1. INTRODUCTION

This paper intends to highlight the key legal concerns that, in my opinion, are flagged in the Proposal for a European Parliament and Council Directive concerning the distance marketing of consumer financial services and amending Council Directive 90/619/EEC and Directives 97/7/EC and 98/27/EC (COM(98)0468 - C4-0647/98 - 98/0245(COD)) (the "Proposal") which is still in the pipeline. Recent expectations that it will finally be enacted (after more than 3 years of preparation) lead me to focus my attention again in this draft piece of legislation. When reviewing the draft, almost three years after I read it for the first time, I have reached a kind of stubborn conclusion that it is an unnecessary, time inconvenient and imperfect rule and hence the motivation to criticise the draft with the naive hope and desire that it will finally be abandoned before becoming in force.

2. STAGES IN THE PROCEDURE FOR THE ENACTMENT OF THE PROPOSAL

The Proposal is nowadays awaiting Council common position.

The approval and final enactment of the Directive has been hampered by the radical divergence on the extent of the European harmonisation on financial services: whilst some Member States support total harmonisation, the majority of them uphold a minimum harmonisation. The Council has faced a number of situations evidencing the impossibility or reaching a final political compromise. Thus, during the Internal Market session on December 7, 1999, the Council invited the Commission to carry out an in depth survey on prior consumer information requirements in the area of financial services in the Member States with a view towards identifying common places to widen the scope of harmonisation.

The two main pending matters relate to (i) the scope of the prior consumer information right key and (ii) the law applicable to the services, i.e., that of the supplier’s or the consumer’s country of residence.

The European Council’s attempts to reach a consensus in the meetings held on November 11, 2000, March 12, 2001 and May 30, 2001 encountered an increasingly strong opposition between these two main streams.

From the initial proposal prepared by the European Commission and published in the Official Journal of the European Community on December 11, 1998 (C385, 010) thus far, the Proposal has undergone the stages highlighted as a summary in the following chart:

Nov 98

INITIAL PROPOSAL

Common basis setting out the conditions under which distance marketed financial services are offered/requested, negotiated and concluded as to reduce divergences in national approaches to this policy area and setting forth the key consumer rights:

- Right to prior relevant information

- Right to a reflection period (14 days: binding offer)

- Right of withdrawal (13 days, if (1) breach of prior information right or (2) breach of reflection period)

April 99 DECISION OF THE SOCIAL AND ECONOMIC COMMITTE

- The "minimalist" approach: the Proposal sets minimum standards which Member States would be free to improve (backed by 13 Member States).

- the "maximalist" approach: the Proposal sets maximum Community standards from which Member States would not be allowed to diverge (Commission, The Netherlands, United Kingdom)

- The Committee also wanted the directive to be implemented into national law by June 30, 2001 (rather than 2002 as first proposed)

- Prohibition of advance payments

May 99 EUROPEAN PARLIAMENT VOTES 1st READING

Right of prior information: detailed list of information

Right of withdrawal:

- 14 days

- Except financial services subject to non-controlled price fluctuations or non-life insurance contracts valid for less than 1 month

July 99 AMENDMENT OF INITIAL PROPOSAL

Right of prior information: in paper or other durable means

Right of withdrawal:

- Between 14 and 30 days, as determined by Member States

- the supplier must respect the withdrawal period set out in its home country, not to hamper consolidation of European financial market

- is set out generally, subject to certain exceptions

ROBBINSON LISTS

Oct 99 EUROPEAN PARLIAMENT BACKS 1st READING

 

 

3. DIRECTIVE ANALYSIS

3.1 OBJECTIVES OF THE DIRECTIVE

The Directive has two main objectives:

(a) To establish a common system for the offering, negotiation and rendering of distance marketed financial services with a view towards consolidating the Single Market (Recitals 1, 2 and 3) and to enhance consumer confidence in distance selling as a way to enhance confidence in new technologies (such as e-commerce).

- Directive as non-exclusive legislation: Any other European financial services and consumer protection legislation will apply notwithstanding the implementation of the Directive.

