Cross selling practices in financial products and transparency implications Working Party:...

Cross selling practices in financial Cross selling practices in financial products and transparency products and transparency implicationsimplications

Cross selling practices in financial Cross selling practices in financial products and transparency products and transparency implicationsimplications

Working Party: Distribution of Insurance ProductsHILA-AIDA SUMMIT, Athens - Greece, 07 – 09 May 2014

08.05.2014

Alkistis Christofilou, Partner - Rokas (Athens)

Working Party : Distribution of Insurance Products08.05.2014

HILA-AIDA SUMMIT, Athens - Greece

© Alkistis Christofilou - Partner

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IMD2 Article 21a para. 1 - Tying and bundling practicesIMD2 Article 21a para. 1 - Tying and bundling practices

When insurance is offered together with another service or ancillary product

as part of a package or the same agreement or package, the insurance intermediary or the insurance undertaking shall inform and offer the customer the possibility of buying the different

components jointly or separately [and] provide for a separate evidence of the premium or prices of each

component.




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IMD 2 – alignment to MiFID 2IMD 2 – alignment to MiFID 2

IMD 2 Recital 9: distribution of insurance contracts including investment products should: be aligned between IMD 2 and MiFID 2 Minimum standards must be raised to create level playing field for all packaged

insurance investment products

MiFID 2 sets high and detailed standards of transparency and care for suitability of customer’s investment needs

MiFID 2 Article 24 para. 11: only duty to inform customers whether they can buy the component services separately and to provide for a separate evidence of the costs and charges of each component.




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Tying and bundling – IMD 2 DefinitionsTying and bundling – IMD 2 Definitions

Article 2.1.(19): “tying practice” means the offering or the selling of an insurance product in a package with other distinct

ancillary products or services

where the insurance product is not made available to the consumer separately => “Tying practices”: where the various components are not available

to buy on a standalone basis –> not allowed Article 2.1.(20): “bundling practice” …

where the insurance product is also made available to the consumer separately but not necessarily on the same terms and conditions as when offered bundled with the ancillary services

=> “Bundling practices”: where the various components of a contract can be bought separately -> allowed




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Examples of cross-selling practices – Is there a risk to the consumer? Examples of cross-selling practices – Is there a risk to the consumer?

What is a “Gateway” product: current account, mortgage loan, investment scheme, various insurances

Examples: Current bank account bundled with travel insurance, mobile phone

insurance, roadside recovery Mortgage loan with fire insurance and life / incapacitation insurance Health insurance bundled with life insurance linked to investment Municipalities and regional authorities buying complex structured investment

products in combination with deposits Bundling is coupled with loyalty or volume preferential contract conditions




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IMD2 Article 21a para. 2 – explaining the riskIMD2 Article 21a para. 2 – explaining the risk

Where the risks resulting from such an agreement or package offered to a customer are likely to be different from the risks associated with the components taken separately the insurance intermediary or undertaking shall upon the customer’s request

* IMD2 Recital 21: The directive is an important step towards increased level of consumer protection and internal market integration

provide an adequate description of the different components of the agreement or package

and the way in which its interaction alters the risks.

** KIID PRIIPs Reg– Key information document for investment & insurance products




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IMD2 Article 21a para. 4 – Advising on packaged productsIMD2 Article 21a para. 4 – Advising on packaged products

Member States shall ensure that where an insurance intermediary or an insurance undertaking provides advice, it ensures that the overall package meets the demands and needs of the customer

=> MiFID 2; duty to investigate and understand customer needs

Article 1.9: Advice is the personal recommendation to a customer, either upon request or at the initiative of the insurance intermediary or undertaking




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Is cross-selling a good or a bad thing? Is cross-selling a good or a bad thing?

IMD 2 Recital 41

cross-selling practices are a common and appropriate strategy for retail financial service providers throughout the Union

IMD 2 Recital 41a

When insurance is offered together with another service or product as part of a package or as a condition for the same agreement or package, it is subject to Directive 2005/29/EC on Unfair Commercial Practices




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Directive 2005/29/EC on Unfair Commercial PracticesDirective 2005/29/EC on Unfair Commercial Practices

Article 5.2 - unfairness test: a practice is unfair if cumulatively It is contrary to the requirements of professional diligence, and The practice materially distorts or is likely to distort the economic behaviour with

regard to the product of the average consumer whom it reaches or to whom it is addressed

Article 2(h): professional diligence is the standard of special skill and care which a trader may reasonably be expected

to exercise towards consumers, commensurate with honest market practice and/or the general principle of good faith in the trader’s field of activity.

