Since 31 October 2004 consumer sales of financial services on-line, by phone or by mail have been governed by new, EU Directive-driven rules.
Analysis
Distance Marketing of ConsDistance Marketing of Consumer Financial Products
Q: Where can I find the new rules?
A: For first mortgages offered to consumers and most other financial services including general insurance policies, life assurance and pensions, the rules are contained for the most part in the sections of the Financial Services Authority's Handbook which will be brought into force on 31 October 2004 by the Distance Marketing Directive Instrument 2004 ("FSA Rules"). For all other financial services including second mortgages to consumers, debt management services and credit cards, the relevant rules are in HM Treasury's Financial Services (Distance Marketing) Regulations 2004 ("DM Regs").
Q: When do the new rules come into force?
A: The DM Regs come into force on 31 October 2004 and will apply to all contracts for the distance sale of relevant financial services to consumers concluded on or after that date. The FSA Rules were going to come into force earlier, on 9 October 2004 (the implementation date required by the EU Directive behind this new law), but the FSA has recently relented and pushed the general in-force date back to 31 October 2004. From now on here we will use the term "rules" to describe the new regulations generically.
Q: So what do the new rules apply to?
A: The marketing and concluding of all contracts for the sale to consumers of financial services at a "distance". A "distance contract" is one which is concluded in a way which has involved no simultaneous physical presence between the parties before the contract is made, in other words no face to face contact. There has been a lot of chat about situations in which a customer picks up a leaflet in a branch of a building society, for instance, takes it away, fills it in and then sends it off by post. Is that a distance contract? HM Treasury has sat on the fence on this issue, whilst the FSA appears to have come down the side of there being no distance contract if there has been any personal presence on the part of the consumer on the premises of the seller, no matter how perfunctory and impersonal. These hybrid situations apart, all contracts concluded exclusively by fax, post, telephone or internet will clearly be covered.
Q: Who is going to enforce the rules if we have one set of rules introduced by HM Treasury and another introduced by the FSA?
A: Good question, and unfortunately there is not a simple answer. The position is that for all financial services currently regulated by the FSA including pensions, life assurance and investments it will be the FSA, for general insurance policies it will also be the FSA, even though outside a distance sales context, the FSA will not start to regulate the insurance business until 14 January 2005. For all the rest including second charges on real property, credit cards and debt management it will be the Office of Fair Trading and Trading Standards Officers employed by local authorities.
Q: So what's the penalty for getting it wrong?
A: Under the DM Regs, breaches of certain provisions are criminal offences and there can be personal criminal liability for responsible company directors or managers. The Office of Fair Trading or Trading Standards Officers can also apply to the courts for immediate banning injunctions in respect of marketing activity that breaks the rules under the Enterprise Act 2002. This can happen if it can be shown that the conduct in question harms or is likely to harm the collective interests of consumers.
The rules also render void any contract term which is inconsistent with any of the rules or purports to impose on a consumer additional or greater duties or liabilities than those provided for in the rules.
Also overridden will be any contractual terms which aim to apply the law of a non-EEA state so as to prevent a contract or supply closely connected with the EEA being covered by the rules. So far as the FSA rules are concerned, the FSA's normal enforcement powers will apply including the power to mete out substantial finds for non-compliant conduct.
Q: So what broadly is the effect of the new distance marketing rules?
A: There are two main thrusts of the new rules Firstly, there are compulsory disclosures as to the identity of the product seller and the product itself. Secondly, there is an obligation to allow an unconditional cancellation right, exercisable within a specified number of days after the conclusion of the contract.
Q: So what are the compulsory disclosures?
A: Where do we start? The best place is probably to say that here we are going to focus on the DM Regs. There are differences between these and the equivalent FSA rules, but the broad effect is the same.
In essence, there are two categories of disclosure that have to be given before the conclusion of the contract. In both cases there are, as ever, exceptions, but for both types the requirement is that the disclosure must be given "in good time prior to the consumer being bound". The first category of disclosure has to be supplied in a "clear and comprehensible manner appropriate to the means of distance communication used"
Effectively this means that if the product is being offered by direct mail, then the relevant disclosure has to be given in that mailing.
The disclosure that has to be given here is all set out conveniently in Schedule 1 to the DM Regs. There are no less than 21 separate fields of disclosure. These include a description of the main characteristics of the financial service, the arrangements for payment and performance, the identity, main business and geographical address of the supplier and any limitation on the period for which the information provided is valid.
Q: So what about the second category of disclosure?
