EUROPEAN COMMISSION Brussels, 11.5.2022 SWD(2022) 141 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT REPORT

Accompanying the document Proposal for a DIRECTIVE 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} - {SEC(2022) 203 final} - {SWD(2022) 142 final}



Table of contents 1.Introduction: Political and legal context 1.1.Objective and scope of this initiative 1.2.Interaction of DMFSD with existing legislation and upcoming initiatives 1.3 Peer-to-peer lending and this initiative 2.Problem definition 2.1.What are the problems to be addressed by the initiative? 2.2.What are the problem drivers? 2.3.How will the problem evolve? 2.4.Intervention logic 3.Why should the EU act? 3.1.Legal basis 3.2.Subsidiarity: Necessity of EU action 3.3.Subsidiarity: Added value of EU action 4.Objectives: What is to be achieved? 4.1.General objectives (GOs) 4.2.Specific objectives (SOs) 5.What are the available policy options?

5.1.What is the baseline from which options are assessed? 5.2.Description of the policy options 5.3.Options discarded at an early stage 6.What are the impacts of the policy options? 6.1.Option 1: Repeal of the Directive and non-regulatory measures 6.2.Option 2: Comprehensive revision 6.3.Option 3a: Repeal and modernisation of relevant provisions introduced in horizontal legislation 6.4.Option 3b: Repeal and modernisation of relevant provisions introduced in product-specific legislation 7.How do the options compare? 7.1.Effectiveness 7.2.Coherence with other EU legislation and policy objectives 7.3.Efficiency 7.4.Comparison of options and proportionality 8.Preferred option 8.1.Option 3a: Repeal and modernisation of relevant provisions introduced in horizontal legislation 8.2.REFIT (simplification and improved efficiency) 9.How will actual impacts be monitored and evaluated? Annexes Annex 1: Procedural information 1)Lead DG, Decide Planning/CWP references

2)Organisation and timing 3)Consultation of the RSB 4)Evidence, sources and quality Annex 2: Stakeholder consultation – Synopsis report 1)Introduction and consultation strategy 2)Consultation activities and tools - types of stakeholders and data collection tools 3)Evidence, Sources and quality 4)Main stakeholder feedback per consultation activity Annex 3: Who is affected and how? 1)Practical implications of the initiative 2)Summary of costs and benefits 3)Impact on Small & Medium Enterprises (SMEs) 4)One-in, one-out Annex 4: Analytical methods 1)Partial quantification 2)Description of the analytical methods Annex 5. Problem tree Annex 6 Interaction of DMFSD with existing legislation and on-going initiatives Annex 7 Examples of industry misleading and unfair practices at advertising and pre-contractual stages Annex 8 Background information on financial services products sold at a distance

Annex 9 Glossary

1.Introduction: Political and legal context Directive 2002/65/EC on Distance Marketing of Consumer Financial Services (‘the Directive’ or ‘the DMFSD’) aims at ensuring the free movement of financial services in the single market by harmonising certain consumer protection rules governing this area. 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 e (i.e. without the simultaneous physical presence of the supplier and the consumer). The Directive sets out information obligations to be provided to the consumer prior to the conclusion of the distance contract (pre-contractual information), grants for certain financial services a right of withdrawal to the consumer, and bans unsolicited services and communications from suppliers. The Directive has been subject to a full-fledged Evaluation and the Commission has presented its results in a Staff Working Document. The evaluation examined whether the Directive has achieved its objectives and whether it is fit for purpose. It assessed the overall functioning and practical application of the Directive as well as its continued relevance in view of market and legal developments and the current needs of stakeholders. The main results of the evaluation can be grouped in two overarching conclusions: following the entry into application of the Directive, a number of EU product-specific legislative acts (e.g. the Consumer Credit Directive) and EU horizontal legislation (the General Data Protection Regulation) have been enacted. The impact of these more recently enacted pieces of legislation is that the Directive’s relevance and added value has been subsequently eroded. Secondly, in those areas in which the Directive is still relevant, a number of developments (e.g. digitalisation) have impacted its effectiveness. In this light, in the New Consumer Agenda, the Commission stated its intention to prepare a proposal for the revision of the Directive in order to reinforce consumer protection in the context of the digitalisation of retail financial services. The Council Conclusions on the New Consumer Agenda support the Commission’s intention to revise the Directive, in particular with a view to strengthening consumer protection by implementing specific measures preventing consumer misinformation. The European Parliament, through different legislative initiative resolutions, such as the resolution of 20 October 2020 with recommendations to the Commission on a “Digital Services Act: adapting commercial and civil law rules for commercial entities operating online”, has called on the Commission to introduce new measures in areas in which the Directive still has value (e.g. transparency provisions and digital nudging). The Directive has been included in the REFIT annex of the 2020 Commission Work Programme, with a potential new legislative proposal depending on the outcome of the Evaluation and this Impact Assessment. Under the President’s Political Priorities of ‘A Europe Fit for the Digital Age’ and ‘An Economy that Works for the People’, the Commission has launched a variety of political and legislative actions (e.g. a Digital finance package, the Capital markets union 2020 Action Plan, the ongoing Retail Investment Strategy) which have directly or indirectly impacted the Directive. Alongside the different Commission political and legislative actions, over the past twenty years distance marketing of consumer financial services has changed rapidly. Financial providers and consumers have abandoned the fax machine, mentioned in the Directive, and since then new players with new business models have emerged, such as fintech which also includes technological developments in sectors such as insurance . The total transaction value growth of the Fintech sectorin Europe has been increasing on a yearly basis since 2017. Consumers have more confidence in buying through digital tools and are increasingly purchasing financial products and services online, leading established players to adapt their marketing and business practices. At the end of 2020, 57% of EU consumers were using banking apps or banking mobile site. The impact of the COVID-19 pandemic and the related lockdowns has accelerated the use of online shopping in general. This trend has also been noted in the recent European Banking Authority Report with regards to financial services and Eurostat data states that 12% of EU citizens have purchased at least one financial service online in 2020. 1.1.Objective and scope of this initiative The Evaluation concluded that the Directive has been partially effective in increasing consumer protection but of limited effectiveness in consolidating the single market due to barriers that are beyond its remit. In addition, needs originally addressed by the Directive are currently addressed by other EU legislation that significantly overlap with it. According to the Evaluation, 15-28 million EU consumers have benefited from key Directive provisions since its transposition in 2004, chiefly in the context of payment accounts, insurance and - to a lesser extent – pensions and consumer loans. The initial objective of this initiative was to gather and analyse the coherence of the Directive vis-à-vis the other overlapping EU legislation. To do so, a mapping exercise of the relevant EU product and EU specific legislation was conducted to see whether all the relevant parts of the Directive have been taken over by the more recent EU legislation. The initiative looked into whether the Directive could be safely repealed without creating any legal lacunae and without lowering the level of consumer protection, whilst ensuring the fostering of the single market for cross-border sale of financial products and services sold at a distance. The aim of this initiative was to simplify the current legislative framework, either by repealing it, or safeguarding only those parts that are still relevant and might be relevant in the future. As a second step, after analysing the coherence of the Directive, the initiative aim was to consider whether the residual ‘legally relevant’ parts of the Directive are still practically relevant (effective) for the stakeholders. In other words, the aim of this second step was to see whether the still relevant elements of the Directive played a significant role in terms of consumer protection and consolidation of the single market, especially in light of digitalisation. In this second step, the Directive’s safety net feature was also analysed. The safety net means that the rules of the Directive apply whenever (i) a new product appears on the market for which there is no EU legislation yet (e.g. virtual currencies are a financial service product not yet subject to legislation at EU level), (ii) the product-specific legislation does not provide the right(s) established by the Directive (e.g. the right for the consumer to withdraw from the contract within an established time-period is not laid down in the relevant insurance legislations), (iii) the product-specific legislation creates exemptions and the product falls outside the scope of application (e.g. consumer credit loans below EUR 200 are not covered by Directive 2008/48/EC - Consumer Credit Directive). It is important to keep in mind that the Directive defines financial service in a wide manner, encompassing any banking, credit, insurance, personal pension, investment or payment service. Thus, the Directive captures traditional products such as a life insurance policy or the opening of a bank account but also recently emerged products such as cryptocurrencies or consumers taking out a loan from a crowdfunding platform. Based on the survey conducted for the Evaluation Study the most popular product purchased in the last 5 years by distance means was in the insurance sector (31%) followed by consumer loans (27%) and payment accounts (15%). It must be kept in mind that the Directive applies only whenever the financial service is bought at a distance, meaning that there is no simultaneous physical presence of the consumer and the supplier. On the basis of the survey conducted for the Evaluation Study, more than 60 % of the respondents mentioned that they used online or email to buy a financial service; 26% concluded the distance contract via phone. 1.2.Interaction of DMFSD with existing legislation and upcoming initiatives Within the EU legislative framework concerning financial products and services, the Directive acts as a lex generalis. Thus, the rules established by the Directive apply horizontally to any service of banking, credit, insurance, personal pension, investment or payment nature sold at distance. However, in case there is a sector-specific legislation in one of the mentioned financial services which establishes rules similar to or more extensive than those laid down in the Directive, the former (i.e. the sector-specific legislation) will apply (lex specialis). The Directive entered into application in 2002 and was intended to cover the gap resulting from Directive 97/7/EC on the protection of consumers in respect of distance contracts, since the latter excluded from its scope financial services. Directive 97/7/EC, which has in the meantime be repealed and replaced by Directive 2011/83/EU on consumer rights (hereafter ‘the Consumer Rights Directive’), and the DMFSD share a lot of similarities in that they both provide consumers with basic consumer rights, such as the right of withdrawal and the right to obtain pre-contractual information. In this light, while the current version of the Consumer Rights Directive excludes from its scope financial services, the Consumer Rights Directive, in particular the provisions concerning distance contracts, and the DMFSD bear a number of similarities. When the Directive entered into application, the legislative landscape concerning rules on financial services sold at a distance was sparse, meaning that the scope of application of the Directive’s rules was vast. However, over the years, a large number of EU legislative acts have entered into application. At least fourteen (14) product-specific legislation have been enacted in the different sectors of financial service and at least five (5) horizontal legislations have had a direct pact on the Directive (See Table 24 in Annex 6In addition, the Commission continues to publish legislative proposals which impact directly or indirectly the Directive. A closer look concerning coherence between the Directive and relevant EU acts and the resulting problems is provided in Section 2.1. However, the current legislation and proposed amendments to the EU legislative framework point towards the need to study the concrete impact of these changes to the Directive, including the coherence between the different legislations and the remaining relevance, if any, for the Directive.

