European Commission Proposes Package to Boost Consumer Protection and Confidence in Financial Services

WASHINGTON, July 12 /PRNewswire-USNewswire/ -- To help promote a safer and sounder financial system, preventing a future crisis and restoring consumer confidence, the European Commission today proposed changes to existing European rules to further improve protection for bank account holders and retail investors.

"The adoption of today's package marks the Commission's latest endeavour to bring transparency and responsibility to Europe's financial system in order to prevent and manage future crises," said European Commissioner for the Internal Market and Services, Michel Barnier.

The recent financial crisis illustrated once more how banks are susceptible to the risk of "runs on the bank" when bank account holders believe that their savings are not safe and try to withdraw them all at the same time. Since 1994, the EU's Directive (94/19/EC) has ensured that all European Union Member States had a safety net in place for bank account holders, but the recent financial crisis exposed shortcomings in existing schemes; the Commission proposal will fully amend the 1994 Directive and ensure that lessons learned from the crisis will lead to even better protection for bank account holders and retail investors.

For bank account holders, the measures adopted today mean a number of things:

Better coverage: The increase in coverage to EUR 100,000 by the end of this year is now confirmed. This means that 95 percent of all bank account holders in the EU will get all their savings back if their bank fails. Coverage now includes small, medium and large companies as well as all currencies. Excluded are all deposits of financial institutions and public authorities, structured investment products and debt certificates;

Faster payouts: Bank account holders will be reimbursed within seven days. This will be a major improvement on the much longer period that many account holders currently have to wait before getting their money back. To facilitate this, supervisory authorities will have to inform Deposit Guarantee Scheme managers earlier about problems at banks. And banks will have to clearly specify in their books whether deposits are protected or not;

Less red tape, less bureaucracy, and faster payouts: For example, if an account holder lives in Portugal and has an account at a failing bank headquartered in Sweden, the Portuguese scheme would repay the account holder on its own initiative and be the contact point. The Swedish scheme would then reimburse the Portuguese scheme. This would be a strong improvement over the current situation, where all correspondence has to be done via the scheme of the country where the bank's headquarters are located;

Better information: Bank account holders will be better informed on the coverage and functioning of their scheme by a new easy to understand standard template and on their account statements;

Long-term and responsible financing: There have been concerns that existing Deposit Guarantee Schemes are insufficiently funded, but today's proposals include a four-step approach to ensure sounder financing. Solid ex-ante financing provides for a solid reserve but can be supplemented by additional ex-post contributions if necessary. If this is still insufficient, schemes can borrow a limited amount from other schemes ("mutual borrowing") and, as the last resort, other funding arrangements can be considered. Contributions will continue to be borne by banks but they will be calculated in a fairer way to reflect the risks posed by individual banks.

For investors who use investment services, the Commission proposes faster compensation if an investment firm fails to return the investor's assets due to fraud, administrative malpractice or operational errors, and the level of compensation is to go up from EUR 20,000 to EUR 50,000. Investors will also receive better information on when the compensation scheme applies and will get better protection against fraudulent misappropriations where their assets are held by a third party - as in the recent Madoff affair. The proposals are fully in line with the EU's commitments under the G20, and have now been passed to the European Parliament and the Council of Ministers for their consideration.

The European Commission has also launched a public consultation on options to improve protection for insurance policy holders, including the possibility of setting up Insurance Guarantee Schemes in all EU Member States.

SOURCE Delegation of the European Union to the U.S.