Response to consultation on draft Guidelines for cross-selling practices
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In theory, it is certain that if a large number of consumers oppose terms and conditions that are proposed to them, it could have an effect on the financial industry’s practices. This would require that consumers have full awareness of the impact of conditions imposed on them and have enough time to thoroughly assess and compare different market offers. However, this is really far from real life experience, as the imbalance of bargaining power is one of the fundamental characteristics of relationships between professional suppliers and consumers, and this is even more true in the financial sector.
When referring to the potential benefits of cross-selling, it is important to distinguish between tying and bundling. Indeed, some of the above presented potential consumer benefits (financial benefits, convenience and wider choice) could be achievable through bundling, provided that the consumer has a real choice to purchase each component of the package separately. On the other side, we hardly see how tying can benefit consumers – in our view, the benefits are exclusively for financial service providers.
As regards the assessment of potential financial benefits, in practice, cross-selling too often simply makes it impossible for the consumer to estimate whether he is gaining from it or not. The financial benefits are not always obvious, although it is marketed in such a way. For example, bundled items are not included into the APR (Annual Percentage Rate) of credit products. It should also be strongly nuanced that, not only costs at the time of purchase, but overall costs for the consumer in the long run (i.e. in the life span of the contract) must be considered. This implies taking into account potential tariff increases for individual services included in the package as well as switching costs for the consumer. Cross-selling makes prices opaque and weakens the part of competition that is price driven. Packages must prove financial benefits for the consumer. Markets for mortgages, insurance, deposits, payment services are very price sensitive. It is fairly easy for a financial service provider to prove financial benefits at the point of purchase. Whether the financial benefit maintains in the life span of the contract should be addressed by relevant supervisory authorities.
As regards item (c) Access to a wider range of products, we have not found any concrete positive examples of consumer benefits. Not making a product available separately seems more like harmful tying than a benefit for the consumer.
See also our comments under question 3.
Once again, there is a need to specify that potential detriment associated with tying and bundling may vary. Indeed, sectoral legislation on retail financial services sees tying practices as particularly harmful, distorting competition and negatively affecting consumers’ purchasing options and mobility, while bundling at least leaves choice to the consumer.
The Guidelines should make reference to behavioural biases and the fact that firms exploit consumers’ biases to design and market financial services in a way which does not always meet consumer interests and needs. BEUC calls on EU national regulators and supervisors to take behavioural insight into consideration in their policies, to make sure that retail financial products available to consumers meet their needs and expectations. They should monitor the application of the product governance policy adopted by financial institutions, if any, and not hesitate to intervene in case of consumer detriment (product intervention powers).
BEUC response to the Commission consultation on tying and other potentially unfair commercial practices (2010) contains numerous examples of cross-selling practices in different Member States and their potentially negative impact on consumers . For example, bank account packages that include overdraft facility and credit card on a take it or leave it basis; ancillary products (bank account, multi-risk insurance contracts) tied with mortgage credit; “optional” insurance bundled with credit. In France, consumer associations regularly point out that bank packaged accounts sold in package" are often more expensive than services bought separately. In addition, many packages include services consumers do not need . In Slovenia, with travel or accident insurance linked to credit cards, consumers cannot opt-out or adapt insurance premiums.
More recently, BEUC position on the draft MiFID II proposal (2012) provided examples of tying of retail investment services: Which?, our British member, reported that tying practices happen frequently on the British market. In particular high interest rates are given on deposits sometimes tied with complex products as structured products or structured deposits sometimes with high charged product. Our Belgian and Slovenian members reported cases where clients were teased with a very high interest rate on a short term deposit if they invested a same amount in a UCITS or a structured product. In some Nordic countries, access to the best interest rate for a mortgage credit requires borrowers to invest in UCITS, shares or savings accounts. Such practices are detrimental for consumers as they are stimulated to borrow a higher amount to be able to invest .