By way of example, in 2008, thus 6 years after the entry into application of the Directive, the Consumer Credit Directive (CCD) entered into force. The CCD established rules in the area of pre-contractual information and the right of withdrawal for those products (consumer loans) that fall within its scope. Thus, whenever the product falls under the scope of CCD, the rules of the CCD apply and not the rules of the DMFSD on pre-contractual information and the right of withdrawal. However, the CCD has a number of exemptions (e.g. loans below EUR 200 or above EUR 75 000). For those exempted products, the rules of the DMFSD apply. However, it has to be kept in mind that the CCD is under revision and a number of currently exempted products from the CCD might eventually fall under its scope, rather than the DMFSD, in a couple of years. 1.3 Peer-to-peer lending and this initiative The Explanatory Memorandum of the recent Proposal for a new Directive on consumer credit refers to the protection of consumers granting credit through peer-to-peer lending platforms. In this context, it states that ‘the protection of consumers investing through these platforms, and the responsibilities of the platforms towards these consumers will be assessed in another context’. A preliminary assessment of these issues has, therefore, been carried out in the context of the present initiative, in particular since the Crowdfunding Regulation, in Article 1(2)(a) excludes from its scope ‘project owners that are consumers’. A set of questions were submitted to stakeholders. While the protection of consumers granting credit through peer-to-peer lending platforms is not addressed by this initiative since this issue is too specific to fit the logic of the proposal and the horizontal nature of the Directive (the Directive captures all financial services, irrespective of the particular products or services), a number of preliminary findings have emerged. In general, national consumer authorities rarely, if ever, receive complaints in this area. However,interviewed respondents suggest that natural persons making funds available for consumer credit via peer-to-peer platforms, such as crowdfunding platforms, might be insufficiently protected against misconduct. Hence, it was noted that complaints are more often received from consumers providing the funding, rather than the borrowers. In a majority of the respondents’ Member States, there is currently no regulatory or effective supervisory framework to protect natural persons acting as lenders on such peer-to-peer lending platforms as such activity often falls outside the regulatory perimeter, or the application of the existing rules may be unclear. Interviewees agreed that disclosure requirements, such as simplified disclosure of credit agreement terms or borrower’s risks, and a duty of care clause could be appropriate. Some respondents argued in favour of other safeguards, such as caps on amounts that can be made available for consumer credit on such platforms by natural persons. Others also supported rules for secondary markets in claims. 2.Problem definition 2.1.What are the problems to be addressed by the initiative? Problem 1 concerns the current framework of the Directive. The key question under Problem 1 is to understand the scale of the problem as a result of the substantial developments in the EU legislative framework: considering its lex generalis nature and all the subsequent post-2002 legislation, does it still have a meaning to exist (relevance) in its current format? How does the Directive interact (coherence) with the more modern EU legislation? What are the problems created by this lack of coherence and decreased relevance? After examining the problems concerning the legislative framework (Problem 1), Problem 2 and Problem 3 concern those financial services for which parts of the Directive are still legally relevant. Thus, Problem 2 and Problem 3 concern only those parts of the Directive (i.e. those rules) that apply to certain financial services/products for which currently no sector specific legislation exist (e.g. currently no specific legislation in force on virtual currencies), the sector specific legislation whose rules do not cover the rules established by the DMFSD (e.g. right of withdrawal for certain insurance products) or whose sector specific legislation exempts certain products due to limitations to the scope of application (e.g. consumer loans below EUR 200 are exempted from the Consumer Credit Directive; thus the rules of the DMFSD would apply). As depicted in Annex 5, three overarching problems have been identified, each propelled by three types of drivers: a regulatory framework that fails to ensure legal certainty (problem driver 1), behavioural biases that are exploited by financial providers (problem driver 2), and barriers that hamper the possible increase of cross-border provision of financial products. In turn, Problem 1, Problem 2 and Problem 3 translate into consequences for consumers (detriment in case the product they bought is unsatisfactory, lack of sufficient trust to contract a financial service, both in home Member State and/or cross-border, and hence loss of welfare), and businesses (uneven playing field, compliance costs and loss of welfare due to the lack of realization of the potential of the internal market). 2.1.1.Problem 1: Lack of coherence and decreased relevance of the DMFSD due to overlap with product-specific and horizontal legislation As indicated in Annex 6, since 2002, the EU has been active in the area of financial services, adopting a large number of legislative acts. At the time of writing this impact assessment, there are two ongoing legislative proposals (Revision of the Consumer Credit Directive and a Proposal for a Regulation on Markets in Crypto-assets) and prospective revisions (e.g. to the Mortgage Credit Directive, on-going work in the area of Retail Investment) which are likely to have a direct impact on the legislative framework of the DMFSD. The legislative framework of the DMFSD is a moving target, as its relevance and coherence is linked to the adoption of new legislation. In this light, the scale of this issue is described in the Table 1. Table 1. Legal Mapping of the Directive and overlaps with product specific legislation Pre-contractual information Right of withdrawal Ban on unsolicited service Banking products Right of withdrawal on payment accounts Fully relevant Article 9 of the DMFSD was amended by Unfair Commercial Practices Directive Savings accounts Consumer Credits Consumer credits below EUR 200 and above EUR 75,000 Consumer credits below EUR 200 and above EUR 75,000 Mortgages Mortgages for Member States that opted to give this right under DMFSD and not Mortgage Credit Directive Mortgages for Member States that opted to give this right under DMFSD and not Mortgage Credit Directive Insurances Information on the right of withdrawal for investments covered by that right Investments covered by article 6 of DMFSD Personal pensions Fully relevant Fully relevant Investments Information on the right of withdrawal for investments covered by that right Investments covered by article 6 of DMFSD Payment services Mostly non-relevant Mostly non-relevant The table illustrates the seven (7) areas that fall under the definition of ‘financial services’ and represents the regulatory links (legal framework) between the Directive and these 7 areas with regard to the three basic consumer rights established in the DMFSD. The red colour signifies that the articles of the Directive are no longer relevant. Orange signifies that the product specific legislation is currently under review and the possibility of the Directive still being relevant is put into question. Green signifies that, from a regulatory point of view, the Directive is still relevant. Ban on unsolicited services and communication Out of the three rights provided by the DMFSD, the articles concerning the ban on unsolicited services and communication are nowadays irrelevant. With regard to the ban on unsolicited communication, the e-Privacy Directive and the General Data Protection Regulation apply horizontally, thus also covering unsolicited communication in the area of financial services. With regard to the ban on unsolicited services, the Unfair Commercial Practices Directive implemented in 2007 addressed this aspect and explicitly amended Article 9 of the DMFSD. Right to obtain pre-contractual information Most of the product-specific legislation adopted after 2002 in the area of financial services have imposed the obligation on financial service providers to supply pre-contractual information to consumers. The content of information to be provided to consumers varies, depending on the specific EU legislation in question. First, the overlap between the DMFSD and the product specific legislation means that the relevance of the DMFSD articles on pre-contractual information are limited to those financial products which are exempted from the product-specific legislation since in case of over-lap the applicable rules are those laid down in the product-specific legislation For instance, “buy now pay later” consumer loans of less than EUR 200 do not currently fall under the current Consumer Credit Directive. Thus, the obligations for financial providers to provide pre-contractual information in that case stems from the DMFSD. The DMFSD articles would also apply to those financial services products for which no product-specific legislation is currently in force, such as cryptocurrencies.

