A single market for capital and investments brings a myriad of benefits, but also exposes consumers to cross-border cases of mis-selling of financial products. BETTER FINANCE advocates for a collective redress mechanism that benefits all EU citizens as direct or indirect investors, such as small and individual shareholders, pension fund participants, life insurance policy holders or other financial services users.

 

A proper collective enforcement mechanism for consumers is the founding pillar of a true Capital Markets Union.

 

The Collective Redress Directive must reflect an EU innovative approach and create a mechanism that ensures a high level of consumer protection (Art. 38 and 47 of Charter of Fundamental Rights) and equal conditions for access to justice (Art. 67 of Treaty on the Functioning of the European Union) for the entire spectrum of consumers in the EU, including investors and financial services users.

Collective Redress

BETTER FINANCE’s main proposals:

1. INCLUDE ALL FINANCIAL SERVICES USERS

2. ENABLE THE OPT-OUT SYSTEM

3. EMPOWER CONSUMER PROTECTION NGOs

4. ARTICULATE WITH ALTERNATIVE DISPUTE RESOLUTION (ADR) MECHANISMS

 

Key info

The European Commission proposed a Directive establishing a collective redress mechanism for breaches of consumer rights. This act is currently called the Directive on Representative Actions for the Protection of the Collective Interests of Consumers.

For the savvy ones, it also has a procedure file code: 2018/0089/COD.

What’s collective redress?

Class actions. Like when a consumer NGO sues a company for breaching investor rights and claims compensation to the benefit of all the affected consumers. But we don’t call it like that, because policy makers wish to move away from the concept of U.S. class actions-style of litigation, which is popularly considered “abusive”.

Why is it different from the Injunctions Directive?

Because you could also claim compensation for your loss, not just declare a certain action (or inaction) to be illegal. And you can do that collectively, with other consumers as well. That is, if this file passes.

 

Who are the main actors deciding on this procedure?

In the EU, Directives and Regulations are proposed by the Commission (in this case DG Justice and Consumers), then voted by the European Parliament and by the Council of the EU (the one with Ministers, not with Presidents).

The European Parliament appointed a responsible committee (Legal Affairs Committee, abbreviated JURI) to adopt amendments and negotiate with the Council of the EU. The JURI Committee named a rapporteur on the file, MEP Geoffroy Didier, and political parties appointed several shadow rapporteurs.

The Council of the EU is made up of Ministers from your Government. We’re not sure who’s in charge here, but we believe that it is the Working Party on Consumer Protection that deals with this file in the Council.

What happened so far, in short:

11 April 2018 – European Commission publishes the text of the proposal

6 December 2018 – JURI Committee votes amendments

26 March 2019 – European Parliament votes its position in single reading

Ongoing – the Council of the EU must adopt a common position on the file

What next?

The three institutions (European Commission, European Parliament and Council of the EU) will start “trilogues” – like a dialogue, but with three players – formally referred to as “inter-institutional negotiations“. There they will negotiate the text of the Directive, and then formally re-vote on the file and adopt it.

Who vs who?

Well, since it concerns consumers, there are consumer organisations, like BETTER FINANCE or BEUC on one side.

On the other side, there are business stakeholders.

So, in a nutshell, it’s the interests of businesses vs. those of consumers.

What?

This Directive should enable certain entities to initiate court actions against companies who infringe consumer rights, but only in certain cases.

When?

Collective redress actions could be initiated when some consumer rights are breached.

How?

These entities would be able to ask a judge for:

injunctive claims, through which an action is declared illegal and its effects are stopped;

compensatory claims, through which compensation for damages caused is requested.

By whom?

These entities would be subject to prior authorisation as authorised organisations, and could be for example consumer NGOs or national competent authorities.

For whom?

Entities seeking collective redress from businesses can only act on behalf of consumers, not the other way around.

Where?

Normally, in all EU Member States.

What are our key claims?

The current EU Directive proposal stipulates that it would only apply to breaches of certain directives and regulations, such as MiFID II or UCITS. However, none of these directly cover individual and small equity investors, employee share-owners or bond holders, to name a few.

    

The reality is that, based on our research, the vast majority of affected consumers in financial scandals are direct investors (shareholders, bondholders), who would not benefit from this mechanism in its current form.

This gap in the scope of application creates unjustified discrimination between direct and indirect investors and creates barriers to the free movement of capital and the right to access to justice, contrary to the Treaty on European Union (TEU) and Treaty on the Functioning of the European Union (TFEU).

What to do?

Include the Market Abuse Directive (MAD2), Regulation (MAR) and PEPP Regulation in the scope of Article 2(1).

An opt-out system is of particular importance for consumer cases, where the value of claims may be heavily offset by lengthy and costly individual court actions, or where the lack of resources, knowledge or information act as strong deterrents for consumers pursuing their rights in court.

