European Federation of Financial Advisers and Financial Intermediaries (FECIF)
From a strategic perspective, and also against the backdrop of the Capital Markets Union"- an initiative which strives to promote increased cross-border selling of insurance products and other financial services - we urge the EBA to investigate into whether the regulatory environment and the market structure for Reg- and InsurTech is as uneven as it is for FinTech. Is the patchy regulatory framework, that can be found in the quarters of FinTech, mirrored by Reg- and InsurTech? If this is the case, then an isolated view on FinTech-regimes might not be enough, since it creates a potential contradiction within the wider strategy of the CMU. Consequently, any regulatory effort must not only be directed towards FinTech, but should strive towards a joint harmonization of Fin-, Insur-, and RegTech. The ensuing problem would be that this task moves far beyond the EBA's mandate.
If, however, the regulation for Insur- and RegTech is already more comprehensive than the one for FinTech, then the EBA must assess the root causes for structurally uneven regulatory environments within the intended reach of the CMU, and draw appropriate and practical conclusions for the synchronization of legislation that aims to structure the FinTech-realm.
Inter-agency cooperation among the ESAs (esp. in cooperation with EIOPA) would be desirable in order to prevent inter-agency competition, redundant legislation, and undue regulatory burdens for those market-participants that fall into the Fin/Insur/Reg-Tech spectrum. Regardless of the structure of current authorization - and registration – regimes, the EBA (and, as a matter of fact, the remaining ESAs) must protect the vested interests of consumers, hence standing faithful to the principle of technological neutrality, which implies that the provision of similar or at least comparable financial services shall be subject to identical regulatory requirements, irrespective of the means of distribution (i.e. on- or off-line). In addition, and for the sake of maintaining an undistorted market environment, the same regulatory requirements already in place (i.e. MiFID, IDD and other relevant provisions) must be taken into account when devising new authorization and registration regimes, regardless of the respective channel of distribution."
Past efforts within the banking sector (i.e. the introduction of IBANs) have already led to a harmonization of certain payment standards within the EU and the Euro-zone, making it easier for corporate and private clients alike to transfer money across national borders. Major problems arise as soon as larger amounts of money are being transferred from Euro into foreign currency. Cross-border non-Euro transfers are usually monopolized and carried out by retail banks, and are as such subject to heavy charges. New providers (e.g. Transferwise) have introduced FinTech-related innovations, and succeeded in drastically reducing the cost for particular payment services, while simultaneously lowering processing time considerably. Incurring bank charges for the transfer of 1.000 € into its £-equivalent can easily exceed 20 €, whilst the process might take up to five days. Newly emerging payment services usually deposit the money within 1-3 days, charging only a fraction of the price (around 5 € per 1.000 €). Opportunities arise for those banks and payment institutions willing to integrate FinTech-based solutions into their service portfolio, hence offering their customer-base a more comprehensive and competitively priced variety of products. Conversely, retails banks and payment institutions that cling to their established business models might need to surrender considerable amounts of market share towards newly established players, which have proven to be increasingly skilled in terms of offering a wide range of specialized services at a considerably lower price point.
In general we agree with the EBA’s assessment and would like to add that there might exist at least two main areas of FinTech-innovation that impact on the activities of said institutions: the first one is Robo-advice, the second RegTech. We share the believe that FinTech can be a force for good" by means of introducing a greater variety of choice to customers, while simultaneously lowering costs for consumers and financial institutions. Due to the deployment of technological innovations (i.e. RegTech) advisors and intermediaries are put in a position that allows them to handle and process information more swiftly, and to comply with regulatory requirements via automated systems. Decreasing administrative expenses will not only lead to increasing profit margins within the industry (making it more competitive and resilient overall), but also facilitates the provision of services at a lower price point, eventually increasing the availability and affordability of investment products or payment services on a retail level. Whilst technological innovation might certainly initiate shifts and processes of restructuring within certain segments of the market (i.e. when it comes to employment chances for lower skilled administrative workers), the overall effects of Fin/InsurTech on the investment, credit, and insurance sector have the potential to actually strengthen the existing industry. The financial sector might especially benefit from multiple channels of communication via apps and online portals, with increasing awareness in sections of the market that were previously not susceptible to traditional forms of advice and acquisition. Increasing awareness for both risks, as well as the corresponding credit and investment products to hedge potential hazards, has the potential to tap into untouched market segments. This technology-induced mobilization of barren client potential increases the need of intermediaries to act as qualified advisors in the process of product selection. While being confused by the abundance of information provided on the internet, the majority of clients still value face-to-face counseling with their advisors. In this regard, it is paramount to maintain and strengthen the central role played by advisors and intermediaries in the process of providing the customer with a product that fits both, their financial needs, and their personal risk situation. In this scheme, Fin-/InsurTech innovation plays an important role in mobilizing previously barren customer potential, while the product-selection-process must still be carried out by sufficiently qualified intermediaries and advisors. Lastly, we do appreciate concerns over technological developments which might threaten the existing business model, profitability, and the capital position of certain incumbent firms. In this sense, the EU and national institutions should act in order to avoid any systemic and disruptive effects of FinTech solutions, in particular, adverse implications in terms of financial stability and unemployment and, more generally, the loss of trust in financial markets."
