Value for money approach: ESBG position
In September 2022, the European Commission circulated among stakeholders a Discussion Note on a “Value for Money” (VfM) approach with the aim to solicit views on how the retail investor protection framework might be enhanced through the development of an approach aimed at ensuring that products offered to retail investors offer value for money.
ESBG welcomed the intentions of the EC and DG FISMS to assess how the retail investor protection framework may be enhanced through this specific methodology, nevertheless, we believe that it should be made clear that this approach cannot work as one-size-fits-all under the entire product governance requirements. By the same logic, we wanted to stress that existing tools already provide for a “Value for Money” approach.
Therefore, we answered to the discussion note questions and we sent our position to DG FISMA with the aim of explaining why this approach should mainly focus on products distributed under investment advice, if at all. In order to prevent a distortion of the competition between manufacturers, the concept will need to be fine-tuned, taking into account the potential regulatory increasing costs of bureaucracy, calculation and daily reporting obligations.
The new regulatory regime should also contribute to diversify the supply. As it is well known, a broad range of manufacturers and products is essential to guarantee a competitive offer. For example, when EC asked to assess that certain products that are offered to consumers do not offer Value for Money, ESBG believes that there are already current requirements under product governance to address the performance of products and their costs and charges.
These are implemented through various measures taken by the manufacturers and distributors. Moreover, at the level of the distributors, a check is already carried out during the investment advice process as to whether the distributor also offers equivalent products to the product which is intended for recommendation. About which criteria should be used for an assessment of VfM, ESBG agrees that manufacturers already carry out comprehensive inquiries of the costs of their products in order to inform investors (i.e. in the PRIIPs KIDs), so that meaningful data is available on costs and charges. However, the client may take into other considerations like the horizon of investment of a piece of its savings, the level of security etc, so it is not possible to only take into account figures. The investor is usually interested in the most attractive possible return. The future return of a product cannot be predicted when it is launched.
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State Aid rules for banks in difficulty
The European Savings and Retail Banking Group (ESBG) welcomes the initiative of the European Commission to launch a targeted consultation aiming at reviewing the State Aid rules for banks in difficulty.
The potential revision will assess the fitness of the current rules regarding burden-sharing, market discipline, financial stability, and the protection of taxpayers among other things. The modernized framework should ensure that the State Aid rules are applied proportionally, are adapted to the crisis management and deposit insurance (CMDI) legislation and are specifically targeted at different kinds of bank crises.
ESBG argues that all DGS measures available under the CMDI framework applied in accordance with the rules established by the DGSD and the BRRD/SRMR, regardless of national specificities in the design, the governance, and the functioning of DGSs, should be exempted from the application of the regular State Aid control rules. It should be made clear that when DGS funds are used for support measures, State Aid rules should not be applicable and no notification to the Commission be required. Exempting the application of the State Aid rules on actions under the CMDI framework will allow the effective and undisturbed use of measures foreseen under DGSD/BRRD/SRMR.
Furthermore, and until such improvements are effectively achieved, ESBG finds it important to avoid any increase in contributions to the national DGS and to the Single Resolution Fund (SRF).
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ESBG supports consumer participation in capital markets
ESBG has recently shared its comments with the European Commission on new package of measures to increase consumer participation in capital markets. The upcoming MiFID II Review provides the opportunity to contribute to this goal and in this regard, ESBG highlighted several key priorities that should be addressed as part of the Review:
Keeping the choice between commission-based and fee-based model: no ban on inducements. The current legal framework on inducements is appropriate to protect clients against potential conflicts of interest. A ban on inducements – that would leave room only for the fee-based model – will inevitably lead to an advice gap for retail clients and only a small number of wealthier investors would continue to invest in capital markets whereas the vast majority of retail investors would refrain from it. However, we believe that some adjustment may need to be done in order to achieve a common understanding across Member States on what an inducement is and to avoid different interpretation by National Competent Authorities that undermine the level playing field.
Reducing information overload: The flood of information introduced under MiFID II overwhelms clients. The vast majority of clients would like to have the option to waive some of the mandatory information. (opt-out), which they do not perceive as helpful.
Harmonisation of different investor protection requirements: When providing investment advice or selling financial instruments, investment firms have to comply with several different requirements (MiFID II, PRIIPs, 2 SFDR, etc.) Many of these requirements are not harmonized and it’s a huge problem for both advisors and investors.
