Out-Law Analysis | 26 Mar 2015 | 5:32 pm | 3 min. read
Cross-selling has led in the past to mis-selling, as was the case with sales of payment protection insurance (PPI) to credit card or loan customers. The EU financial regulators are taking action now because they want to make sure a uniform approach is adopted by regulators across Europe.
Companies which engage in cross-selling should take the opportunity now to discuss the issue with national regulators. Regulators may change their approach in light of the outcome of the consultation, so now is the time for companies to make their views known. A report and guidelines on the cross-selling are expected towards the end of 2015.
The consultation on cross-selling (37-page / 367KB PDF) closed last week. It is being run by a committee of the European Supervisory Authorities (ESAs). The ESAs are the European Securities and Markets Authority, the European Banking Authority and the European Insurance and Occupational Pensions Authority.
The joint body proposes eleven guidelines which it says national financial regulators should use to regulate activity in their countries. The guidelines say that companies should make it obvious to customers that products could be purchased singly rather than in a package; that there should be adequate staff training; that providers should include a breakdown of the price of a bundled or tied product; that they should conduct an assessment of suitability of the product for the customer, and that they should offer post-sale cancellation rights.
The guidelines make it clear that sales incentives or remuneration models for staff should not be linked to selling tied or bundled products, such as selling PPI to accompany a loan or credit card. Incentivising staff to push such products could lead to miss-selling, the guidelines argue, echoing similar guidance from January 2013 (34-page / 2.3MB PDF) which was issued by UK regulator the Financial Conduct Authority (FCA)'s predecessor the Financial Services Authority.
In its response to the consultation on the ESAs’ guidelines (5-page / 536KB PDF), the UK Council of Mortgage Lenders (CML) suggested that many of the measures outlined in the rules already form part of the EU's Mortgage Credit Directive (MCD). The CML highlighted the “considerable cost, both in terms of resources and staff time” that banks, building societies and other lenders are already spending implementing the MCD, without adding in further regulation. The CML also warned that time spent dealing with regulation detracted from innovation, which would create products and services that better meet the needs of customers.
The trade body warned that extending the description of cross-selling to include non-financial service products could stifle innovation. Indeed, financial service providers may want to give customers access to online aggregator platforms – allowing consumers to see all their bank accounts with different lenders in the same place – and extending the guidelines into such arenas could hold back their development.
The ESAs’ guidelines apply irrespective of the sales channel used, meaning that companies using social media or other online methods to promote and sell their products and services need to be just as aware of the rules as those using more traditional methods, such as telephone sales or over-the-counter transactions in a branch.
The guidelines say that firms need to pre-set internet purchase decisions to “no” rather than “yes” so that customers need to “opt in” to purchase part of a bundle rather than “opt out”, and that the price or cost of products needs to be displayed early-on during the reading of a webpage rather than “hidden” near the foot of a sales form.
The UK’s FCA went into even more depth on such issues in March 2015 when it issued its guidance on the use of social media (20-page / 1.2MB PDF). Firms using Twitter to promote their products need to make sure that their tweets pass the FCA’s test of being “fair, clear and not misleading”, even within the 140-character limit. Using illustrative examples, the FCA’s guidelines indicate how attaching an image to a tweet can be a useful way of including the necessary investment warning.
While the ESAs set out the guidance, it will be down to each country’s competent authority to implement it. The sector needs to engage with regulators directly on cross-selling to ensure that the same rules are applied across Europe. This will help companies that are looking to internationalise their products and services and will provide a level playing field across the continent.
There is already evidence that the ESAs' actions are bearing fruit. Just this week the FCA announced that it will consult on the banning of opt-out selling and increased regulation of the sales of 'add on' insurance products because they do not always work in the best interests of consumers.
The work of the ESAs in this area is to be welcomed because it will give providers more clarity. When the extent of regulation applicable to specific activities is clarified it lets providers make more informed decisions about the regulatory risks of any product, service or approach that they introduce before costly investment decisions are made which ultimately have negative consequences of financial markets and consumers.
John Salmon is a financial services specialist at Pinsent Masons, the law firm behind Out-Law.com