Consumer Protection Report 2023

The Swedish Financial Market Regulator, Finansinspektionen, has released the Consumer Protection Report 2023. The report highlights key drivers of consumer risk for firms and briefly discusses areas where further regulation may be warranted to protect consumers from harm.
#### Key drivers of consumer risk for firms
The report identifies several key drivers, which include high interest rates coupled with high inflation leading to the unaffordability of loans and other practices leading to same result, poor business practices leading to unsuitable investments of consumers including practices such as greenwashing, liquidity and valuation issues of investment funds leading to redemption issues and late payments of the proceeds of redemption, or continuing risks of investment fraud. Some of these issues are briefly described below:
(1) Unaffordability of loans: Several factors have contributed to the fact that loans have increasingly become unaffordable for consumers. There is the current economic situation with a high inflation and interest rate making particularly variable interest rate loans hard to service. There is – and was in past years – a lack of thorough credit assessments by institutions ensuring that loans are truly affordable by households, even in times of crisis. There is an increasing trend towards the use of credit intermediaries who sometimes charge extraordinary high fees for the mediation of loans and who agree with ultimate lenders on minimum finalized loan arrangements.
(2) Unsuitable investments: Here, too, several factors come or came into play. Due to the high level of digitalization and increased access to financial markets, many consumers are now (financially) able to save and invest in products that may not be suitable for them, including cryptoassets or structured products. Furthermore, product suitability assessments do not always seem to capture the unsuitability of potential investments or aren’t performed in a way they should be. In addition, consumers might buy unsuitable products due to biased financial advice which remains a key issue in the Swedish financial market. Bias, so it seems, often arises from unsound payment agreements among financial services firms. Also, the design of investment platforms has led many consumers to purchase products unsuitable for them given their financial situation, their risk tolerance, or their investment objectives. Finally, against the backdrop of the general trend towards sustainability, many consumers have been induced to purchase allegedly sustainable products which truly aren’t sustainable. The issue of greenwashing has become more prevelant than ever before.
(3) Liquidity and valuation issues of investment funds coupled with high distribution costs:
Financial market turbulences caused by events like the pandemic or the onset of Russia’s war against Ukraine have illustrated the importance of managing liquidity and valuation risks in investment funds. In such situations, liquidity disappeared from various markets, making it challenging to accurately value certain fund assets. This caused investment fund investors not being able to redeem their investments promptly or having their holdings misvalued. An investigation in 2022 revealed that some fund managers lacked clear internal valuation guidelines. And although regulation is currently underway or about to come into effect introducing measures such as swing pricing to offset such risks, FI remains highly concerned about current shortcomings in pre-investment liquidity evaluations particularly involving (corporate) bonds.
#### Possible future regulation
In light of the above noted issues and some other risks identified by FI, the regulator has identified several areas where further regulation may be warranted and thus FI will look into to prevent harm from consumers. These are:
– the remuneration models for investment products to ensure the prevention of conflicts of interest and undue charges being imposed on consumers;
– the „penalties“ charged by financial institutions for an early repayment of loans;
– the lack of competition in the e-identification market leading to substantial risks as to cyber attacks.
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Please note: there are many, many issues addressed in the report which are likely to be of interest for our clients and which are not summarized above. Please refer to the original document for more detailed, comprehensive information.