A: Thanks for reminding us. The second category of disclosure also has to be given in good time prior to the conclusion of the contract. The differences here are first of all that the communication has to be "on paper" or "in another durable medium which is available and accessible to the consumer". The second difference is that here it is not just the prescribed information in schedule 1 but the entire contractual terms and conditions which have to be supplied. In the context of an insurance policy, for instance, it would be the full terms and conditions of the insurance cover.
Q: So what about the exceptions?
A: For the first category of disclosure, the two exceptions both apply to telephone sales. The first is that at the beginning of the conversation the supplier has to make clear his identity and the commercial purpose of the call if it is initiated by him. Does this mean that a caller from an outsourced contact centre has to give the name of the Contact Centre or its client? The DMA has been lobbying on this point and it now looks as though the FSA at least will allow the client's name to be given, but advice should be taken before making a final decision on this. The second exception in this telephone sales scenario is that less information than the disclosure in schedule 1 can be provided, but only if a consumer explicitly consents during the phone call. The reduced disclosure here is just six fields of information and focuses on key aspects such as a description of the main characteristics of the service and the total price to be paid.
Q: And wasn't there an exception also for the "on paper, or "in another durable medium" disclosure obligation?
A: Yes absolutely. The exception here applies to a situation where the contract has been concluded at the consumer's request using a means of distance communication which does not enable provision of the full terms and conditions and schedule 1 information prior to the contract being concluded.
What does all this mean? Can the seller state in the small print in a mailing that any response will be considered a request by the consumer for immediate conclusion of the contract? The view of the FSA on this, recently expressed in "Handbook Notice 36" is that this will not wash. Postal communication normally enables the provision of the full terms and conditions in a durable medium perfectly well, in advance of the conclusion of the contract. So where will the exception apply? It looks as though this is only going to apply in a telesales context.
Q: So what does "in good time before the conclusion of the contract" actually mean?
A: There is no laid down timetable which tells us what period of days or weeks will apply in relation to which type of product. The FSA tells us that it is simply a question of looking at the product category and deciding what will be reasonable in the circumstances. For shorter term and less complex products like holiday insurance or credit card insurance, 5, 7 or 14 days might be the general order, whilst for more complex products such as pensions or life insurance, we may be talking 14 or 28 days or even longer.
Q: So what do I have to do to ensure that information is supplied "in a durable medium"?
A: Clearly paper qualifies, and otherwise the FSA tells us in its Glossary that it will be any instrument which enables the recipient to store information so that it is accessible for future reference for a period of time adequate for the purposes of the information. This will therefore include floppy disks, CD Roms, DVDs an email and, according to recent oral pronouncements of FSA officials, a pdf which can be easily downloaded on to the hard drive of the recipient's computer. Not regarded as "a durable medium" will be general website content because it can be so easily and quickly changed.
Q: So what about the cancellation rights?
A: For distance contracts relating to life insurance or personal pensions, the unconditional cancellation right period is 30 calendar days starting the day on which the contract is concluded. For all other relevant contracts the cancellation period is 14 calendar days.
Q: Are there exceptions to the cancellation right?
A: There are always exceptions. There will be no cancellation right if the price of the product depends on fluctuations in the financial markets outside the supplier's control, for instance unit trusts, foreign exchange or equity swaps. There will also be no cancellation right if the contract has been performed by both parties at the consumer's express request before he cancels it. Nor will there be a right if it is an insurance policy of less than one month's duration.
Q: How can the cancellation right be exercised?
A: There are detailed requirements as to how notice of cancellation may be given which are set out in the rules.
Q: What if some part of the service has already been supplied before the cancellation right is exercised?
A: This can happen, for instance in the case of an insurance policy where the individual may have been on cover for some days before the cancellation right is exercised. Here, the rules allow the supplier to deduct from any post cancellation refund a suitable charge for the service already supplied. This has to be in proportion to the overall charge
Q: What disclosures does the supplier have to make about the cancellation right in advance of the contract being concluded?
A: The schedule 1 disclosures which we have already talked about include a number of fields of information which focus on the cancellation right. These include "practical instructions for exercising the right to cancel" and the amount which the consumer may be required to pay for services already rendered before the cancellation right is exercised.
Q: Is there also something in the new rules about renewal of financial services contracts?
A: Correct. The new rules require that if a supplier wants to be able to renew a distance contract automatically/on a negative option basis, it must obtain the customer's prior consent for that renewal process to be effective.
Q: So is that it?
A: As ever certainly not. Before concluding any marketing material or product information to which these rules might apply, specific advice will have to be taken. There are also other rules which we have not covered such as those relating to inertia consumer sales of financial services, which are prohibited.
