Symposium "Requirements to be met by financial intermediary services – consumer protection in the context of the financial market crisis"

Date:

10.03.09 10:00 AM

Location:

Berlin

Speaker:

Federal Minister Ilse Aigner

Check against delivery!

Dear Representatives of political circles, public authorities, the business community, science and association, Ladies and Gentlemen,

The financial market crisis is by far the overriding subject in public discussions of late. It is even to put it literally "in everyone's mouth"
The "word of the year 2008" is financial crisis; the "non-word" – ailing banks.

This demonstrates yet again that the financial crisis has reached our daily lives. It doesn't just encompass abstract numbers, deposit money or bank transfers, it affects people. The Federal Government was therefore quick to take co-ordinated and consistent action. That was the right thing to do! We have given the banks a protective shield. This meant that we could prevent the money cycle breaking down. The guarantee declaration of the Federal Chancellor encouraged people to trust in the future.

Anyone who has invested his money in savings, current accounts or savings certificates or as overnight money or fixed-term deposits with banks with their registered office in Germany will not lose one cent as a consequence of the crisis. That was how we managed to maintain the confidence of our citizens. In this way we were able to avoid a run on the banks and panic. There were no images like the ones we saw in Iceland.

Nevertheless, one thing must be clear: numerous people have invested their money in shares, certificates or securities portfolios on the global financial markets. Financial institutions often advised them to do this. Many of these investors have lost a great deal of money through the financial crisis.

All the same, it's not about the one-sided apportioning of blame or polarisation today. I don't wish to condemn banks lock, stock and barrel or consumers who could have sought out more information. A ping-pong game of this kind won't help us to move forward. What are important today are solutions.

My ministry already set up a telephone hotline at the end of last year. The 140,000 calls, numerous letters and personal conversations have revealed many individual tragedies. What they basically demonstrated was that confidence in the financial world has been badly shaken. This loss of confidence has far-reaching consequences.

Some people are now even questioning the financial system and the social market economy. It is the primary task of banks to re-build this confidence. Some banks are helping their clients. But there are still major differences in how banks deal with their clients. I must, therefore, call on banks to follow the good examples.

But besides the banks people are also asking questions about political circles. We must give people further orientation, beyond the steps that have already been taken. That's why my ministry has launched the "Quality offensive - Consumer finances".

We want to give consumers a guide, a kind of route planner. This will help them to steer their way successfully through the financial world – in uncertain times of a financial crisis and beyond. It's like going on holiday in an unfamiliar country. With a map or a route planner you can even find your way around unknown territory. For particularly difficult terrain you also need a travel guide. It is better to explore high mountains with a mountain guide. He is familiar with the topography and knows how to correctly interpret changing weather conditions. He is also responsible for the safety of his fellow mountaineers. This is the role I see for financial advisers. They must discuss an appropriate financial pathway with their clients that is suitable for both the investor and investment.

In this way they must ensure that their client's investment is safe. For this journey through the financial world to be successful, what is very important is the traveller himself. He or she must embark on the journey. To this end he/she needs the necessary equipment. This is where the "Quality offensive - Consumer finances" comes in.

Let's start by planning the route. When you are about to embark on a journey, you have to make sure it matches your goals and your budget. The same applies to picking a financial product. I would like the route planner to always flag up the product that is best suited to the client's needs. For this purpose we need a standardised, high quality selection process.
Two aspects are important in order to guarantee success: transparency and comprehensibility.

Every traveller will be disappointed if there is a simple bed and breakfast behind the façade of a 5-star luxury hotel. The same applies to financial products.

• First of all it must be clear what a product entails.
• Secondly, the product must keep its promise.

As the journal Finanztest revealed, many investors hold certificates that they don't understand. It becomes even more difficult when several financial products are linked. It is very difficult for the consumer to distinguish between them. A situation where you have to first undergo training as a financial expert in order to handle your money affairs is not acceptable!

One step towards more transparency is the Debt Securities Bill that we have just approved in the Cabinet. This contains a transparency obligation for bond terms and conditions, in particular for certificates. Furthermore, the client must be given all the necessary additional information in order to be able to correctly assess and evaluate the bank's offers. The emphasis here is on "necessary".

Mountains of paper on the scale of multi-tome reference books may contain information on every possible detail. But they don't help the consumer. When a traveller asks about how to get to a city, then he's not given a book about the city's history.

Besides the necessary information we need mechanisms which ensure that the client can accurately assess the financial product. The certification systems of the Federal Financial Supervisory Authority (BaFin) are not sufficient. This is because they are only oriented towards the formal criterion of completeness.

We have to find ways of also making statements about the content of the offering. To this end we need clear statements about the four main features of an investment product, namely

• security,
• flexibility
• return and
• costs.

This information must be easily comparable as it is in a map. In all maps the north is at the top and water is blue.

Let me now move on to the next area, the mountain guide – by that I mean the financial intermediaries. Last December my Ministry published a study on the requirements to be met by financial intermediary services. I'm going to look in more detail at the study by Dr. Evers. In Germany a financial intermediary who offers investment funds or closed-end funds does not need any expert knowledge. The same applies for the so-called tied financial intermediaries who only sell insurance or securities for one company.