- Maximum standards for harmonisation: The Member States are prevented from passing or enacting national rules or regulations in the harmonised fields.

(b) Enlarging the scope of consumer protection.

3.2 SCOPE

As to the scope of the Directive, it is intended to constitute the main legal framework for the rendering of distance financial services, thus, without being limited to electronic rendering of services.

It applies therefore to the solicitation, offering, negotiation and conclusion of financial services either by letter, telephone, wireless communications, other electronic means (in all possible environments: open or closed), etc. This entails that the Directive will introduce into some national laws (for example, Spain) new forms of negotiation and contracting which were absolutely unknown to the basic legal framework (both the Spanish Civil Code and the Commercial Code refer back to the XIXth century), as well as altering rules and provisions already set forth in this legislation (as Articles 1.262 et seq. of the Civil Code regarding letter contracting or Article 51 of the Commercial Code regarding wireless contracting).

As to contract formation, Spanish case law has traditionally considered telephone means as non-distance contract formation routes (see, for instance, the Supreme Court Judgement dated January 3, RJA no. 11), whilst applying the provisions set out in the legislation for contract formation via letter to other modern contract negotiation methods, such as telex, facsimile and e-mail (Supreme Court Judgement dated July 30, 1996, RJA no. 6.079). Despite such a different consideration in our case law, there is no doubt that the rendering of financial services over the phone will be considered, as far as the Directive and its implementation is concerned, distance marketing of financial services and will, hence, be subject to its provisions.

The scope of the Directive is "to approximate the laws, regulations and administrative provisions of the Member States concerning distance marketing of consumer financial services" (Article 1).

The expression "distance contract" means any contract concerning financial services concluded between a supplier and a consumer under an organised distance sales or service-provision scheme run by the supplier, who, for the purpose of that contract, makes an exclusive use of distance communications up to and including the moment when the contract is concluded. Hence, the Directive is not applicable to distance financial services provided other than within an organised and established scheme, or to financial services which are not contracted exclusively through distance communication.

The definition of "financial services" in the proposed Directive includes banking, investment, insurance and payment services.

The concept of "consumer" for the purposes of the Directive includes only individuals who, with regard to any financial service, act for purposes which are outside their trade, business or profession. Hence, the Directive is not applicable to business-to-business financial services. It is important to know that the Directive is applicable whether or not the consumer is resident in the European Union.

3.3 PRIOR AND POST CONSUMER INFORMATION

As opposed to the Initial Proposal, the scope of the information that needs to be made available to the consumer prior to the contract is much more detailed in the Amended Proposal. The Amended Proposal, however, does not require the conditions notice which is served to the consumer prior to the contract to be maintained over a certain period of time, whilst in the Initial Proposal the financial service supplier was bound to maintain the terms and conditions notice which had been served to the consumer for a 14-day reflection period (without being allowed to vary, reject or otherwise repudiate them within such period).

The Initial Proposal only requested the notice of the terms and conditions of the proposed contract. In the Commission’s reasoning justifying this change in the Amended Proposal, the Commission argued that the service of a contract in the phone distance marketing was cumbersome, if not impossible.

Practice reveals that this reasoning is not completely accurate: firstly, because the terms and conditions of a contract may very well be served over the phone (provided always that the contract is reasonably concise and drafted in a consumer-friendly manner). Secondly, because the trading carried out up to date in Spain by phone banks has enabled the meeting of this requirement without major objections: the vast majority of the phone banks and phone banking services of the Spanish-based credit entities serve the client with copies of the contract(s) that shall be made available over the phone prior to trading commencement.

As to the information to be communicated to the client, it must be pointed out that regarding (i) life insurance contracts (marked with number "1" in the following chart), (ii) non-life insurance contracts (marked with number "2" in the following chart), (iii) collective investment schemes (marked with number "3" in the following chart), (iv) securities issuance and sale tenders (marked with number "4" in the following chart) and (v) investment services (marked with number "5" in the following chart), the requirement to provide prior information is greatly relaxed in the Directive. This is due to the fact that the European legislator is relying on other existing European legislation for these services (namely, Directive 92/49/CEE, of June 18, 1992, on non-life insurance, Directive 92/96/CEE, of November 10, 1996, on life insurance, Directive 85/6117CEE, of December 20, 1985, on collective investment schemes, Directive 89/298/CEE, of April 17, 1989, on securities tenders and Directive 93/22/CEE, on investment services).

