The European Commission is scrutinising the tying and cross-selling of products in a bid to end anti-competitive practices that reduce customer mobility and price transparency

Last month the European Commission for Internal Market and Services launched a consultation on tying and other potentially unfair commercial practices in the retail financial sector which went somewhat under the radar.

In the consultation, the Commission says: “Some tying and cross-selling practices, such as packaging two or more products together are unfair because consumers are unable to switch between products or make clear and accurate price comparisons.”

The consultation follows an investigation commissioned by the EC of cross-selling across EU member states, which found that 572 million contracts could be switched Europe-wide if such practices were not in force.

The most common forms of harmful bundles identified by the Commission include mortgage loans with life and other insurance, pension products with life insurance and investment advice with other services, such as fund transfers.

The study also highlighted the fact that tying practices have been replaced not just by mixed bundling but also by conditional sales practices, such as the obligation to pay salary into the current account applied to consumer loans; minimum time periods for access to other products when opening a personal account or getting investment advice, and being obliged to get loan guarantees together with life insurance and payment protection.

Uncompetitive and unfair tying practices were found in the UK while, tying was found to have survived despite legal prohibitions in Belgium, Portugal and Slovakia. In the cases of Ireland and Spain, tying had been replaced by other uncompetitive practices.

The Commission says: “The results of the test suggest cases of tying practices that are anti-competitive as well as harmful to consumers and small and medium enterprises as they reduce customer mobility, price transparency and the comparability of providers on the market, increase switching costs and negatively affect consumer confidence. It also finds that mixed bundling often has a similar negative effect on consumers as tying.”

The financial adviser firm The Emba Group has also voiced these concerns.
Sales and marketing director Mike Fitzgerald says: “Currently you go into a bank and the checklist comes out. The products on offer are not bad products but the consumer doesn’t always have full knowledge of the cost of the mortgage with the life cover or payment protection. In my years of experience when you unbundle the offering you will find that the client would be better served buying individual products from brokers. It is very rare that a consumer gets the better deal from a bundled package.”

On the other hand, mortgage.co.uk strategic partnerships director Kevin Friend argues that the practice of bundling is not necessarily anti-competitive.

He says: “It does, however, require careful scrutiny to ensure the customer is clear on what the true cost of borrowing is in particular.”

Friend says we need to consider the change in the market since the “heady days” of irresponsible lending, during which arguably consumers benefited from lenders fighting for market share without regard for profit or pricing for risk.

He says: “This was to prove to be a short-term gain for many borrowers because the initial benefit of a low rate is now proving costly as many struggle to remortgage, failing to meet tight criteria as hard lessons have been learnt.”

As the focus of the Commission’s study is on products such as mortgages with life and general insurance, the reaction of the banking sector to the Commission’s work will be interesting. The European Banking Federation has confirmed that it has set up an internal working group to look at the issue and it is expected to publish its position on this mid April.

Going forward, Fitzgerald says: “There is likely to be more and more bundling of policies and products. The consolidation within the market will mean potentially a loss of competitiveness in terms of price and products on offer to the consumers.”

Friend says there is support for the Commission to look carefully at why this practice exists and ensure transparency in all transactions.

He says: “Forced sales whereby consumers are hooked in must be stopped as often rates are not the best in the market. The merit which underpins the above is simple for the Commission.”

It is clear from the Commission’s investigation that the driving objective is to improve product and price offerings to consumers. At the other end of the spectrum the Commission through its consultation is seeking the participation of lenders and product providers in order to look at fair ways of attracting and retaining consumers.

Commission Consultation closes 14 April. To comment go to: link