GUARANTEE FUNDS IN FINANCIAL SERVICES

The defense of the consumers before insolvency situations of the banks, insurances and investment services

Introduction

Throughout history most of the states at any moment they have experienced more or less intense episodes of financial crises, although nevertheless the causes that cause them continue being not known. The economic cycles, factors as an alteration in the general economic situation and, specially, the incorrect management of the operators, are, doubtlessly explanatory elements of these, although of little sustenance in which is related to the search of efficient solutions that manage to avoid them. To such an extent that can even be said that the history of the financial crises is also the one on the attempts to avoid its repetition as well as its more negative effects.

The extension and improves of the information levels provided to the customer, the regulation and supervision of activities and the intervention of the authorities are some of the formulated proposals trying to mitigate the effects of such periods. Although in this problematic one it deserves special attention knowing how the different legal orderings solve, each one in its way, the situations of economic crisis of the credit organizations, still more when it is evident that as a result of the liberalization process that historically have been producing in all the European states exist a greater preoccupation for the subject, until the point that the figure of the guarantee fund which we will approach, it occupes a position of especial attention in the financial field as measurement of fundamental protection to endorse to the economizer - investor before possible situations of risk, and is that even from the own European Union has been tried to equip to all the States with minimum covers forehead to the appearance with these financial crises.

Although already the Directives relative to insurances forced the insurance companies at the time of guaranteeing their solvency to have certain amount of own resources, in which was called “margin of solvency", when it is possible to speak of a real European legislation in the matter is from the publication of the Directive 94/19/CE relative to the guarantee systems of deposits and the Directive 97/9/CE, relative to the indemnification systems of the investors.

With such norms they tried clearly in the communitarian scope to create an harmonization related to the Guarantee Funds in the banking and values sector, so that any citizen of the European Union could open a banking account in any State member and carry out banking transferences towards or from this account with complete surety.

Nevertheless, this wanted harmonization has not been fulfilled, coexisting in the communitarian scope diverse and distant levels of protection that cause a great insecurity in the consumer.

For all these reasons, we are going to analyze, among other questions, mainly the problematic ones to, which in this scope faces the consumer - user - investor, to develop simultaneously diverse proposals of normative evolution to obtain the most beneficial possible homogenization and improvement of the European legislations.

Analysis

The Funds of Guarantee have as main objective guarantee the commitments of the financial organizations with their customer. Such organizations have appear to cover a necessity of the European legal orderings as answer to a process initiated by the own European Union to equip all the States with a cover as opposed to the appearance of foreseeable financial crises.

A) GUARANTEE FUNDS OF THE FINANCIAL ORGANIZATIONS.

a) Bigger harmonization and increase of the guarantees of the Funds of Guarantee in the European Union.

Although in the European Union a great harmonization in relation to the Funds of Guarantee of the banking and values sectors has been obtained mainly though the Directive 94/19/CE relative to the guarantee systems of deposits and the Directive 97/9/CE, relative to the indemnification systems of the investors, it has been impossible to avoid that the same one has been in certain way incomplete, because different types of application based on the different States members persist.

Thus, although it is true that a minimum level of protection has been established that guarantees the return of a certain amount whatever is the Member State in which the credit organization is located, it is true that the minimum amount that will be object of that return it will vary depending on the legislation of each State, which evidently affects excessively on the wanted equality of treatment of the European client.

In the communitarian scope this cover supposes a minimum of 20,000 Euro for all the deposits or the rights of each depositor or investor, respectively, that the states members can combine with a limitation of the right of the depositor or investor to a specified percentage that cannot be inferior to 90% of the right.

Thus, for example, in Spain the traditional accounts and deposits (those known as impositions on credit fixed) are covered by the Fund of Guarantee of Deposits (FGD) that guarantees this minimum of 20,000 Euro by client, independently of the number of account he is titular. That is to say, if an investor has several accounts and deposits, the maximum guaranteed is calculated on the amount placed in all of them. If, for example, an account has two holders, to each one of them a maximum of 20,000 Euro is guaranteed.

Anyway, although we talk of the FGD as if it was one, in Spain exist three types of funds, one for each covered entity type: banks, savings banks and credit cooperatives. All of them try to guarantee the deposits in cash and in values constituted in credit organizations when some of the following circumstances takes place: first, declaration of bankruptcy of the organization. Second, judicial request of suspension of payments. And third, unpaimment of the required and payable deposits, with declaration of the National Bank of Spain that the financial situation of the organization disables to restitute them in an immediate future. However, the amounts placed in accounts and deposits that surpass the amount of 20,000 Euro, are not covered by the FGD. In these cases, the holders will have to wait till the processes of bankruptcy or suspension of payments will be solved to recover the amounts that surpass the limit covered by the FGD, process that could be delayed several years.