Rights which cannot be enforced in practice are worthless

– European Commission SEC(2011) Towards a coherent European approach to collective redress, para 1.1.

With opt-out, the right to choose whether or not to be included in a redress action remains intact for each member of the group.

What is the difference between opt-in and opt-out?

In an opt-out system, a public authority or consumer organisation seeks to enforce the rights and obtain compensation for all affected consumers, with the latter having the choice to be excluded from the action and proceed on their own.

In an opt-in system, consumers must actively and expressly manifest their will to join the action, before statutory deadlines, and fulfill procedural conditions in order to adhere to a class action.

To set a practical example:

Trader A breaches the law and causes financial loss for 100,000 consumers, against which consumer organisation BF seeks to pursue court action.

– in the opt-in system, each of the affected consumers must undertake certain procedural actions (write a writ of summons, a claim of adherence, pay judicial taxes) within a defined time-frame (generally, before the first hearing) to be included in the case;

– in an opt-out system, the consumer NGO disputes the case on behalf of all consumers; if succesfull, all consumers have the choice to benefit of the redress decision or to exclude themselves and proceed otherwise.

 

 

What to do?

Impose the opt-out system for collective redress.

The majority of collective redress proceedings brought against infringements of investors and financial services users’ interests (since 2008) have been initiated by experienced and well-established associations representing the interests of consumers, savers and individual investors.

The organisations would need to be authorised as representative associations to be able to initiate collective redress actions.

BETTER FINANCE believes that flexible conditions are needed, both to enable consumer NGOs to act at their full potential and to avoid/block entities that are seeking to turn this mechanism into a business.

What to do?

We support the initial Commission criteria in Article 4, meaning that eligible entities would need to:

1) Be established according to the law of their respective Member States;

2) Serve the purpose of defending the rights and interests of consumers;

3) Have a non-profit character.

In addition, establishment of ad-hoc associations, for the sole purpose of a class action, is needed in order to address the essence of collective redress, which is spontaneity.

Alternative Dispute Resoltuion (ADR) is firmly supported in the field of financial services[1]. Out-of-court settlements can bring several potential benefits for consumers, meaning:

1) Rapidity: ADR procedures can save consumers from lenghty judicial procedures – see the Fortis case below

2) Simplicity and specialisation: ADR bodies may be better placed to solve highly complex or technical cases

3) Costs: ADR may prove much “cheaper” for consumers

4) Judicial system relief: ADR helps reduce the overburdening of national courts, especially in cases with hundreds of thousands of affected consumers.

Consumer organisations should be allowed to choose whether to proceed through ADR first or directly with national courts. If a settlement is reached with the trader, it would then be validated by a court and become applicable to all those covered.

What to do?

BETTER FINANCE strongly supports articulating the actions in Articles 5 and 6 (injunctive and compensatory claims) with the possibility of first going through an ADR procedure.

 

 

 

 

[1] CFA Institute – Redress in Retail Investment Markets.

Why are we so upset?

The most relevant sector concerning observed mass claims/issues is the financial services sector”.

– European Commission, ‘Study Regarding the Problems Faced by Consumers in Obtaining Redress for Infringements of Consumer Protection Legislation, and the Economic Consequences of such Problems: Final Report’, p. 4.

A pan-European consumer collective redress mechanism is needed to ensure proper enforcement of consumer rights.

 

 

 

 

[2]

 

Studies done by the European Commission (2008,[1]) have shown that 79% of EU citizens are willing to pursue their rights in court if collective action is available, while 76% of consumers are willing to trade cross-border if cross-border redress is available. Up to now, action at Member State level did not achieve the purpose of ensuring a pan-EU mechanism for private enforcement of consumer rights, nor do similar systems even exist at national level. The EC noticed highly divergent and unequal conditions for consumer redress at national level as of 2008, which it tried to level through soft law (recommendations) in 2013.

However, the 2018 review on the implementation of the recommendations on collective redress states that only one in four Member States attempted to implement the “same basic principles”, and even in those cases the “reforms have not always followed” the EC’s recommendations. What is more, in nine EU jurisdictions there is no form of collective redress at all. Consumers have to rely on traditional procedural law instruments. Also the European Parliament’s (‘EP’) report (October 2018) stresses the “strong need for a binding European instrument” concerning collective redress for consumer issues.

[1] European Commission, 2012: Flash Eurobarometer 57.2 – 2012.
[2] images source, see BEUC, 2018: Myths and Realities about Collective redress

Examples of mis-selling

The third IPO tranche of Deutsche Telekom AG shares for the retail sector at large took place in May-June 2000, selling stock to over 1 million citizens at a price of €63.50/share. Due to misreporting of future liabilities, overvaluation of assets and the dot.com bubble, German citizens lost about 85% of their investments in Deutsche Telekom shares.

