Situation of the European and National Legislation of Financial Services, summary of the main international and national problems
in connection with consumers

Consumers protection at a European level in the financial services industry, should guarantee that there is previous information, being it sufficiently wide, complete and in comprehensible terms so that the consumer knows and becomes aware of all aspects of the service that are to be given or of the product that are going to contract before the moment of the performance or the contracting, even with a previous period of reflection that were the sufficiently ample and in its defect a possibility of revocation in conditions that allow their effectiveness. The current agile development of financial services transactions, the great amount of products and services, and the complexity of most of them could make difficult to a certain extent, the transparency that consumers demand. That is no obstacle to Community institutions dictating a regulation that not only would harmonize national legislations, but also would provide with an effective content of consumers protection, facilitating with priority the prevention of problems and providing the consumers with agile, effective and costless mechanisms of conflicts resolution.

In the financial scope, there is an urgent need to systematize the European regulation of consumer protection. It is possible to characterize the national and Community regulation, as dense, complex and dispersed, which is not synonymous of effectiveness, on the contrary, the application of all this legislation has been incapable to prevent that lately authentic financial scandals have arisen, that proliferate unfortunately every time with more frequency, affecting to more numerous and ample groups of consumers. But the greater problem is not than the existing norm has been insufficient to avoid the conflicts, but that it has been incapable to solve them. Suffice it to quote so illustrating cases as the scandal in Spain of the massive closing of languages schools that has left to hundreds of thousands of Spanish consumers, immersed in a conflict with the financial institutions, because they try that consumers pay a service that have stopped receiving and that have derived in a multitude of judicial proceedings, which are finishing with disparate solutions.

It seems that legislators are incapable to approve a norm that prevents the existence of conflicts, and they are pleased patching it to prevent that the same conflict will be repeated in the future, that is to say the financial institutions go ahead of the norm and they take advantage of their many deficiencies to avoid consumer protection and thus to increase their substantial income as they are at the cost of ignoring consumers rights. In this sense in Spain, only after the alluded scandal of the massive closing of Language Schools, the Law of Consumer Credit has been modified, which has not solved the problem of the affected consumers, it has only been partially patched to try to avoid that the same mechanisms are used to commit a law fraud, but with much probability it will not prevent that others will arise.

There is an excessive tendency to regulate activities of financial operators through self-regulation, ethical codes and codes of good practices, that limit consumer protection, because on the one hand, the code observance is controlled generally through administrative organs, their decisions being non-executive, and on the other hand, their writing is done behind the opinion’s back, and without taking into account a significant participation of the consumers themselves. And example of it can be found in the mortgage scope, in which a good practice agreement had the aspiration to reduce the level of protection acquired by Spanish consumers.

Bearing in mind that every member state of the European Union has developed its own system of consumer protection, it is due to make progress in the homogenisation of the protection given to the consumers in matter of financial services by the different national regulations. The lack of harmonization should be corrected with a binding European norm of compulsory fulfillment that achieves that consumers protection were of the same strength, independently of the member state where they were. If there is an essential aspect in consumers protection where lack of harmonization is more that evident is the one of the extrajudicial resolution of conflicts, that in the context of financial services is allowed to be excluded of the regular system through consumption arbitration. In Spain, it is not only allowed but also it is boosted, with self-regulations of their own figures, such as the called “Defender of the Client”, a figure that has not specific regulations in another sector, that has not the nature of arbitration, because it is imposed by the financial institution to the consumer, being this the one in charge of his / her financing. Moreover, specific administrative organs are created to solve consumers claims, resolutions that are not those but mere reports, because they not entail the parts, in difference with the arbitration decisions. As it may be seen, there is a special, differentiated and privileged treatment of financial institutions in relation to the consumer conflicts that arise. This treatment has not any justification, and allows to confer some advantages on these institutions, who are benefited from them, so it signifies that when there is somebody who is benefited, there is always another one harmed, in this case, self-evidently, the harmed ones are the consumers.

Specifying the most usual problems that consumers find at the financial services sector, in the European scope, that are the origin of their defencelessness, and suggesting some possible solutions, the followings proposals are made:

- Lack of information: a European regulation of compulsory fulfillment by the member States shall be enacted, in order to promote and guarantee the previous information to consumer. Lack of knowledge of their rights prevents consumers from demanding their rights. The consumer, before contracting, must know and understand all the aspects of the service that is to be provided with, this is achieved by forcing the financial institutions to mention in writing in a legible and detailed way the essential aspects of the contract. It is not enough that these aspects appear on the contract, but that would be precise that it was specified very clearly how must they appear, that is to say, place, order, size of the letter, etc.

But, it is not enough with this. The legal consequence of their lack of fulfillment of the required formalities of the financial institutions should be stopped, and they should not be others that the most favourable for the consumers, even ordering the contractual nullity and the restoration of the benefits, being favourable always to consumers.

