Warning on CDFs (contracts for difference)

According to our national financial authority sellers of CDFs are unbalanced in their information to consumers and investors about risks and return opportunity.

The Norwegian Consumer Council encourages consumers to disregard offers on CDF, unless consumers themselves fully understand the nature of these products and could afford to loose more money than they are investing. Our advice to the vast majority of consumers would simply to stay away.

Also the European financial authorities ESMA and the EBA warn investors on contracts for difference. It is said in their joint press release;

“The two authorities are concerned that during the current period of low investment returns, inexperienced retail investors across the EU are being tempted to invest in complex financial products, which they may not fully understand and which can end up costing them money they cannot afford to lose.

Andrea Enria and Steven Maijoor, (Chairs of the EBA and ESMA), warned:

– Retail investors across the EU should be aware of all the risks arising from investing in CFDs. These products appear to promise investors substantial returns at a low cost but may ultimately cost them far more than they may have intended or could afford to lose.

– CFDs are complex products that are not suitable for all types of investors, therefore you should always make sure that you understand how the product you are buying works, that it does what you want it to do and that you are in a position to take the loss if it fails.”

The authorises continues to raise alertness among consumers and investors by encouraging consumers to read their agreement or contract with the CFD provider before making a trading decision.

It a good reminder but we would like to add that consumers should be on full alert also to those promises and explanations that at given orally.

ESMA and EBA encourage consumers and investor to “check if the CFD provider is authorised to do investment business in your country. You can check this on the website of the CFD provider’s national regulator”

Concurrently with the publication of this warning, the EBA is addressing an internal Opinion under Art. 29 of the EBA Regulations to national supervisory authorities on the prudential supervision of CFDs.

Why we don’t embrace consumer education

Consumer organisations hold low esteem towards conventional / traditional consumer education and literacy schemes. Probably because it will not create the much needed balance of power between consumers and their providers.

I have so far spent most of June 2012 in meetings, debates and attending presentations on the subject of consumer protection in the financial markets. Representatives for numerous governmental and regulative bodies in EU, Americas and trans-national institutions have met consumer organisations, without interference from the corporate financial players. The scene for these meetings has been the Transatlantic Consumer Dialogue (TACD) 13^th annual meeting in Washington D.C.  The absence of industrial representatives has allowed an unconstrained dialog, without the habitual claims of over-regulation, unchangeable system feature, which makes it impossible to improve consumer conditions or ideas about consumer’s affection to their providers of financial services and products.

Some reflections from the dialog:

1. Consumer representatives on both sides of the Atlantic (including myself) calls for active consumer protection from financial supervisor authorities and regulators. We regard undertakings from supervisory authorities and regulators as more effective than our own undertakings and those of consumers. Consumer representatives have a long history of warning and urging consumers to act rational. We have suggested alternative products and behaviour, but still we see consumers going right in the traps of the financial sector time after time. Complex products, creative labeling and product developments must take much of the blame. No wonder we rather call for specialised finance consumer authorities and supervisors.

During those passed days I have had the chance to meet several of such specialised finance consumer authorities.  E.g. the 10 month old Consumer Finance Protections Bureau (CFPB) of USA, the Financial Consumer Agency of Canada (CFCP), Department of Consumer Protection in the European Banking Authority (EBA), Global program on consumer protection and financial literacy in The World bank, Financial education and Consumer Protection Unit in OECD (which is the secretary for the G20 on the matters of Financial education and Consumer Protection). All of them inspiring.

2. On both sides of the Atlantic, officials involved in the financial consumer aspects has focus on financial literacy. Consumer organisations hold low esteem towards conventional / traditional consumer education and literacy schemes. Probably because consumer education and literacy schemes don’t create the much needed balance of power between consumers and their providers.

None of those officials who promote financial literacy as a meaningful measure regards it as a sufficient condition for improved retail financial markets. Anything else would be naïve. The same officials have yet to substantiate the assumption that financial literacy is an effective tool to handle the current challenges which consumers experience.

I have yet to be persuaded – beyond theoretical arguments– that we will experience more effective markets and less consumer detriment if we prioritize conventional consumer education.

Society would benefit more if we provided decision making tools rather than providing classroom based education or financial literacy through adjusted school curriculum. Interactive digital technology serves consumers well for this matter. The Norwegian Consumer Council has developed www.finansportalen.no a price and product comparing site, which gives a platform for better consumer choices. We have also made necessary steps to bring this site to smart-phones.

With the tools of finansportalen.no we simplify choices of personal property and casualty insurance, current accounts, saving accounts, credit, mortgage and investment products. With such tools close at hand when purchasing financial products, consumers are allowed to act rational. Consumers get full comparable information presented in a simplistic manner from all providers. Such information is a necessary condition for effective markets. We estimate the societal benefit of finansportalen.no to be at least NoK 200 million.

Effective markets are the end purpose of any financial literacy scheme. So why not give priority to  price and product comparing sites, rather than costly consumer education programs?