FINANCIAL SERVICES: MEETING CONSUMERS" EXPECTATIONS Green Paper
Date: 1996-05-22
Institutions: European Commission
Subjects: competition, consumer protection, financial institution, financial market, single market

COMMISSION  OF THE  EUROPEAN  COMMUNITIES 

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Brussels,  22.05.1996 
COM(96) 209  final 

FINANCIAL SERVICES: 
MEETING CONSUMERS1 EXPECTATIONS 

Green Paper 

(presented  by  the  Commission) 

EXECUTIVE  SUMMARY 

The  creation  of  the  single  market  for  financial  services  is  inevitably  having  a  profound 
impact on both financial  service providers and on all those, including private consumers, 
who purchase them. The providers are gaining -access to a much wider market  and at the 
same  time  are  being  subjected  to  fiercer  competition  at  home.  The  buyers  of  financial 
services  are benefiting  from  greater competition  in terms both of price and  service  and  a 
wider choice of financial  products. 

This  Green  Paper  considers  the  specific  protection  of  a  particular  category  of  user  of 
financial  services  - the  private  consumer  -  since  that  category  generally  needs  a  higher 
level of protection than other more experienced or powerful  users. Although the  financial 
services  directives  are  targeted  primarily  at  the  financial  sector  they  are  also  concerned 
with  the  rights  and  interests  of  the  consumer.  They  contain  certain  provisions  that 
safeguard  consumers'  rights  to  correct  and  complete  information,  protect  their  legal 
interests  and  provide  access  to  means  of  redress.  Furthermore,  all  these  directives  are 
intended  to  secure  the  stability  and  trustworthiness  of  the  financial  services  sector,  by 
imposing strict prudential rules and minimum capital requirements. 

Until the  results  of the  1996 Studies  become  available  later this  year,  the  Commission's 
experience  of  the  operation  of  the  single  market  is,  at  present,  limited.  However,  a 
number  of problems  encountered  by consumers  have already  been identified  and need  to 
be examined  carefully  to  see what  action  can be taken to  remedy  them.  These  problems 
include the refusal  to  sell financial services to non-residents, the lack of information  and 
the  fraudulent  activities  of  unscrupulous  intermediaries.  It  is  also  quite  possible  that,  in 
the future,  other consumer concerns will become evident. 

The  distance  selling  of  financial  services  is  an  area  that  merits  special  attention.  The 
directive currently  being approved  covers distance selling of all goods and  services, with 
the exclusion  of financial  services. Both the scale and  complexity  of distance  selling  are 
increasing.  Although  the  vast  majority  of  these  contracts  are  currently  offered  and 
concluded  at domestic level, it is anticipated that cross-border business is also destined to 
expand rapidly.  This is a sector which is still at an embryonic  level  of development.  The 
Commission is therefore  examining whether binding legislation will be required. 

In order to assess clearly what problems might need to be addressed both generally  and in 
relation to the distance selling of financial  services, the Commission  invites comments on 
present  and  anticipated  developments  in the cross-border  provision  of  financial  services. 
With  the  publication  of  the  Green  Paper,  the  Commission  intends  to  stimulate  a  wide-
ranging  debate  with  all  interested  parties.  A  hearing  will  be  organised  in  the  next  few 
months to enable interested parties to discuss the issues raised in this Paper. 

Responses (in writing) to this Green Paper are requested no later than  15 October  1996 
to: 

The Director-General  - DG XV 
European  Commission 
Rue de la Loi 200 
B-1049 Brussels 
Fax: (+32 2) 295.65.00 
E-mail: John.MOGG(5)DG 15.cec.be 

a. 

FINANCIAL SERVICES: 
MEETING CONSUMERS'  EXPECTATIONS 

Financial  services  are a crucially  important  part of the economy  of the  European  Union. 
Virtually  everyone  uses financial  services: from public  authorities,  financial  institutions, 
industrial  and  commercial  enterprises  of  all  sizes  (whether  SMEs or  giant  corporations) 
through to non-profit  making organisations, households and individual consumers. 

On 29 June  1995 the Council adopted a common position on the proposal  for  a directive 
on the protection  of consumers in respect of distance contracts1. At the second reading  in 
the European Parliament on  15 December  1995, an amendment seeking to bring  financial 
services within the scope of the proposal failed to win the necessary majority  required  for 
its  adoption.  Although  financial  services  were  included  in  the  original  Commission 
proposal,  the  Commission,  during  this  debate,  accepted  the  exclusion  of  financial 
services,  explaining  that,  given  the  increasing  complexity  and  diversity  of the  European 
financial  sector, the consumer  protection  aspect of the marketing  of financial services  in 
general and the particular question of distance selling merited specific  consideration. 

This  Green  Paper  covers  a  number  of  consumer  policy  issues  in  the  financial  services 
sector,  including,  in  particular,  the  distance  selling  of  financial  services.  Given  their 
particular  needs,  it  concentrates  on  some  of  the  concerns  of  private  consumers. 
Nevertheless,  the  Commission  is  aware  that  not  all  problems  facing  consumers  may  be 
addressed in the present Green Paper. 

