Distance marketing of consumer financial services
2007 Butterworths Journal of International Banking and Financial Law, n.º 9
Consumer financial services have experienced a dramatic change in the last decade. These changes do not only affect the shape of financial products (for example, bundling financing, investment, pensions and insurance into a single financial product) but also the channels through which financial products are offered and distributed to the market.
Spain, in spite of being a market with dense physical branch coverage, had not fallen behind this trend. Consumer financing is no longer the financing of consumption, but a wide, integrated platform where consumers also invest, save and contract a wide range of other products, from insurance to foreign exchange services. Moreover, nowadays, contracting consumer financial services is only a few clicks away on the Internet, or as far as the nearest supermarket, auto dealer or retailer. In a nutshell, more services are offered by more suppliers.
It is clear that, as more players flow into the market to offer their wide variety of financial products, consumers profit from the beneficial offshoots of competition. Just as an example, alternative distribution channels, specially the Internet, have been brought into play by many European banks to assail a market that, throughout the era of traditional, face-to-face, customer-banker’s relationship, was truly impregnable.
All needed to be said, there have been casualties in the process. As a recent report of the Bank of Spain suggests, for example, financial services providers, when using new distribution channels such as the Internet, have shown far more propensity to fall afoul of consumers’ rights.
A call for enhanced consumer protection was incontestable, except that, most often, consumer protection raises structural barriers throughout the European Union as it requires suppliers to take account of the regulations enshrined in the fifteen (now twenty seven) different legal systems. In other words, the beneficial effects for consumers of enhanced competition would most likely be lost in the hands of the regulations that, ironically, were meant to protect them.
The challenge was, hence, to strengthen financial services consumer protection, but, as far as possible, pre-empting the Member States’ heterogeneous regulations which would have resulted in the ousting of foreign competitors. That was the aim of Directive 2002/65/EC of the European Parliament and of the Council of 23 September 2002 concerning the distance marketing of financial services (the “Directive”).
The endeavour proved to be long and tricky. The difficulties to reach a consensus during the five year period that the negotiation of the Directive lasted were only matched by the struggles and delays to implement the Directive across Europe. Spain has been the last country to transpose the Directive, almost three years after the deadline, through the enactment of Law 22/2007 (the “Law”). The delay may not be justifiable, but, fortunately, the Law’s general fidelity to the text and spirit of the Directive will foster consumer’s confidence in on-line financial services and, by creating a common playing ground for all European financial services providers, will certainly boost competition in the consumer finance market.
Applicability of Other Regulations
After much discussion and resistance, the Directive disregarded the system of “minimum harmonisation” which has been the traditional way of regulating consumer protection issues, and adopted the principle of “maximum harmonisation”: Member States are prevented from diverging from what is provided in the Directive, except as specifically permitted (for example, the regulations dealing with the burden of proof, discussed below). Indeed, this feature is key to achieve the aims of the Directive as (in the words of the European Parliament) it would enable suppliers “to offer their products throughout the Single Market, without the hindrance of having to comply with different national consumer protection laws on distance sales”.
However, as the Directive recognises, more convergence is needed. A myriad of local rules are not pre-empted by the Directive, such as the following Spanish regulations that will be need to be factored in when marketing consumer financial services at distance:
- the Consumer Law and other consumer protective regulations, a set of rules that contain very substantive regulations applicable to consumers (information rights, abusive clauses, etc);
- the Law on Electronic Commerce (implementing “Electronic Commerce Directive”), that, for agreements executed in electronic form, sets out regulations dealing with the substantial validity of these agreements, non solicited communications, information rights, and other duties applicable to information society providers; and, inter alia
- other sectoral (non-life insurance, prospectus, investment services) and general regulations (for example, Law on Consumer Finance that provides for substantive regulations dealing with mandatory jurisdiction for these kind of agreements, required content of the agreement, informational rights, “reflection periods”, maximum interest rates, etc).
SCOPE OF APPLICATION
The Law provides certain consumer rights applicable to financial services procured through distance sales schemes organised by the financial service provider.
These rights are imperative and cannot be contractually waived. Further, the Law, in accordance with the Directive, establishes that choice of the law of a non-Member State would not override the applicability of these “special rights” if the contract has a close link with the European Union (i.e., the supplier is established in the European Union or, otherwise, has targeted the European Union territory).
It is common for the consumer and the supplier to enter into an initial agreement (i.e., opening of a bank account, acquiring a credit card, executing a portfolio management contract, etc) under which a series of transactions will be made (deposit or withdrawal of funds to or from the bank account, payment by credit card, transactions made within the framework of a portfolio management contract, etc). If the parties enter into an initial agreement under which a series of successive transactions are carried out, the Law will only apply to the initial agreement. Likewise, the information requirements set out in the Law will only apply once to a series of transactions carried out by the same parties, even if there is no initial agreement, provided that no longer than a year has passed between any two transactions. In any event, an amendment of the initial agreement (such as a possibility to use an electronic payment instrument together with one's existing bank account) will call for the application of the Law.