Since, at the time (in 2001), and still today, German legislation did not have a proper collective redress mechanism to facilitate adherence to a class action, the “number of suits filed with the Regional Court Landgericht) in Frankfurt rose to about 1,700 cases in 2003, representing more than 15,000 individual plaintiffs”. Although this triggered the adoption of the Capital Markets Model Case Act (KapMuG), it took another 10 years for all claims to be resolved.

The third Deutsche Telekom AG Initial Public Offering (IPO) was undertaken between May – June 2000, when the “T-shares” were sold at a peak price of €65; by the end of 2000 (28 December), the share price dropped by -58%. Over the last 16 years, the share price fluctuated around -75% of the IPO price.

source: BETTER FINANCE own research & composition

 

 

 

 

 

 

 

 

In the United States (US), on the other hand, where the same pleas were brought against the defendants, the case started in 2001 and ended in 2005 with a settlement of €120 million. In the meantime, the sheer size and number of files assigned to the Frankfurt court, even though it only represented 1.7% of all affected consumers, was enough to saturate and block the procedure.

Following the failure of Banco Popular, the Single Resolution Board (SRB) adopted a decision on June 7, 2017, to transfer all shares of Banco Popular to Banco Santander for the symbolic price of €1, a decision approved by the European Commission. As a result, more than 300,000 retail investors, who bought and held equity valued at €2.5 billion (€2,500,000,000) raised through an emergency IPO of May 2016, lost all of their savings. EU public authorities claimed a “successful” outcome of the bank resolution mechanisms implemented after the 2008 crisis, since “no taxpayers money” was involved.

– Single Resolution Board Press Release (7/6/2017), Banco Popular

There are currently 88 pending cases against the Single Resolution Board (SRB), European Central Bank (ECB) and European Commission (EC), claiming compensation, and interest, for the damage inflicted following the decisions that led to the acquisition of Banco Popular at the symbolic value of €1.

– European Banking Institute, Case-law, Actions related to the resolution of Banco Popular Español S.A.

Based on available information and data, we estimate that a potential total loss incurred by a retail investor that bought shares in the June 2016 IPO of Banco Popular may have been as high as -99.9999998447386%, while the real loss (until 07/06/2019) was of -74%. Therefore, mathematically, the actual loss due to the transfer decision may have been as high as €644.1 million for all former shareholders of Banco Popular.

 

 

 

 

 

 

Image source here

BM POP page here

Formed in 2010, following the merger of several savings banks (cajas) in Spain, the group Bankia started to raise additional capital through issuance of shares to the public (IPO) and by converting clients’ bank deposits into preferred shared (hence, “preferentes“). In short, Bankia offered clients who had deposits (transferable, short- or long-term deposits) to convert their savings into preferred capital participation (equity) of the bank. Instead of the interest rate received on the deposits, they were “sold” higher and regular dividends per share. In addition, as “preferred” shareholders, their dividend payments would have precedence over other payments in case of losses or negative yields. In short, these equities were sold as fixed income securities, although they are not.

According to BETTER FINANCE’s research, retail clients suffered from what could be considered a double instance of mis-selling:

1) First, preferred shareholders are “preferred” for dividend payments, but also for losses.

2) Second, financial mis-reporting (‘inaccurate financial data’), together with the real estate bubble burst, caused significant drops in share prices.

The first trading day (19 July 2011) closed at €182.87/share, and spiked up to €190.18/share a few days later. However, by mid-2012 (June) the share price had dropped to €39.40/share (-78.4% loss) and by the end of 2012 (one year and a half later) the closing price for Bankia shares reached €19.70/ share, representing a loss of -90.21% of the initial investment.

The share price continued to decrease, hovering around €2-€5 per share and arriving at €1.785/share (closing quote) on 20 September 2019. This means that investments were never recouped.

 

 

 

 

 

 

 

 

 

As a result, almost 300,000 retail clients lost nearly all their lifetime savings from bank deposits in a hazardous investment with preferred shares.

Fortis NV (NL) and Fortis SA/NV (BE) issued shares to retail and institutional investors in the course of 2007-2008. However, due to the announced acquisition of the banking group ABN AMRO, “the transaction put a strain on Fortis’s balance sheet” which triggered “drastic liquidity problems in 2007, resulting in a precipitous drop of its stock price”, affecting many individual share-owners of the bank (source).

The case was initiated by four retail financial services users’ organisations: Deminor (Belgium), VEB (Netherlands), SICAF (Netherlands) and FortisEffect (ad-hoc) and a Foundation (FORsettlement), established ad-hoc to supervise, monitor and administer the distribution of the Settlement Amount, in accordance with its articles of association”, according to the binding settlement.

