Opinion of the Economic and Social Committee on the 'Draft Commission communication: "Freedom to provide services and the interest of the general good in the Second Banking Directive"` ()

(96/C 204/18)

On 26 March 1996, the Economic and Social Committee, acting under the third paragraph of Rule 23 of its Rules of Procedure, decided to draw up an Opinion on the above-mentioned draft communication.

The Section for Industry, Commerce, Crafts and Services, which was responsible for preparing the Committee's work on the subject, adopted its Opinion on 3 April 1996. The Rapporteur was Mr Pelletier.

At its 335th Plenary Session (meeting of 24 April 1996), the Economic and Social Committee adopted the following Opinion by 44 votes to 20 with 10 abstentions.

1. Subject of the draft Commission communication

1.1. The European Commission has adopted a draft communication on the freedom to provide services and the interest of the general good in the Second Banking Directive (89/646/EEC). The draft sets out the Commission's thinking on and interpretation of the freedom to provide services (Title I) and the interest of the general good (Title II) under the Second Banking Directive. The Commission has initiated consultations on its interpretation and will turn the draft into an interpretive communication in the light of the comments received.

1.2. The Commission's discussion concentrates on Article 20 of the Directive which requires credit institutions to notify the competent authorities of their home Member State of services which they intend to offer for the first time in another Member State. The Commission also analyzes the concept of the general good and the conditions under which rules adopted in the interest of the general good can be applied to a branch of a European credit institution.

2. General comments

The Treaty of Rome and its enhancement in the Banking Directives of the Single Market Programme were aimed at creating commercial opportunities for European credit institutions, and reducing the power of all Member States to prevent the free flow of capital and the provision of financial services. Where credit institutions have been authorized by their home states, including compliance with basic prudential Own Funds, Solvency Ratio, and Accounting Directives, they have the right to provide those services listed in the Annex to the Second Banking Directive throughout the EEA. All exceptions to this must be justified in Community law. Restrictions beyond this are a clear attempt to thwart the Single Market and the intention of the Treaty of Rome. Similar considerations apply to the Investment Services Directive.

However, in practice, several structural and regulatory impediments to competition in financial services in Europe exists despite a popular presumption that a Single Market has been created.

2.1. The Committee considers that the Commission's draft communication was necessary as there were too many uncertainties and differences of interpretation which were impeding the development of the single banking market. The Commission's clarifications will make it easier for credit institutions to invoke the freedom to provide services and thus to offer consumers competitive services.

2.1.1. The reasons why the use of the freedom to provide banking services has fallen short of the expectations aroused in consumers and industrial and commercial firms by the Second Banking Directive may be principally economic but legal or administrative impediments can also be a factor. In contrast to other forms of service, banking services, and lending in particular, place the risk not on the buyer but on the seller, i.e. the credit institution (credit risk). Controlling this risk logically requires that the credit institution be very close to its customers. Establishment makes this easier. Moreover, in all the Member States the banking sector is very competitive, both because supply greatly exceeds demand and because of the sector's international openness which in most Member States seems to predate the Second Banking Directive by a considerable margin.

2.1.1.1. The above explains why credit institutions seeking to expand in Europe have tended to do so by setting up branches or by acquiring or forming alliances with local credit institutions, rather than via the freedom to provide services.

2.2. This situation will no doubt change, as the activities of investment firms listed in the investment services Directive (the communication and execution of transactions in financial instruments and the management of investments) ought to lend themselves more to the freedom to provide services. Also, there will be considerable growth of secure electronic trading and custody systems for financial instruments.

2.2.1. Moreover, economic and monetary union and the establishment of the single currency, and thus the elimination of exchange risk, limited, it is true, to the currencies which form the hard core of EMU participants, together with the necessary although still embryonic fiscal harmonization, will make the freedom to provide services more attractive in the European context.

2.2.2. The Single Market for financial services is based on the principle of the 'single passport` whereby a financial institution may offer its services throughout the EU, whether via local branches or cross-frontier services based on a common framework of rules administered by competent authorities in the home country where the financial institution is licensed. These basic principles underlie the Second Banking Directive.

2.2.2.1. The Second Banking Directive also enables the host country to introduce regulations for monetary policy purposes (Art. 14.2) and on grounds of 'the general good` (Art. 19.4). With regard to monetary policy, itself a specific example of 'the general good`, it is essential that Member States should not invoke Article 14.2 for bogus reasons to protect national financial institutions from competition, e.g. by banning or slowing down the introduction of new financial services offered by banks based in other Member States, competition from which is opposed by domestic banks.