As regards consumption and overconsumption of unwanted and unsuitable products, we would also like to draw the ESAs attention to cross-selling practices involving insurance add-ons to non-financial products, i.e. small insurances which cover very specific types of risk such as mobile phone theft, payment services fraud, a lack of snow on a skiing holiday or cancellation of travel. They have proliferated widely and further to standard home, car and liability insurances. Insurances constitute an increasing portion of household budgets. Small insurances are sold mainly by non-professional insurers and are mostly ancillary to the purchase of a good or a service. We have identified three main problems related to small insurances and their cross-selling:
- Poor product quality: many small insurances include a broad range of restrictions and exemptions which makes them useless to victims of loss, accident or harm.
- Unfair selling context: Ancillary, small insurances are often proposed to consumers when they buy a specific product or service. This puts them in a bad negotiation position by leaving them exposed to pressure and being misled. Information on the insurance is usually conveyed orally, in a casual way without bringing attention to many uncovered risks.
- Shoddy business models: Premiums paid by consumers are mostly used to remunerate the seller instead of funding compensation for damages. Intermediaries such as shop assistants are highly incentivised to sell small insurances, which creates conflicts of interests and consumer detriment.
BEUC advocates for inclusion of small insurances under the scope of the draft revised Insurance Mediation Directive, as well as for a ban on tying practices for insurance products .
The Norwegian Consumer Council has reported another widespread example of overconsumption - mortgages that tie consumers to saving accounts or investment products (UCITS funds). It is a kind of bundling that does not respect consumers’ interest. Consumers who need a mortgage are those with a deficit of capital. Saving products are products for consumers with surplus of capital. The rationale for allowing such bundling is obviously to provide some kind of security to mortgage providers and income from fees. It would be in the consumer interest not to invest or save capital they lack, but rather direct the amount to increased down payments on the mortgage.
The following non exhaustive list of criteria could be used to determine whether a cross-selling practice is unfair or not:
- Do consumers have freedom of choice?
- Are prices transparent?
- Can consumers make comparison with other products?
- Can consumers switch easily?
- What is the impact of the practice on the duration of the contractual relationship between a consumer and a financial service provider?
All the legislative proposals on retail financial services published following the EC consultation in 2010 contained provisions related to tying and bundling. Although, as already mentioned above, all those texts (MiFID II, MCD, PAD and draft IMD II) recognise the harmful impact of tying on competition and consumers, none of them has ultimately introduced a ban on that practice. In general, firms are only required to inform the consumer whether the service can be purchased separately and provide the price of individual items included in the package. Only the Mortgage Credit Directive instructs Member States to allow bundling and prohibit tying practices, but this general provision has been considerably weakened by a Member State option allowing all kinds of tying justified on the grounds of providing additional security to the creditor in the event of default."
BEUC welcomes Guidelines 1-7. That being said, we believe that information disclosure alone will not ensure fair treatment of consumers by providers. The root cause of the problem must be addressed, i.e. clear rules on tying and bundling practices are needed. As already explained above, since sectoral EU legislation does not put virtually any limitation on cross-selling, the impact of these Guidelines is likely to be rather limited and will not change current business practices in countries where no specific national legislation exists in this area.
The Guidelines may potentially help to enhance consumer experience with bundling practices, oblige the financial service providers to better inform the consumer about his right to also purchase services separately.
The draft Guidelines outline what kind of information should be provided to the consumer, but do not provide for the supervisors’ power to monitor the information provided. It would be relevant to have a reference in the Guidelines to such power and the competent authorities should be strongly encouraged to exercise their powers in this respect.
It is unclear how the proposed Guideline 8 would be implemented in practice and the illustrative examples do not help understanding different scenarios. For example, in the Mortgage Credit Directive, a rationale behind cross-selling is creditors’ risk coverage, and not consumer benefit. Then, how suitability/appropriateness assessment would fit here?
Another example, MiFID 2 Art 24(1) provides that “… when providing … ancillary services to clients, an investment firm should act … in accordance with the best interests of its clients…” Yet, it is not specified how product tying can be in accordance with the best interests of consumers.