The often-unclear regulatory status of FinTech enterprises on both national and EU levels, leads to a distortion of the market environment (i.e. level playing field issues), and has a detrimental effect on matters of consumer protection as well (i.e. through the absence of technology-neutral legislation). Established financial advisors and intermediaries, whose distribution channels are predominantly geared towards modes of physical, face-to-face customer-relations, are subject to increasingly strict regulatory regimes. This increasing regulatory burden stands in stark contrast to a large number of FinTech businesses which seem to be able to populate the market place, and engage with customers, while remaining largely unregulated in their activities. Loopholes created through such an unclear regulatory status weakens prevalent efforts of consumer protection. They also impact negatively on the comparative advantage of established financial service providers who seek to offer high-grade services to their customers. As such, well trained financial advisors do not only prepare and deliver information to their customers, eventually supporting them in making informed, prudent decisions on future investments, they are also instrumental in an ongoing effort to increase consumer protection by means of safeguarding the ability of customers to access qualified advice whenever needed. The unclear regulatory status of some FinTech enterprises endangers critical supply-side infrastructure that is crucial to the practical realization of consumer rights. In regards to the unclear regulatory status of some FinTech-enterprises EBA must concentrate on the accessibly and the integrity of advice, i.e. is the customer able to access information and receive advice in similarly comprehensive fashions regardless of the channel of product distribution? This issue is of even more importance in the realm of robo/automated advice, in particularly when it comes to credit/deposit services: The conducted research seems to suggest that a certain fraction of the market is not subject to regulation (which is bad enough). This begs the question whether regulation is in place and safeguarding the integrity of robo-/automated-advice, i.e. defined basic characteristics of the advisory process. The absence of such provisions might otherwise provoke situations where customers place an investment with an unregulated market participant, on the basis of equally unregulated advice, delivered by a potentially unqualified robot/algorithm.
The answer to this question has been addressed in our respective responses to question 1 (Authorization and registration regimes) and 10 (Unclear consumer rights). In addition we would like to stress once more the centrality of the ESAs Joint Committee in the ongoing effort of building comprehensive and coordinated regulatory frameworks. As suggested by EBAs research it seems to be evident that consumers and financial service providers alike are confronted with patchy, work-in-progress legislative environments on the European and national level. In order to prevent further, counterproductive fragmentation alongside Fin-/Insur-/RegTech lines the ESAs must engage in a productive inter-agency dialogue which should strive towards a harmonization of the existing regulatory landscape.
In the past FECIF has submitted multiple examples of potential obstacles in an email to Stephen Ryan at the European Commission (April 20, 2017). Among others these examples included: term life insurance is not available in Belgium, and could not be sourced from any UK providers either; a similar situation exists for direct life annuities in France, which could neither be sourced locally nor cross-border; ongoing regular premiums for life insurance policies that must be discontinued when the policyholders move across borders within the EU (e.g. from Belgium to Germany), or support additional taxes (e.g. from Germany to Belgium); existing requirements by Spanish regulators which have created reporting duties in cases where funds are distributed outside of Spain; requirements by the Polish regulators according to which asset managers must keep track of ultimate beneficial owners, even when the purchase is made via a platform.