In addition, it should be necessary to regulate the advertising in the financial sector, there can be no doubt of the great strength of the financial products and services in advertising. Great marketing campaigns are launched in mass media, encouraging consumption and contributing to a great extent to the over-indebtedness. So, a specific regulation in relation to advertising contents becomes necessary.

Finally, it must be allowed that consumer information does not come only and exclusively from the financial institutions, but it is necessary that mechanisms of compulsory fulfillment were established with the following purpose: all the available information should arrive to the Consumers Associations effectively, to be supplied to consumers themselves by the associations, providing the information with the characteristics of independence and neutrality.

- Period of reflection: as it has been said before, the gradually greater complexity of the financial products causes that most of the times, consumers are ignorant of what are exactly contracting. The precipitation that contracts are celebrated with, does not contribute to improve information that consumers have. It might hope that European regulation forced financial institutions to do in advance, a contractual offer to consumer before celebrating the contract, where its essential terms would be contained. In this way, at the moment of contracting, the consumer that had decided could be able to express in a conscious and mature way, his / her declaration of will, being fully aware, avoiding disagreeable surprises, that are generally insurmountable.

- Right to rescind: right to retract once signed the contract by the consumer should be guaranteed effectively, and more in this complex area. Moreover, it may happen that for a certain service it was not possible that consumer could carry out any previous reflection due to the dynamics and agility of the services itself. In these cases, depriving consumers of their right to rescind consent initially conferred, would be the same as leaving them in a state of total defencelessness. Rescindment should be able to be exercised in an easy way and with the minimum possible cost. Because, in another way, the obligation to observe excessive formulations and the existence of high penalties, would prevent consumers from their effective right demand, that would be to say that consumers lack of the right to rescind.

- Creation of new costs by the use of the services. It is clear that financial institutions manage to charge new costs to consumers for the services supplied, before the passivity of Public Authorities. The case of banking commission charges is paradigmatic and indicative of the defencelessness of financial services users. For the utilization of the same services, the financial institutions, are charging more and more commissions, increasing their profit account year by year. At the current time, the alternatives to avoid the abuse of these commissions not only at a national level but also at a European level are non-existent.

In Spain, each user pays the average of 176 euros per year of commissions in a basic banking operation, in other words, without taking into account loans or other products beyond a current account, a saving account, a credit and a debit card. That has its origin in the establishment of new commissions on services that were not charged before, and the increase of the amount of the existing ones. And, in spite of one might expect, it does not redound to an improvement of the services provided, on the contrary, sometimes, new intolerable limitations of schedules are settled down (payment of non-direct-debit bills are allowed by some institutions only at a very restricted schedule, and only two days per week), or some services are not provided any more (for example, window withdrawals if the amount is less than 300 euros, having the consumer to do it compulsorily in a cash machine, forcing customers to have at least a debit card with its corresponding commissions).

And the worst thing is not this proliferation of charges, it is outrageous that this is set, not observing the current feeble regulations with regard to this subject. Most of the times, the charges do not appear on the notice bard of the banking branch offices, and generally they are not previously informed to consumers as it should be compulsory observed. In view of this situation and given the common and absolutely extended practice of all financial institutions, the public administrations in incapable to put an end to this situation.

The solution depends on guaranteeing the right of consumers to receive the information of all the existing charges with a previous character, and to establish the consumer consent for the alteration of the initially stipulated commissions and charges. In the same way that the obligation that the cash machines inform consumers about the exact amount of the commission that is to be charged, has been introduced, it is necessary that consumers were promptly informed in an effective and reliable way about what the exact commission cost is for every service that is to be provided, and in the case of charges corresponding to services that previously were not charged, or assuming that the amount of the existing ones were increased, it is indispensable that consumers give their consent in writing, from the moment when the change is current, because this implies an alteration of the contractual conditions that demands the agreement of all the parties and they must not be imposed unilaterally by one of them, in this case the financial institutions.

- Imposition on consumers of linked products and services. The financial institutions, under the protection of lack of information of consumers about their rights, sell products and services that are linked to the main contract that is what the consumer just want to contract. A paradigmatic example is located at contracting a mortgage credit. The financial institutions knowing that the only insurance that is compulsory by law is the fire insurance, take advantage of the situation to make the consumer contract all kind of insurance with their own insurance companies (home, unemployment, accident insurance), forcing to have their salary, cards or other type of products paid directly into their bank account. It is necessary that this practice proliferation were limited, firstly, providing consumers with the right information about the non-obligation of contracting products and services that are connected, about their exact cost, and secondly, allowing consumers, once having contracted them, would easily dissociate themselves from them without any alteration on the main contract.