BEUC considers that it could be useful to include in this guideline a specific reference to the ‘suitability’ criteria contained in MiFID 2 (knowledge & experience of the products, financial situation and objectives & risk tolerance). While we are aware that such a ‘suitability’ assessment will only be statutorily required for advised sales of investment products under MiFID 2, it would be necessary to encourage all types of financial services firms to consider, where appropriate and feasible, undertaking such an assessment to reduce the risk of miss-selling.
Guideline 10 is too general and raises concerns with regard to its efficiency. In fact, sectoral EU legislation already referred to above has addressed conflicts of interest in the remuneration structures of sales staff in a very fragmented way. For example, MiFID 2 provisions on sales incentives are quite vague and unlikely to rule out conflicts of interests.
Illustrative example 3 is inappropriate: bonus is directly linked to a sales target; hence it will fluctuate depending on whether or not the target has been achieved.
In our view, there should be a horizontal approach to conflicts of interest: remuneration of firms’ staff and intermediaries should be at least product-neutral, i.e. not related to the type and volume of products sold.
The last sentence of Guideline 11 should be strengthened by replacing “unless there are good and justified reasons why this is not realistic” with “unless there are technical links between two or more of the products which mean that one of the component products can exist only as part of a package, such as off-set mortgages”.
Question 2: Do you agree with the identified potential benefits of cross-selling practices?
Consumers are usually not in a strong position to negotiate individually the offers and contracts proposed to them. The conditions offered to them are most often on a ‘take it or leave it’ basis.In theory, it is certain that if a large number of consumers oppose terms and conditions that are proposed to them, it could have an effect on the financial industry’s practices. This would require that consumers have full awareness of the impact of conditions imposed on them and have enough time to thoroughly assess and compare different market offers. However, this is really far from real life experience, as the imbalance of bargaining power is one of the fundamental characteristics of relationships between professional suppliers and consumers, and this is even more true in the financial sector.
When referring to the potential benefits of cross-selling, it is important to distinguish between tying and bundling. Indeed, some of the above presented potential consumer benefits (financial benefits, convenience and wider choice) could be achievable through bundling, provided that the consumer has a real choice to purchase each component of the package separately. On the other side, we hardly see how tying can benefit consumers – in our view, the benefits are exclusively for financial service providers.
As regards the assessment of potential financial benefits, in practice, cross-selling too often simply makes it impossible for the consumer to estimate whether he is gaining from it or not. The financial benefits are not always obvious, although it is marketed in such a way. For example, bundled items are not included into the APR (Annual Percentage Rate) of credit products. It should also be strongly nuanced that, not only costs at the time of purchase, but overall costs for the consumer in the long run (i.e. in the life span of the contract) must be considered. This implies taking into account potential tariff increases for individual services included in the package as well as switching costs for the consumer. Cross-selling makes prices opaque and weakens the part of competition that is price driven. Packages must prove financial benefits for the consumer. Markets for mortgages, insurance, deposits, payment services are very price sensitive. It is fairly easy for a financial service provider to prove financial benefits at the point of purchase. Whether the financial benefit maintains in the life span of the contract should be addressed by relevant supervisory authorities.
As regards item (c) Access to a wider range of products, we have not found any concrete positive examples of consumer benefits. Not making a product available separately seems more like harmful tying than a benefit for the consumer.
See also our comments under question 3.
Question 3: Do you agree with the identified potential detriment associated with cross-selling practices?
Overall, we agree with the identified potential detriment.Once again, there is a need to specify that potential detriment associated with tying and bundling may vary. Indeed, sectoral legislation on retail financial services sees tying practices as particularly harmful, distorting competition and negatively affecting consumers’ purchasing options and mobility, while bundling at least leaves choice to the consumer.
The Guidelines should make reference to behavioural biases and the fact that firms exploit consumers’ biases to design and market financial services in a way which does not always meet consumer interests and needs. BEUC calls on EU national regulators and supervisors to take behavioural insight into consideration in their policies, to make sure that retail financial products available to consumers meet their needs and expectations. They should monitor the application of the product governance policy adopted by financial institutions, if any, and not hesitate to intervene in case of consumer detriment (product intervention powers).