The Law is applicable when certain personal, objective and formal requirements are met.
The Law is applicable whenever the parties of a financial transaction are:
- a consumer, that is, any natural person who contracts financial services for purposes which are beyond its trade, business or profession; and
- a financial services supplier (or an intermediary of such supplier), that is, any person, public or private, who provides financial services in his/her commercial or professional capacity (i.e., banks, insurers, managers of pension funds, collective investment schemes and venture capital entities, investment services companies, etc).
The Law is not only applicable to Spanish suppliers, but to foreign entities as well, as long as:
- they have a branch or other permanent presence in Spain; or
- the consumer is a Spanish resident, provided that the services are specifically targeted to the Spanish territory, and that, in case of EU suppliers, the Law (and any other related Spanish regulations) will only be applicable in matters dealing with publicity of collective investment schemes, insurance, consumer protection, choice of law and non-solicited communications.
The Law only applies to “financial services”, that is, any service of a banking, credit, insurance, personal pension, investment or payment nature.
Form of Offering/Procurement
Financial services provided to consumers only fall within the scope of application of the Law if the parties where not physically in contact during the preliminary and signing phases of the contract and, instead, communicated between themselves using an organised (i.e., not occasional) distance sales or service provision scheme (electronic, telephone, fax, courier, etc) run by the supplier.
Unfortunately, the area of consumer information rights is not fully harmonised under the Directive. The Law has not abused this possibility and, further to the information rights imposed by the Directive that are described below, has only stated the applicability of other existing requirements set out elsewhere (see above, Introduction – Applicability of Other Regulations).
Content of Information
The Law, mirroring what is set out in the Directive, establishes that the supplier shall provide to the consumer certain information on paper or other durable medium (i.e., any instrument which enables the consumer to store the information in a way accessible for future reference and which allows the unchanged reproduction of the information stored).
As in the Directive, this information deals with the supplier (identity, address, registration information, and supervisory authority), the financial service (description of the main characteristics, total price and costs, expiration date of the information, special risks, etc), the distance contract (minimum duration, early termination, applicable law and withdrawal rights), and redress (available out-of-court complaint mechanisms, applicable insurance funds, etc).
The precise extent of the description of the financial service is to be defined in the Law’s implementing regulations, still to be enacted.
In addition to the information required by the Directive, the Law also requires the supplier to inform the consumer that the contributions to pension funds will be used to cover the events provided in the agreement and will not be refunded except in the specific and exceptional cases established in the applicable regulations.
As stated in the Directive, the Law limits the information to be provided in the case of voice telephony communications (identity of the supplier, commercial purpose of communications initiated by the supplier, description of the main characteristics of the financial service, total prices and costs to be paid by the consumer and withdrawal rights). In any event, the supplier must state that the rest of the information is available upon request.
Whether the communication is made by phone or otherwise, the Law requires that the information on contractual obligations communicated by the supplier to the consumer during the pre-contractual phase is in conformity with the contractual obligations which would result from the law presumed to be applicable upon signing of the distance contract.
The information shall be provided reasonably before the time the consumer becomes bound by the offer or contract.
Exceptionally, as is the case under the Directive, the Law allows the supplier to provide the information to the consumer after the execution of the contract when, at the consumer’s request, the contract has been executed using a means of distance communication which does not enable the provision of information as required by the Law.
Further, the consumer is entitled to receive at any time the contractual terms and conditions on paper, and to change the means of distance communication used to liaise with the supplier.
The Law provides swift sanctions for breaches of information duties by suppliers.
In the first place, suppliers are subject to penalties that will vary depending on whether the supplier is a financial entity subject to Spanish prudential supervision (in which case, the infringement will be considered and punished as a serious or very serious breach of the applicable prudential supervision regulations) or is a non-Spanish supervised entity (in which case the penalty will be that established in consumer laws and regulations).
Secondly, the failure to provide the information on a timely basis will delay the commencement of the withdrawal period (see below, Withdrawal Rights – Content).
Moreover, the Law provides that the failure to provide proper information to the consumer will allow the consumer to terminate the contract, without cost, at any time.
RIGHTS OF WITHDRAWAL
The area of withdrawal rights is subject to maximum harmonisation. All Member States must provide withdrawal rights, subject to the same terms and conditions (including, the same single terms during which the withdrawal right is available).
The Law has reflected this principle in its entirety, with one striking exception: the exclusion of pension funds from the financial services that benefit from withdrawal rights.
The Law provides that consumers will be allowed to withdraw from the contract without penalty and without giving any reason during a period of 30 calendar days, in the case of life insurance, or 14 calendar days, in the case of any other financial products.