Packaged retail investment and insurance products (PRIIPs): ESBG is aligned with the ESAs advice on the review of the PRIIPs Regulation and we call the EC to take into account in order to include these points in the Retail Investor Strategy. The scope should not be extended to new products, at least until it is possible to introduce a more differentiated approach between products under the PRIIPs Regulation and it is necessary to maintain the exemption from the scope of PRIIPs for pension products.
Suitability and Appropriateness assessment: We don’t see any weaknesses in the present suitability and appropriateness regime. Currently, the suitability and appropriateness regimes find themselves to be under extensive development, considering both the requirements from the new ESMA Guidelines on Appropriateness and Execution only as well as the requirements from the implementation of ESG-considerations into the suitability regime.
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Clear and fair rules for the use of machine learning in Internal Rating Based models
The European Savings and Retail Banking Group (ESBG) welcomes the initiative of the European Banking Authority (EBA) to discuss the implications of the use of machine learning (ML) in the internal rating based (IRB) models for credit risk.
We encourage the EBA to build a clear and fair supervisory scheme that goes further and allows compliance with the proposed principles to be measured, and that finds the balance between the advantages and the new risks that machine learning brings.
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Daisy chain of internal MREL
The “daisy chain” deduction framework increases the necessity of legal certainty, predictability, and proportionality in the internal MREL (iMREL) regulation.
Resolution groups with entities in only one member state should be exempted from the “daisy chain” deduction framework. The transitional period for applying the requirements should also be extended to 1 January 2024. Moreover, ESBG warns that the introduction of the “daisy chain” proposed by the European Commission in late October should explicitly not increase other prudential requirements for banks. Finally, the scope of application of iMREL should be fixed at 5% of Total Risk Exposure Amount (TREA) for non-resolution entities in the level 1 text and not left at the discretion of the Single Resolution Board (SRB) as is currently the case.
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Call for evidence on the European Commission mandate regarding the PRIIPs Regulation
In Europe there are many PRIIPs that retail investors can purchase. In the area of structured products (PRIPs) alone, there are more than 1.5 million of them.
Regarding the use of the Key Information Documents (KIDs) to choose or compare between the products that banks offer to their clients, we believe that they do not play a role in product selection per se; there are other sources of information and the KIDs, which are designed for retail investors, are not suitable as a basis for product comparisons by the sales offices. For product approval purposes, the sales offices have designed separate technical solutions to obtain the required information. These tools allow, for example, the filtering of products according to certain product designs such as capital protection or certain underlings. However, there are individual contents of the KIDs that are used by the institutions for product selection. This includes, for example, the SRI, which is also used for the target market under MiFID II product governance.
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ESMA's review of the MiFID II best execution reports
The RTSs 27 (and 28) currently regulates the best execution reporting by execution venues and investment firms.
We understand that the crucial question for RTS 27 reports is if these reports should be re-instated. Based on the evidence we have with these reports so far, we do not think that they provide meaningful information which justifies the efforts of producing these reports. Neither have these reports been widely used by prospective recipients so far (measured by observed page views) nor are they helpful for investment firm’s own decisions to determine suitable best execution venues. We do not expect that the proposed modifications of RTS 27 reports would change that. Therefore, we welcome the European Commissions’s proposal to delete the Art. 27 (3) [RTS 27] as part of the Capital Markets Union package.
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Assessment of SMEs’ Post-COVID Financial Health
Small and medium sized businesses (SMEs) have been hard hit by the ongoing COVID pandemic. This is especially the case in high employment sectors, such as tourism, hospitality, and leisure.
National governments and the EU have stepped in with unparalleled levels of support to help struggling SMEs[1]. Banks have put in place a variety of solutions to help their clients, both in cooperation with and as a complement to public authorities’ measures. Guarantee institutions have also played a key role in supporting corporate lending dynamics by setting up extensive support measures[2]. In addition, accountants have helped SMEs adjust to the COVID circumstances based on their skills and capabilities around financial distress and business planning.
On top of their individual efforts, these sectors have also worked together at national and EU levels. In some cases, this has already led to initiatives aiming to reduce uncertainties and difficulties for SMEs. We also acknowledge the impact of the Roundtables organised by the European Commission in reinforcing these cooperative efforts and laud the efforts of national partners who have reached out to other sectors.