BEUC response to the Commission consultation on tying and other potentially unfair commercial practices (2010) contains numerous examples of cross-selling practices in different Member States and their potentially negative impact on consumers . For example, bank account packages that include overdraft facility and credit card on a take it or leave it basis; ancillary products (bank account, multi-risk insurance contracts) tied with mortgage credit; “optional” insurance bundled with credit. In France, consumer associations regularly point out that bank packaged accounts sold in package" are often more expensive than services bought separately. In addition, many packages include services consumers do not need . In Slovenia, with travel or accident insurance linked to credit cards, consumers cannot opt-out or adapt insurance premiums.
More recently, BEUC position on the draft MiFID II proposal (2012) provided examples of tying of retail investment services: Which?, our British member, reported that tying practices happen frequently on the British market. In particular high interest rates are given on deposits sometimes tied with complex products as structured products or structured deposits sometimes with high charged product. Our Belgian and Slovenian members reported cases where clients were teased with a very high interest rate on a short term deposit if they invested a same amount in a UCITS or a structured product. In some Nordic countries, access to the best interest rate for a mortgage credit requires borrowers to invest in UCITS, shares or savings accounts. Such practices are detrimental for consumers as they are stimulated to borrow a higher amount to be able to invest .
As regards consumption and overconsumption of unwanted and unsuitable products, we would also like to draw the ESAs attention to cross-selling practices involving insurance add-ons to non-financial products, i.e. small insurances which cover very specific types of risk such as mobile phone theft, payment services fraud, a lack of snow on a skiing holiday or cancellation of travel. They have proliferated widely and further to standard home, car and liability insurances. Insurances constitute an increasing portion of household budgets. Small insurances are sold mainly by non-professional insurers and are mostly ancillary to the purchase of a good or a service. We have identified three main problems related to small insurances and their cross-selling:
- Poor product quality: many small insurances include a broad range of restrictions and exemptions which makes them useless to victims of loss, accident or harm.
- Unfair selling context: Ancillary, small insurances are often proposed to consumers when they buy a specific product or service. This puts them in a bad negotiation position by leaving them exposed to pressure and being misled. Information on the insurance is usually conveyed orally, in a casual way without bringing attention to many uncovered risks.
- Shoddy business models: Premiums paid by consumers are mostly used to remunerate the seller instead of funding compensation for damages. Intermediaries such as shop assistants are highly incentivised to sell small insurances, which creates conflicts of interests and consumer detriment.
BEUC advocates for inclusion of small insurances under the scope of the draft revised Insurance Mediation Directive, as well as for a ban on tying practices for insurance products .
The Norwegian Consumer Council has reported another widespread example of overconsumption - mortgages that tie consumers to saving accounts or investment products (UCITS funds). It is a kind of bundling that does not respect consumers’ interest. Consumers who need a mortgage are those with a deficit of capital. Saving products are products for consumers with surplus of capital. The rationale for allowing such bundling is obviously to provide some kind of security to mortgage providers and income from fees. It would be in the consumer interest not to invest or save capital they lack, but rather direct the amount to increased down payments on the mortgage.
The following non exhaustive list of criteria could be used to determine whether a cross-selling practice is unfair or not:
- Do consumers have freedom of choice?
- Are prices transparent?
- Can consumers make comparison with other products?
- Can consumers switch easily?
- What is the impact of the practice on the duration of the contractual relationship between a consumer and a financial service provider?
All the legislative proposals on retail financial services published following the EC consultation in 2010 contained provisions related to tying and bundling. Although, as already mentioned above, all those texts (MiFID II, MCD, PAD and draft IMD II) recognise the harmful impact of tying on competition and consumers, none of them has ultimately introduced a ban on that practice. In general, firms are only required to inform the consumer whether the service can be purchased separately and provide the price of individual items included in the package. Only the Mortgage Credit Directive instructs Member States to allow bundling and prohibit tying practices, but this general provision has been considerably weakened by a Member State option allowing all kinds of tying justified on the grounds of providing additional security to the creditor in the event of default."
Question 4: Please comment on each of the five examples in paragraph 13, clearly indicating the number of the example to which your comment(s) relate.
