. 2/2004.
551
      Information provided by vzbv, 9th September 2004.

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         product variety. However, in comparison to the motor insurance market, there has
         been very little innovation with regard to home contents insurance since
         liberalisation. Providers tried to sell new product types, but the market was not
         very receptive to innovation,

           “After liberalisation, Axa offered a new home contents product bundle for some time,
           but then returned to its old contracts because of very low sales and lack of consumer
           interest. In general, home insurance has a relatively low social significance and
           consumers are not very interested in it”.552

7.123    There is some concern that since liberalisation of the insurance sector, insurance
         against weather-related damage has become unavailable in some parts of the
         country (e.g. insurance against flooding in areas close to a river).553 The vzbv
         would welcome a move to the all-risk coverage principle that is usually applied in
         Anglo-Saxon countries. These changes would have to be made in the Insurance
         Contract Act, but there is no indication that this might be done in the near
         future.554

7.124    We did not identify any interviewees who thought that simplification or
         standardisation with regard to home insurance would be necessary or beneficial
         for the German home insurance market.

         Life insurance

7.125    In Germany, the majority of life insurance contracts is still in the form of
         traditional with-profits insurance. Indeed, the German Insurance Association
         (GDV) sees with-profits life insurance as a very simple product that combines a
         savings and a risk component. They argue that it has a relatively low investment
         risk compared to unit-linked life insurance and note that it has enjoyed significant
         tax benefits for many years, although these have been under review and will be
         reduced as of 2005.555 However, the Federal Association of Consumer


552
      Interview with BaFin in Bonn on 11 May 2004.
553
      According to vzbv, the problem of lack of access to insurance for some parts of the population is not
      confined to home insurance, but also applies e.g. to invalidity insurance (information provided by
      vzbv on 9th September 2004).
554
      Interview with vzbv, 10th May 2004.
555
      Interview with GDV, 10th May 2004.

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         Organisations (vzbv) disagrees strongly with the statement that with-profits life
         insurance products are a very simple product, and attributes the success of this
         product simply to the aggressive distribution strategy of insurance companies.556

7.126    Although unit-linked insurance has grown in the last years, it still only accounted
         for less than 5% of total life insurers’ assets in Germany in 2001. According to
         some industry experts, the low share of unit-linked insurance is due to the fact that
         insurers as well as distributors,

           “have a vested interest in traditional insurance”.557

7.127    It is estimated by the vzbz that annually around 4-8% of with-profits life
         insurance contracts are cancelled before maturity and that in total only 45% are
         held until maturity and hence surrender values are likely to be of relevance to a
         considerable proportion of policyholders. In addition to the calculation of
         surrender values, which are regulated through the Insurance Contract Act,
         cancellation penalties may also be imposed on consumers who exit the contract
         early and distribution costs are typically front-end loaded. The implication of
         these factors is that consumers who cancel in the early years may receive
         substantially less than the value of the contributions paid in.558 However, a
         commission set up at the Ministry of Justice to deal with the reform of the
         Insurance Contract Act found that this had not led to a situation of general
         agreement on how these should be determined.                      Hence, the commission
         recommended requiring providers to pay policyholders the actuarial reserves
         relating to the contract determined in line with the calculation methods used for
         premium calculations.559




556
      Information provided by vzbv, 9th September 2004.
557
      Unit-linked life insurance in western Europe: regaining momentum? Sigma Number 3/2003,
      publication by Swiss Re
558
      Interview with vzbv, 10th May 2004; information provided by vzbv on 9th September.
559
      Abschlussbericht der Kommission zur Reform des Versicherungsvertragsrechts vom 19. April 2004,
      available at http://www.bmj.bund.de/media/archive/647.pdf.

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7.128    Despite the information requirements that are imposed, market transparency is
         still not high enough for pension and life insurance products according to
         consumer associations,

           “A big issue is the reliability of the forecast of the yield or the final lump sum at the end
           of the contract. Providers tend to lure consumers with positive advertising. Consumer
           organisations are looking for more objective data to check the plausibility of yield
           forecasts. … As providers normally make a bigger profit than the guaranteed rate
           (currently 3.25% [2.75% in 2004] they must give their customers a surplus share of at
           least 90% of the result of capital investment. This legal provision does not cover profits
           arising from a lower mortality or from costs being lower than predicted. Legal
           provisions stipulate a “fair” surplus sharing, but in practice it is very difficult to
           control the process.”560

7.129    In addition, it is thought that consumers are often not aware that the legally
         determined maximum guaranteed interest rate will only be applied to the savings
         part of their contributions, i.e. that the effective guaranteed interest rate is lower
         than that stated (currently 2.75%). Consequently, there have been requests from
         consumer organisations that insurance providers should be required to inform
         customers not only about their surplus sharing, but also about the split of their
         contributions in savings part, costs and risk part. However, in its recent review of
         the Insurance Contract Act, the commission set up for this purpose by the Federal
         Ministry of Justice (BMJ) concluded that such an information requirement would
         not provide any additional value to consumers.561

7.130    According to both the Federal Association of Consumer Organisations (vzbv) and
         the Ministry of Consumer Protection (BMVEL), the main problem with regard to
         capital life insurance contracts is a lack of objective sales advice due to the
         German system of sales commissions for insurance products. Commission is
         typically highest for with-profits life insurance and is based on the number of new
         contracts rather than those held until maturity. They argue that this means that




560
      Strategic considerations related to the provision of information on selected financial products, ISO
      COPOLCO Group on Financial Services, Annex 2.
561
      Interview with GDV, 10th May 2004.

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         insurance agents recommend with-profits life insurance contracts even if they are
         not the best investment product for the respective consumer.562

7.131    Despite the remaining problems identified with regard to life insurance contracts,
         there is no perception that product simplification would help to resolve any of
         these issues. On the contrary, in its final report, the commission that had been set
         up at the Ministry of Justice to deal with the planned reform of the German
         Insurance Contract Act explicitly rejected the option of product standards and
         regulation for life insurance products by identifying higher prices to the end
         consumer as the inevitable result,

           “A “benevolent” regulation from a consumer protection perspective would eventually
           only lead to an increase in prices of insurance products without providing the
           policyholder with significant benefits. Also with regard to life insurance, the
           experience proves true that costs of legal rules will always be borne by the end
           consumer, even if they are targeted at the producer, here the insurer.”563

         Mortgage credit

7.132    Consumer protection relating to mortgages has been increased in Germany since
         August 2002. Consumers now have the right to exit the contract within two
         weeks (within a month if the lender does not inform the customer about the right
         to exit). The purchaser should receive the draft contract two weeks before a
         certification appointment in order to be able to study it in detail. All these
         changes are intended to prevent hasty decision-making on the part of property
         purchasers and mortgage credit borrowers or at least allow them to re-consider
         their decisions.564

7.133    Both BaFin and the Association of German Mortgage Banks (VDH) mentioned
         the combination of mortgages and life insurance products as a potentially
         problematic issue thought to have come about because of tax rules.565 Under such


562
      In this context, it is interesting to note that sales agents associated with an insurance provider account
      for about 80% of total insurance sales (in value), intermediaries for about 15%, and direct insurance
      sales for about 2.7-3% (interview with the GDV in Berlin on 10 May 2004).
563
      Abschlussbericht der Kommission zur Reform des Versicherungsvertragsrechts vom 19. April 2004,
      available at http://www.bmj.bund.de/media/archive/647.pdf.
564
      Information provided by the Federal Ministry of Finance, letter dated 23rd August 2004, enclosure 1.
565
      Interview with VDH, 1st July 2004 and with BaFin, 11th May 2004
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         contracts, consumers repay the interest on the mortgage and contribute to a life
         insurance policy which aims to repay the capital at maturity. However, there is a
         concern that in some cases the mortgage capital represents the expected, instead
         of the guaranteed, value of the life insurance contract, and therefore that
         consumers may be left with a financing gap that could be considerable. However,
         BaFin believes that Germans will always be very interested in products that enjoy
         tax benefits.

7.134    According to a study on the European market for mortgage credits, information
         and advice on mortgage credits is readily available in Germany.566 During our
         interviews, there was no perception that simplification of mortgage credits would
         be needed and/or beneficial in order to improve the functioning of the German
         market.

         Collective investment schemes

7.135    Recent legislation has increased the information provision that has been required
         by investment funds in Germany.                Indeed, according to the Association of
         Investment and Asset Management (BVI), there is a general trend in German
         regulation of investment funds to move away from product regulation towards the
         regulation of the supply chain, in particular with regard to increased transparency
         rules for providers and information provision requirements for distributors. The
         trend toward transparency and information instead of product regulation has been
         reinforced by the introduction of the new Investment Act (Investmentgesetz),

           “In principle, investment fund providers can offer any products they want as long as
           they inform consumers adequately.”567

7.136    BaFin stresses the importance of information provision as a method of ensuring
         effective consumer protection,

           “Investor protection is based on the rules of conduct for investment services enterprises
           enshrined in the Securities Trading Act (Wertpapierhandelsgesetz – WpHG). The
           cornerstones of the rules of conduct are the duties of disclosure and organisational


566
      Study on the Financial Integration of European Mortgage Markets, Mercer Oliver Wyman, October
      2003.
567
      Interview with BVI, 10th June 2004.

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           duties required of financial institutions. As far as disclosure is concerned, investors can
           only make independent, responsible investment decisions if they are given
           comprehensive information about the nature, risks, costs, and opportunities of an
           investment.”568

7.137    Nonetheless, one product restraint that is in place regards the spread of costs. In
         particular, if the purchase of fund shares has been agreed for several years, a
         maximum of one-third of the payment agreed for the first year may be used to
         cover costs. All other costs must be distributed equally over the remaining
         payments.569

7.138    One area where there were suggestions for improvement were in the disclosure of
         total expense ratios (TER). Although disclosure is compulsory, the vzbv criticises
         the TER formula since it does not include transaction costs. The vzbv would like
         the TER requirements to be adjusted to include the mandatory disclosure of
         transaction costs. The code of conduct published by the Association of Investment
         and Asset Management (BVI) contains some cost disclosure standards, but the
         vzbv still believes that binding regulatory requirements should be imposed with
         regard to information and cost disclosure.570

7.139    There was no perception that – in addition to standardisation brought about
         through the UCITS Directives – there was any need for simplification of
         investment funds in Germany.

         Financial advice

7.140    The regulation of financial advice is changing in the light of the Insurance
         Mediation Directive. However, the Ministry of Consumer Protection (BMVEL)
         expressed its concern about the current lack of regulation of financial advice in
         the German insurance sector,



568
      Annual Report 2002, Bundesanstalt für Finanzdienstleistungsaufsicht, available at
      http://www.bafin.de/cgi-bin/bafin.pl?sprache=0&verz=06_$P$resse_amp_Publikationen*03_
      P$u$blikationen*01_$J$ahresberichte*96_J$a$hresbericht_2002&nofr=1&site=0&filter=&ntick=0.
569
      Investment Act, article 125, available at http://www.bafin.de/cgi-
      bin/bafin.pl?sprache=0&verz=04_$R$echtliche_Grundlagen_amp_Verlautbarungen*02_$G$esetze&
      nofr=1&site=0&filter=&ntick=0.
570
      Interview with vzbv, 10th May 2004.

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           “It would be the BMVEL’s ideal to make insurance agents personally liable if they do
           not sell the best product to consumers but the one with the highest provision for them.
           At the moment, the legal provisions are not sufficient to enforce this principle of
           “acting in the best interest of the investor”. In addition, minimum qualification
           requirements for insurance sales reps would be positive”.571

7.141    Hence the general trend in Germany regarding financial advice is to increase the
         requirements rather than to simplify them and there was no call for simplified
         financial advice from market participants.

Cross-border trade
7.142    Overall, German interview participants were not very optimistic about the
         potential for cross-border trade in financial services or for this being increased
         through the use of simplified or standardised products. Their main concern was
         that tax, and particularly legal, structures imposed severe barriers to cross-border
         trade that would remain significant constraints even if products were to be
         standardised or simplified. The importance of a relationship of trust between
         customers and local staff was also mentioned as a barrier to cross-border trade and
         one that would not be overcome through product regulation.

Benefits
7.143    One of the areas where standardisation was thought to have had a beneficial
         impact was in the area of collective investment schemes. According to the
         Association for Investment and Asset Management, having European regulation
         for investment funds has helped to foster cross-border trade. It was suggested that
         in the past, foreign fund providers were often punished through higher taxes in
         Germany, i.e. faced tax discrimination. However, since the introduction of
         European-wide rules for UCITS, this has no longer been possible.572

7.144    The German Association of Private Building Societies was optimistic that
         simplified or standardised products could facilitate cross-border trade in financial



571
      Interview with BMVEL 10th May 2004.
572
      Interview with BVI, 10th June 2004. On the topic of tax discrimination against non-domestic funds in
      Germany see also “Taxation: Germany and Austria must end discrimination against foreign
      investment funds; Commission seeks information from France”, Europe Commission Press Release,
      IP/03/990, 10th July 2003.
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         services. However, they nonetheless highlighted that differences in civil, contract
         and tax law would still remain as obstacles to a true internal market. They noted
         that it would therefore be important to ensure that a Europe-wide standardised
         product would not be in conflict with national law. It was argued that the
         introduction of an optional “European” legal framework for these “European”
         products could solve this problem, although they were concerned that a European
         certification system should not reduce product variety. Furthermore, they also
         noted that it would be important to take care not to distort competition between
         different product types by providing a European certification scheme for one
         group, but not for others.573

7.145    However, linked to the concern of the German Association of Private Building
         Societies regarding product variety, the Association of German Mortgage Banks
         (VDH) argued that cross-border trade should be seen as an opportunity to
         introduce product variety by selling national products abroad.574 Hence this
         suggests that it is product variety rather than standardisation that would lead to
         cross-border trade.

7.146    Finally, it was noted by the Federal Association of Consumer Organisations
         (vzbv) that where cross-border trade has occurred it has usually occurred through
         setting up national subsidiaries. Interestingly they note where insurance products
         from abroad are sold in Germany they have brought features from the foreign
         market e.g. English unit-linked and smoothed life insurance contracts. However,
         the vzbv also noted that even cross-border cash transfers are not working
         properly, despite the fact that they perceived this to be a very standardised
         procedure. In addition, they believed that cross-border trade was more likely for
         pure investment products than for insurance products.575

7.147    The Association of German Banks rejected the vzbv’s view that cross-border
         transfers were not working properly in the European Union, pointing out that


573
      Interview with the German Association of Private Building Societies, 6th July 2004.
574
      Interview with VDH, 1st July 2004.
575
      Interview with vzbv, 10th May 2004.
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         consumer complaints both with regard to cross-border trade play only a very
         minor role in relation to the total number of complaints received by the respective
         bodies (although this could simply reflect the very small number of cross border
         transfers that occur).576

Barriers
         Product design

7.148    Different countries may choose to regulate product features in different ways for
         the purposes of their own market, which may result in considerable differences
         across countries. For example, in Germany, there is no legal right to repay
         mortgages early and standard long-run fixed interest loans are very popular.
         According to the Association of German Mortgage Banks (VDH) these loans are
         generally available at lower interest rates than alternative loans that provide an
         option to repay early. There are a number of reasons why long-run contracts
         without an option to repay are cheaper, including the lower risk that the loan will
         be repaid early, which reduces the cost of financing the loan, and the ability to
         distribute the distribution costs over a long period.577

7.149    It is believed that different national regulators may have taken different decisions
         regarding these product features and hence that cross-border trade in mortgages
         may be limited because of this. Thus there may not be improved cross-border
         trade between those countries where the typical product features of choice are not
         the products features that are found in the standardised product.

         Distribution

7.150    Several interview partners argued that consumers would like to see intermediaries
         face-to-face indicating a preference for physical presence as opposed to trade
         occurring through the freedom to provide services.578 They also named related
         barriers such as:



576
      Information received from the BdB, letter dated 12th August 2004.
577
      Interview with VDH, 1st July 2004.
578
      Interview with BMF, 19th May 2004, and interview with DSGV, 21st May 2004.

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          •   Language barriers; and579

          •   Importance of agents, which tend to offer national products.580

7.151     The importance of local intermediaries expressing a preference for domestic
          products suggests that this would remain a barrier even for those institutions
          entering markets through establishing physical presence in other countries.

7.152     According to the DSGV, the market for financial products is ruled by the specific
          local and regional demand that is based on cultural and linguistic barriers.581

          Tax and legal restrictions

7.153     The trade associations interviewed blamed the lack of a true European internal
          market for financial products on the differences in national regulations, e.g. with
          regard to contract, tax, and civil law, and a resulting lack of legal certainty when
          operating in other countries. For banking products, problems with consumer
          identification when purchasing financial services products from abroad were
          raised (the acceptance of a digital signature would help).

7.154     The majority of interviewees did not believe that further product standardisation
          beyond that already in place in Germany or product simplification would be an
          important tool to facilitate cross-border trade.582

7.155     The Ministry of Finance argued that the creation of “European” simplified
          products would be difficult due to differences in tax law, labour law, civil law and
          other institutional differences. In particular, they noted the following as reasons
          making cross-border trade more difficult:

          •   Unknown regulation and supervision of foreign insurers (“lender of last
              resort” guarantees etc); and




579
      Interview with BMF, 19th May 2004, and interview with DSGV, 21st May 2004.
580
      Interview with BMF, 19th May 2004.
581
      Interview with DSGV, 21st May 2004.
582
        Interviews with BdB and GDV, 10th May 2004.

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        •   Different regulations regarding the ability to bequest would affect the
            tradability of products.

7.156   Hence standardised or simplified products that were not combined with
        standardised legal and tax frameworks were thought unlikely to lead to cross-
        border trade.




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Section 8        Greece
Summary
8.1      Regulation of retail financial services in Greece focuses on ensuring the provision
         of the adequate information to the consumer. The consumer is then expected to
         take responsibility for the decisions that they take.