In  Part  I,  the  Commission  indicates  to  what  extent  the  interests  of  the  consumer  of 
financial  services  have  been  taken  into  account  in  Community  legislation.  In  Part  II,  a 
number  of  concerns  that  have  already  become  apparent  are  identified.  The  final  part  of 
this  Green  Paper  considers  briefly  future  trends  in  the  marketing  of  financial  services, 
including  distance  selling. The views of interested  parties  are sought on all these  issues, 
to enable the Commission to undertake further  action. 

[/ 

1 

OJ No C 288, 30.10.1995. 

FART I - WHAT HAS BEEN ACHIEVED SO FAR? 

In financial services the Commission's primary objective has been the creation of a single 
market  putting  into  effect  the  Treaty  principles  of  free  movement  of  persons,  goods, 
services  and  capital.  That  objective  has  now  been  largely  achieved  by  the  progressive 
adoption  of  some  50  directives  targeted  at  the  providers  of  financial  services,  the 
Community's banks, insurance companies and securities houses. 

The single market  in financial  services is built on the principles  of home country  control 
and  mutual  recognition  based  on  the  implementation  of  agreed  minimum  standards  of 
prudential  supervision.  As  a  result  providers  of  financial  services  may  operate  freely 
across  the  European  Union.  This  should  result  in  greater  competition,  increased 
economies  of  scale  and  greater  consumer  choice.  These  effects  are  already  becoming 
apparent  notably  in the  availability  of new financial products  and  of new ways  of  doing 
business  (for  example,  in  insurance  and  share  trading),  as  well  as  in  increased  cross-
border  activity.  More  detailed  information  on  the  benefits  of  the  single  market  will  be 
available  later  this  year,  as  the  Commission,  following  a  request  from  the  Council,  is 
currently  undertaking  a  major  review  of  the  impact  of  the  single  market  legislation, 
including  financial  services.  This  study  will  contain  economic  and  other  data  on  the 
effects  of  the  single  market  on the  major  economic  sectors  and  industries  including  the 
financial  services  sector.  In  particular,  these  data  will  measure  the  impact  of  the  single 
market  in terms  of the price of different  services  and products, current and  future  trends, 
and  in terms  of  consumer  choice. From this  viewpoint,  the  1996 study  will  be  useful  as 
regards the  issue  of consumer  policy  in financial  services, but might not provide  enough 
information  to answer the specific questions that are raised in this Green Paper. 

The  financial  services  sector  has  traditionally  been  subject  to  strict  regulation  and  the 
European  Union's  'minimum'  standards  are  far-reaching.  Such  regulation,  the  primary 
objective  of which  has been to establish the necessary  conditions for the  free  circulation 
of financial  services,  has also had the effect  of  increasing  the protection  available  to  the 
consumer  who  entrusts  his  or her  money  and  financial  interests  to the  financial  services 
industry. In safeguarding  the financial  strength, probity  and reliability  of the providers of 
financial  services these prudential  standards provide valuable protection to the purchasers 
of those services. 

The financial  services  directives have also laid down a number of provisions  designed  to 
protect  consumer  interests  in  particular  areas  (for  example,  law  applicable  to  insurance 
contracts,  redress,  right  of  withdrawal,  minimum  information,  conduct  of  business 
principles).  Thus,  while  the  financial  services  directives  are  targeted  essentially  at  the 
financial  institutions, protecting  the  interests  of  consumers  has also  played  an  important 
role.  The  financial  institutions  are  themselves  well  aware  that  a  reputation  for  honesty 
and  good  customer  service  are  among  the  most  effective  marketing  tools  in  an 
increasingly  competitive  market.  Various  aspects  of  consumer  protection  in the  field  of 
financial  services  have  been  addressed  - directly  or  indirectly  - by the  existing  texts  of 
Community  law. In particular  those relating to  information,  legal protection  and  systems 
of  redress,  which  together  form  a  basic  set  of  rights  established  for  the  benefit  of  the 
consumer, are examined  in the sections that  follow. 

•  Consumer  information 

Given  the  complexity  of financial services, it is essential  that the consumer  be  provided 
with  the  necessary  information  to  enable  him  or  her  to  make  an  informed  decision  on 
whether  to  purchase  a  financial  service  and  on  the  most  suitable  'product'  to  buy. 
Accordingly,  financial  services  directives  contain  a  number  of  provisions  requiring 
financial 
institutions  to  provide  their  clients  with  appropriate  information.  These 
provisions  apply  to  the  relevant  financial  contracts  without  distinction  as  to  how  the 
contract was concluded (face-to-face,  at a distance, etc.). 

