The European Commission has
published a 150-page report on current account fees across 27
countries in Europe. Overall, the agency argues that retail banking
fees are still too high, too opaque and differ too widely across
the European Union – though it has stopped short of imposing fee
caps. Hugh Fasken reports.
The European Commission’s (EC) latest heavyweight research into
retail banking fees across the 27 countries of the European Union –
the third such document in four years – has been published
inauspiciously at a time when the global credit crisis shows signs
of petering out.
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Nonetheless, the EC is using the crisis to
give extra emphasis to its repeated demands for fairer and more
transparent banking fees; better harmonisation across the continent
for basic banking charges; and simpler, easier ways to switch bank
accounts, including cross-border services.
For banks in some European markets, the
consequence from this latest salvo is clear: they will have to
address shortcomings in retail banking fees and charges if they
want the growing regulatory spotlight on banking fees to dim. If
not, banks in countries such as Italy, Spain and France may find
themselves being forced to make changes – and accept lower fee
income and profits from retail banking in the process.
For banks in other European markets where
basic banking fees are relatively low, such as the Netherlands,
Belgium, the UK and Germany, there may be a commensurate – if
somewhat politically risky – opportunity to raise fees in line with
the European Union average, put at €160 ($236) per year by the
EC.
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By GlobalDataDiscussing the release of the report on 22
September, Meglena Kuneva, the EU’s consumer affairs commissioner,
said: “The best, the most innovative, and the most competitive
retail markets are those driven by consumers. Europe is yet to
unlock this potential in retail financial markets.
“They say with crises come the opportunities.
In the interest of our citizens and in the interest of our
economies, this is an opportunity we should now grab.”
Some of the report’s conclusions include: the
average banking price for a similarly defined heavy user of banking
services ranges from a high of €831 per year in Italy to a low of
€28 in Bulgaria; some 80 percent of Europeans think it would be
useful if all financial services providers used a standardised
information sheet for comparable products; and 10 percent of the
banks surveyed had little or no price information available on
their websites while one third of them had incomplete price
information in their tariff lists.
It also stated that consumers in countries
with opaque price structures are likely to pay more for bank
accounts.
Kuneva added: “My main message is that the
future of retail banking, like that of any retail service today,
cannot be written without the consumer dimension being firmly
placed at the heart of the debate.
“You cannot get a vibrant, integrated,
competitive retail market if you don’t get the consumers right. I
am referring to the basic principles of consumer information,
consumer awareness and consumer choice. And the financial market
has never been a market easy to navigate for consumers.”
Regulation on the rise
Significantly, the release of the
report comes at a time of increasingly aggressive global regulatory
inspection of banking practices – in particular on overdraft and
credit card fees in the US and the UK (see The global assault on banking fees begins)
– with some banks such as Royal Bank of Scotland in the UK and Bank
of America in the US already showing signs of pre-empting any
legislative backlash with new products and policies.
On 23 September, a day after the release of
the current account fees report, the European Commission released
details of new draft legislation aimed at “significantly
strengthening the supervision of the financial sector in
Europe”.
The legislation will create a new European
Systemic Risk Board (ESRB) to “detect risks to the financial system
as a whole with a critical function to issue early risk warnings to
be rapidly acted on”.
It will also set up a European System of
Financial Supervisors (ESFS), composed of national supervisors and
three new European Supervisory Authorities for the banking,
securities and insurance and occupational pensions sectors.
The ESRB will have the power to issue
recommendations and warnings to EU member states (including the
national supervisors) and to the European Supervisory Authorities,
which will have to comply – or else explain why they have not done
so.
A violation of basic
principles
According to the EC’s report, called
Data Collection for Prices of Current Accounts Provided to
Consumers, current account prices vary “significantly” across
the EU, with average annual fees reaching over €100 in Italy,
France and Spain but remaining under €60 in countries such as
Bulgaria, Portugal, the Netherlands and Belgium. In Italy, which
tops the list with average annual account fees of €400, more
“specific and intensive” services can take current account fees up
to €831 a year, stated the EC.
Kuneva said: “Our findings have shown us that
many retail financial contracts are overly complex and, even worse,
are not transparent. This makes it difficult and costly for
consumers to deal with them. In a nutshell, retail financial
contracts and commercial practices often violate the basic
principles of good consumer markets.”
She added: “In the face of increasing
complexity in financial products, financial education has a role to
play in helping consumers. However, financial education is
insufficient on its own. Financial service providers must bear
responsibility for producing information people can realistically
use and understand…
“Information should be concise, contain all
the necessary facts that are sufficient for an informed decision,
and it should be presented in a timely and comprehensible
manner.”
Insufficient web data
In looking for basic information on
banking fees, the EC said that 66 percent of all the banks surveyed
– 224 banks covering 81 percent of the EU market – required
additional contact to find the relevant information while 34
percent did not since the information located on websites was
“sufficient”.
Around 10 percent of the banks had
little or no price information available on their websites and 33
percent had incomplete price information. The countries where most
banks were contacted again were Austria, Greece, Italy, Malta and
Spain.
The comprehensive report also looked at
financial advice and the sales of financial products, payment
trends and account switching. Some of the statements made by the EC
on these topics include:
• Consumers find pre-contractual
information, in many cases, difficult to understand. Incomprehensible and insufficient information are
given as major obstacles to cross border shopping of financial
services;
• Some 79 percent want clear and comparable standardised information
between banks and financial services providers, as is foreseen, for
instance, in the new Consumer Credit Directive;
• There is evidence that consumers
often do not obtain suitable financial advice. Data from Germany
indicates that consumers terminate 50-80 percent of all long-term
investments prematurely because of inadequate advice, leading to an
estimated loss of income of €20 billion to €30 billion a year;
• Those selling financial products
may not have sufficient understanding of the products to
effectively advise consumers. Bank employees may often be faced
with an inherent conflict of interest; and
• For current accounts, switching
rates remain low at 9 percent for 2007 and 2008, compared, for
instance, with 25 percent for car insurance.
Kuneva stated: “The field of behavioural
economics provides us with important insights into consumer
behaviour.
It shows that personal advice is the main
driver for consumers’ decisions to buy a specific financial product
and that many consumers rely, almost unthinkingly, on the
recommendation of a familiar bank employee or on the advice of a
broker because they perceive them to be an expert in their
profession or a neutral source.
“In principle, advisers should act honestly
and fairly… Yet the reality is too often quite different. We have
growing evidence that consumers often do not receive suitable
advice on financial services.”
Conclusions and
recommendations
In conclusion, Kuneva stated that
the European Commission must extend its work on “standardising
pre-contractual information” to cover all relevant financial
products as well as a reliable framework that helps “disentangle
perverse incentives in financial advice” with respect to all types
of products, including mortgages or individual investments.
She said the European Commission must actively
promote the enforcement of consumer legislation, and notably the
enforcement of the Unfair Commercial Practices Directive, with
respect to the marketing and pricing information of banking and
retail financial products.
Other recommendations include the development
of publicly available fee tariffs by all banks on their websites,
and, ambitiously, the development of centralised ‘banking
comparison’ websites – hosted by either domestic central banks or
the European Central Bank – to which retail banks would provide
their tariffs annually in a predefined format.