8.2      There is no evidence of products being simplified in Greece or that they have
         recognised any need for simplified, or further standardisation, of products.

8.3      Although there is a lively debate in Greek financial press around financial services
         regulation we did not find any academic literature on the need for simplified
         products. There have not been any significant regulatory reviews of the financial
         sector considering the problems of product complexity, and there were no
         products identified as simplified.

Table 34: Simplified products in Greece

Product list                                         Does Greece have simplified products?

Basic deposit account with payment means                              No

Cash based savings products on which interest                         No
or other return is paid

Credit or deferred debit card                                         No

Private pension plans                                                 No

Motor insurance                                                       No

Home insurance                                                        No

Life assurance                                                        No

Mortgage credit                                                       No

Collective investment schemes                                         No

Financial advice                                                      No



8.4      In the banking sector, there is concern regarding the emergence of more
         sophisticated products and that this increases the potential for information

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         asymmetry. The response has been to focus on ensuring that consumers have
         adequate, relevant information to make appropriate decisions. The key piece of
         regulation is the Bank of Greece’s Governor’s Act 2501/2002, which sets the
         minimum information standards for products distributed by banks.

8.5      However, there is a recognition that information by itself may not be sufficient for
         markets to work effectively. In particular, if the information provided results in a
         lot of data being presented to the consumer this may actually result in increasing
         confusion. Therefore both the Bank of Greece and the Hellenic Bank Association
         (HBA) believes there is a need to focus on the quality of consumer information,

           “There is no need for a lot of information. What is necessary is the quality of
           information provided and not the quantity. Specific attention should be given in order to
           provide to the consumer the right information at the right time in order to be able to
           take a conscious decision and make a conscious choice.”583

           “During the creation of Act 2501/2002, the HBA cooperated with the Bank of Greece
           by highlighting according to commercial banks, what is recognised as “useful
           information” in order to deal with consumer confusion.”584

8.6      Ensuring the comparability of banking products is also a critical issue regarding
         consumer information. The Bank of Greece has given indications that it might act
         in this direction since it has noticed differences in terminology, which makes
         comparison of banking products more difficult,

           “One problem is that the lists of information [obligatory lists of characteristics of
           products] posted by banks often use different terminology and calculations for the same
           characteristics. So we think that this could be a matter of consideration in the future.”
           585



8.7      There is therefore a recognition that standardisation may be beneficial to allow
         consumers to better compare the offerings of different providers but it is
         standardised information rather than standardised product terms which would be
         beneficial.




583
      Interview with HBA, 13th May 2004.
584
      Interview with the Bank of Greece, 13th May 2004.
585
      Interview with the Bank of Greece, 13th May 2004.

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8.8       This is consistent with the recognition that more diversified (and potentially
          complex) products can better meet the needs of consumers,

            “A modern and efficient banking system does not limit itself to traditional
            intermediation between savers and investors, but offers a broad spectrum of financial
            services, ranging from highly specialised consultancy and investment banking services
            to innovative combinations of bank products and other retail banking services offered
            to end-consumers.”

            “Low interest rates have stimulated and continue to stimulate product innovation.”586

8.9       In addition to regulation, the Hellenic Banking Association has also developed a
          more general Code of Banking Ethics (1997), pre-dating the Governor’s Act,
          promoting similar information provision requirements for other products.

8.10      Finally, the Bank of Greece does not believe there is a significant unbanked sector
          or see any need to introduce products – such as “simplified products” – to increase
          provision,

            “There is no such social problem relating to the lack of basic bank accounts for low
            income-earners.”587

            “The only “access problem” I think exists is that those over the age of 70 cannot take
            out a personal loan.”588

8.11      It appears that the system under which the minimum information is prescribed by
          the regulator (the Bank of Greece), and the HBA cooperates with the regulator on
          the way the rules are implemented by banks to ensure their uniform adoption and
          to enhance comparability, is seen as broadly effective. There is therefore currently
          no call for simplification on banking products (this covers banks accounts, cash
          deposits, credit cards and mortgage credit),

            “The Act [Governor of the Bank of Greece’s Act 2501/2002] ensures access to
            products, information for the consumer and comparable information.”589

            “Even synthetic products become accessible through the provision of information on
            risk, for example.”590



586
       Interview with the Bank of Greece, 13th May 2004.
587
       Interview with HBA, 13th May 2004.
588
       Interview with the Bank of Greece, 13th May 2004.
589
       Interview with HBA, 13th May 2004.

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8.12      However, this may partly reflect the belief that it is not the role of the regulator to
          design products for consumers,

            “Our authority [credit system supervisor] has no competency for pricing and the
            structure of products, and through these the risk or profit inherent in a particular
            product. However, we do emphasise the obligation to provide information to the
            consumer on the risks being incurred.”591

8.13      In contrast to many countries, investment fund products are perceived to be
          generally more complex than insurance products and aimed at more sophisticated
          investors. The problems caused by information asymmetries are targeted through
          the code of conduct for investment fund management companies and portfolio
          investment companies set out by the Hellenic Capital Markets Commission
          (CMC) and the code of conduct established by the Ministry of the National
          Economy for Investment Services Companies.

8.14      It is argued by the regulator that there is already considerable information in a
          standard form to help consumers make informed decisions. In particular, funds
          are already in investment categories which describe the amount of risk that the
          consumer is taking on.           There are also comparative tables setting out the
          characteristics of different funds and facilitating comparison between funds.

8.15      In addition, we already have standardisation in the form of the UCITS Directive,
          that have increased the fund choice available to Greek investors and the number
          of providers in the Greek market.                There was little need identified in the
          interviews for further standardisation or simplification of investment funds.

8.16      In the insurance sector, the same overall approach focusing on information
          provision has been adopted. However, the regulator does not believe that
          information provision has been sufficient to allow consumers to make product
          comparisons,




590
      Interview with HBA, 13th May 2004.
591
       Interview with the Bank of Greece, 13th May 2004.

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            “Although insurance companies provide information before the signing of the contract
            and in the contract document itself, insurance products remain incomparable to the
            average consumer.”592

8.17      This may reflect the inherent complexity of the products. Indeed, the regulators
          currently responsible for insurance products did not believe that insurance
          products could be simplified such that consumers could make meaningful
          comparisons between them.

8.18      However, in the financial press, the Insurance Companies and Actuaries
          Supervisory Directorate of the Ministry of Development has been accused of
          inadequate enforcement of the legal framework.

8.19      Through Law 3229/2004, a new independent regulatory authority has been
          created for the insurance sector, to take over the responsibilities of the
          aforementioned supervisory directorate of the Ministry of Development.

8.20      There is also significant change taking place regarding private pensions. This
          market has not been very significant to date, with the majority of the population
          depending on public provision.

8.21      This sector is regulated by the Ministry of Employment and Social Security who
          have recently modified the regulatory system of private pension schemes. The
          first “occupational” scheme was recently established for the employees of the
          Ministry of National Economy, although more schemes of this kind are
          anticipated. Although individual private pensions have been available for fifteen
          years or more, they are rare.

8.22      The largest problem in the development of the private pensions market appears to
          be the belief that the public pension system will provide adequate provision in the
          longer term (even though there is increasing dis-satisfaction with its current
          performance). It seems unlikely that simplification or standardisation will in itself
          solve this problem.




592
       Interview with the Ministry of Development, 13th May 2004.

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8.23      However, one problem identified in the pensions market in Greece is the under-
          developed annuity market. This appears to have reduced the choice of private
          pensions and addressing this problem could improve innovation.

8.24      The private pension market is not the only area where there are currently low
          levels of provision. Home insurance has been identified as another area where
          provision is very low compared to other Member States. In the financial press,
          there are divergent opinions regarding whether competition will resolve these
          issues or whether consumer education is required to make consumers aware of the
          benefits of these types of insurance.            However, again, this appears a more
          fundamental question than could be addressed by product simplification or
          standardisation.

8.25      Finally, in the interviews undertaken for the purpose of this project, we identified
          a common desire to leave consumers with some responsibility for the purchases
          they make.         This was seen as particularly important for the long-term
          development of the market.

8.26      Beyond the provision of key information, there is a recognition that consumers
          have a responsibility to invest only after they have educated themselves
          appropriately. It should also be noted that the access to certain investment types is
          only reserved to higher incomes, especially in the sector of private banking,

            “We must not forget the responsibility of the customer to inform themselves and
            compare products.”

            “We need strategies promoting the education of consumers but also teaching the
            consumer their responsibilities… You are in a free economy now. No authority can
            guarantee your returns.”593

8.27      Indeed, there is some confidence that consumers are becoming more informed.
          Regulators and observers of the financial market stated that they are growing
          accustomed to consumers who know how to inform themselves regarding
          financial products, provided the appropriate information is supplied by credit
          institutions or by intermediaries,


593
       Interview with the Bank of Greece, 13th May 2004.

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         “For many reasons, the consumer of today is better informed. They know what they
         want. They will not be directed. They obtain information and values putting technology
         to use. Today the Internet provides them with this opportunity. People, especially the
         young, are increasingly using it.”

Table 35: Alternative regulatory interventions in Greece

                         Information provision           Regulation of sales      Voluntary codes of
                                                            and advice                 conduct

Basic deposit          Governor’s Act 2501/2002           Code of Banking          Code of Banking
account with                                                  Ethics                    Ethics
payment means

Cash based             Governor’s Act 2501/2002           Code of Banking          Code of Banking
savings products                                              Ethics                   Ethics
on which interest
or other return is
paid

Credit or              Governor’s Act 2501/2002           Code of Banking          Code of Banking
deferred debit                                                Ethics                   Ethics
card

Private pension        Governor’s Act 2501/2002
plans                  (where sold through bank)

                       Law 400/1970 (where sold
                      through insurance company)
                        amended according to EU
                      directives: Articles 4 and 13c

Motor insurance        Law 400/1970 (where sold
                      through insurance company)
                        amended according to EU
                      directives: Articles 4 and 13c

Home insurance         Law 400/1970 (where sold
                      through insurance company)
                        amended according to EU
                      directives: Articles 4 and 13c

Life assurance         Law 400/1970 (where sold
                      through insurance company)
                        amended according to EU
                      directives: Articles 4 and 13c

Mortgage credit        Governor’s Act 2501/2002                                   European voluntary
                                                                                    code of conduct
                                                                                   regarding the pre-
                                                                                      contractual
                                                                                      provision of
                                                                                    information for
                                                                                       mortgages

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Collective            Pre-contractual information
investment              form provided for mutual
schemes               fund shares under Article 24
                           of Law 1969/1991

                      Code of Conduct for Mutual
                          Fund Management
                       Companies and Portfolio
                        Investment Companies

                             Ministerial Decision
                          122/1997/B-340: “Code of
                           Conduct for Companies
                            Providing Investment
                                  Services”

Financial advice          Governor’s Act 2501/2002     Ministerial Decision
                          (where the product/service     122/1997/B-340:
                            sold through a bank)        “Code of Conduct
                                                          for Companies
                             Ministerial Decision            Providing
                          122/1997/B-340: “Code of          Investment
                           Conduct for Companies             Services”
                            Providing Investment
                                  Services”



Sources of information
8.28     The information in this section comes from a range of sources. These included
         publications from the following institutions (in addition to those interviewed
         listed below):

         •   Government Gazette; and

         •        Insurance Market magazine.

8.29     We also consulted the financial press and general media in order to get a wider
         picture and alternative viewpoints.

8.30     Interviews were conducted with:

         •   Enosi Ellinikon Trapezon (Hellenic Bankers Association, HBA);

         •   Hellenic Capital Markets Commission (CMC);


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          •   The Insurance division of the Ministry of Development; and

          •         Trapeza tis Ellados (Bank of Greece, TE).

8.31      Table 36 below shows the regulators responsible for the various products in
          Greece.

Table 36: Greek primary regulators

Product list                                                      Primary regulators

Banking products (including credit cards and                         Bank of Greece
mortgages)

Insurance products (both life and general)                Directorate of Supervision of Insurance
                                                           Companies and Actuaries (Ministry of
                                                         Development); new independent regulator
                                                       established under Law 3229/2004, remains to
                                                                         be staffed

Pensions                                               Ministry of Employment and Social Security

Investment products                                        Hellenic Capital Market Commission

Financial advice                                           Hellenic Capital Market Commission


Development and characteristics of simplified products
8.32      Greece has no products that we have categorised as simplified products.

Alternative regulatory interventions
8.33      The financial market in Greece began to be liberalised in 1991. It was at this time
          that the first regulations referring to transparency were introduced in order to
          address the problem associated with the increasing sophistication of banking
          products.594

8.34      Since the mid to late 1990s, regulators and trade associations have recognised the
          growing variety, complexity and sophistication of financial products on offer in
          the Greek market.




594
       Governor of the Bank of Greece’s Act 1969/8 August 1991.

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8.35      This has been heralded as a sign of the increasing maturity and competition in the
          market. In addition, the growing range of products is recognised as a response of
          the financial sector to competition in order to maintain profits and is seen to cater
          to a wide range of consumer preferences and thus to be beneficial to the consumer
          and investor,

            “A modern and efficient banking system does not limit itself to traditional
            intermediation between savers and investors, but offers a broad spectrum of financial
            services, ranging from highly specialised consultancy and investment banking services
            to innovative combinations of bank products and other retail banking services offered
            to end-consumers.” 595

            “Growing competition reduces profit margins related to the supply of traditional bank
            services and induces banks to intensify efforts to diversify their products and expand
            into new markets, goals which require substantial investment in equipment and the
            acquisition of new skills by bank personnel.” 596

8.36      There is therefore a strong argument that in a number of markets, product
          differentiation is required to meet the needs of different types of consumers and
          raise participation. Until these markets are developed further there is little case
          for simplification or standardisation of product features.

Provision of information
8.37      There are extensive rules governing the provision of information for banking
          products, mortgages (through the European voluntary code), insurance and
          investment fund products.

          Bank of Greece Governor’s Act 2501/2002 Re: Credit institutions’ disclosure
          requirements to retail customers with respect to terms and conditions governing the
          provision of bank services

8.38      The Bank of Greece Governor’s Act 2501/2002 came into force on 1st January
          2003. It stipulates minimum information and transparency to bank customers, the
          mode by which this information is provided and timing of information.




595
       Bank of Greece, Annual Report 2002.
596
       Bank of Greece, Annual Report 2000.

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8.39     The HBA contributed to the composition of the Act by recognising which pieces
         of information are critical for the consumer, in order to make an informed
         decision. The Act covers all products sold by banks,

             “The Bank of Greece, recognising that furnishing bank customers with accurate and
             adequate information facilitates their choices, hence promoting competition, and
             enhances the reliability of the banking system, has recently codified and supplemented
             the provisions governing the transparency of banking transactions. Specifically, for
             certain products offered by banks, such as financial derivatives and guaranteed capital
             investment products, where customers are exposed to market risk, it is of particular
             importance to provide additional information on the characteristics of these products
             and the risks to be incurred.” 597

8.40     This requires the bank to set out the terms of the product. This includes
         information on:

         •     Key features of the products, including charges and minimum balances etc.;
               and

         •     For synthetic products (more complex banking products), customer
               information must include specific elements facilitating the comparability of
               such products with other products of a similar nature (either deposits or
               investments), as well as the full description of both expected returns and
               potential risks to be incurred.

8.41     For example, banks must give the consumer a clear and accurate description of the
         factors determining the rates of return on the specific products, including
         alternative assumptions as to the main determinants of the rates of return
         (scenarios on the evolution of stock market indices, exchange rates etc.), and
         mentioning at least two representative examples (such as the favourable and
         unfavourable scenario),

             “… In the case of mixed deposit-investment products, recently complaints have focused
             on the lack of information regarding returns and risks which investments of this kind
             entail. With the application of 2501/2002 AG/BG banks are obliged to provide full and
             intelligible information, accompanied by at least two representative examples, so that




597
      Bank of Greece, Annual Report 2002 referring to the Bank of Greece Governor’s Act 2501/2002.

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            investors may have at their disposal all the information necessary for responsible
            decisions.”598

          Law 400/1970 regarding insurance business

8.42      Law 400/1970 “Regarding the Private Insurance Company” has been amended
          according to EU directives and has been codified by the Association of Insurance
          Companies. Article 4 (specifically paragraph 3D) sets out the minimum level of
          information consumers must be supplied pre-contractually for all life products.

8.43      Article 13C stipulates supplementary information provision for the more complex
          investment-linked (usually unit-linked) life products. This brings the Third Life
          directive into Greece law.

8.44      This requires information to be given on the terms of the product, for example,
          charges and surrender values.

          Code of Conduct for Mutual Fund Management Companies (AEDAK) and Portfolio
          Investment Companies (AEEX)

8.45      The CMC aims to ensure adequate and comparable information provision to
          investors through the enforcement of Law 1969/91 (mainly Article 24) and the
          “Code of Conduct for Mutual Fund Management Companies (AEDAK) and
          Portfolio Investment Companies (AEEX)” and the “Code of Conduct for
          Investment Services Companies.”

8.46      The CMC takes responsibility for the authorisation of funds on a case by case
          basis. This ensures the fund characteristics are appropriate for the way it is
          marketed and the types of consumers who will invest in it.

8.47      Information is available on the investment category the funds fall into (bonds,
          money market, equity and mixed) providing the customer with information
          regarding the risk they are taking on,

            “…bond funds, we know will invest 60-70% in fixed income securities and are thus low
            risk. Buying a share of different funds exposes one to different degrees of risk.”599




598
       The Work of the Office of the Bank Ombudsman in its First Four Years of Operation (1999-2002):
       Summary Presentation, in the Hellenic Bank Association Bulletin (Oct-Nov-Dec 2002).

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8.48      In addition, comparative information is available comparing the characteristics of
          different funds with the aim of helping consumers make an informed choice.