- Lack of transparency on fast consumers credit granting. At the current moment, there are many companies that offer almost immediate credits of a reduced amount. These companies launch appealing advertising campaigns where consumer is not informed about the real cost of the operation. The real fact is that interest rate that is to paid at the loan return are going to be higher that the regular ones of the market, but the consumer, blinded by the easiness of procedures and the immediacy with which is going to have his /her money available, does not consider this circumstance. The new European regulation of consumers credit should pay special attention to this kind of credits, emphasizing the previous contractual offer, the consumer right to rescind, the contract clauses stressing preferentially the mention of interests and other costs, and regulating the advertising contents in such a way that advertising does not mislead about the real cost of the loan.

- Temporary staff and limited training of the commercial areas of financial institutions. The financial institutions tend to a politic of staff constraint and labour costs savings, so the personnel that are involved in commercial tasks has scarced training. On the one hand, there is a high precariousness of employment, due to the fact that most of staff have temporary contracts, and on the other hand because they are lacking in appropriate training. Financial institutions tends to substitute 2nd degree graduates for 1st degree graduates, with the corresponding saving of labour costs that they imply. On the other side, payment by objectives achieving is encouraged, in a way that the more contracts or services are performed, the more staff is paid. The role of the financial agent is not also regulated specifically. All this results in consumer harm, because information that consumers are given about products or services that are contracted, comes from this kind of personnel, that lacks the proper training. It is necessary a regulation to be issued to obligate financial institutions to ensure that only qualified staff have contact with consumer, before and at the moment of contracting.

- Solvency and Guarantee of Financial Institutions. One of the basis of the financial system is in the confidence. Financial services users demand a system that guarantees that money that they deposit at the financial institutions is guaranteed. This system shall guarantee that it is possible to check effectively how is the financial and solvency statement of a financial institution before doing some contract with it. In Spain, there have some cases that show the ineffectiveness of the current mechanisms. Gescartera and “Eurobank del Mediterráneo” have been cases where consumers have not got any chance to check the real situation of their solvency with a previous character. Although there have been some advances at a European level with regulations that have set up guarantee funds that respond to consumers in case of insolvency of financial institutions, at a national level, its implementation has been late, in a completely different way and sometimes inefficiently. It is necessary to harmonizate all the national regulations with the statement of an updated minimum guaranteed amount, and at least with the same amount than the highest of the current ones in all the Member States. It is necessary to establish a system of protection or guarantee in the European framework and a unique European register has to be created. This register should be easily accessed by consumers, and it has to contain the entitled financial institutions, it has to supply financial information about their solvency rates and it has to grant a real application of consumers rights and good practices.

- Unfair Clauses. The contracts that have been signed by consumers with financial institutions are mostly adhesion contracts, where the consumer lacks in ability of negotiation of the general conditions, that are written previously and unilaterally by the financial institutions. Many times, clauses have an abusive character, because they restrict or limit consumers rights. In spite of the existing progress on protection against unfair clauses, they are not still sufficient, and the fact is that these abuses keep on being committed. It is good to create a register of contracting general conditions, but it is necessary to provide it of effective contents. It would be precise to establish the obligatory nature of previous registration of the general conditions in order to get a binding character for the consumers, being necessary that the registration would be given prior consent by an institution that examined if the clauses are or are not unfair. Consumers and users organizations should take part in this institution effectively. At present, there are only commissions or organizations, with a nominal participation of consumers, and whose decisions are not binding, that is why they lack effectiveness in controlling the abuse nature of general conditions clauses. The current system leads necessarily the control to be always “a posteriori” and always through the Courts of Justice. There is not doubt that with the actions of injunction, the Justice Administration has been given efficient judicial proceedings, and that theoretically should have the characteristic of speed. But for consumers solving conflicts uniquely and exclusively through the recourse to law is always expensive and provides a late solution. Moreover, when a consumer in particular reports a financial institution, this uses to try to reach an agreement with the consumer, in order to avoid the statement of nullity nature of the questioned clause, and keep it current for its application en masse to the rest of consumers. At present, regardless judicial actions, Consumers Associations do not count on other tools of extrajudicial nature, that permit unfair clauses to be eradicated from the general conditions. The most suitable system is the prior control of general conditions contents, in which Consumers Associations as representative of consumers interests are to have an outstanding leading role.

- Ignorance of extrajudicial systems of conflicts resolution. As it has been referred, financial institutions are allowed to have an own system of extrajudicial conflict resolution. In Spain, this special system is even encouraged, because some regulations have been issued to regulate the named “Defensor del Cliente”, hired by financial institutions and several administrative body of claims, named “Comisionados”, whose dicta are not binding on financial institutions if they are in favour of customers. So, even having this ineffective extrajudicial system of conflicts resolutions, consumers are ignorant of its existence, and the statistics of reports made by these administrative bodies present a claims number per year that is regrettable and meagre. Although it is compulsory to publish in the notice board of the financial institutions the name and address of the client defenders, they do not observe this obligation. The solution consists of making compulsory that a reference about extrajudicial systems of claiming was contained in a prominent place and in a readable and emphasized way in all the service supplying contracts.