BEUC agrees with the above examples of consumer detriment. See also our examples above.Question 5: Please comment on the proposed guidelines 1 and 5 as well as the corresponding examples, stating clearly in your response the guideline paragraph number to which your comment relates.
Answer to questions 5, 6 and 7BEUC welcomes Guidelines 1-7. That being said, we believe that information disclosure alone will not ensure fair treatment of consumers by providers. The root cause of the problem must be addressed, i.e. clear rules on tying and bundling practices are needed. As already explained above, since sectoral EU legislation does not put virtually any limitation on cross-selling, the impact of these Guidelines is likely to be rather limited and will not change current business practices in countries where no specific national legislation exists in this area.
The Guidelines may potentially help to enhance consumer experience with bundling practices, oblige the financial service providers to better inform the consumer about his right to also purchase services separately.
The draft Guidelines outline what kind of information should be provided to the consumer, but do not provide for the supervisors’ power to monitor the information provided. It would be relevant to have a reference in the Guidelines to such power and the competent authorities should be strongly encouraged to exercise their powers in this respect.
Question 6: Please comment on the proposed guidelines 2, 3, 4 and 6 as well as the corresponding examples, stating clearly in your response the guideline paragraph number to which your comment relates.
See Q5Question 7: Please comment on the proposed guideline 7 as well as the corresponding examples, stating clearly in your response the guideline paragraph number to which your comment relates.
See Q5Question 8: Please comment on the proposed guideline 8 as well as the corresponding examples, stating clearly in your response the guideline paragraph number to which your comment relates.
BEUC commentsIt is unclear how the proposed Guideline 8 would be implemented in practice and the illustrative examples do not help understanding different scenarios. For example, in the Mortgage Credit Directive, a rationale behind cross-selling is creditors’ risk coverage, and not consumer benefit. Then, how suitability/appropriateness assessment would fit here?
Another example, MiFID 2 Art 24(1) provides that “… when providing … ancillary services to clients, an investment firm should act … in accordance with the best interests of its clients…” Yet, it is not specified how product tying can be in accordance with the best interests of consumers.
BEUC considers that it could be useful to include in this guideline a specific reference to the ‘suitability’ criteria contained in MiFID 2 (knowledge & experience of the products, financial situation and objectives & risk tolerance). While we are aware that such a ‘suitability’ assessment will only be statutorily required for advised sales of investment products under MiFID 2, it would be necessary to encourage all types of financial services firms to consider, where appropriate and feasible, undertaking such an assessment to reduce the risk of miss-selling.
Question 9: Please comment on the proposed guidelines 9 and 10 as well as the corresponding examples, stating clearly in your response the guideline paragraph number to which your comment relates.
BEUC fully supports Guideline 9.Guideline 10 is too general and raises concerns with regard to its efficiency. In fact, sectoral EU legislation already referred to above has addressed conflicts of interest in the remuneration structures of sales staff in a very fragmented way. For example, MiFID 2 provisions on sales incentives are quite vague and unlikely to rule out conflicts of interests.
Illustrative example 3 is inappropriate: bonus is directly linked to a sales target; hence it will fluctuate depending on whether or not the target has been achieved.
In our view, there should be a horizontal approach to conflicts of interest: remuneration of firms’ staff and intermediaries should be at least product-neutral, i.e. not related to the type and volume of products sold.
Question 10: Please comment on the proposed guideline 11 as well as the corresponding examples, stating clearly in your response the guideline paragraph number to which your comment relates.
Guideline 11 needs to be more detailed. The meaning of “disproportionate penalties” should be clarified. For example, in Belgium when a bundled financial offer is made for a mortgage credit, it generally offers a lower rate, as long as the different contracted services are maintained, e.g. mortgage credit with home insurance. Even if the offer gives the borrower a total advantage at the moment the contract is signed, this is not necessarily the case a few years later. The link which is created between those different contracts prevents the borrower from taking advantage of the market opportunities.The last sentence of Guideline 11 should be strengthened by replacing “unless there are good and justified reasons why this is not realistic” with “unless there are technical links between two or more of the products which mean that one of the component products can exist only as part of a package, such as off-set mortgages”.