8.49      Finally, the decision of the 132nd / 19.5.1998 of the council of the Board of
          Directors of the Hellenic Capital Markets Commission: Topic 2: “Code of
          Conduct for Mutual Fund Management Companies (AEDAK) and Portfolio
          Investment Companies (AEEX)” establishes explicit minimum information
          standards. This information is to be conveyed in both pre-contractual advice and
          in written information supplied.

Regulation of the sales and advice process
8.50      As shown in Table 37 there is relatively little attention paid to the regulation of
          sales and advice process in Greece.

Table 37: Regulation of the sales and advice process for investment products –
disclosure and qualification

                                                  Life assurance, pensions and investment
                                                                   funds

Need for a fact find to understand the                               No
customer
Written record of advice given                                       No
Disclosure of level of commission                                    No
Disclosure of turnover with provider                                 No
Disclosure with whom contractual                                     No
relationship exist
Do legal professional qualifications exist for                      Yes
advisers?
Is there a publicly available database of all                        No
advisers?

8.51      Insurance advisers should, under the law, facilitate comparison if asked to do so
          by the client,




599
       Interview with CMC, 14th May 2004.

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           “Law 1569/85 states that agents must act in the interest of the customer not the
           insurance company. In this role, the agent can offer the comparison of products where
           the consumer cannot compare alone as these are too complex and differentiated.”600

8.52      This was not seen as important as information provision throughout the interviews
          in Greece. However, further elements of sales and advice regulation will come in
          through the transposition of MiFID.

8.53      The only regulation that directly relates to this is Ministerial Decision
          122/1997/B-340: “Code of Conduct for Companies Providing Investment
          Services”. The aim is to establish rules governing the relationship and conduct of
          companies and their, or related companies’, employees during the conduct of their
          activities.

8.54      This has a number of quite high-level objectives: the healthy functioning of the
          Greek capital market is to be safeguarded, the interests of the investing public are
          protected, transaction transparency is safeguarded, healthy competition between
          companies and the correct and full information of the market is made.

          Bank of Greece training initiatives & Hellenic Banking Institute (HBI)

8.55      The Bank of Greece has noted that the growing complexity of products has
          required commercial banks through Act 2501/2002 to provide proper training of
          their employees such that they provide specific information to consumers.

8.56      Training takes place through HBI (the training division of the HBA), established
          in 1986 in order to provide training services mainly to bank employees, as well as
          to other professionals of the financial sector and higher education graduates. The
          HBI has been qualified by the Greek state as a Centre of Professional Training
          and collaborates with high calibre trainers. Training is provided in various
          methods: in-class seminars; in-service seminars on demand by individual banks;
          distance learning courses and e-books.




600
       Interview with Ministry of Development, 13th May 2004


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          Insurance sector professional qualifications601

8.57      A dedicated Committee of the Ministry of Development is charged with setting a
          curriculum for, and regulating the training and examinations of, all those wanting
          to work as insurance advisers. This Committee authorises private schools to teach
          the curriculum they set.

8.58      The three professional groups providing insurance product advice (insurance
          brokers, insurance agents and insurance advisers) should be qualified to recognise
          the characteristics of different types of products and know the clients legal rights
          to information and advice.

          CMC training scheme

8.59      According to CMC executive council decision 1/294/19-2-2004, the CMC sets the
          material for, and conducts examinations for, qualifications in: the analysis of
          shares and the market; client portfolio management; investment advice; and
          reception and transmission of orders. The aim of these examinations is to raise the
          general level of qualification, improving the quality of services being provided
          and resulting in a more competitive market and better protection of the investor.
          Resulting from more recent regulations, the Union of Institutional Investors has
          been made responsible for designing a curriculum and carrying out examinations
          for the aforementioned professionals. The curriculum and examination do,
          however, have to be authorised by the CMC.

Voluntary codes of conduct
          Code of Banking Ethics

8.60      The HBA’s Code of Banking Ethics sets out the conduct of banks towards
          customers and the level of information customers should provide to banks. This
          follows similar lines to the Bank of Greece Governor’s Act 2501/2002 although
          they were created through separate processes. The Code of Ethics is broader as a
          document,




601
       Interview with Ministry of Development, 13th May 2004.

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            “The voluntary approach is different (from the regulatory)… Both hard regulation and
            voluntary codes are necessary. The code is also pro-competition but doesn’t imply
            sanctions.”602

8.61       The Code has come into effect following its approval by the General Assembly of
           the Hellenic Bank Association. It is essentially a voluntary agreement that
           functions in parallel to the Act 2501/2002 of the Governor of the Bank of Greece.

8.62       The basic aim of the Code is to increase transparency and openness during
           transactions and, above all, to create trust in the relations between banks and their
           customers. This includes the need to provide:

       •    Information leaflets on the basic banking services offered in bank premises;

       •    Information on the rights of the consumer and the risks they are taking on; and

       •    The service charges which include the bank's fee, any costs or taxes, the levies
            or other duties and charges.

8.63       The intention is that banks will use a uniform terminology with a common
           meaning. However, although this is the intention there are some concerns that
           this information is not always readily available and that there are differences in
           terminology across banks.

8.64       In case of investment services provided by a bank, similar information
           requirements are presented.

           Voluntary code of conduct on home loans

8.65       The agreement establishing this Code was negotiated and approved by the
           European Commission, the European Consumers Association and the European
           credit sector associations which issue housing loans.603

8.66       The aim of the code is to provide transparent and comparable information to
           consumers. The banks agreeing to the code agree to provide a variety of facts to
           the consumer using a standardised European information form.


602
       Interview with the Bank of Greece, 13th May 2004.


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Balance between simplification and other forms of intervention
          General points

8.67      There are no examples of simplified financial products or efforts to encourage
          standardisation of products in Greece. Instead, there are laws and voluntary codes
          prescribing the information consumers need to make informed decisions.

8.68      The diversity of products is seen to reflect the free, competitive nature of the
          market, a result of the liberalisation of the early 1990s.

8.69      However, the regulatory system in Greece is undergoing change. We can observe
          the development of a dedicated, independent regulator for insurance and pensions,
          modelled on the CMC and the possibility of a Regulatory Authorities
          Coordination Council which may accelerate the information provision and
          standardisation process. This appears to offer the potential for addressing the
          regulation of insurance products that are seen as the most complex and where
          information provision is seen as the least satisfactory.

8.70      Even if the simplification of products were seen as necessary, none of the
          regulators currently see themselves as responsible for such a process (the
          exception could be the CMC, which stated in interview that more authority over
          the characteristics of products being suggested to it for authorisation would be
          welcome).

          Basic deposit account with payment means

8.71      In the banking sector, the efforts made to provide good information, along with
          efforts to train central and commercial bank employees are seen as having been
          effective.

8.72      In particular, the Bank of Greece Governor’s Act 2501/2002 establishes minimum
          information standards and the mode by which this information will be provided
          for all products offered by banks.




603
       Taken from www.hba.gr/5publ/enimerotika/kodikas.pdf.

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8.73     These products are not seen as complex. However, it is recognised that
         competition is creating increasingly complex banking products that consumers
         will find more difficult to understand and compare.

8.74     It is also recognised that yet more information is not a sufficient regulatory
         solution, but instead better quality information is required. The standardisation of
         information appears to be the next step that may be used to aid consumers.

8.75     Hence, simplification is not recommended for banking sector products at present.

         Cash based savings products

8.76     Most of the larger credit institutions in Greece (e.g. Alpha Bank, National Bank
         and Emporiki) have instant access and savings accounts, which they describe as
         “basic”, “plain” or “traditional.”

8.77     These appear to be relatively simple products that are widely available. They
         usually include a cheque book, cash card, one or more credit cards, loan facilities,
         overdrafts and standing order facilities, as well as having the option of attaching
         investment and insurance products.

8.78     Banks could legally stop offering these “basic” accounts but it is recognised that
         the next step up are investment and insurance linked banking products which are
         not attractive to the lower end bank customer.

8.79     The market is therefore seen to provide simple products that consumers
         understand. There are relatively few complaints in this market and therefore it is
         not thought to be an area of concern.

8.80     Therefore a simplified cash based product is not seen yet as necessary in the
         Greek market.

         Credit or deferred debit cards

8.81     Regulation of credit cards has focused on information provision (as does
         regulation of all other banking products).




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8.82      Information to credit card holders should include information on the interest rate,
          the annual fee, the method and the period before interest is charged on any
          outstanding balance, and any other expenses and commission fees, as well as the
          conversion rate for foreign currency transactions.

8.83      Credit institutions have to inform credit card holders of the special terms and
          conditions governing the responsibilities of both the card issuer and the card
          holder, the manner in which the customer should notify the issuer in the event of
          theft or loss etc.

8.84      The credit card market is seen as working effectively and therefore based on the
          interview evidence, there appears little justification for simplification or
          standardisation of credit card features.

          Private pension plans

8.85      Occupational pension programmes are essentially unknown in Greece. Up until
          now, these have only been provided by international firms and a small number of
          large Greek companies mostly in the financial sector.604

8.86      Even though occupational pension provision is currently very low in Greece,
          individual private pensions are still relatively rare as all consumers are covered or
          still believe they are covered by public social security. Indeed, even though there
          have been many proposals to reform the pension system and the current public
          provision is seen as unsatisfactory, there still appears a belief that the public
          provision will provide for most consumers in the future. The public system
          operates on the basis of Pay As You Go provision.

8.87      Where individual pensions exist, these are provided by the life insurance industry
          and lead to lump sum payments, as the annuity market is still undeveloped.

8.88      Individual private pensions are covered by the same regulations as insurance
          products, are sold by insurance companies and thus suffer the same problems.



604
       Attitudes towards pension in Greece: a multivariate analysis of survey data, O’Donnell, O and Tinios,
       P, April 2001.

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         Where they are sold by banks, information and advice is provided according to the
         Bank of Greece’s Governor’s Act 2501/2002 and according to the Banking Code
         of Ethics (HBA, 1997).

8.89     With Law 3029/2002, a private form of this collective social security has emerged
         in the form of the “occupational funds” as a supplement to the public social
         security. Both public and private social security funds are governed by a high
         level of regulation of all financial sectors, through dedicated committees reporting
         to the Ministry of Employment.

8.90     Information provision to consumers is not emphasised nor is comparability since
         consumers do not have a choice over funds. Rather the company they work for,
         or the sector of their work, dictates the occupational fund they can invest in.

8.91     The pensions sector is one of the least developed in terms of product complexity.
         Although there are strict regulations on pensions, these relate to capital adequacy
         and liquidity, rather than to simplification of characteristics for consumers. Thus,
         simplification is not thought to be appropriate, at least until the evolution of the
         new (private) occupational pension funds has been observed.

         Motor insurance

8.92     Motor insurance is compulsory in Greece, but even so it is estimated that 20% of
         Greeks do not have insurance.

8.93     Since 1993 insurance companies have been able to set their own premium levels
         for motor vehicle insurance. Over the last four years, the market has not been
         seen to be working satisfactorily; in particular, it was seen as dominated by state
         owned providers writing 50% of the business. This, it is claimed, has resulted in
         premiums being below cost as firms have used motor insurance as a loss leader.

8.94     However, in terms of service, there were seen to be positive moves, with an
         industry-wide “friendly agreement” such that claims are paid out by the




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          consumer’s own insurance company to be settled later with the other party’s
          insurer.605

8.95      The market is seen as slowly adjusting, with a number of firms leaving the
          market, and mergers resulting in a number of players growing rapidly. In none of
          the interviews conducted for this project did we find an argument for
          simplification of motor insurance in Greece.

          Home insurance

8.96      There is concern regarding the level of home insurance in Greece. Some studies
          show Greece has only 7% of households insured (this compares to 54% for Italy,
          the second lowest in Europe). Even following a number of earthquakes, levels of
          household insurance have not risen noticeably.

8.97      There are divergent opinions as to whether the low level represents an opportunity
          for the industry that will be corrected by market forces, or whether action needs to
          be taken to educate the Greek population about the needs for appropriate
          insurance cover.

8.98      However, there is no evidence that the low level of provision has anything to do
          with the complexity of the product. Indeed, there is an argument that there is a
          need for the market to develop more attractive products that meet the
          requirements of Greek consumers. Suggesting further differentiation is required.

          Life insurance

8.99      In the insurance sector, the same overall approach focusing on information
          provision has been adopted. Minimum pre-contractual information requirements
          are set out by Law 400/1970 “Regarding Private Insurance Companies” (amended
          according to EU directives).

8.100     However, this is not seen to have been particularly effective. It is argued that
          inadequate enforcement has led to consumer insecurity and distrust towards
          insurance companies and the supervisory authority (Ministry of Development), as


605
       The European Motor Insurance Market in 1999, CEA.

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         well as a lack of understanding regarding the different insurance products
         available, particularly the life and unit-linked products, and thus an inability to
         compare products.

8.101    However, the regulator does not believe that information provision is likely to be
         sufficient to allow consumers to make product comparison,

           “Even with the information provided by insurance companies, I don’t see how
           consumers can compare products as their characteristics are so varied and the
           terminology used to describe the same characteristic varies.”606

8.102    Equally, advice regulation is not seen as particularly effective. Although insurance
         advisers should, under the law, facilitate comparison if asked to do so by the
         client,

           “Even where there is an essentially similar mutual fund linked product, the relative
           risks of the different mutual funds might be overlooked.”607

8.103    This may reflect the inherent complexity of the products, however, the Insurance
         Companies and Actuaries Supervisory Directorate of the Ministry of
         Development has been accused of inadequate enforcement of the legal
         framework.

8.104    Through Law 3229/2004, a new independent regulatory authority has been
         created for the insurance sector, to take over the responsibilities of the
         aforementioned supervisory directorate of the Ministry of Development. It would
         therefore seem premature to assume any requirement for simplification, at least
         until the new regulatory authority has developed and shown whether it is possible
         that using information provision will facilitate product comparison.

8.105    In the insurance sector much work needs to be done to establish information and
         comparability standards similar to those in the banking and investment sectors and
         more generally to enhance consumer confidence in the insurance sector. Before
         simplification is contemplated, the new regulatory authority should be allowed to
         develop.


606
      Interview with Ministry of Development, 13th May 2004.

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         Mortgage credit

8.106    Mortgage credit is covered by the Governor’s Act 2501/2002 and the European
         voluntary code. There is an obligation to provide information in a standardised
         format, which facilitates comparability,

           “Poor information provision, especially regarding the various charges, is the main
           cause of complaints regarding loans. With the application since 30.9.2002 of the
           Voluntary Code of Conduct for housing loans (mortgages) and the coming into force,
           from the beginning of 2003 of the 2501/2002 Act of the Governor of the Bank of Greece
           (AG/BG), borrowers will have at their disposal all the information they need to arrive
           at responsible decisions, under the condition that they carefully study the information
           they are given, they ask for clarifications regarding points which are unintelligible to
           them and carry out a brief market research in order to select the bank with the most
           advantageous conditions for their case”608

8.107    According to tests undertaken to assess the success of the European home loans
         code there were mixed results for the performance in Greece.609 Although they
         scored well in terms of general information, they performed poorly in terms of
         personalised information.          However, most alarmingly, in most cases it was
         difficult to find any indication of the code or any information regarding the code
         of conduct.

8.108    Finally, the survey also identified a number of other problematic areas, for
         example, Greece scored badly in terms of information regarding the differences
         between fixed and variable mortgages and mortgage customers needed to open a
         bank account to pay the monthly instalments.




607
      Interview with Ministry of Development, 13th May 2004.
608
      The Work of the Office of the Bank Ombudsman in its First Four Years of Operation (1999-2002):
      Summary Presentation, in the Hellenic Bank Association Bulletin (Oct-Nov-Dec 2002).
609
      Monitoring the Uptake and Effectiveness of Voluntary Code of Conduct on Pre-Contractual
      Information for Home Loans – Contract Reference No: B5-1000/02/000552, Presented by the Institute
      for Financial Services e.V, 17 June 2003, available from
      http://www.europa.eu.int/comm/consumers/cons_int/ fina_serv/loans/documents/survey_report.pdf

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         Collective investment schemes

8.109    The CMC has observed an increasing number of investment funds being created
         since the early 1990s. There are now over 260 active investment funds in Greece
         with total net assets of €30.4 billion compared with the €503 million of 1991. 610

8.110    In the investment sector, the CMC effectively enforces information provision
         standards and in coordination with the Union of Institutional Investors sees to the
         appropriate training of collective investment advisers. These tools have made
         products better understood and more comparable (probably more so than in any of
         the other sectors discussed) despite the inherent complexity perceived in mutual
         fund investment products.

8.111    Investment fund products are however perceived to be generally more complex
         than insurance products and aimed at more sophisticated investors. Information
         asymmetries are targeted through the code of conduct for mutual fund
         management companies and portfolio investment companies set out by the
         Hellenic Capital Markets Commission (CMC). As well as through the code of
         conduct established by the Ministry of the National Economy for Investment
         Services Companies. Law 1969/1991 governs the functioning of investment fund
         management companies and portfolio investment companies and has been
         amended to incorporate EU directives relating to information provision. Article 24
         (and 22) sets out minimum pre-contractual information provision standards to
         potential investors free of charge.

8.112    The regulator believes that current systems to categorise funds allow investors to
         choose funds with particular risk characteristics (e.g. bonds relative to equities in
         technology companies), whilst there are some restrictions on products; for
         example, limiting the degree to which a fund can be invested in a single stock
         aimed at preventing consumer taking on too much risk.




610
      Hellenic Capital Market Commission, Annual Report 2003.

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8.113    In combination with “comparative tables” drawn by the Union of Institutional
         Investors, products are seen as largely comparable by investors. There is no
         identified need for simplification in this market.

8.114    However, issues around product complexity remain under review and the
         regulator is interested in working with providers to set out products that meet the
         requirement of particular investors and to consider product terms such as entry
         and exit fees for particular products. However, the intention is that this is done on
         a case-by-case basis.

         Financial advice

8.115    The focus of regulation to date has been on information provision rather than
         regulating the advice process.     There was no recognised need for simplified
         financial advice process.