Business models based upon FinTech approaches will further highlight the need for legislation to be more consistent (and more consistently applied and enforced) across the EU. We would also point out that the current regulatory regimes are very much geared towards the specific situation of larger market participants (both in terms of the systemic risk they pose, and the resource they have) and are not adapted to smaller players, whether they are IFAs or FinTech. Against this backdrop the principle of subsidiarity needs to guide any form of necessary and proportional regulation: due to the heterogeneous structure of the respective national markets it must be regarded as opportune to initiate policy measures on a national level first. EU regulators should however assume a supporting role in that regard, i.e.: (I) by means of capacity building via the development of an open-ended long-term strategy for a European FinTech cluster; (II) via the provision of (potentially unsolicited) policy advice to national regulators; (III) or through the sharing of best practices with, and the facilitating coordination among, national policy hubs. While staying faithful to the principle of subsidiarity the EU must promote the harmonization of licensing standards and categories for FinTech-based activities across Europe.
Due to varying regulatory frameworks, heterogeneous market conditions, and diverging investment/insurance cultures, such impulses for innovation are best set and located on the national level. In the long run it is in fact desirable to bundle Fin/InsurTech expertise on a European scale, for example through the launch of an “Innovation Academy” with clearly defined aims and objectives. It is, however, important to recognize the already existing initiatives in various member states (i.e. the recently launched FinTech-council in Germany). Under these circumstances the European level should be mainly concerned with harmonizing the various strands of innovation which filter through from the respective national markets, for example by means of communicating best-practice-advice on a regular basis. A rigid standing could have counter-productive effects at this point, as it might hamper innovative impulses forming already on a national level.
Any initiative must be guided by the objective of clarifying the prevalent division of labour between ‘primary’ (expertise-based) and ‘secondary’ (self-advised) sources of information. Well trained professional advisors and intermediaries (primary sector, expertise-based) operate from within a well-established and thoroughly regulated business model, which ensures the proper provision of high-quality advice to their customers. Secondary, self-advised sources of information, often promoted in the realm of FinTech-innovation, are highly useful tools for supplementing the services of qualified and well-trained intermediaries and advisors. They can, however, only act as said supplement, but never as a substitute for expertise-based services. Any form of licensing on the national/European level must take this complex relation into account, and treat the FinTech-model as complementary to the existing insurance/investment industry, eventually subjecting the former to the same rules, regulations, and standards as the latter. The principle of technological neutrality is an additional principle that must guide any regulatory approach to Fintech activities. In our point of view a level playing field is mandatory for the functioning of the single market. Traditional financial intermediaries should not be disadvantaged, but on the contrary, their role should be strengthened as an important mediator between insurance companies and the use of anonymous new technologies and solutions.
We are welcoming in particular the national regulatory regimes for crowdfunding in Europe, for instance the regulation on crowdfunding in Germany (Kleinanlegerschutzgesetz", 2015). These regulations effectively protect investors and users of crowd funding platforms. In the past years, the use of crowd funding and crowd investing platforms has led to the significant loss of money for some investors. Users of these platforms had been ill-informed about the real risks concerning their investment. Therefore, efforts by national regulators to adapt the regulatory framework to the reality of crowdfunding platforms are, in our point of view, a positive and well received development across the industry. Self-regulatory initiatives are not sufficient to tackle ensuing challenges. Customer protection requires adequate and complete regulation by competent authorities, as this is already the case with insurance-, banking- and investment-services."
The availability of adequate and effective settlement mechanisms is of particular importance when business models utilize online distribution channels for financial services. The absence of physical (as in face-to-face) distribution networks, which also serve as mediums through which complaints can be relayed, drastically increases the necessity of accessible and transparent settlement and complaints handling procedures. The need for such comprehensive mechanisms gains particular importance against the backdrop of automated advice: the malfunctioning or manipulation of the underlying algorithm, in combination with a lack of proper channels to voice concerns and place complaints, might lead to situations in which systemic failures go undetected for prolonged periods of time, eventually causing large scale financial damage to those customers who were exposed to improper advice. In addition, level playing-field issues must be taken into account as well: firms that operate largely within traditional distribution channels are expected (by regulators and customers alike) to set up mechanisms capable of handling and settling complaint issues within a reasonable time-frame, and under the premise of producing feasible results in an efficient manner. Any firm involved in matters of financial advice should be subject to similar requirements, regardless of the means of distribution.
