Commissioner Kuneva speech

ECOSOC European Consumers Day

Berlin

16thMarch 2007

Responsible official: Simon Cottee, tel 67582

Date produced: 06/03/07

Ladies and Gentlemen,

I am delighted to have the opportunity to address the conference today. It is good to see so many people interested in consumer policy in the area of financial services.

I would first like to explain to you my view of the current state of the internal market in retail financial services. I will then outline my overall consumer strategy, and explain how it applies to retail financial services

The internal market in retail financial services

The internal market in retail financial services: Where are we at present?

493 million consumers make the internal market the largest retail market in the world in economic terms. It therefore has the potential to be the most competitive, innovative and dynamic retail market.

Instead, today we have 27 national mini-markets. The result is a lack of competitive pressure to reduce price divergence.

Today, the e-commerce revolution – which has yet to reach its critical mass – has transformed the potential for integration of retail financial services markets in the EU.

But while the technological means are increasingly in place, business and consumer behaviour lags far behind, restrained by internal market obstacles and a lack of confidence in cross-border shopping. Consumers and financial services providers have begun to embrace e-commerce, but mostly within strictly national markets.

Despite this, certain financial services are well suited to being delivered over the internet, and a recent survey in one large MemberState suggested over half of internet users do the majority of their banking on-line.

The possibility to have a deeply integrated retail market is there, but it remains very far from being realised.

Just one example:

  • 26% of consumers who have bought a financial service have done so on-line, or over the phone, or by post domestically, but only 1% have done so cross-border.

This figure shows the potential for an internal market in retail financial services, facilitated by e-commerce, but it also shows how far we are from fulfilling it.

Financial services can be complex, and difficult to understand.With some financial products, such as a mortgage loan or a private pension, consumers may only takethem out once in a lifetime, yet they have a great economic importance. Therefore consumers cannot afford to make the wrong decision.

We must make sure EU citizens are in a position to understand the financial products they are considering, and feel confident in choosing the right product for them.Informed and empowered consumers can also turn up the competitive pressure, bringing benefits for all consumers.

At a time when we are reflecting on how the Commission should structure its policy in retail financial services, it is important to consider how we can put the consumer at the centre of our policy, and make sure that the single market delivers concrete benefits for consumers.

Consumer Strategy 2007-2013

What can the new consumer strategy,which has just been adopted for the next seven years, contribute to this area? Let me explain to you my reasoning for this strategy.

I have three main objectives for the strategy.

I want to empowerEurope's consumers. This means creating the right market conditions for them to be able to make informed, considered and rational choices, and equipping them with the tools to do so.

I want to enhance the economic and non-economic welfare of Europe's consumers, in terms of price, choice, quality and affordability.

Finally, I want to protect consumerseffectively. Market failures for consumers fall into two categories – those that individuals cannot address and those that they should address themselves.

I want to ensure that consumers are effectively protected from the former so that they can devote their time and attention to the latter.

I have a number of key priorities in this respect.

First, we need a better evidence basis for monitoring and intervening in markets. We currently lack much of the data needed to assess market functioning from a consumer point of view.

We also need to develop a more sophisticated model of consumer behaviour so that policy is built on an understanding of consumers as they really are – rather than the entirely rational (almost robotic) beings presented in the textbooks.

Here, I want to develop a new model for consumer behaviour that takes into account both classical models of rational behaviour and perfect information and the findings of behavioural economics that reveal the inherent biases in human nature.

Understanding these biases is crucial to consumer regulation,hence the need for more research in this area.

Finally, I will seek to bring a greater consumer dimension to many other EU policies.

I certainly hope that consumer policy will be at the heart of the Commission Single Market review that is being carried out this year.

The internal market in retail financial services could undoubtedlybenefit from a more consumer oriented approach.

Financial Capability

How can we apply the general reasoning of the consumer strategy to retail financial services?

One of the ways to empower consumers is to increase their financial capability, and give them more confidence in their ability to purchase financial services.

In terms of financial capability, there are two separate but related challenges here, functional illiteracy and financial illiteracy. Functional illiteracy is more widespread than we would wish in some Member States.

For instance, according to a study in the UK,among the adult populationthere, 23%, if presented with the Yellow Pages and asked to name a plumber, could not do so. More than 20%, when asked to choose between receiving £30 or 10% of £350, chose the lower figure.

It is very difficult to educate someone in financial services if they have difficulty reading or performing simple calculations.

Functional illiteracy is clearly a matter for Member States, but financial illiteracy is also a challenge. Even well educated citizens may have problems with financial terminology and calculations.

In this area, Community institutions could contribute some European added value to the ongoing activities at national level.The Commission is organising a conference on financial capability in two weeks time. I will speak at this conference myself and I am looking forward to the debate we will have there.

In the light of this debate, we will have to decide on follow-up. One possible idea could be to set up a network of responsible national authorities, with interested industry representatives, to exchange and develop best practice, and to promote its use in Member States.

However, education is not a replacement for consumer protection rules, and enhancing financial capability has to be part of a whole range of policies aimed at empowering consumers.

Pre-contractual information

One way to protect consumers effectively is to provide them with the right pre-contractual information.Good, clear information can help a capable consumer make the right decisions between competing products. The information must be understandable for its target audience in order to deliver benefits.

However, we are not sure that the pre-contractual information requirements in current EU Directives give consumers the information they really need.

Is it too little information, too much or just about right? Is it the information they want and need? Can they understand it? Can they use it to compare offers?

To answer these questions, we need a better evidence base. We will ask consumers directly what they think.

We will then have the data to ensure that the pre-contractual information required by EU law is actually serving its citizens well, that it helps them compare offers and make decisions.

But the effective functioning of the demand side of the market is about more than accurate, complete and appropriateinformation.

Consumers incur search costs in obtaining information. Market transparency about price, quality, and other parameters is also essential. But this information also needs to be comparable.

The proliferation of different products makes comparisons between suppliers difficult. In some Member States, there are thousands of different mortgage products, and some individual suppliers offer nearly one hundred different products.

It seems increasingly clear that intervention is needed to enable consumers to make informed, rational choices without incurring excessive search costs.

Conclusion

An integrated internal retail market where consumers could compare and purchase from financial services providers throughout the EU would significantly sharpen competition and reward the most efficient retailers.

It could also help boost the EU's external competitiveness if it became an attractive destination for e-commerce shoppers from around the world.

If we can help citizens increase their financial capability, we can empower them to take advantage of the clearer, more easy to compare information that will be offered.

I am convinced that consumer policy is at the centre of many of the economic, social and political challenges the EU faces, and that by tackling issues such as financial capability, and providing better pre-contractual information, we can deliver real benefits to citizens.

Through sound consumer policy, the EU can make a significant contribution to competitiveness and also help re-connectEurope with its people.

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