The Department welcomes the opportunity to respond to the European Commission s call for evidence.

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1 Irish Department of Finance s response to the Call for Evidence on the need for a coherent approach to product transparency and distribution requirements for Substitute retail investment The Department of Finance is responsible for the legislative and policy framework for financial services in Ireland, including in relation to consumer issues within the Government s overall framework for consumer policy. The Department welcomes the opportunity to respond to the European Commission s call for evidence. The Irish Financial Regulator has made a separate response to the Call for Evidence. In their response they state that in certain circumstances EU Intervention could be worthwhile and that while they accept that the features of competing will differ to a certain extent, they would welcome the introduction of a set of minimum requirements relating to disclosure, provision of information and advertising and marketing. We agree with the Financial Regulator s views on this. The Financial regulator also emphasised the absence of a harmonised set of suitability requirements in the field of retail investment. We would also like to make some specific comments on the text of the call for evidence document. 1. In the introduction to the call for evidence (page 6) it is stated that varying levels of investor protection embodied in different families of financial legislation may expose retail investors to different risks. It can be argued that investors are prepared to accept that different risks or levels of exposure to risk will arise in different families or forms of investment. However, they may be less willing to accept or adjust to the same range or level of risk arising within a family or class of product. 2. As far as the reference to national taxation policies on page 10 of the Call for Evidence is concerned, the point needs to be made that different fiscal regimes do not impede greater retail integration providing there is no discrimination against foreign providers. 3. One additional area that we believe the call for evidence should consider is financial services redress mechanisms. We appreciate that the Commission have taken a number of initiatives in the area of alternative dispute resolution mechanisms, including the launch of a network of National Ombudsman schemes. However there is a risk of variations in the composition, competence and standing of such schemes. On page 21 of the Call for Evidence reference is made to the idea of the industries developing self regulation. As pointed out in the recent European Parliament Report into Equitable Life there can in some cases be limits to the jurisdiction of voluntary industry based schemes. If the provider is not a member there is nothing these schemes can do to resolve a consumer s complaint. As regards the ten questions posed in the Call for Evidence the Department of Finance does not have comprehensive data in relation to market practices which would enable it to provide quantitative answers to the questions posed. Neither have we conducted an exhaustive comparison of the regulatory frameworks governing the individual investments. We have however sought to provide answers to the individual questions as best we can. 1

2 CALL FOR EVIDENCE ON "SUBSTITUTE" RETAIL INVESTMENT PRODUCTS Questions Question 1: Do you see that different regulatory treatment of substitute gives rise to significant problems? Please explain why you consider this to be the case. Neither market participants nor consumers have raised the issue with us. Question 2: Do you regard the perceived concerns relating to different levels of product transparency and intermediary regulation as a significant threat to the further development of EU markets for retail investment? somewhat agree Question 3: Is it appropriate to regard different retail investment as substitutable - regardless of the legal form in which they are placed on the market? Which of the listed below should be considered as substitute investment? - UCITS funds yes - nationally regulated retail funds yes - exchange traded or listed funds yes - unit-linked life insurance (especially which mortality risk level is small or nil) yes - retail tranches of structured notes no - some annuities; yes - some bank term deposits (e.g. with embedded optionality or structured deposits) yes - others (please list and describe) The bulk of annuities would not be substitutable. What are the features/functionalities (holding period, exposure to financial/other risk, capital protection, diversification) that lead you to regard them as interchangeable? Have you encountered any legal or other definition which would encompass the range of 'substitute investment '? 2

3 In relation to the that we have identified above as interchangeable, the features/functionalities that have led us to regard these as interchangeable are the holding periods, diversification and exposure to financial/other risk. We have not come across any definition for substitute investment. Question 4: Which factors in your opinion drive the promotion and sales of particular investment? Please use the table below to rank these factors in terms of importance (very significant; significant; no opinion; insignificant) for each of the different. In addition to completing the table, we would welcome further explanation of your view as to which factors are particularly important for each product. UCITS Nonharmonised funds Unitlinked life insurance Retail structured Annuities (Structured) Term deposits Taxation Financial innovation Cultural preferences Distribution models Regulatory treatment We have no hard evidence or market based data on the factors that drive the promotion and sales of particular investment. However we suspect that in the domestic market the two main driving factors are:- cultural preferences, distribution models (for example availability of intermediaries) From the purchaser s point of view tax efficiency may also be a factor. 3

4 Question 5: Product disclosures: Do pre-contractual product disclosures provide enough information to help investors understand the cost and possible outcomes of the proposed investment? Please use the attached tables to provide your evaluation of the adequacy of the information provided with regard to the following items for each category of investment product. Nature of information provided UCITS Nonharmonised funds Unit-linked life insurance Retail structured Annuities (Structured) term deposits Product features Direct costs Indirect costs (or foregone performance) Risks Capital guarantee Likely performance Conflicts of interest Compensation or fee retrocession We have no market based data on which to provide an answer to this. In the absence of some insight into investor needs, preferences and behaviour a comparison of the legal requirement in relation to each product is likely to be of limited value. 4