For each of these services, the following chart highlights the specific information that must be made available to the client:

INFORMATION

1

2

3

4

5

a. Identity and address of the supplier (or its local representative, if any)

NO

NO

NO

NO

NO

b. description of main features of the financial service

NO

NO

NO

NO

NO

c. total price of the service (including tax)

YES

YES

NO

NO

NO

d. arrangements for payment, delivery or performance of the service

YES

NO

NO

NO

NO

e. period during which the offer or the price stands

YES

YES

NO

NO

YES

f. if the price fluctuates, disclosure of this circumstance and particulars allowing the consumer to verify the price at the time of concluding the contract

YES

YES

NO

NO

YES

g. the cost of using the distance communication (other than at the basic rate)

YES

YES

YES

YES

YES

h. Existence and duration of withdrawal rights

YES

NO

NO

NO

YES

i. Exceptions to withdrawal rights

YES

NO

YES

YES

YES

j. the amount to be paid by the consumer in the event of exercise of withdrawal right after the rendering of the service

YES

YES

 

 

YES

k. minimum term of the contract

YES

NO

NO

NO

NO

l. information on cancelling the contract

YES

NO

NO

NO

NO

m. applicable law (if other than the laws of the consumer’s place of residence)

NO

NO

YES

YES

YES

n. Jurisdiction (if other than the jurisdiction of the consumer’s place of residence)

NO

NO

YES

YES

YES

o. Supervisory authority to which the supplier is subject

NO

YES

YES

YES

YES

p. out-of court complaint and redress procedures

YES

NO

YES

YES

YES

As to the form and timing in which all the information should be communicated to the consumer, the following issues must be considered:

(a) Prior information: The information to be served before the completion of the contract must:

  1. Include a clear indication of its commercial purpose;
  2. be provided in a clear and comprehensible manner;
  3. be provided in any way appropriate to the means of distance communication used;
  4. comply with all principles of fairness in commercial transactions, as well as the principles which govern the protection of persons who lack capacity pursuant to national law (such as minors). The harmonisation target is hampered at this point, as the financial service supplier will abide by the principles governing protection of persons who lack capacity in each country to which it targets its services, rather than by those in its country of residence. As to the reference to the principles underlying "fairness in commercial transactions", it is dubious whether the home or the host State rule applies (i.e., whether the principles to be respected shall be those applicable in the place of residence of the consumer or of the supplier). In the absence of further references, I believe that this should refer to the principles prevailing in the place of residence of the consumer. Given that the financial service supplier will, by application of its home regulatory rules, respect the principles of its home State on fairness in commercial transactions (whether in respect of its activities within or beyond the boundaries of its place of residence), the fact that the reference to such principles should be construed as a reference to the host country prevailing principles entails, in the end, that the principles prevailing at both home and host countries will have to be fulfilled.

(b) Information to be communicated after conclusion of the contract: The Directive follows, in this regard, a cumbersome approach whereby the supplier must communicate to the consumer all the prior information referred to in paragraph (a) above, as well as the terms and conditions of the contract.

  1. This information needs to be communicated on paper or on a durable medium (i.e., any instrument enabling the consumer to store information addressed personally and specifically to him/her and which is mainly contained in floppy-disks, CD-ROMs and the hard drive of the consumer’s computer where electronic mail is stored);
  2. the information needs to be addressed in a clear and comprehensible manner, the medium used to be agreed between the parties; and,
  3. the Directive does not specify how long the supplier may take to serve this information after conclusion of the contract. In the absence of any indication, the information should be furnished reasonably shortly after conclusion of the contract.

