Opinion of the Economic and Social Committee on the 'Green Paper - Financial services: meeting consumers' expectations` (97/C 56/15)

On 29 May 1996 the Commission decided to consult the Economic and Social Committee, under Article 198 of the Treaty setting up the European Community, on the 'Green Paper - Financial services: meeting consumers' expectations`.

The Section for Protection of the Environment, Public Health and Consumer Affairs, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 1 October 1996 The rapporteur was Mr Pellarini.

At its 339th plenary session (meeting of 31 October 1996), the Economic and Social Committee adopted the following Opinion with 63 votes in favour and 4 abstentions.

1. Introduction

1.1. In recent years, financial services have taken on a fundamental role in the lives of individual consumers and families. At the same time, the services on offer have proliferated: from the payment of bills to house mortgage, from compulsory third-party car insurance to credit cards, and including supplementary pension schemes and health insurance policies. Many forms of payment can now be made only through a banking transaction.

1.2. This has however entailed an increase in the problems involved in offering and providing these services, in safeguarding the rights of users and hence in the related legal disputes. The contracts for many financial services are necessarily complex and are not easy for the consumer to understand.

1.3. The completion of the single market must offer the consumer the opportunity to choose among various suppliers and various services, through full, clear information on the conditions in force, so that the consumer has a chance to make comparisons. However, the greater range of choices also makes it more difficult to navigate among them and makes transparency and information all the more necessary.

1.4. For the firms supplying these services, it means on the one hand a wider market, which increases the opportunities for expansion, but on the other hand fiercer competition in each country.

1.5. Adoption of a single currency will also inevitably lead to profound changes in the conditions for granting credit and remuneration of savings. It would also be desirable to take account of this impending development, which will involve greater uniformity of rules and conditions in financial services.

1.6. The proposal for a Green Paper on financial services and the consumer made by the Commissioners responsible thus has its starting-point in existing problems which have become more urgent and complex, and changed their nature, with the completion of the single market.

2. Contents of the green paper

2.1. Part 1 of the green paper summarises the approximately fifty directives that deal with financial services. The Commission considers that the objective of a single market in this sector 'has now been largely achieved` ().

2.2. This single market is based on the principles of country-of-origin control and mutual recognition; as a result 'providers of financial services may operate freely across the European Union` ().

2.3. This freedom of provision should lead to an increase in competition, greater economies of scale and a wider choice for consumers. There has already been an increase in the availability of new financial products and new ways of doing business.

2.3.1. The Commission's review of the impact of single market legislation, currently in progress and covering inter alia the financial services sector, will allow more detailed assessment of these effects in the near future. It will be particularly interesting to see the impact of the single market on the prices of various products and services and thus on consumer choice.

2.4. The Commission considers that the financial services sector has traditionally been subject to strict regulation, with far-reaching 'minimum` standards intended to establish the necessary conditions for a free market in financial services, with the knock-on effect of increasing the protection available to the consumer.

2.5. The green paper then outlines the legislation regarding consumer information, legal protection and systems of redress in more detail.

2.6. The green paper notes that proper information is essential if a consumer is to be able to make an informed choice of product or service. There are thus a number of provisions laying down information to be provided in the banking and insurance sectors and for trading in shares and securities.

2.7. Regarding legal protection, reference is made to the right of host countries to 'impose rules they have adopted to protect the interest of the general good` ().

2.7.1. The green paper goes on to mention the Rome Convention of 19 June 1980 on the law applicable to contractual obligations, and notes that there is potential for conflict between the provisions of the Convention (which give precedence to the law of the State of residence of the consumer) and the single market principle of mutual recognition, which tends towards the application of the law of the service provider.

2.8. Regarding systems of redress it is noted that depositors are able to take legal action to secure their right to compensation (). For consumer credit the consumer has the right to pursue remedies against the grantor of the credit.