- More and more complex products. The financial institutions, faced with the pronounced loss of profitability of traditional investments, for example, through the stock market, have designed new financial products with which they intend to transfer the probable loss to consumers in such a way that the institution is safe from market fluctuations. So, a new sort of atypical financial contracts where savings losses are accepted by the consumer, who does not know exactly the risk that is taking when contracting. In these cases, we stress again on the consumers lack of information causes by the bad commercial practices of financial institutions that omit to inform about the main aspects of the contract. Some proposals have pointed out to try to solve the consumer information shortage, that in this new contractual forms should be applied in a more strict way.

- Lack of supervision on financial institutions. In Spain, there has been recently clear examples showing that financial institutions lack of a supervision and control system that is effective to the consumers protection. The Gescartera case and the suspension of payments of “Eurobank del Mediterráneo” bank have implied that thousands of consumers have seen that savings that they have deposited vanished into thin air. Both institutions were being supervised by the competent state institutions, but the consumers were not advised of any irregularity of the assets. The supervisor body should have some liability mechanism against consumers when a supervised financial institution leaves consumers without the savings that they have deposited in it. In this way, the inadequate inspection would not affect the weakest parts that are consumers themselves. On the other side, it is necessary that consumers know effectively the sanctions that have been imposed by the supervisor body to financial institutions that acts in an irregular and/or illegal way. To that, they should be given the greatest possible publicity. Again, we point out that the informative and preventive tasks that Consumers Associations can perform on this field, would have maximum utility, and with this purpose, they should be supplied the appropriate resources.

- Consumer Responsibility in case of card payment fraud or error. As a result of the tendency to stablish at a European level the financial services consumers protection by means of methods named “flexible”, through agreements, recommendations, ethical codes, good practices agreements, etc, it is found that the consumers responsibility subject in case of card theft or loss, is regulated with a recommendation that far from being applied systematically by financial institutions is being ignored. The solution is very easy, and consists of elevating the recommendation to the rank of Community directive, so that it were a regulation that must be complied with by financial institutions.

- Consumers over-indebtedness. It is the fault of the current economic politics that encourages consumption as one their main factors, that consumers have reached a indebtedness level near the limit of their economic capacity. If there is a more or less significant increase of interest rates, it will involve the situation of family bankruptcy of many consumers that will not be able to face with the return of credit and loans that have contracted at present. For example, according with the last published data, just the mortgage payments are the 42% of the average wage in Spain, although the low interest rates of the last period. Unfortunately, there is no European regulation that prevents and gives solutions to consumers’ over-indebtedness. Firstly, solutions depends on prevention, in such a manner that the finance company would know the real situation of wealth of the consumer, and would have banned to exceed certain limits even though the opposite will of the consumer. In order to do that, easy access registers should be created, containing the level of indebtedness of consumers with financial institutions. And a European regulation of compulsory observation should be approved to regulate the situations of family bankruptcy, so the over-indebted consumer could delay his /her payments in time, according to his/her current and real capacity of returning debts. This system cannot be exclusively up to financial institutions, but it must manage the ways and forms of which the own consumers have an effective participation, being Consumers Association as their representatives, the ones that can best defend their interests in this scope.

- Safety of means of payment. The implementation of new technologies in the financial sector, as the Internet, electronic and telephonic banking, electronic wallets, etc makes that the effective regulation of safety of this means of payment use were a very urgent necessity. In this field, it seems essential that Consumers Associations participate effectively in the establishment, valuation and certification of the safety of the different means and ways of payment, and in this way, consumers confidence would be favoured, encouraging their generalised utilization and extension.

In conclusion, the new stage that the Commission seems to point out looks like appropriate. This consists of giving importance to discuss with consumers representatives before the approval of the regulations on the financial scope. This stage has started with the changes of Consumer Credit Directive, as long as this consultation involves after the approval of regulations of compulsory fulfillment by the Member States, that contains experiences and suggestions expressed by consumers, which grant their highest and most appropriate protection.

It is time to overcome the age of flexible regulations through recommendations, ethical codes or good practice agreement, that have involved just obstacles to consumers’ protection. It is time also to deal decisively with the creation of an harmonized European framework, that in no case should be a minimum harmonization, but binding regulations of compulsory fulfillment should be approved by the Member States, acting prior and urgently in the field of effective information to consumer, the opportunity to think, the chance to retract and the effective, fast and costless solution of conflicts.