Second Consultation on Review of Consumer Protection Code Consultation Paper CP 54
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SECOND CONSULTATION ON REVIEW OF CONSUMER PROTECTION CODE
CONSULTATION PAPER CP 54
BACKGROUND
1.1 The Central Bank of Ireland is committed to the provision of a comprehensive consumer protection framework which sets out requirements for regulated firms when dealing with consumers. On 28 October 2010, the Central Bank of Ireland published Consultation Paper CP 47 Review of Consumer Protection Code (CP47) setting out proposed new and amended requirements in order to strengthen the existing Consumer Protection Code (the Code) which was introduced in July 2006, with an Addendum issued in May 2008.
1.2 Our overriding objective continues to be the strengthening of the consumer protection framework and the introduction of revised measures which will benefit consumers in their dealings with regulated firms. To this end, the revised Code, once implemented, will provide a number of additional protections for consumers of financial services along with enhancements to existing provisions.
ANALYSIS TO DATE
1.3 51 submissions were received in response to CP47, all of which are available on our website at
www.centralbank.ie. The submissions received represented a cross section of interest from consumer representative bodies, financial institutions, trade bodies, representatives from the voluntary and community sector, regulatory bodies, individuals and academics. We would like to thank all those who made submissions to us on this very important topic.
1.4 We have undertaken a robust analysis of comments received during the consultation process in addition to undertaking some further research and analysis of the issues under consideration. We believe that, the approach now proposed in this consultation paper on many of the topics and issues raised in CP47 strikes the right balance between listening to
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the views expressed in the submissions received and improving the consumer protection framework.
1.5 A key element of our work in developing our position in the revised Code has been the consideration of the conduct of business provisions contained in a number of EU Directives covering financial services that have been transposed into Irish law since the publication of the original Code, namely:
the Payments Services Directive (PSD);
the Consumer Credit Directive (CCD); and
the Electronic Money Directive (EMD).
The purpose of these directives is to harmonise European laws in the various financial sectors covered by them to ensure that, once transposed, national laws do not create a barrier to entry for the financial services providers that operate in the relevant sectors. Inherent in this policy is that consistency of rules across Member States creates a level playing field and increases competition, which, in turn, is for the benefit of consumers.
Consumer protection measures that are harmonised in EU Directives are not repeated in this proposed revised Code. The Scope of the proposed revised Code sets out the additional requirements, which will apply to regulated firms when providing the activities covered by the three EU Directives listed above.
ENHANCED CONSUMER PROTECTION
1.6 Once implemented, the revised Code will provide for a range of new and expanded consumer protection benefits over and above the protections contained in the current Consumer Protection Code, including:
enhanced “knowing the consumer” and “suitability” provisions which set out in greater detail the information to be gathered and considered by regulated firms before offering, recommending or selling financial products to consumers. This is intended to improve the process of providing financial products and services to
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consumers, and to better match consumer needs and financial objectives based on the information provided by consumers to regulated firms;
increased focus on the necessity for lenders to assess the affordability of mortgages for consumers;
additional protections for consumers who are identified as being vulnerable when seeking financial services, which will require regulated firms to provide reasonable arrangements and/or assistance, as necessary, to facilitate such consumers when carrying out their financial affairs;
a requirement for regulated firms to obtain proof of the existence of a power of attorney, and to operate within the limitations set out in the power of attorney, in circumstances where a person presents themselves as acting for a consumer under a power of attorney;
further protection for guarantors who must be informed, in writing, if an account for which they are acting as guarantor is still in arrears 31 days after arrears first arise;
addressing the complexity of information on a range of financial products and services through expansions in the provision of information requirements to assist consumers in making fully informed decisions;
further requirements on information provided to consumers, which must be clear, accurate, up to date, written in plain English, and the font size used must be clearly legible;
enhanced advertising information and display requirements which are intended to ensure that all advertisements are clear, fair and not misleading, including restrictions on use of small print in all types of advertisements;
further restrictions on unsolicited personal visits and phonecalls by regulated firms to existing customers and a prohibition on personal visits and phonecalls to
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consumers who are not existing customers, in order to provide greater protection against pressurised selling;
further protection for consumers with arrears through the inclusion of arrears handling provisions for loans, separate to those covered in the Code of Conduct on Mortgage Arrears, in order to provide consistent protections for consumers who are experiencing financial difficulties with loan repayments;
obligations on product producers to identify the target market of consumers for their investment products and to provide this information to intermediaries, along with information on the key characteristics and features of the product, to assist intermediaries in understanding the product that they are selling;
restrictions on intermediaries in relation to the use of the terms ‘broker’ and ‘independent’;
enhanced conflict of interest provisions, and significant new requirements in the area of remuneration disclosure, for example, the requirement that a mortgage intermediary must disclose the existence, nature and amount of any fee, commission or other remuneration received in relation to the product provided to the consumer;
enhancements to the claims processing provisions, such as the requirement that regulated firms ensure that any claim settlement offer is fair, and represents the firm’s best estimate of the claimant’s reasonable entitlement under the policy.
