2011 Banking Conduct Supervision Report Information note

• Regulation initiatives (chapter II)
• Projects to promote financial education (chapter III)
• A summary of market conduct supervisory activities (chapter IV)
• An analysis of the characteristics of retail banking markets (theme boxes)
• Two market conduct regulation themes (chapter I) instrumental for the ongoing reflection in international fora in which Banco de Portugal plays an active part
• The usual synopses of regulatory and legislative initiatives and the international agenda

Supervisory activities

Banco de Portugal’s supervisory work focuses on all trading stages. The Bank assesses compliance with information requirements, rules of conduct and all other applicable rules. In addition to the conduct of inspections at credit institutions (‘mystery client’ or accredited inspections) supervision involves the analysis of information reported to Banco de Portugal and released on institutions’ websites. It also involves analysis of complaints and information requests from bank customers.

In 2011 Banco de Portugal:

• Supervised 5,112 advertising campaigns from 65 institutions, of which 20 had been previously analysed as they related to indexed and dual deposits. The Bank required that 128 campaigns be changed and three suspended, which was fewer than in the previous year, representing progress in the way in which institutions implement the rules in force. 73 per cent of the campaigns changed involved consumer credit products.
• Checked 924 fees and expenses leaflets and 600 interest rate leaflets in institutions’ price lists, which must be reported to Banco de Portugal. It also analysed 339 price lists through on-site inspections at branches and institutions’ websites;
• Examined draft credit agreements in force at institutions: 2,114 referring to home loan products of 199 institutions and 2,155 to consumer credit products of 143 institutions;
• Boosted its supervisory activities, by raising the number and geographical dispersion of on-site inspections carried out at branches of credit institutions. It paid special attention to simple deposits, with 822 on-site inspections of 55 credit institutions. The priority assigned to this market is due to its importance in harnessing household saving and the considerable impact of new product launches. Banco de Portugal also assessed the compliance of 45 prospectuses on indexed and dual deposits prior to trading;
• Intensified its supervisory activities in home loans and payment services markets. It conducted 749 and 1,312 on-site inspections respectively, in both cases as a result of a greater number of inspections carried out at institutions;
• Monitored compliance with rate caps applied to consumer credit agreements, with a reported 1.32 million new such agreements (110,000 agreements per month on average);
• Analysed 14,697 complaints from bank customers. In 2011 complaints against credit institutions received by Banco de Portugal dropped by 3 per cent year-on-year. In 41 per cent of closed complaints the Bank saw no evidence of infraction on the part of institutions. This figure was however lower than in 2010;
• Issued 1,138 recommendations and specific orders, requiring institutions to correct default and irregularities detected in the exercise of banking conduct supervision;
• Initiated 38 breach of regulations proceedings.

Regulation initiatives

Banco de Portugal issued codes of conduct on responsible credit granting, bundling and transparency and completeness of agreements.

In bundling, the Bank has defined as good practice that home loans, consumer credit or bank deposits should not be sold jointly with investments without capital guarantee.

In transparency and completeness of agreements the Bank has defined good practices to be observed by institutions, notably in the use of general contractual terms that pursuant to the law allow for a unilateral change in interest rates and other charges (jus variandi). At the same time, the Bank has established transparency, clarity and proportionality principles that must be complied with under these clauses and their exercise.

Banco de Portugal has defined good practices regarding pre-contractual and contractual information, customer’s solvency assessment and bundling of consumer credit agreements. This occurred at the time of publication of the Impact Assessment Report provided for in Decree-Law No 133/2009, which transposed the Consumer Credit Directive.

