Tomasz Klemt, Chapter 10: Financial market – in search of optimal consumer (customer) protection in:

Robert Grzeszczak (Hrsg.)

Economic Freedom and Market Regulation, Seite 231 - 248

In Search of Proper Balance

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Reihe: German and European Studies of the Willy Brandt Center at the Wroclaw University, Bd. 10

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Financial market – in search of optimal consumer (customer) protection Tomasz Klemt Key words: EU Law, Insurance Distribution Directive, The Polish Finan‐ cial Supervision Authority (UKNF), MIFID II, market regulations, regu‐ lation efficiency Introduction Properly designed and applied regulations are a prerequisite for the effect‐ ive functioning of the financial market. Their final shape, however, de‐ pends on the existing market and political conditions, which means that market participants are influenced by almost every public and private eco‐ nomic decision (Kennedy, 1962: 8). The currently prevailing trends in this area are called paradigms, i.e. patterns accepted by the scientific commu‐ nity which are a solution to a certain problem (Kuhn, 1970: 10). Thus, in relation to regulation, paradigms are the framework of ideas and standards that define not only policy objectives and the types of instruments that can be used to attain them but also the very nature of the issues they are sup‐ posed to address (Ramsay, 2016: 161). Until recently, the so-called Wash‐ ington Consensus has served as such a pattern in the financial market (Lopes, 2012: 69). The previous financial system paradigm assumed the market to be ratio‐ nal, efficient, and competitive (with an optimal allocation of resources and the lack of information asymmetry, market imbalance, and externalities). Consequently, the focus was on the security of individual institutions and the rationality of the financial market, assuming that this ensures the secu‐ rity of the entire system. This widely accepted assumption was, however, challenged by the experience of the financial crisis of 2007-2009. It clear‐ ly demonstrated that the then functioning system of micro-prudential su‐ pervision was insufficient and needed to be strengthened and complement‐ ed with regulations concerning the macro-prudential aspect. One of many negative opinions on that system was expressed by Joseph E. Stiglitz, who Chapter 10: 231 believed that the free market ideology became only an excuse for new forms of exploitation, which was a direct inspiration for this chapter (Stiglitz, 2010: 221). A consequence of the changes forced by the financial crisis was the de‐ velopment of a new systemic paradigm, also called the "Basel Consensus" (Monkiewicz, 2016: 66). It assumes that the financial market is unstable and pro-cyclical, with a tendency towards herd behaviour. This instability is further exacerbated by the complexity of financial systems and financial innovations (Eatwell, 2009:11). The new assumptions affect the form and content of regulations. The number of new acts appearing in this area is often referred to as a "regulatory tsunami" (Widawski, 2017: 5). The changes concern the so-called market regulators, financial entities, as well as purchasers of products offered in the financial market. As a result of the systemic changes taking place, it is necessary to an‐ swer the question of whether there has also been a change in the regula‐ tory paradigm. In other words, it is a question of the scope and conse‐ quences of the current changes in the financial market. Their essence boils down to the permanent dilemma between regulation and economic free‐ dom. Have the lessons learned from the crisis changed the view of market participants on this issue? It is impossible to answer this question based on the traditional methods of legal research and legal analysis only. Hence the use of the law in action aspect and empirical research: individual in-depth interviews (IDIs) carried out with financial market participants (regulators and regulated entities). They were asked about the most desirable areas of regulation, the effectiveness of market tools and their relation to the cur‐ rent competencies of the regulator and its regulatory priorities. As a conse‐ quence of the adoption of this research field, conclusions have been drawn concerning the paradigm shift in consumer (customer) protection in the fi‐ nancial market that forms a part of the current doctrinal discussion in this area (Schooner, 2015: 59). The importance of information in protecting financial market participants The existing form of protection of financial market participants (con‐ sumers) has been closely linked to the development of general European consumer law. It has its own separate normative basis in Articles 4(2)(f), 12, 114 and 169 of the Treaty on the Functioning of the European Union (TFEU) and Article 38 of the Charter of Fundamental Rights of the Euro‐ Tomasz Klemt 232 pean Union (CFR). These provisions make it necessary to ensure a high level of consumer protection in all Union policies. This makes consumer law different from other elements of the legal system in terms of its basic features, with the emphasis on, among other things, transparency of infor‐ mation, limitation of the pacta sunt servanda principle, the need to estab‐ lish the content of the contract, the semi-imperative nature of the