2.9. Finally, the first part of the green paper describes a number of other measures intended to guarantee the trustworthiness and strength of bodies offering financial services. It notes that, in line with the principles of the single market and the 'Cassis de Dijon` judgement, 'any financial service benefiting from mutual recognition may, if it is legally provided in the home country, be offered in the host country, ... even if the service in question does not exist in the latter country or even if domestic institutions may not offer it` ().

2.10. The second part of the green paper deals with problems that have already become evident, such as discrimination against non-residents, difficulties in providing financial services freely across the EU, the lack of information and the failure to harmonize taxation.

2.11. The Commission accepts that much remains to be ascertained, both because there is as yet little data on the single market, and because not all the directives have been implemented by the Member States.

2.12. Regarding refusal of services to non-residents, it is noted that Community law cannot oblige institutions to accept clients.

2.13. There is also a problem with restrictions on supply in certain countries under the general good clause. The green paper states that 'the proportionality of such restrictions with the objective pursued` must be demonstrated ().

2.14. In many cases absence or inadequacy of information is a cause of dissatisfaction for consumers, or leads them into errors in their choice of financial services. This is particularly the case for the most complex services arranged on a cross-border basis, such as mortgages and consumer credit.

2.15. For credit cards the question of responsibility for misuse after loss or theft arises, and there is also a demand for greater transparency in the conditions for their use in other countries.

2.16. One significant problem is that of unregulated intermediaries making attractive offers in foreign markets.

2.17. Another matter often raised is the failure to harmonise taxation, which distorts competition and leads to significant financial movements.

2.18. There are also certain problems associated with compulsory civil liability motor insurance for vehicles taken to another State. The green card system does not cover damage to a foreign car caused by a locally registered one, which leads to delays and problems with legal proceedings. The Commission is in the process of examining the compatibility of compulsory uniform 'bonus-malus` tarification systems with Community legislation.

2.19. The third part of the green paper summarises the measures that are currently under consideration or due for adoption. It refers specifically to the rules for the distance selling of financial products, which because of its peculiarities is not covered by the directive on distance selling in general. These rules are to involve a requirement for prior information, written confirmation of the content of a contract, and a cooling-off period.

2.20. The complexity of the problems of distance selling has also grown as a result of the use of information technology and computerised trading. When the systems - currently used at national level - expand to the international level, new problems will result; these need to be anticipated and studied in order to provide a level of security equal to that applying to distance selling of other products.

3. General comments

3.1. A number of significant contributions were made to the in-depth study and discussion of the subjects raised in the green paper by representatives of consumers' associations and banking, insurance and financial organisations at a hearing held by the Economic and Social Committee on 15 July 1996 (). The observers present also included CEEC representatives.

3.2. The green paper, while fully setting out many problems connected with financial services, seems to show traces of the immediate cause of its drafting, namely the draft directive on consumer protection for distance selling. Indeed, in the third part, covering the prospects for Community action, only cases involving distance selling of financial services are mentioned. If it confined itself to this, the green paper would be greatly impoverished, and there would be no justification for its title which appears to cover all the expectations of consumers.

3.2.1. The ESC reiterates, however, that the Commission's green paper constitutes an important opportunity to study the existing problems and barriers in greater depth, in order to provide better protection for the user of financial services and encourage wider cross-border provision of financial services.

3.2.2. Moreover, such protection has been included by the Commissioner responsible among the ten priorities in consumer affairs proposed by the Commission in its document of October 1995 (); it should also be noted that the year 1996 has been dedicated to consumer affairs.

3.2.3. As the Commission is the first to acknowledge (), experience of the operation of the single market is still limited, and this means that only certain problems encountered already can be identified. However, these are enough for an initial analysis and for possible action to remedy them at Community level.

3.2.4. The green paper is thus not intended by the Commission to be exhaustive on questions relating to financial services, but aims to set off a wide-ranging debate involving the specialised press and trade associations in the banking and insurance sectors and consumer organisations.

3.2.5. There will be an important opportunity to compare notes and bring together different views on this matter at the hearing to be held by the Commission in November 1996, at which the ESC will be represented.

