Financial products and services in Europe have a bad rep. Not only do “investment products, private pension and securities” persistently rank as the worst of all 31 consumer markets according to the annual EU Consumer Scoreboard1, these markets also lag considerably behind others in terms of cross-border trade, thereby severely limiting competitiveness.
In short, financial products suffer from a lack of consumer trust, the absence of comparability and the difficulty of switching between services and products. These barriers become even more problematic across borders, thus exacerbating the negative perception of consumers.
Several initiatives at EU level aimed at further integration of European markets, such as the Capital Markets Union (CMU) and the Digital Single Market (DSM), are set to dominate the agenda of stakeholders dealing with financial services in Europe in 2016. Whereas these initiatives partially address some issues pertaining to cross-border trade in financial services and products, they do not directly deal with the wider realm of Retail Financial Services.
A new initiative announced by the EC at the end of 2015 now aims to shed light on this regretful situation. To some extent the “Green Paper on Retail Financial Services” can be seen as the retail finance component of the DSM initiative, looking at how to facilitate a genuine cross-border supply of retail financial services and how the digitalisation of these services can contribute to a truly integrated EU market.
Since financial products and services are immaterial, it may seem counterintuitive to suggest that they do not lend themselves to cross-border trading. Nevertheless, a part of the problem stems from the actual nature of financial products and services, hampering their trade across borders. To some extent the immaterial nature of banking and other financial industries have made them ideally suited to become pioneers on the digital market, but other aspects related to these products limit the potential for cross-border trading.
Far from showing a European Digital Single Market in financial products and services, a snapshot of the current situation reveals a fragmented market with wide discrepancies between the various Member States and the absence of a level playing field in terms of consumer protection. Although large multinational suppliers are present in most EU Member States, they continue to adapt to local market conditions.
Whereas all stakeholders agree that digitalisation presents great opportunities, the hurdles to achieving a single digital market remain significant. One of the more important hurdles is consumer confidence. With no clear view on rules and regulations in other Members States, or the potential lack of access to adequate redress across borders, end-users prefer to stick to their domestic markets. Brand recognition also plays an important role in confidence, with potential customers wary of trusting an unknown foreign brand.
Besides confidence, other factors weigh in on the fragmentation of markets. Naturally, certain products and services are heavily dependent on local market conditions, divergent fiscal environments, demographics, climate differences, etc. Another local element that affects the possibility of creating a true Digital Single Market in Finance is the fact that civil law is, and will remain, fragmented for the foreseeable future.
The ultimate question is whether these barriers simply form part of the unescapable realities of a union comprising 28 member states and the complicated and sensitive nature of the finance sector? Reducing consumer protection and security standards according to some notion of a lowest common denominator in order to achieve homogenisation across the different member states is not a viable or acceptable option, nor can a climate of regulatory arbitrage be permitted.
Some would ask whether local rules are really so indispensable and whether it wouldn’t make sense to start removing obstacles that don’t make sense or that are superfluous. Such a process should involve national supervisory authorities as well as the European Supervisory Authorities, simultaneously allowing for the identification of best practices. Obviously some financial industries, such as the insurance sector, by their very nature, will remain tied to the local reality.
Whereas technology to some extent continues to contribute to the creation of a single market by enabling companies to improve the availability and comparability of information, facilitating cross-border transactions, simplifying disclosure and driving down prices, further integration of security and consumer protection standards as well as that of payment services and systems remains a necessary precondition for companies to reach customers in other Member States. The same applies to the elimination of national barriers in terms of language, as well as tax discrimination against EU citizens from different Member States.
If EU Citizens are to really benefit from a Capital Markets Union, a Banking Union and a Digital Single Market, and if the financial industry is to regain their trust, the Green Paper needs to herald the eradication of national barriers currently hampering access to and distribution of adequate and cost effective financial services.
1. 10th Consumer Scoreboard - June 2014
2. BETTER FINANCE participation at Euractiv Workshop: “How can financial services work better for EU consumers in the digital age?”