rules, protection against unfair market practices, and the growing importance of "soft law" (Schooner, 2015: 59). Good access to market information is a prerequisite for the proper func‐ tioning of the market and its development. Regardless of the current sys‐ temic paradigm, the right to information is therefore one of the most im‐ portant rights granted to purchasers of goods and services (Lagocka- Poguntke, 2012: 17). From the first consumer policy programme adopted in 19751 to the European consumer programme and the multiannual con‐ sumer programme for the years 2014-20202, the right of access to infor‐ mation has been, and continues to be, a permanent element of the "con‐ sumer protection by information" model at the European Union level (Kind, 1998: 5). This is because information is a condition for the con‐ sumer to make the right decision. Imbalance in terms of access to informa‐ tion leads to a situation called information asymmetry, which results in a number of adverse phenomena (including negative selection and moral hazard) (Bebczuk, 2003: 3). The features of the financial market and of the products in the market increase the risk of information asymmetry as the market develops. One of the basic issues in this area is the so-called financial illiteracy (Lumpkin, 2010: 8). It consists in insufficient education of individuals, who often do not understand basic financial concepts. This is confirmed by the out‐ comes of the conducted study. Almost all the respondents emphasised a significant shortage of educational activities in the financial market. In their view, the Financial Supervision Authority (KNF) should be inspired by the competition regulatory body in Poland, which runs a number of ed‐ ucational and information campaigns. Interestingly, in the opinion of the 1 Council Resolution of 14 April 1975 on a Preliminary Programme of the European Economic Community for a consumer protection and information policy, OJ C 92, 25.4.1975, p. 1. 2 Regulation No 254/2014 of the European Parliament and of the Council of 26 February 2014 on a multiannual consumer programme for the years 2014-20 and repealing Decision No 1926/2006/EC, OJ L 84, 20.3.2014, p. 42–56. Chapter 10: Financial market – in search of optimal consumer (customer) protection 233 respondents, educational activities in the field of new regulations should also be addressed to the market entities that apply new regulations in prac‐ tice. Another issue is the complex design and extensive documentation of fi‐ nancial products, which in practice makes it difficult to compare them. Even a consumer who is familiar with financial terminology may not be able to process large amounts of complex information (Lumpkin, 2010: 8). This is closely linked to the growing complexity of financial products, which often have hidden clauses that impose conditions on the final out‐ come of transactions. This complexity also leads to the lack of transparen‐ cy of the price calculation of a given product. It is usually unclear to the buyer whether the price includes the product only or whether the commis‐ sion and advisory services are also included – and in what amount. An ex‐ ample of post-crisis activity in this respect in Poland is the intervention of the KNF in the area of commissions charged for the distribution of insu‐ rance products by banks, aimed at setting and limiting its amount. Yet another element that causes information asymmetry is the long du‐ ration of some financial products. In such cases, certain information and conditions only come to light after a certain period of time. In particular, this applies to pro-cyclical instruments whose final financial result may differ significantly from the historical data that the buyer is driven by at the time of the conclusion of the contract. The accountability of such in‐ struments also remains a major issue. It is almost impossible for the pur‐ chaser to verify whether the unfavourable outcome of the investment was a result of the incompetence or dishonesty of the service provider, rather than market conditions. (Lumpkin, 2010: 8). The experience of the financial crisis of 2007-2009 has demonstrated that, despite the development of information tools, these risks still have a significant negative impact on the buyers of financial products, and the current system of their implementation and enforcement has failed (Kirsch, Squires, 2017: 7). Therefore, a number of new regulations have been introduced, which provide not only for the obligation to ensure that customers have basic knowledge on the products and services but also in‐ troduce documents standardising the way this information is conveyed. A tool provided for in the Insurance Distribution Directive (IDD) 3 in the 3 Directive 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution (recast), OJ L 26, 2.2.2016, p. 19–59. Tomasz Klemt 234 form of a standardised Insurance Product Information Document (IPID) can be given as an example here. By means of this document, the insu‐ rance distributor provides the customer with relevant information about the insurance product in an understandable form to enable the customer to make an informed decision, taking into account the complexity of the in‐ surance product and the type of customer. The lack of confidence in finan‐ cial market self-regulation in this respect is reflected in the establishment of a precise IPID