The program, and the proposals, to be found in this paper, stem from various reflections elaborated during recent years on the approach that EU financial legislation follows in relation to the protection of “clients” in different contexts. Moving from the assumption that there is no single notion of “client” in the current state of the legislation across different sectors, and that the techniques that are employed by the architraves of EU financial legislative texts vary greatly from one field to the other, the purpose of this paper is to uphold the idea that there seems to be developing a core of fundamental, general principles for the protection of – broadly speaking – “users” of financial services and products, which is the result of a process of cross-sectoral circulation of rules and standards, that finds its origin in the wide body of conduct of business rules established in the context of MiFID.
EU financial legislation is notoriously based on a sectoral approach, revolving around its three traditional sectors: banking, capital markets, and insurance-pension funds. Each sector has its body of EU legislation, embedded in the relative silos. Ultimately, even the identification of the subject to be protected – whether a “client”, a “customer”, an “investor”, a “policy holder”, etc. – varies considerably across sectors, rendering the identification of the target of the protection awarded by different statutes variable in accordance with each of their respective objectives and aims. This also has an institutional dimension, resulting in the articulation of three different European Agencies, in relation to the different sectors (EBA, ESMA and EIOPA).
The articulation of this regulatory and institutional set up has undergone, over time, several changes, which sometimes seem to challenge the sectoral approach: significant examples of this are, for instance, the regulation of financial conglomerates, or the PRIIPS Regulation.1 However, these exceptions do not change the overall picture, but attention needs to be drawn to a wider phenomenon of circulation of schemes and models across the different sectors.
Protecting end-users in the context of financial transactions assumes, first of all, that one identifies “who” needs to be protected, and then “how”, that protection should be achieved. These two aspects are interconnected and mutually influential.
Most notably, in the banking sector, the protection of “clients” is intended basically as the protection of “depositors”, who are the first and immediate category of stakeholders upon which the positive externalities resulting from the complex interplay of regulation and supervision are expected to reverberate. It is therefore not by chance that, in the whole normative package of CRD and CRR, the term “client” only appears in a few, limited provisions, being instead mostly substituted by reference to “depositors”.
Not all the corpus of EU banking law, however, follows the approach highlighted in the previous paragraph. There are, in fact, areas where legislation is directly aimed at protecting the customer/client of the financial institution: for instance, consumer credit or mortgage credit rules have since long been the outpost for the protection of the weak party in certain contractual arrangements, albeit not all, between customers and banks.
In the context of capital markets, MiFID I, elaborating on the previous ISD of 1993 (see art. 11, ISD), gave birth to a robust analytical body of EU conduct of business rules2 in the field of investment services.3 Nowadays, MiFID II and MiFIR, in force since January 2018, are the peaks of a wide package of normative measures that build on the pre-existing MiFID I regime, thereby enlarging and deepening their scope.4
The comprehensive approach of MiFID II to the topic of conduct of business rules is, indeed, evident in relation to all the potentially relevant areas: starting from the formation of the contract to its execution and the subsequent phases: the core elements of these rules consider information, transparency, suitability, conflicts of interests, inducements, best execution and product governance.
Under insurance prudential regulation, the “client” – here referred to as the “beneficiary”, the “policy holder” or the “insured person” – plays a slightly more direct role than in the context of prudential-oriented banking legislation (see Recital (16) of Solvency II). Within the Insurance Distribution Directive, the mirroring of MiFID is quite evident: there are, amongst others, rules on advice (Article 20), suitability (Article 30), inducements (Article 29(4)), conflicts of interest and transparency (Article 19), clearly influenced by MiFID standards. The rules on product oversight governance (POG), introduced by the IDD and set forth under its Article 25, are probably one of the most significant innovation in the distribution of insurance products within the EU, and are a good example of how the MiFID approach affected insurance legislation in the Union.5
The expansion of MiFID standards – a phenomenon far from being moot – took place essentially due to two competing sets of forces: the first are centripetal, the second are centrifugal. Under its centripetal forces, the MiFID normative package has attracted within its perimeter, and scope, an increasing number of new topics, some of which may even seem a bit odd (see, for instance, structured deposits or emission allowances). Under its centrifugal forces, instead, MiFID standards have expanded beyond its boundaries, influencing other sectors (IDD, for instance, but also mortgage credit, and lastly, the upcoming crypto-asset legislation-MiCA).
In addition to MiCA another area that sees the development of common principles across different sectors is ESG. Among the avalanche of sustainable finance norms, three pieces of legislation are particularly relevant: the Taxonomy Regulation, the Disclosure Regulation, the “Low Carbon Benchmarks Regulation”, and the Corporate Sustainability Reporting Directive (CSRD). This bourgeoning legislation on ESG finance is now being applied in the different silos: several amendments to MiFID, UCITS, AIFMD are indeed already in place, and also the EU Banking package is incorporating ESG elements within its huge body.