Altogether, these measures have probably helped to prevent thousands of bankruptcies and insolvencies, as pointed out by Bruegel; however, in some cases, they may have also deferred solvency problems into the future.
Accountancy Europe, the European Association of Co-operative Banks (EACB), the European Association of Guarantee Institutions (AECM), the European Banking Federation (EBF), the European Savings and Retail Banking Group, SMEunited and the five supporting organisations of this joint statement believe that it is time to start preparing for that future now!
Our organisations concur that SMEs, accountants, financial and guarantee institutions, and other key actors in the SME ecosystem need to get together to discuss SMEs’ overall post-COVID business outlook. Therefore, we announce the following:
- We will organise pan-European discussions involving our sectors and the relevant public authorities at the EU level in order to ensure a common understanding of the challenges and solutions.
- We will support initiatives by our national members when and where they deem it useful to organise cross-sectoral national meetings, reflecting country specificities and needs.
What would these discussions consist of?
Bottom-up, cross-sectoral voluntary discussions at the level of the national markets could be useful in leading to a common understanding among the participating stakeholders on the up-to-date situation of SMEs, which is vital for the effective monitoring and assessment of companies’ financial health and prospects.
The signatories will support possible new or continued national discussions around these issues by providing relevant analyses and promote an exchange of best practices that could serve as an inspiration for these discussions[3].
We also emphasise the overall need to foster the green and digital transition of the economy, as well as reporting and data sharing systems to meet changing business and market demands. Digitalisation can enable a better and more secure data exchange and provide more valuable insights through forward looking data and big data analytics. This will support the objectives of the twin transition of the EU economy.
Finally, in these discussions, there are two important balances to strike:
- While addressing what is different or unique about this crisis, we should also not overlook our best standard tool in getting out of a crisis: financiers working in a competitive market who use hard and soft data available to them about the creditworthiness of the borrowers. The market-based, time-tested risk assessment mechanisms should be allowed to function.
- While there is diversity in starting positions, impact of the crisis, structure of economies and characteristics of restructuring and insolvency frameworks, there is also a strong EU interest in ensuring consistency and synergies across national approaches. This means striking the right balance that gives an EU-wide steer to discussions that reflect national priorities.
Why is viability assessment important?
National dialogues to improve the availability of data and the assessment of viability can enable a better monitoring of businesses’ post-COVID health, and therefore:
- Help develop a sectoral view of SME debtors at a particular risk of financial problems post-COVID;
- Help governments better target any additional post-COVID measures, such as national measures (such as tax forbearance measures) or the EU Recovery Fund allocations toward uses that can make the most difference, i.e., in support of businesses and sectors most in need and which have the best chances of contributing to a sustainable recovery[4];
- Facilitate debt and loan restructuring for viable borrowers; and
- Help identify what additional measures are needed to help “near-viable” SMEs survive post-COVID, i.e., businesses that would otherwise be healthy were it not for (for example) the debt overhang caused by COVID, which might still need additional temporary help to prevent them from going out of business.
In this context we note the recent paper of the ESRB focusing on preventing and managing a (potentially) large number of insolvencies. In particular, we agree with the following observations:
- ‘The rise in insolvencies that normally accompanies a contraction in economic activity has so far not materialised, but a major wave of insolvencies may yet happen if crisis management measures are withdrawn too quickly.’
- As we enter the post-COVID phase, the goal should be to avoid insolvencies of fundamentally viable firms and to deal with insolvencies of fundamentally unviable firms efficiently. This phase will require ‘a transition from broad-based, system-wide measures to a more targeted approach’.
- ‘Policies must be geared towards rebuilding the economy, fostering adaptation to structural change, rather than trying to preserve, or return to, the pre-pandemic economy.’
- Strategies to address solvency issues should include, where needed, ‘improved restructuring frameworks and debt relief or equity injections to repair balance sheets of corporates with viable business models.’
- Slow or overly complex restructuring proceedings ‘could damage in particular SMEs.’
- For companies found to be ‘unviable in the post-COVID-19 economy, efficient insolvency procedures should be developed to facilitate the swift redeployment of resources to more efficient uses.’
