UK: Distance Marketing of Financial Services Directive 2002/65/EC

In the November 2001 IT Bulletin we discussed the early draft of this Directive and the first stages of its passage through the EU legislative process. The new Directive has now finally been passed by the EU and entered into force on 9 October 2002. Member States will now have until 9 October 2004 to pass domestic legislation implementing the Directive.

The new Directive should not be confused with the Distance Selling of Consumer Goods Directive that was passed in 1997 and entered into force in 2000. That Directive is similar in some respects but it does not cover financial services since they were considered to require a separate set of rules. The new Distance Selling of Financial Services Directive fills that gap. Both Directives only protect natural persons in their capacity as consumers and do not protect individuals if they are acting in a professional capacity.

The new Directive regulates the marketing of financial services by means of distance communication. "Financial service" means any service of a banking, credit, insurance, personal pension, investment or payment nature. "Means of distance communication" is defined as any method of communication where the parties are not simultaneously present e.g. telephone, fax, traditional mail, proprietary computer networks and the internet. There are five key features of this new Directive:

Inertia selling is the marketing practice of supplying financial services to a consumer without a prior request on his/her part and including a request for immediate or deferred payment. Under the Directive a failure of a consumer to respond after receiving such unsolicited financial services cannot be taken to be consent.

It is an opt-in system (prior consent of the recipient is required) in relation to sending unsolicited faxes or using automated calling systems for direct marketing of financial services. Member States have been given the option to choose between opt-out (prior consent of the recipient is not required) and opt-in in relation to all other forms of direct marketing e.g. email and mobile phone text messaging. However to be consistent with the new Privacy and Electronic Communications Directive, direct marketing of financial services by email, fax, mobile phone text messaging and non-automated telephone calls will need to be opt-in unless it is an email or text message to an existing customer.

Whether an opt-in or opt-out system is used by the Member States there must be no cost to the consumer.

In general before a contract is concluded a consumer must receive in a durable medium all of the information specified in Article 3 relating to the supplier, the financial service, the distance contract and means of redress as well as any other prior information required by Community or domestic legislation. "Durable medium" means any instrument that enables the consumer to store information and access it in the future e.g. floppy discs, CDROMs, DVDs and the hard drive of the consumer's computer on which the electronic mail is stored. It does not include Internet websites unless they fulfill the criteria contained in the definition of a durable medium.

After the conclusion of a financial services contract by means of distance communication the consumer will have a period in which they can withdraw without penalty and without giving any reason. If it is a life insurance contract or a personal pension they will have 30 days but for other types of financial services it is 14 days. There are a number of types of product that will not be subject to a cooling off period including where there is a risk of price fluctuations in the financial market, insurance policies of less than a month (e.g. travel and baggage) and contracts completed at the request of the consumer within a month. Member States may provide that contracts for credit related to property or immoveable property will also not be subject to a withdrawal period.

The refund for financial services contracts cancelled within a cooling off period must be made within 30 days and the quantum correspond to the formula in the Directive.

Consumers cannot waive their rights under the Directive. If it is clear there is a close link with an EU Member State the Directive’s affect cannot be negated by the relevant financial services contract merely specifying the laws of a non-EU Member State should apply. As a further protection to consumers, Member States must ensure one or more of the following types of organisation can also take court action to enforce compliance – public bodies, consumer organisations and professional organisations.

Most businesses would be already familiar with similar information provision requirements and direct marketing restrictions as a result of similar provisions in the existing Distance Selling of Consumer Goods Directive and various privacy related Directives. Where this new Directive differs from many others is that it is one of the most prescriptive to come out of the EU in recent years. It leaves little scope for variation when the Member States implement it. Businesses offering financial services to consumers in multiple EU countries may welcome the new Directive as a step towards increasing the level of harmonisation of financial services regulation across the EU. The sting in the tail of the Directive however is that it ensures that consumer protection watchdogs are able to ensure that regulation is complied with by business. Financial service providers will therefore need to make compliance a priority.

© Herbert Smith 2002