2.2.2.2. The question of whether or not such regulations are for protectionist rather than genuine monetary policy reasons may need to be resolved by the European Court of Justice.

2.2.2.3. As to 'the general good` provisions of the Second Banking Directive, a problem arises because 'the general good` is not defined in the Directive and different Member States may have different conceptions of 'the general good`, e.g. some may feel that consumer protection requires very strict control over the range of financial products and services on offer, whereas others may believe that the consumer's interest is best served by opportunities for financial innovation and competition between banks to promote consumer choice.

2.2.2.4. The Treaty of Rome requires any national regulations must not be discriminatory as between firms based in different Member States.

2.2.3. The Commission's frequent assertions that it will ensure the strictest possible compliance with the spirit and letter of the Second Banking Directive through examining its implementation and practical application is most welcome. However, to be more effective in this task the Commission needs more staff resources to be involved.

2.2.4. Any Member State proposing to introduce new regulations on 'general good` grounds should first notify the Commission and the authorities of the other Member States; if 'the general good` policy arguments are bogus, the Commission should initiate appropriate action.

3. Specific comments

The draft communication gives rise however to observations on the two questions raised in the draft:

- The scope of the criteria for distinguishing the freedom to provide services from the freedom of establishment, particularly with regard to the use of an intermediary or electronic equipment.

- The scope of the rules of the host country adopted in the interest of the general good insofar as they relate to contract law applicable to banking transactions in that country, under the right of establishment and the right to provide services with movement on the part of the provider. What is at issue here is the relationship between Community law (in this case the Second Banking Directive) and the Rome Convention on contractual obligations.

3.1. Freedom to provide services

In Title I the Commission clarifies the scope of Article 20 of the Second Banking Directive which requires a credit institution wishing to exercise the freedom to provide services by carrying on activities within the territory of another Member State for the first time to notify the competent authorities of the home Member State of the activities which it intends to carry on.

3.1.1. Services covered by the Directive

Nature of the services concerned:

The Commission considers that:

- only services involving activities listed in the annex are covered;

- only services carried out for the first time fall under the Article 20 procedure (notification of the competent authority of the home Member State).

3.1.1.1. The upshot is that a credit institution which, under freedom to provide services, has already carried on activities listed in the Annex prior to the entry into force of the Second Directive is not, as regards those activities, subject to the Article 20 procedure.

3.1.1.2. This raises two questions which are not answered by the Directive:

- Should the fact that an activity has been carried on only once or a few times be considered sufficient?

- How far back in time should one go to find evidence that the activity has been carried on previously?

3.1.1.3. The Commission rightly considers that it would be absurd to set a quantitative limit or a cut-off date. The credit institution need only have provided a service at least once, regardless of when that was. It must simply be able to furnish evidence of this previous activity.

3.1.2. Forms of provision of services

3.1.2.1.Various forms of provision of services

When activity is to be conducted in the territory of another Member State provision of services may be exercised in one of three ways:

- With movement on the part of the provider, in which case Article 20 applies;

- With movement on the part of the recipient: the service is provided in the Member State in which the credit institution is established, with the recipient not having been subjected to commercial canvasing in the country in which he is ordinarily resident. Article 20 does not apply.

- Movement of the service itself, in cases where the service is provided by post, telephone, fax etc. If the service is provided on the initiative of the customer, Article 20 does not apply. If the credit institution canvases for business, Article 20 does apply.

3.1.2.2. Advertising

3.1.2.2.1. The Commission sets out to determine under what conditions advertising could rank as an intention to provide a service in the territory of another Member State.

3.1.2.2.2. Advertising defined as the making of a representation in any form in order to promote the supply of goods or services is to be regarded as simple promotion and, as such, not subject to prior notification.

3.1.2.2.3. When however the advertisement constitutes commercial canvasing, ranking as an actual invitation, issued at a distance, to enter into a contract or where it precedes a physical journey by the supplier, the Article 20 procedure must be observed.

3.2. Freedom to provide services and commercial sales

3.2.1. The Commission makes a distinction according to whether the service is provided on the initiative of the customer, in which case the credit institution is exempted from compliance with the Article 20 procedures, or the result of a commercial approach on the part of the credit institution, on the territory of the beneficiary. An act of this kind demonstrates the intention to provide a service within the meaning of Article 20 and is thus subject to prior notification.