Cross-border trade
8.116    Simplification or standardisation of products was not thought to help cross-border
         trade through freedom of establishment, freedom to provide services or consumer
         purchases from other Member States.

8.117    Instead, it was felt that the gains from trade were likely to be relatively small and
         the barriers due to language and culture were difficult to overcome.

8.118    This is at least consistent with the experience in a number of markets which have
         seen considerable entry, such as the motor insurance market. In this case, after
         initial success the re-emergence of Greek providers has been observed.

Benefits
8.119    The UCITS Directives were seen to have been beneficial for Greece. They have
         resulted in a greater number of potential providers and greater fund choice than
         would otherwise have been the case. This may be related to the size of the Greek
         financial services market, as cross-border trade allows both the advantage of a
         greater variety of products and to exploit economies of scale (that might not be
         possible if the Greek market worked in isolation).


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8.120    This was not thought to be entirely due to the standardisation that had resulted.
         In particular, in the investment product sector there is greater interest in cross-
         border trade as investors are on average better qualified to understand investment
         markets abroad than the average bank customer is to understand foreign banking
         sectors,

           “Cross-border activity has greatly increased in the last 5 years. Consumers want
           choices, choices extending beyond national [investment] products.” 611

           “UCITS have contributed to this growth in cross-border trade of financial products.”
           612



Barriers
8.121    The greatest barriers to cross-border trade are the relatively small gains to be
         made on some products meaning search costs are too high to make this beneficial
         for consumers or the returns to entry (on either an establishment or services basis)
         are too low, the difficulties with language and the uncertainty regarding the
         regulatory system.

         Cultural differences and language

8.122    In the banking sector, there is little cross-border trade on most common banking
         products, such as loans, and credit cards even though these are perceived as very
         straightforward and consumers are able to compare the provision across Member
         States suggesting that simplification or standardisation in other products would
         not bring cross-border trade. This is thought to be due to problems regarding
         language and cultural differences,

           “Cross-border trade is free even now but there are significant language and cultural
           barriers.”613

         Little economic gain

8.123    In the banking sector the main driver of cross-border trade was the potential to get
         a better return. If there were material differences such as those between interest


611
      Interview with the CMC, 14th May 2004.
612
      Interview with the CMC, 14th May 2004.
613
      Interview with the Bank of Greece, 13th May 2004.

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         rates this would stimulate cross-border trade in financial products without any
         need for simplification,

           “Interest rate differences are what will stimulate cross-border trade.”614

8.124    The view was that the gains from cross-border trade were simply too small for
         consumers to search for provision outside of Greece or indeed, for providers to
         incur the costs of entry either through the freedom to provide services or through
         freedom of services.

         Confidence in the regulatory system

8.125    The degree to which consumers are willing to buy across borders is thought to be
         directly related to the level of regulation.

           “People who understand the regulation of the financial system and the harmonisation
           of standards and procedures and possess the necessary level of education are more
           likely to be unsuspicious and thus invest abroad.“ 615

           “Cross-border trade in products takes place as long as the overseas market concerned
           is highly regulated.” 616

8.126    The recurring problems that have been noticed in the investment product sector
         are related in general to products not authorised by the CMC from outside the EU
         or EU products not in compliance with EU directives. 617

8.127    Therefore, simplification or standardisation would not increase cross-border
         activity unless it increased the confidence consumers felt buying from abroad or
         from providers from other Member States. Greek participants did not believe that
         simplification or standardisation would be able to improve this substantially.

         Differences in regulatory system remain

8.128    Even if there were simplified or standardised products this would not lead to an
         increase in cross-border trade through freedom of establishment or freedom to



614
      Interview with the Bank of Greece, 13th May 2004.
615
      Interview with the CMC, 14th May 2004.
616
      Interview with the CMC, 14th May 2004.
617
      Interview with the CMC, 14th May 2004.

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         provide services. In particular, other rules, such as conduct of business rules
         would remain making entry into other Member States problematic,

           “Different laws (in different countries) such as those relating to advertising prevent
           banks from entering different markets.”618




618
      Interview with the Bank of Greece, 13th May 2004.




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Section 9          Ireland
Summary
9.1       The Irish retail financial services market has seen considerable change over the
          past few years, and even now the pace of development is still strong. This has
          seen the implementation of new legislation, important new regulatory bodies
          being set up and simplified products being designed; much of which has been
          coupled with an increasing emphasis upon consumer protection.

9.2       Ireland has two products which we have categorised as simplified: the Personal
          Retirement Savings Account (PRSA); and the “Savermark” on the Special Saving
          Incentive Accounts (SSIAs), although the SSIA is no longer available.619 The
          genesis of these products was different with the PRSA developed through a
          Government review of pensions, whereas the Savermark was created by the
          Consumers’ Association of Ireland and applied to a Government designed, tax
          privileged product. In addition, we have categorised Ireland as also having a
          simplified financial advice process in as far as certain requirements are reduced on
          the sale of the standard PRSA.

9.3       Although Ireland does have simplified products, they are a very recent
          development in the Irish market and hence their impact can not be fully assessed
          and the extent to which they will play central roles in their respective markets is
          still unclear. Indeed the very fact that simplified products have only been in
          existence for a short time led to considerable concern about the wisdom of
          extending simplified standards across products or countries when the success of
          the existing products is not yet known. The Irish Financial Services Regulatory
          Authority (IFSRA) stated that,

           “The jury is still out on them”620




619
      It should be noted that the Savermark was a simplified product standard which was applied to the
      SSIA which was a Government designed tax privileged product. New SSIAs can no longer be taken
      out, although products can still be transferred between providers.
620
      Interview with IFSRA, 12th May 2004.

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Table 38: Simplified products in Ireland

          Product list                                     Does Ireland have simplified products?

          Basic deposit account with payment means               No (There have been some very
                                                           preliminary discussions about developing a
                                                                      basic bank account)

          Cash based savings products on which                             Savermark
          interest or other return is paid

          Credit or deferred debit card                                        No

          Private pension plans                               Personal Retirement Saving Account

          Motor insurance                                                      No

          Home insurance                                                       No

          Life assurance                                                       No

          Mortgage credit                                                      No

          Collective investment schemes                                    Savermark

          Financial advice                                  Reduction in advice requirements on the
                                                                        standard PRSA



9.4       Complexity has, however, been identified as a problem in the Irish financial
          services market. IFSRA has stated that,

           “Most consumers still view financial services as complex and difficult to understand”
           621



9.5       Indeed, according to their statistics, 63% of consumers do not shop around
          because they do not fully understand what they should look for in a financial
          product or service.622

9.6       The complexity of the market, and the need for simplified products, is somewhat
          contested by the Irish Bankers Federation, who note that,

           “The slow take-up to date of the PRSA, which was designed to be a low-cost simplified
           pensions product in response to a perceived market demand, tends not to support the


621
      IFSRA Strategic Plan 2004-2006, 15th January 2004.
622
      Press release 11th May 2004, IFSRA.

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           view that there is any significant unmet need for more simplified products. Purchase
           decisions are not made on price alone and consumer needs in many instances are
           becoming more complex rather than less; thus the market responds accordingly”623

9.7       Nonetheless they recognise that,

           “Notwithstanding the PRSA experience, in pensions and investments there is a
           continuing perceived need for more simplified products”624

9.8       In addition to the new simplified products, there has also been a rapid growth in
          the number of alternatives to product simplification in the Irish market, which
          primarily reflects the trend for an increasing focus upon the protection of the
          consumer. Many of these were only established very recently, and for some their
          implementation is still ongoing. Further, these interventions are typically seen as
          complementary to simplified products and to each other rather than being seen
          strictly as substitutes.

Table 39: Alternative regulatory interventions in Ireland

                                       Information         Regulation of         Voluntary codes of
                                        provision         sales and advice            conduct

          Basic deposit
                                                                                 IBF Codes of Ethics
          account with               IFSRA cost tables
                                                                                    and Practice
          payment means

          Cash based savings
          products on which          IFSRA consumer                              IBF Codes of Ethics
          interest or other              guides                                     and Practice
          return is paid

          Credit or deferred                                                     IBF Codes of Ethics
                                     IFSRA cost tables
          debit card                                                                and Practice

                                                         Qualified Financial
          Private pension
                                                              Adviser
          plans
                                                           Qualification

          Motor insurance            IFSRA cost tables

          Home insurance             IFSRA cost tables

          Life assurance             IFSRA consumer      Qualified Financial
                                      guides and cost         Adviser



623
      Interview with IBF, 11th May 2004.
624
      Interview with IBF, 11th May 2004.

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                                      survey           Qualification
                                  (forthcoming)

                                                                          IBF Codes of Ethics
                                                                             and Practice
                                IFSRA consumer
          Mortgage credit                                                 EU Voluntary Code
                                    guides
                                                                            of Conduct on
                                                                             Homeloans

                                                                            Investment Costs
                                                    Qualified Financial    Disclosure Code of
          Collective
                                                         Adviser          the Irish Association
          investment schemes
                                                      Qualification           of Investment
                                                                                Managers

                                                    Qualified Financial
          Financial advice                               Adviser
                                                      Qualification



9.9       Of the products that have not already seen the use of a simplified product, the
          only one in which there has been an identification of a potential need was the
          bank account with payment means.         It was noted that the possibility for a
          universal or simplified bank account with payment means was under discussion in
          connection with the Government’s national payments strategy and that, in part,
          this was motivated by a desire to move to electronic payments rather than
          necessarily a concern about bank accounts being overly complex or driving
          financial exclusion. However, this was described as being in the very early stages
          of consideration.

9.10      Other products such as credit cards, motor insurance, home insurance and
          mortgages were seen as being products which consumers saw as straightforward
          but where there had been a need for additional information to help consumers to
          choose between the offerings of different providers. The majority of life insurance
          in Ireland was thought to be in the form of a pure protection product with a
          relatively recently developing investment based life insurance market. The use of
          cost tables to provide comparative information was seen as addressing many of
          the major concerns in these markets.




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9.11      Finally, Irish participants did not believe that simplified or standardised products
          would impact cross-border trade.

Sources of information
9.12      The information in this section came from a range of sources. These included
          publications from the following institutions (in addition to those interviewed
          listed below):

          •   Central Bank and Financial Services Authority of Ireland (Central Bank of
              Ireland);

          •   The Irish Citizens Information Database;

          •   Ministry of Science, Technology and Commerce;

          •   Motor Insurance Advisory Board; and

          •   The Society of Actuaries in Ireland.

9.13      In addition, press releases and news stories in the press were also examined.

9.14      Interviews were conducted with:

          •   Consumers Association of Ireland (CAI);

          •   Irish Bankers Federation (IBF);

          •   Irish Financial Services Regulatory Authority (IFSRA);

          •   Irish Insurance Federation (IIF); and

          •   The Irish Pensions Board (IPB).

Table 40 below shows the regulators responsible for the various products in Ireland.

Table 40: Irish primary regulators

                           Product List                        Primary regulators

          Banking Products (including credit cards
                                                                      IFSRA
          and mortgages)

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          Insurance Products (both life and general)

          Pensions                                                      Irish Pensions Board

          Investment Products                                                  IFSRA

          Financial Advice                                                     IFSRA



Development and characteristics of simplified products
9.15      The following section describes products that we classified as simplified. We
          highlight their characteristics, how they were developed and, where possible,
          assess the impact that they have had on the market.

Savermark625
9.16      The Irish Government developed a tax privileged savings account called the
          Special Saving Incentive Account (SSIA) which could be a deposit account (with
          either a fixed interest rate or a variable rate) or a collective investment scheme.

9.17      SSIAs allowed individuals to save between €12.70 and €254 per month. The Irish
          Government would then add €1 for every €4 that individuals contributed.
          However, a condition of the account was that it must be held for at least 5 years to
          obtain the full benefit; else a tax would be applied that would take back the full
          amount of the Government contributions. New SSIAs can no longer be taken out,
          since the first contribution to them had to be made by 30th April 2002.

9.18      Following the design of the SSIA by the Irish Government, the Consumers
          Association of Ireland (CAI) established a product standard called the Savermark
          and it is this Savermark which we have categorised as bringing about a simplified
          product.

9.19      The CAI argued that the Savermark scheme for SSIAs was developed because the
          SSIA was a new financial product and hence consumers had no prior experience
          of using them and were thus more at risk of making bad investment decisions.


625
       Much of this section is based on information gathered from the interview with the CAI, 12th May 2004
       and the CAI website regarding the details of the Savermark scheme.

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          There were also worries that the products would be marketed as “simple”, so
          people would not make the effort to fully understand them, as they would assume
          that they couldn’t go wrong.

9.20      In addition, the major feature of the SSIAs was the Government contribution on
          offer, and hence it was thought that consumers would focus most of their attention
          upon this feature since this dominated any interest received. The CAI thus
          believed that consumers were in danger of paying little attention to the other
          details of the SSIA they were buying, and ending up with a poor-quality financial
          product that didn’t suit them. The CAI therefore developed the details of the
          Savermark through consultation and discussion, and using their general
          experience of consumer problems.

9.21      Interestingly, however, the CAI described what they were trying to achieve with
          the Savermark as being focused on information,

            “The Savermark was almost entirely about transparency… The aim of the Savermark
            was to provide consumers with a simple tool that would allow them to understand, and
            get involved in, the market… SSIAs could easily have been mis-sold, and the
            introduction of the Savermark stopped this happening”626

9.22      In this sense, the CAI saw the Savermark primarily as representing a check list
          against which an SSIA could be assessed.

9.23      Just as the SSIA could be structured as variable deposit accounts, fixed rate
          deposit accounts and equity based accounts, so too the Savermark had standards
          for these different types. Table 41 outlines the main conditions that the three
          different types of account must match in order to qualify to be branded with the
          Savermark.

Table 41: Characteristics of simplified product – Savermark (for cash based savings
accounts or collective investment schemes)

          Non-Price Characteristic               More Detail                     Explanation

          Access                            Investors should have easy       Access within 7 days if
                                              access to their money                 desired



626
       Interview with CAI, 12th May 2004.

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          Minimum level of                                                         The account must accept
                                                  For fixed and variable
          Contributions                                                            minimum contributions of
                                                    deposit accounts
                                                                                       €12.70 per month

          Price Characteristic                          More Detail                         Explanation

          Interest Rates                           For variable deposit            Must shadow the European
                                                        accounts                   Base rate by a margin of no
                                                                                    more than 1% p.a. for the
                                                                                           full 5 years

                                                   For fixed rate deposit           A margin of no more than
                                                          accounts                  1% p.a. below swap rates
                                                                                      (the wholesale rates
                                                                                        between banks)

          Charges                                Exit costs for fixed rate         The penalty for breaking a
                                                    deposit accounts               fixed rate contract should
                                                                                   be based on loss recovery
                                                                                              only

                                                Charges on contributions                 No charges based on
                                                for equity based accounts                   contributions

                                                  Annual Management                The charge can be no more
                                                 Charge for equity based                 than 1.5% p.a.
                                                        accounts
                                                                        st
          Source: “Savermark Report”, Consumers’ Association of Ireland, 1 March 2002,
          http://www.consumerassociation.ie/savermark.html

          Access

9.24      The Savermark required that consumers should be able to get access to their
          money within 7 days. (Tax advantages would be lost from money withdrawn
          from the SSIA, but funds could still be transferred to other providers without
          losing the tax benefits.)

          Contributions

9.25      For the deposit based accounts, the Savermark imposed the restriction that
          minimum contribution limits could not be greater than €12.70 which was the
          smallest amount that could be contributed to the SSIA.

          Pricing restrictions

9.26      There were a number of pricing restrictions that were imposed according to the
          type of SSIA that was under consideration:
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          •     Variable rate deposit accounts required the interest rate received to be no more
                than 1% point below the European Central Bank (ECB) rate for the full five-
                year term of the product;

          •     Fixed rate deposit accounts had a restriction to be no more than 1% point
                below the swap rate (the wholesale rate between banks). In addition any
                penalty imposed on exiting the fixed rate account needed to be disclosed and
                could only be based on the loss recovery; and

          •     Equity based accounts could not have any charges on contributions and the
                annual management charge could not be greater than 1.5% of the value of the
                fund.

9.27      The Savermark did not impose any explicit restriction on exit penalties when
          consumers switch providers.           This was because exit penalties had not been
          identified as a significant problem in the Irish market and hence there was not
          seen to be a need to prevent them.

          Impact

9.28      It is important to note that since the Savermark was introduced very soon after the
          launch of SSIAs, it is hard to observe the “before” and “after” situations, and thus
          observe how it affected the market. It is possible that by introducing the product
          standard so early, it stopped a negative market outcome developing in the first
          place – i.e. it could have played a preventative role.                Further, there is no
          quantitative evidence identified examining the impact of the Savermark.

9.29      The CAI argue that the Savermark has reduced charges, and this conclusion has
          been agreed with by independent commentators,

              “[the Savermark] promoted competition among financial institutions. The result is
              reduced charges on certain Special Savings Incentive Accounts (SSIAs) and improved
              terms and conditions”627




627
       SSIA Savermark standard is established by consumer group, Aileen Power, Sunday Business Post
       Online, 3rd March 2002.

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9.30      It is however worth noting that very few providers are thought to have charged
          below the caps set in the Savermark. This could support the argument that price
          caps encourage convergence on the cap, with this acting as a target level for
          providers, and no providers attempting to drive rates below the cap.

9.31      In terms of the relative size of the different types of product taken out under the
          Savermark banner, it is estimated that approximately 70% of the Savermark
          SSIAs were in deposits and around 30% in equity.628

9.32      There are contrasting views on the impact of the Savermark and there seems
          limited evidence that product providers attempted to use the Savermark as a
          method of marketing their products. Indeed the recognition in the marketplace
          regarding the Savermark seemed surprisingly low when conducting our
          interviews. (Although this could reflect the inability to open new SSIAs since
          April 2002.) Further, the Savermark on the SSIA has been a one-off development
          and similar approaches have not been applied on any other products.