template with a graphic template and indication of de‐ tailed features of the document (such as colour, accuracy, title and lan‐ guage) (Grzeszczak, Klemt, 2019: 288). Article 10 of the IDD provides for an obligation to ensure that insu‐ rance and reinsurance distributors and employees of insurance and reinsur‐ ance undertakings carrying out insurance or reinsurance distribution activ‐ ities possess appropriate knowledge and ability in order to complete their tasks and perform their duties adequately. At least 15 hours of professional training or development per year should be ensured. Also, an obligation for insurance and reinsurance intermediaries to hold professional indemni‐ ty insurance, with a minimum guaranteed amount specified, has been in‐ troduced. In addition, Member States are required to ensure that adequate, effective, impartial, and independent out-of-court complaint and redress procedures for the settlement of disputes between customers and insurance distributors are established (Article 15). In order to strengthen information efficiency, Member States shall ensure that, when carrying out insurance distribution, insurance distributors always act honestly, fairly, and profes‐ sionally, in accordance with the best interests of their customers (Article 17). One of the most interesting obligations imposed under this Directive is the requirement for the insurance distributor to determine, on the basis of the information received from the customer, the requirements and needs of that customer and to provide the customer (in an understandable form) with objective information about the insurance product so as to enable him or her to make an informed decision (Grzeszczak, Klemt, 2019: 280). The insurance distributor should be able to prove that such an analysis has been carried out, which is another expression of regulatory mistrust and an increase in requirements towards financial market players. This results from the experience of the crisis, which has shown that the sales activity (which is questionable in terms of content and ethics) was aimed at max‐ imising commissions and not at selling financial products that are ad‐ equate to the purchasers’ needs (Pachuca-Samulska, 2018: 120). Chapter 10: Financial market – in search of optimal consumer (customer) protection 235 The post-crisis paradigm also includes the adoption of the principle of accountability and the introduction of severe sanctions. The entire Chapter VII of the IDD deals with this issue. Interestingly, the concept of a finan‐ cial sanction of not less than EUR 5 million for a legal person and not less than EUR 700 000 for a natural person has been used for some infringe‐ ments to prevent abuses and motivate compliance with the new regula‐ tions. In line with the principle of cooperation between national regulatory authorities that are part of multi-level governance in the European Union, the relevant national bodies shall inform the European Insurance and Oc‐ cupational Pensions Authority of all administrative sanctions and other measures imposed in relation to this Directive (Grzeszczak, 2012: 78). The tendency described is also reflected in the Markets in the Financial Instruments Directive (MiFID II)4. Similarly to the IDD, MiFID II pro‐ vides for restriction of access to activities (Article 5 and Title III), preven‐ tion of conflicts of interest (Article 23), information obligations (Article 24 et seq.), obligation to act honestly, fairly, and professionally, in accor‐ dance with the best interests of the clients (Article 24), suitability and ap‐ propriateness assessment (Article 25), cooperation under a system of mul‐ ti-level governance (Articles 67-69, 79-87), and penalties for breaches (art. 70-75). The study carried out demonstrates that as a result of the crisis there has been a reinforcement of information obligations in the financial market: they have been clarified and secured by severe financial sanctions. They are introduced by means of directives that often use the maximum (full) harmonisation method, which is supposed to unify the EU standards in this area, facilitating cooperation between national regulators that is neces‐ sary to preserve macro-prudential rules. The role of financial market regulators There are numerous entities that are involved in consumer protection in the financial market. On the example of Poland, the following actors can be identified: consumer advocates, the Financial Ombudsman, consumer organisations, the Court of Arbitration at the Financial Supervision Au‐ 4 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU, OJ L 173, 12.6.2014, p. 349–496. Tomasz Klemt 236 thority (KNF), the Office for Competition and Consumer Protection (UOKiK), and the Financial Supervision Authority (KNF). The latter two can certainly be called market regulators5. They use a number of regula‐ tory instruments which, following the European Commission's example, can be divided into four main categories according to their type: hard law standards, otherwise known as general law standards, soft law standards, education and information, and economic instruments6. A common feature of the above-mentioned instruments and regulations in the financial market is to work for the stabilisation and solvency of the institutions operating in this market together with securing the interests of its weaker participant, whose knowledge and