First, I would like to thank TISA for their kind invitation to speak at this important event. It comes at a crucial time, as discussions around Capital Markets Union have begun in earnest, with some concrete proposals now on the table, and the European Commission having released a couple of months ago its roadmap for a Green Paper on retail financial services and insurance- one of the areas that Commissioner Hill has said from the beginning of his appointment that he wanted to prioritise.
Lord Hill has stated that three principles need to inform activities to improve the landscape for European savers: transparency, choice, and competition. I will speak briefly about each before moving on to consider three other principles that appear to me to be equally important: value for money, equity, and adequacy.
Hill has stated that by transparency, he means "ensuring that consumers are not pressured into accepting certain prescribed products or services, and have good, clear information on which to base their decisions". This includes providers being open about both incentive and cost structures.
There have been a whole raft of measures introduced at EU level over recent years to try and promote transparency. These include the Mortgage Credit Directive, PRIIPS, the Payment Account Directive in both its incarnations, and MIFID. However, as the Socialist group lead for MIFID II/MIFIR, I am well aware of some of the barriers to introducing further transparency over the costs of providing financial services, particularly when some maintain that this will reduce the ability to cross-subsidise other activities like research into new investment opportunities.
Over the long run, it may well be societal rather than regulatory developments which have the largest impact on transparency. Digitalisation is of course key here, not least through comparison websites. An interesting report released by Deloitte last year highlighted how this may well, over the long term, reduce incumbent banks' abilities to cross-sell, and lead to a situation where they must either focus on a smaller range of very competitive financial products, or on a much stronger model of relationship-based banking. The former option is great for financially and internet-literate consumers, or those who benefit from advice from independent financial advisors, but not so helpful for those who may struggle with taking large financial decisions on their own.
For Lord Hill, choice appears to involve both enabling savers to benefit from products provided by foreign suppliers, and shifting out of bank deposits and other more traditional methods of saving, and towards capital markets.
Certainly, very few EU consumers currently use banking products, for example, from other countries. As of 2012, Eurobarometer suggested this applied to less than one in thirty European consumers. However, one in ten said that they would potentially be interested in consuming products from another country- so there does appear to be potential there. Above all, we must ensure that those travelling between European nations for work or family reasons are not financially disadvantaged as a result.
In addition, many have pointed to the lower likelihood of European consumers purchasing products through the capital markets, compared with their US counterparts. I am rather sceptical of some of these arguments. First, the US system has been built up over decades and is a reflection of a patchy social security system, which few European citizens would wish us to emulate. Secondly, it is legitimate to ask whether lending to family and friends, for example, is really an efficient method of allocating capital across the economy. It may be good for social cohesion, but we can question whether it is always efficient. And finally, we must be wary of wishful thinking, in the light of existing misselling scandals, such as those around Payment Protection Insurance within my own country. In addition, governments have not proved to date to be especially competent at promoting financial education, with significant concern, again, in my country, about whether sufficient high-quality advice will be available for pensioners looking to cash in their annuities. It is not clear to me that European consumers will have the tools they need to obtain a good deal, if they shift decisively away from traditional banking as a means of saving.
Nonetheless, the hope of the European Commission appears to be that once these opportunities are opened up, competition will help drive down price and cost differentials between countries and functionally similar products.
As Lord Hill himself has noted, however, trust is key to facilitating saving. Again, many measures have been undertaken at EU level to shore up savers' trust in the financial system, from Banking Union to the Single Resolution Mechanism and deposit guarantees.
But here perhaps I might respectfully question some of his conclusions. He has suggested that 'risk mitigation and security are an essential element of any financial services policy. But they should accompany, and not stand in the way of, innovation and new product development'. I do not agree. Product design can, and should, be conducted with a view to reducing risk fopr consumers who often have very low levels of financial literacy and, indeed, numeracy.
Overall, I believe that three other principles need to be at the heart of policies towards saving: value for money, equity and adequacy.
First, I would like to see a more muscular approach being adopted to questions concerning the value for money obtainable by consumers. Given the low level of cross-border consumption of financial products as things stand, there is a role for legislators to undertake comparisons themselves, and act on them where necessary. I see a parallel here with arrangements for supplying finance to SMEs, which appear to vary wildly between member states.
In addition, we need more informatino at EU level on issues like the availability of financial services in the first place, particularly in disadvantaged communities and to disadvantaged groups. This is far more developed in the US, where banks are required to report regularly on who they supply financial products to- and ultimately to justify apparent gaps in provision. I believe a similar approach would benefit Europaen consumers as well, not least given widening gulfs in access to bank branches and internet bankin.
Another element of the second additional principle we need to bear in mind- equity- is the need to consider womens' generally lesser ability to save across Europe. This is a particular problem in countries like the UK, with a contribution-based state pension system. Auto-enrolement into occupational schemes can help, but in Britain the current system has been deisgned in a way that shuts out people undertaking more than one low-paid job- the majority of whom are women and the very people who have the largest need to save.
Finally we come to the principle of adequacy. Many European consumers who wish to save are finding it incredibly difficult to do so, simply because of the paucity of their incomes. Around a third of British people, for example, lack the savings to deal with an eventuality like a cooker or fridge breaking down. It is little wonder then that many people end up being pushed into expensive methods of borrowing. This may be part of the reason why, again in my own country, projections on the savings ratio were, as of last year, set to fall rather than rise. We need to see more of a focus on these kinds of issues, of feeble, precarious and inadequate incomes, at EU level, particularly within elements like the European Semester. Ultimately, it is better-off taxpayers who will bear the brunt of a lack of savings by those who are less well-off, through means-tested benefits.