3.2.2. The Commission is right to argue (see I(B) - Commencement of the provision of services) that the supervisory authorities of the host country are not entitled to make the commencement of activities under the freedom to provide services subject to their confirmation of receipt of notification from the supervisory authorities of the home Member State, as they would be if the rules governing freedom of establishment were to apply.

3.2.3. The removal of the requirement for notification of the supervisory authorities of the Member States of origin under the freedom to provide services does not appear desirable however where this procedure, as suggested in point I(A)(4) of the draft communication, pursues a simple objective of exchange of information between supervisory authorities.

3.2.3.1. The notification procedure enables national authorities to exercise supervision over foreign institutions operating on their territory, particularly with regard to application of the rules adopted in the interest of the general good for the protection of consumers.

3.2.3.2. Moreover, although lack of notification may not in itself vitiate a contract, it may, if accompanied by infringement by the institution in question of national general good rules, provide grounds for termination of the contract.

3.2.3.3. The current provisions should therefore be maintained and, where necessary, certain national practices which might infringe the Second Directive should be ended. In order to ensure that the law, thus defined, is effectively applied, it would be helpful if the Commission were to specify the sanctions which might be applied against institutions failing to provide the required notification, even this did not render banking contracts invalid.

3.3. Freedom to provide services via an intermediary

The Commission states that it follows from the case law of the Court of Justice that, 'for the links between an independent intermediary and a credit institution to be regarded as meaning that the credit institution falls within the scope of the arrangements governing a branch, the intermediary must at one and the same time:

- have received an exclusive brief from a single credit institution,

- be able to negotiate on behalf of the credit institution and commit the latter, and

- operate on a permanent basis`.

'It is, therefore`, the Commission concludes, 'only where the independent intermediary acts as a genuine extension of the credit institution that the credit institution falls within the scope of the arrangements applicable to the establishment of a branch`.

There are a number of problems with the interpretation of these criteria:

3.3.1. Exclusive brief

3.3.1.1. This means that if the intermediary has an exclusive brief the credit institution falls within the scope of the arrangements applicable to the establishment of a branch. In the absence of an exclusive brief, however, for example if the independent intermediary is acting for a number of different institutions, the rules on freedom to provide services apply.

3.3.1.2. With regard to intermediaries, the mere fact that an institution holds multiple briefs does not seem sufficient grounds to bring it automatically within the scope of the freedom to provide services.

3.3.1.3. It is not clear from the case law of the Court of Justice cited by the Commission (De Bloos Judgment of 6 October 1976 and Blanckaert and Willems of 18 March 1981) that an exclusive brief is a necessary condition for application of the rules governing freedom of establishment. It is true that absence of an exclusive brief has been considered as one factor among others leading to the conclusion that there was no establishment. But it is going too far to deduce from this that the absence of an exclusive brief would mean that the rules on the right of establishment were not applicable, even if all the other criteria were fulfilled.

3.3.1.4. The Committee would also like to draw the Commission's attention to difficulties which application of this exclusive brief criterion might pose:

- What approach would be adopted in the event that an intermediary represented a number of different institutions, but each one in respect of distinct types of transaction or product, with the result that its brief was, de facto if not de jure, exclusive?

- It should be ensured that each of the briefs is actually exercised, to prevent theoretical or dormant briefs being invoked to confer on an intermediary, whose brief is in effect exclusive, the status of provider of services.

3.3.1.5. The Committee therefore considers that it is preferable to observer the criteria established by the Court of Justice in its 'insurance` Judgment (Commission versus Germany) of 4 December 1986, in which the Court ruled that 'an ... undertaking of another Member State which maintains a permanent presence in the Member State in which it provides services comes within the scope of the provisions of the Treaty on the right of establishment even if that presence has not taken the form of a branch or agency, but consists merely of an office managed by ... a person who is independent but authorized to act on a permanent basis for the undertaking, as would be the case with an agency`.

The Committee therefore considers that the 'exclusive brief` criterion should be more closely defined to take account of the reservations expressed in points 3.3.1.1 to 3.3.1.4.