orientation is limited in com‐ parison to the professional partner (seller, service provider). The aim is to strengthen the weaker participant’s position and, as a result, to level the playing field and ensure, also in the retail market, freedom of choice and free decision-making. The consequence is that the entire financial turnover is subject to "market and compensatory" practices7. The role of institutions functioning in this market is to ensure proper implementation and enforce‐ ment of regulations. This is achieved by, among other things, licensing, and supervision of financial market entities, secured by a system of judi‐ cial control. One of the basic tasks of market regulators is currently to supervise the process of financial product sales, not only in terms of sales obligations but also compliance with advertising law and the competence of distribu‐ tors. The empirical research has highlighted the key importance of precontractual protection of the buyer of financial products. The representa‐ tives of the regulatory authority (KNF) pointed to a continuous lack of competence in this area, suggesting that websites that mislead consumers should be blocked and that an inspection tool in the form of so-called "mystery customers" should be permitted. 5 For more see: T. Klemt, Methods and tools of regulating markets in praxeological point of view, in this book. 6 Better regulation Toolbox, online:‐ cess/planning-and-proposing-law/better-regulation-why-and-how/better-regulationguidelines-and-toolbox/better-regulation-toolbox_en, (access: 2020-03-15). 7 Judgment of the Constitutional Court of 21 April 2004 (K 33/03). Chapter 10: Financial market – in search of optimal consumer (customer) protection 237 The obligations resulting from data protection rules introduced under the GDPR8 remain a relatively new issue. They also aim to protect buyers, but the protection is limited to natural persons. The Regulation imposes an obligation on financial institutions to provide information and the right of access, correction, transfer, and deletion of personal data. One of the most interesting rights in the financial market is the right to object and not to be subject to decisions based solely on automated processing. This means that the assessment of the situation of a given purchaser must be individu‐ alised and cannot be limited to automated algorithms only. Another element of the protection of financial products' buyers is the complaint handling mechanisms. The provisions require strict adherence to deadlines and the reporting of data to supervisory authorities. In addi‐ tion, the Polish judiciary has adopted a principle protecting buyers that consists in reversing the burden of proof in the event of a financial institu‐ tion's breach of its obligation to respond to a complaint within the dead‐ line9. In such cases, it is not for the purchaser to prove a mistake on the part of the financial institution, but for the financial institution to prove that it has not made the mistake. Guarantee and compensation schemes are another way of protecting consumers in case of structural problems of a financial product seller. This is achieved by setting up special institutions to collect funds from market participants on a mandatory basis and to pay out guaranteed sums in the event of an entity's insolvency. All the initiatives aimed at consumer em‐ powerment and the actions taken by competition authorities in the finan‐ cial market should also be mentioned here. Their role in improving con‐ sumer protection is invaluable (Word Bank, 2011: 6). As previously indicated, the scope of consumer protection in the finan‐ cial market is determined by a number of legal, political, and economic factors. The awareness of these implications, combined with the willing‐ ness to answer the question of the assessment of the current role of finan‐ cial market regulators, formed the basis for conducting the empirical re‐ search in this area. 8 Regulation 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation), OJ L 119, 4.5.2016, p. 1–88. 9 Supreme Court Resolution of 13 June 2018, III CZP 113/17. Tomasz Klemt 238 The results of this study indicate that the regulatory priority in recent years has been to streamline the financial services sales process and to protect customers. The overriding aim is that the consumer should be well informed and make informed choices, which is consistent with previous doctrinal findings. The representatives of the KNF point to the lack of regulatory powers in the strict sense, which is conditioned by the lack of the right to direct legislative initiative. This is a significant restriction for the possibility to react quickly in the changing financial market. One of the representatives of the regulator indicated that each time a new regulation must be "learnt" by the regulatory body. The issuance of the Solvency II Directive10, which came into force in 2015 in response to the crisis of 2007-2009, can be given as an example here. It is still at an early stage of implementation – new issues related to these provisions are emerging all the time which require the authority to take a position. This concerns Poland as well as other EU Member States. The respondents expressed a belief that the changes in regulatory priori‐ ties are closely linked to market developments and current policy needs. The financial crisis, abuses