International Market Conduct Update
G20/OECD High-Level Principles on Financial Consumer Protection to be reviewed in 2021
It has been approximately 10 years since the G20/OECD High-Level Principles on Financial Consumer Protection (Principles ) were first introduced. As a result, the OECD Task Force has undertaken to review the Principles, as part of its 2021-22 work program. A questionnaire administered by the OECD Secretariat was distributed to the International Financial Consumer Protection Organisation (FinCoNet) members recently, seeking information and views related to new policy areas that could find their way into updated and forward-looking Principles. A public report with recommendations for revised or updated Principles, if any, will be issued once the review has been completed.
FinCoNet and OECD hold international seminar on performance-based regulation & financial consumer protection
Recently, the International Financial Consumer Protection Organisation (FinCoNet), in collaboration with the Organisation for Economic Co-operation and Development (OECD) Task Force on Financial Consumer Protection held a seminar to explore the topic of “performance-based” regulations and the approaches taken or proposed towards achieving better consumer outcomes.
The seminar was a virtual event, held via a Zoom video connection on March 17, 2021, and brought together financial consumer protection policy makers, regulators, supervisors, academics and other stakeholders. The event featured a presentation by Professor Lauren D. Willis, which was followed by a panel discussion on current and proposed thinking related to improving outcomes for financial consumers through the regulation and supervision of financial products and services.
Professor Willis gave a key-note presentation on her work relating to performance-based consumer law, which focuses on outcomes or objectives, rather than the means by which they should be achieved. As explained by Prof. Willis, it involves measuring the performance of regulated entities against those outcomes, rather than, or in addition to, measuring their performance against regulation based on conduct requirements. During her presentation, she examined why traditional regulatory interventions have failed and suggested that a new “performance-based” regulatory instrument would accomplish two objectives:
- Unite, through performance standards, the interests of financial institutions with the goals of regulators for consumer comprehension of suitable consumer products, thereby redirecting the creative potential of the private sector. As an example, Professor Willis points to how emissions standards have reduced pollution.
- Institutionalize a monitoring system that provides feedback on actual consumer comprehension and product choices, which can then be used to improve both the marketplace and regulation in a virtuous cycle.
Prof. Willis argues that a performance-based regulatory regime has the potential to incentivize financial institutions to educate consumers, develop products that align with their expectations and channel them toward products that are suitable for their circumstances.
The second tranche of the seminar consisted of a moderated panel discussion of leading jurisdictions who have developed and implemented performance-based regulation in the financial consumer protection sector. The panel included presentations from Katherine Gibson, Member of Transitional Management Committee, Financial Sector Conduct Authority (South Africa)(FSCA), Sze Gin Low, Director and Head, Market Conduct Policy Division, Markets Policy & Infrastructure Department, Monetary Authority of Singapore (MAS) and Alexander Smith, Head of Strategic and Cross-cutting Policy, Financial Conduct Authority (FCA), UK.
Gibson’s presentation introduced the new South African twin peaks regulatory model (similar to the Canadian model) which provides for separate authorities to oversee the prudential and conduct matters of South African financial institutions. She presented South Africa’s approach to regulation, which consists of a mix of principles and rules. The newly introduced Conduct of Financial Institutions Bill creates one law for the market conduct regulation of all financial institutions and provides for a consistent, proportionate, activity- and performance-based approach with the aim of ensuring appropriate customer outcomes. The FSCA is currently at different stages of implementing its hybrid approach across the sector, with the insurance policyholder protection work being well advanced but heavily rule-based and the standards/principles-based banking work lagging behind. The FSCA partnered with the International Monetary Fund’s (IMF) Consultative Group to Assist the Poor (CGAP) to develop and implement a customer outcomes indicatory framework, which has largely been embedded into the new Bill.
Singapore presented its outcome-focused approach next. The MAS representative, Sze Gin Low, presented the desired outcomes of MAS’ regulatory framework:
- Stable financial system;
- Safe and sound intermediaries;
- Safe and efficient infrastructure;
- Fair, efficient and transparent markets;
- Transparent and fair-dealing intermediaries; and
- Well-informed consumers.
Low argued that there is no single right way to achieve effective regulation and that this end is typically achieved through a combination of prescriptive rules and broad principles and outcomes, and placing responsibility on firms to deliver the outcomes sought. She indicated that existing laws and regulations are complemented by guidelines and that there is a shared responsibility between firms, industry and consumer associations and regulators to achieve focused outcomes. Low provided the example of the outcomes targeted by its “ fair dealing” guideline.
The shared responsibility model in Low’ s example requires Boards and Senior Management teams to decide how best to achieve the outcomes, to devise clear strategies to achieve them, to monitor the effectiveness of their strategies and policies and to demonstrate that their strategies, policies, systems and processes support the outcomes sought. In turn, the industry and consumer associations are expected to play their part by developing case studies and best practices, identifying areas of improvement, aligning codes of practice, conducting training and educating consumers. All of this, while the regulators continue to assess the ability of financial institutions to comply with the guidelines and take supervisory and enforcement action, which, Low argues, can also be outcome-based.
Low then described the mystery shopping exercise MAS conducted to assess the industry’s implementation of its fair dealings guideline. One hundred and twenty-six mystery shoppers seeking financial products made five hundred visits to banks and insurance companies. A panel of industry practitioner reviewed the fact finding process, product disclosure and product suitability. The results showed that the information collected from the shoppers by the financial institutions was inadequate to properly assess their needs, the disclosures lacked information on product risks, fees and charges, warnings, exclusions and the free-look period and that almost one third of all product recommendations were unsuitable.
MAS responded to these findings by enhancing its market conduct standards in three areas:
- Employee and representative competency – It added knowledge about complex products to its licensing exams and introduced an ongoing training requirement.
- Quality of sales and advisory – It introduced a balanced scorecard framework to incorporate non-sales key performance indicators (KPIs) in sales staff remuneration and introduced measures to address risks posed by the use of sign-on incentives and the large-scale movement of sales staff.
- Accountability for conduct – It required banks and insurers to create independent sales audit teams to perform post-transaction verifications and reinforced boards and senior management responsibility for delivering fair dealing outcomes.
Low concluded her presentation by sharing some of the results of the 2021 Banking Trust Index of Singapore (BTIS). Overall, the banking industry was rated as the fifth most trusted industry in Singapore, behind healthcare, education, technology and transportation. The study also found that sixty-three percent of Singaporeans rated their trust in banks as “high”.
The seminar concluded with remarks from Maria Lucia Leitao, FinCoNet Chair and Head of Banking Conduct Supervision at the Central Bank of Portugal (Banco de Portugal).
 Associate Dean for Research, Professor of Law, William M. Rains Fellow, Loyola Marymount University, Los Angeles, California (USA)
 “Performance-based Consumer Law: Incentivizing Firm Innovation to Meet Consumer Needs & Expectations”
 Mr. Smith’ s presentation was not available on FinCoNet’s website at the time of writing. The article will be updated once the information is posted.