Marketing and Sale of Product Packages

Circular Marketing and Sale of Product Packages CIRCULAR: 25/2011 DATE: 06.09.2011 THE CIRCULAR APPLIES TO: Banks Financing companies Insurance companies FINANS TILSYNET Postboks 1187 Sentrum 0107 Oslo

Marketing and Sale of Product Packages 2 | Finanstilsynet The right of financial institutions to offer a service on the condition that the customer simultaneously acquires another service is regulated in the Financing Activities Act § 2-14 with the accompanying regulation dated 1 June 1990 No. 429 on product packages, etc. (the Product Packages Regulation). The purpose of the regulation is to facilitate competition between financial institutions. The regulation is intended to prevent financial institutions with a broad product range from restricting competition from other financial institutions by tying their customers to a total package. Additionally, it is a goal to make it easier for the customer to navigate the market. The Product Packages Regulation prohibits two types of product packages. First, a financial institution cannot offer a service on the condition that the customer simultaneously acquires another service, cf. the regulation § 2 first paragraph. The second form of unlawful product packages is to give a customer particularly favorable terms if the customer purchases multiple services. Under regulation § 2 second paragraph first sentence, an exception has been made from the prohibition on product packages in cases where there is a connection between the services such that one service presupposes the simultaneous use of another service. Exceptions from the prohibition are also made in cases where the customer receives particularly favorable terms if a combined offer of multiple services can be justified by cost savings, cf. § 2 second paragraph second sentence. The background for this exception was that any cost savings from producing multiple services simultaneously or for the same customer should also benefit the customer. The example was property insurance and cost savings from issuing policies with multiple insurances. If the customer receives a particularly favorable term on a product package, such a product package is therefore lawful if the combined offer of services is justified by cost savings. A line must be drawn between the savings that qualify for the exception and those that do not. Finanstilsynet has assumed that it is up to the individual financial institution to document cost savings, and that hypothetical future costs, such as future marketing costs, cannot be accepted as cost savings in this context. Finanstilsynet further assumes that the cost savings must be quantifiable. Examples here are cost savings in connection with customer follow-up, while higher customer satisfaction is an example of a non-quantifiable size. Finanstilsynet assumes that there must be a reasonable relationship between the cost savings that qualify for the exception and the favorable terms. If the documented cost savings linked to the sale of product packages are insignificant, then the special favorable terms given to customers in the form of discounts or similar cannot be of a significant size and thus constitute a large cost for the institution. The cost savings that the institution achieves by selling product packages must, in other words, be reasonably identifiable in discounts and similar benefits given to customers. Product packages that are jointly offered by several companies within a group may also be in conflict with the prohibition on cross-subsidization in the Financing Activities Act, cf. § 2a-8 second paragraph, and the provision on confidentiality. Finanstilsynet is given competence in the Product Packages Regulation § 2 third paragraph to decide in doubtful cases whether a term is in conflict with the regulation.

Marketing and Sale of Product Packages Finanstilsynet | 3 As is well known, Finanstilsynet has evaluated a total customer concept that presupposed that the customer, in order to receive a discount of 0.30 percentage points on the interest rate on a mortgage loan, also had to buy fund and insurance products in the same group. Finanstilsynet found that a total customer concept that presupposes cross-sale of securities fund and insurance products from different companies in the group is in conflict with the Product Packages Regulation. The bank in question has adjusted its practices according to Finanstilsynet's assessment. Several of the largest banks have also either stated that they do not have product packages, or that they will withdraw their product packages from the market. Finanstilsynet will ask the boards of institutions to carefully review the product packages they offer to ensure that any offers are in accordance with law and regulation. If a financial institution wishes to apply the provision in the regulation on cost savings, the institution will be asked to describe what cost savings follow from the combinations of services in the product packages they offer, and the relationship between the cost savings and the favorable terms. For cases where the product packages require a combination of services from different companies, the financial institution will be asked to describe the cost savings that the individual companies achieve as a result of this combination of services. The financial institution must also be able to document that the product package does not conflict with the prohibition on cross-subsidization in the Financing Activities Act § 2a-8, or the provision on confidentiality. Finanstilsynet will apply a restrictive practice in the enforcement of the regulations. Erik Lind Iversen Kjell Arne Aasgaarden Contact persons: Section Manager Kjell Arne Aasgaarden, tel. 22 93 99 22 Special Advisor Anders N. Kvam, tel. 22 93 99 27 Senior Advisor Kristin S. Kværnø, tel. 22 93 97 53

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