When dealing with consumer information, the Directive follows a very stringent approach that will certainly hamper the consolidation of the Single Market without providing helpful protection to the consumer. It is my opinion that for the consumer to have reasonably detailed information of the financial services offered/requested, it would be enough to make sure that the terms and conditions of the contract, drafted in a language easily comprehensible for the consumer, are furnished prior to the contract being entered into (along the route followed in the Initial Proposal). By requesting a double communication of information, the Directive unnecessarily aggravates the burden of managing the contract, without this proving significantly more helpful for the protection of the consumer.

Fortunately, and as an exception to the general rule, the supplier is exempt from the obligation to provide information after conclusion of the contract if the prior information and the terms and conditions of the contract are furnished on paper or on another durable medium before the contract is concluded.

The clear recommendation would hence be that the terms and conditions of the contract are furnished to the client prior to the conclusion of the contract on paper or another durable medium. This is clearly fairer for commercial relationship purposes, as it enables the consumer to form a clear and precise view of the rights and obligations the parties to the contract are assuming.

From the supplier’s point of view, serving the terms and conditions of the contract in advance is also suitable, as this triggers the initiation of the period for the consumer to exercise the withdrawal right, hence shortening the term during which the contract may be revoked. In fact, it is logically impossible for the consumer to form a valid legal intention and consent if he is not aware of the terms and conditions of the contract. No matter how accurate and reliable the description of the service to be provided and its main terms may be, the issuance of an informed and knowledgeable intention and consent requires, in my opinion, offering the consumer the possibility of reading and understanding the contract prior to issuing his/her consent. Admitting otherwise almost entails accepting the assumption of a mentally "impaired" consumer.

The Amended Proposal is in other articles somehow sensible to this, hence requesting the consumer’s express consent so as to conclude the contract prior to the moment when its terms and conditions are communicated to the consumer (Article 4. 1 (b)).

3.4 The withdrawal right

It qualifies as a unilateral "ad nutum" termination right, i.e., as the right of one of the parties to a contract to terminate it without evidencing nor alleging grounds and without penalty. As to the legal consequences of the exercise of this right, the law applicable to the contract shall govern.

The withdrawal right is possibly one of the most negative elements of the proposed Directive. With different expressions, European and Spanish legislation set forth various similar termination rights, mainly within consumer protection legislation: those under Directive 97/7, of May 20, 1997 on distance selling contract (named "derecho de resolución" in the Spanish-language version of the directive), Law 7/1996, of January 15, 1996, on retail commerce ("derecho de desistimiento"), etc.

In the Amended Proposal this right is generally vested in respect of all financial services, as opposed to the Initial Proposal, where it had a somehow exceptional character. In the Initial Proposal, the withdrawal right was only applicable in cases where the supplier breached the prior consumer information rights (i.e., breached its obligation to furnish to the consumer certain relevant information prior to the conclusion of the contract) or the reflection right (i.e., unfairly induced the consumer to conclude the contract before the end of the period provided to the consumer to analyse –and, as the case may be, accept- the supplier’s binding offer).

A long list of exceptions, nevertheless, applies to this withdrawal right in the Amended Proposal. Having established the withdrawal right generally, the Amended Proposal excludes a long list of services from such a right, simply forced by the logic of the rendering of such services.

Thus, this withdrawal right shall not be applicable to contracts concerning:

  1. foreign exchange services.
  2. the reception, transmission and execution of orders related to, and services in respect of, the following financial products:
  3. - money market instruments;

    - transferable securities;

    - collective investment schemes;

    - financial futures and options;

    - exchange and interest rate instruments the price of which depends on fluctuations in the financial market outside the supplier’s control.