A financial intermediary should therefore be considered to constitute a branch only if all the other criteria listed by the Commission in the draft communication are also met:

- permanent presence of the financial intermediary in the host Member State;

- ability to negotiate on behalf of the credit institution and commit the latter.

3.3.2. Ability to negotiate on behalf of the credit institution

The same analysis applies to the ability to negotiate. In the strict legal sense this means the power explicitly granted to the intermediary to enter into legal agreements on behalf of the credit institution. In assessing the power to negotiate, the decisive factor should be the intermediary's ability to commit the credit institution.

3.3.2.1. The intermediary may well not be empowered to grant loans on its own authority and yet still, from the point of view of the client, provide a permanent service analogous to that of a branch, which, incidentally, might also not be empowered to grant loans.

3.3.3. Permanence

The Commission draws attention to the fact that under the Treaty the concept of freedom to provide services differs from that of freedom of establishment in that the former is of a temporary nature. But provision of services still has to be assessed in terms of the frequency of activities, and establishment implies a permanent, stable and continuous presence in the host country. There is however no case law to determine what this actually means.

3.3.3.1. The concept of permanence also poses problems in relation to the use of electronic machines.

3.4. Freedom to provide services using electronic machines

3.4.1. The Commission argues that in the (unlikely) event that an electronic machine is the only place of business of a credit institution in a Member State, the machine is not an establishment in its own right, having no 'human` management. Installation therefore requires only notification under the rules on provision of services.

3.4.2. The Committee would stress that it fully shares the European Commission's stance on the rules applicable to electronic machines. An electronic machine cannot come under the rules governing an establishment unless it meets all the criteria set by the Court of Justice to qualify as an establishment. Since one of these criteria - the presence of management - is not met, an electronic machine therefore comes under the rules governing freedom to provide services. This solution is appropriate: it would be surprising if an electronic device providing a direct contact between the consumer and the service provider (comparable to a telephone, etc.) were to be designated a branch.

3.4.3. The Committee endorses the approach adopted by the Commission, of firstly checking whether electronic machines come under the rules governing freedom of establishment and concluding that since this is not the case, they come under the rules governing freedom to provide services. This approach tallies with Article 60 of the EC Treaty which provides that 'services shall be considered to be 'services` ... where they are normally provided for remuneration, in so far as they are not governed by the provisions relating to freedom of movement for goods, capital and persons'. The Commission should, perhaps, restate this in the communication.

3.5. Specific problems of application with regard to the freedom to provide services raised by the banks and not clarified by the Commission

3.5.1. The Committee would like to draw the Commission's attention to a number of practical problems. There is no reason why freedom to provide services may not be exercised via a branch once authorization to provide services has been obtained by the parent company. In such circumstances it would seem appropriate for the benefit of notification to be extended automatically to all the branches of a given company within the European Union.

3.5.2. Moreover, the multiplicity of opportunities for approaches using telematics - both on the initiative of banks and on that of their customers - necessitates detailed study of the Member States' ad hoc rules on contracts with a view to distinguishing between services provided on the initiative of the customer and those provided under the freedom to provide services by a bank situated in another Member State.

3.5.2.1. The Commission ought to be in a position to make a comparison and to provide some clarification, for example in the case of a consumer credit proposal (model offer of credit to a consumer in accordance with national case law, conditions for inclusion in the proposal of exact financial information).

3.5.3. In some Member States the supervisory authorities require banks providing services on their territory to provide them with various information (e.g. volume and type of activities) for statistical purposes. This is very expensive and involves a great deal of administrative work, particularly as the requirements vary from on Member State to another. Such a requirement is not, we feel, in conformity with the Second Banking Directive for the following reasons:

- Article 21(1) of the Second Directive states that the 'host Member State may, for statistical purposes, require that all credit institutions having branches within their territories shall periodically report on their activities in those host Member States to the competent authorities of those host Member States`. No such possibility exists for freedom to provide services.

- It is doubtful that such an obligation is justified by the interest of the general good.

3.5.4. In some Member States foreign banks wishing to offer portfolio management services are required - like national banks - to join a national supervisory organization and to pay the relevant membership fees. Such a requirement is an obstacle to the freedom to provide services as banks are already suitably supervised in relation to this kind of activity in their country of origin.

