EC CONSULTATION DOCUMENT ON THE STUDY ON TYING AND OTHER POTENTIALLY UNFAIRCOMMERCIAL PRACTICES IN THE RETAIL FINANCIAL SERVICE SECTOR

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1 Fédération Française des Sociétés d'assurances Le Interest Representative Register ID : Pages : 5 EC CONSULTATION DOCUMENT ON THE STUDY ON TYING AND OTHER POTENTIALLY UNFAIRCOMMERCIAL PRACTICES IN THE RETAIL FINANCIAL SERVICE SECTOR FFSA POSITION PAPER The French Federation of Insurance Companies is a trade association which groups together 211 insurance and reinsurance companies representing 90% of the French market. In particular, its purpose is the promotion of insurance and reinsurance, the defense of the interests of the profession and the establishment of common ethical standards. The FFSA welcomes the opportunity to respond to the European Commission s consultation on the study on tying and other potentially unfair commercial practices in the retail financial service sector. The FFSA would prefer to provide general comments on the findings of the study rather than to answer directly the questions contained in the consultation document. 1 General comments on the study The FFSA recognizes the work done by the CEPS for trying to present a comprehensive and qualitative inventory of tying and potentially unfair practices. However, in view of the poor response rates (only 66 responses to a questionnaire that was sent to 6,529 financial institutions and 430 national organizations and associations), the study doesn t seem to reflect the reality of the market. Moreover, the FFSA has experienced some difficulties in recognizing the practices pointed out by the study for France. This is due to the lack of illustration of these practices and also to the inconsistent use of terminology to qualify them. For example, the study does not make a clear distinction between the concepts of "product tying" and "product bundling" at times seemingly being referred to interchangeably, without a clear understanding of their distinction. The same lack of distinction is to be stressed concerning the concepts of pure bundling and mixed bundling. In France, it is said that legislation forbids tying sales, which is true. The study acknowledges the high level of the French legislation which transposed perfectly the UCPD Directive and has adopted specific policy initiatives. During 2010, the future Loi Lagarde will provide consumers with the choice between several payment protection insurance contracts when they sign a loan. 1

2 As it is developed in the study, France is one of the most regulated countries on the matter of unfair commercial practices as well as tying sales. Even if Member States can go further on the provisions of the Directives for financial services, the CJEU ruling, of 23 April 2009 known as Total Belgium, points out that the definition chosen by the French consumer code in article L122-1 is more severe than the one chosen by the European directives. Therefore, the court of appeal of Paris issued a ruling on may 14 th 2009 (known as France Telecom and Orange Sports of the 5 th chamber of the court of appeal of Paris) and considers that article L122-1 of the French consumer code is incompatible with the regime established by the European directive since it generally and preventively bans subordinate offers without analyzing their unfair characteristics regarding the directive. Nevertheless, examples of tying sales are mentioned in the study for France. At this stage, the FFSA would like to stress the difference that has to be made between multiple risk coverage and practices where several financial services or several insurance contracts are bundled up. 2 Multiple risk coverage As an example of tied sale, the study cites home insurance. The FFSA understands that it is about multiple risks home insurance. This package was created as a result of the strong lobbying carried out by the consumers. The idea is to supply coverage against several relevant home risks within the same contract and therefore the same premium. A multiple risk home insurance contract generally includes liability insurance (that was requested by the authorities and the consumers) fire insurance, water-damage insurance and sometimes theft insurance. They both wanted to cover as many people as possible to avoid serious financial consequences of their liability and to provide victims with compensation. With this example, the study may hint that multiple risk home insurance is necessarily coupled with natural catastrophy insurance, technological catastrophy insurance, storms insurance and terrorist act insurance. These four types of guarantees are mandatory and are imposed by the French law. The underlying principle of these guarantees is that from the moment the insured person subscribes to the multiple risk home insurance policies, these four guarantees are imposed on him. The aim of course is to cover most of the French population against these risks. The FFSA stresses that the aim of the authorities is in line with the professional players in the industry. Indeed, the wish to supply guarantees against different risks in one contract allows a higher pooling of the risks therefore offering an appropriate premium and compensating the disaster victims with the common amount of premiums collected. As a matter of fact, it would be much more expensive for the consumer to pay each coverage policy separately. Concerning coverage policies against theft, fire, water-damage and liability, they establish a requested individual guarantee due to a collective technique of pooling the risks. Moreover, the amount of the premium is calculated on an individual basis according to seriousness of the covered risk. On the contrary, the mandatory coverage imposed by the law is based on the principle of national solidarity, the amount of the premium being undifferentiated, unattached to the value of the covered risk. In both situations, the idea is to supply an almost universal coverage, considered as essential guarantees by the consumer as well as the authorities. The FFSA has not recorded any request for the splitting of different guarantees of multiple risks home insurance. By contrast, the FFSA acknowledges request for additional guarantees in this particular product. 2