RESPONDING TO CONSULTATION PAPER CP54
1.7 We are firmly of the view that, in the interests of consumers, all enhancements proposed need to be put in place as early as possible and consequently, a move to swift implementation and monitoring of compliance with our revised Code is a key priority for us. Therefore, this second consultation is specific in its purpose, responses required and timeframe to achieve our objective of prompt introduction on 1 January 2012.
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1.8 Purpose
The purpose of this second consultation is three-fold:
i) to outline the position we have reached on some of the issues and questions posed in CP47;
ii) to highlight a number of new or amended provisions that we have included on the remaining issues that were posed in CP47, and the additional and emerging issues which have come to our attention as part of our analysis of the submissions received in response to CP47 and also as a result our ongoing regulatory work which has identified issues that we believe warrant the inclusion of further protection for consumers through additional Code provisions; and
iii) to give a final opportunity to our stakeholders to review a full version of the proposed new Code.
1.9. Responses Sought
While we are providing an opportunity for all interested parties to review the latest version of the revised Code, we are only seeking comments on certain proposals. In this regard:
Section 1 below outlines the analysis undertaken and the decisions reached on some of the specific areas where we requested responses as part of CP47. This Section is for information only and we are not seeking further responses to these issues.
Section 2 below outlines areas where we are seeking comment from interested parties. This Section outlines new proposals not included in the first consultation which have come to light as part of our analysis of submissions received or through ongoing regulatory work, and also outlines significant amendments to provisions that were contained in the first consultation.
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SECTION 1: OUR POSITION ON ISSUES/QUESTIONS RAISED IN CP47
1.10 In CP47, we outlined a number of areas where we sought specific views and comment. In some cases, we outlined our intention in CP47 to include additional rules in the new Consumer Protection Code. For example, we outlined the provisions that would be included in the revised Code arising from the Review of the Intermediary Market. These provisions are now embedded in the version attached to this document and no further comments are sought.
1.11 In relation to other matters raised in CP47, we have now reached a final position which will result in the strengthening of consumer protection and will provide a better outcome for consumers in their dealings with regulated firms. Consequently, we are not seeking any further comment from interested parties on these issues. Our position is as follows:
a) Vulnerable Consumers
In CP47, we outlined our view that there are consumers who, due to certain vulnerabilities, may require additional protection in their dealings with regulated firms when carrying out their financial affairs and we raised questions for consideration in this area. While most respondents agreed with the general principle that certain consumers may need a greater level of care and assistance when making financial decisions, a number of respondents raised practical difficulties with the implementation of the provisions as proposed.
In response to the points raised and as a result of further research, we are now introducing a revised approach in the Code for identifying and dealing with consumer vulnerability in the financial services sector. Firstly, our definition of vulnerable consumer now identifies two categories of vulnerable consumer, those capable of making decisions and those with limited capacity to make decisions. A common sense approach is required to the assessment of capacity. Assessments should be based on a consumer’s ability to make a particular decision at the time it needs to be made, and not on their ability to make decisions in general. Secondly, a new Common Rule has been included requiring that regulated firms provide vulnerable consumers with such reasonable arrangements or
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assistance that may be necessary to facilitate their dealings with a regulated firm. We expect regulated entities to carry out the ‘Knowing the Consumer’ and ‘Suitability’ requirements in the Code and to use this as the basis for determining, with common sense, whether there is any evidence of consumer incapacity. This amended approach provides for additional protections for vulnerable consumers while, at the same time, providing a practical approach for regulated firms in their approach to identifying and dealing with vulnerable consumers.
b) Suitability of Mortgages
We sought views on proposed additional provisions in this area, including the assessment of the consumer’s ability to repay, a prohibition on the acceptance of self-certified declarations of income, a requirement that a lender satisfy itself that, in the case of interest-only mortgages the consumer can repay the principal amount at the end of the mortgage term, and whether their introduction would result in a greater level of responsible lending. We also asked if the Standard Financial Statement (SFS) which is in place under the Code of Conduct for Mortgage Arrears should be used when assessing whether a mortgage is affordable for a consumer.
In response, we have retained the provisions on interest-only mortgages and the prohibition on self-certified declarations of income, and expanded the provisions covering the assessment of a consumer’s ability to repay. While not being prescriptive in introducing a form similar to the SFS for mortgage affordability, we are requiring that a lender’s assessment of affordability must include:
consideration of information gathered under the “Knowing the Consumer” provision,
the impact of a known future change in the consumer’s personal circumstances; and
the outcome of a test on the consumer’s ability to repay on the basis of a 2% interest rate increase above the interest rate offered.