Second, the overlap between the Directive and the product-specific legislation has led to practical issues. Both in the stakeholder consultation related to the Evaluation Study and in the Public Consultation related to this Initiative, stakeholders in the insurance sector pointed out that this overlap has led insurance providers to present two sets of pre-contractual information documents, one stemming from the insurance specific legislations and one stemming from the DMFSD. This amounts to unnecessary financial cost for the providers but also detrimental for consumers who, in this manner, suffer from information overload. Right to withdrawal While most product-specific legislation have introduced the right to obtain pre-contractual information, not all have included the right of withdrawal. For instance, in the banking sector, the Payment Accounts Directive (PAD), while providing extensive pre-contractual information obligations, does not establish the right to withdraw. Thus, the right of withdrawal in instances of a banking account bought at a distance, stems from the DMFSD. The DMFSD articles would also apply to those financial services products bought at a distance for which no product-specific legislation is currently in force, Scale of the Problem & the Safety Net feature of the Directive In light of the Table 24, Figure 3 and Figure 4 found in Annex 6, it is safe to say that the regulatory relevance of the DMFSD has been in a constant state of decline caused by post-2002 EU legislation. In addition, the scale of this problem appears to be growing since, excluding the Proposal to Revise Solvency II, the current European Commission proposals in different financial services overlap and reduce further the DMFSD’s relevance. The proposal concerning the Revision of the Consumer Credit Directive intends to widen the scope to consumer loans below EUR 200 and above EUR 75 000. The proposal for a Regulation on Markets in Crypto-assets will regulate an area which is currently subject to no specific regulation and hence, would fall under the DMFSD. These instances, just like the recently adopted Crowdfunding Regulation, illustrate that the DMFSD is further losing its relevance vis-à-vis different financial products. The lack of relevance of the DMFSD is also illustrated by the fact that it refers, in its recitals and in the operative part, to largely out-dated technologies, such as fax machines, floppy discs, CD-ROMs, DVDs. The problem linked to the relevance of the DMFSD is further exacerbated by the fact that the provision regulating the relationship between the DMFSD and the product-specific legislation is unclear. First of all, the hierarchical norm setting out which legal provision should apply is not laid down in the text. When the DMFSD does refer to the lex generalis/lex specialis relationship, it concerns only the right for pre-contractual information. In addition, as explained above this is still not sufficiently clear for certain financial providers, in particular in the insurance sector, since, to be on the safe side, they provide two sets of pre-contractual information documents to the consumer. In addition, in the Public Consultation, national authorities and industry stakeholders stated that certain definitions and concepts of the DMFSD require further clarification, in particular ‘fully completed performance’ under Article 6(2)(c) and ‘concluded at the consumer’s request’ under Article 5(2) of the DMFSD. The view that the current DMFSD regulatory framework is losing its relevance is shared by all stakeholders. While they disagree on how to solve the problem, the erosion of the relevance of the DMFSD is a given-fact. However, more than 70% of stakeholders from all groups also agree that, while the relevance of the DMFSD has been reduced, the safety net feature as a result of the horizontal scope of the Directive renders the DMFSD effective. Different stakeholders have provided different examples of the use of the safety net feature of the DMFSD. Financial providers explained that they reverted back to the DMFSD provisions when they were in doubt as to which legislation applies to cryptocurrencies. Another example, cited by both financial providers and public authorities, concerned the use of digital on-boarding. Due to the lockdowns related to the COVID-19 pandemic, instances of physical meetings in banks between consumers and providers was kept to a minimal. Thus, digital on-boarding of potential clients took place on a more regular basis. In such instances, financial providers, upon seeking the views of the relevant competent authorities, applied the DMFSD since the contract was being concluded ‘at a distance’. Public authorities have also cited other instances when they use the DMFSD, such as in the area of investment in expensive wines and diamonds, or certain gift-cards that fall outside the scope of PSD II, or current loans below EUR 200 that fall outside the Consumer Credit Directive. With regard to the consumer loan sector, the scientific researcher and most consumer organisations participating in the Public consultation noted that most of the dangerous products for consumers on the market, such as buy now pay later loans below EUR 200, appeared on the market thanks to digitalisation only after the entry into force of the Consumer Credit Directive. Thus, it is the DMFSD, rather than the Consumer Credit Directive, that provides, until the latter in revised, consumers with a minimum level of protection, in terms of pre-contractual information and a right of withdrawal. It was also highlighted that the emergence of new products brought by digitalisation outpace the required time for the EU to legislate. In this regard, the safety net in the DMFSD has been used to cover instances not foreseen by the product-specific legislation at the time of entering into force. The safety net feature of the DMFSD has also been applied by the national courts vis-à-vis still unregulated products (e.g. crypocurrencies). The scientific researcher and consumer organisations who participated in the public consultation noted that financial products in the digital sphere tend to be complex for the average consumer to understand. Thus, the safety net feature of the DMFSD provides the minimum ex ante and ex post protection for the consumer whilst also providing the necessary trust to contract such innovative products Public authorities cited the usefulness of the DMFSD as a catch-all instrument during investigations. Thus, for the same investigation, they cite and apply rules from both the product-specific legislation and the DMFSD. Nearly half of the financial service providers replying to the inception impact assessment highlighted the importance of the safety net. Industry representatives in the area of insurance and all consumer organisations point out that the safety net feature has, over the years, helped build consumer trust, especially since the right of withdrawal in the area of insurance stems in fact from the DMFSD. In addition, a number of EU based industry representatives noted that the safety net ensured a level playing field and cited the on-going entry into the financial services market by Bigtech companies. For instance, Amazon is active in different areas of financial services and might, in the near future, develop products that do not fall under any product-specific legislation. Thus, the DMFSD would capture such products. The provision of financial services by Bigtechs has been on the Commission’s radar for a number of years. Over the years, Bigtechs, through their business models, have been able to process vast numbers of personal data processing activities and have deployed state-of-the art technological tools. As referred in the EU Digital Strategy ‘these developments are changing the nature of risks to consumers, users and financial stability and they may also have a significant impact on competition in financial services’. In this light, it is worth recalling that the DMFSD is without prejudice to Regulation 2016/679 (the General Data Protection Regulation). Thus, the processing of personal data by Bigtechs falls under the scope of Regulation 2016/679, which already establishes rules and principles such as purpose limitation and data minimisation. However, with Bigtechs increasing their offers to consumer to buy financial services, both legislations can contribute to ensure that the consumer’s personal data is safeguarded and that all financial service providers are subject to the same rules and regulations, thereby ensuring a level playing field. 2.1.2.Problem 2: Consumers taking out financial services by means of distance communication are not sufficiently protected and face detriment As a result of market, technological and behavioural developments that occurred after the adoption of the DMFSD, some consumers contracting financial services at a distance are not adequately protected from arrangements that will become unsustainable for them. Ill-suited products may cause detriment, such as debt spirals and over-indebtedness. The reasons for the lack of sufficient protection are multiple, stemming both from the consumer’s behavioural actions (e.g. heuristic decision making) and manipulative behaviour by the financial provider. This lack of protection causing consumer detriment cuts across the different rights provided by the DMFSD. Sub-problem 2.1.: Limited consumer awareness of key elements and costs of some financial services (e.g. pre-contractual information does not include how the info needs to be presented) Consumers may face detriment when purchasing financial services at a distance if they are not aware of key features of the services they purchase. In this light, the DMFSD obliges financial providers to provide, ‘in good time before the consumer is bound by any distance contract or offer’, pre-contractual information to the consumer so that the latter is in a position to choose the product that serves him best. The Behavioural Study on the digitalisation of the marketing and selling of retail financial services highlights that the lack of information provision at the pre-contractual stage and the lack of time for consumers to analyse the information provided (22% of the respondents to the Evaluation Public Consultation stated that the time allocated was insufficient and felt under pressure to sign the contract, chart below), lead to a situation whereby consumers do not understand the terms and conditions of the financial services they contract.

