There is certainly no shortage of rhetoric on the need of enforcing more consumer protection mechanisms in the EU. The reality however is that consumer protection is often given only lip service by politicians and regulators who may fear upsetting big business by exerting pressure on them to give their customers a fair deal.

Some countries need to rethink consumer protection more radically than others. In Malta we have a small market and, as the Governor of the Central Bank has repeatedly said, a small market can suffer from certain inefficiency that in practice means that consumers often get a raw deal, despite the presence of competition in many areas of the market.

The need for consumer protection is nowhere more necessary than in Malta. Our inflation rate is persistently higher than that in the eurozone and this is eroding our competitiveness. Moreover, in certain services the market is served by very few providers that can often dictate terms that are more frequently associated with monopolies. The local banking sector is considered by many as one of the areas where a radical rethink of consumer protection is badly needed.

We have all heard of the exorbitant fees often charged by some local banks both to small businesses and also individual consumers. The cases of mis-selling of financial services products by certain banks and other service providers are often blatantly evident, but little seems to be done to stop this corrosive practice that is destroying the trust that small investors have always had in financial markets.

Now it is also becoming increasingly difficult for small businesses to obtain credit from banks that prefer to buy the more liquid and less risky local or foreign debt in the form of corporate and sovereign bonds that they can dispose of with ease in the stock market.

I am certainly not in favour of the government micro managing the way banks operate. But there is a strong case for regulators to be more visible when protecting consumers. This is what the Financial Service Authority in the UK intends to do. The chairman of the FSA, Adair Turner is quoted saying: “The way we do things now is not good. We may need to put what is expected into rules to make it easier for us to say what is not acceptable.”

The US regulators are not lagging behind on this issue. They have established a consumer bureau to oversee mortgagees and credit cards while, according to the Financial Times, “the Securities and Exchange Commission recommended that brokers be required ‘to act in the best interest’ of their customers”. Similarly, the French regulators “plan to put written warnings on products they consider too complex for retail investors”.

Financial services regulators in leading financial centres are abandoning the “light touch” approach in their regulation of financial products by insisting on full disclosure to minimise the frequency of mis-selling scandals that hit millions of consumers in the EU. The FSA has set an example by shifting to “more intrusive” supervision of financial products aimed for small investors.

This new style of supervision includes better scrutiny when large profit margins are recorded on certain products, as well as the quality of the financial advice given to consumers. The creation by the UK government to create two authorities to replace the FSA will mean that a Consumer Protection and Markets Authority will be set up to protect consumers’ interests.

This new authority is expected to be empowered to set maximum charges caps for particular financial services. It is also expected to make it mandatory for risk warnings to be included in all offerings of investment products sold by banks. It will also ban some retail high-risk financial products. Self-certified mortgages that could encourage irresponsible borrowing may also be prohibited.

It is hardly surprising that the big boys leading major banks are trying to scare the market by saying that this approach is too heavy-handed and that it will lead to operating costs increasing and consumer choice being reduced. But what the FSA and other regulators are doing through this radical rethink is saving the banks from the consequences of their own greed while guaranteeing a fair deal for consumers.

In Malta we have a tradition of following the banking practices of the UK which is, arguably, the most important global financial centre. We will do well to follow the FSA initiative for tighter consumer protection sooner rather than later.

jcassarwhite@yahoo.com