9.33      The main advantage that other market participants observed were that the
          Savermark assisted in explaining the risks to consumers and in making them more
          aware of the SSIA.

9.34      In summary therefore, as a product standard, the Savermark was not generally
          seen to have had a substantial impact on the market, but as a reference point or in
          terms of its informing role it was seen as somewhat better.

Personal Pension - Personal Retirement Savings Accounts
          National Pensions Policy Initiative/ Pensions (Amendment) Act, 2002629

9.35      In the early 1990s there was little direct regulation of pensions, and various
          occupational and private schemes existed at that time. The National Pensions
          Policy Initiative (NPPI) was launched in October 1996 in order to contribute to
          the debate on achieving a fully developed national pension system in Ireland, and


628
       Interview with CAI, 12th May 2004.
629
       Much of this section is drawn from National Pensions Policy Initiative A brief guide to Report of The
       Pensions Board, The Irish Citizens Information Database, ID: A02861, 30th January 2002.

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          to help prepare a long-term plan in order to achieve this system. The NPPI report
          in May 1998 and concluded that,

            “There is a low level of understanding and awareness of pensions amongst the general
            public”630

9.36      They further argued that there was a need for a fully developed national pension
          system that enables all residents in Ireland to acquire an income that allows them
          to maintain their established standard of living on attainment of retirement age,

            “By improving the arrangements for the delivery of low-cost, value for money and
            secure provision for pension saving in a simple, transparent and well-understood
            manner, the Initiative intends to create a platform for substantial expansion in the
            effective demand for pension plans”631

9.37      In particular, they recommended the development of the Personal Retirement
          Savings Account (PRSA) to be a low-cost, easy access pension account helping
          people to save for retirement in a flexible manner. It was clear that this was
          directly linked to overcoming complexity,

            “The specific purpose of the Board’s recommendations is to reduce complexity which
            increases cost and makes it more difficult for employers and individuals to understand
            and commit themselves to making pension provision.”632

9.38      In addition to calling for the introduction of PRSAs, the report also calls for the,

            “Establishment of a norm for what would be regarded as a good quality product. It is
            recommended that products which meet the standards of flexibility, scope and
            information which make up the norm should be allowed to show a kitemark so that
            customers can have confidence that they meet common needs”633

9.39      Hence two types of PRSA were developed (more details on these are found in the
          next section covering the characteristics of simplified products):




630
       National Pensions Policy Initiative A brief guide to Report of The Pensions Board, The Irish Citizens
       Information Database, ID: A02861, 30th January 2002.
631
       Securing Retirement Income – National Pensions Policy Initiative – Report of the Pensions Board,
       The Pensions Board, May 1998.
632
       National Pensions Policy Initiative A brief guide to Report of The Pensions Board, The Irish Citizens
       Information Database, ID: A02861, 30th January 2002.
633
       Securing Retirement Income – National Pensions Policy Initiative – Report of the Pensions Board,
       The Pensions Board, May 1998.

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          •   Standard PRSA – charges are capped and there are restrictions on how the
              money can be invested; and

          •   Non-standard PRSA – here there is no maximum level of charges and there
              are fewer investment restrictions.

9.40      The primary reason for the development of the non-standard PRSAs was to tackle
          the accusation that standard PRSAs alone would offer insufficient investment
          variety (which could be of particular disadvantage to more sophisticated
          investors), but also because of concerns regarding whether existing products could
          meet the standard PRSA requirements.

9.41      The NPPI recommendations, including the introduction of PRSAs, were
          subsequently largely implemented in the Pensions (Amendment) Act, 2002 and
          the National Pensions Reserve Fund Act 2000.

9.42      Personal Retirement Savings Accounts (PRSAs) first became available in Spring
          2003, and the Irish Pensions Board is responsible for the regulation, supervision
          and compliance with the provisions of the Pensions Act, 1990 as amended. The
          Irish Pensions Board also keeps an up-to-date list on its website of the charges on
          all PRSA products (standard and non-standard), and the PRSA providers.

9.43      As noted above, PRSAs can be standard or non-standard. The non-standard
          PRSAs feature fewer restrictions on how the money can be invested, and have no
          maximum level of charges. Nevertheless, they must still conform to certain
          standards and restrictions and we have categorised them as a simplified product.
          Table 42 below explains the various different characteristics of the PRSA. Unless
          otherwise noted, the characteristics apply to both the standard and the non-
          standard PRSA.

Table 42: Characteristics of simplified product - PRSA

          Non-Price Characteristic            More Detail                Explanation

                                                                  Cannot be greater than €300
                                         Minimum contribution         per annum, €10 per
          Contributions
                                               level               electronic transaction, or
                                                                   €50 per other transaction

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                                       Default Investment        Each provider must have a
          Investments
                                           Strategy              default investment strategy

                                    Where the money can be       Apart from temporary cash
                                           invested.              holdings, only in pooled
                                         Standard only                     funds

                                                                 PRSAs cannot be sold with
                                       Bundling of PRSAs          their purchase dependent
          Marketing / Selling
                                         Standard only            upon purchase of another
                                                                           product

                                                                 PI cover and clear reasons
                                    Requirements on advisers         for transfers from
                                                                   occupational schemes

                                    Reduction in sales process      Standard PRSAs sold
                                                                 through via employers have
                                         Standard only             a reduced sales process

                                                                  Full disclosure of potential
                                                                 and actual commission and
          Information                 Disclosure of charges
                                                                 all other charges payable by
                                                                    contributors is essential

                                                                 A reasonable expectation of
                                    Providers must provide a       the future benefit of the
                                    Statement of Reasonable       scheme must be provided
                                        Projection (SRP)           annually, on request or
                                                                    when charges change.

                                                                   A Statement of Account
                                                                  must be provided at least
                                      Statement of Account        every 6 months detailing
                                                                 total contributions received
                                                                  and performance of funds

                                       Declaration of non-        Non standard funds must
                                            standard              indicate that they do not
                                                                  meet the requirements of
                                       Non-standard only            the standard PRSAs

             Price Characteristic         More Detail                   Explanation

                                     The maximum level of         A cap of no more than 5%
                    Charges                charges               of contributions and 1% per
                                         Standard Only                annum of the fund

                                                                 Must be set as a percentage
                                    The calculation of charges    of contributions and/or
                                                                 PRSA assets and cannot be


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                                                                                        set in cash terms

                                                                                     They cannot be applied
                                                                                    when the PRSA provider
                                                                                     receives a transfer from
                                                                                         another pension
                                                  When charges can be                   arrangement, upon
                                                       applied                            termination of
                                                                                    contributions, transfer of
                                                                                   funds or the suspension or
                                                                                       recommencement of
                                                                                           contributions

                                                                                   The PRSA provider must
                                              Change in charging                  give at least 2 months prior
                                              structure                             notice of changes to the
                                                                                      charging structure

          Tax incentives                                                                        Yes
          Source: “Personal Retirement Savings Accounts (PRSAs) A Consumer Guide”, produced jointly by the
          Pensions Board and the Consumers Association of Ireland


9.44      It is also the case that all employers (even very small employers) must provide
          access to a standard PRSA or alternatively must run their own pension scheme
          with few restrictions regarding who can join the scheme.

          Contributions

9.45      In order to ensure that consumers are not prohibited from gaining access to
          PRSAs, there are limits on the minimum contribution levels that providers can
          impose on consumers. The minimum contribution that providers place on the
          product cannot be greater than €300 per annum, €10 per electronic transaction or
          €50 for all other transactions.

          Investment restrictions

9.46      Both standard and non-standard PRSAs must provide a default investment
          strategy. This represents the investment strategy that will be followed unless the
          contributor has indicated otherwise in writing and chosen alternative investment
          options. The default investment strategy must be such that it meets the reasonable
          expectations of someone at retirement.                     However, the exact meaning of
          “reasonable expectations” is not defined in legislation, but is rather left to the
          individual scheme’s appointed actuary to consider. In turn this means that the


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          Society of Actuaries in Ireland has provided guidelines on what it considers to be
          reasonable and hence actuaries are instructed specifically to examine:

          •   That the asset mix is consistent with fulfilling the reasonable expectations of a
              typical contributor;

          •   Whether adequate asset diversification is provided for in the strategy;

          •   Whether concentration risk has been satisfactorily controlled; and

          •   Whether adequate arrangements are in place in relation to pricing, liquidity,
              and cash holdings.634

9.47      It should be noted that the lack of prescription in legislation was generally
          perceived as better than giving detailed rules on the exact investment allocation
          that could be followed and as allowing pension fund managers flexibility in their
          strategies.

9.48      It is clear, however, that the default investment strategy is not designed to be
          entirely risk free and indeed this is reiterated in the guidance from the Society of
          Actuaries in Ireland. At the time of interviewing, however, there were ongoing
          discussions regarding the investment allocation in the light of the recent decline in
          equity markets. There is clearly a concern about a default investment strategy in
          which investors’ capital is at risk. However, there was also a recognition that
          guaranteed funds are typically only of value to consumers who stay to term.
          Hence having a default investment strategy, from which consumers need to be
          able to opt out, invested in a fund of potentially less value to consumers who do
          opt out was not seen as the best decision.

9.49      In addition to the requirement to have a default investment strategy, standard
          PRSAs can only be invested in pooled funds (collective investments). Non-
          standard funds on the other hand have fewer restrictions and are therefore able to




634
       Guidance Note GN31C (ROI): PRSA Actuaries and Personal Retirement Savings Accounts
       Investment, The Society of Actuaries in Ireland, effective 1st November 2002.

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          offer guaranteed or bonus funds and offer a wider range of investment
          opportunities.

          Sales process

9.50      At the time that the PRSA was being developed, there was a concern that there
          could be possible mis-selling with consumers recommended to leave occupational
          schemes (as had been observed in the UK). In order to prevent this there was a
          condition imposed where whoever advised a sale of a PRSA where the individual
          was transferring funds from an occupational scheme had to set out the costs and
          benefits of both options. In addition the adviser needed €1 million of Personal
          Indemnity cover (which is now in line with European Directives). Further, if the
          transfer was being recommend because the occupational scheme was going to be
          wound up then proof needed to be with the Irish Pensions Board that the wind up
          was actually happening.

9.51      The sales process on the PRSA was under consideration at the time of
          interviewing regarding whether it could be streamlined. Both the standard and the
          non-standard PRSA generally face the same sales process. The exception to this
          is the sale of the standard PRSA via employers. In these circumstances advisers
          may simply establish whether employees have a pension and, if not, can offer the
          PRSA without having to undertake a full individual fact finding process.635

          Information requirements

9.52      There are a number of additional informational requirements in place on the
          PRSA including full disclosure of commission and charges (in line with European
          Directives on life insurance and insurance mediation).       Providers must give
          consumers a statement of reasonable projections which must be a reasonable
          expectation of the future benefit of the scheme. These projections use standard
          assumptions that inflation will be 3% per annum and investment growth will be
          6% per annum. It must be provided annually, on request or when charges change.




635
       Interview with IPB, 12th May 2004.

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          A statement of account setting out the level of contributions and the current value
          of the fund must be provided at least every six months.

9.53      In addition, non-standard funds must disclose the fact that they do not meet the
          requirements of the standard funds.

          Pricing restrictions

9.54      Charges for PRSAs must be set as a percentage of contributions or assets. They
          cannot be set in cash terms i.e. they can not be set as a cash amount per year or
          contribution. The reason given for this is,

            “Such charges, even though justifiable from a provider’s perspective, for transactions
            whose cost is independent of size (e.g. contribution collection), weigh proportionately
            more heavily on smaller contracts. Prohibiting their use would ensure that lower
            income customers are given similar value for money to higher income customers and,
            consequently, it is more likely to mean that terms would be seen as attractive”636

9.55      Whilst it is clear that a pricing structure calculated in cash rather than percentage
          terms would indeed be likely to cost low contribution consumers more as a
          percentage of contributions, a structure linking price to the underlying costs where
          these costs are fixed by transaction rather than the value of transactions may in
          fact be more economically efficient. Hence these restrictions are embedding a
          principle of cross-subsidy between high and low contribution customers.
          Nonetheless, these restrictions would not prevent providers from reducing the
          annual management charge for customers for large funds.

          Tax incentives

9.56      PRSAs have tax advantages linked to age and income in which an increasing
          proportion of income can be contributed to the PRSA out of gross income as age
          increases. The rates applied were the same as the tax relief offered on existing
          personal pension products such as the retirement annuity contract.




636
       Securing Retirement Income – National Pensions Policy Initiative – Report of the Pensions Board,
       The Pensions Board, May 1998.

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          Reason for categorising as simplified

9.57      There are a number of reasons why we have categorised both the standard and the
          non-standard PRSA as a simplified product. There are minimum contribution
          limits in place to ensure that access to the product is not prohibitive for
          consumers. There are also restrictions on the structure of prices with only charges
          on contributions and the value of the fund allowed and hence no charges on
          aspects such as transfers or on ceasing or resuming contributions. Further a
          default investment strategy must be provided which is such that it must meet the
          reasonable expectations of someone at retirement and hence which ensures asset
          diversification. In addition, the standard PRSA also imposes a price cap.

          Impact

9.58      The PRSA has only been available since Spring 2003, however, some efforts have
          been put in place to raise the awareness of the PRSA and pensions in general.
          Motivated by the NPPI report, and during the second half of 2003, the National
          Pensions Awareness Campaign used a budget of €500,000 to increase awareness
          of pensions, particularly within those sectors of the population identified as
          having consistently low coverage of pensions. In particular, they highlighted the
          need for supplementary pension provision in order to provide a comfortable
          income on retirement, and included all aspects of pension provision, including
          PRSAs. The Irish Pensions Board believed that this campaign had been critical to
          the success of PRSAs.

9.59      Given the recent development of the PRSA there is limited information available
          on its impact. Further, it is noted that at the same time that the PRSA was
          introduced, other changes occurred in the market and hence it is difficult to isolate
          the part that PRSAs played in this. For example, disclosure at the point of sale
          was introduced in 2001/2 and there has been a move to level loaded pricing which
          is thought to have increased transparency and also led to lower upfront costs for
          consumers.637




637
       Interview with IIF, 11th May 2004.

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9.60      Nonetheless, there has been a steady increase in the uptake of PRSAs, although
          the total numbers remain small. By the end of June 2004, 33,000 PRSAs had been
          taken out, with a combined value of €83.6 million. Of these, 26,000 were standard
          PRSAs and 7,000 were non-standard. 62,000 employers had signed up with a
          PRSA provider to provide access to their employees – though this became legally
          compulsory in certain circumstances as of 15th September 2003. It is worth noting
          that these figures indicate that large numbers of employers that have signed up
          with a PRSA provider have not had a single employee take out a PRSA.638

9.61      Evidence from April and May 2003 found that only 50% of consumers were
          aware of PRSAs.639 Further, the IIF point out in their press release that the groups
          where awareness is low are the very groups that the PRSA is targeting, namely
          those with low incomes and the unskilled. They note that if these groups have not
          heard of PRSAs, then there is little chance that it can raise pensions coverage
          amongst them. More recent evidence from December 2003 suggests that public
          awareness has increased to 60%.640

9.62      PRSAs were thought to have had an impact on other retirement products,

            “In anticipation of PRSAs being launched, existing private pension providers did move
            towards the new standards and became more flexible”641

9.63      Further, the Irish Pensions Board believed that the price cap on the standard
          PRSA has had an effect on the pricing of non-standard PRSAs. In particular,
          none of the non-standard PRSAs have charges on contributions that are greater
          than the 5% limit, (although annual management charges are as high as 1.65% for
          some non-standard PRSA funds).642



638
       PRSAs exceed 30,000 at end June 2004 – Total Asset Value now over €83 million, press release, The
       Pensions Board, 6th August 2004.
639
       Wider Pension Coverage must be Supported by Greater Funding Awareness - IIF, press release, Irish
       Insurance Federation, 2nd July 2003.
640
       PRSA uptake at 26,899, value €60.5m, at end March 2004, press release, The Pensions Board, 7th May
       2004.
641
       Interview with IIF, 11th May 2004.
642
       Interview with IPB, 12th May 2004.

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9.64      However, there has also been a concern in the market that price caps have
          prohibited the development of the PRSA by reducing the incentive of providers to
          sell the product and decreasing the remuneration available to advisers who may
          therefore also face lower incentives to sell these products. Indeed it seems that a
          higher price cap (or no price cap at all) would have led to a more attractive
          product from the supply side – implicitly supporting a view that pensions are
          products that need to be sold rather than being bought. Further, it is thought that
          there were not many new providers that entered the pensions market following the
          launch of the PRSA.643

9.65      Moreover, despite what was considered to be a good marketing campaign
          launching the products, it has been argued by several industry participants that
          PRSAs have not been successful,

            “The impact of PRSAs has been extremely poor. This is because encouraging people to
            save for the future is a very hard thing to do… PRSAs have been sold by the critics as a
            bad product. They have argued that the returns are not clear, and that consumers can’t
            understand them… PRSAs were well launched – there was a big campaign in the lead
            up with a lot of advertising, but the take up has been poor. People are simply thinking
            shorter term than saving for retirement”644

9.66      Indeed it has been questioned whether a simplified product like PRSAs can
          successfully solve the problems of the marketplace,

            “Even the best standardised product in the world can’t solve the problem that people
            are too short sighted to save for their retirement.”645

9.67      Instead some argued that compulsion of pension contributions would be a better
          solution to the problem of people not saving for their retirement rather than
          simplified products which may not address the problem of myopia.

9.68      Additional concerns were raised regarding the development of the PRSA and
          wider concerns that standardised products could lead to a creeping rise in
          regulation,



643
       Interview with IBF, 11th May 2004
644
       Interview with CAI, 12th May 2004.
645
       Interview with CAI, 12th May 2004.