On the other hand the investment in shares is covered by the Fund of Guarantee of Investments (FGI). This fund was recently created with similarity to the FGD, being the amount that guarantees also 20,000 Euro for each investor. This fund covers the reimbursement of money, values and instruments that are deposited or registered in companies of investment services (societies and values agencies, mainly) and credit organizations (banks, savings banks and cooperatives) when these undergo some of the following situations: first, they have been declared in bankruptcy or suspension of payments. And second, when the CNMV declares that the company cannot fulfil the obligations contracted with the investors.

Finally we have the investment funds. These do not have any cover from the guarantee funds. The legislation establishes a series of cautions to guarantee the contributor one that he will recover his money in case of insolvency of the managing organization. The main caution is the effective separation between the managing organization, in charge of the transaction of values, and the depositor organization (the one in charge of guarding the values that acquires the fund). This last one must be necessarily a credit organization (bank, saving bank or cooperative), that it is supervised by the National Bank of Spain, or a society or values agency, that is supervised by the CNMV. The lodging plans have the same system of guarantees. The only difference with the investment funds is that the supervisor body who must supervise the managing organizations in this case is the Main Directorate of Insurances.

Seeing the negative experiences in the European Union, we think that it is necessary to rise this minimum that has remained really small, and even reframe the possibility of restoring a new system that offers a greater level of protection to users. In this sense we understand that the situation of the economizer-investors as opposed to the European banking sector reflects the necessity that the cover of the funds of guarantees will not be fixed as a concrete amount, but a cover through somewhat percentage. Definitively, we propose a system in which the cover will be more proportional to the amount deposited in the account, deposit or investment. From here the suggestion to modify the system towards a proportional cover though somewhat percent, that could be, as an example, 50% or even create a cover system that tends towards a mixed system in which a fixed amount is combined with an percentage of the amount demanded by the applicant.

We think that these proposals of cover are much more reasonable that those that prevails in the European scope at the moment, in such way that an individual investor-economizer who has put into the hands of a financial organization an amount inferior or similar to 20,000 Euro, he can be satisfied with the cover that the Guarantee Fund of Deposits and the Guarantee Fund of Investment offers him. Nevertheless the situation in which will be involved an investor with an inverted amount very superior to the legal limit will not be favorable. From here our main argument for the modification of the present minimum of legal cover of the Guarantee Funds and could surpass the limitation that the system supposes in the defense of the interests of the all consumers and users.

On the other hand, we think that would be also interesting to value the incorporation to the present system of cover of an update term, similar to which it is used in the insurance policies, that annually will evaluate the total of deposits and investments made in each state member to identify the necessity a modification in the amount covered by the guarantee system.

All these modifications should be always implanted accompanied of an iron control on the part of the communitarian and national administrations that avoid that the increase of the guarantees ends up repelling in the economy of the client, because we can not forget that all the proposals exposed until now would be implanted in the European scene generating their corresponding effect on the financial organizations, the situation would cause that the financial organizations had to face a series of contributions much more elevated, reason why they will be forced to have greater reserves in their balances to be able to face the payment of the new requirements that the guarantee system plans. When destining more money to reserves and, therefore, to reduce the money destined to deposits, the banks will decrease the proportion of capital in circulation, and therefore, and consequently, would obtain minor rentability with their investments. Which would generate small rentability to the financial organizations and could as well have as effect the possibility of an increase of the banking commissions, and even, as last instance a generalized raise of the interest rates in the economy.

b) Organic modification of the Guarantee Fund and its systems of operation.

Finally, we think that to guarantee the functional independence of the Guarantee Fund of Investment is necessary the creation of an instrument that allows the direct representation of the interests of the affected investing economizers. The exposition comes to be similar to the Spanish figure of the impositors in the General Assembly of a Savings bank. Within the managing society its form of Joint-stock company allows that there is a participation on it on the side of the shareholders, the companies of investment services adhered in the same proportion in which they carry out their contributions to the Fund, reason why in last instance the participation would be allowed to all who form the capital of such companies of investment services.

B) GUARANTEE FUNDS FOR INSURANCES.

The situation in the field of the Guarantee Funds for Insurances is much more difficult, to such an extent that it is perfectly possible that, within the framework of the liquidation of a same company of insurances, an insurance holder could be covered by a guarantee fund, whereas another person with an identical insurance contract is not protected or it is in smaller degree. The lack of harmonization in this field is bigger than in the Guarantee Funds of the Credit Organizations, affecting excessively the treatment equality, not only between insurance operators but also between insurance companies and other financial organizations.