In  banking,  depositors  -  including  inter  alia  consumers  -  must  be  informed  about  the 
deposit-guarantee  scheme which is there to protect their deposits and savings. In the field 
of consumer credit, prior information  must be given on credit limits, the cost of the credit 
(in  particular  the  annual  percentage  rate  of  charge  -  APR)  and  termination  procedures. 
The  proposal  for  a  directive  on  cross-border  credit  transfers  requires  clients  to  be 
properly informed,  both before and after the transfer is made. 

In insurance,  the policy-holder  must be informed  before  and during the execution of the 
contract of the essential aspects of the contract (duration, right of cancellation,  applicable 
law, complaint  procedures). The information  required  is more detailed  in the field of  life 
assurance than  for  non-life  insurance given the fact that life  assurance products  generally 
imply a long term  commitment. 

In  the  securities  and  stock  exchanges  field,  a  number  of  the  directives  are  solely 
concerned  with the provision  of  information,  while  all of the directives  in this area  seek 
to ensure investor protection by means of maximum transparency. Examples are the stock 
exchange  listing  and  public  offer  prospectuses,  requirements  for  the  information  to  be 
supplied  to  unit  holders  in  collective  investment  funds  and  the  investment  services 
directive's requirement to publish transaction details to the market. 

• 

Legal  protection 

Certain  provisions  in a number of directives  strengthen the consumer's position  vis-à-vis 
the  financial  institution  and  protect  the  consumers"  legal  interests  should  something  go 
wrong. In all three  sectors, host countries may impose rules they have adopted to protect 
the interest of the general good. A co-ordinated collective investment fund  (UCITS) must 
respect  the  marketing  and  advertising  rules laid down by the  state where  it is seeking  to 
do  business,  while  investment  firms  must  respect  the  conduct  of  business  rules  of  the 
State  in  which  they  are  providing  services.  These  provisions  reflect  the  case  law  of  the 
Court of Justice, which has always ruled that the need to protect the recipient of a service 
may justify  limitations  on  the  cross-border  provision  of  services,  an  example  being  the 
prohibition  of  cold-calling.  Accordingly,  consumers  can  be  protected  by  their  own 
domestic  set  of  consumer  protection  rules,  provided 
that  these  rules  are  non 
discriminatory, necessary, non duplicative and proportionate. 

The Rome Convention of  19 June  19802  on the law applicable to contractual  obligations, 
which  has  been  ratified  by  almost  all  the  Member  States3,  contains  specific  rules 
covering all kinds of contracts concluded  with consumers. Whenever  a contract has  been 
concluded  with  a  consumer  further  to  a  solicitation  or  publicity  by  the  provider,  the 
choice of applicable law made by the parties may not deprive the consumer of the  benefit 
of the  "imperative provisions" of his/her own legislation  (provisions from which  the  law 
of  a  given  country  does  not  allow  any  derogation  in  a  contract).  If  no  law  has  been 
chosen,  the  applicable  law  will  be  that  of  the  country  where  the  consumer  is  resident. 
This Convention, which does not cover insurance, constitutes a significant  guarantee that 
the  most  vulnerable  party  may  benefit  from  the  most  protective  provisions  of  the 
legislation  which  he  or  she  knows  best,  even  if  another  law  has  been  chosen  in  the 
contract.  The fact  that the Rome  Convention  tends towards the application  of the  law  of 
the  country  where  the  consumer  has  his/her  main  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  such 
conflict  occurs, 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  (proportionality,  necessity  and  non-duplication).  If these criteria are not  fulfilled, 
the law of the country where the provider is established will apply. 

In banking,  the  directive  on deposit-guarantee  schemes  creates  a minimum  coverage  of 
ECU  20  000  (with  a  transitional  figure  of  ECU  15  000  for  some  countries)  in  case 
deposits  become  unavailable.  This  measure, which  is mainly  designed  to  strengthen  the 
stability  of  the  banking  system  as  a  whole,  nevertheless  has  significant  implications  in 
terms  of  consumer  protection.  Directives  on  consumer  credit  have  laid  down  minimum 
requirements  such  as  the  need  for  a  written  agreement,  the  possibility  that  consumers 
may  discharge  their  obligations  before  the  time  fixed,  and  the  formula  to  calculate  the 
APR.  The  proposal  for  a  directive  on  cross-border  credit  transfers  contains  clear 
obligations  for  banks,  such  as  the  prohibition  of  double  charging  and  the  minimum 
refund  of  lost transfers,  which  give  legal protection  to users  (including  consumers).  The 
Commission's  recommendation  on  payment  systems  also  contain  provisions  setting  out 
rights  and  obligations  of  card  issuers  and  card  holders,  including  provisions  on 
responsibility  in cases of loss, theft  or forgery  of cards. 