3.5.5. It is also a cause for concern that some Member States require banks conducting certain types of activity to have a permanent physical presence on their territory. Such a requirement has always been considered disproportionate by the Court of Justice - insofar as it constitutes a negation of the freedom to provide services - except in one specific case: when it is necessary to prevent the freedom guaranteed by Article 59 (freedom to provide services) being used by a service provider whose activities are conducted mainly or entirely in a Member State other than that in which he is established in order to circumvent the professional rules which would apply to him were he to be established in that Member State. The Committee would like to see the Commission draw attention to this in the communication.

3.5.6. Commencement of services

When may a credit institution, which has notified the competent authority of its home Member State of its intention to exercise the freedom to provide services, commence its activities? May it do so immediately following notification or must it wait for acknowledgement from the authorities of the host country?

3.5.7. Article 20(2) of the Second Directive requires the competent authority of the home Member State to forward the notification to the competent authority of the host Member State within one month of receipt.

3.5.7.1. The Commission rightly considers that the competent authority of the host Member State is not entitled, as it would be under the rules governing the establishment of branches, to make the commencement of activities under the freedom to provide services dependent on the issue of an acknowledgement of notification.

4. General good

4.1. Notification of conditions to be met in the interest of the general good

Before discussing the concept of the general good contained in the Second Banking Directive, the Commission raises the question of notification by the competent authority of the host country of the conditions to be met in the general good, and expresses the view that this is an option and not an obligation.

4.1.1. The Commission takes the view that it is not possible to conclude from the wording of Article 19(4) that an obligation exists, since the text is silent about the content and form of such notification and about sanctions. At all events it would be undesirable to burden the host Member State with a duty to provide the credit institution with information which is so ill defined. The duty to obtain information thus rests with the credit institution itself.

4.1.2. The Commission goes on to argue that a credit institution wishing to set up a branch in another Member State should be able to obtain the information it is seeking from the host country without any difficulty. There are two provisos however:

- first, refusal to accede to such a request for information would not be in breach of Community law. Any harm suffered would be covered only by national law;

- secondly, the Member State is bound by an obligation as to means and not as to result. Thus the Member State could not be required to give notification of all its legislation and a non-notified text could still be fully relied on against the credit institution.

4.1.3. The Committee considers it regrettable that the Member States are not required to communicate a list of all the rules which they consider to be in the interest of the general good, even if such a list could not be exhaustive. This would make it easier for credit institutions wishing to operate in another Member State to research the local legal environment and would eliminate the need for systematic recourse to legal counsel.

4.1.3.1. The Commission maintains that the supervisory authorities may carry out the notification provided for in Article 19.4 but they are not required to do so. Notification would thus be optional and not obligatory. The Committee does not subscribe to this approach, for the following reasons:

- If the authorities merely have the option of notifying credit institutions of the rules in the interest of the general good, why is a specific provision needed on this?

- To support its interpretation, the Commission cites the uncertainty arising from the use of the expression 'if necessary`. The meaning is however clear: notification of the rules is obligatory only if the host Member State has general good provisions applying to the branch.

- In order to support its argument that the burden of information rests with the credit institution the Commission invokes the principle that ignorance of the law is no excuse. We feel that this principle also applies to the supervisory authorities of the country concerned.

- The Commission argues that it is not possible to conclude from the wording of Article 19(4) that an obligation exists, since the text is silent about the content and form of such notification. The Committee feels that this lack of precision does not remove its obligatory force but concedes that it does weaken it. The Committee would therefore like to see the Commission propose an amendment of Article 19(4) so as to define the requirement for notification both as to form (e.g. publication or notification on demand - by post or via consultation at the offices of the supervisory authority) and as to content (e.g. notification of textual references or their content). The Committee would emphasize that it is of great importance that the Commission determine which are the areas of the general good whose rules must be notified to the credit institution. It would be difficult to require the supervisory authorities to communicate all the rules adopted in the interest of the general good applicable within its territory. Certain areas should therefore be excluded (eg. criminal law, large sections of civil law, etc.). The Committee calls upon the Commission to examine this question carefully.

4.1.3.2. The Committee would also like to see Article 19(4) amended so as to require the supervisory authorities to inform a credit institution wishing to provide services in another Member State of the conditions to be met in the interest of the general good. A credit institution providing occasional services in another Member State will have even more difficulty than a credit institution established there in obtaining information on the rules in the interest of the general good in force in that Member State.

4.1.3.3. In general terms, the Committee feels that the requirement to inform credit institutions of the rules adopted in the interest of the general good can only facilitate the exercise of freedom of establishment and freedom to provide services.