3.2.6. The document, presented by the Commission's DG XV and DG XXIV, must be seen in that light. It is full of information, reflections, sets of problems, but - one could say - above all, questions and contradictions.

3.3. Protection of the economic interests of the consumer must not come second to completion of the internal market. Referring to existing legislation on financial services the green paper notes that 'the primary objective ... has been to establish the necessary conditions for the free circulation of financial services` and that it 'has also had the effect of increasing the protection available to the consumer ....` (). The Commission clearly refers here to the prudential rules, which are intended to ensure the stability of the financial sector, and hence to regulate its relations with the supervising authorities. The consumer is thus indirectly protected insofar as the security of deposits and investments relies on that stability.

3.3.1. The green paper seems to present protection of the economic interests of the consumer as secondary and subordinate to the completion of the single market. Various Commission documents also take this line, most notably the Communication on Priorities for Consumer Policy 1996-1998 () cited above.

3.3.2. This viewpoint ought to be changed, insofar as it is equally important to pursue the objective of ensuring an adequate return for consumers in terms of convenience and service. The single market must not benefit producers of goods and providers of services alone, whilst remaining irrelevant (if not actually prejudicial) to the citizen. This would be a further hindrance to acceptance of the sacrifices needed for the completion of EMU and to citizens' ability to identify with the European ideal.

3.3.3. Consumers' requirements should be given the same weight as the needs of companies, who furthermore have themselves an interest in ensuring that the services that they provide and the way that they deliver them are best able to meet their clients' needs.

3.3.4. Furthermore the significance of such consumer protection is also recognised in the Treaty on European Union, which requires the Community to 'contribute to the attainment of a high level of consumer protection` (Article 129a).

3.4. The difficult position of consumers faced with the complexities of many financial services and the laws governing them should thus always be borne in mind. It would be useful if the Commission were to prepare a publication for a general readership giving an easily understandable summary of the most important measures in the fifty Directives on financial matters.

3.4.1. This means that consumer protection should be a fundamental political and legal priority for national and Community legislators; such protection cannot be left to the automatic operation of single market mechanisms, as the green paper appears to presume. This does not necessarily imply a multiplication of rules, but rather that consideration of consumer protection should be central to the legislative process where financial services are involved.

3.4.2. Account must also be taken of the fact that at present much of the Community legislation on financial services refers back to national rules.

3.4.3. The Commission should examine the two possible alternative approaches to producing reliable, comprehensive protection for the economic interests of those using financial services. A horizontal Directive, establishing common rules for financial services targeted at private individuals and, if necessary, directives laying down specific rules for individual sectors; or alternatively the continuation of the current situation - namely, specific Community legislation for each sector, but with the aim of identical treatment for all financial products as regards the protection of consumers' economic interests.

3.4.4. The codes of conduct adopted by various trade associations, either spontaneously or as a result of requests by consumer groups, are certainly useful and should be encouraged. However, a basic legal framework is required for both more effective protection and more transparent competition with a level playing field across the Community.

3.4.5. Companies would be able to base their activities on precise rules, knowing that all other companies would be equally bound by them, and consumers would gain in assurance when buying services from abroad.

3.5. Community level harmonisation should deal with three principal aspects: transparency of the market and information for consumers, contractual terms, and consumers' right to redress.

3.5.1. Where transparency and information are concerned, particularly for the most complex services, there should be a requirement to inform the consumer as far as is technically feasible (including a description of the elements of the financial service and their prices, as is the practice in commercial transactions) prior to purchase.

3.5.2. The contract should be in writing, signed by and available to the client. The text should make explicit mention of the binding terms of the contract, and unfair and oppressive clauses should be deleted.

3.5.3. The consumer must always have a right of redress, this could be exercised in a variety of ways. In the first instance every provider of financial services should set up an internal procedure to handle claims, and their clients should be made aware of its existence at the moment of purchase.

