EU proposals to improve confidence and protection in financial services revealed

Written by Ray Clancy

Monday, 19 July 2010 10:24

The European Commission has unveiled its proposals to boost consumer protection and confidence in financial services and prevent and future crisis.

As well as changes to existing European rules to further improve protection for bank account holders and retail investors it has also launched a public consultation on options to improve protection for insurance policy holders, including the possibility of setting up Insurance Guarantee Schemes in all Member States.

For bank account holders, the new measures mean that in event of a failure they would receive their money within seven days, faster than before, would be covered for up to €100,000 and be better informed on how and when they are protected.

For investors who use investment services, the Commission proposes faster compensation if an investment firm fails to return the investor’s assets due to fraud, administrative malpractice or operational errors, while the level of compensation is to go up from € 20 000 to € 50 000.

Investors will also receive better information on when the compensation scheme would apply and get better protection against fraudulent misappropriations where their assets are held by a third party such as in the recent Madoff affair.

The proposals, which are fully in line with the EU’s commitments under the G20, are now passed to the European Parliament and the Council of Ministers for consideration.

‘This package marks the Commission’s latest endeavour to bring transparency and responsibility to Europe'’ financial system in order to prevent and manage future crises. European consumers deserve better. They need reassurance that their savings, investments or insurance policies are protected no matter where in Europe they are based,’ said EU internal market and services commissioner Michel Barnier.

The changes mean that 95% of all bank account holders in the EU will get all their savings back if their bank fails. Coverage now includes small, medium and large companies as well as all currencies. Excluded are all deposits of financial institutions and public authorities, structured investment products and debt certificates.

Faster payouts will be a major improvement as today many account holders wait weeks, even months, before getting their money back. In order to facilitate such a short payout, managers of Deposit Guarantee Schemes will have to be informed early about problems at banks by supervisory authorities. Banks will have to specify in their books whether deposits are protected or not.

There will also be less red tape. For example, if you live in Portugal and have your account at a failing bank whose headquarters are based in Sweden, the Portuguese scheme would repay you on its own initiative and act as your contact point. The Swedish scheme would then reimburse the Portuguese scheme. This would be a strong improvement over the current situation, where all correspondence has to be done via the scheme of the country where the bank’s headquarters are located. The new approach will mean less bureaucracy and faster payouts.

Deposit Guarantee Schemes will be more soundly financed and banks will be able to offer competitive products throughout the EU without being hampered by differences. And taxpayers will benefit from a better financing of schemes, rendering state intervention much less likely.