associated with the sale of financial products, and staff changes within the management of the regulator were mentioned in this respect. Two respondents expressed a belief that the range of avail‐ able regulation is coming to an end and that it is therefore necessary to in‐ crease the dialogue with the market to regulate certain areas on a volun‐ tary basis under the supervision of the regulator, making the market more willing to submit to such regulation (as it would have a real impact on its shape). As for the most effective tools for the protection of financial services’ customers, both business representatives and the KNF have clearly stressed the positive role of institutions that can really help individuals, such as consumer advocates and the Financial Ombudsman (until 2015: the Insurance Ombudsman). Their position results from extensive exper‐ tise, ease of access (regional structure) and respect for such institutions. The latter factor results, among other things, from the reputational risk of financial entities, which is particularly increased in case of a dispute with a consumer supported by a public authority. Business representatives con‐ firmed that giving a case publicity makes it a priority to solve it. In con‐ 10 Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) OJ L 335, 17.12.2009, p. 1–155. Chapter 10: Financial market – in search of optimal consumer (customer) protection 239 trast to such instruments, complaint procedures should be mentioned, which, in the opinion of the KNF and the supervised institutions, do not serve their purpose. In fact, they are considered as delaying the initiation of court proceedings, which results in the customer waiting longer to re‐ cover his or her money. The – too few – arbitration and mediation proce‐ dures, which mainly concern small cases, are assessed in a very similar way. One of the regulator's representatives stated explicitly that "in the current situation in the financial market, going to court in unfortunately the only effective method". At present, the regulator reacts only to sys‐ temic problems, and usually does not refer to individual cases. The lack of resources of the KNF to effectively carry out its broad com‐ petences is an important limitation of the scope of customer protection. There is an insufficient number of inspectors who could effectively check the implementation of new regulations protecting customers in hundreds of thousands of supervised entities. At the same time, the authority is not an attractive employer for experienced professionals from the financial market in terms of earnings. In view of such an assessment of the effectiveness of protection tools and the level of protection in relation to the financial market customers, the question was asked about additional competences and tools that the regulator should be equipped with and about the desired area of regulation on the example of the insurance sector. Business representatives pointed to the need to increase the share of electronic tools and procedures, which would accelerate the office's operation and allow concentrating resources on regulatory and control activities. In particular, the need to focus on is‐ suing practical interpretations of the rules was stressed as this would in‐ crease legal certainty in the operation of market players. It was also noted that there is an emerging trend towards the general formulation of certain obligations and general clauses in legal acts, which are then clarified by means of formally non-binding communications and KNF guidelines indi‐ cating certain minimum operating standards which need to be documented in each case. Additionally, it was pointed out that it is necessary to equip the regulator with tools for the effective implementation of the educational function. Two KNF representatives indicated the sufficient scope of com‐ petences and the subject of consumer protection, with one of them stating that "client protectionism is a double-edged sword: on the one hand, it protects someone, but on the other hand it makes them feel exempt from thinking”. Tomasz Klemt 240 KNF representatives pointed to the area of financial product sales as the one where numerous abuses resulting in the violation of customers’ inter‐ ests by financial institutions occur. The proposal of one of the regulator's employees was to return to a previously employed solution: KNF's ap‐ proval of the content of documents related to the sale of financial prod‐ ucts. A good standard for such documents could then be established, bal‐ ancing the interests of all market participants. The principles and method of regulation defined in this way are associ‐ ated with a number of instruments’ features, including their effectiveness, understood as acting through appropriate, proportionate measures and in‐ tervening in accordance with the principle of subsidiarity, ensuring the achievement of the intended objectives in good time. The appropriate choice of instruments results from knowing them and referring to the ex‐ perience of practice in this area. Shift from consumer to customer protection The changes in the financial market under the new systemic paradigm are exemplified by the regulatory changes described in the previous sections of this chapter. They consist not only in strengthening the existing institu‐ tions and establishing new ones (material scope), but also affect