3.5.4. Apart from recourse to the courts, two other systems for resolving disputes exist. The first involves representatives of the client and the service provider appearing before an independent arbitrator.

3.5.5. The second system, involving an ombudsman, has been operated successfully for a number of years in several countries.

3.6. There are problems, such as that of different taxation arrangements for certain products and services, which are closely related to the economic and financial policy choices of each Member State.

3.6.1. Moreover, differences in tax treatment give rise to distortions which, given the completion of the single market, cannot be ignored and must be taken into account. And, as the green paper rightly states, 'As long as unanimity is required in the Council on tax questions, there is little prospect of resolving these fiscal obstacles to the operation of the single market for financial services` ().

3.7. Another important problem is the definition of 'general good`, taken into account by every Member State to limit the supply of financial services. The problem of legal safeguards, too, is extremely important. The green paper includes it in the paragraph dealing with the 'general good` question in Part One, referring to the Rome Convention of 19 June 1980 and the case law of the Court of Justice. But there is a need for a more precise definition of the concept of 'general good`, to prevent it being used simply for protectionist purposes, and certainly to the detriment of consumers' freedom of choice.

3.7.1. The green paper notes that 'host countries may still impose their domestic rules adopted in the interest of the general good ... . This may significantly reduce the range of services offered. ... Limitations of supply caused by the application of the general good clause are a matter of concern` ().

3.7.2. In the green paper the Commission cites the Rome Convention of 19 June 1980 on the law applicable to contractual obligations (), which contains specific rules covering all kinds of contracts concluded with consumers. For contracts concluded with consumers, the Convention lays down that the courts of the consumer's country of residence shall be competent where the case is brought by the other contracting party, while the consumer also has the option of taking legal action in the country where the other party is based.

3.7.3. The Commission states that the option of applying the law of the consumer's country of residence 'may create a potential conflict with the principle of mutual recognition applicable within the single market, which tends towards the application of the law of the service provider` (). Where there is a conflict, 'the consumer's home state law can take precedence over the law of the supplier provided that it respects the "general good" criteria laid down by the Court of Justice` (). Otherwise, the law of the country of the service provider applies.

3.7.4. These principles clearly offer little in the way of legal certainty, with the likelihood of long and costly legal proceedings in case of a dispute. The green paper seems to accept this state of affairs unquestioningly.

3.7.5. The ESC, however, considers this state of affairs to be wholly unsatisfactory, and suggests a number of possible steps towards resolving it.

3.7.6. A first solution, which would consist of harmonising the general good provisions applicable to contracts made by consumers, would be a difficult and lengthy process, primarily because there has been no harmonisation of Member States' contract law.

3.7.7. There is a need for short-term solutions in anticipation of future uniform legislation, and the ESC would like to suggest a few points for consideration.

3.7.8. The problems lie in the fact that the concept of 'general good` is only vaguely defined and interpretations could diverge widely between two countries or between a country and the Court of Justice.

3.7.9. There is thus a primary requirement for a distinction between public administrative law and private contract law. The former includes, inter alia, provisions regarding trade and 'trading practices`, which latter quite clearly include those which protect consumers.

3.7.10. The two Banking Directives and others connected with it are based on Article 57 (2) of the Treaty, as are those on insurance. These directives regulate the activities of bodies offering credit or insurance. In practice this means checks on the enterprise concerned and its ability to carry out the regulated activities, and continuous monitoring of their compliance with the appropriate prudential rules.

3.7.11. As far as this very tightly defined area of good trading practice is concerned, the Member States are no longer able to invoke the general good clause, except in regard of measures regulating commercial practice but unrelated to the monitoring of the enterprise, i.e. those on economic organisation, distribution, production, or the use of a service.

3.7.12. Consider the problem from the point of view of contract law, and in particular the way in which protection of consumers' economic interests is organised. In private international law the Rome Convention seeks to unify the rules on conflicts between laws in the European Community. The aim is to introduce a uniform set of rules governing contractual obligations into the national laws of Member States.