The need to address consumer protection originated in general contract law, being subsequently developed in other fields, including financial services. TFEU. Since the Tobacco Advertising6 ruling, measures adopted on the basis of Article 114 TFEU must have the aim of improving the conditions of the internal market. In practice, this entails that consumer protection rules enacted at the EU level generally pursue a two-fold objective: on the one hand, safeguarding consumer interests; on the other, more broadly, enhancing the internal market.7
The protection of consumers in the internal market has been progressively shaped by CJEU case law, such as Mars,8 Cassis,9 Buet,10 Claudia Schmidt,11 Canal Digital,12 Axa Royale,13 to name a few. Based on such precedents, EU consumer legislation built the standard of the average consumer, who is reasonably circumspect and deemed to be an autonomous and reasonably well-informed subject. This seems to have set the benchmark for the level of protection established across subsequent pieces of EU consumer directives, including the Unfair Commercial Practices Directive (UCPD), the Consumers’ Rights Directive, the Distance Marketing Directive which applies to the remote commercialisation of financial services; and the Unfair Contract Terms Directive, applicable to any consumer contract, aiming to approximate the laws, regulations and administrative provisions of the Member States relating to unfair terms in contracts concluded between a seller or supplier and a consumer. The legislative framework relies on two main axes for consumer protection:14 (i) on the one hand, rules requiring the disclosure of adequate information; and (ii) on the other hand, rules providing for corrective mechanisms throughout the contractual relationship. These principles are also clearly visible in the body of the already cited EU Financial legislation.
The short analysis developed in the previous paragraphs suggests that, in a context where the sectoral approach still moulds EU financial legislation, one also witnesses a slow, albeit relentless, establishment of cross-sectoral rules aimed at protecting those who, for different reasons and purposes, seek financial institutions for the purpose of receiving and accessing financial services, and products of different kinds. Those rules are, mostly, the core of the MiFID investors’ protection regime, as established, in a steadily evolving way, starting from the ISD of 1993, up to the MiFID II package, recently complemented by new objectives (ESG).
This phenomenon offers the opportunity to identify, and to single out, a number of common core, general principles that address the issue of the protection of “users” of financial services across different sectors.
The usefulness of this exercise is motivated by the possibility of having a shared set of principles that, notwithstanding sectoral differences, identify common approaches to the protection of such “users”, leaving at the same time space and flexibility for more specific, sectoral-oriented or detailed rules of protection. The principles that can be identified are, on the one side, general enough to reflect common needs and common goals across different sectors and, on the one side, sufficiently flexible in order to allow for their adaptation and specification in each of the context where they are bound to apply.
There may be – at least, we believe – sufficient grounds to consolidate those principles – which are, indeed, already visible – in a General Charter for the protection of financial users in EU legislation, to be intended on a cross-sectoral basis. The Charter would not, indeed, be aimed at overcoming sectoral-specific legislation, which remains necessary because of the different approaches, and goals, to be achieved in each context (as shown in the previous paragraphs), but it would identify overreaching, mandatory standards valid throughout the entire range of financial services, products, activities. It might also help reducing inconsistencies and non-justifiable differences between different sectors.15
The exercise leading to the establishment of the Charter is far from being merely theoretical.
a. Within each silos, the Charter might prove useful in orienting and shaping the action of regulators, supervisors and Courts in supporting the interpretation and enforcement of sectoral EU legislation, filling its gaps, and supporting the uniform application of its core principles.
b. The Charter might be useful to uphold supervisory convergence across different markets, products and actors that are becoming increasingly overlapped and intertwined.
c. The Charter would have a high political impact, clearly placing the direct protection of customers, clients, investors, policyholders at the centre, and at the core, of the objectives of EU financial legislation.
We are in a time where EU financial legislation is, in many respects, at a turning point. As new values and objectives arise, and markets rapidly develop under the increasing pressure of new technologies, the protection of end-users becomes increasingly complex to achieve. The traditional sectoral approach is showing increasing shortcomings, calling for greater cross-sectoral uniformity. At the same time, the system has developed, often outside more formal schemes, a complex web of interrelations and echoes, which reverberate throughout different rules and sectors.
The time, therefore, seems to be ripe for providing stronger support to this process, by building a wide-ranging dialogue between the market, scholars and regulators in order to establish a common Charter for safeguarding the rights of financial users across the Union, with a high political value and significance. n