4.1.3.4. The Commission should consider the case where a Member State's refusal to provide information on general good rules reasonably requested by a firm leaves that firm to conclude it is unable to undertake business in that State's territory: in such a case the Committee believes the State would be guilty of taking measures which had the effect of discriminating against firms from another Member State.

4.2. Applicability of rules adopted in the interest of the general good

May the host Member State require a credit institution wishing to operate on its territory to comply with the same conditions laid down in the interest of the general good, regardless of whether the credit institution intends to conduct its activity through a branch or under freedom to provide services?

4.2.1. The Court of Justice has spelt out a number of criteria for determining whether a measure can be relied on against a service provider to ensure compliance with rules adopted in the interest of the general good. Such a measure must:

- come within a field which has not been harmonized,

- be in the interest of the general good,

- be non-discriminatory,

- be objectively necessary,

- be proportionate to the objective pursued,

- not duplicate rules to which the provider of services is already subject in the Member State in which he is established.

4.2.1.1. The host Member State may enforce its general good rules against a service provider only in accordance with the criteria set out above.

4.2.1.2. The Commission considers that the Second Banking Directive adds nothing new to the Court's long-established case law.

4.2.2. In its case law on branches' compliance with rules relating to the general good, the Court has in two respects softened its approach with regard to the principle that the economic operator must comply with the laws of the country in which it is established, unless it can demonstrate that they are discriminatory. It has held that the rules on equal treatment also prohibit all hidden forms of discrimination which, by applying other distinguishing criteria, actually lead to the same result. More recently it has held that any restriction is in principle contrary to Article 52 unless it is in the interest of the general good and is necessary and proportionate. This is an instance of the full and complete application of the principle of mutual recognition.

4.2.2.1. The Second Directive provides for mutual recognition of the banking activities listed in the annex, both by a branch and under freedom to provide services, subject to the host country's general good rules. With regard to the conditions of carrying on this activity, it does not distinguish between setting up a branch and the provision of services.

4.2.2.2. The Commission is therefore of the opinion that the legal reasoning to be applied when assessing the conformity of general-good measures with Community law is identical, whether the operator to which the measure applies carries on its activity through a branch or under freedom to provide services.

4.2.3. The Commission deduces from the Second Directive, read in conjunction with the Court's general good case law, that any non-discriminatory national measure which restricts a banking activity benefiting from mutual recognition and carried on either through a branch or under freedom to provide services must, if it is to be capable of being lawfully enforced against a Community credit institution, be in the interest of the general good, be necessary and proportionate and not duplicate the rules of the home country.

4.2.4. The Court of Justice has so far recognized the following areas of the financial sector as being covered by the concept of the general good: professional rules intended to protect the recipient of services, the protection of consumers and workers, preservation of the good reputation of the national financial sector, the prevention of fraud, social order, the protection of intellectual property and the cohesion of the tax system.

4.2.5. These principles are those established by the Court in its case law on the general good. The Member State imposing the restriction might therefore have to show that a measure fulfils the conditions.

4.2.5.1. However, the assessment of the proportionality of a restriction may differ according to whether the institution is operating as a branch or under freedom to provide services. The Court has recognized this difference by imposing a less restrictive and more 'lightweight` legal framework for provision of services than for establishment. A general-good restriction might therefore be judged proportionate when applied to a branch, but disproportionate in relation to a provider of services.

4.2.6. The Commission is aware that the question of the applicability of the general-good rules is closely linked to that of the law applicable to banking contracts. But the single market in banking has not harmonized the substantive law of the Member States applicable to banking contracts. The Commission therefore recommends that reference be made to the Rome Convention of 19 June 1980 which unifies the rules governing the choice of law and makes it possible to determine which law shall be applicable to a contractual obligation.

4.2.7. However, the Commission considers that application of the Rome Convention's rules for determining the law applicable may conflict with the principle of mutual recognition of banking activities, the cornerstone of the Second Directive, which tends towards application of the law of the service provider, subject to the rules governing the interest of the general good in the host country, provided however that those rules satisfy the Court's criteria. The question is whether the solutions offered by application of the Rome Convention could be set aside if they conflicted with the Community principle of mutual recognition.