3.7.13. As far as a contract concluded with a consumer is concerned, the applicable law is that of the country where the consumer usually resides, under Article 5 of the Rome Convention.

3.7.14. Not all consumer credit contracts are in accordance with Article 5 of the Rome Convention, or with the analogous conditions of Article 13 of the Brussels Convention. This will be the case if the conclusion of the contract has not been preceded by a special proposal or advertising in the country, or in general if the consumer has actually travelled abroad in order to settle the price.

3.7.15. However, even in such cases it is not necessarily certain that consumers would be deprived of protection under the law applicable in their country of residence, which might be more favourable to their interests. In effect, if the courts of the country of the consumer's residence are considered competent, then the laws of that same country should be applied.

3.7.16. This is a clear and satisfactory solution for all parties: consumers benefit from the protection of the legislation of their countries, while services providers know which laws are applicable.

3.7.17 Unfortunately the Commission chooses to reject this clear and simple solution, since it 'considers that application of the rules for determining the law applicable laid down in the Rome Convention may conflict with the principle of mutual recognition of banking activities, the cornerstone of the Second Directive` ().

3.7.18 The ESC does not share this view. The rules of the Rome Convention cannot conflict with the principle of mutual recognition, since they deal with two different fields of activity. The principle of mutual recognition is only applicable in the field of public commercial law, not contract law, particularly given the provisions in favour of the protection of consumers' economic interests.

4. Specific observations

4.1. If consumer credit is excepted, current Community legislation on banking and insurance services only offers real protection to users of complex, sophisticated services (shares, securities, secured deposits); those who use 'everyday` services are protected by improvised measures rather than by a well-defined universal framework of guarantees.

4.1.1. This green paper aims explicitly at protecting the economic interests of the individual consumer. It is therefore necessary to make a clear distinction between financial services for large-scale users (company credit, reinsurance contracts, etc.) and those for individuals and families which are the subject of this opinion.

4.1.2. The provision of basic banking facilities (current and deposit accounts) should be ensured for every citizen, on the condition that the costs of such a service are not imposed on other citizens. Banks are a service to the public, not a public service. Non-residents should be able to make use of at least these basic services, without discrimination in treatment and charging by comparison with residents.

4.1.3. Inter-bank agreements (such as the Eurocheque system) and cooperation agreements between insurers are widely exempt from Community competition rules. The result is that there is practically no competition on charges.

4.1.4. A table of the most common financial services needs to be drawn up so that clients can make a simple and immediate comparison of their suitability. This table could be produced with the assistance of businesses' and consumers' organisations.

4.1.5. It would be better still to be able to choose between various suppliers on the basis of their overall attitude to customer service (quality of service, better information and transparency, pricing levels, etc.)

4.2. For distance selling of financial services in particular, rules should be applied that are equivalent to those laid down in the horizontal directive on contracts negotiated at a distance. However, care should be taken not to damage consumers' interests by applying over-general rules. A cooling-off period is inappropriate for services that require immediate execution, such as the sale or purchase of shares, or credit urgently needed by the consumer.

4.2.1. More and more sales use information technology (e.g. across the Internet) and this is set to boom in the next few years. Given the nature of the medium, these transactions merit particular attention within the regulation of distance selling of financial services.

4.2.2. Television advertising of financial products should be heavily regulated, particularly if it is by unauthorised intermediaries.

4.2.3. The Commission could examine the possibility of considering, as part of its ongoing research into the information society, the problems associated with new forms of marketing using television and information technology.

4.3. Given their complexity, considerable attention needs to be paid to integrated pension and health insurance policies. The current EU-wide rethinking of welfare schemes has already opened up enormous possibilities for this type of service and will continue to do so; at present this type of service is amongst those subject to the lowest levels of transparency.

4.3.1. For premiums, the client should first and foremost be given a realistic estimate of the revenue which will arise, without projections that often turn out to be completely implausible. There should be very clear information about the procedures for withdrawing from the contract and the costs incurred, the consequences for the heirs in the event of the death of the policyholder, and the tax advantages and disadvantages.