The insurance directives contain provisions on the determination of the law applicable to 
a contract.  The  "standard"  situation  is that the  law applicable  will  be that  of the  country 
where  the  risk  is  located,  which  is  usually  where  the  policy-holder  is  resident.  This 
system  ensures  that  insured  persons  are  normally  subject  to  the  set  of  rules  with  which 
they  are  most  familiar  and  may  only  lose  the  protection  of  their  national  set  of  rules  if 
they  so  decide.  Moreover,  the  life  assurance  directives  have  granted  subscribers  a 
cooling-off period of  14 to 30 days to enable them to reflect  fully  on the suitability of the 
long-term commitment they are proposing to enter into. 

2 
3 

OJNoL266,  9.10.1980, p.l. 
Austria, Finland and  Sweden have not yet ratified  the Convention. 

In  securities  and  stock  exchanges,  the  Commission  has  proposed  a  mechanism  for 
investor  compensation,  based  on  the  same  principles  as  the  deposit-guarantee  directive. 
When  enacted,  each  Member  State  will  be  required  to  have  an  investor  compensation 
scheme, providing  a minimum  level of compensation  (at least to the smaller  investor)  in 
the event that an investment firm is unable to meet its obligations to its clients. 

• 

Systems of redress 

In banking,  Member  States must ensure that the depositor's  rights to compensation  may 
be  the  subject  of  an  action  by  the  depositor  against  the  deposit-guarantee  scheme.  A 
similar  clause  is  proposed  in  the  investor  compensation  scheme  draft  directive.  In  the 
area of consumer credit, the consumer has the right to pursue remedies against the grantor 
of the credit and Member  States are required to adopt one of three alternative  systems of 
surveillance, i.e. either to ensure that persons offering  credit or arranging for credit obtain 
official  authorisation or that these persons are subject to inspection or monitoring of their 
activities  by  an  official  body,  or  to  promote  the  establishment  of  appropriate  bodies  to 
receive complaints and to provide information  or advice to consumers in this regard. The 
proposal  on cross-border  credit transfers  requires Member  States to ensure that there  are 
adequate and effective  means for the settlement of disputes. 

In legal  expenses  insurance, the policy-holder  must be explicitly  informed  in the  event 
of a conflict  of interest with the insurer, about his or her rights to have the free choice of 
a lawyer, and to have recourse, if necessary, to an arbitration procedure. 

Furthermore, the existing Community  law in the field of financial  services has  addressed 
some aspects that indirectly affect  consumer protection. These are the  following: 

•  A trustworthy financial  services industry 

One of the main objectives  of the financial  services directives  is to maintain the  stability 
and  the  trustworthiness  of  the  sector.  All  directives  contribute  to  this  goal.  A  series  of 
stock market directives - many in fields where no national legislation previously  existed -
require  that  all  important  and  price-sensitive  information  be  rapidly  supplied  to  the 
market.  In  addition,  the  directives  on  money  laundering  and  insider  trading  have 
permitted the adoption of common sets of rules to ensure orderly financial  markets. 

Measures  in all three  sectors require that  senior  staff  and major  shareholders  of  financial 
firms should be fit and proper persons of recognised probity  and professional  experience. 
A recent  directive  adopted  in response  to the collapse  of the  BCCI  (Bank  of  Credit  and 
Commerce  International)  imposed  a  further  series  of  requirements  to  combat  fraud. 
Financial institutions must not form part of a structure that is lacking in transparency  and 
makes  supervision  more  difficult:  the  head  office  and  registered  office  must  be  in  the 
same  Member  State  and  auditors  must  report  serious  problems  to  the  competent 
authorities. 

Reference  should  also  be  made  to  the  Community's  competition  rules,  which  are  of 
crucial  importance  in  safeguarding  the  interests  of  the  consumer  in  the  single  financial 
market. 

• 

Strong financial  institutions 

The  smooth  functioning  of the  mutual  recognition  and  home  country  control  principles, 
the corner-stones  of the  single market,  is largely  dependent  on the  mutual  trust  between 
national  control authorities. A sufficient  level of confidence  could not have been reached 
without  the  creation  of  a  harmonised  basic  set  of  prudential  rules.  For  users  and,  in 
particular,  for  consumers  it  means  that  whatever  institution  they  choose,  the  same 
minimum prudential  rules will be followed.  This is particularly  important when  financial 
services such as life assurance imply long term commitments. 

In  all  three  sectors  providers  of  the  relevant  financial  services  are  subject  to  a  formal 
authorisation  procedure  and  to  detailed  and  strict  minimum  capital  requirements  both 
initially and on an on-going basis. Firms that are not authorised may not provide the core 
services covered by the directives. 

•  A wider choice of financial  services and products 

One of the principal  objectives  of creating a single market in financial services has been 
to increase and diversify  the choice of financial  products offered  to users. The principle is 
quite  simple.  Based  in  part  on  the  "Cassis  de  Dijon" judgement4,  any  financial  service 
benefiting  from  mutual recognition  may, if it is legally provided  in the home country, be 
offered  in the host country, via a branch or on a cross-border basis, even if the service in 
question does not exist in the latter country or even if domestic institutions may not  offer 
it. As a result, savings and insurance products are already being offered  on markets where 
they were previously  unavailable. 

