Final Main Report An assessment of the extent of an identified need for simplified, standard financial services products SANCO/2003/B4/001 A report for the European Commission by: Charles River Associates 1 Undershaft London EC3A 8EE United Kingdom Rue de l’Abbaye 2 B-1000 Bruxelles Belgium December 2004 CRA No. D0-5003 Charles River Associates Acknowledgments During the course of this project we spoke to a wide variety of Government bodies, regulators, trade associations and consumer bodies as well as industry participants across the Member States of the European Union. We would like to thank them for their extensive help in the preparation of this report. We would also like to thank members of the European Commission’s Health and Consumer Protection Directorate for their input and direction in writing this report. For further details on this report, please contact: Tim Wilsdon and Kyla Malcolm Charles River Associates 1 Undershaft London EC3A 8EE Tel: +44 (0) 20 7664 3700 Or Rainer Nitsche Charles River Associates Rue de l’Abbaye 2 B-1000 Bruxelles Belgium Tel: +32 2 627 1400 December 2004 Contents Page Executive Summary........................................................................................................................................i Section 1 Introduction.............................................................................................................................1 A definition of a simplified, standard product............................................................................................1 The structure of the report...........................................................................................................................2 Section 2 Methodology............................................................................................................................4 Stage 1 - Background research ...................................................................................................................4 Stage 2 - Member State background research ............................................................................................5 Stage 3 - Member State Interviews............................................................................................................6 Stage 4 – Confirmation from Member States.............................................................................................7 Section 3 Consumer detriment and simplified products ....................................................................9 Information asymmetry.............................................................................................................................10 Complexity of characteristics...............................................................................................................10 Difficulty in assessing quality ..............................................................................................................15 Infrequency of purchase .......................................................................................................................16 Switching costs..........................................................................................................................................18 Myopic Behaviour.....................................................................................................................................20 The need for simplified products from a theoretical perspective.............................................................22 Different solutions to informational problems .........................................................................................25 Simplified products...............................................................................................................................25 Information ...........................................................................................................................................25 Financial advice ...................................................................................................................................25 Implications of the literature for simplified products...............................................................................27 The potential problems from simplified products................................................................................27 Section 4 Development and characteristics of simplified products .................................................29 The existence of simplified products........................................................................................................29 Genesis and objectives ..............................................................................................................................31 Section 5 Bank accounts with payment means ..................................................................................33 Simplified bank accounts..........................................................................................................................34 Common characteristics.......................................................................................................................35 Assessment of simplified products........................................................................................................37 Alternative interventions for countries without simplified products .......................................................38 Information provision...........................................................................................................................38 Regulation of sales and advice.............................................................................................................39 Voluntary codes of conduct ..................................................................................................................39 Assessment of the need for simplified products.......................................................................................40 Section 6 Cash based saving products.................................................................................................48 Simplified cash based saving accounts.....................................................................................................50 Common characteristics.......................................................................................................................50 Assessment of simplified products........................................................................................................52 Alternative interventions for countries without simplified products .......................................................52 Information provision...........................................................................................................................53 Regulation of sales and advice.............................................................................................................54 Voluntary codes of conduct ..................................................................................................................54 Assessment of the need for simplified products.......................................................................................54 Section 7 Credit or deferred debit cards ............................................................................................57 Alternative interventions for countries without simplified products .......................................................59 Information provision...........................................................................................................................60 Regulation of sales and advice.............................................................................................................60 Voluntary codes of conduct ..................................................................................................................61 Assessment of the need for simplified products.......................................................................................61 Section 8 Private pension plans............................................................................................................65 December 2004 Contents Page Simplified private pension plans...............................................................................................................66 Common characteristics.......................................................................................................................67 Assessment of simplified products........................................................................................................70 Alternative interventions for countries without simplified products .......................................................76 Information provision...........................................................................................................................77 Regulation of sales and advice.............................................................................................................78 Voluntary codes of conduct ..................................................................................................................79 Assessment of the need for simplified products.......................................................................................79 Section 9 Motor insurance....................................................................................................................83