Figure 1. Amount of time to review the information about the offer and the provider before having to sign the contract. The reason for such incomprehension of key elements and costs can be multiple and may involve information overload or information complexity by the financial provider. In fact, according to a Report of a National Competent Authority, presenting the costs in a complex manner with specific legal jargon is a way for financial providers to ensure that consumers do not fully grasp the information they are provided. This has been recorded in particular for the consumer loans market and the savings products market. These two markets represent, on the basis of the Evaluation study, 46 % of all sales carried out by distance selling in the past five years (Figure 5). In this manner, the financial providers comply on paper with their pre-contractual obligations, but the aim and spirit of the law is not reached. Likewise, consumer organisations argue, and this is also documented in the Behavioural study, that, while the DMFSD obliges the financial providers to propose pre-contractual information, its rules neither establish how (‘the form’) the information is to be proposed (the DMFSD uses the term ‘clear manner’, but does not specify that it should be displayed ‘prominently’) nor does it ensure that the information is fit to modern digital tools. The same consumer organisations, in the consultations linked to this initiative, pointed out that setting up an obligation on Member States to establish an independent comparison website could help consumers at the pre-contractual stage. This idea is borrowed from the Payment Accounts Directive (2014/92/EU, ‘PAD’) which indeed establishes such an obligation on Member States. Through this comparison website the consumer would be able to obtain information on the payment accounts available on the market and thus make an informed decision. However, the recent PAD Evaluation found ‘that comparison websites are at very different levels of quality and functionality’. The Study noted that the ‘introduction of the comparison table does not necessarily translate into a feeling of trustworthiness, impartiality and transparency’. Sub-problem 2.2.: Sub-optimal use of the Right of withdrawal The right of withdrawal (Article 6 and 7 DMFSD), aims to provide consumers with a ‘cooling-off period’ (of 14 days, extended to 30 days for life insurance contracts) for most of the financial services purchased through distance means of communication. This allows consumers time to rethink and reassess the contract, as well as the opportunity to change their minds and terminate the contract without penalties for non-performance and without having to provide a reason. The right to withdrawal is especially important for financial services marketed sold at a distance, because digitalisation and the acceleration of decision-making processes could facilitate making wrong financial choices. From the Evaluation Study Public Consultation, it emerged that more than 90% of the consulted consumers indicated that having the right of withdrawal is important (for 75% it is very important), more than 85% of industry stakeholders consider it relevant and 100% of the national authorities consider it relevant. The Evaluation survey notes that up to 13% of the consumers surveyed were not made aware of their right to withdraw and that up to 20% of the consumers surveyed buying an insurance product were not fully informed of the extent of costs/charges associated in case that would have exercised their right of withdrawal. Considering that online sale of financial services is expected to grow, it is reasonable to expect that the number of EU citizens concerned by this sub-optimal use of the right of withdrawal will increase. A special 2011 Eurobarometer investigating the extent of consumer empowerment showed that consumers’ awareness of their rights in respect of cooling-off periods after engaging in a distance purchase tends, in certain market segment, to be low. In the case of car insurance sold through distance means, for example, more than half of consumers do not have a clear understanding of their withdrawal rights, with 27% believing (incorrectly) that they can cancel a contract and simply pay an administrative fee, 10% (incorrectly) believing they will not be refunded if they choose to withdraw from a contract, and 18% (incorrectly) believing they do not have the right to cancel a contract at all. This finding is corroborated by data from the Evaluation Study and the Behavioural Study on the digitalisation of the marketing and distance selling of retail financial services. The Behavioural Study found that existence of the right of withdrawal was not communicated to 39% of respondents. The Evaluation of the DMFSD confirmed this result and further shows that 54% did not receive information on the conditions for exercising the right to withdrawal. The study found that the problem was particularly prevalent in the money transfers market, where 53% of consumers are not informed on their right to withdrawal. Apart from the lack or inadequate informational provision of the right of withdrawal, various commercial tactics flagged by desk research are used by financial providers to circumvent potential revenue losses that can arise from withdrawals. For instance, providers may require consumers to make the first payments after the standard 14-day cancellation period has elapsed, for example within a month of receiving their contractual agreement. The aim is to shift the consumer’s attention away from the timeframe set for cancelling to the timeframe set for making a first payment. By then, if the consumer wishes to withdraw, they will have missed the opportunity to do so. This practice is often discussed in the context of insurance products contracted by phone, where premium payments often begin one month after an agreement is sent to the consumer. Another tactic is to make the process complex and burdensome which can discourage or prevent consumers from using the right. This has been included in the European Banking Authority Opinion on the DMFSD. The question on how and whether the withdrawal was done according to the Directive has led, according to desk research conducted by the contractor carrying out the Support Study, to litigation before national courts, for instance in Estonia and Germany.. Among the most common complaints in relation to withdrawals from contracts, nearly two out of five relate to consumers being subject to hidden charges or fees upon initiating the withdrawal process. About one in three consumers describe providers’ miscalculations that would have shortened the withdrawal time window and potentially prevented them from exercising their right to withdraw. In short, the lack of awareness of consumers on the possibility of benefit from the mentioned right at the moment of the purchase, the refusal by the provider to accept the withdrawal and experience of bureaucratic difficulties faced by consumers while exercising their right lead to a sub-optimal use of the right of withdrawal. Sub-problem 2.3.: New market practices exploiting patterns in consumer behaviour The Behavioural study provides a list of examples concerning new market practices. Digitalisation has facilitated the emergence of new distribution channels on the market, often providing opportunities for financial providers to benefit from gaps in the regulatory framework. In fact, since the DMFSD does not explicitly define how pre-contractual information should be presented, providers can engage in practices at advertising and at pre-contractual stage to nudge consumers into purchasing their services. Such market practices come in different ways and means. The Behavioural study provides 5 overarching practices: (i) the way in which information is provided (e.g. benefits added while costs hidden or given less prominence), (ii) features that may accelerate the decision to buy the product (one-click products), (iii) the actual design of the offer (pre-ticked boxes), (iv) consumer targeting and personalisation (v) tools made available to consumers to assist their decision-making process). These practices are then further broken down into specific actions taken by providers to exploit patterns in consumer behaviour (see Table 25 in Annex 7). In this regard, it is worth noting that all the instances mentioned in the table are problematic. For instance, a mystery shopping exercise in the area of payment services found that 56% of consumers looking to transfer money experienced hardship in finding information on the terms and conditions. The technique of obscuring information has also been noted with regard to the selling of payment protection insurance (PPI). Information on financial services if often complex and difficult to understand for the average consumer, and especially for consumers in a situation of vulnerability. This is exacerbated when there is no physical contact between the financial service provider and the consumer. This is why some NGOs and consumer organisations advocate for the creation of basic necessary financial services with simple standardised features, to avoid financial exclusion. With regard to distorting consumer decision-making through ways of how information is presented, a study by Invesco found that consumers in the pension market are more aware of positively framed messages than negatively framed messages. The study showed that 64% of consumers were more likely to read a statement encouraging them to manage their pension compared to a statement warning them against failing to manage. Considering that the DMFSD is still of great relevance in the pension sector, namely that the right of pre-contractual information and right of withdrawal stem from it, ensuring that consumers receive clear and easily comprehensible information is important. With regard to techniques that help accelerate the decision to buy a certain product, the Behavioural Study found that fast purchasing processes (i.e involve two or three clicks) led consumers to choose the best loan for them only in 36.09% of the cases. With regard to techniques concerning the actual design, the instance of bundling was labelled as ‘rather detrimental’ to consumer welfare. The average rating of this practice scored as relatively high (compared to other practices covered) and above 3, meaning that it was perceived rather detrimental. With regard to targeting and personalisation, the Behavioural Study notes that fewer than 10% of consumers have no concerns whatsoever when they are the target of personalised offers. The risk concerning such practices is price discrimination, which may be detrimental to the consumer. In addition, a horizontal issue mentioned by consumer organisations linked to personalised offers concerns advice provided by robots. Robo-advisors are online platforms that use artificial intelligence or algorithms to process information on clients’ investment preferences, risk tolerance and loss-absorption capacity, to determine an investor profile and make a personalised and often product-specific investment recommendation. Better Finance, in their Annual Robo-Advice Report described, respectively, the issues concerning transparency and suitability offered by robots as ‘disappointing’ and ‘alarming’. The European Commission Expert Group on Regulatory Obstacles to Financial Innovation (ROFEIG), in its Final Report to the European Commission, refers to used cases of robo-advice in the financial sector (e.g. in brokerage and investment management or in insurance products and services) and calls on the Commission to look into this issue. 2.1.3.Problem 3: The competitiveness of the internal market for financial services sold by means of distance communication is not fully achieved due to barriers to the provision of financial services across borders One of the two main objectives of the DMFSD is to foster cross-border sales of financial services. Figures pre-DMFSD illustrated that the lack of EU action in this area led to consumers not trusting services from other Member States. According to the Eurobarometer 205 survey, only a small fraction of respondents would consider purchasing a financial product or service from another EU. The introduction of the provisions on pre-contractual information obligations, right to redress, ban on unsolicited services and communication and the right of withdrawal in the DMFSD was meant to address consumer concerns and trigger the provision of cross-border financial products.