The proposed way forward seems reasonable, although it appears that the suggested measures are rather limited, especially against the backdrop of the multiple advantages a financially literate customer base is able to offer in terms of consumer protection, but also in regards to growing market potential. A well-educated and financially literate customer base understands the limits and possibilities of retail financial services and instruments much better, and they usually demonstrate a greater awareness when it comes to the necessity of accumulating funds and being equipped with proper insurance cover. In that particular context it is also important to inform customers of the advantages and limitations of Fin-/InsurTech technologies, i.e. access to a great variety of information and services, but also in transparent and incomplete regulation, poor complaint handling procedures, potential miss-selling in the case of corrupted or manipulated algorithms. Establishing higher levels of financial literacy should have an enabling function, and support consumers in confidently selecting their preferred means of product distribution. The ultimate goal of such measures must be to establish a two-tier strategy, in which Fin/InsurTech ist used as a platform to draw information from, and to handle relatively simple products, while complex products (depositions, payment, loans, insurances) are sold by competent intermediaries, advisors, and brokers. Increased financial literacy must make customers susceptible to the qualitative difference between the various types of advice, which can be relayed either on- or off-line. In fact, what is often described as robo-advice is actually robo-investing, and does not cover the essence of advice, i.e. financial planning and helping customers identify their long-term goals and needs. Automated systems have been introduced successfully to sections of the market where consumers are clear about their preferences and needs (i.e. in the case of car or travel insurance), and where the products on offer are relatively homogenous while exposing low levels of differentiation. In cases of more complex instances of decision making (high stakes, far stretching time horizon, multiple heterogeneous products on offer) the situation presents itself differently, as evidence produced by behavioral economics suggests. In these circumstances consumers generally require face-to-face interaction with a qualified advisor before taking a decision. A properly educated, financially literate consumer will be able to differentiate between the heterogeneous requirements that different products bring with them, and pick the appropriate distribution channel accordingly. Lastly we would also encourage EBA to differentiate between multiple age cohorts when devising approaches to financial literacy, since Baby-Boomers, Millennials, and post-Millennial age cohorts expose different degrees of familiarity with automated tools. Some of these cohorts are familiar with automated tools, but might lack the proper guidance to discern between the provision of mere information and investment advice, or to acknowledge the value and advantages of human advice. In this sense, Millennials’ and Post-Millennials’ familiarity with new technologies, integrated with the support of human advisors, may help foster their level of financial literacy.
We welcome such initiatives, but would also like to remark that consumer choices that are increasingly guided by artificial intelligence can have serious drawbacks, which need to be communicated clearly and explicitly. Creating a heightened awareness of the potential risks arising from digital services is as much part of a comprehensive financial education as being aware of its merits. We would like to highlight that the use of artificial intelligence can, in some cases, create serious issues when clients make unadvised choices. In this context, we want to refer to a recent survey conducted by AEGON (“What’s the new sustainable income rate in retirement?” published in January 2017) on this topic. The use of FinTechs could potentially lead to wrongly advised clients, and therefore accentuate a situation of miss-selling in Europe. Hence, in times of digital solutions, we want to encourage EBA to enlighten consumers about the potential dangers of digital distribution channels. From a consumer-protection perspective financial literacy programs must touch upon the following issues: (a) herding and pro-cyclical investment behaviour; (b) consumers may no longer be given the opportunity to access any human financial advice - in the long run, excessive automation may hinder the opportunity to access human financial advice at all, thereby sacrificing human sensitivity; (c) mistakes in information collection in an automated environment, thereby raising the issue of liability allocation in case of economic damage; (d) automated devices may entice investors to rush into inputting data without properly reading pre-contractual information, thereby paving the way for potential infringements of privacy law and the sale of unsuitable products and services (in particular, the user may be enticed to complete by trial the automated procedure to access a specific product, without an effective evaluation of the suitability of the choice); (e) misleading web-advertisements for the promotion of automated services; (f) personal data used for other purposes. The input of personal data may be requested by the platforms for their business, as a consequence of specific agreements/links with other market participants particularly interested in the profiles of all registered users. The data collection of these platforms often does not comply with the provisions on privacy.
We agree with the specific concerns identified in the Discussion Paper, i.e. restricted access to advisory services due to Granular market segmentations, price discrimination and non-transparent credit scoring, as well as ethical risks related to algorithmic functions (e.g. discrimination based on the consumer’s gender). In this sense, the potentially negative impact of Big Data on the provision of financial services should be carefully considered, especially when striving towards maintaining comprehensive modes of consumer protection in the area of banking, insurance, and investment services.