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            “The aim of creating a standardised product in PRSAs was to drop the need for the
            regulation of the sales process by replacing it with regulation of the product itself.
            However, in practice what has happened is that the product regulation has simply been
            added to the regulation of the sales process, which has been retained, and the total
            regulatory burden has increased”646

9.69      In a wider context, the experience of the PRSA in Ireland (and indeed of the
          Stakeholder pension in the UK), was not seen as providing an example to be
          followed elsewhere,

            “Why take an idea or product which is unproven and then attempt to apply it to other
            countries? It is not clear whether Stakeholder pensions have had a beneficial effect in
            the UK market, so it is dangerous to implement similar products across the EU”647

            “The jury is still out on them”648

9.70      Thus overall the PRSA is thought to have had only a minor impact although it
          must be noted that the product was only a year old at the time of the interviewing.
          It is also interesting to note that the IPB is currently seeking to consider methods
          to further encourage take-up of PRSAs and other pensions, suggesting that they
          do not believe that the PRSA has so far been successful in significantly increasing
          pension coverage in Ireland.649

Simplified financial advice
9.71      In addition to categorising the PRSA as a simplified product, we have also
          categorised the advice process on the standard PRSA as simplified financial
          advice.

9.72      This advice process involves a reduction in the fact find or know-your-customer
          requirements compared to those processes in place for other similar but non-
          simplified products. When providing advice on the standard PRSA distributed via
          employers, advisers can simply establish whether employees have a pension and,
          if not, can offer the PRSA without having to undertake a full fact find process.650


646
       Interview with IIF, 11th May 2004.
647
       Interview with IIF, 11th May 2004.
648
       Interview with IFSRA, 12th May 2004.
649
       Irish Pensions Board website, October 2004.
650
       Interview with IPB, 12th May 2004.

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9.73      It is interesting to note that this reduction in requirements only applies to the
          standard PRSA which we have categorised as a simplified product. However, it
          only applies to the standard PRSA when distributed via employers.

9.74      There is no information available by which we can assess the success or otherwise
          of the simplified financial advice process for the PRSA.

Alternative regulatory interventions
9.75      In several product areas, Ireland has adopted alternative measures to tackle
          product complexity and other problems in the financial services sector. The
          development of these measures has recently been accelerated by the establishment
          of IFSRA on 1st May 2003 which brought together the role of the regulation of
          financial services under a single organisation.

9.76      It is important to recognise that IFSRA’s focus to date has been on information
          provision rather than direct product regulation or product design, which they have
          not undertaken, preferring instead to improve information provision. Indeed,
          although it has only been established for a short period of time, IFSRA has been
          very active in pushing for greater consumer protection and has already introduced
          several initiatives, such as industry codes of practice, cost tables and consumer
          information publications.

9.77      Further, it is interesting that the range of alternative regulatory interventions are
          perceived by IFSRA as complementary rather than as substitutes in regard to
          improving the functioning of financial services markets.651

Provision of information
9.78      The importance of focusing on improving information is identified through
          market research conducted by IFSRA:

          •   63% of consumers do not shop around because they do not fully understand
              what they should look for in a financial product or service;



651
       Interview with IFSRA, 12th May 2004.

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          •     80% of consumers find it hard to get truly independent information on
                financial products and services; and

          •     92% of consumers said they would read more information on financial
                products if it was written in plain English.652

9.79      This lack of understanding is linked to the identification of one of the consumers’
          major concerns being information asymmetries,

              “Imbalance of information on consumer issues, which puts financial services providers
              in a much stronger position than the consumer”653

9.80      IFSRA has therefore strived to increase the amount of information available to
          consumers, and has done this in a number of ways. As well as the cost tables and
          the consumer guides that are described below, this has included opening a new
          Information Centre on one of the main streets in central Dublin, and a consumer
          help-line which has been seen as successful,

              “Since the Financial Services Regulator was established a year ago, we have received
              11,000 calls to out consumer help-line. Our website was launched in December 2003
              and since then has had an average of 17,000 visitors each month.”654

          Cost tables

9.81      The cost tables are comparative surveys, and are an attempt by the regulatory
          authorities in Ireland to provide consumers with all the information that they need
          on the available products in order to allow them to make informed choices. They
          are mainly aimed at tackling the problem that the majority of consumers will not
          examine the full range of products that are available to them due to the search
          costs involved, and gathering all the information together in one place clearly
          reduces the search costs. Linked to the tables are a list of basic points to be borne
          in mind when shopping for that particular product, and important questions to ask
          providers.


652
       Press release 11th May 2004, IFSRA.
653
       IFSRA Strategic Plan 2004-2006, 15th January 2004.
654
       Liam O’Reilly, Chief Executive, IFSRA quoted in Press release, ‘It’s your money’ Awareness
       Campaign & Information Centre Launched, 11th May 2004. Available from
       www.ifsra.ie/news/nw_article.asp?arc=0&ID=63.

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9.82      Currently cost tables exist for motor insurance,655 credit cards656 and personal
          current accounts.657 When considering which cost tables to develop, IFSRA
          commissioned market research to identify the areas consumers were most
          concerned about in regard to comparing information. Motor insurance, credit
          cards and personal current accounts were seen as well understood by consumers,
          but the main concern was the need to compare products. Thus the order in which
          the cost tables have been developed reflects these concerns. A similar cost table
          for home insurance was also recently launched and a cost survey on life insurance
          is expected later this year.

9.83      IFSRA intends to update the motor insurance survey every 3 months, and the
          credit card and current account surveys every 6 months and consumers can sign
          up to a mailing list so that they get regular updates.

9.84      The exact form that the tables take differ. When designing the tables, IFSRA
          contacts all the product providers and then uses in the tables those features that are
          the most common across all providers. Where there are less common features
          offered, then these are covered in the questions to ask providers.658

9.85      For the current account survey the format is a simple table with each of the
          possible charges listed, and details given within the table of whether each applies
          to the account of a particular bank. The two types of charges covered are
          transactions charges (standing order, cheques etc) and service charges (setting up
          a direct debit, issuing a replacement PIN and unauthorised overdraft surcharge
          interest rate, etc).




655
       Motor Insurance Cost Survey, IFSRA, Published Regularly, available from http://www.ifsra.ie/
       frame_main.asp?pg=%2Fconsumer%2Fcr%5Fintr%2Easp&nv=%2Fconsumer%2Fcr%5Fnav%2Easp
656
       Credit Card Cost Survey, IFSRA, Published Regularly, available from http://www.ifsra.ie/
       frame_main.asp?pg=%2Fconsumer%2Fcr%5Fintr%2Easp&nv=%2Fconsumer%2Fcr%5Fnav%2Easp
657
       Personal Current Account Cost Survey, IFSRA, Published Regularly, available from
       http://www.ifsra.ie/
       frame_main.asp?pg=%2Fconsumer%2Fcr%5Fintr%2Easp&nv=%2Fconsumer%2Fcr%5Fnav%2Easp
658
       Interview with IFSRA, 12th May 2004.

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9.86      The credit card survey adopts a similar simple tabular layout, with a list of various
          important features relevant to credit cards, and details given within the table. The
          features considered include the APRs charged, the levels of various fees (such as
          late payment, non-euro purchase fee) and the introductory offers given. IFSRA
          reports that to date the credit card tables were the most complex to undertake as
          the number of features on which prices differ, or where elements of service differ
          were much greater than in the other tables so far produced.659

9.87      For the motor insurance cost survey a slightly different approach is taken with
          information conveyed through describing what different companies would offer
          different example consumers and they use eight profiles e.g. a 39-year-old
          engineer living in Clare, driving a VW Passat worth €14,000. As well as giving
          the cost of each policy (separately for men and women), the survey gives details
          of the main policy benefits, such as whether they include a recovery service, or a
          replacement or hire car.

9.88      As a very interesting development in information provision, the profiles which are
          used in the motor insurance cost survey change in each edition in order to stop
          “gaming” by providers, where they lower prices just for the specific profiles in the
          survey in order to appear cheaper than they actually are in general. Hence the
          changing profiles prevent false focal points of competition from developing in a
          way that is not in the interest of consumers.

9.89      The nature of motor insurance, with consumer heterogeneity leading to a huge
          variety of differing offerings, means the survey can not give consumers the exact
          information applicable to them. It can however give them an idea of whether their
          current policy is relatively expensive or not by giving them some figures to
          benchmark against; it can also give them an idea of which companies are likely to
          be able to offer them the best deal.




659
       Interview with IFSRA, 12th May 2004.

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9.90      However, concern has been expressed that the cost tables in general are focused
          on only one part of the whole product mix - namely the price - and that this could
          reduce their impact,

            “It is too soon to judge the impact of these surveys. The general principle is fine.
            However, I would expect them to have greater impact in the future if they focus on other
            aspects of the product and not just price, as in practice price is only one aspect that
            people consider when buying a financial product.”660

9.91      Nonetheless there is also a recognition that if such information is going to be
          produced then it is important that it is done in a fair way across all providers,

            “We don’t really mind if IFSRA does these surveys, as it does help people to understand
            the market and to make decisions. If someone is going to do it, then its better that its
            IFSRA who will do it properly and fairly. They help shopping around, and get
            information to the consumer”661

9.92      Indeed, IFSRA’s own information is very positive about the use of the cost
          surveys. They report that there have been almost 10,000 downloads of the cost
          surveys in the six months to September 2004. This is in addition to the demand
          for printed versions of the cost surveys. Further, the cost surveys have also been
          reproduced by national newspapers.

          Consumer guides

9.93      Another way that IFSRA has attempted to guide consumers through complex
          retail financial services markets without resorting to simplified products is to
          develop simple, yet comprehensive, guides to various different products.
          Currently there are “Independent Consumer Guides” to savings & investments,662
          personal loans & credit663 and mortgages.664 In addition, they have a consumer
          guide to life insurance forthcoming.




660
       Interview with IBF, 11th May 2004.
661
       Interview with IIF, 11th May 2004.
662
       Independent Consumer Guide to Savings and Investments, IFSRA, 30th January 2004, http://www.
       ifsra.ie/frame_main.asp?pg=%2Fconsumer%2Fcr%5Fintr%2Easp&nv=%2Fconsumer%2Fcr%5Fnav
       %2Easp
663
       Independent Consumer Guide to Personal Loans and Credit, IFSRA, 31st May 2004,
       http://www.ifsra.ie/
       frame_main.asp?pg=%2Fconsumer%2Fcr%5Fintr%2Easp&nv=%2Fconsumer%2Fcr%5Fnav%2Easp

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9.94      These guides go through and carefully describe the array of different products
          available in these markets, and explain how they differ. They explain what the
          important factors to consider are when choosing to purchase one of these
          products, what questions to ask, and they also contain glossaries that clarify what
          much of the common “jargon” means.

9.95      Thus rather than seeking to simplify product terms, these guides therefore act to
          help consumers understand the product terms.

          Renewal notices

9.96      In 1984, the Motor Insurance Advisory Board (MIAB) was set up by the
          Government to review all factors affecting the cost of motor insurance. Its role
          was reappraised in 1998, and the board was asked to,

            “Establish a mechanism for systematically monitoring developments in motor
            insurance costs and for providing meaningful analysis and evaluation of the factors
            influencing changes in motor insurance premium rates”665

9.97      The MIAB reported in April 2002, and it found that there was a lack of
          transparency surrounding motor insurance, with policyholders unclear on,

            “the cover they are buying, its extensions and limitations nor how much each element
            costs”666

9.98      To tackle this lack of transparency, MIAB drafted a standardised renewal notice
          in their final report. The aim was that this would detail each element of premium
          calculation so that consumers are clear on the extent of the cover for which they
          are being asked to pay. Consumers would be able to identify elements of cover in
          excess of that which is compulsory, or that they require. The MIAB believed that
          this would allow meaningful comparisons between policies, and informed
          decision making by consumers as to whether they wish to buy optional extras.


664
       Independent Consumer Guide to Mortgages, IFSRA, 28th January 2004, http://www.ifsra.ie/
       frame_main.asp?pg=%2Fconsumer%2Fcr%5Fintr%2Easp&nv=%2Fconsumer%2Fcr%5Fnav%2Easp
665
       Treacy establishes Motor Insurance Advisory Board”, Press release, Mr Noel Treacy, Minister for
       Science, Technology & Commerce, September 1998. Available from
       http://www.entemp.ie/press/1998/motor_iab.htm
666
       Final Report of the Motor Insurance Advisory Board – Executive Summary, Motor Insurance
       Advisory Board, 2001.

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9.99      In the event, however, this standardised renewal notice has not been developed
          because the industry did not believe that it was feasible, and that whilst much of it
          was sensible in theory it would not work in practice. In particular, the Irish
          Insurance Federation was concerned that the proposed structure of the renewal
          notice was such that it would not be appropriate for a number of different
          providers. There was a concern that providers did not all have the same business
          models to calculate the appropriate premiums and hence it would not be possible
          for providers to present the information in the required manner. It was also
          recognised that insurance features are not typically priced in a purely additive
          manner but rather take into account the whole package of cover that is being
          offered.667

9.100     Instead the IIF has developed a voluntary code to take on board the majority of
          the MIAB’s proposals and has instigated a less comprehensive (and in their view
          more feasible) manner of comparisons through alternative information provision.

Regulation of the sales and advice process
9.101     There are three different types of financial adviser in Ireland:

          •   Tied advisers – IFSRA does not authorise these, as they are agents of the
              provider;

          •   Multi-agent – IFSRA authorises these and they must disclose who they
              represent; and

          •   Authorised adviser – IFSRA authorises these and they advise on the whole
              market.

9.102     In addition to the authorisation process of some of the advisers, there are also
          regulations in place regarding undertaking a fact find, know–your-customer
          requirements and suitability of advice.




667
       Interview with IIF, 11th May 2004.

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          The Qualified Financial Adviser (QFA) qualification

9.103     The QFA qualification is an initiative to launch a new single qualification for
          those working in financial services, and was announced during January 2003. It
          was introduced to aid consumers of financial advice to choose a qualified adviser
          in a market where the myriad of qualifications can make understanding who is
          properly qualified complex. It is a joint venture between the Institute of Bankers
          in Ireland, the Insurance Institute, the LIA and the Central Bank of Ireland,

           “The main factor behind its establishment is to create a single, recognisable
           qualification for financial advisers that will ensure a certain standard in the
           industry”.668

9.104     To gain the QFA qualification, financial advisers need to pass four exams that
          provide the necessary knowledge to be able to competently advise retail
          consumers on financial products. The qualification also features an ongoing
          continuous professional development programme to ensure that advisers remain
          up to date with any changes,

           “A holder of the qualification will be called a Qualified Financial Adviser and they will
           use the QFA brand to demonstrate to consumers their competence in the provision of
           advice on retail financial products”669




668
      New Single Financial Services Qualification, press release of the Central Bank of Ireland, 14th January
      2003.
669
      New Single Financial Services Qualification, press release of the Central Bank of Ireland, 14th January
      2003.

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Table 43 below summarises the regulation of sales and advice.

Table 43: Regulation of the sales and advice process for investment products –
disclosure and qualification

                                                         Life assurance, pensions and investment
                                                                          funds

Need for a fact find to understand the                                       Yes
customer
Written record of advice given                                               Yes
Disclosure of level of commission                                            Yes
Disclosure of turnover with provider                                          No
Disclosure of with whom contractual                                 Yes (for multi-agents)
relationships exist
Do legal professional qualifications exist for         Yes (Qualified Financial Adviser qualification
advisers?                                                            being brought in)
Is there a publicly available database of all                                 No
advisers?



Voluntary codes of conduct
          Irish Bankers Federation Codes of Ethics and Practice

9.105     The Irish Bankers Federation has produced a series of codes of practice for its
          members, though these tend not to impose strict conditions - the requirements are
          relatively general in nature. In addition, meeting the code does not allow firms to
          brand their products with some form of mark to indicate to consumers that they
          conform to the codes. Instead they define basic conditions that all products should
          meet.

9.106     However, the code of practice for personal customers does contain some slightly
          stricter conditions for firms to meet than the other codes, notably relating to fees
          and charges. Here the code of practice states that,

           “Where fees and charges are accumulated and applied periodically to current accounts
           and where these fees and charges total more than €12.70, you will be advised at least
           10 working days before they are deducted. A breakdown of the amount being deducted




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              will also be given. A breakdown of amounts less than €12.70 is also available, on
              request.”670

9.107     Currently, the Irish Bankers Federation has, codes of practice covering, among
          others, personal customers, transparency in credit charges for personal customers,
          small business customers and one on card-based payment systems.

          Voluntary code of conduct on home loans

9.108     As with other Member States, Ireland has implemented the voluntary code of
          conduct on home loans.

9.109     Evidence indicates that 11 credit institutions have signed the code and while this
          number may appear small, it does represent approximately 95% of the market. 671

          Irish Association of Investment Managers investment costs disclosure code

9.110     The Irish Association of Investment Managers has developed a voluntary
          investment costs disclosure code that supports the principle of the fair disclosure
          of the costs of investing. The code is not specific to the precise format in which
          these disclosures must be made, but the principle is that the information should be
          presented in such a way that,

              “A client is able to fully appreciate the impact of those ancillary costs on the overall
              investment return”672

9.111     Specifically, details of fees and expenses should be disclosed under four
          categories:

          •     The management fee;

          •     The custody fee, where custody is provided by or arranged by the manager;



670
      The IBF Code of Ethics and Practice – Code of Practice for Personal Customers, The Irish Bankers
      Federation, available from http://www.ibf.ie/pdfs/personal_customers.pdf.
671
      European Agreement on a voluntary code of conduct on pre-contractual information for home loans,
      First Annual Progress Report on Implementation in the European Union by 30th September 2002,
      European Banking Federation, European Savings Bank Group, European Association of Cooperative
      Banks, European Mortgage Federation and European Federation of Building Societies and Eurofinas,
      30th September 2002, available from
      http://www.europa.eu.int/comm/consumers/cons_int/fina_serv/loans/documents/survey_report.pdf
672
      Irish Association of Investment Managers - Investment Costs Disclosure Code, November 2002.

