On 11.05.2022, the EU Commission published a proposal for a directive concerning distance contracts for financial services. The proposal provides for an amendment of Directive 2011/83/EU (EU Directive on Consumer Rights) and a repeal of Directive 2002/65/EC (Directive on Distance Marketing of Consumer Financial Services), which is still to be further discussed in the Council and the EU Parliament in the course of the legislative process. The aim of the proposed directive is to promote the provision of financial services in the internal market while ensuring a high level of consumer protection. To this end, relevant aspects of consumer rights in relation to distance financial service contracts are to be taken into account within the framework of Directive 2011/83/EU.
In the context of the European Commission’s Regulatory Fitness and Performance Programme (REFIT), it was noted that after the entry into force of Directive 2002/65/EC a number of product-specific EU legislative acts (such as the Consumer Credit Directive) and horizontal EU legislative acts (such as the General Data Protection Regulation -GDPR-) were adopted, which themselves included aspects relating to consumer rights in relation to financial services that were ultimately also covered by the Directive. The consequence of this newer legislation was that the relevance and added value of the Directive gradually diminished. However, the Commission continued to see value in the Directive, as its horizontal application provided consumers with a certain level of protection for distance contracts where EU regulation was lacking for certain financial products. In addition, some provisions of the Directive (such as the right of withdrawal for certain insurance policies) also applied to certain financial services for which there were already legally binding EU rules.
The Commission added to its reasoning that a number of developments, such as the increasing digitalisation of services, have hampered the effectiveness of the Directive in achieving its main objectives. In addition, consumers are increasingly using online financial services, although financial service contracts negotiated at a distance often appear complicated and difficult for them to understand. In addition, the distance selling of consumer financial services has changed rapidly over the last 20 years, adding new business models and new distribution channels. On the other hand, consumers are increasingly willing to use digital tools and purchase financial products and services online in this context, prompting established players to adapt their marketing and business practices.
The above circumstances are further compounded by recent events related to the pandemic situation. For example, the COVID 19 pandemic and the exit restrictions imposed in this context have also accelerated the use of online distribution channels in general. Due to the pandemic-related exit restrictions, physical meetings between consumers and providers in banks were kept to a minimum, resulting in more regular digital onboarding of potential customers. In this context, the Distance Marketing of Financial Services Directive also played a role in ensuring the provision of financial services and at the same time ensuring a high level of consumer protection (for example in the banking sector), especially for digital onboarding purposes.
The Commission therefore concluded that effective consumer protection in online financial services required legislative action.
II. Objective of the proposed directive
The Commission’s proposal for a Directive aims to simplify and modernise the legal framework for distance financial services contracts in order to ensure a higher level of consumer protection for online financial services. For this purpose, the relevant aspects of consumer rights in relation to distance financial service contracts shall be taken into account in the framework of the current Directive 2011/83/EU (which had so far excluded financial services from its scope), while repealing Directive 2002/65/EC.
III. Approaches to implementing the goal
The Commission’s proposal for a directive explicitly mentions five core aspects that need to be implemented in order to achieve the goal:
1. Full harmonisation
The stated aim of the proposal is to strengthen consumer rights. This objective is to be pursued in particular also against the aspect that consumers can negotiate and conclude contracts with providers in another Member State. In order to promote a consistently high level of consumer protection, similar rules should therefore apply to all financial service providers in all EU Member States and consumers should be guaranteed the same rights (harmonisation).
2. Obligation to provide pre-contractual information
The Commission already clarified in Directive 2002/65/EC that the use of a means of distance communication must not lead to an unjustified restriction of the information conveyed to the consumer. In its draft directive, following this idea, regulations are provided with regard to the timely transmission of clear and comprehensible key information in order to strengthen the necessary transparency and ultimately also the consumer’s maturity. The Aim is to regulate the time, scope and content of the pre-contractual information to be provided. In the course of this, Directive 2011/83/EU is to be modernised to the extent that details such as the indication of the e-mail address by the financial service provider have been added. In addition, details as well as any hidden costs or the risk in connection with the financial service must be disclosed. The information must be clearly displayed on the screen.
It also regulates the manner of provision with regard to electronic communication. Furthermore, the time of provision is also specified so that consumers have sufficient time to process the information.
3. Right of withdrawal
Certain products and services in the area of financial services are by nature complex and may be difficult for consumers to understand. To address this, the draft also includes the strengthening of the right of withdrawal as a fundamental consumer right. The proposal foresees an obligation for businesses to provide electronic buttons to facilitate the consumer’s right of withdrawal when concluding a financial services contract with a consumer.
In addition, as mentioned above, if the consumer receives the pre-contractual information less than one day before the conclusion of the contract, the trader shall provide a notice of the right of withdrawal in parallel with the pre-contractual information.
4. Fairness on the internet
Due to their intangible nature, financial services are particularly suitable for distance transactions, which is why they are increasingly concluded electronically. In order to do justice to consumer protection here as well, the Commission’s proposal contains specific provisions regarding the design of an adequate explanation to be provided at a distance, including via online tools. Both the requirements for the duty to inform and the possibility for the consumer to request the intervention of a person in the case of the use of online tools are specified. The latter, in particular, is intended to ensure the consumer’s ability to interact with a human being. In this way, it should also be ensured that entrepreneurs do not profit from consumers’ behaviour patterns. Against this background, businesses are prohibited from setting up their online user interface in a way that may distort or interfere with consumers’ ability to make a free, autonomous and informed decision or choice.
5. Tightening enforcement
Finally, the proposal also provides for the strengthening of enforcement rules in relation to the provision of financial services by means of strict sanctioning possibilities. In the future, the current enforcement and sanctions provisions of Directive 2011/83/EU, including the amendments introduced by Directive (EU) 20019/2161 on better enforcement and modernisation of consumer protection rules, on sanctions for widespread cross-border infringements, on consumer rights, will be extended to distance financial services contracts.
The repeal of Directive 2002/65/EC and the inclusion of a number of provisions on consumer financial services contacted at a distance in Directive 2011/83/EU will allow member states to adapt existing legislation to the changed consumer protection needs where necessary.
Although implementation of the Directive means a need for action on the part of the companies concerned and thus also a further incurrence of costs, in return they also receive more legal certainty, which leads to a certain relief on the part of the companies. The costs incurred should also comply with the principle of proportionality in view of the benefits that the obligations of the companies towards consumers and society mean.
Moreover, the Commission has chosen a simplified regulatory approach by repealing Directive 2002/65/EC and incorporating only a small number of articles into Directive 2011/83/EU. Simplification for businesses in the case of financial services contracted at a distance is also achieved by establishing measures to simplify information requirements and their adaptation to digital use, as well as a provision establishing the clear principle that in the case of two legal provisions regulating the same subject matter, one takes precedence over general legal provisions as a lex specialis.
A higher degree of legal clarity and the simplified legal framework should, on the one hand, reduce the number of complaints and, on the other hand, increase the level of certainty and compliance, which can also be expected to reduce the administrative burden on the public administration. The specific measures to strengthen coordination and improve the conditions for enforcement should also lead to efficiency gains in enforcing the requirements of the Directive.
It remains to be seen, however, what changes may be made by the participating bodies in the further course of the legislative procedure.
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