3 3 Multiple services The FFSA doesn t understand some examples of tied sales which appear to be incorrect: Home insurance coupled with motor insurance policies or payment protection insurance coupled with health or disability insurance cannot be tied in France as tied are strictly banned. The FFSA hasn t seen any real life examples of tying health insurance or motor insurance with another non financial products even so the study mentions with low accuracy several critical cases in France and Poland. These two first examples can only be combined marketing offers, a practice also common within other industries. The consumer can find these products separately on the market, and is in no way forced to subscribe to the two products. Life insurance and portfolio management : Three kinds of «portfolio management can be found: - The insured person can handle himself or herself the portfolio - The insurer can handle for him or her his portfolio - The insured person can ask some other firm to manage it for him or her. These are not tying sales but different methods of execution of the life insurance contract and the management of the units under unit linked insurance contract cannot be separated from the contract itself. 4 Consumer protection The scorecard analysis on the customer impact test suggests that France doesn t fulfill the criteria for consumer protection. This statement is particularly surprising when the study itself acknowledges that the French legislation is particularly protective for consumers and that there is no impact on the competition. (No negative results on antitrust test.) 4.1 The legislation As said below, the consumer remains free to purchase the products separately from the same or different providers. If the market has developed crossed offers it is because such practices are convenient for consumers who find an advantage in a premium offering a rebate, a single distributor and therefore a single interlocutor in case of damage. From an insurance perspective, combined product offerings help the consumer to benefit from lower premiums for several products through economies of scale. The study denounces the switching costs as barriers to exit for consumers and asserts that the practices under scrutiny negatively affect customer mobility. In France, it is not the case. Except for life insurance, all natural persons have the right to cancel their contract each year without any cost, which makes mobility easier. Thanks to the Chatel law, insurers have to better inform their policyholders on this right by recalling the date of termination of the contract and the delay to cancel when sending the request for premium. Moreover, for health insurance, insured persons can terminate the contract every year while insurers are not allowed to ask for cancellation even in the case of increased risk. The study also denounces limited information on the second product. As for insurance product, this would be against the national duty to provide the subscriber with a detailed estimate and a description of the main characteristics of the contract before its conclusion. It would also be conflicting with the duty of advice in insurance. Under IMD, the intermediary has to provide the subscriber with a written advice on the insurance product. 3

4 4.2 The turn over The issue of practical convenience and satisfaction in dealing with their provider is a strong reason for consumers to remain loyal to their current provider. This has particular significance in the insurance sector, where consumers are risk-averse in their decisions. Nevertheless, in France, there is an abundance of consumer bodies and organisations advising consumers on the different products and offers. The growing success of comparison websites shows that French consumers feel quite free to leave their insurer for another. Contrary to the statement in the study, consumers have the choice to purchase combined products or services and there is no coercive behaviour on the part of the provider. As a result, the turnover remains important in France. For example: Concerning motor insurance the turnover of contracts reaches nearly 17% in Concerning multiple risk home insurance the turnover for 2008 is nearly 12% a level which remains slightly lower than auto insurance. 25% 20% 15% 10% 5% 0% ,4% 21,2% 16,8% 16,6% 14,3% 14,7% 12,1% 11,8% Résiliations Affaires nouvelles Résiliations Affaires nouvelles Auto MRH (Study Home Insurance in 2008, detailed results, FFSA-GEMA) Concerning the distance marketing of financial services, the commission itself concludes in a report that the lack of t development of the distance selling is not due to legal problems but more to language barriers and cultural behaviors. Indeed, consumers are therefore understandably more cautious in dealing with a new foreign entrant than a company that has been established in the country for decades. The commission itself recommends not revising the directive DMD for the moment. 5 Lack of anti-competitive impact The study outlines that the features of the French market are obviously sufficient to insure a competitive market through its diversified insurance distribution channels and its multiple insurance firms. On a competitive market, mixed bundling sales contribute to the variety of supplies. Generalizing "standard" contracts would go against competition, innovation and would not meet the consumer's need. The study acknowledges that the practices identified are not found to be anti- competitive in nature. It also notes that bundling or integrating two or more components into one contract can lead to significant savings in production, distribution and transaction costs, and to improved quality. Finally, the study recognizes the practices may have positive effects for both provider and consumer. It is important to highlight that in addition to the efficiencies and benefits to consumers, there may be significant ramifications associated with precluding 4

5 or prohibiting combined product offerings. Where combinations of insurance products are sold together, consumers can be assured of receiving the optimal level of insurance coverage to meet their needs. 6 EU legislative action In addition to the various national rules and legislation in place, further EU measures mentioned in the study that can deal with the practices in question already apply to the retail financial services sector, such as the Unfair Terms in Consumer Contracts Directive and the Insurance Mediation Directive (IMD), which guarantee a high level of protection of consumers interests by ensuring advice and assistance that is tailored to meet their specific needs, and addresses any potential concerns over informational asymmetry. Therefore, sufficient legislation is already in place to tackle the practices analysed in the study, and there is no evident need for the introduction of further specific rules in this area. 5