the per‐ sonal scope of protection. As a consequence, it is necessary to reflect on the validity of the concept of "consumer" used so far. An additional argu‐ ment in favour of this is the change in the nomenclature that is being car‐ ried out at the level of European legislation and, as a result, in national le‐ gal systems. The doctrine follows the legislator, having to verify the con‐ ceptual apparatus used. Many scientific publications have tackled the subject of decoding the concept of “consumer”, but they have not resulted in a fully satisfactory doctrinal definition (Szustak, 2014: 115). The term in question is an ele‐ ment of legal language and can be found in numerous normative acts, which often also establish a legal definition of the term, albeit used only for the purposes of a given legal act. The importance of the consumer in EU law is significant, as evidenced by the extensive body of case-law of the Court of Justice of the European Union, which has shaped the meaning of the term "consumer". However, it should be pointed out that this inter‐ pretation is of a restrictive nature, referring to a natural person who per‐ Chapter 10: Financial market – in search of optimal consumer (customer) protection 241 forms activities unrelated to his or her commercial or professional activi‐ ty11. However, the specificity of the issues in the financial market discussed in the section on information obligations makes it necessary to cover a wide range of entities going beyond the traditionally understood concept of the consumer. At the same time, financial market legislation increasing‐ ly frequently uses the term "customer", as defined for the first time in the Council Directive of 8 December 1986 on the annual accounts and consol‐ idated accounts of banks and other financial institutions to indicate the transferor or transferee12. This term has increased in importance with the adoption of the Basel system paradigm in the financial market. Legal scholars argue that the concept of the customer, which is present in the EU regulations, covers the entities remaining within the scope of operation of the European System of Financial Supervision, bringing it closer to the meaning: "recipients of financial services” (Piotrowska, 2019: 108). EU law has a strong impact on the Member States' legislation. Consequently, a number of definitions of the term "customer" have appeared in Poland in various legal acts, in‐ cluding the Act of 5 August 2015 on the handling of complaints by finan‐ cial market entities and the Financial Ombudsman and the Act of 1 March 2018 on the prevention of money laundering and terrorism financing. Fur‐ thermore, pursuant to the Act of 31 July 2019 amending certain acts in or‐ der to limit regulatory burden, as of 1 January 2021 the provisions con‐ cerning consumers will apply to a natural person concluding an agreement directly related to his or her business activity if the content of that agree‐ ment indicates it does not have a professional nature for that person, re‐ sulting in particular from the subject of his or her business activity made available on the basis of the provisions on the Central Registration and In‐ formation on Business Activity. That process is so strong that both Bel‐ 11 Judgment of the Court 14 March 1991, Criminal proceedings against Patrice Di Pinto C-361/89, ECLI:EU:C:1991:118; Judgment of the Court of 22 November 2001 Cape Snc v Idealservice Srl (C-541/99) and Idealservice MN RE Sas v OMAI Srl (C-542/99), Joined cases C-541/99 and C-542/99. ECLI:EU:C:2001:62 5; Judgment of the Court of 17 March 1998. Bayerische Hypotheken- und Wech‐ selbank AG v Edgard Dietzinger, C-45/96, ECLI:EU:C:1998:111. 12 Consolidated text: Council Directive of 8 December 1986 on the annual accounts and consolidated accounts of banks and other financial institutions (86/635/EEC). Tomasz Klemt 242 gium and Sweden have introduced a uniform definition of a customer in the financial market (Colaert, Busch, Incalza, 2019 :390). This trend indicates a change in the paradigm of the personal scope of protection in the financial market in the European Union, establishing a new standard of customer protection which is a development and exten‐ sion of consumer protection due to the specific features of the financial market. These features are primarily considerable professionalisation and complexity of the products distributed, requiring expertise independent of the status of these products’ buyer (natural or legal person). In addition, it should be pointed out that there is a huge amount of financial resources that the sector manages, so any irregularities and pathologies that occur have an impact on the condition of the entire economy (O'Hara, 2004: 4). Therefore, it seems that currently in the financial market, the concept of “customer” is an overarching category, covering such terms as investor, depositor, policyholder, insured, beneficiary, member of a scheme, market participant, and consumer (Piotrowska, 2019: 108). In view of the above, the division of customers into professional (industry) and non-professional (retail) ones is particularly important and determines the standard of pro‐ tection granted to each of the groups13. The latter group usually consists of entities without sufficient financial resources and legal and financial knowledge that would ensure a balance in their relationship with a