•  The pricing of financial  services 

Users and in particular consumers look to the single market to bring them cheaper as well 
as better  financial  services. The financial  services directives do not seek to interfere  with 
the free  determination  of prices. Indeed the only direct intervention  in this area has been 
in  the  insurance  sector,  where  imposed  and  approved  tariffs  have  been  abandoned. 
Having  removed  this  obstacle,  the  insurance  directives  have  opened  the  way  for  more 
competition. 

Judgement  of 20 February  1979, No  120/78, Rewe-Zentral AG, Rec. p.649. 

FART II - CONSUMER CONCERNS IN CROSS^BORDERTRANSACTIONS 

The Community's  legislative framework already provides all clients with a certain degree 
of protection, by imposing rules and obligations on the providers of financial services. 

However,  as stated  earlier, the Commission's  practical  experience of the operation of the 
single  market  is  still  rather  limited.  This  is  due  in  part  to  the  fact  that  certain  of  the 
financial  services  directives  have only  recently entered  into  force.  But it is also true that 
not all of the directives have been implemented  in full and on time by the Member States. 

The  Commission  is  determined  to  make  every  effort  to  ensure  that  the  legislative 
commitments  made  by  the  Member  States  are  fully  honoured  notably  by  making 
available details of each Member State's record in transposing directives into national law 
and taking legal action to secure the timely and correct implementation of the directives. 

Apart  from  the  implications  deriving  from  the  failure  to  implement  Community 
legislation  in  a  timely  and  correct  manner,  a  number  of  problems  encountered  by 
consumers  have  already  been  identified  and  reported  to  the  Commission.  The 
Commission  is aware that this list is by no means exhaustive and that other problems  are 
likely to  arise  in the  future.  This  Green  Paper  is precisely  aimed  at focussing  the  debate 
on  some  of  the  current  and  future  problems  in  order  to  elaborate  the  appropriate  action 
plan to solve them. 

•  The refusal  of financial  services to non-residents 

Some  consumers  have  been  refused  financial  services  in  another  Member  State  on  the 
grounds  that  they  are  not  resident  in  or  nationals  of  that  State.  Such  "private" 
discrimination  is  deeply  resented  by  European  consumers  and  is  apparently  in  total 
contradiction with the idea of a single market without frontiers. 

The  Commission  has,  for  example,  been  informed  by  many  consumers  that,  in  one 
Member  State, a number  of insurance  companies  refused  to insure them or granted  them 
less  favorable  contractual  terms  on  the  grounds  that,  as  they  came  from  certain  EU 
countries,  they  entailed  a  higher  risk  for  the  company  than  others.  The  Commission  is 
also  aware  that,  in  another  Member  State,  certain  credit  institutions,  allegedly  for  tax 
reasons, refuse  to  offer  some banking  services  (current account, credit card, etc.) to non 
residents. 

The main  difficulty  in dealing  with  such  situations  lies in the  fact  that,  since  contractual 
freedom  is an essential principle of contract  law, Community  law cannot oblige  financial 
institutions 
to  accept  clients,  be  they  national  or  foreign.  Consumers  suffering 
discrimination  can only address themselves to national  courts. This is an important  issue 
which the Commission  is monitoring closely in co-operation with the Member States. 

•  Difficulties  in providing financial  services in another Member  State 

Host countries may still impose their domestic rules adopted in the interest of the general 
good,  or  falling  within  their  residual  competence  (e.g.  monetary  policy).  This  may 
significantly  reduce  the  range  of  services  offered.  For  example,  interest-bearing  current 
accounts are not available in at least one Member State. 

Limitations of supply caused by the application of the general good clause are a matter of 
concern. The services of the Commission have published a draft  communication5  inviting 
comments.  It details the  legal  conditions  under  which  general  good  provisions  may  still 
restrict  the  flow  of  banking  services. A  similar  exercise  is  anticipated  in  relation  to  the 
insurance and securities sectors. Legal restrictions related to general  good  considerations 
dissuade foreign  companies from offering  their products abroad, and, by limiting  choice, 
may  therefore  be  detrimental  to  the  consumer.  The  proportionality  of  such  restrictions 
with the objective pursued must therefore  be demonstrated. 

In  the  insurance  sector,  many  complaints  refer  to  difficulties  in  obtaining  compulsory 
motor insurance cover from insurers based in another Member State. 

Insurers  often  justify  their  refusal  on  the  ground  that  the  system  of  compulsory  motor 
insurance is too complex. This is partly due to the need to protect both the  policy-holder 
and  the  victim  of  an  accident.  The  arrangements  put  in place  to  ensure  such  protection 
(green  card  system,  compulsory  membership  of  guarantee  funds)  may  make  it  less 
attractive  to  offer  cross-border  services.  Furthermore,  the  obligation  to  appoint  a  fiscal 
representative  and  a  local  claims  representative  in  the  country  of  the  risk  often  entails 
significant  costs.  The  Commission  is  currently  examining  this  issue  in  order  to  meet 
these concerns. It will also consider other consumer issues in the insurance sector. 