5. Principle of mutual recognition

5.1. The commission takes the view that, for full effect to be given to the principle of mutual recognition, a three-stage approach should be adopted:

5.1.1. Determination of the law applicable on the basis of the Rome Convention.

In the draft communication the Commission concentrates essentially on conflicts between the Rome Convention's rules on the law applicable to contracts concluded with a consumer and Community rules.

The possibility of other conflicts between the Rome Convention and Community rules on establishment and provision of services should be checked: for example, a credit institution provides a service to a non-consumer (e.g. another credit institution). In such a case it is possible that the host Member State would, under Article 7 of the Rome Convention, require compliance with its directly applicable laws. The Commission should take account of this possibility in its communication.

5.1.2. The Commission correctly concludes from the Court's case-law that (1) application of the principles of the Rome convention could lead to a conflict with the principle of mutual recognition, under which only the rules adopted in the interest of the general good of the host Member State which pass the tests laid down by the Court may be applied to the provider of services, and that (2) if such a conflict should arise, Community law would prevail.

5.2. The Committee approves the Commission's initiative to create a single competitive market without administrative obstacles.

5.2.1. It should be pointed out however that the great majority of rules adopted in the interest of the general good are intended to protect consumers in each Member State.

5.2.2. Failing to take account of general-good rules essential for consumer protection can have the opposite effect. Liberalization of the market, particularly that for savings, must not be done at the expense of the small saver.

5.2.3. The Committee therefore proposes that the Commission apply different reasoning, according to whether the free provision of services is aimed at a well informed or less well informed person.

5.2.4. The need to protect the latter category of customer and such customers' ignorance of foreign law ought to justify application of national general-good laws.

5.2.5. There are two precedents in Community law for distinguishing between informed and less informed customers: 1) Article 11 of the investment services Directive requires that the rules of conduct which investment firms are required to abide by 'must be applied in such a way as to take account of the professional nature of the person for whom the service is provided`; 2) Article 4 of the proposal for a Directive on investor-compensation schemes authorizes Member States to exclude certain professional investors from coverage or to reduce their coverage.

Done at Brussels, 24 April 1996.

The President

of the Economic and Social Committee

Carlos FERRER

() OJ No C 291, 4. 11. 1995, p. 7.

APPENDIX to the Opinion of the Economic and Social Committee

The following amendments which received at least one quarter of the total votes cast, were defeated in the course of the debate:

Point 2.2

Delete the point.

Reasons

A separate communication from the Commission on the ISD will be forthcoming and the Committee should offer no comment on the Investment Services Directive at this stage.

Result of the voting

For: 31, against: 34, abstentions: 3.

Add a new point 2.2.3 worded as follows:

'In theory any financial institution which feels that it may be discriminated against can complain to its national authorities or to the Commission; ultimately the matter could go to the European Court of Justice which has a rather good track record in cracking down on abuses of "general good" provisions. But financial institutions are normally reluctant to challenge their supervisors - whether domestic or foreign. Many years of expensive litigation may be involved and there are many ways in which the supervisor can damage their business prospects.`

Reason

Unlike most other sectors, banking is both heavily regulated and dependent on the good will of supervisors so that discrimination is rarely complained against. It would further strengthen the Opinion to recognize this.

Result of the voting

For: 26, against: 38, abstentions: 4.

Delete point 3.2.3.2.

Reason

It would be extremely damaging to have financial contracts terminated, both to the financial institution involved and to the whole principle underlying the Second Banking Directive and the Single Market for financial services more generally.

Result of the voting

For: 23, against: 35, abstentions: 5.

Point 3.2.3.2

Reword the point to read:

'Lack of notification may not in itself vitiate a contract, nor, for reasons of legal certainty, may it provide grounds for termination of the contract, even if accompanied by infringement by the institution in question of national general good rules.`

Reason

The Commission also considers the sole purpose of the notification procedure to be the reciprocal provision of information between supervisory authorities. It is not intended as a consumer protection measure. Nor is it a precondition for the validity of a banking contract. Lack of notification thus may not under any circumstances justify the termination of a contract.

Result of the voting

For: 19, against: 31, abstentions: 10.

Add to point 4.2.1.2

'However, it needs to be recognized that financial institutions may be unwilling to initiate or threaten litigation or even to query the legality of "general good" restrictions on their activities because banks are conscious that the balance of power is weighted very heavily in favour of their host country supervisors.`

Reason

Self explanatory.

Result of the voting

For: 18, against: 51, abstentions: 4.