One directive, two sets of rules

Topic: Financial services
 
Who: HM Treasury
 
Where: Westminster
 
When: August 2004
 

What happened:
 
The UK Government published the Financial Services (Distance Marketing) Regulations 2004 implementing the EU Distance Marketing of Consumer Financial Services Directive.  The regulations ("the New Regs"), a summary of the consultation feedback and the Government's response are at www.treasury.gov.uk/media//43283/implementation_dmd.pdf

Like the Consumer Protection (Distance Selling) Regulations 2000 (which apply to pretty much all products and services outside the financial sector) the New Regs have two broad themes, first of all seller/product disclosure and secondly cancellation rights.

Most of the New Regs come into effect on 31 October 2004 "just slightly later" (as the DTI puts it) than the Directive's 9 October deadline for implementation. 

But what about the FSA rules?

"Hang on a minute" some of you might be saying, "what about the Distance Marketing Directive Instrument 2004 published by the Financial Services Authority in April 2004, effective 9 October 2004?  Wasn't this intended, by way of amendments to the FSA Handbook, to implement the same EU Directive?"

Yes it certainly was, but the FSA's instrument covers only those financial products  which the FSA regulates.  It does not regulate consumer financial products such as consumer credit (other than mortgages which will come under the FSA remit from 31 October 2004) or other so-called "gap" products such as (until 14 January 2005) most general insurance, debt management and advice services and cheque cashing services.

All of these remain the regulatory responsibility of the DTI/HM Treasury and the OFT.  Which means that wherever these types of services were to be offered for sale to consumers at a distance, separate implementing regulations apart from the FSA rulebook changes were needed, hence the New Regs.

Understanding "distance contracts" and "consumers"

Like the 2000 Regulations, the New Regs only apply to "distance contracts" made to "consumers".  The rules do not therefore extend to sales to sole traders, partnerships or unincorporated associations.  The government did actually consider whether to extend the remit of the New Regs beyond sales to consumers, but determined that there was "no identified detriment requiring attention" and this appeared to be supported by business lobbying. 

On the exact meaning of "distance contracts", HM Treasury worryingly admits it is not clear whether there is a distance contract in the following circumstances:-

• where a consumer enters a bank, picks up a leaflet about financial services and without talking to anyone about the product takes it away to complete  and either posts it back or completes an application on line; or
• where a consumer enters a bank and uses a terminal provided there (or even an in-branch telephone) to conclude a contract, without talking face to face with a member of staff. 

Would these situations be covered by the New Regs?  One approach is to take the view that so long as the means of communication used is capable of being utilised without the parties being physically present together, then that is enough for the rules to apply. In other words it will make no difference if the means of communication is in fact used in a way that involves person to person contact, for instance by way of a form being handed over a counter.

Credibility indicators key?

Another approach, however, is to consider that purchasing at a distance means the consumer is deprived of some of the indicators that would normally give him/her the ability to assess the credibility of the supplier.  This suggests that where there is simultaneous physical presence and so an opportunity to discuss the contract face to face, as well as physical contact that give the consumer the confidence to shop, the New Regs should not come into play.

Government sits on the fence

The Government's interpretation was originally the former rather than the latter. Most in the consultation, however, disagreed with that approach and the final official position is, somewhat alarmingly, that having listened to the views expressed and sought views from other member states, the Government believes that both interpretations are legally sustainable.  It has therefore decided to simply replicate the wording of the Directive and leave the interpretation and guidance to the enforcement authorities and the courts.  Hmmmm.

Country of Origin?

HM Treasury also discusses the question of country of origin.  The Directive itself is not clear as to whether member states are required to adopt country of origin (where the rules are only enforced against suppliers resident in the enforcer's state) or apply the alternative "host state" interpretation (where so long as consumers are resident in the UK, the UK enforcement authorities would take action regardless of whether the supplier was resident in the UK or elsewhere within the EU).  On consideration, the Government has opted for "country of origin" unless the supplier's home state has not yet implemented the Directive or introduced equivalent rules.