While according to Eurostat’s estimates around 12% of the individuals in the EU have, in 2020, purchased at least one financial service online in the previous 3 months, the share of EU citizens making cross border purchases remained relatively low in 2005-2020. According to the Eurobarometer surveys, in 2011 94% of respondents that had purchased financial products reported not having purchased these products from another Member State, while in 2016 this share stood at 92%. According to the Eurobarometer surveys, the most common financial service bought between 2003 and 2016 from another Member State were current bank accounts (3% in 2016). The other financial services were credit cards, car insurance and investment funds, shares or bonds, all with an average 1% of respondents reportedly contracting at least one of those products from another Member state in 2016. The reasons for such figures are the result of a number of barriers that consumers and businesses face. On the consumer-side perception, emotional, cultural and language barriers, such as consumer preferences for domestic products, informational friction and a lack of trust or confidence. The lack of confidence may be the result of perceived problems associated with cross-border transactions, such as websites being blocked or not being able to finalise a transaction. From the business side, industry stakeholders consulted for the Impact Assessment Support Study indicated a number of barriers that are preventing them from offering services cross-borders, including lack of demand (particularly in the banking industry); providers generally prefer serving markets in which they are physically established; entrance costs (for example, due to language barriers); different tax regimes and other regulatory barriers such as the lack of common rules on services and contracts. Differences in the way the DMFSD was transposed at national level due to the regulatory choices offered to Member States (e.g. third paragraph of Article 6(1), Article 7(2) DMFSD) and the lack of clarity on when the DMFSD applies and when the product-specific legislation applies have also been cited as barriers to cross-border expansion by industry stakeholders and public authorities in the stakeholder consultation to this initiative. However, a recent European Banking Authority (EBA) report stresses that there appears to be widespread use of digital platforms to market and distribute payment services, credit products (including short-term unsecured loans and mortgage products) and investment products, and it should increase. This is expected to increase cross-border provision of financial services. This is confirmed by the desk research linked to this Initiative, which indicates that digitalization, the entrance of new players (e.g. FinTechs), new services (e.g. P2P lending) and the use of new channels (e.g. mobile apps) will continue to grow in the coming years. Just as an example from the banking sector, according to a 2018 European Banking Federation survey, 90% of the banks surveyed highlighted that digitalization was their main priority. In this light, the revision of the rules concerning financial services will help overcome a number of the barriers mentioned above, including entrance costs on the business side and, on the consumer side, will help increase consumer trust and confidence in buying services cross-border. However, this Initiative will not be able to overcome issues related to geo-blocking or emotional, cultural and language barriers. In addition, the DMFSD, through its safety net, plays an important part in ensuring a level playing field for all competitors providing financial services. In fact, 65% of the industry stakeholders consulted during the preparation of the Evaluation Study believe that the safety net feature ensures that future products, that might not be yet subject to product specific legislation, would at least be subject to the rules of the DMFSD. This is shared too by the majority of the consumer organisation replying to the survey ran by the contractor working on the Support Study. In this regard, the Directive creates a level playing field since it ensures a minimum set of rules applies to all current and future services and providers, thereby preventing unfair competition from providers exploiting legal loopholes due to a lack of product-specific legislation. 2.2.What are the problem drivers? Driver 1: Lack of legal clarity When the Directive was adopted, the EU acquis in the area of financial services was limited. However, over the years the progressive adoption of EU rules in the different financial services has led to issues of coherence with the product specific legislation. The sources driving this lack of legal clarity can be attributed to: (a) the lack of a clear hierarchical provision in the current DMFSD setting out the lex generalis/lex specialis relationship between it and the product-specific or horizontal legislation. In fact, nearly half of the business associations and company organisations responding to the public consultation rated the issue of over-lap concerning the provision on pre-contractual information and right to withdrawal as occurring often or on a daily basis. In addition, the issue of overlapping legislations creating legal uncertainty has been reported in different studies and the figure in the Evaluation study stating that half of the position papers received flagged the overlap issue was experienced during the preparation of this initiative. (b) the fact that the DMFSD uses vague terms ‘in good time’ in Article 3 DMFSD, ‘fully completed performance’ in Article 6(2)(c) DMFSD and that while it is generally technological neutral in that it applies regardless of the technology used by the financial providers, it still refers to outdated technologies (e.g. floppy disk, fax). In fact, according to the Evaluation survey, only 1% of consumers used a fax machine during the period 2013-2018 to buy at a distance a financial product. Driver 2: Developments in consumer behaviour, often exploited by providers, making regulatory framework inadequate Over the past twenty years consumer behaviour has evolved, fuelled by the spread of the internet and the appearance of mobile devices. In fact, the Behavioural Study notes that consumers nowadays prefer a more direct and faster conclusion of contracts in the area of financial services. The Support Study accompanying this Initiative, highlights in the analysis of the consumer journey, consumers biases, such as anchoring or herd behaviour, which may trigger consumer detriment and points out that the Directive does not adequately address such behaviour. For instance reference is made to practices by financial service providers which prey on the consumer’s desire to buy a product in a fast manner. In this context, the provider promotes its products by saying that, for instance, a loan can be provided in less than 15 minutes or through just one-click. Often, the loan agreement that the consumer buys would turn out not to be the ideal one. Driver 3: Emergence of new distribution channels and financial services due to increased digitalisation Digitalisation has refashioned the relationship between the consumer and the financial provider. It has led established players to adapt their marketing and business practices and fostered the entry into the market of new players with new business models (e.g. fintech firms). In addition, these new channels impact also the quality of the information the consumer receives at pre-contractual stage (e.g. the provision of pre-contractual information based on the DMFSD for a mobile phone screen may not necessarily empower the consumer). For instance, a consumer needs to swipe around thirty times in order to read all the pre-contractual information on his mobile device. In addition, new financial service products have appeared since 2002, across the different financial services sectors, such as buy now pay later credits or Amazon selling insurance products online in Germany. 2.3.How will the problem evolve? The concerns linked to the evolution of the Problem 1 will continue to increase, in the sense that the decline of the relevance of certain articles of the DMFSD is expected to persist and the issues of coherence with the other EU legislation are expected to increase. The relevance is expected to decline since a number of products currently falling under the DMFSD should, once the revised Consumer Credit Directive and Markets in Crypto-assets Regulationenter into application, be regulated by the latter legislations. There is no indication that the Commission will not use its right of initiative in the area of financial services and thus future legislation in the area of application of the DMFSD may be expected. More product-specific legislations in the future also mean that due to the lack of a clear hierarchical norm in the DMFSD, more issues of duplication and legal uncertainty may be expected. Not intervening will also continue to render certain parts of the DMFSD framework obsolete, in the sense that references to outdated technologies will continue to feature and the articles on unsolicited communication and on unsolicited services which are already superseded by more recent EU legislation will continue to feature. In addition, the evolutions and disruptions to the market brought by the digitalisation of the financial services will continue. In fact, Eurostat estimates that in 2020, around 12% of the individuals in the EU have purchased at least one financial service online. The increase in the number of individuals who have purchased financial services online from 2015 to 2019 has been of 5 percentage points. Even though, as explained in the Directive’s Evaluation, in the last years the share of consumers reporting problems across various financial services has decreased, with more and more consumers purchasing financial services at distance, the volume of problems would increase.

At the same time, the FinTech sector has had considerable transaction value in 2020. New products like Buy Now Pay Later schemes, i.e. interest free short term credits to spread payment of retail goods currently covered by DMFSD but not by sector-specific legislation, have been continuously growing in EU countries for several years. But also outside the EU: in the UK the unregulated Buy Now Pay Later market more than trebled in size in 2020, and in the US it faced massive growth due to COVID-19 is expected to triple by 2024 (from USD 39 billion in 2020). The further digitalisation of the financial services sector also implies the possible emergence of more complex financial services/products, increased speed with which consumers can sign a contract and purchase a financial service (e.g. speedy, or ‘one-click’ products) and more sophisticated tools to better influence and shape consumer behaviour (e.g. using ‘Big Data’ to personalise communications and offers, giving prominence solely to positive reviews, or using influencer marketing). Further digitalisation could also lead to increased cross-border purchases of financial services. According to the Consumer Conditions Survey 2021, in 2020 27% of EU consumers purchased a good or a service from a provider located in another EU country. This represents an increase of 9 percentage points since 2014. The consequences of the current problems and the possible evolution impacts the Directive’s two main objectives, namely ensuring a high level of consumer protection and fostering the provision of cross-border financial services. In fact, from the consumer side, the consequences of the current and future problems are that consumers who have suffered detriment (for instance, bought through digital means a loan that was not fit for him/her) have less trust in the market. On the other hand, consumers, because of the problems and problem drivers explained above, might not have trust in buying a financial service at a distance in the first place. With regard to the objective of fostering the provision of cross-border financial services, the over-lap issue has caused unnecessary compliance costs (e.g. providing two sets of pre-contractual information documents) and the current and future barriers has led and will lead to loss of welfare since opportunities are not taken up. 2.4.Intervention logic Figure 2 below illustrates the three problems inflicting the current Directive (column in red labelled ‘Problems’) and the three drivers (horizontal box at the end of the figure labelled) that are the source for the three identified problems. The problems and the problems drivers have been explained in Chapter 2. As will be explained in the next chapters, in particular Chapter 4, this Initiative pursues 3 general objectives which can then be further broken down into 5 specific objectives (column in the middle of the figure coloured in blue). These 5 specific objectives are linked to the respective three identified problems. The column on the right (coloured in orange) proposes the three options identified as possible options to fulfil the objectives of this initiative (they are further explained in Chapters 5 till 8). In short, the three options propose a set of measures that aim to address as best as possible the general and specific objectives of this initiative that, in turn, address the problems inflicted to the Directive. Figure 2. Intervention logic 3.Why should the EU act? 3.1.Legal basis The Treaty on the Functioning of the European Union (TFEU) confers upon the EU the competence to adopt measures for the establishment and functioning of the internal market (Article 114 TFEU). More specifically, according to article 114(1) TFEU, the EU can adopt measures for the approximation of Member States rules and, pursuant to article 114(3) TFEU, with regard to consumer protection the EU ‘will take as a base a high level of protection’. Article 169(1) TFEU, relating to consumer protection, states that to promote the interests of consumers and ensure a high level of consumer protection, the EU shall contribute to protecting the health, safety and economic interests of consumers, as well as to promoting their right to information, education and to organise themselves to safeguard their interests. Article 169(2) TFEU specifies that these objectives can be reached through measures adopted pursuant to Article 114 TFEU in the context of the internal market completion. This is the legislative approach taken also for the adoption of the DMFSD in the field of distance marketing of financial services to consumers. The objectives set out in Article 169 TFEU are meant to be achieved through Article 114 TFEU, which serves as the legal basis for the possible revision to be carried out through this initiative. Accordingly, Recital 1 of the DMFSD states that ‘[i]t is important, in the context of achieving the aims of the single market, to adopt measures designed to consolidate progressively this market and those measures must contribute to attaining a high level of consumer protection, in accordance with Articles 95 and 153 of the Treaty’. Recital 2 of the DMFSD further outlines that ‘[b]oth for consumers and suppliers of financial services, the distance marketing of financial services will constitute one of the main tangible results of the completion of the internal market’. 3.2.Subsidiarity: Necessity of EU action Since 2002 the number of EU Member States has significantly increased and the internal market has thoroughly expanded, making even more relevant the consequences arising from its malfunctioning. The legal framework for retail financial services has evolved since 2002, including through the development of product-specific legislation and horizontal legislation. This, coupled with the gradual creation of the Capital Markets Union (CMU) – started in 2015 and boosted through the actions detailed in the new CMU plan adopted on 24 September 2020, increases the necessity of a revision of the DMFSD. Integrating national capital markets into a unified EU single market, making the EU a safer environment to invest and reducing obstacles to make financing accessible to European companies and households require an update of the DMFSD to fully benefit from the advantages of distance marketing of financial services without reducing consumer protection. The development of robo-advisors and online trading platforms is an example of how distance marketing can now take different forms as compared to the past. Considering the changed scenario, a revision of DMFSD is justified. Considering these new distribution channels, the cross-border element is expected to increase and thus this Initiative will ensure the establishment of rules that will strengthen the cross-border element through harmonised rules. 3.3.Subsidiarity: Added value of EU action In light of the situation as developed over the past two decades, improving the current regulatory framework can only be achieved at EU level. The EU added value of doing so would be to bring a clearer legislative framework that ensures legal certainty, achieved through more harmonisation.