Simultaneously, we are inputting our views on the area of the provision of mortgages to the EU Commission as part of the development of the Mortgage Credit Directive.
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c) Information about Products
Consumers are often confused by the complexity of financial products. It is our view that enhanced provision of information requirements are necessary to ensure that consumers are provided with sufficient and relevant information on financial products so that they can make an informed decision on the product or service they are considering. These enhanced information disclosure requirements as set out in CP47, such as the requirement to provide information about the main features of an investment product, including the risks attaching to the product, are now included in the revised Code. We have not made a final determination in relation to risk disclosure methodologies such as a traffic light system. We intend to undertake research on the development and implementation of a consistent approach to risk disclosure by regulated firms, and on approaches that would assist consumers with identifying their own risk appetite, to determine the best way forward in the longer term.
d) Product Producer Responsibilities
While the gathering of information under the ‘Knowing the Consumer’ provisions and the subsequent assessment of the suitability of a product for a consumer rests squarely with the regulated firm that has the point of sale relationship with the consumer, we consider that product producers must take on increased responsibilities for providing information to intermediaries in relation to the investment products which they sell on behalf of the product producers. Consequently, for the most part, we have retained the provisions as outlined in this area in CP47.
e) Arrears Handling
Any consumer facing financial difficulties or arrears must be treated sympathetically by their lender. The Central Bank introduced its Code of Conduct for Mortgage Arrears (CCMA) in January 2009, and we have substantially expanded it since January 2011. The CCMA provides a framework for how lenders must engage with residential mortgage consumers when they find themselves in a pre-arrears or arrears situation. The treatment of arrears on other loans is also a significant issue and protections for consumers will now be significantly expanded through this revised Code outlining how consumers must be treated by lenders when faced with difficulties in repaying loans, including credit card debt.
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f) Transfer of Mortgages
It is vital that in cases where a consumer’s residential mortgage is transferred to another firm, the existing protections available to that consumer are not diluted. Consumers should receive the full protection of all relevant codes of conduct issued by the Central Bank, particularly the CCMA, in circumstances where residential mortgages are transferred to another legal entity, regardless of the reason for, or the structure of, the transfer. Following our analysis of CP47 proposals and further consideration of the provisions in the CCMA and this revised Code, we are satisfied that, between them, strong statutory protections are in place for consumers when dealing with regulated entities.
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SECTION 2: ADDITIONAL/EMERGING ISSUES
In addition to the views expressed in the submissions received on the CP47, we have given consideration to a number of issues that have come to our attention, primarily arising from recent themed inspections, and also from the new Consumer Advisory Group, established under the Central Bank Reform Act, 2010. To address these issues, we have included additional and expanded provisions in this consultation paper. Comments are invited from interested stakeholders on the issues outlined below.
There are a number of additional and expanded provisions included throughout the revised Code. However, we would draw your attention specifically to the following:
i) Basic Payment Account
In recent weeks, the Department of Finance published a report for consultation on a Strategy for Financial Inclusion. The Central Bank is a member of the Steering Group involved in the preparation of this report. We strongly support the financial inclusion agenda and the development, as proposed, of a basic payment account as described in the Strategy for Financial Inclusion. In order to support this proposed Strategy, we are now proposing a number of new provisions in Chapter 3 of the Code relating to the promotion and accessibility of basic payment accounts, while accepting that many rules relating to the operation of a basic payment account will be covered by the EU Payments Services Directive, and any future EU initiative covering the provision of basic payment accounts.
ii) Complaints Resolution
In light of our recent themed inspection work in this area and our ongoing work with the Financial Services Ombudsman, we are proposing to further extend the requirements on regulated firms in relation to complaints handling and resolution. In particular, we are proposing that regulated firms will be required to analyse complaints in order to identity if any patterns of consumer complaints are emerging. This analysis must be escalated to the regulated entity’s compliance/risk function and senior management.
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iii) Unsolicited Contact
Pressurised selling of financial products to consumers, under any circumstances, is of particular concern to the Central Bank in light of the consumer detriment which can occur. Where unsolicited contact is allowed, strict rules must be in place covering the circumstances of how and when it is allowed in the interest of protecting consumers from unwanted selling tactics which can be perceived as aggressive and overly intrusive or pushy. Consequently, we have decided to further restrict the circumstances in which unsolicited contact can be made with consumers. In particular, we are proposing that the informed consent of the consumer is required before any contact can be made to sell or market a financial product or service to an existing customer. In addition, we are proposing that regulated firms will not be allowed in any circumstances to make an unsolicited personal visit or telephone call to a consumer who is not an existing customer.