The period for withdrawal shall begin the later of the following:
- the day of the execution of the distance contract or (in the case of life insurance) from the time when the consumer is informed that the distance contract has been executed; or
- the day on which the consumer receives the contractual and other required information.
The service could be provided before the expiration of the withdrawal period with the consumer’s consent (see below, Effects).
Withdrawal rights benefit all financial products (except for the exceptions explained below) and any other distance contract, attached to such financial product, for services provided by the same supplier or by a third party under an agreement with the supplier.
Lastly, it is worth noting that the enforceability of investment services’ contracts is not suspended during the withdrawal period (an option that was available under the Directive).
The Law, following what is provided in the Directive, states that the right of withdrawal is not applicable to:
- financial services which price is subject to market fluctuations during the withdrawal period, such as services related to foreign exchange, securities, and derivatives;
- travel and baggage insurance policies or similar short-term insurance policies of less than one month's duration; and
- contracts which performance has been fully completed before the expiration of the withdrawal period at the consumer's request (i.e., wire transfer orders).
As permitted under the Directive, Spain has excluded certain additional contracts from those benefiting from withdrawal rights:
- credits contracted in connection with the acquisition or improvement of real estate;
- credit secured by mortgage or other rights related to immovable property; and
- declarations by consumers using the services of a Notary Public, provided that the Notary Public confirms that the consumer information rights have been respected.
The last exception is intended to cover certain types of contracts that, as a result of the sweeping definition of “distance contract” and “means of distance communication”, may fall within the scope of the Law (for example, when the consumer, after applying for a financial service through the Internet, is directed to the Notary premises to formalise the agreement without the presence of the supplier). The non application of the withdrawal rights is meant to avoid undermining the status of such transactions in situations where, as a result of the statutory duties imposed on the Notary, the consumer is otherwise protected.
Upon the exercise of its right of withdrawal, and except for insurance contracts where the consumer shall not be charged any amount, the consumer may only be required to pay for the service actually provided by the supplier with the consumer’s approval. The amount payable shall be proportional to the consideration agreed for the entire services and in no case result in a penalty for the withdrawal.
In order to demand any payment from the consumer the supplier will need to prove that the consumer was duly informed of the amount payable in case of withdrawal (see above Information Rights). However, in no case may the supplier require such payment if the supplier has unilaterally commenced the performance of the contract before the expiry of the withdrawal period.
In turn, the supplier shall return any amount received from the consumer no later than 30 calendar days after the date on which the supplier received the withdrawal notice from the consumer. Conversely, the consumer shall return any sums and/or property that he/she has received from the supplier within no later than 30 calendar days after the date on which the consumer dispatches the withdrawal notice.
Credit Card Frauds
As set out in the Directive, the Law establishes that the consumer has the right to request cancellation and refund of any payment made as a result of the fraudulent use of its credit card in connection with financial services distance contracts.
This is right is merely a reproduction of the right granted to consumers in respect of any other distance contract as stated in Directive 97/7/EC on the protection of consumers in respect of distance contracts (implemented in Spain by Law 47/2002 amending Law 7/1996 on the Regulation of Retail Commerce).
The Burden of Proof
The burden of proof is one of the few (but significant) areas where the Directive intentionally departed from the “maximum harmonisation principle”.
As in other Directives dealing with consumer protection, the Directive allowed Member States to stipulate (or not) that the supplier has to prove compliance with its obligations in connection with information, consent and performance of the contract. The Law has opted-in with regard to this matter and, therefore, when it comes to distance financial services, places the burden of proof on the supplier.
UNSOLICITED COMMUNICATIONS AND SERVICES
The Law, as stipulated by the Directive, limits the so called “inertia-selling”. The provision of unsolicited financial services (including tacit renewals of existing financial contracts) is prohibited in all cases where, as a result of such unsolicited service, the consumer will be required to make an immediate or deferred payment and, as a result, the consumer is exempt from any obligation thereunder.
The Law, however, restricts the concept of “tacit renewal” by excluding, inter alia, those tacit renewals that are provided in the original contract, provided that the renewal is made in the same terms and conditions.
Unfortunately, the Law does not implement in Spain the Directive as amended by Directive 2005/29/CE of the European Parliament on Unfair Business Practices, which further expands and homogenises the protection granted to consumers in connection with unsolicited services.
The Law, following the Directive, also limits “cold-calling” marketing techniques. However, the regime applicable in Spain to unsolicited communications, as amended by the Law, diverges from the one established by the Directive.
Basically, unsolicited communications are permitted:
- if made by telephone (whether automated or not), fax or other electronic means, if they have been previously consented by the consumer or (notably expanding the exceptions allowed by the Directive) are made in the context of a pre-existent contractual relationship; or
- if made by any other means of distance communication systems, if the consumer has opted-in by specifically consenting the communication (which is the strictest alternative of those permitted by the Directive, as it also allowed Members States to permit these types of communications without prior consent as long as the consumer is entitled to opt out).