Cancellation rights wrinkle

On cancellation rights, the New Regs stick with the regime of the Directive, which is 30 days for life insurance and pensions contract and 14 days for most other financial products.  These periods are calendar days not working days and they start to run the day after the day the contract is concluded. 

Payments by consumers when an insurance contract is cancelled?

The Directive states that where a consumer cancels a distance contract he may only be required to pay for the service actually provided up to cancellation.  However, article 7(2) allows member states to introduce provisions that would prevent a consumer from having to pay anything on cancelling a distance contract for insurance. 

Most general insurance in the UK will from 14 January 2005 be inside the FSA regulatory tent, but certain insurance products do not come under the FSA umbrella.  These include breakdown insurance, insurance in respect of non-motor goods supplied by the provider or in respect of risks linked to travel booked with the provider. 

FSA position on payment for pre-cancellation cover

On insurance policies it regulates, the FSA has gone for an approach which allows the insurance provider to charge the consumer for the cover actually provided up to cancellation, provided the amount payable is in proportion to the service provided compared to the full coverage under the contract, provided it is not characterisable as a penalty and provided the consumer was told the amount payable as part of the pre-contract information.

HM Treasury follows FSA

For "gap" insurance products the Government has also taken the view that it would be reasonable to allow insurers to make a proportionate charge, and paragraph 13 of the New Regs sets out the conditions that apply.  These are similar to those imposed by the FSA, but insurers will need to pay close attention to the requirements for disclosure, in good time before the contract is concluded, about the likely charge to be made.

Required Disclosure

Schedule 1 to the New Regs sets out no less than 21 rules covering "information required prior to the conclusion of the contract".  This includes the identity of the main business of the supplier, the geographical address at which the supplier is established and any other geographical address relevant to the consumer's relations with the supplier; where the consumer's dealings are with any professional other than the supplier, the identity of that professional and the capacity in which he is acting with respect to the consumer and the geographical address relevant to the consumer's relations with that professional, a description of the main characteristics of the financial service, the total price to be paid by the consumer to the supplier for the service including all related fees, charges and expenses and all taxes paid via the supplier or, where an exact price cannot be indicated, the basis for the calculation of the price enabling the consumer to verify it, the minimum duration of the distance contract in the case of financial services to be performed indefinitely or recurrently and information as to cancellation rights. 

In schedule 2 are 6 rules applicable to information required in the case of voice telephone communications. 

Additional  provisions

Other provisions mirror the 2000 Distance Selling Regulations by criminalizing demands for payment in respect of unsolicited financial services, rendering void any contractual term which is inconsistent with any provision of the new Regs and overriding any contractual term which aims to apply the law of a non-EEA state so as to prevent a contract or supply closely connected with an EEA state from being governed by the provisions of the Directive.

Regulation 9(4) makes it clear that notice of cancellation by a consumer will be valid if it is sent by e-mail to the business electronic mail address of the supplier last known to the consumer. 

Regulation 24 amends the Unfair Terms in Consumer Contracts Regulations 1999 so as to deem automatically unfair, for the purposes of these regulations, any contractual term placing on a consumer the burden of proving whether a supplier or intermediary has complied with obligations deriving from the Directive or any provision implementing it. 

Why this matters:
 
Clearly, the requirements for pre-contract information are going to have a significant effect on much advertising for financial services in the UK with effect from Halloween 2004 and it should be borne in mind here that most of the regulations will apply to distance contracts "made on or after 31 October 2004".  This means that if discussions or negotiations over the sale of a particular financial service have been on going for a period before this date, but the contract is actually concluded on or after 31 October, the supplier will have to ensure the requisite pre-contract disclosure is supplied before 31 October 2004. 

What of the bifurcation in regulations between the FSA and HM Treasury? Where industry concern and confusion is already being reported by the DMA as to the effect of the new Directive, it is not helpful that there are two sets of regulations implementing the same Directive, even less so that they come into force on different dates.  However, the Treasury summary of consultation feedback and response document includes an extremely helpful "Map of financial services" at Annex A which lists out pretty much all types of financial service and who regulates them.  Early reading and memorising is recommended!