Update on the status of the new proposal
Digitalization has contributed to unpredictable developments and significant changes to the financial services market. Financial services offered to consumers have evolved and diversified considerably, new products have appeared, especially in the online environment, and their use continues to develop, often in a fast and unpredicted manner. The protection of consumers from the risks connected with the use of emerging technologies has always been a key focus of the initiatives taken by the European Union.
In 2002 the European Institutions adopted the Directive 2022/65/EC on Distance Marketing of Financial Services to Consumers (“DMFSD”) to address the needs of financial consumers in the digital era. While this was a first important step, digital technology has grown fast and looks today very different than 20 years ago, especially in the financial services industry.
In May 2022 the European Commission presented a proposal (the “Commission Proposal”) to repeal the DMFSD and to update, modernize and transfer its key provisions on financial services into a new chapter of Directive 2011/83/EU (the “Consumer Rights Directive”).
On 6 June 2023 the European Parliament and the Council reached an agreement on the Commission Proposal. The provisional agreement – which is briefly commented on in the following paragraphs – needs to be endorsed and formally approved by both institutions.
Scope of application and the safety net
The new rules aim to clarify the relationship between the provisions set forth in the Commission Proposal and the sector-specific legislation. To ensure legal certainty and avoid any duplications or overlaps, the Commission Proposal clarifies that if another Union act concerning the provision of specific financial services already contains rules on pre-contractual information, right of withdrawal and adequate explanations to the customers, the provisions set forth in the Commission Proposal do not apply. By contrast, whenever a new product appears on the market for which there is no specific EU legislation, such product must be subject to the requirements set forth in the Commission Proposal (so-called “safety net”).
At the same time, it is envisaged that certain provisions included in the Consumer Rights Directive will start to apply also to the distance marketing of financial services, thereby ensuring that financial services contracts will be subject to the same rules as those applying to other sales and services contracts. The level of protection afforded to consumers will be heightened as the Consumer Rights Directive contains specific provisions on enforcement and penalties which will strengthen the powers entrusted with national supervisory authority vis-à-vis market operators.
The Commission Proposal introduces an obligation for traders to provide consumers with clear and comprehensible information before they are bound by a distance contract or any corresponding offer. This information duties relate, among others, to the trader’s identity, contact details, geographical address, registration information, description of the financial service, total price, personalized pricing disclosure, risk factors, right of withdrawal, duration of the contract, termination rights, etc. The scope of the information duties is extended compared to the current rules.
In the case of telephone communication, the trader must explicitly identify itself and clarify the purpose of the telephone call at the beginning of any conversation with the consumer. This pre-contractual information mentioned above should be provided at least one day before the consumer is bound by the contract. If the information is provided less than one day before the execution of the contract, the trader must send a reminder on the possibility to withdraw from the distance contract and the procedure to be followed to this end. The reminder must be sent, at the latest, one day after the conclusion of the contract.
The information provided to the consumers must be presented in an easily readable format, accessible to visually impaired consumers. The burden of proving compliance with the above obligations lies with the trader.
Right of withdrawal
The right of withdrawal has always been one of the cornerstones of the EU legislation on distance marketing of financial services.
The Commission Proposal confirms that the consumer is entitled to withdraw from the contract within a period of 14 days following the conclusion of the distance contract or the receipt of the terms and conditions as well as the pre-contractual information (if this occurs later). The exceptions to the right of withdrawal include, among others, consumer financial services whose price depends on fluctuations in the financial market outside the traders’ control, which may occur during the withdrawal period. This provision is in line with the existing legislation, except for certain amendments aimed at including, for instance, crypto-assets in the list of exempted services. Payment for the service provided before withdrawal must be proportional and not be structured as a penalty. The trader must return any received sums within 30 days, and the consumer must return received sums without delay within the same timeframe.
Adequate explanations and right to human intervention
To enhance online fairness, the Commission Proposal requests traders to provide adequate explanations to consumers regarding the proposed financial services contracts. These explanations should enable the consumers to assess whether the contract and the related services suit their needs and financial situation. The explanations must cover pre-contractual information, essential contract characteristics, including ancillary services, and the specific effects the contract may have on the consumer, such as consequences of payment default. This information must be provided free of charge to the consumer and prior to the conclusion of the contract. In case the trader uses online tools, consumers are granted the right to request and obtain human intervention.
When concluding financial services contracts at a distance, traders are requested not to design, organize or operate their online interfaces in a way that deceives or manipulates the consumers who are recipients of their service or in a way that otherwise materially distorts or impairs their ability to make free and informed decisions. The aim of this provision is to limit the use of dark pattern marketing techniques to influence consumer’s choices and to increase transparency.
Under the current version of the Commission Proposal, Member States will have to comply with the new rules within 2 years of the date when the final text of the directive will be published.
While the Commission Proposal largely confirms the current framework under the DMFSD, it contains some new provisions which will strengthen the protection of consumers and force financial institutions to change their marketing procedures and documentation in order to cope with the new requirements.
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