The procedure followed the Dutch Model Collective Redress Act (WCAM), by which the parties must go through ADR and obtain a settlement which would then be validated by the Amsterdam Court of Appeals. A settlement was reached on 14/03/2016, which was later amended in 2017 and validated by the court in July 2018.

The agreed maximum Settlement Amount totals €1,308,500,000. The initial number of estimated affected shareholders was 220,000, but by 23 May 2019 roughly 266,000 early compensation claims were received (source).

The Foundation reserves the right to dismiss claims that are not eligible. The total fee requested by the four claimants totaled €45 million, or 3.43% of the settlement amount.

In May 2016, the Norwegian Consumers’ Council (Forbrukker Rådet) initiated legal proceedings against Den Norske Bank (henceforth DNB) for “closet index tracking” with index tracking funds sold as actively managed funds to retail investors. The class action was initiated on behalf of 180,000 clients of DNB, claiming restitution of the difference in fees and charges applied for actively managing the funds in question, amounting to NOK 690 million (€77.1 million).

This is because unit holders in passively managed, index-tracking funds paid an annual management fee of 0.3%, while those in actively managed funds paid six times more, i.e. 1.8%. The NCC filed the claim pursuant to the class action procedure, benefiting of an opt-out system, which allows all harmed consumers of DNB to benefit of the positive decision taken by Norwegian courts.

On the left-hand side are the annual returns (first graph) and cumulative returns (second graph) of an actively managed fund (blue) and that of its market index benchmark (red). As apparent, the returns display differences (positive and negative) between the performance of the fund and that of the benchmark from one year to another, while the cumulative performances break-off after a couple of years. 

 

 

 

 

 

 

On the left-hand side are the annual and cumulative returns of index-tracking funds, whose purpose is to perform as close as possible to the market index benchmark. Therefore, a “closet indexer” would look as follows: a fund that is sold as actively managed, but for which the annual and cumulative returns in reality overlap with those of the benchmark.

source: BETTER FINANCE own composition based on fund and benchmark data;

 

 

 

 

 

 

After the claim was dismissed in first instance, the Oslo Court of Appeals sustained the action of the NCC (30 August 2019) awarding an indemnification equal to NOK 345 million (€34.7 million) to all 180,000 customers, unknown to the NCC. The decision was challenged and is now pending judgement before the Supreme Court.

Our Position Explained

What do we mean by a “fully-fledged and proper collective redress mechanism”?

BETTER FINANCE wrote 70 pages of arguments supporting the cause of EU financial services users to finally benefit from a proper collective enforcement mechanism. Click on the links below to access the documents based on the topic:

I. Position Paper on the Collective Redress Directive
II. Working Paper 1: Articles 3, 5, 6 and 8 of the Directive
III. Working Paper 2: Article 2 of the Directive (Scope)
IV. Working Paper 3: Aligning the opt-out system with compensation claims
V. Working Paper 4: Definition of consumers
VI. Working Paper 5: Private International Law applicable to Collective Redress cases
VII. Working Paper 6: Consumer Protection provisions in key EU Financial law
VIII. Working Paper 7: EU Competence, Legal Basis and Subsidiarity
IX. Collective Redress Slideshow Presentation

What can you do?

Talks at EU level for a pan-EU collective enforcement mechanism have been ongoing for at least 24 years. Yet, we still seem far away from establishing a procedure that will be useful in practice and benefit consumers.

The EU Parliament believes it wrapped up the file. The Council of the EU may never reach consensus.

In the meantime, consumers affected by “Dieselgate” in the US have been compensated to the tune of  €30 billion, while EU consumers are still waiting for the trial to start.

Sounds fair? Not to us.

You can really help to sort out this situation, depending on your position:

– if you’re a consumer, ask your Member of the European or national Parliament what is being done to defend your right to access to justice and proper collective enforcement;

– if you’re a Member of the European Parliament, ask the rapporteur and the shadows what is being done to defend consumers’ rights to access to justice and proper collective enforcement;

– if you’re the rapporteur, please defend consumer rights and work towards a proper collective enforcement mechanism;

– if you’re a responsible Minister, propose the amendments put forward by BETTER FINANCE to defend consumers’ rights to access to justice and proper collective enforcement;

If you’re interested to read more:

We’ve uploaded the most important documents and links with information:

1) If you want to follow the procedure, know the main actors and steps forward, see here.

2) European Commission’s Proposal for a Directive on Representative Actions for the Protection of the Collective Interests of Consumers, which is currently under debate

3) The European Parliament’s amendments can be found here.

4) If you want to track our progress with this file, click here.