This presentation on the G20/OECD High-Level principles on Financial Consumer Protection and sectoral guarantee arrangements by Sebastian Schich addresses the role of guarantee arrangements to protect consumer assets in the financial service sector, such as pension and insurance claims and bank deposits. More information is available on the OECD website at http://www.oecd.org/finance/financialsectorguarantees.htm http://www.oecd.org/finance/financialconsumerprotection.htm

1. THE “G20/OECD HIGH-LEVEL PRINCIPLES ON
FINANCIAL CONSUMER PROTECTION” AND
SECTORAL GUARANTEE ARRANGEMENTS
INTERNATIONAL SEMINAR ON
INVESTOR PROTECTION SCHEMES
LONDON - 19 JUNE 2015(*)
Sebastian Schich
OECD Directorate for Financial and Enterprise Affairs
(*) Adapted from initial presentation

2. I. Motivation
II. G20/OECD “High-Level Principles on
Financial Consumer Protection” and the role of
guarantee arrangements to protect consumer’s
assets in different financial service sectors
III. Incidence of guarantee/compensation
arrangements across sectors and issue of
government backing
IV. Concluding remarks
Structure of presentation

3. • Strong interest in ensuring appropriate financial
consumer protection.
– Trust and confidence in the financial system underpins
real economic growth
– Greater complexity of many financial products
– Transfer of risk to households who are taking on more
directly financial risk and associated responsibility
• First means of protecting consumers is sound
regulation, but despite preventive measures, financial
service providers will fail from time to time.
• Financial sector compensation/guarantee arrangements
aim at ensuring appropriate protection of financial
consumers (including investors).
I. Motivation

4. • OECD long active in the area of financial consumer
protection; set up in 2010 a G20/OECD Task Force on
financial consumer protection.
• Task Force developed “High-Level Principles on Financial
Consumer Protection” (cross-sectoral perspective; not
superseding any sectoral regulatory principles).
• “Principles” endorsed by G20 leaders in 2011; adopted by the
OECD Council as a Recommendation in July 2012.
• Currently working on “Effective Approaches to Support the
Implementation of the G20/OECD High-Level Principles on
Financial Consumer Protection” (henceforth referred to as
“Effective Approaches”).
II. G20/OECD “High-Level Principles on
Financial Consumer Protection”

5. • To stimulate implementation of “Principles”
and identify
– “common effective approaches” (broad range of
jurisdictions),
– “innovative or emerging effective approaches”
(limited to a number of jurisdictions) to
implementation, and
– “underlying assumption” (providing greater
clarity) for “Principles”.
II “Effective Approaches”

6. Principle Number of
lines of text
1. Legal, Regulatory and Supervisory Framework 16
2. Role of Oversight Bodies 13
3. Equitable and Fair Treatment of Consumers 4
4. Disclosure and Transparency 20
5. Financial Education and Awareness 21
6. Responsible Business Conduct of Financial Services Providers and Authorised Agents 17
7. Protection of Consumer Assets against Fraud and Misuse 3
8. Protection of Consumer Data and Privacy 5
9. Complaints Handling and Redress 8
10. Competition 5
II. “G20 High-Level Principles on Financial
Consumer Protection”

7. • “Guarantee arrangements” not explicit but part of the
concept behind Principle 7, which includes “winding-
up” of service providers.
– Principle 7: “Relevant information, control and protection mechanisms
should appropriately and with a high degree of certainty protect
consumers’deposits, savings, and other similar financial assets,
including against fraud, misappropriation or other misuses.”
– “Underlying assumption” for Principle 7: “Consumer protection and the
need to keep consumers’trust in the financial system require that
special arrangements are in place so that consumers bear limited losses
when a financial services provider is wound up.”
II. The “Principles” on guarantee
arrangements to protect consumers’ assets

8. • “Common effective approaches:”
– In case of financial services provider’s failure, and in the event that the
consumers’ assets are not separated from the financial services provider’s
general assets, the way of protecting consumers’ assets is either to give to
consumers a preferred claim in the winding up procedure (as is commonly the
case in the insurance sector), and/or to organise an efficient guarantee scheme
which may be the case totally or partly in the different sectors, i.e. banking,
insurance and securities.
– Most common are deposit guarantee schemes. Financial services providers are
usually required to participate in order to be registered and/or licensed.
– Financial service providers are also usually required to participate in investor
guarantee schemes in order to be registered and/or licensed.
• “Innovative/emerging effective approaches:”
– Insurers may be required, for purpose of authorisation (license/registration), to
participate in an Insurance Guarantee Schemes (IGS).
II. Guarantee arrangements as “effective
approaches” to support implementation of Principle 7

9. • Further to protecting financial consumers,
guarantee arrangements seem to have
become a preferred instrument to fulfil other
specific financial policy objectives, including:
– safeguarding the stability of the system; and
– addressing market failures that impede a more
preferable allocation of resources.
III. Incidence of selected types of guarantee
arrangements

10. III. Incidence of selected types of guarantee
arrangements (contd.)
Source: Schich and Kim (2011). Note: Number of arrangements.

11. III. Incidence of selected types of
guarantee arrangements (contd.)
Source: Schich and Kim (2011). Note: Estimates relate to end-2010.

12. • Risk considerably reduced if “backed” by the government; although global
financial crisis has shown that even within presumably safe world of
government guarantees, value of guarantee depends on strength of
sovereign.
• Whether or not a guarantee scheme is backed by a government depends
among other things on the systemic role of the institutions covered: in this
regard, policy considerations are evolving.
• In any case, even in deposit insurance, no unanimity yet whether there is a
government guarantee and what might be covered (e.g. Iceland versus
Australia).
• Issue of whether and to what extent there is sovereign backing increasingly
relevant for other sectors than that of deposit-taking banks.
• Policy challenge how to communicate what is covered by private and
public arrangements and where are the limits!
III. Selected issue: A guarantee is risky, just like
any financial promise

13. • Looking across countries at “effective approaches” to achieve
financial consumer protection, the role of explicit guarantee
arrangements differs from one financial service sector to another.
• Deposit insurance arrangements are the norm, insurance
policyholder protection schemes exist especially where insurance
is mandatory, while pension fund policyholder protection
schemes are rare.
• Guarantee arrangements in a number of areas have proliferated,
and it is useful to take a cross-sectoral perspective (not least as
issue of “sovereign backing” and how to communicate about it is
relevant beyond deposit insurance area, but also so as to learn
about how to deal with moral hazard, funding, etc.).
IV. Concluding remarks

14. Thank you
Selected references:
• G20/OECD Task Force on Financial Consumer Protection (2014a), “Effective
Approaches to Support the Implementation of the Remaining G20/OECD High-Level
Principles on Financial Consumer Protection”, 9 September.
• G20/OECD Task Force on Financial Consumer Protection (2014b), “Annex IV to the
Report on the Work To Support the Implementation of the Remaining G20 High-
Level Principles on Financial Consumer Protection – Principle 7”, November.
• OECD (2013), “Policyholder Protection Schemes – Selected Considerations”, OECD
Working paper on Finance, Insurance and Private Pensions No. 31.
• Schich and Kim (2011), “Guarantee Arrangements for Financial Promises: How
Widely Should the Safety Net be Cast?”, OECD Financial Market Trends, June.
• World Bank (2012), “Good Practises for Financial Consumer Protection”, June.
sebastian.schich@oecd.org
http://www.oecd.org/finance/financial-markets/financialsectorguarantees.htm