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          •     Commissions paid to brokers, including any soft commissions separately
                identified; and

          •     Any other material costs/expenses incurred e.g. stamp duty and other fiscal
                levies, auditing expenses etc.

9.112     The code was introduced from 1st July 2003, and it is recommended that an
          investment manager provide the information to their clients at least annually. For
          clients holding their investments directly, the information should be provided in
          both monetary amounts and in terms of the basis point impact on the client’s
          reported investment return. Most of these disclosures are now required due to the
          UCITS Directive.

Balance between simplification and other forms of intervention
          General points

9.113     There were a number of issues that were expressed regarding the use of simplified
          and standardised products in financial services.

          Lack of understanding of risk

9.114     One significant concern with the design of products expressed was that those
          products labelled as simplified would be seen as guaranteed in some way, and that
          this could leave the consumer with the impression that their position was more
          secure than in reality or that the product was more secure than other products on
          the market,

              “Would consumers think that simplified products equals risk free?”673

9.115     This is illustrated by the example of PRSAs. It is notable that standard PRSAs
          can only be invested in pooled funds – primarily for transparency reasons. This
          therefore excludes guaranteed funds the certainty of which may be of value to
          many consumers. Hence it may be the case that some non-standard PRSAs are
          actually of lower risk than some standard PRSAs which consumers may not




673
      Interview with IFSRA, 11th May 2004.

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          realise (assuming that such products are held to the point at which the guarantee
          matures).

9.116     In addition there was a concern that if products are labelled as simplified or
          standardised then consumers would not engage in the learning process about a
          product and would therefore also be unable to engage with more complex
          products in the future. The Irish Insurance Federation argued that,

           “The danger with standardisation is that it can make consumers complacent, and they
           may not fully engage in the learning process in order to understand the products that
           they are buying. They may mistake a standardised product for one that is recommended
           by the Government, or one that is completely safe.”674

          Focus on narrow features

9.117     A concern that has been raised regarding simplified or standardised products, but
          that may be equally applicable to alternative approaches such as cost tables, is that
          they could focus consumers’ attention unduly on a narrow range of features. This
          could then create the incentive for firms to cut back in the areas that consumers
          don’t examine closely, in order to be able to compete more effectively in those
          area where they do focus their attention.

9.118     On the other hand, if consumers have a tendency to get distracted from the key
          features of financial products by relatively unimportant details, this could actually
          be beneficial. This would see consumers’ attention being brought back to the
          important points such as price and quality. In other words, this can help to reduce
          unnecessary product differentiation which serves more to confuse consumers than
          to offer them greater choice.

          Preferences for alternative approaches

9.119     In general many of the market participants preferred the provision of information
          to consumers, rather than the development of simplified or standardised products.
          This included the CAI who welcomed the guides produced by IFSRA that include
          questions to ask providers,




674
      Interview with IIF, 11th May 2004.

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           “Information is the better route… if they’re informed they can deal with the market… a
           huge amount can be achieved by that”675

9.120     Similarly, the IBF argued that,

           “Consumers are entitled to make their own mistakes; we can’t turn into a nanny state
           where we make every decision for them”

           “Consumer education is the best route to tackling the complexity of financial
           products”676

9.121     In addition, industry participants in Ireland frequently referred to the UK in
          discussions, as the markets are largely similar. It has been argued that IFSRA’s
          market remedies in Ireland came earlier in the process of market development
          than the Financial Services Authority’s did in the UK– partly because the Irish
          have been closely observing the regulatory process in the UK market. This has
          meant that the “excessive” product differentiation that has been observed in the
          UK may not develop in Ireland and hence simplified or standardised products
          may not be necessary. In other words, they don’t think they need this solution as
          they have managed to pre-empt the problem from occurring in the first place.677

          Unproven success

9.122     One of the biggest concerns that was expressed regarding the use of simplification
          or standardisation was the scepticism that those simplified, standard products that
          already exist had actually been successful. The perception from Irish participants
          was that in the pensions arena, standardisation had not been successful in either
          Ireland or the UK,

           “It is not clear that Stakeholder pensions have been successful in the UK so it is
           dangerous to extend this across the EU”678




           “We are concerned that any future simplified products may not work. The question is
           really, do we trust the regulators enough to get this right? In the light of the failure of



675
      Interview with CAI, 12th May 2004.
676
      Interview with IBF, 11th May 2004.
677
      Interview with CAI, 12th May 2004.
678
      Interview with IIF, 11th May 2004.

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           PRSAs the answer has to be no. We would like to see a model of where such a scheme
           has worked before we implement it everywhere.”679

9.123     However, the extent to which the poor success of simplified, standard pensions
          was linked purely to what was considered by market participants to be stringent
          price regulation, was unclear. For example, it was recognised that in both the UK
          and Ireland the simplified product had brought the advantage of changing the
          structure of prices in other parts of the pensions market by moving away from
          upfront charges and towards level loaded charges, which in many cases was seen
          as being to the advantage of consumers, especially those who lapse contributions
          in early years of a product (although potentially seen as having a detrimental
          impact on the willingness of providers to offer, and actively market, such
          products).

          Basic deposit account with payment means

9.124     All market participants in Ireland believe that payment accounts are relatively
          straightforward and that consumers understand it. It is thought that around 90% of
          adults in Ireland have a bank account.680

9.125     Given the recognised simplicity, however, it is therefore surprising that all
          account charges other than the interest rate are regulated by IFSRA. Banks in
          Ireland must request permission regarding charges both when developing products
          and also when wishing to change charges on existing accounts.681

9.126     At present the Irish Competition Authority is conducting a study into banking in
          Ireland.     This has not been driven by concerns of complexity, but by pure
          competition issues.       However, the biggest issue that was highlighted during
          interviews in Ireland regarding payment accounts was related to switching and the
          perceived high costs of switching current accounts. At present IFSRA and the
          banking community are in the process of developing switching codes to improve




679
      Interview with IIF, 11th May 2004.
680
      Based on information from IFSRA.
681
      This is regulated in Section 149 of the Consumer Credit Act.

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          this.   Furthermore, no participants suggested that simplified or standardised
          products could play a useful role here.

9.127     Nonetheless, given that a significant minority of people in Ireland are without a
          bank account, there may be a potential need for a simplified bank account. Indeed
          this has been recognised in Ireland and there have been some preliminary
          discussions about the need for a universal bank account. However, it was clear in
          discussions that this is being driven by the national payments strategy, which
          expresses a desire to move towards more electronic forms of payment, and away
          from cheques rather than being motivated by complexity concerns. It is also
          noted that the Irish Government makes welfare payments in cheque form at
          present. If a simplified banking product or universal bank account was to be
          developed, it is likely that this would involve having no credit facility.682

          Cash based savings products on which interest or other return is paid

9.128     It was remarked of cash based savings products that,

           “They are pretty straightforward products”683

9.129     Furthermore, prices are often described as being linked to the European Central
          Bank rate and hence seen to be transparent.

9.130     In the light of this it is unusual that the CAI decided to bring out the Savermark on
          deposit accounts. However, it was noted that this was partly driven by the launch
          of a new high-profile product in which the Government matching dominated the
          interest rate and hence brought concerns that other features would be ignored.

9.131     It is worth noting that a similar approach has not been taken to savings products
          more widely, and indeed that neither the CAI, nor any other market participant
          believed that there were any concerns with the functioning of the savings market
          that would require the design of a simplified product.



682
      According to IFSRA this was a common requirement elsewhere such as Canada where banks are
      required to open a universal account for anyone; overdrafts are not included in these banks because of
      concerns regarding obliging banks to lend to customers.
683
      Interview with IBF, 11th May 2004.

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          Credit or deferred debit cards

9.132     There are believed to be only eleven providers of credit cards in Ireland. Three of
          these have entered the market in recent years of which one, MBNA, claims to
          have gained a significant market share in card issuing, suggesting that switching
          has not been a problem in the market.684

9.133     IFSRA noted that their consumer research indicates that consumers see credit
          cards as straightforward products. However, as indicated previously, there are a
          wide range of features in credit cards and there remain concerns surrounding
          consumers’ understanding of the different types of charge and the level of charges
          on different product features e.g. order of payments and the fact that charges may
          vary inside or outside the euro zone. This may mean that it is difficult for
          consumers to understand how much the product actually costs and to be able to
          compare them against other forms of credit.

9.134     Partly in response to this, IFSRA developed the cost tables and these have been
          praised by others,

           “The IFSRA tables published recently are clear, and the products themselves are
           relatively straightforward”685

9.135     IFSRA indicates that the route to tackling these remaining problems is,

           “In the first instance, we need to improve information”686

9.136     No interviewees raised concerns about the Irish credit card market that could be
          solved by a simplified credit card, but rather market participants stressed that a
          continued improvement in the quantity and quality of information available to
          consumers is the best route to follow.687



684
      MBNA is believed to have gained market share direct from consumers rather than from existing
      providers contrasting out processing. However, it should be noted that there are concerns that a recent
      stamp duty imposed on credit cards may inhibit switching. Based on interview with IBF.
685
      Interview with IBF, 11th May 2004.
686
      Interview with IFSRA, 12th May 2004.
687
      It is thought that the UK debate on having a summary box of the key information displayed clearly to
      consumers is being noted by IFSRA.

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          Private pension plans

9.137     Problems in the pensions market were identified in the 1998 report into pensions
          that led to the development of the PRSA simplified product.688 The report that
          recommended them commented that,

           “The prime reason for the Initiative is the belief that there is much which can be done
           to improve the extent of pension coverage”689

9.138     The first problem area they identified was the,

           “Perceived complexity of pension provision and the language used”690

9.139     It was therefore the identification of this complexity that to a significant degree
          led to the development of the PRSA simplified product, with the authorities
          deciding that this would be a more effective route to tackling these problems than
          any substitute methods.

9.140     The Irish Pensions Board will have to report on the success of PRSAs by
          September 2006, and if they are judged to have not raised pensions cover
          sufficiently then other options will be considered, including compulsion. It seems
          clear that this report in September 2006 will be an excellent opportunity to fully
          assess the impact of the PRSA and to assess whether a simplified pension product
          has been of value in the Irish market. Meanwhile, there seems no reason for an
          additional simplified product.




688
      Along with the PRSA, Retirement Annuity Contracts (RACs) have been available in Ireland for
      sometime and the RACs also remain available to consumers. They are personal pensions and have the
      same tax rules as PRSA. However, they are described as being, “mainly designed for the self
      employed and for those who are not in pensionable employment to enable them to accumulate funds to
      provide for their retirement.”. Further, the RACs have none of the additional product constraints that
      are found in the PRSAs and hence do not qualify as a simplified product. Source: Irish Pensions
      Board, available from http://www.pensionsboard.ie/information/booklet11/ book11sec02.asp#2
689
      Securing Retirement Income – National Pensions Policy Initiative – Report of the Pensions Board,
      The Pensions Board, May 1998.
690
      Securing Retirement Income – National Pensions Policy Initiative – Report of the Pensions Board,
      The Pensions Board, May 1998, p135.

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          Motor insurance

9.141     A major issue recently related to motor insurance in Ireland has been the high
          level, and increasing level, of premiums. There appeared to be a range of reasons
          for this including:

          •     Legal costs – it is thought that these represent an increasing proportion of
                premiums and a higher proportion than, for example, in the UK;

          •     Accident rates – there have been more accidents and of a greater severity; and

          •     Compensation claims – these were thought to be rising rapidly.691

9.142     These increases in premiums slowed last year due to a new penalty points system
          being introduced on drivers that appeared to have a downwards effect on
          accidents, and premiums began to fall in response. However it is believed that the
          initial effect of penalty points have worn off and accident rates are increasing
          again.

9.143     Despite these price rises there has been no suggestion that this was due to
          complexities and hence no suggestion it could be solved by simplified products.

9.144     However, as was noted earlier, the MIAB found that there was a lack of
          transparency surrounding motor insurance, with policyholders unclear on:

              “the cover they are buying, its extensions and limitations nor how much each element
              costs”692

9.145     Indeed the IIF noted that,

              “There is a huge variety of product terms”693

9.146     Nonetheless, IFSRA believes that motor insurance is well understood by
          consumers and there is evidence that consumers shop around and are doing so
          more and more. Indeed this is expected to increase following the publication of


691
      Based on the interview with IIF, 11th May 2004.
692
      Final Report of the Motor Insurance Advisory Board – Executive Summary, 2001.
693
      Interview with IIF, 11th May 2004.

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          the motor insurance cost tables which serve to make the market more transparent,
          and make consumers more conscious of which product they are buying.

9.147     In addition, there was no strong sense that exclusions of cover were a worry,

           “Exclusions have not been a big issue in Ireland, on the contrary – it appears that over
           time companies have been adding to their coverage…They are informing consumers
           and selling policies on the basis of things like better claims procedures or particular
           features”694

9.148     Given the evidence that consumers shop around, the increased information
          available from IFSRA and the fact that neither industry participants nor the
          regulatory examinations have argued that complexity is driving any major
          concerns in motor insurance, the role that simplified products could play in this
          market seems small.

          Home insurance

9.149     Home insurance was not considered to be a complex product by any of the market
          participants interviewed. Furthermore, in no area of our research were exclusions
          noted as a major issue in the Irish home insurance market indicating little need for
          intervention. Indeed, the CAI raised concerns that any attempt to fix coverage to
          prevent exclusions could prevent competition.

9.150     However, the CAI noted that home insurance products can be quite inflexible,
          with consumers given a choice between a set of fixed products, with no option to
          choose their own combination of features e.g. typically consumers are offered a
          package of a level of cover on contents and another level of cover on buildings or
          a different level of cover on both, but do not always have the ability to state the
          combination of the levels of cover they require. They expressed a desire for
          consumers to be able to have a much greater choice over the exact specification of
          the product they purchase suggesting that less standardisation would in fact be
          beneficial.

9.151     Furthermore, that IFSRA did not initially concentrate on information regarding
          home insurance is a reflection of the fact that consumers did not identify any



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          issues in home insurance of being of significant concern, although home
          insurance cost tables have now been developed.

9.152     Overall therefore there appears to be no evidence suggesting that a simplified
          product would improve the functioning of the home insurance market in Ireland.

          Life insurance

9.153     The IBF believes that the majority of life insurance in Ireland is made up of pure
          protection products which are seen as very straightforward, for which the media
          regularly publishes information on the best buys and in which there are not
          thought to be any problems. Indeed, the IIF argues,

           “You can’t find a much simpler product”695

9.154     The exclusions problem has also not been noted in the life insurance market, again
          with providers tending to add to the range of conditions covered rather than
          reduce this, again implying little need for invasive regulation.

9.155     The investment based life insurance market was described as being reasonably
          small in Ireland but growing, However, given the small size of the market it is
          difficult to conclude that simplified products are required and no need was
          identified during country interviews.

          Mortgage credit

9.156     There are around seventy providers of mortgages in the Irish market and the range
          of products has been expanded over recent years. Products which are thought to
          be very straightforward have been developed including tracker mortgages.

9.157     The IBF voice their opinion that,

           “The increase in choice reflects the increasing segmentation and sophistication of the
           market – with providers looking to accommodate specific niches with specially
           designed products. This is not the industry artificially manufacturing unnecessary




694
      Interview with IFSRA, 12th May 2004.
695
      Interview with IIF, 11th May 2004.

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           products, but instead shows firms responding to the changing demands of
           consumers”696

9.158     Thus they argue that any apparent complexity in fact demonstrates a healthy
          market developing a wide variety of products and hence far from being a problem
          to be solved, is an outcome to be encouraged.

9.159     General opinion is that the mortgage market is working relatively well and is not
          in need of significant new regulation. IFSRA commented that the market appears
          to be quite competitive and that they,

           “Are not planning any significant initiatives here”697

9.160     The CAI made similar comments,

           “They aren’t complicated, they don’t need standardisation”698

9.161     Furthermore, Ireland has been found to have effectively taken up the Voluntary
          code of conduct on home loans,

           “In 80.8% of cases general information was given and in 92.3%, personalised
           information” 699

9.162     In addition, when selling mortgages, providers need to clearly quote the APR and
          also the cost per £1,000 so this creates a large degree of transparency in the
          pricing of mortgages.

9.163     Therefore, there has been no identified need for simplified products.




696
      Interview with IBF, 11th May 2004.
697
      Interview with IFSRA, 12th May 2004.
698
      Interview with CAI, 12th May 2004.
699
      Monitoring the Uptake and Effectiveness of Voluntary Code of Conduct on Pre-Contractual
      Information for Home Loans – Contract Reference No: B5-1000/02/000552, Presented by the Institute
      for Financial Services e.V, 17 June 2003, available from http://www.europa.eu.int/comm/consumers/
      cons_int/ fina_serv/loans/documents/survey_report.pdf. The report points out that these figures must
      be interpreted with care, as the absolute amount of information received is very low, so these results
      should not be overrated.

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          Collective investment schemes

9.164     Despite the considerable success of the Irish Financial Services Centre in selling
          collective investment schemes (particularly across borders), the size of the
          domestic Irish market is very small.

9.165     However, a simplified product did apply here in the form of the Savermark on the
          equity based SSIA. Since the demise of these products there has been no attempt
          to design further simplified products for collective investment schemes and no
          market participants indicated that there was a need for such products in the
          market.

          Financial advice

9.166     Providers must conduct a fact-finding exercise before advising on any investment
          products to establish whether the products are suitable and what risk profile
          individuals have. This means that consumers already benefit from quite a strong
          level of protection on financial advice. (Although there was a recognition that
          having advisers able to have different statuses for different products was a
          concern e.g. individuals could be authorised advisers for investment products but
          not for insurance products.)