• 

Poor quality of the service offered  and lack of information 

Consumers  face  difficulties  in  assessing  and  fully  grasping  the  increasing  variety  and 
complexity of financial services. The Commission has been informed  that some  financial 
institutions,  sometimes  in  breach  of  host  country  legislation,  have  offered,  on  a  cross-
border  basis,  complex  financial  services  such  as  mortgage  or  consumer  credit,  without 
providing  the  consumers  with  sufficient  information.  For  example,  documents  were  not 
made  available  in the  language  of the  consumer,  amortisation  tables  were  missing,  and 
figures  were  presented  in  a  misleading  manner.  Although  the  Commission  cannot  take 
any  direct  action  against  the  companies  or  their  intermediaries,  the  national  authorities 
can  do  so  in  accordance  with  the  terms  of  the  directives  and  making  use  of  the  co 
operation with other supervisory authorities that has been developed. 

Draft  Commission  communication  on  freedom  to  provide  services  and  the  interest  of  the  general 
good  in the Second Banking Directive (OJ No C 291, 4.11.1995, p.7). 

9 

Most complaints  addressed  to the Commission  about the lack of information  provided  to 
the consumer on prices and conditions, the lack of professional  advice and the  difficulties 
in comparing  various  services  are found  in the field of banking,  where  the  directives  do 
not  themselves  impose  consumer  information  requirements  (except  for  consumer  credit 
and  -  when  the  current  proposal  is  adopted  -  for  cross-border  credit  transfers).  As  a 
follow-up  to  its  May  1995 report  on the operation  of the  consumer  credit  directive6,  the 
Commission  is  examining  the  current  situation  regarding  customer  information  (both 
before  and  after  the signing of a contract)  in the credit sector with particular  reference  to 
mortgage credit, consumer credit and leasing. 

With regard  to cross-border  payments, and  in particular  cross-border  credit transfers,  the 
main  problems  reported  by  consumers  -  lack  of  full  written  information  on  conditions, 
double  charging,  excessive  execution time and  lack of adequate  redress procedures  - are 
tackled  in the relevant proposal which is currently before  Parliament and the Council and 
which,  it  is  hoped,  could  be  adopted  before  this  Summer.  The  improvement  of  cross-
border credit transfers  and the introduction  of a single currency will undoubtedly  remove 
two  of  the  main  obstacles  affecting  the  cross-border  provision  of  financial  and  other 
services.  The  market  should  be  more  integrated  and  the  existence  of  a  single  currency 
should facilitate  comparisons for the consumer. 

As regards payment  cards, user groups appear mainly  concerned  about the  unsatisfactory 
implementation  of the principles  contained  in the  1988 Commission  recommendation  on 
payment  systems7, notably the rules defining  the responsibility  of the parties in the event 
of loss, theft  and copying of a payment card. Consumers also call for greater transparency 
as regards the conditions for use of a payment card particularly  when it is being used in a 
Member  State  other  than  that  in  which  the  consumer  is  resident.  The  Commission  is 
examining  the  area  of  payment  cards  (including  pre-paid  cards)  and  other  payment 
facilities  (including  home  banking  and  cyber-payments),  with  a  view  to  promoting  an 
effective  single  market  for  such  instruments,  while  also  assuring  the  consumer  better 
legal  protection  and  clear  and  complete  information.  The  Commission  has  already  held 
initial  consultations  with its advisory  groups on payment  systems, one of which  includes 
consumer  representatives.  Additional  input  into this  debate  is welcomed,  with  a view  to 
further  action. 

• 

Intermediaries 

Cases  have  been  reported  of  "aggressive",  sometimes  illegal,  actions  by  unregulated 
intermediaries, mainly  in the field of banking  and investment, often  causing  considerable 
distress  and  even  hardship.  Consumers  seeking  credit  have  been  proposed  seemingly 
attractive  conditions  by  brokers  representing  foreign  institutions.  Such  intermediaries 
took  high  advance  fees,  whilst  the  information  given  proved  to  be  poor  (for  example, 

Commission  report  on  the  operation  of  directive  87/102/EEC  for  the  approximation  of  the  laws, 
regulations  and  administrative  provisions  of  the  Member  States  concerning  consumer  credit 
(COM(95)  117 final,  11.5.1995). 
Commission  recommendation  88/590/EEC  concerning  payment  systems  and  in  particular  the 
relationship between  card holder and card  issuer (OJ No L 317, 24.11.1988, p.55). 

10 

credits  proved  to  be  much  more  complicated  and  expensive  than  was  apparent  at  first 
intermediaries  sell 
sight).  There  have  also  been  other  cases  where  unregulated 
commodities  or  commodity  derivatives  on  a  cross-border  basis.  The  Commission  is 
examining  whether  it would be appropriate to bring these instruments  (commodities  and 
commodities  derivatives)  within the  scope  of  Community  legislation,  thus  making  such 
activities subject to authorisation and supervision throughout the Community. 