But not everyone who can spell the word "mountain" is a good mountain guide. It's no wonder that some consumers get lost and fall by the wayside.

Many people complain to me about inadequate, incomprehensible advice or advice that was not suitable for them. One couple wrote to me that an adviser "worked on them" to such an extent that they could no longer think straight. They agreed to purchase certificates without really understanding what that meant. One bank employee with many years experience wrote to me that that was the trend: the best sales reps often had the least technical expertise.

The qualifications of financial intermdiaries will, therefore, be one focus of my work in the near future. We are going to examine whether the term "financial adviser" should in fact be protected by law. At the very least, we must urgently introduce binding minimum standards for all financial intermdiaries and a high level vocational qualification. I also believe that the special situation enjoyed by intermdiaries selling investment funds or closed-end funds is no longer acceptable. One good example for the improvements to qualifications are the rules for the sale of insurance that entered into force in May 2007. They contain a requirement to obtain authorisation and an expert knowledge test for non-tied insurance brokers. Unfortunately, there are still far too many exceptions today. There is scope for considerable improvement.

In the run up to this symposium I talked to banks, financial intermediary associations and representatives of the insurance industry. I am pleased that we seem to be on the same wavelength when it comes to the subject I just touched on - the "need for a vocational qualification". We have to build on this common ground.

But qualifications alone are not enough. Particularly in the case of the victims of Lehman, the problem lies far more in the lack of expertise of the financial intermediaries. Some investors are rather victims of irresponsibility and lack of scruples.

One example: someone wrote to me that he wanted to invest his father's savings. The security of the investment had the highest priority for him. He did not want to take any risks. A well qualified financial adviser with many years’ experience advised this gentleman to invest in certificates. He even said that only the outbreak of World War III could jeopardise the investment. At the same time, he got the client to sign a document confirming that he was purchasing the securities expressly at his own wish and at his own risk. The adviser told him that this was simply what the computer system required. I don't need to tell you what happened to the money...

It’s like sending someone who lives on a plain and wanted to go for a leisurely walk, on a strenuous mountain climb.

There are equally negative examples in the insurance industry. For instance a relatively elderly lady was advised to take out a term life insurance policy!

The reasons for this behaviour of financial service providers mostly have to do with their internal sales and incentive systems. Financial advisers themselves wrote that they are often under incredible pressure. This goes as far as illegal practices. The worst case is that the adviser could lose his job if he doesn't sell a specific number of financial products. It's completely obvious that in a climate like that there’s scarcely any motivation to offer the client the best advice. But that is quite unacceptable.

Under no circumstances may profit and commission be allowed to lead to a situation where quality, seriosity and respect for the client's wishes are abused. It is legitimate and even necessary to generate profit through the sale of financial products. Money should be earned through the client not on his back. I'm going to ensure that that is the case in future.

Allow me to conclude with my third area: tools for consumers. You need to equip yourself for a journey and you have to be equally well prepared for a financial discussion. You don't go and climb a mountain wearing sandals.

My Ministry supports the Stiftung Warentest (German Consumer Foundation), which offers important advisory services particularly through the magazine Finanztest. Together with the adult evening class centres we offer courses nationwide entitled "Fit in provision for old-age".

There are truisms from the financial world which everyone should be familiar with like:

• The higher the profit, the higher as a rule the risk or
• Don't buy anything that you don't understand.

But we want even more. We want to raise awareness amongst consumers about how to ask the right questions of financial service providers. For that reason my Ministry will draw up a corresponding check list.

Ladies and Gentlemen,
When a tour operator doesn't organise a trip properly, this raises the question: How can the consumer assert his rights? The same applies to financial services. I know from many letters that consumers often feel that they are completely powerless when it comes to the banks which they see as being in a far stronger position. Often they cannot prove or only offer poor evidence of miscounselling. Many conversations took place only on the phone. Only in very few cases were documents signed or handed over. Other clients were kept hanging on for so long with their complaints that the statutory period of limitation had expired. The debt securities bill aims to afford consumers greater protection in three areas:

1. a record obligation for financial consultations,
2. a legally enforceable right to the handing over of the record and
3. an extension of the periods of limitation.

Irrespective of this, it should be a matter of course in the event of a conflict for clients to be given details of where to find the competent ombudsman service. In the case of banks and insurance companies these institutions have proved their worth.

Ladies and Gentlemen,
There is an old Asian saying, "A journey of a thousand miles begins right at your feet".

That's why we should embark on that journey together here today. My ministry’s Quality Offensive - Consumer Finances is already up and running.

Let’s use today's symposium to further improve
•the route planning,
•the guide services and
•the equipment

for the journey through the financial world.

In this context I wish to build in particular on your active participation. I would be happy to offer the services of my Ministry in the near future to chair a discussion platform on the open topics.

I look forward to hearing your ideas. I, therefore, hope that our Symposium and the further discussions will be rewarding!

Further links on the topic: Requirements to be met by financial intermediaries – more quality, better decisions.