Foreword and Summary from Finansinspektionen's Consumer Report 2017.
"How should my occupational pension be managed? Which funds should I choose in the premium pension system? Is it time to switch to a fixed mortgage rate?" As consumers on the financial market, we are faced with many difficult decisions that we more or less cannot avoid. Often, these decisions are related to choices that we make only occasionally in our lives, so there are limited opportunities to learn from our (or our friends'!) mistakes.
The economic development in Sweden and the rest of the world does not make this situation any easier. Because interest rates are historically low, many people are being drawn into increasingly risky investments in order to generate some kind of return on their savings. Sometimes the investments are both expensive and unreasonably risky, but still recommended by dishonest actors. Savers in the premium pension system are particularly exposed to this risk since many of them are not well-versed in fund savings but still need to make a decision.
Even if low interest rates contribute to an increase in share prices in the short term, lower interest rates over the long term mean a lower expected yield given a certain risk level. In such a situation, the size of the fee becomes important for the return on savings. High fees that have facilitated good yield in the long run mean that savers will have less money once the fee is paid.
The low interest rate also influences our possibilities for and willing-ness to borrow. This can be seen on the housing market, where 16 per cent of new mortgage holders have loans exceeding 600 per cent of their annual income. Given that three-fourths of Swedish mortgage holders have variable interest rates, households with small margins may find higher interest rates difficult to handle. More households should therefore discuss their interest rate adjustment period while sitting around the dinner table – and more should consider switching to a fixed interest rate.
Regardless of whether decisions concern loans, savings or other finan-cial services, consumers must interact with financial firms. Firms generally hold the upper hand – they are professionals doing business with amateurs. Information can never bridge this gap. A high level of consumer protection requires that firms not use this advantage to their benefit, but rather actively consider what is best for the consumer. This responsibility does not mean placing a thick stack of paper in front of the consumer to be quickly scanned and signed.
Products and services must be designed to adapt the complexity, cost and risk to consumers' needs and circumstances. Firms must also ensure that their sales staff and external distributors face incentives that enable them to prioritise the interests of the client. A consumer should not be granted too large of a loan or recommended unsuitable savings products simply because doing so benefits the firm's or its employees' short-term financial interests.
FI will be clearer in its communication about how the authority inter-prets the rules regarding, for example, "protecting the interests of the customer". It is part of our strategy to pursue communicative and proactive supervision. The framework document that FI is publishing together with this report clarifies the objective of the authority's con-sumer protection work. This document takes us one step closer to a financial market where it is a little bit easier to be a consumer.
Stockholm, 11 May 2017
Finansinspektionen (FI) presents in this report the risks consumers are facing on the financial market and that FI is prioritising in its supervision. One example is the risk that consumers will be granted larger loans than what their personal finances allow. Another is the risk of unsuitable investments, which increases as consumers are forced to make increasingly difficult decisions about their savings. FI also accounts in the report for other observations made in its supervision, for example that digitalisation can lead to better tailored products and more competition, but also to certain risks.
Consumers on the financial markets must make more and more deci-sions while at the facing an increasing number of options. Financial products are difficult to evaluate, and many consumers know little about or have limited interest in financial matters. As a result, con-sumers are generally at an information disadvantage in their interac-tion with financial firms. Regulation is therefore needed to protect consumers and avoid a negative outcome for both individual consumers and the economy at large.
Financial firms must be stable and subject to good control and risk management if consumers are to be able to trust that their investments with these firms are safe. Consumers must also have access to clear, relevant information in order to be able to compare the fees and other terms and conditions associated with different products.
However, simply providing information is not sufficient for ensuring a high level of consumer protection. Even when consumers have access to a lot of information, they may, for a number of reasons, have difficulty interpreting and understanding the terms and conditions of various products. The manner in which the information is presented, for example the alternatives that are pre-selected, has a strong influence on which decisions are made. Furthermore, conflicts of interest within financial firms may lead to the sale of products that are not suitable given the individual consumer's needs and circumstances.
FI presents in this report the risks that it has given the highest priority with regard to consumers on the financial market as well as the measures that FI has taken or plans to take.
The first risk that FI highlights is that consumers may be granted larger loans than what their personal finances can handle. This is a prioritised risk for FI from several perspectives. The risk for consumers is especially large when it comes to consumption loans, which are designed and sold in a way that could give rise to conflicts of interest. This could have large, negative consequences for consumers, and in a worst-case scenario could result in a record of non-payment and over-indebtedness.
Mortgages constitute the majority of household debt. Vulnerable households, i.e. households that have large loans in relation to their income or the value of their home, may need to sharply reduce their consumption if interest rates were to rise or they were to suffer a loss of income. This could have negative consequences for both individual households as well as the economy. There is therefore cause for strengthening households' resilience and reducing the share of vulner-able households from both an economic perspective and a consumer protection perspective.
The second risk that FI highlights is the risk that consumers' savings will be placed in unsuitable investments. Many of the financial deci-sions that consumers must make are related to savings, for example their pension savings. These decisions are difficult since it is hard to predict the outcome of savings products and since fees and costs are often expressed as percentages and may consist of several components.
FI takes the position that firms developing and selling savings products must take more of a responsibility to adapt their products to the needs and circumstances of consumers. This applies to risk and com-plexity, but also to fees. New regulation on the market for financial instruments and insurance products clarifies that firms bear such a responsibility. New rules also place stricter requirements on the han-dling of conflicts of interest that may arise when financial advisors receive a commission or sell their own products. FI is of the opinion that a market for independent financial advice is an important compo-nent in making the savings market more manageable for consumers.
There are specific risks associated with savings in insurance products, for example that consumers may be treated unfairly when life insur-ance companies manage and distribute surpluses. Another risk is that consumers cannot sufficiently determine what the consequences are of moving pension capital between different firms.
FI also accounts in the report for other observations made in its supervision and the trends it has identified on the market.
Digitalisation and the large number of new services available to con-sumers is one example. In some cases, consumers are facing risks that are not always managed by existing regulation. This is the case when it comes to crowdfunding, which on the one hand can facilitate funding for small- and mid-size firms, but on the other hand can introduce risks for the consumers who invest or lend money through funding platforms. Binary options, a type of speculative and risky product that has a very short horizon, are another example. FI considers them to be unsuitable for most consumers.
Digitalisation can also be beneficial for consumers. For example, FI believes that automated advisory services could play an important role in the development of the market for independent financial advice. In terms of payment services, there many examples of how digitalisation is resulting in more user-friendly services and contributing to more competition.
Finally, FI discusses the opportunities available to consumers to make active decisions regarding sustainability aspects in financial products. Sustainable investments, for example via funds, are becoming increasingly common, but in the absence of a shared information standard it is difficult for consumers to compare the sustainability aspect of savings in different funds.