finan‐ cial institution (Szustak, 2014: 115), which also finds its basis in doctrinal studies and analyses (Willemaers, 2014: 22). For instance, the Insurance Distribution Directive (IDD)14 and the Mar‐ kets in Financial Instruments Directive amending Directive 2002/92/EC and Directive 2011/61/EU (MiFID II)15 have also adopted this terminolo‐ gy. They confirm the tendency to create a unified terminology based on the concept of the customer. When referring to general principles and legal bases, the IDD uses the term "consumer", while all specific obligations (for instance requirements and needs analysis, information, and training obligations) consistently refer to the concept of "customer" in the insu‐ 13 Judgment of the Court of 3 October 2019 Jana Petruchová v FIBO Group Hold‐ ings Limited, ECLI:EU:C:2019:825. 14 Directive 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution (recast), OJ L 26, 2.2.2016, p. 19–59. 15 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU, OJ L 173, 12.6.2014, p. 349–496. Chapter 10: Financial market – in search of optimal consumer (customer) protection 243 rance market. The MiFID II uses the terms: "professional client" and "re‐ tail customer". The conceptual changes are closely linked to the emergence of a new paradigm concerning the scope of customer protection in the financial market, and the two phenomena remain in a feedback loop, influencing each other. One of the effects of the crisis has therefore been a paradigm shift in the financial market, accelerating the transition from consumer protection to customer protection (which justifies the adoption of both terms in the title of this chapter). The practices applied, take the form of a variety of tools used for the financial market sector concerned. They de‐ pend on regulatory action at EU and national level (with a predominantly EU dimension) (Willemaers, 2014: 5). Conclusions The analysis confirms the creation of a new and coherent system of cus‐ tomer protection in the financial market. It covers various instruments, de‐ pending on the condition of a given sector, each of which has different regulatory needs. Self-regulation, although possible and desirable, cannot be the basis for the functioning of the financial market. National regula‐ tory authorities make extensive use of instruments developed at Union level, ensuring their practical implementation. There are, however, some limitations indicated by the respondents surveyed. They concern the com‐ petencies of the regulatory authority, but also the resources assigned to it to implement its powers. Information has played, and will certainly continue to play, the key role in protecting the financial market customer. The crisis related to the SARS-CoV-2 epidemic should further strengthen the trends in this area. Until now, epidemics have not been considered a significant risk influenc‐ ing decisions related to financial products. Yet, they are closely related, which means that financial institutions' customers should be made aware of their implications. Securing the fulfilment of information obligations with sanctions for their violation and creating an institutional system to ensure their observance is a manifestation of the new regulatory paradigm (Schooner, 2015: 59). The changes resulting from the financial crisis of 2007-2009 have in‐ creased regulatory pressure even further, broadening its material and per‐ sonal scope. There are now a number of institutions whose task is to pro‐ Tomasz Klemt 244 tect financial market customers. Their roles and importance are assessed in different ways by market participants. The research shows that the effec‐ tiveness of a given regulatory tool, its availability, and the involvement (co-participation) of market players in shaping the instrument are of key importance. Despite the establishment of sector-specific approaches for banking, se‐ curities, and insurance, there are consistent regulatory trends that justify a new regulatory paradigm for the whole financial sector, moving from con‐ sumer protection to customer protection. The extension of the scope of personal protection and the conceptual change observed in emerging EU financial market legislation (which is different from other markets) justi‐ fies the emergence of a new, specific concept in the form of a "financial services customer”. This term covers both non-professional and professional entities (which do not fall within the concept of “consumer” that is interpreted narrowly by the CJEU). At the same time, it has a wide range of meanings, includ‐ ing such terms as: investor, depositor, policyholder, insured, beneficiary, member of a scheme, market participant, and consumer. This reflects the tendency to extend the scope of protection of financial market customers at the expense of the regulated entities' freedom to conduct a business. This is a phenomenon that is evaluated positively by market participants, provided that their voice is taken into account in the ongoing regulatory work. It is also necessary to develop educational activities that will raise awareness of the content and interpretation of new regulations. In the long term, a financial market that enjoys the trust of customers will bring tangi‐ ble benefits to all market participants. References Bebczuk R. N., (2003), ‘Asymetric Information in Financial Markets. Introduction and Applications’, Cambridge: Cambridge University Press. Cartwright J., Hesselink M. W., (2008), ‘Precontractual Liability in European Private Law’, Cambridge: Cambridge University Press. Colaert V., Busch D., Incalza T., (eds.) (2019), ‘European Financial Regulation. 