4.3.2. At the time a health insurance contract is made the client should receive precise details of what is not covered and excesses. Furthermore there must be the strictest limits on an insurer's ability to unilaterally terminate the contract; this should be totally banned in the event of a policyholder's serious illness.

4.4. Mortgage circulation and market transparency should be favoured, establishing Community rules on procedures and required information, rates, forms of guarantee, etc. The Commission should consider the possibility of a directive on this important subject.

4.5. The Commission should also consider the case for a directive on insurance along the same lines as the Banking Directives, in order to ensure a minimum level of protection to all insured persons.

4.6. The practice of usury or loan-sharking has reached worrying levels in recent years in various countries. This delicate matter has significant social consequences, such as excessive levels of debt, and is subject to no regulation at Community level. The ESC would repeat what it said in its 1992 opinion on the consumer and the internal market, namely that 'there have not as yet been any Community legislative initiatives in this area, although there is a Community dimension to the problem` (). The ESC would also remind the Commission that the Council is giving priority to 'investigating the question of excessive levels of consumer debt` (). It urges the Commission once more to state what action at Community level is desirable in order to contribute towards alleviating the debt problem. Finally, it asks the Commission, when formulating a view, to refer to the study which it it commissioned from the University of Leiden's Instituut voor Recht en Beleid in 1992 ().

4.7. Means of payment also deserve greater attention. For cheques, for example, the possibility of abolishing the value date should be considered, as this is a source of considerable abuse and does not improve security. For a view on the inadequate observance of the recommendation on payment systems (), reference is made to the position taken up only recently by the ESC ().

5. Conclusions

5.1. The ESC endorses the initiative taken with this green paper, which could be an important first step towards resolving the problems involved in best meeting the needs of users of financial services.

5.2. The first important task for the Commission is to draw up a White Paper on financial services and consumers, listing the rights to be protected and the mechanisms for protection. Certainly to be included among the former are the right of access, exhaustive information, transparency of services and means of redress.

5.3. In this light, the lack of data on the effects of the single market is particularly important and should be rectified at the earliest possible opportunity. Better targeted and more efficient intervention needs information on the most common causes of disputes on the various services. It would therefore be appropriate first to hold a broad inquiry into these, in collaboration with trade associations from the sector and consumer organisations. This would also enable the priorities for Community intervention to be identified. The inquiry should be carried out quickly and should not be allowed to delay a decision on immediate action.

Brussels, 31 October 1996.

The President of the Economic and Social Committee

Tom JENKINS

() Green Paper on financial services - meeting consumers' expectations (COM(96) 209 final), p. 3.

() Ibid. p. 3.

() Ibid. p. 4.

() Ibid. p. 6.

() Ibid. p. 7.

() Ibid. p. 9.

() A summary of the hearing is included in the appendix to the Section Opinion.

() COM (95) 519 final.

() Green Paper: Financial Services - meeting consumers' expectations (COM (96) 209 final) Summary, p. 1.

() Ibid. part 1, p. 3.

() COM(95) 519 final - OJ No C 295, 7. 10. 1996, p. 14.

() Green Paper: Financial Services - meeting consumers' expectations (COM (96) 209 final). p. 12.

() Ibid. p. 9.

() Ibid. p. 5.

() Communication in OJ No C 291, 4. 11. 1995, p. 19.

() Opinion of 26. 11. 1992, OJ No C 19, 25. 1. 1993, p. 22.

() Council Resolution of 13. 7. 1992, OJ No C 186, 23. 7. 1992.

() See too point 377 of the Commission's report on the operation of Directive 87/102/EEC, COM(95) 117 final.

() 88/590/EEC of 17. 11. 1988.

() Point 2.3.3 of the Opinion on priorities for consumer policy (1996-1998), OJ No C 295, 7. 10. 1996, p. 64.