Note: Professional diligence difficult to benchmark, particularly in financial services, if the practice is widely followed by providers

IMD 2 Article 15(1): Insurance intermediaries shall always act honestly, fairly, trustworthily, honourably and professionally in accordance with the best interests of their customers




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Directive 2005/29/EC on Unfair Commercial Practices (2)Directive 2005/29/EC on Unfair Commercial Practices (2)

Article 6: Misleading practices are unfair

False and untruthful information, deceitful as to the benefits, risks, composition, results, price calculation, advantages; omission of material information

Article 8: Aggressive practices are unfair

As they significantly impair (or are likely to) the average consumer’s freedom of choice or conduct with regard to the product

Unfair practices make the consumer take a transactional decision he would not have taken otherwise

Maximum harmonisation directive with exception of financial services

=> Member States may pass more stringent rules in financial services




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From cross-selling to mis-sellingFrom cross-selling to mis-selling

Aggressive sales practices Pressure and inertia selling

Churning

Steering




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From cross-selling to mis-selling - Examples From cross-selling to mis-selling - Examples

Unclear terms on cover and price Sell services the consumer doesn’t need

selling insurance against home emergencies and breakdowns, e.g. of water pipes, when already covered by home fire insurance, and/or by water supply companies themselves

(UK HomeServe facing a GBP 3.4 m fine in 2014) Selling credit card insurance along with credit cards

(13 UK banks and CPP insurance were obliged by UK FCA to pay €1.5 bn to 7 m customers)

Selling PPI insurance along with credit (UK banks paid €11,7 bn) Forced bundling of life insurance on group health policies purchased by employers

(USA NYSE listed Humana Insurance required to pay USD 4.5 m for fines and a consumer restitution refunds pool in settlement with the insurance commissioners of the States of Mississippi, Missouri and Wisconsin)




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Features of financial products promoting mis-sellingFeatures of financial products promoting mis-selling

Factual and psychological factors Information asymmetry between sellers and customers Strong element of trust and path-dependency embedded in “relationship

banking” Limited interest and awareness of customers in “shopping around” for best

deals Misleading information Various cognitive biases putting emotional pressure on consumers

choice and information overloads endowment biases difficulty in handling uncertainty and risk misevaluation of future benefits and costs




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IMD 2 Article 21a para. 4, 5 – The RegulatorIMD 2 Article 21a para. 4, 5 – The Regulator

EIOPA, EBA, ESMA will develop and periodically update:

guidelines for the assessment and supervision of cross-selling practices

Indicating, in particular, situations in which such practices do not comply with Article 15(1) on proper professional conduct

Member States may maintain or adopt

additional stricter measures or intervene on a case-by-case basis to prohibit the sale of insurance together with another service or product

as part of a package or as a condition for the same agreement or package

when they can demonstrate that such practices are detrimental to consumers




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What does a financial regulator consideras “mis-selling”?What does a financial regulator consideras “mis-selling”?

Example 1: UK FSA’s Final Guidance of January 2013 - Risks to customers from incentive schemes to sellers of financial products

Incentive schemes increase the risk of mis-selling if not closely monitored by companies

Conflicts of interest, if e.g. supervisor earns bonus on the volume of sales made by his staff

Mis-selling is the failure to deliver fair outcomes for consumers, i.e. when: Customers are not treated fairly They don’t understand the key features of the service They do not understand whether they are given advice or only information Information is not clear, fair and transparent; Information does not enable customers to make an informed decision on whether to

buy or not; Customers buying on advised basis are not recommended products suitable to their

needs




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Financial regulator’s guidance to avoid mis-sellingFinancial regulator’s guidance to avoid mis-selling

Example 2: Bank of Greece 2013 Guidelines to banks when selling insurance

Upon commencing marketing, the bank officer shall make clear that:

The bank is also acting as an insurance intermediary

The client may provide his own insurance cover if compatible with the loan agreement and the bank must accept it

The client is entitled to cooperate with his own intermediary in finding the appropriate cover

The bank may in no way “recommend” an intermediary in a manner that may be considered as obligatory for the client




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In summaryIn summary

When insurance is part of a packaged product, the insurance intermediary or undertaking shall Make each product separately available Provide separate price Explain how risk may vary from separate to packaged product and describe each

product components (upon customer’s request) If advice, i.e. personal recommendation is provided, the overall package of

products shall meet customer’s needs and demands Sales practices must be in conformity with the unfair commercial practices directive;

they shall not be aggressive, unfair, misleading Bundling may prove to the benefit of the consumer

Tendency of aligning regulation across the financial sector starts becoming reality

Working Party: Distribution of Insurance ProductsHILA-AIDA SUMMIT, Athens - Greece, 07 – 09 May 2014


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