With the  exception  of actions falling  within the consumer  credit  directive8, the  activities 
of  unregulated  intermediaries  are  not  within  the  scope  of  the  secondary  Community 
legislation:  Member  States  are therefore  free  to regulate them  as they  see  fit  in  order  to 
protect  the  consumer,  provided  that  they  respect  the  Treaty  rules  on  freedom  of 
establishment  and free provision  of services. But it is also clear that  such  intermediaries 
are  in  fact  often  operating  in  contravention  of  the  existing  national  laws.  Problems  of 
illegal  activity  and  fraud  are  outside  the  Community's  competence  and  can  only  be 
tackled  by  the  national  authorities  and  national  courts.  The  Commission  is,  however, 
currently  examining  the  question  of  unregulated  credit  intermediaries  to  assess  what 
further  action of a legislative or non-legislative nature is called  for. 

•  Difficulties  in the enforcement of financial  contracts 

A  large  number  of  complaints  and  petitions  lodged  with  the  Commission  and  the 
European  Parliament  refer  to  the  enforcement  of  a  contract  (both  national  and  cross-
border)  and the  interpretation  of the terms  of the  contract.  Where the problem  relates  to 
the  execution  or  the  interpretation  of  a  contract,  neither  the  Commission  nor  the 
Parliament  has the  competence  to  determine  the rights and  duties  of  contracting  parties. 
This remains the responsibility of the national courts. 

•  Lack of harmonisation in taxation 

Consumers  frequently  complain  that  the  advantages  of  "cross-border  shopping"  (price 
and  contractual  terms)  can be  offset  by the  fact  that the taxation  regime  remains  that  of 
the country  where they  have their residence. For example, a consumer  who, attracted  by 
advantageous  price  and  contractual  conditions,  subscribes  to  a  life-assurance  contract 
abroad  will  still  be  subject  to the tax regime  of his/her country  of residence. The  whole 
operation  can  therefore  become  far  less  attractive.  Furthermore,  in  some  countries,  this 
consumer  will not be allowed to deduct the premiums for  income tax purposes,  because 
the contract has been passed with a non-established  company. Indeed the Court of Justice 
has  stated9 that  a Member  State may  refuse  the deductibility  of  life  insurance  premiums 
paid  to  a  non-established  insurer  in  order  to  maintain  the  coherence  of  its  tax  system. 
However,  a recent  ruling  appears  to  qualify  the  scope  of that judgement  by  recognising 
the right of a borrower to obtain social advantages connected with bank loans even when 
the loan is contracted with a non-established credit institution10. 

The consumer  credit directive requires Member  States to ensure either that persons  offering  credit  or 
acting as an intermediary are officially  authorised or controlled and supervised  in their home  country, 
or that there are appropriate channels for consumers to obtain information  and make complaints. 
Judgement of 28 January  1992 in Case No C-204/90 Bachman, ECR 92 p.249. 
Judgement of  14 November  1995 in Case No C-484/93  Svensson-Gustavsson  (not yet published). 

9 
10 

11 

Progress  on  the  tax  front  has  been  limited.  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. 

•  Specific  problems in the field of compulsory civil liability motor insurance 

Some of the complaints which have been addressed to the Commission and the European 
Parliament deal with specific problems encountered by victims involved in a cross-border 
traffic  accident.  In  addition  to those  cases  referring  to  the  interpretation  of the  terms  of 
the contract. There are broadly two types of concern. 

First, there are traffic  accidents that fall within the scope of the green card system and the 
motor  insurance directives, i.e. accidents caused by a car visiting  another  Member  State. 
These  arrangements  are  designed  to  help  victims  to  obtain  compensation  and  appear  to 
work  fairly  well.  Secondly,  there  are traffic  accidents  that  are not  covered  by  the  green 
card  system,  i.e.  those  suffered  by  a  car,  its  passengers  or  any  other  persons  visiting 
another  Member  State,  and  caused  by  a  local  vehicle.  The  problems  faced  by  such 
victims in obtaining adequate compensation within a reasonable time (distance,  language 
problems, unfamiliar  legal and court procedures) have prompted the European Parliament 
to adopt a resolution asking for  specific measures. The Commission has already  informed 
the European  Parliament  that  it is considering  appropriate  action in order to tackle  some 
of the problems encountered by victims in obtaining  compensation. 

In  addition,  the  Commission  is  presently  examining  the  compatibility  with  Community 
legislation of compulsory uniform  "bonus-malus" tarification  systems.  -

12 

wmMmMimMÊ^ÊJSm^Ê^. 