In fact, the real thing is that at the moment there is no protection for a big number of insurance holders, the biggest part of the insurance holders of the European Union are not protected by a guarantee system in case of liquidation of the insurance company. Only some states members have guarantee systems of insurances and its cover varies considerably from a country to another one. Eight countries of the European Union have a guarantee system in which the insurances of nonlife are protected and six the insurances of life. It is only in three countries where exists a guarantee system which protects the not of life and life insurances simultaneously (Spain, United Kingdom and Malta). The lack of harmonization in this area creates a great number of gaps and duplications in the protection of the insurance holders.

For consumers it is not easy to know if they are covered by a system due to the different reach of the cover of the national regimes of guarantee (covered insurance holders, insurance classes, scope of territorial application, protection level), and to what extent, mainly in case of cross border activities (branch and free benefit of services). This lack of harmonization at communitarian level does not exist in other areas of financial services, as they are the banking and values sectors.

The adoption of the Directorate on reorganization and liquidation of Insurances companies has reinforced, evidently, the protection of the insurance creditors in case of liquidation though a system of general and special privileges. Nevertheless, when the company does not have sufficient technical provisions or depending on the type of demands to which it must do face, the remaining money can be non sufficient to pay all the creditors.

In a frame of increasing convergence of financial products it is difficult to justify, from a perspective of the single market, why a consumer who buys, for example, a saving product of life insurance to a company of insurances is not protected by a guarantee system, whereas the same consumer would be covered if he bought a product of almost identical saving to a bank. The protection of the consumer would not have to depend on if a product is bought in a bank or in an insuring company.

In Spain for example it is the mentioned Liquidation Commission the one that guards by the guarantee of all these assets. This organism guarantees any credit, whatever it is the quantity. In fact, it can demonstrate that it has given back the credits inverted in insurances to the 100%. As in all insurance, the main guarantee for the policyholder must be the solvency of the organization, by which it must guard the supervisor body of this activity, that is the Main Directorate of Insurances. In the case of the forecast insurance companies, similar in their activities to the insurers (although unlike these, the first ones they do not have shareholders, but all clients are mutualistics), the supervision function is transferred to the Autonomic Communities. These have developed their own supervision bodies depending of the Councils of Economy, which contribute to foment this lack of harmonization. The solvency level comes established in the insurers by the technical provisions, that must be sufficient to guarantee all the obligations assumed in contracts and to armor the stability of the company before oscillations of the sinisterness. In this way not only the banking accounts and deposits count on the endorsement of a liquidation organism, but also the insuring companies are under such system of protection.

As solution to this problem, we understand that in addition to the existing and future norms in the area of solvency, is necessary the creation of a "Guarantee Fund of Insurances" as last mechanism of intervention to assure the protection of the insured, other categories of possible plaintiffs and to assure the stability of the insurance agencies. Since the stability of these, or rather, the expectation of stability that the consumers have of them, is the element on which the confidence of the insurance holders is based and what bases the insuring industry like this. If a crisis supposes the destruction of this confidence, the incapacity to face the claims of the affected consumers still has a more devastating effect in the confidence that the insured deposit in the insuring organizations. The creation of a Guarantee Fund of Insurances would fortify the confidence around it and as a consequence would consolidate the own industry giving an incentive to the competitive scope and promoting a conscience of collective responsibility between the members of the insuring industry that would impel an improvement in the management of risks.

The Guarantee Fund of Insurances would allow to give the insurance holders a protection system much more flexible, fast and sure, which would avoid that the development of a guarantee system by each state member carried out to a situation of confusion, duplicity and finally, lack of protection for great amount of European insurance holders. The European Commission must be the one who sets the standards to follow by all the European States and will be later when each country will adapt the norm to the necessities that its own consumer market demands but always starting off of the guidelines that the European Commission has proposed previously. In its process of legislative harmonization the European Community will have to arrive at a consensus on the form that must take a Guarantee Fund of Insurances for all the members of the European single market, because first of all it is necessary to adopt a Guarantee Fund of Insurance uniform for all the states members.

The previous step is to establish a system of minimums for the insurance holders, a legal instrument of minimum guarantees binding at communitarian level that would establish the mutual recognition with the harmonization of certain fundamental norms.

This system would be coherent with the exposition followed in the effective legislation of the European Union related to the banking activities and the values sector. It would allow to accommodate different legal expositions and to adapt the already existing national mechanisms in the States members. Reason why the harmonization would be only focused in the necessary aspects for the correct operation of the single market, leaving to the legislation of each state member the more specific aspects.