9.167     We have defined the advice process on the standard PRSA when distributed
          through employers as simplified advice since this has lower sales regulation than
          other products. Indeed, IFSRA did indicate that it was considering ways to
          simplify the overall advice process in terms of the “reasons why” letter, and
          know-your-customer requirements. Further, it noted that the trade-off between
          product and advice regulation was something that would mean that if there was
          further simplification of products, they would be seeking to reduce the advice
          regulation.

9.168     Nonetheless, there was a concern that if simplified advice meant generic advice or
          a needs assessment that this did not really represent advice. Furthermore, IFSRA
          research suggested that most people seek advice at key life stages and it would be
          very difficult to have simplified advice that accounted for the different needs at
          different life stages.

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9.169     Indeed it was noted that financial advice by its very nature is aimed at specific
          individual circumstances and IFSRA questioned whether simplified financial
          advice was therefore possible. Given the existing simplified advice on the PRSA
          and the lack of additional simplified products, there was no identified need for
          simplified financial advice.

Cross-border trade
9.170     In general, Irish interviewees believed that the differing legal and regulatory
          frameworks seen across Europe caused a significant barrier to entry. Participants
          were not optimistic that simplification or standardisation would have any impact
          on cross-border trade either through freedom to provide services or through
          establishment.

Benefits
9.171     It was noted that there is already evidence of cross-border trade between Ireland
          and other countries.        For example, the Bank of Scotland entered the Irish
          mortgage market from the UK (although subsequently set up in Ireland). The
          similarities in tax and legal systems between the UK and Ireland were thought to
          be important in their ability to do this. Hence if standardisation or simplification
          of products brought with it standardisation of tax and legal systems it was thought
          that this may lead to more opportunity for cross-border trade to develop.

9.172     This also supports the argument that cross-border trade will develop naturally in
          regional clusters with similar legal, cultural structures and with shared languages.

Barriers
9.173     However, despite this, the majority of participants believed there was likely to be
          little, or no, impact on cross-border trade from simplified products.

9.174     In the context of motor insurance, the CAI said,

           “It would be a pointless effort…It would be a waste of time and effort”700




700
      Interview with CAI, 12th May 2004.

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9.175     In particular, this was driven by differences in legal structures imposing different
          costs of claims and different levels of compensation in different countries
          (suggesting that they did not believe standardisation of legal structures on
          particular products was likely). Therefore, standardisation would not remove the
          primary difficulties in purchasing products from abroad or make it easier for the
          providers from one Member State to enter the market of another.

          Consumer preferences

9.176     Furthermore, the IBF commented that,

           “In addition to legal, tax and regulatory matters there are cultural issues associated
           with trade in financial services across borders. For example in some countries (like the
           UK and Ireland) variable rate mortgages are common, whilst in others (continental
           Europe) fixed rates are common. In some countries credit cards dominate, while in
           others it is debit cards. Firms with experience in product propositions that may have
           strong appeal in one market may find that these propositions have only limited appeal
           in other markets”701

9.177     It was not thought that standardisation or simplification would overcome what
          were seen to be inherent consumer preferences. Indeed, this suggests that although
          standardisation may make it technically easier for a provider in one Member State
          to enter into another, it is unlikely to be successful.

          Tax and legal differences

9.178     Concerns were also expressed by the IIF regarding the barrier caused by
          regulatory structures,

           “Heterogeneity between countries on legal, tax and regulatory issues means that
           attempting to use simplification to boost cross-border trade is not easy. Countries
           would need to deregulate in order to enable a boost in cross-border trade…
           Standardisation is one way to iron out anomalies across Europe, but the regulatory, tax
           and legal problems are much bigger”702

9.179     In addition, the Irish Pensions Board thought simplified products would not have
          any effect on cross-border trade in pensions, as these are mainly driven by tax
          relief and individuals need to have relevant earnings in the state to qualify for
          relief.


701
      Interview with IBF, 11th May 2004.
702
      Interview with IIF, 11th May 2004.

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          Legislation problems of product design

9.180     Concerns were also raised about the difficulty of designing a simplified product at
          a European level,

           “Even if a simplified product starts off as a good idea, by the time it goes through the
           administrative procedures to formulate it, and by the time everybody has had their say,
           it will end up so watered down that the ultimate end product will be very weak”703

9.181     Hence there was a concern that any standardisation or simplification done at a
          multi-national level would not bring tangible benefits and therefore would not
          lead to additional trade.

9.182     Simplified, standardised products should therefore be designed, if at all, at the
          national level to reflect the relevant market circumstances. This could potentially
          make it easier for providers to enter into the market, however, there is no evidence
          in Ireland that this has been the case.

          Lack of clearing

9.183     A particular barrier to cross-border trade that was highlighted during interviews
          was that of the lack of a single clearing house across the euro zone. There was a
          particular concern with regard to cheques which are very prevalent in Ireland, i.e.
          it was noted that a cheque written in euros in one Member State would not
          currently be accepted in another Member State also in the euro zone, and this had
          dampened the benefits of the single currency.

9.184     A single automated clearing house was thought to be something that would have
          brought additional benefits both in cross-border trade within financial services,
          but equally importantly across other products as well, since it would facilitate the
          trade in other products. However, the absence of such a system was thought
          likely to limit any impact of simplification or standardisation on cross-border
          trade.




703
      Interview with IIF, 11th May 2004.

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Section 10 Italy
Summary
10.1    Simplified products have not been a huge focus of the Italian financial services
        sector to date. Instead, the focus has been on ensuring the development of more
        transparent processes and on the provision of information. Indeed most market
        participants see the simplification or standardisation of information as a greater
        priority than the simplification or standardisation of products.

10.2    Nonetheless, there are two examples of products that we have categorised as
        simplified, standard products:

        •   Basic deposit account with payment means; and

        •   Open pension funds (private pension plans).

10.3    The first example of a standardised and simplified product is the “Servizio
        bancario di base” (basic banking service). This was created by the Italian Banking
        Association and launched in February 2004 through its newly formed platform,
        PattiChiari (Clear Pacts). This was designed to meet the basic needs of Italians
        who did not have a current account and hence the main aim was to overcome
        financial exclusion. However, this was not the only focus of the product, which
        had multiple goals including: transparency; comparability; and the simplification
        of terminology. It was thought that the involvement of very senior stakeholders in
        the banking sector was vital to the development of all the PattiChiari initiatives.

10.4    The second example is the “Fondi aperti” – (open pension funds). These are
        pension schemes that are offered by fund managers or insurance companies and
        which are seen partly as second pillar pensions and partly as third pillar pensions.
        The pricing structure in particular was designed to avoid complexity in the
        comparison of products. The design of standardised contracts by the industry in a
        cooperative dialogue with the regulator was seen as a way to achieve more
        comparable schemes.




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Table 44: Simplified products in Italy

 Product list                                       Does Italy have simplified products?

 Basic deposit account with payment means         Servizio bancario di base - basic banking
                                                                   service

 Cash based savings products on which                                No
 interest or other return is paid

 Credit or deferred debit card                                       No

 Private pension plans                                Fondi aperti - open pension funds

 Motor insurance                                                     No

 Home insurance                                                      No

 Life assurance                                                      No

 Mortgage credit                                                     No

 Collective investment schemes                                       No

 Financial advice                                                    No

10.5    Outside the two products mentioned above, we did not find any evidence during
        our research or during the interviews for other simplified or standardised
        products.

10.6    Concerns were expressed about both home insurance and life insurance and there
        was some suggestion regarding the potential for benefits from simplification or
        standardisation of these products (although as explained below considerable
        unease about the use of simplification or standardisation generally).

10.7    One particular concern expressed with respect to simplified and standardised
        products was the impact they could have on competition and innovation. Whilst
        having other non-simplified or non-standardised products alongside such a
        product would mitigate against this, it was clear that market participants
        nonetheless believed that there would be a detrimental impact on competition due
        to the regulated product becoming a focal point of competition.


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10.8      Further concerns were that product standardisation that was done through
          legislative means could lead to a reduction in innovation and could enshrine in
          legislation products which become inappropriate in the years to come – a problem
          that was seen as being of even greater concern on a European level.

            “Simplification …needs to be adapted to market changes and developments and
            innovations… Hence I would see it managed by the regulatory authority rather than
            defined at legislative level” 704

10.9      Indeed rather than simplifying or standardising products, market evolution in Italy
          over the last few years has actually been towards complexity and the development
          of more sophisticated products. These changes have been seen as representing
          progress and demonstrating the development of a successful financial services
          market. Hence this has not been seen as detrimental to consumers. Indeed, the
          increased number of differentiated products is recognised as bringing benefits to
          consumers and investors as the wider range of product features can meet their
          needs more closely, as is recognised by the Director General of the Bank of Italy,

            “The Italian financial system is increasingly building up a structure that is typical of
            the most advanced countries. Longer life expectancy, public pension reforms, and more
            diffused knowledge of financial instruments tend to strengthen the movement towards
            managed savings; these factors make people search for highly differentiated products
            even for small investments; they stimulate the demand for ever more complex and
            sophisticated financial services”.705

10.10     For example, in the payment card arena, cards offering revolving credit were
          introduced around five years ago, and whilst there are concerns regarding the cost
          of borrowing in this manner, it is nonetheless an example of product development
          and differentiation that meets the needs of Italian consumers.706

10.11     At the same time as regulators are welcoming some of the product differentiation,
          it has been noted that increasing the complexity of products may create
          information asymmetries. It has therefore been recognised that it is crucial to



704
       Interview with COVIP, 14th April 2004.
705
       Speech by Bank of Italy Director General Vincenzo Desario (January 10 2001) at LUISS University;
       available on www.luiss.it.
706
       Complimenti, lei ha un credito, Soldi & Diritti n. 53 (Altroconsumo supplement, July 2000) and A
       rate con la carta di credito, Soldi & Diritti n. 70 (Altroconsumo supplement, May 2003).

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         ensure that consumers are well informed about the products they are considering
         purchasing and hence a number of steps have been taken to improve information
         for consumers,

           “The logical necessary condition for [a free market in financial services] is that savers
           are equipped with all the necessary information to make an investment decision …
           Hence the banking system has the goal of making customers more aware and better
           informed”.707

10.12    However, across financial services as a whole it is recognised that information
         provision alone, though necessary, is not sufficient to address market failures.
         Hence a substantial focus, particularly in the insurance sector, but also across the
         whole of financial services in Italy is to simplify the information that is provided.
         Indeed ISVAP has recognised that the provision of pre-contractual information
         may not be the best method to communicate with consumers,

           “consumers are not always willing to read the documents and not all the information is
           readily understandable to consumers.”708

10.13    Due to the lack of understanding of existing information, ISVAP is currently
         undertaking research into the possibility of improving the Nota Informativa
         (information sheet) by shortening it and including some numerical indices e.g.
         developing summarised information sheets which would highlight the key
         features of the policy including cost, risk etc. This would focus on the individual
         product rather than providing comparisons with those from other products.

10.14    Recent regulatory changes have lead to the development of a new authority,
         (“Autorità per la tutela del risparmio – the authority for the protection of saving”),
         although it is essentially the continuation of CONSOB, the financial regulatory
         body.      The new authority will have the following aims: protecting savings and
         investors; market trustworthiness; transparency and accuracy of monitored
         entities; informing the consumer; training financial operators; and overseeing
         competition rules.



707
      Indagine conoscitiva sui rapporti tra il sistema delle imprese, i mercati finanziari e la tutela del
      risparmio, Associazioni Bancaria Italiana , 5th February 2004.
708
      Interview with ISVAP, 13th April 2004.

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10.15   Below shows the different interventions that could be seen as addressing the
        concerns of excessive complexity and information asymmetries. These have
        mainly focussed on the provision of better information.




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Table 45: Alternative regulatory interventions in Italy

                                 Information          Regulation of     Voluntary codes of
                                  provision          sales and advice        conduct

                              Comparability of
                              features (through
        Basic deposit            PattiChiari)
        account with                                                        PattiChiari
        payment means         Information sheets
                                    (“Fogli
                                 informativi”)

        Cash based savings
                              Information sheets
        products on which
                                    (“Fogli                                 PattiChiari
        interest or other
                                 informativi”)
        return is paid

                              Information sheets
        Credit or deferred
                                    (“Fogli
        debit card
                                 informativi”)

                                 Assogestioni
        Private pension
                              classification and                         Code of conduct
        plans
                                benchmarking

                              Prospectus (“Nota
        Motor insurance                                ISVAP rules
                                Informativa”)

                              Prospectus (“Nota
        Home insurance                                 ISVAP rules
                                Informativa”)

                              Prospectus (“Nota
        Life assurance                                 ISVAP rules       Code of conduct
                                Informativa”)

                                   Cost index
                                  (“Indicatore
                              sintetico di costo”)
        Mortgage credit
                              Information sheets
                                    (“Fogli
                                 informativi”)

                                 Assogestioni
        Collective
                              classification and                         Code of conduct
        investment schemes
                                benchmarking

                             Register of advisers
        Financial advice                                                  Assoreti code
                                 (proposed)



10.16   Finally, Italian interviewees were pessimistic about the chances of simplified
        products impacting cross-border trade, particularly arguing that the preference for
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        face to face distribution would prevent such trade occurring especially for mass
        market products.

Sources of information
10.17   The information in this section came from a range of sources. Some of the most
        important sources included publications from the following organisations (in
        addition to those interviewed listed below):

        •   Altroconsumo (A consumer magazine);

        •   Associazione Nazionale fra le Imprese Assicuratrici (ANIA, the Association
            of Italian insurers);

        •   Bank of Italy;

        •   Italian Ministry of Finance; and

        •   PattiChiari (A new project developed in banking).

10.18   In addition, press releases and news stories in the press were also examined
        including from MiaEconomia.

10.19   Interviews were conducted with:

        •   Associazione Bancaria Italiana (the Italian Banking Association);

        •   Associazione Difesa Utenti Servizi Bancari Finanziari Postali e Assicurativi
            (ADUSBEF, the consumer association on financial services);

        •   Assogestioni (the mutual funds association);

        •   The secretariat of the Comitato Interministeriale per il Credito e il Risparmio
            (CICR, the cross-ministry committee on credit and savings);

        •   Commissione di Vigilanza sui Fondi Pensione (COVIP, the pension funds
            regulator); and




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         •    Istituto per la vigilanza sulle assicurazioni private e di interesse collettivo
             (ISVAP, the insurance regulator).

Table 46 below shows the regulators responsible for the various products in Italy.

Table 46: Italian primary regulators709

                         Product List                                       Regulators

         Banking Products (including credit cards                           Bank of Italy
         and mortgages)

         Insurance Products (both life and general)                            ISVAP

         Pensions                                                              COVIP

         Investment Products                                                Bank of Italy

         Financial Advice                                                    CONSOB



Development and characteristics of simplified products
10.20    The following section describes products that we classified as simplified. We
         highlight their characteristics, how they were developed and, where possible,
         assess the impact that they have had on the market.

10.21    The development of simplified products in Italy has not been driven purely by one
         part of the financial services sector. Interestingly the two products have been
         developed in two different ways with the basic banking service developed by the
         trade association representing the banks (the Italian Banking Association) with no
         involvement from the regulator, whereas the design of open pensions was also
         done by the trade associations, but encouraged by the actions of the pension
         regulator (COVIP).




709
      At the time of writing a number of changes were being considered regarding the regulation of
      financial services in Italy.




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Basic banking service710
10.22    Starting in December 2000, there was a recognition by the Italian Banking
         Association that banks in Italy were perceived as being powerful and providing
         services that suffered from asymmetric information. In the light of this they
         commissioned market research to understand what concerns consumers had. The
         most problematic issue was the lack of clarity. They then set themselves a five
         year time horizon to address these issues.

10.23    A major development in addressing the concerns identified was the creation of the
         PattiChiari (Clear Pacts) platform. This has so far materialised into eight
         initiatives, kicking off between 15th October 2003 and 15th March 2004. The main
         purpose was,

           “Practical action to make things easier for ordinary citizens and businessmen, with
           clear rules, simple, understandable information, ways to compare the services and
           offers of different banks and choose the best solution for one’s own needs. In a word, to
           improve relations between banks and customers.”711

10.24    During the process, PattiChiari involved about 200 top-level stakeholders in the
         banking sector, supported by extensive field research on consumers. It is believed
         that the extensive involvement of high level banking staff was key to the
         successful development of the proposals,

           “Without the countless energy of 14 top CEOs around the table, we couldn’t have
           achieved such a big project”712

10.25    One initiative in PattiChiari was the development of the basic banking service
         (“Servizio bancario di base”) and it was clear that financial inclusion was a
         primary aim of this,

           “We would like to improve financial inclusion - the possibility of not being excluded
           from basic banking services to those who have not got access to them yet”. 713




710
      Substantial proportions of this section are taken from Project PattiChiari: The New Order in Bank
      Branches available from www.pattichiari.it and the interview with the Italian Banking Association,
      April 2004.
711
      Project PattiChiari: The New Order in Bank Branches available from www.pattichiari.it.
712
      Interview with the Italian Banking Association, 15th April 2004.

                                                                                                       341
December 2004
                                                                                                            Charles
                                                                                                            River
Italy
                                                                                                            Associates


             “this product is designed for the millions of Italians who do not have a current bank
             account”714

10.26    In part the development of this was related to the very high proportion of
         unbanked adults in Italy with around 23% of the adult population (around 8.2
         million) unbanked, which is around three times the European average.715

10.27    In addition to the basic banking service, there are a number of other features in the
         PattiChiari platform which are covered in the section on alternatives to simplified
         products.

Table 47: Characteristics of simplified product – Basic banking service

 Non-price characteristic                        More detail                       Explanation

 Transactions                               Type of transactions          A variety of transactions must
                                                                            be allowed including the
                                                                                payment of bills.
                                                                              Chequebooks are not
                                                                                    provided.

                                                Lack of credit             There is no credit facility on
                                                                                    the account

 Link to other products                                                       No custody account is
                                                                                    provided

 Access