In the retail financial services field, harmonisation in financial regulation aims to protect the financial system from market failures whose effects can spill over across the EU. In fact, regulatory frameworks providing consumers with different levels of protection in some Member States could create negative externalities possibly affecting also market participants based in other Member States. It is key to increase consumers’ trust in distance marketing of financial services by rising the available legal safeguards within a harmonised context. Rules concerning distance marketing are meant to favour cross-border provision of financial services and FinTech innovations in turn can further facilitate the provision of financial services from a distance. Finally, the revision of the DMFSD aims at addressing those shortcomings identified by the Evaluation, with a view to better achieving the objectives of the Treaties – namely enhancing consumer protection while favouring the conclusion of contracts from a distance, thereby further integrating the internal market for financial services. In conclusion, there are two main reasons why the EU should act, in particular to foster the cross border offering of financial services. First, digitalisation is creating a dynamic through which BigTechs may become increasingly active in financial services. The possibility of BigTechs offering financial services cross-border leads to opportunities and risks; opportunities in the sense that BigTechs can scale up rapidly and thus offer products across borders in a fast manner; risks in the sense that BigTechs can leverage their dominance and, for instance, engage into product tying or bundling or behave in a way that is not data protection friendly. Second, the Directive offers the EU with the chance to address such opportunities and risks, especially since the Directive provides a wide definition of the term ‘financial service’, thus covering all possible financial sectors. Addressing such risks leads to two tangible benefits: (i) Equal playing field - ensuring that current or future financial services offered by BigTechs are subject to the same regulation as traditional financial services. One of the main feature of the Directive is the ‘safety net’ feature, meaning that its provisions apply also to products that appear on the market for which no product-specific legislation exists yet (e.g. cryptocurrencies). The safety net feature in the context of cross-border sales of products and services is appreciated in particular by traditional financial service providers; (ii) Consumer trust: the fact that consumers are provided with basic rights (pre-contractual information & right to withdrawal) increases trust and this leads to more cross-border purchases of financial services. In light of the above, EU intervention is warranted both for current and future products. 4.Objectives: What is to be achieved? 4.1.General objectives (GOs) In line with the original objectives of the Directive, the general objectives of this Initiative are: ·GO 1: Streamlining of the regulatory framework ensuring higher clarity for all stakeholders, whilst ensuring a high level of consumer protection. ·GO 2: Reduce detriment and ensure a high and consistent level of protection for consumers purchasing financial services at distance. ·GO3: Facilitate cross-border provision of financial services and the competitiveness of the internal market. 4.2.Specific objectives (SOs) GO 1 SO 1: Simplify the existing legal framework by removing regulatory overlaps and ensure that the Directive’s relevant provisions are included in the most adapted regulatory legislation(s) (problem 1) GO 2 SO 2: Ensure that consumers purchasing financial services at distance are empowered by effective and timely information (problem 2.1) SO 3: Ensure that consumers reflect on their purchases and exit unsuitable agreements for the provision of financial services (problem 2.2) SO 4: Prevent that consumers are nudged into purchasing financial services which are not in their best interest (problem 2.3) GO 3 SO 5: Reduce barriers for providers offering financial services across borders while enabling more choice for consumers (problem 3) 5.What are the available policy options? Option 0: Baseline scenario – no policy change Option 1: Repeal of the Directive and non-regulatory measures Option 2: Comprehensive revision Option 3: Repeal, modernisation of relevant provisions introduced in other legislation Option 3a: relevant provisions introduced in horizontal legislation Option 3b: relevant provisions introduced in product-specific legislation The three identified policy options are effective and propose substantially different policy measures. The option design is wide and ranges from Repeal (Option 1) of the current framework to comprehensive reform (Option 2). These two distinct policy options had support from different stakeholders right from the start of the consultations. A third policy choice proposed to repeal the current Directive but safeguard its relevant provisions, either in another regulatory legislation or directly in the product-specific legislations. The starting point of the initiative was based on one of the main outcomes of the Evaluation, namely that the needs originally addressed by the Directive have progressively but not exhaustively been addressed by other EU legislation (reduced relevance) and that there is significant overlap between the Directive and subsequent EU legislation (lack of coherence). The founding aim of the initiative was to simplify the current legislative framework (General Objective 1 and Specific Objective 1). As a first step, a mapping exercise was conducted to check the degree of overlap between the Directive and other EU legislations and the remaining legal relevance of the Directive. After conducting the mapping exercise and identifying those financial sectors were the Directive was still legally relevant, the practical relevance (effectiveness) on the ground for the stakeholders was examined. At this stage, the safety net feature was analysed: an examination was conducted to see whether in those instances where the Directive was still legally applicable (for instance in insurance sector and for private pensions) the stakeholders were actually applying it on the ground. This two-step approach could have led to a total repeal of the directive and abandoning of the safety net function, namely if the Directive and its key features were not used on the ground. However, the outcome was that in certain cases it was still legally relevant and applied on the ground. In this context, Option 1 (Repeal) was the starting point and could not be discarded upfront, since the objective of simplifying the current legislative framework (eliminating overlaps) could have been achieved through this Option. In addition, it is worth noting that in the Inception Impact Assessment replies, businesses were either in favour of keeping status quo or in favour of repeal. 5.1.What is the baseline from which options are assessed?