Banking conduct supervision at international level

The role played by banking conduct supervision has been progressively recognised at international level, most notably in its regulatory dimension. The new European Banking Authority (EBA) started operating in early 2011, with banking conduct supervision as well as prudential supervision powers. The European Union has thus acknowledged that financial consumer protection and prudential supervision complement each other. Most G20 countries also acknowledged this when at the end of 2011 they endorsed the Financial Stability Board’s (FSB) report on Consumer Finance Protection and the High Level Principles on Financial Consumer Protection and requested additional work from the FSB and the OECD for their implementation. G20 also considered it important to create an entity that would be responsible for financial consumer protection at international level, acknowledging FinCoNet (International Financial Consumer Protection Network) – in which Banco de Portugal participates – as the only organisation that might bring together regulators in this field.

Banco de Portugal has been proactively involved in this activity and in the European Commission’s regulatory initiatives within this scope. In 2011 these included draft directives on mortgage credit and regulation of complex financial instrument trading (which went on to include indexed deposits) and the activities of the Comitology Committee under the Consumer Credit Directive.

Financial education projects

In 2011 the final report of the Survey on the Financial Literacy of the Population was published and presented at the Banco de Portugal’s 1st Conference on Financial Literacy, entitled Por uma cidadania financeira ativa (“Aiming at active financial citizenship”).

Banco de Portugal played an active part in the Portuguese National Plan for Financial Education launched in 2011, whose activities are being developed jointly with CMVM (the Portuguese Securities Market Commission) and ISP (the Portuguese Insurance and Pension Funds Regulatory and Supervisory Authority).

In 2011 Banco de Portugal began releasing leaflets on the rights and duties of bank customers entering into consumer credit agreements and bank deposits, distributed through institutions’ branches.

The Bank Customer Website continued to be an active instrument to inform and educate bank customers and supply services to the public. In 2011 the daily average number of visitors reached 4,427, which was 13 per cent more than in 2010.

Banco de Portugal also stepped up its involvement in the International Network on Financial Education (INFE), a key international organisation for cooperation in the field of financial education, coordinated by the OECD. In this context, Banco de Portugal has taken part in drafting the proposal for High-Level Principles on national financial education strategies.

Market conduct regulation themes

In this report Banco de Portugal also shares its views on the fundamentals and components of the regulation model to be implemented.

Banking conduct supervision has been playing an increasingly relevant role in the main international institutions’ agenda, given its importance in promoting financial stability. Such acknowledgement led G20 to request the OECD to develop with the Financial Stability Board the Principles on Financial Consumer Protection, formally adopted in October 2011. Banco de Portugal has actively participated in the activities of the OECD’s Task Force created for this purpose. This report analyses banking product consumer protection in Portugal in the light of each of those principles.

The axioms of financial market efficiency and economic agents’ rationality underlying most economic models have been put into question in the wake of the international financial crisis. Banco de Portugal is monitoring this, and in this report it also presents important contributions from behavioural economics to an understanding of the functioning of retail banking markets. This approach substantiates the extension of regulation to new non-conventional areas of regulators’ intervention. The acknowledgement that, in addition to financial literacy, there are psychological factors that may be crucial in consumer behaviour is in some cases associated with the defence of more intrusive regulation models that envisage interventions on financial products’ characteristics and even the prohibition of their trading (product intervention).

Banking conduct supervision – 2011 figures:

• 5,112 advertising campaigns inspected, involving 65 institutions; 131 campaigns changed
• 924 fees and expenses leaflets and 600 interest rate leaflets analysed
• 339 price lists examined at branches and on institutions’ websites
• 45 prospectuses of indexed and dual deposits analysed
• 2,114 home loan product draft agreements and 2,155 consumer credit draft agreements analysed of 199 and 143 institutions respectively
    
• Inspections of banking products and services:
  • 749 inspections of home loans, involving 42 credit institutions
  • 1,058 inspections of consumer credit, involving 84 entities (including 'points of sale’)
  • 822 inspections of simple deposits, involving 55 banks
  • 1,312 inspections of payment services, involving 88 institutions
      
• 14,697 complaints received on matters falling within the scope of the Bank’s tasks
• 2,550 information requests from bank customers
• 1,138 recommendations and specific orders issued
• 38 breach of regulations proceedings initiated