Online financial services: Commission proposes to strengthen consumer protection

On 11 May 2022, the European Commission adopted a proposal to  reform the European regulatory framework governing financial services contracts concluded at distance¹ (the Proposal). The Proposal would strengthen consumer rights and foster the cross-border provision of financial services in the single market.

Context

In 2002, the Directive 2002/65/EC on Distance Marketing of Consumer Financial Services² (the Distance Marketing of Financial Services Directive or DMFSD) was introduced with a view to ensure the free movement of financial services in the single market by harmonising certain consumer protection rules in this area, and to ensure a high level of consumer protection. It applies horizontally to any present or future service of a banking, credit, insurance, personal pension, investment or payment nature contracted by means of distance communication (ie without the physical presence of the trader and the consumer), in so far as there is no EU product-specific legislation or no EU horizontal rules covering the particular consumer financial service.

The European Commission recently proceeded to a full evaluation of the DMFSD and came to the following main overarching conclusions:

• Following its entry into force, the relevance and added value of the DMFSD subsequently decreased as a number of additional EU product-specific legislative acts (including the Consumer Credit Directive³ and the Mortgage Credit Directive)⁴ and EU horizontal legislation (including the General Data Protection Regulation)⁵ were enacted.
• Nonetheless, the Directive still remains relevant in a number of areas, notably in the case of financial products that are not as yet subject to any EU legislation (such as in the crypto-assets sector).
• Finally, a number of developments, such as the increasing digitalisation of services, have affected the DMFSD’s effectiveness in reaching its principal objectives of ensuring a high level of consumer protection and fostering the cross-border conclusion of financial services sold at a distance.

Some 20 years after the adoption of the DMFSD, the distance marketing of consumer financial services has changed rapidly in light of the overall digitalisation of the sector and the new types of financial services that have been developed and new, innovative actors (such as fintechs) that have  emerged since the rules were first introduced in 2002. Similarly, consumers are now used and willing to use digital tools and are purchasing financial products and services online, leading established players to adapt their marketing and business practices since financial service contracts are increasingly concluded by electronic means.

Modernisation of the European framework

The Proposal aims to simplify and modernise the legislative framework by repealing the existing DMFSD while including relevant aspects of consumer rights regarding financial services contracts concluded at a distance within the scope of the horizontally applicable Consumer Rights Directive.

The overall objective of the legislation remains unchanged: to promote the provision of financial services in the internal market while ensuring a high level of consumer protection. This objective is obtained through the reinforcement of the following five key areas:

• Pre-contractual information: The Proposal aims to regulate what, how and when pre-contractual information is to be provided to consumers. New details have been added, such as the need for the trader to provide an email address. The Proposal also regulates how the information is to be provided with regard to electronic communication and sets out rules when the information is to be provided so consumers are given enough time to understand the precontractual information received and be able to digest it before actually concluding the contract.

• Easier access to the right of withdrawal: Since certain products and services are complex and might be difficult to understand for consumers, the Proposal intends to ease the 14-day withdrawal rightfor distance contracts for financial services.

This right would be strengthened in two specific ways:

• a withdrawal button should be provided by the trader for financial services contracts concluded at a distance, to ease the exercise of this right;
• a notification of the right of withdrawal should be provided by the trader in case the pre-contractual information is received less than a day from the conclusion of the contract.

However, this right of withdrawal would not apply in certain cases, such as where consumer financial service whose price depends on fluctuations in the financial market outside the trader control, which may occur during the withdrawal period, such as services related to crypto-assets.

• Online fairness: The proposal sets out special rules to protect consumers when concluding contracts for financial services by electronic means. First, it establishes rules concerning adequate explanations that take place at a distance, including via online tools (eg robo-advice or chatbots).

The rules establish the information requirements that the trader is to provide the consumer with and the possibility for the consumer, if online tools are used, to request human intervention. Therefore, the consumer should always have the possibility to interact with a human being representing the trader. The proposal also aims to ensure that traders do not benefit from consumer biases. In this light, they are prohibited from setting up their online interfaces in a way which can distort or impair the consumers’ ability to make a free, autonomous and informed decision or choice.

• Enforcement: The Proposal would also strengthen the rules on the enforcement with regard to the provision of financial services and would provide for stronger penalties in cases of widespread cross-border infringements, with a maximum penalty of at least 4% of annual turnover.   

• Full harmonisation: the Proposal would introduce full legal harmonisation, establishing similar rules for all providers across Member States.

Next steps

The Commission's Proposal will now be discussed by the Council and the European Parliament. Once adopted, Member States should transpose the Proposal into national law and apply its provisions by 24 months from adoption of the Proposal.

¹ Proposal for a Directive 2022/0147 of 11 May 2022 of the European Parliament and of the Council amending Directive 2011/83/EU concerning financial services contracts concluded at a distance and repealing Directive 2002/65/EC, COM(2022) 204 final.
² Directive 2002/65/EC of the European Parliament and of the Council of 23 September 2002 concerning the distance marketing of consumer financial services and amending Council Directive 90/619/EEC and Directives 97/7/EC and 98/27/EC, OJ L 271, 9 October 2002, p. 16.
³ Directive 2008/48/EC of the European Parliament and of the Council of 23 April 2008 on credit agreements for consumers and repealing Council Directive 87/102/EEC, OJ L 133, 22 May 2008, p. 66.
⁴ Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to residential immovable property and amending Directives 2008/48/EC and 2013/36/EU and Regulation (EU) No 1093/2010, OJ L 60, 28 February 2014, p. 34.
⁵ Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC, OJ L 119 4 May 2016, p. 1.