The baseline from which options are assessed (Option 0) is a "no policy change" scenario. It implies the continuation of the status quo for the period 2022-2031. Hence, the Directive would remain in force but no specific measures would be undertaken to tackle the problems detailed in Section 2, which could evolve as explained in Section 2.3 (How will the problem evolve). Certain provisions of the DMFSD are still relevant for facilitating consumer protection in distance selling and marketing of financial services. According to the Directive’s Evaluation, 15-28 million EU consumers have benefited from key Directive provisions since its transposition in 2004, chiefly in the context of payment accounts, insurance and - to a lesser extent – pensions and consumer loans. In the baseline scenario, the Commission would continue to monitor the Directive implementation at national level, and national authorities would continue to enforce it. Enforcement authorities would continue to cooperate through the Consumer Protection Cooperation (CPC) network and the European Consumer Centres Network (ECC-Net). The Court of Justice of the European Union (CJEU) would continue to interpret the Directive, shedding further light on some of the unclear provisions, when required to do so. With regard to the impact of currently proposed legislation by the Commission, this will be particularly of a regulatory nature (see Section 2.4). On the one hand, the current Consumer Credit Directive and Markets in Crypto-assets Regulation proposals will lead to less products being captured by the DMFSD and thus result in a reduction of its relevance. On the other hand, the current Solvency II proposal will lead to more insurance firms falling under the scope of the DMFSD. This is so since the revision of Solvency II proposes to exempt insurance firms currently falling under Solvency II and thus, whenever the service is sold at a distance, the DMFSD would apply. Keeping status quo has only received mild support, mainly from financial providers who oppose repealing the Directive. In fact, half of the financial providers/associations who responded to the Inception Impact Assessment are in favour of keeping the current framework for two main reasons: first, they view positively the technology neutral approach of the Directive; second, the safety net feature is important for certain current financial services and for future ones. With regard to the actual application of the safety net feature, through the different consultations held, public authorities have cited a number of instances when they use the DMFSD, including in the area of investment in expensive wines and diamonds, or certain gift-cards that fall outside the scope of PSD II, or current loans below EUR 200 that fall outside the Consumer Credit Directive. Public authorities have also been recorded as stating that they use the DMFSD as a top-up when carrying out investigations, meaning that they include the provisions of the DMFSD in conjunction with the product-specific legislation. In addition, national courts have also used the DMFSD vis-à-vis still unregulated products (e.g. crypocurrencies). 5.2.Description of the policy options In addition to the baseline scenario, four other options are considered to address the problems identified, with the aim to achieve the initiative’s objectives, as shown in the intervention logic (Figure 2). Table 3. Proposed measures per Policy Option covering financial services Option 1: Repeal and non-regulatory measures Option 2: Comprehensive revision Option 3a: Repeal, modernisation of relevant provisions injected in horizontal legislation(CRD) Option 3b: Repeal, modernisation of relevant provisions injected in product-specific legislation Simplification of the legal framework (problem 1) Repeal would eliminate current over-lap and thus help simplifying the framework. Repeal would also lead to the disappearance of the “safety net” feature provided by DMFSD Clarify in the legislation that new measures going beyond the current sector specific legislations would apply to all financial services, but that sector specific legislation applies when there is an overlap with DMFSD. Clarify in the legislation that sector specific legislation applies when there is an overlap with the modernized former DMFSD articles. Repeal would help simplifying the framework. No “safety net” feature for future products that would not be subject to product specific legislation. Information (problem 2.1) Financial education campaigns to improve financial and digital literacy, run by the European Commission and the relevant EU agencies, such as the European Insurance and Occupational Pensions Authority. Introduce rules on information to be included in advertising; Standardised pre-contractual information form for all financial services; Introduction of rules on robo-advice to enhance transparency and fairness; Specify the timing for the provision of the key information (i.e. information are provided not generically “in good time” but at least “one day before” the contract is concluded). Require that information is adapted to the channel on which it is displayed; Modernization of the information that needs to be provided to consumers (e.g. inclusion of the need to mention email address); Specify the timing for the provision of the key information i.e. information is provided not generically “in good time” but at least “one day before” the contract is concluded) Alternatively, mandatory reminder of the Right of Withdrawal after the conclusion of the contract). Require that information is adapted to the channel on which it is displayed; Modernization of the information that needs to be provided to consumers (e.g. inclusion of the need to mention email address); Specify the timing for the provision of the key information (i.e. information are provided not generically “in good time” but at least “one day before” the contract is concluded). Alternatively, mandatory reminder of the Right of Withdrawal after the conclusion of the contract. Right of withdrawal (RoW) (problem 2.2) Awareness raising campaigns on consumer right of withdrawal, organised by the European Commission and the relevant EU agencies. Provision of a specific “Withdrawal form” including standard rules on manner of exercise for the right of withdrawal. Reminder of the right of withdrawal in case pre-contractual information is provided less than one day before. Financial service providers to provide for a cancellation button. Reminder of the right of withdrawal in case pre-contractual information is provided less than one day before. Financial service providers to provide for a cancellation button. Exploitative practices (problem 2.3) Industry self-regulation to avoid harmful practices, based on an EU Recommendation. Ban on product tying. Prohibition of default options e.g. pre-ticked boxes. Prohibition of default options e.g. pre-ticked boxes. Cross-border offer and access (problem 3) Guidelines by the European Commission on information disclosure and on the application of right of withdrawal to increase harmonisation. Establishment of a new framework. Establishment of new provisions bringing legal clarity. Establishment of new provisions bringing legal clarity. Option 1: Repeal of the Directive and non-regulatory measures Option 1 envisages the repeal of the Directive. In procedural terms, the Commission would need to adopt a proposal to repeal the current DMFSD. This would then be subject to the co-decision procedure. With regard to Problem 1 and the linked actions to ensure a simplification of the legal framework, the result of the Commission proposal to repeal would be that at EU level, once the current DMFSD is repealed, there would no longer be EU horizontal rules providing consumers with rights and applicable to future financial services or products for which there would not, as yet, be product-specific legislation (i.e. no more safety net). In addition, there will no longer be EU horizontal rules in those areas for which the DMFSD is still relevant (e.g. right of withdrawal in the insurance or payments area). Thus, the repeal of the DMFSD frees Member States from the obligation to transpose, implement and enforce the current provisions of the DMFSD. This measure of repealing the DMFSD implies that the overlap at EU level of the rules of the DMFSD and the corresponding rules of the product specific legislation will no longer exist, thereby simplifying the EU legislative framework. However, this does not mean that Member States will automatically repeal their current rules. Therefore, financial providers might still be bound by the current national rules, which, as time goes by, might become different depending on the different Member State legislative action. In fact, if legislation at national level is amended, businesses would need to comply with new rules and consumers would need to familiarise themselves with them. If the level of consumer protection is lowered from the current one, enforcement authorities might need to deal with an increased number of complaints. In addition, since there would no longer be harmonised rules established at EU level, there might also be Member States that remove the right of withdrawal, thus creating disparities across Member States and increasing the uncertainties of contracting a financial service across border. With regard to Problem 2.1 and the linked actions to improve the right of pre-contractual information, in the absence of EU rules, financial education campaigns to improve financial and digital literacy would be required to combat the issue concerning information issues at the pre-contractual stage. The European Commission, in conjunction with the relevant EU agencies, would set up such a campaign which Member States would then implement and complement on the ground. With regard to Problem 2.2 and the linked actions to improve the right to withdrawal, in those Member States that would have kept the right of withdrawal, an awareness campaign on the existence of the right of withdrawal may be envisaged. The aim would be to inform and empower the consumer of the availability of this right. Similar to action proposed for Problem 2.1, the European Commission, in conjunction with the relevant EU agencies, would set up such a campaign which Member States and their public authorities would then implement and complement on the ground. With regard to Problem 2.3 and the linked actions to address exploitative practices, in an effort to ensure consumer trust, financial services, on the basis of a Recommendation proposed on the basis of Article 288 TFEU, providers may implement out of their own will practices that do not cause consumer detriment (self-regulation by industry). With regard to Problem 3 and the linked actions to improve cross-border and access, in addition to the actions under Problem 2.1 and 2.2, guidelines by the European Commission on information disclosure and on the application of the right of withdrawal may increase the provision of cross-border financial services, even though the DMFSD would have been repealed. Option 2: Comprehensive reform Option 2 entails a comprehensive reform of the current framework through the introduction of new measures. Some of the below measures have been inspired by the Recommendations of the Behavioural Study on the digitalisation of the marketing and distance selling of retail financial services, the Evaluation or the contributions by consumer organisations in the context of the stakeholder contributions or other legislations, such as the Payment Account Directive or the recent proposal to revise the Consumer Credit Directive. This option would entail a substantial review of a self-standing act (the Directive itself). Hence, the measures could go beyond what is currently in the Directive and address issues such as robo-advice. Since out of the three policy options, Option 2 is the only comprehensive reform proposing to set out new rules, certain measures, such as measures concerning robo-advice are only included under this policy option. Under this policy option:

Problem 1 (the simplification of the current framework) would be addressed by the following measures: ·the introduction of a hierarchical norm to specify that in case of an over-lap of the obligations stemming from the DMFSD and the sector-specific legislation, the latter prevails; and · a provision explaining that the new obligations imposed by the ‘revised DMFSD (e.g. ban on tying) will need to be applied to all financial services. The addresses of these complementary measures are the Member States that would need to transpose the new provisions and public authorities would then need to enforce the appropriate legislation. Problem 2.1 (issues with pre-contractual information) would be addressed by the following measures: ·Introduction of rules on how information provided at the advertising stage would need to be channelled. Advertising is a powerful tool as it nudges consumers to purchase a product and often uses tools influencing behavioural biases to do so. Most of the time, the problems involve costs and risks not being properly disclosed in the advertisements. At present, the DMFSD does not regulate the provision of information at the advertisement stage. Thus, this will be a new area to be tackled by the DMFSD and the provision will establish how the information would need to be channelled so that the consumer obtains information in a transparent manner. In this regard, the DMFSD would propose a set of provisions regulating standard information for advertising. Concretely, the provision would set out the format and content of how advertisement should be carried out for financial services. The content would include an overview of the main characteristics of the product, the total price and warnings depending on the level of sophistication of the financial product. The addressees will be Member States in the sense that they would need to transpose the new provision and their public authorities that would need to enforce the provision and financial services providers to comply with this new obligation. ·Standardised pre-contractual information form for all financial services: inspired from the pre-contractual obligations laid down in the Payment Accounts Directive, a fee information document and glossary (FID) for all financial services would introduced. The fee information document would be a stand-alone document, presenting in a short and concise manner the accurate amount in the currency of the financial service providers the fees linked to the product or service. It is a basic document capturing the key standard information requirements which, through its generic nature, would be able to apply to present and future financial products. The main addresses, apart from the necessary transposition and enforcement by Member States, would be financial service providers. ·Introduction of rules on robo-advice to enhance transparency and fairness: Digitalization, in this case, Artificial Intelligence, is bringing new automated ways of interacting with consumers. The European Commission Expert Group on Regulatory Obstacles to Financial Innovation (ROFEIG), in its Final Report to the European Commission, refers to used cases of robo-advice in the financial sector (e.g. in brokerage and investment management or in insurance products and services) and calls on the Commission, to improve explainability and interpretability of services that use artificial intelligence (AI). Therefore, the DMFSD represents an opportunity to provide rules on robo-advice, to ensure that the advice provided is suitable, transparent, user friendly and void of any conflict of interest. In this regard, the robo-advice would need to be provided through a durable medium to ensure traceability and the rules will take the form of a set of provisions dedicated to this channel of communication. The provisions would regulate how the robo interacts with the consumer, in the sense that the quality of information provided by the robo would need to meet certain qualifications, such as being independent, transparent and to suggest products in the interest of the consumer. The main addresses would be financial providers that use robo-advice as part of their interaction with consumers.. ·Specify the timing for the provision of the key information: In order to ensure that the consumer is not coerced to sign the contract without reflecting, specifying the current vague term ‘in good time’ would be required. Therefore, the time-gap between the provision of the pre-contractual information and the actual signing of the contract would be of one working day. This would allow the consumer to digest the information before signing the contract. Problem 2.2 (the sub-optimal use of the right of withdrawal) will be addressed with the following measures inspired by the Commission proposal to Revise the Consumer Credit Directive and the current provision on the right of withdrawal found in the Consumer Rights Directive: ·Provision of a specific “Withdrawal form”: Article 11 of the Consumer Rights Directive regulates the exercise of the right of withdrawal. In Annex I (B) it provides a model withdrawal form which may be used by the consumer to express his/her intention to withdraw from the service or product. This model form would be extended to all financial services and would include standard rules on the manner of how the right of withdrawal maybe exercised. Therefore, whenever a consumer exercise his/her right to withdraw, the use of the form would need to be recognized by the service provider. The main addressees would the public authorities who would need to monitor and enforce this obligation and financial providers who would need to accept the withdrawal once this form is presented within the stipulated time. ·Right of withdrawal clearly highlighted in the pre-contractual stage: Since the right of withdrawal is one of the key rights, has remained relevant for certain sectors, and financial services products may be complicated for a consumer to understand, an obligation on financial services providers will be set in order to clearly highlight this right at the pre-contractual stage. This would be done in a way appropriate to the channel used. With regard to Problem 2.3 (exploitative behaviour by financial providers nudging consumers), Article 12 of the Mortgage Credit Directive would be extended to all the financial services market, namely a ban on product tying. The main addresses would be financial service providers. With regard to Problem 3 (cross-border offer and access), the legal framework would be sanitized and modernised.This option would, with the inclusion of the hierarchical provision, ensure more legal certainty and keep the safety net feature of the current Directive. This might increase the level of harmonisation and thus stimulate more cross-border offer. Option 3a: Repeal, modernisation of relevant rights injected in horizontal legislation (Consumer Rights Directive) In this option, the DMFSD would be repealed and only the relevant consumer rights would be injected in the Consumer Rights Directive. The relevance of the three consumer rights enshrined in the DMFSD has been discussed above (problem 1). Since most of the articles of the DMFSD have lost their relevance and the lack of regulatory intervention on its legal framework has resulted in coherence issues with other legislations, only the still relevant rights would be saved, namely the right to pre-contractual information and the right to withdrawal. In doing so, these two rights would be modernized and rendered fit for the digital age, whilst also conserving the safety net feature in case future financial services products appear on the market and for which no legislation would apply. Since the DMFSD would be repealed, the natural place to move these rights would be the Consumer Rights Directive, which is also a horizontal piece of consumer legislation. In this manner, the decision taken by Directive 97/7/EC (predecessor of the Consumer Rights Directive) to exclude financial services from its scope would be partially revisited. Under this option, the injection of the modernised rights would ensure that the internal balance of the Consumer Rights Directive is not impacted and that not all of its rules will apply to financial services. Under this option, apart from the extension of certain rules currently found in the Consumer Rights Directive to distance marketing of consumer financial services, the proposed measures either build on the text of the Consumer Rights Directive or are inspired from the recent Commission Proposal to Revise the Consumer Credit Directive. Thus, in short this option is based on the concept of reducing as far as possible the current overlaps while safeguarding and modernising those provisions that are still relevant. So in essence, option 3a sanitizes and modernise the framework; sanitizes in the sense that the redundant rules (e.g on unsolicited communication) will not feature in the updated version of the rules concerning financial services and modernised in the sense that the still relevant provisions will be rendered fit for the digital age. This will be carried out by changing the current exclusion of financial services from the Consumer Rights Directive and applying, as far as possible, its existing rules, in particular, on pre-contractual information and the right of withdrawal, to financial services. This explains also why measures proposed under option 2, such as robo-advice fit only under option 2, but not option 3. Measures under this Option:

Problem 1 (the simplification of the current framework) would be addressed by the following measure ·Clarification in the legislation that sector specific legislation applies when there is an overlap with modernized-former DMFSD articles: Similar to Article 3(2) of the Consumer Rights Directive, a hierarchical norm to specify that if the provisions of the modernized former-DMFSD articles conflict with a provision of another Union act governing that financial services product, the provisions of that other Union shall prevail and shall apply to the product. The following measures would address Problem 2.1 (issues with pre-contractual information): ·Information adapted to the channel on which it is displayed: To enhance consumer empowerment through effective information, the display of pre-contractual information would have to be done in a way appropriate to the means used (mobile phone screen etc.). ·Modernization of the information that needs to be provided to consumers: Information concerning the financial services provider would be modernised, to include, for instance the provision of its email address which is currently missing from the DMFSD. The Consumer Rights Directive would serve as the basis for the required updating while ensuring that it fits the particular nature of financial services. ·Specify the timing for the provision of the key information: Inspired by the Commission proposal to revise the Consumer Credit Directive, the term ‘in good time’ would be specified, namely that if the pre-contractual information concerning the financial service is provided less than one day before the contract is concluded, the financial services provider would be obliged to send a reminder of the possibility for the consumer to exercise the right of withdrawal. The addressees of the measures would be financial services providers. With regard to Problem 2.2 (suboptimal use of the right of withdrawal) the mechanism explained above concerning ‘specifying the timing for the provision of the key information’ would also improve the right of withdrawal. The suggested mechanism would emphasise the existence of the right of withdrawal and thus, possibly trigger its use, where appropriate. In addition, to facilitate the exercise of this right, a rule obliging financial service providers to provide a cancellation button will be introduced. With regard to Problem 2.3 (exploitative behaviour by financial providers nudging consumers), Article 22 (Additional payments) of the Consumer Rights Directive could serve as the basis to regulate default options in the financial services area. The main addresses will be the financial service providers. With regard to Problem 3 (cross-border offer and access), the repeal of the DMFSD and the injection of the relevant modernized rights would, with the inclusion of the hierarchical provision, ensure more legal certainty, keep the safety net feature of the current Directive and increase the level of harmonisation with regard to the right to pre-contractual information and the right of withdrawal. Thus, this should stimulate more cross-border offer. Option 3b: Repeal of the DMFSD, modernisation of relevant provisions injected in product-specific legislation In this option, the DMFSD would be repealed and only the relevant consumer rights would be injected in the different product-specific legislation. The relevance of the three consumer rights enshrined in the DMFSD has been discussed above (problem 1). Since most of the articles of the DMFSD have lost their relevance and the lack of regulatory intervention on its legal framework has resulted in coherence issues with other legislations, only the still relevant rights will be saved, namely the right to pre-contractual information and the right to withdrawal. In doing so, these two rights will be modernized and rendered fit for the digital age. However, unlike Policy Option 3a, the modernized provisions would be injected into the different product-specific legislation. Thus, for instance, the right of withdrawal would be introduced into the Payment Accounts Directive. This would need to be repeated in all financial services legislation that currently do not offer the same level of rights as the DMFSD. In doing so, the level of consumer protection currently provided by the DMFSD would be conserved. However, two points are worth highlighting. In order to keep the same level of protection, the proposals to amend the product-specific legislation need to be agreed and adopted. In addition, this approach would not ensure the safety net feature, in the sense that while current products would be covered, future products that would not be as yet subject to legislation would remain outside the scope of any EU legislation. This is so since the Consumer Rights Directive excludes from its scope financial services and the DMFSD would be repealed. Therefore, the result of this policy option is that there would no longer be a consumer horizontal legislation covering financial services. The measures proposed for Policy Option 3b are the same as for Policy Option 3a, but the former differs in terms of the delivery instrument choice. This policy option is the outcome of the mapping exercise and the fact that the relevance of the Directive has been reduced. Through repeal but safeguarding the relevant provisions, the general and specific objectives could be reached. In addition, the methodology applied in order to identify the usefulness or not of the safety net (explained in the introductory part of Chapter 5) meant that option 3b could not be discarded from the start. 5.3.Options discarded at an early stage The option to transform the Directive into a Regulation was considered but discarded at an early stage. The prima facie strong point of turning the rules into a Regulation was that it would provide directly applicable rules thereby ensuring a high level of consumer protection and would have reduced barriers in the sense that the possibility for Member States to transpose the rules differently would be eliminated. However, since 2002 the Directive has lost much of its relevance. Creating a large number of actions and making them directly applicable would run counter to the reality of the current state and use of the Directive. In addition, introducing new far-reaching measures and presented in the form of a Regulation would have increased, not decreased, the current problem caused by overlaps between it and the product-specific legislation. Thus, in terms of coherence, this option would have led to complex legal untangling, in particular on recently adopted legislations (e.g. the 2020 Crowdfunding Regulation) or on negotiations of recent legislative proposals such as the revision of the Consumer Credit Directive. In terms of efficiency, the preliminary indications were that the impact on public authorities would be negative since the expected recurrent monitoring and enforcement costs would be excessive. The one-off and recurrent compliance costs of such a far-reaching Regulation, especially handling consumers’ complaints, for financial service providers would have also been hi