  4. Non-life insurance contract for a period of less than 2 months.
  5. Contracts fully performed by the time the consumer exercises its withdrawal right.
  6. In the case of real estate credit, the withdrawal right will not be available when (i) the amount borrowed has already been transferred to the seller, with the consumer’s consent or (ii) the real estate credit has been validly and regularly notarised. The exception which relates to real estate credit is particularly unsatisfactory as it only applies to real estate credits (as defined in the Directive) and not to any other credit facility (the Amended Proposal defines "real estate credit" as any credit, irrespective of any surety or bond attached thereto, mainly intended to allow the acquisition or maintenance of property rights to a site or building to be constructed or under construction, or the renovation or improvement of a building). The Commission has expressly intended to avoid excluding the withdrawal right in respect of other credits. Additionally, the definition of real estate credit in the Amended Proposal is somehow unusual in Spanish legal terminology, where a real estate credit is always a credit with real estate security, whether or not intended for the acquisition, renovation or improvement of a real estate.

The withdrawal right can be exercised in a period ranging between 14 and 30 days, depending on the specific service concerned. The determination of the specific period applicable depends on the Member States. The Commission’s comments to the amendments suggested by the European Parliament mention, as examples, the possibility of offering longer withdrawal periods in respect of long-term contracts or contracts related to large sums of money.

However, in order not to hamper the consolidation of the single market, when the supplier complies with the withdrawal period set out in the legislation of the country in which it is established, it shall not be bound by a different withdrawal period set forth in the legislation of the country in which the consumer is established.

In my opinion, this approach is unsuitable: it would have been more convenient to set out common withdrawal periods (whether or not the same for all financial services) within the European Union. The approach followed by the Amended Proposal will result in asymmetrical legal scenarios which, in the end, will distort the competition amongst financial service suppliers established in different Member States.

Regarding the withdrawal period, the Amended Proposal has followed a kind of middle way approach: it cannot be considered a "harmonised" matter (as each Member State shall have its own withdrawal periods within the maximum and minimum limits set out in the Directive), but the absence of harmonisation, it will neither hamper nor disturb the consolidation of the single market, as the supplier-orientated approach has been followed: the supplier complying with its home State withdrawal period will not be bound to comply with any other host State withdrawal period.

It should be noted that the Amended Proposal refers to the withdrawal period applicable in the place where the supplier is established and not to the one applicable as per the law governing the contract. Hence, it could be the case, for instance, that the supplier established in country "A" where the withdrawal period is 5 days, offers services to consumers established in country "B" whose law establishes a 30-day withdrawal period, under a contract governed by the laws of a third country "C" whose laws provide for a 20-day withdrawal term: the suppliers established in country "B" will be at a competitive disadvantage when offering services to the consumers established in its same country, as they will have to abide to a 30-day withdrawal period, whilst their competitors in country "A" will be able to respect a 5-day withdrawal right only!

Generally speaking, the contract may not be performed before the end of the withdrawal period, unless expressly requested by the consumer. The consumer’s consent for the performance of the contract to initiate before the end of the withdrawal period will not usually prejudice or otherwise negatively affect the consumer’s withdrawal right. Hence, the consumer shall be able to exercise the withdrawal right after having expressly requested to start performing the contract. In this case, upon the exercise of the withdrawal right, the consumer shall be bound to pay the indemnity amount for the total or partial performance, as determined in the prior information served to the consumer. Although the amount payable must not be so high that it may be construed as a penalty.

The provisions of Article 4, paragraph 2 of the Amended Proposal should be criticised. This paragraph reads as follows:

"Without prejudice to the withdrawal right, when the consumer has been unfairly induced by the supplier to conclude a contract, this contract may be annulled, with all consequential legal consequences under the law applicable to the contract, without prejudice to the consumer’s right to seek compensation for the harm he has suffered under national law".

This provision is completely redundant, as this possibility is generally considered in the European consumer protection legislation.

The provision is also imperfect, as the consumer’s rights to seek compensation for the harm sustained will only be available if the conditions set out under Article 5.2 of the Rome Convention dated June 19, 1980, are met. This article lists requirements for the application of the imperative rights declared in the national law of the consumer to a contract governed by a different law. Within the financial services scenario, these conditions are as follows, (1) that the contract conclusion has been preceded in the consumer’s country of residence of an offer specifically targeted to the consumer or other advertising means and that the consumer has carried out within its country all actions necessary for the conclusion of the contract or (2) that the supplier of its representative would have been engaged by the consumer in the latter’s country of residence).

 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.