Business conduct supervision in the financial sector
FinCoNet Annual General Meeting
Introductory remarks by Daniele Franco
Deputy Governor of the Bank of Italy
Rome, November 13, 2019
Good morning, I am happy to open the Annual General Meeting of FinCoNet, which
is now an important player in promoting sound financial market conduct.
The protection of financial consumers is now considered essential for a sound
financial system. Its importance grew in the aftermath of the global financial crisis. But it
is still a challenge to supervisors.
Financial consumer protection was not a supervisory objective until recently. For a
long time, it was assumed that an efficient capital market, effective competition among
banks, a deposit insurance system, together with prudential supervision and financial
market oversight were enough to provide all the protection actually needed.
In the late '70s, the relevance of information asymmetries in financial markets
was eventually recognized. This induced a change in perspective and new initiatives at
the national level, at the supranational level (such as the OECD Recommendation on
consumer protection in consumer credit in 1977), and at the EU level (such as the first EU
Directive on consumer credit in 1977).
Financial regulation originally focused on the reduction of information asymmetries
by imposing disclosure and mandatory formalities in order to enhance the comparability
of products and services. However, the market turmoil of 2008 together with several
studies in behavioral finance proved that this was not enough: disclosure and mandatory
formalities do not ensure that consumers take a decision in their best interest. Hence,
disclosure requirements have been complemented with business conduct requirements
aimed at promoting fairness by financial intermediaries.
Financial regulation in Europe now requires financial service providers to consider
the interest of financial consumers even before their products are offered on the market.
Product governance requirements impose that providers take explicitly into account the
interest of consumers when designing new products, and test them to assess if they will
really serve the interests and the needs of the consumers.
This evolution poses a number of challenges to supervisors dealing with financial
intermediaries' market conduct. For instance, there are still differences in the range of
tools and enforcement powers that conduct supervision authorities rely on in different
countries.
As in the case of prudential supervision, public enforcement typically relies on
on-site and off-site monitoring powers; but challenges for conduct supervision come
from the nature of the analyses required. While prudential supervision can typically
rely on a quantitative approach, the protection of financial consumers may require a
judgment-based analysis of the quality of customer relation arrangements.
Sanctions are of course an essential deterrence tool, and (again, differently from
prudential supervision) may be complemented by the power to impose the reimbursement
of sums unduly charged (which directly favor damaged consumers, differently from
sanctions).
Product intervention powers may further enrich the supervisory toolbox, preventing
harmful products from being distributed.
In addition to public enforcement, effective customer protection may also be based
on private enforcement tools. Complaint management, and effective alternative dispute
resolution (ADR) schemes enabling customers to seek redress, represent relevant tools.
Public authorities may have a role in establishing, or at least promoting, ADR schemes
for the financial system.
Last but not least, financial education programs may obviously complement
regulation and enforcement in ensuring effective consumer protection.
Overall, the work of FinCoNet over these years has become extremely relevant in
supporting the comparison and evaluation of supervisory instruments, the dissemination
of good practices, the analyses of critical issues, the formulation of policy proposals.
The Bank of Italy has also devoted a great effort to the development of a
comprehensive consumer protection framework in the Italian banking system. In 2009 we
established a Banking Ombudsman. In 2014, we established a new Directorate responsible
for business conduct supervision and in charge of financial education initiatives.
Since then, we have issued several Guidelines for financial intermediaries; the
Ombudsman scheme has given solutions to a very large number of complaints filed by
customers; banks and other financial intermediaries reimbursed over € 300 million to
customers; our financial education activities reach more than 100.000 students every year.
However, despite the steps taken so far, we are aware that we are still in the "early
age" of business conduct supervision. That is why FinCoNet meetings are important: we
believe that comparing practices, sharing knowledge and experiences are essential to
ensure financial consumer protection.
The agenda of this two days meeting is very rich. You will be able to analyze and
exchange views on several relevant issues: the tools available and their effectiveness, the
evolving context in your respective jurisdictions, the use of new technology in market
conduct supervision.
New technologies in the financial system challenge regulators and supervisors, they
open up new streams of products and services in a fast-changing market. The rise of
"open banking" and the increased accessibility of bank accounts by third parties represent
the most visible innovations in this field and are already contributing to reshaping the
financial landscape. Conduct supervisors must intensify the use of data and algorithms
to increase the efficiency and scope of supervisory actions.
On Friday, the International Seminar jointly organized by FinCoNet and the Bank
of Italy will provide useful insights on behavioral finance, shedding a light on how this
approach can be embedded in supervisory activity.