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Doktryna, instytucje, praktyka, Warsaw: Wolters Kluwer Polska. Kind S. (1998), ‘Die Grenzen des Verbraucherschutzes durch Information - aufgezeigt am Teilzeitwohnrechtgesetz’, Berlin: Duncker & Humblot. Kirsch L., Squires G. D., (2017), ‘Meltdown – The Financial Crisis, Consumer Protec‐ tion and the Road Forward’, Santa Barbara, California: Praeger. Kuhn, T.S., (1970), ‘The Structure of Scientific Revolutions’, Chicago: The University of Chicago Press. Lopes C., (2012), ‘Economic Growth and Inequality: The New PostWashington Con‐ sensus’, RCCS Annual Review, 4 | 2012, Centro de Estudos Sociais da Universi‐ dade de Coimbra. Lumpkin S., (2010), ‘Consumer Protection and Financial Innovation: A Few Basic Propositions’, OECD Journal: Financial Market Trends, Volume 2010 – Issue 1. O'Hara M., (2004), ‘Liquidity and Financial Market Stability’, NBB Working Paper, No. 55, Brussels. Pachuca-Smulska, (2018), ‘Nowy “paradygmat” ochrony konsumenta na rynku finan‐ sowym w świetle zmian regulacyjnych i instytucjonalnych po kryzysie finansowym 2007-2009, Studia Ekonomiczne, T. CIX, 2018: 107-126. Piotrowska A., (2019), „Ochrona klienta na rynku ubezpieczeniowym. Studium Pub‐ licznoprawne”, Warsaw: Wydawnictwo Naukowe Scholar. Ramsay I., (2016), ‘Changing Policy Paradigms of EU Consumer Credit and Debt Regulation’, in: D. Leczykiewicz, S. Weatherill (eds.), The Image of the Consumer in EU Law, Bloomsbury: Hart Publishing. Riesenhuber K., (2014), ‘A “competitive” contract law in: K. Purnhagen, P. Rott (eds.), Varieties of European economic law and regulation: Liber Amicorum for Hans Micklitz, Cham: Springer. Schooner H. M., (2015), ‘The Dogma of Capital Regulation as a Response to the Fi‐ nancial Crisis’, in: F. Weiss, A. J. Kammel (eds.) The Changing Landscape of Glob‐ al Financial Governance and the Role of Soft Law, Leiden: Brill Nijhoff. Stiglitz J.E., (2010), ‘Freefall: Free Markets and the Sinking of the Global Economy’, London: Allen Lane. Szustak G., ‘Consumer protection as a premise to build trust in the financial service market’, Journal of Economics & Management, Vol. 16/2014: 114 – 133. Willemaers G. S., (2014), ‘Client protection on European financial markets – from in‐ form your client to know your product and beyond: an assessment of the PRIIPs Regulation, MiFID II/MiFIR and IMD 2’, Revue Trimestrielle de Droit Financier, vol. 4, no.4/2014. Tomasz Klemt 246 Winsor T.P., (2010), ‘Effective Regulatory Institutions: The Regulator’s Role in the Policy Process, Including Issues of Regulatory Independence’, London: OECD. Word Bank, (2011), ‘Good Practices for Financial Consumer Protection’, Washington, DC. Vogenauer S., Weatherill S. (eds.), (2017), ‘General Principles of Law European and Comparative Perspectives’, Oxford: Hart Publishing. Chapter 10: Financial market – in search of optimal consumer (customer) protection 247




Die Regulierung verschiedener Märkte hat in den letzten Jahren deutlich zugenommen. Obwohl das Fehlen geeigneter Vorschriften sehr gefährlich sein kann, ist es dennoch wichtig, eine Überregulierung zu vermeiden, um die wirtschaftliche Freiheit als Grundlage des sozioökonomischen Systems in der westlichen Welt nicht zu gefährden. Die vergleichende Untersuchung deckt das Wettbewerbsrecht sowie die sektoralen Vorschriften des Telekommunikations-, Energie- und Finanzmarktes ab und dient dem Ziel der Überprüfung gemeinsamer Grundsätze, anhand derer die Maßnahmen verschiedener Regulierungsbehörden bewertet werden können. Der zweite Schritt ist die Festlegung gemeinsamer Standards für die Bewertung der Eingriffe von Regulierungsbehörden in die wirtschaftliche Freiheit. Das Buch ist nicht nur für Praktiker des Privatsektors von Bedeutung, sondern auch für Regulierungsbehörden der EU-Mitgliedstaaten sowie für nationale und EU-Gesetzgeber und berücksichtigt bereits die verstärkte Regulierung in der Corona-Krise. Mit Beiträgen von Robert Grzeszczak, Dawid Sześciło, Artur Szmigielski, Tomasz Klemt, Michał Dorociak, Maciej Sokołowski, Michalina Szpyrka, Paweł Wajda


The regulation of various markets has increased significantly in recent years. Although the lack of appropriate regulation can be very dangerous, it is nevertheless important to avoid overregulation in order to not jeopardise economic freedom as the basis of the socio-economic system in the Western world. This comparative study covers competition law as well as sectoral regulations of the telecommunications, energy and financial markets, and aims to examine common principles against which the actions of different regulators can be assessed. The authors’ second step is to establish common standards for the assessment of regulatory intervention in economic freedom. This book will be of importance not only to private sector practitioners, but also to regulators in EU Member States and national and EU legislators, and already takes into account the implementation of increased regulation in the coronavirus crisis. With contributions by Robert Grzeszczak, Dawid Sześciło, Artur Szmigielski, Tomasz Klemt, Michał Dorociak, Maciej Sokołowski, Michalina Szpyrka, Paweł Wajda