- A key challenge will be distinguishing between viable and non-viable firms, which cannot realistically be performed on the required massive scale by public administrations or courts. The information and expertise held by informed lenders, such as banks, and by guarantee institutions[5], will be critical for the survival of viable companies. In our view, the better/earlier the information provided by SMEs/accountants, the easier it is for the banks and guarantee institutions to evaluate.A clear implication of this report and the broader discussion is the need for pan-European and national cooperation among companies, lenders, guarantee institutions, the public sector, and providers of financial services. As a first step, public authorities, accountants, financial institutions, guarantee institutions, and SMEs themselves should join efforts in the assessment of the post-COVID solvency and prospects of SMEs. This would in turn support the design of more targeted and effective follow-up COVID aid measures, as well as a progressive transition to a stable, green, and digital economy.
[1] Including furlough schemes, tax deferrals, government-backed loans and guarantees, and loan moratoria. Many European countries have even temporarily suspended the enforcement of insolvency laws.
[2] cf. https://www.flipsnack.com/AECMeurope/aecm-covid-brochure/full-view.html
[3] We do not seek to be prescriptive or comprehensive. It should be up to our national members to decide to hold such discussions and what issues should be discussed.
[4] By which we mean ‘sustainability’ in its more comprehensive sense i.e. environmental, financial and economic, societal etc.
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ESBG launches paper on social taxonomy
BRUSSELS, 5 JULY-ESBG follows with great interest the work carried out by the European Commission and the Platform on Sustainable Finance in developing the EU Taxonomy, and especially its extension to social objectives.
Locally-focused savings and retail banks are built on traditional business models that are centred on being responsible and conscious of the needs of society. We play a crucial role in supporting inclusive and sustainable societies, as we provide fundamental banking services to our customers – primarily private households, SMEs and local/regional communities. We contribute to strengthening social cohesion and ensure that no one is excluded from basic access to financial services.
Due to their specific role, position, and social tradition, we believe that savings and retail banks should be part of any debate on sustainable finance. In light of this, ESBG launched today a white paper on the crucially important social taxonomy. The two-pager describes ESBG members’ socially-committed business model and we highlights what makes them different from other banks. It will be of utmost importance to get the future social taxonomy right in order to allow Europe’s savings and retail banks to continue exercising their customer-centric, socially-committed and responsible approach to business.
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Mortgage Credit
ESBG believes that providing simple and shorter information to consumers will correspond more on the client’s expectations and will have a positive effect on their well-informed decision.
Simplification of information
MCD, like CCD, requires creditors to give excessively detailed information to the consumer prior to entering a consumer credit agreement. Nonetheless, consumers ignore information which is too complex or difficult to remember and there is evidence that simpler information with fewer figures is much more effective at landing critical messages. That information may refer to information that only reflects the specifics of the product and meets with client’s expectations for short and clear information – for example – the repayment periods, the amount of the repayment instalments and the applicable interest rate.
Reduction of information
Regarding the pre-contractual information, it is important to focus on diminishing the number of pre-contractual documents, which banks are obliged to serve to consumers in any case. This approach has not proved itself to be useful for consumers and for that reason the requirements for serving pre-contractual information and Standard European Consumer Credit Information aren’t helping in achieving the objectives of the Directive. Bearing digitalisation in mind, the required information can barely be presented in a clear and comprehensive way on mobile devices.
The reduction of information may be also observed through the role of the right of withdrawal. The right of withdrawal is an instrument for the consumer’s protection and when it is granted to the consumer it should diminish some of the requirements for the service providers, especially in the field of the pre-contractual information that needs to be provided to consumers. If the amount of information is not diminished, there is not a substantial meaning of the right of withdrawal.
Definition of foreign currency loans
ESBG would like to make a proposal to change the current definition of a foreign currency loan making cumulative and non-alternative the conditions.
This option:
- would be simple to apply and appears fully justified to allow the development of cross-border financing, while maintaining a good level of consumer protection;
- limits the scope of the provisions of Article 23 of the MCD to loans more likely to induce currency risk;
- would be completely aligned with the wish of consumer protection developed by the European Commission in the MCD. Indeed, Article 23 of the MCD Directive provides, among the modalities for limiting currency risk, the right for the consumer to convert the credit agreement into an alternative currency, which shall be either:
- the currency in which the consumer primarily receives income or holds assets from which the credit is to be repaid,
- or the currency of the Member State in which the consumer is resident.