As the Guarantee Fund of Investments they will be nourished, exclusively, with contributions of the adhered organizations, that will be established based on the number of clients and the deposited or registered capitals, although they have the possibility of arranging loans.

The present systems of guarantees have a varied scope of application. Whereas France, Ireland and Spain essentially follow an system of "origin country" (all the operations are covered with insurances under the supervision of the State member of origin), the system of the United Kingdom has an orientation of "reception country", although it also covers a certain free benefit of services in the United Kingdom.

The European harmonization towards a system of "origin country" could make appear certain problems, since citizen from an assured European country under the freedom of services by a company of insurances with seat in another European country, where there is a guarantee system with a lower level of protection than the offered in the country of the insured, it would not benefit from the same protection that if it had been done in his origin country.

In fact we face the situation that although a insurance holder has a contract with an authorized insurance company in a country in which exists a guarantee system, is not assured its cover in case of liquidation of the company. It exists also the possibility that even could remain without protection if the insurance has been contracted in a branch established in another country and this branch is not covered by the regime of origin guarantee. In addition, the requirements of transparency of the guarantee regimes vary too much from a country to another one: whereas in some States members this information is obligatory, in other this information is prohibited.

On the other hand, we face also that in the present guarantee systems of European insurances, the given protection varies considerably. In some cases the guarantee regime of insurances covers the totality of the demand of the insurance holders against the insurance company; nevertheless in others the cover level is limited to a percentage, or a maximum amount, or both.

The system of protection of life, health and accidents insurances in France that covers also the pending wrecks as the premiums non consumed, offers a cover of 90,000 Euro by death, 70,000 Euro by plaintiff in the life saving insurance and finally 90,000 Euro by disease, accidents and incapacity.

Another case is the Canadian case with 200,000 CAD (125,000 Euro) but 60,000 CAD (38,000 Euro) in effective value for life, health and accident insurances and 250,000 CAD (158,000 Euro) for the nonlife insurances.

In the case of Korea are 50 million Won (41,000 Euro) for life, health and accidents insurances, and for nonlife insurances.

The present system in the U.S.A. offers for life, health and accidents insurances, a cover of 300,000 USD (300,000 Euro), but are 100,000 USD (100,000 Euro) in effective value 100,000 USD (100,000 Euro) annuities of benefits and 500,000 USD (500,000 Euro) by health benefits. The demands of insured, beneficiaries, assignees and beneficiaries are covered by the system. For non life insurances insurances insurances insurances insurances insurances insurances insurances insurances insurances insurances are 300,000 USD (300 000 Euro) by property and responsibility 10,000 USD (10,000 Euro) by premiums non consumed. For this other case the cover responds the demands, including premiums nonconsumed, of insured and third covers.

Before such circumstance we think that it is neccessary to grant higher levels of protection than the established till now. The amount covered by the guarantee system in the insurance sector has to satisfy the total amount of the contributions done by the insurance holders.

Basing us and taking from reference the cover in non life insurances that is made in Japan with a 90% of the demand, we propose a similar system through the creation of a Guarantee Fund for Insurances. With this proposal we continue defending the alternative of cover through a percentage system instead of a cover through a system of minimum fixed amount.

We think that although the cover made for deposits in investments is considerably inferior, we must value that the insurance sector is an area that differs substantially from the banking societies or investment. Whereas in these sectors it is possible to choose more than one supplier to diversify, in the insurance sector it is much more complicated for the small economizer-investor. To this we add the factor that, the value of the assured goods is often higher, of such form that, many life contracts, by the fact of being long term, have a higher amount than the limits established within the banking sector.

We do not reject a mixed system of guarantee either. As a example, we could take as reference the case of the insurances (of life, health, accidents and nonlife) of the Irish system of protection that responds to a cover of the 100% of the first 2000£ (3,165 Euro) and to 90% of the rest of the demand without maximum amount. In this case, the cover also includes the pending wrecks as the premiums nonconsumed.

In this way, as in the Guarantee Fund of Investments the proposal for the Guarantee Fund of Insurances is that the cover of the funds extends to the money and values that the clients had trusted to the insuring companies, but, of course we understand that will not reach the losses of value of the investment or any credit risk, everything what corresponds to pure losses of investment. The complete protection of the Guarantee Fund for Insurances should cover also third plaintiffs.

In conclusion, to reach the persecuted aim of the European Union all needs firstly to seat the free market, for which it is necessary to create measures that eliminate the defenselessness sensation that at the moment it invades to the communitarian consumer when contracting in other States members, and that allows him to have the security of having guaranteed its savings before future and possible financial crises, it does not matter if they are communitarian, state or of a financial organization in particular.