5 Question 6: Conduct of business rules: Do differences in conduct of business regulation result in tangible differences in the level of care that different types of intermediary (bank, insurance broker, investment advisor/firm) offer to their clients? For which conduct of business rules (know-yourcustomer, suitability, information/risk warnings) are differences the most pronounced and most likely to result in investor detriment? UCITS Nonharmonised funds Unitlinked life insurance Retail structured Annuities (Structured) Term deposits Know your customer Suitability or appropriateness Risk warnings Examples - information In Ireland practically all financial service providers are regulated by the Irish Financial Regulator (FR). These include banks, insurance brokers and investment advisor firms. The FR has a unified Consumer Protection Code (the Code) for all the entities it regulates. The Code contains common rules include know your customer and suitability rules applicable to all regulated financial service providers. In the case of other such as tracker bonds which are not subject to a specific disclosure regime the Code also requires that brochures and application forms contain appropriate information and warnings. The Consumer Protection Code does not apply to the provision of services covered by the Markets in Financial Instruments Directive (MiFID). However the Code s provisions are consistent with those contained in MiFID which means that a similar regime applies to investment type provided by life assurers, long term deposits or certain types of bonds as applies to the investment provided by MiFID firms. This ensures that a consistent level of pre-contractual information is provided to potential investors. However the FR s remit in respect of pre-contractual information and conduct of business requirements does not extend to some other choices available to potential investors such as structured. These are subject to a lighter regulatory regime and the FR, in their response to this Call for Evidence, would like to see the same pre-contractual information requirements extended to them particularly as some of these can be quite complex and include elements such as gearing which need to be clearly explained to potential investors. Question 7: Conflicts of interest: Are there effective rules in place to ensure effective management/disclosure of conflicts of interest (and/or compensation arrangements) by the different categories of product originators and/or intermediaries for the different types of investment product? 5

6 For which type of product do you see a regulatory gap in terms of the coverage of conflict of interest rules? Please explain. As stated above the FR s Consumer Protection Code has a number of common rules that apply to all entities the FR regulates. One of the Common Rules relates to Conflicts of Interest. This rule provide that a regulated entity:- cannot carry on business with a consumer with whom it has a conflicting interest unless that consumer has acknowledged, in writing, that he/she is aware of the conflict of interest and that he/she still wants to proceed, must ensure that it s employees do not offer any inducement likely to conflict with any duties of the recipient or of the recipient s employer, must not enter into a soft commission agreement unless such an agreement is in writing. In addition the rules set out some requirements in relation to soft commission agreements. An evaluation of the Consumer Protection role of the Financial Regulator later this year may give further insight into the effectiveness of this regime. Question 8: unfair marketing / misleading advertising: Is the risk of unfair marketing / misleading advertising more pronounced for some product types than for others? If so, why? Can you point to concrete examples of the mis-selling of the different types of investment product resulting from unfair marketing / misleading advertising?" We have not come across any concrete examples of mis-selling. The FR s Consumer Protection Code has specific rules relating to the advertising of by those that the FR regulates. These rules consist of general rules that relate to the advertising of all financial service and specific rules that relate to specific types of. The rules apply to the type of being advertised and not to the type of supplier. The existence and enforcement of these rules, coupled with the availability of a strong statutory financial services ombudsman seems to have reduced the scope for mis-selling in recent years. Question 9: Is a horizontal approach to product disclosures and/or to regulation of sale and distribution appropriate and proportionate to address the problems that you have identified? Can you specify how this objective of coherence between different frameworks would address the problems? What are the potential drawbacks of such an approach? Given that the same type of are supplied by different types of entities we consider that a horizontal approach to product disclosures and to the sale and distribution of such is appropriate and proportionate. It is easier for consumers and providers to understand one code. When the need arises the Code can be extended to new or providers as they enter the market. 6

7 Question 10: Can market forces solve the problems that you identified (fully/partially)? Are there examples of successful self-regulatory initiatives in respect of investment disclosures or point of sale regulations? Are there any constraints to their effectiveness and/or enforceability? Are you aware of effective national approaches to tackle the issues identified in this call for evidence? Should it be left to national authorities to determine the best approach to tackling this problem in their jurisdiction? Is there a case for EU level involvement? Please explain. We do not believe that market forces can solve the problems in this area, nor are we aware of successful models of self regulation. As pointed out in the recent European Parliament Report into Equitable Life there can in some cases be limits to the jurisdiction of voluntary industry based schemes. If the provider is not a member there is nothing these schemes can do to resolve a consumer s complaint. We believe that in certain circumstances EU intervention could be worthwhile. In a single market investors should ideally be able to access similar information and contracts. Ideally there should also be dispute resolution systems of equivalent competence, independence and cost. Without EU intervention there is too much potential for drift and divergence between member states. 7