These two currencies (income and of place of residence) are considered by the MCD as sufficiently protective of the consumer to propose them as limiting the foreign exchange risk of a loan in a currency. The notion of foreign currency therefore seems legitimate only to apply to a currency that is different from both the currency of income and the currency of the place of residence, which correspond to the proposal of a “cumulative” definition.
Identified Concerns
The review of the Mortgage Credit Directive is expected soon. In our opinion, there is a need for guidance from the Commission on pre-contractual information and how best to provide ‘barrier-free’ information on, for example, smartphones.
In our view, there is also a problem with cross-border loans which is not only related to the MCD, but also:
- for the fact that those credits are secured with an immovable property and the execution of that property (if the credit is not repaid) may be done in a country different from the country where consumer is domiciled.
- because of jurisdiction in court procedures (EU Regulations 1215/2012, 655/2014 and 1896/2006): proceedings may be brought against a consumer by the other party to the contract only in the courts of the Member State in which the consumer is domiciled. The last provision may be departed from only by an agreement which is entered into by the consumer and the creditor, both of whom are at the time of conclusion of the contract domiciled or habitually resident in the same Member State, and which confers jurisdiction on the courts of that Member State, provided that such an agreement is not contrary to the law of that Member State. This means that in order to bring a procedure against the debtor in the country of the creditor, the debtor has to have a domicile within the territory of the country. Having in mind that consumers tend to travel a lot and change domiciles easily these days, bringing a procedure against them is most of the time very difficult or even impossible, because creditors are often in a situation that they do not know where the consumer’s new domicile is.
- when it comes to servicing notices for voluntary payment of the debts and judicial papers – it is almost impossible to find the debtor and serve them with such kind of documents and/or understand where their current domicile is. And this puts a lot of obstacles in terms of the debt collection processes and procedures.
Why Policymakers Should Act
Financial institutions are willing to adapt their mortgage lending process but call for adequate implementation deadlines and help with any additional IT support or other additional costs. A proportionate application of the mortgage credit directive could also be examined in more detail by a cost-benefit analysis.
In our view it is very important that during the revision the Commission assesses the consumers’ understanding of, and satisfaction with, the ESIS Art. 44a from the Directive. The effectiveness and appropriateness of the Directive should be the core focus of the Commission study.
The Commission should examine the current definition of foreign currency loans. The market is experiencing difficulties in the application of the rules and we note that due to the current definition there are cases that fall within the scope of foreign currency loans for which the consumer protection measures set out in the Directive should not be addressed or are disproportionate to actual risk for consumers.
It would be beneficial for consumers to narrow the scope, establishing that the definition will imply cumulative conditions (being residence and receiving the incomes or holding the assets in a currency other than the credit is to be repaid). As a result, the current regime excludes certain consumers from mortgage credit, while creditors would be willing to provide credit in a number of scenarios if the foreign currency loan regime were better aligned with the real risks.
Background
The EU Mortgage Credit Directive aims to integrate the market for mortgage credit, promote common standards across the bloc and protect consumers at an EU level through responsible lending. The 2014 MCD applies to all loans available to consumers when buying residential property. It has the following provisions:
- an obligation for lenders to provide clear and detailed information on loan conditions to consumers;
- an obligation for lenders to assess the creditworthiness of consumers according to common EU standards;
- common quality standards and business conduct principles for all EU lenders;
- the right for consumers to repay credit earlier than determined in a contract;
- an EU passport scheme that allows credit intermediaries authorised to operate in any EU country to deliver services across the EU.
- Since the MCD came into force, there have been numerous additions in the form of supplementary acts (both implementation and delegated) to help strengthen the original text.
The Mortgage Credit Directive ‘study’ is under preparation and will focus only on the topics listed in Articles 44 and 45 of the current directive. It will look into the effectiveness and appropriateness of the provisions on consumers and the internal market. The study will also look into digitalisation and sustainable finance (for example, the EC-funded study on green mortgages). Depending on the conclusions of the Study and the Commission’s assessment, legislative changes may be proposed. Some issues have already been identified as being particularly relevant to the review:
- Loans in a foreign currency (Article 23)
- Digitalisation
- Sustainable finance