The single market  in financial services  is still  at a relatively  early  stage of  development. 
For  banking  it has  been  in  operation  for  three  years, for  insurance  one  and  a half  years 
and only a few months for  investment  services. It is therefore  difficult  to draw  definitive 
conclusions  at this  stage. The  1996  Study  currently  underway  to assess the  early  results 
and impact of the single market could reveal gaps to be filled or problems to be resolved. 
The  results  of  this  study  will  be  available  later  this  year.  Where  gaps  or  problems  are 
encountered,  the  Commission  will consider  what response  is called  for  including,  where 
necessary, new legislation or changes to existing texts. 

The  distance  selling  of  financial  services  is  expanding  rapidly.  It  is  an  area  that  merits 
special attention. A proposal for a directive on distance selling in general has been tabled 
with  a  view  to  laying  down  simple  and  clear  rules  which  would  apply  to  all  new 
techniques  for  selling  products  and/or  services  at  a  distance.  In  order  to  deal  with  this 
rather  specific  situation,  the  Commission's  original  proposal  contained  a  three-level 
mechanism:  this  set  out  a  requirement  for  prior  information  before  the  conclusion  of  a 
contract,  written  confirmation  of  its  content  and  a  cooling-off  period  of  7  days.  After 
several  rounds  of  discussions  within  the  Community  institutions,  the  Commission 
decided  to  support the  exclusion  of  financial  services from this  directive,  as decided  by 
the  Council,  and  committed  itself to  a specific  examination  of this  matter.  A number  of 
issues are to be considered. They include the  following. 

The  distance  selling  of  financial  products  to  consumers  implies  a  special  need  for 
information.  In this context,  special  attention will be paid to the clarity  and  adequacy  of 
information  given to consumers before  and after  the conclusion of the contract. The need 
for written confirmation  will be assessed in this context. 

Another  important  issue will be the granting  of cooling-off  periods  in financial services. 
In  the  field  of  life  assurance,  Community  law  already  gives  the  consumer  the  right  to 
withdraw from  a contract within a specified  number of days. It will have to be examined 
whether  the  concept  of  the  cooling-off  period  should  be  extended  to  other  financial 
services, such as non-life  insurance and certain banking services. It is already accepted in 
the common  position  on the proposal  for  a directive  on distance  selling that  the right  of 
withdrawal  cannot  operate  where  the  price  of  goods  or  services  "is  dependent  on 
fluctuations  in  the  financial  market  which  cannot  be  controlled  by  the  supplier"  or  if 
performance  has begun, with the consumer's  agreement,  before  the end of the  seven-day 
period. 

Furthermore,  the  issue  of  inertia  selling  (supply  without  the  explicit  consent  of  the 
customer)  is currently  not  addressed  in the  existing  financial  services  legislation. Nor  is 
the question of the unsolicited  use of certain means of communication  at a distance (such 
as automatic calling machines and facsimile  machines) at present covered  by the existing 
financial  services  legislation.  For this reason,  it will  have to be examined  to what  extent 
the  offering  of  financial  services  to  consumers  without  their  prior  consent  gives  rise  to 
particular problems. 

13 

The  scale  and  complexity  of  distance  selling  appear  to  be  rapidly  increasing.  In  the 
insurance  field,  distance selling and direct marketing are extending  to all classes of non-
life  and  life  insurance.  In  remote  banking,  the  trend  is  increasingly  towards  computer 
banking,  with  cyber-money  and  electronic  purses  already  available.  In  the  securities 
sector  computerised  trading,  the  creation  of  wholly  electronic  markets  with  electronic 
clearing and settlement and remote market access may ultimately revolutionise  securities 
trading.  The  use  of  distance  selling  of  financial  services  is  currently  offered  and 
concluded  primarily  at  domestic  level.  However,  it  is  anticipated  that  cross-border 
business  could  expand  rapidly,  making  use  of  the  new  opportunities  offered  by  the 
Information  Society. 

The benefits  of the  single market  for  consumers  should  be  enhanced  with the advent  of 
new  electronic  services,  given  the  increased  competitive  environment  and  therefore 
improved  choice  and  value  for  money  that  will  result.  However,  such benefits  can  only 
come about if all clients - including consumers - and suppliers can place their trust in the 
underlying  regulatory  framework.  Although  the  sector  is  still  at  an  embryonic  level  of 
development,  the  future  for  European financial services with these new  communications 
possibilities  could be very promising  and the benefits  to consumers  could be  significant. 
In order to  ensure that these benefits  are indeed  secured,  the  Commission,  in  discussion 
with  interested  parties,  will  continue  to  follow  closely  all  regulatory  and  market 
developments  affecting  consumers as well as consumers' specific  needs in this  important 
field.  The  Commission  wants  to  encourage  innovations  in  distance  selling  methods  that 
would  benefit  consumers,  businesses  and  all  other  clients.  The  need  for  any  regulatory 
action will have to be properly assessed. 

Financial  services, whether  or not sold at a distance, are already  covered  by  Community 
rules  which  provide  consumer  protection.  In  some  cases  (for  example,  most  of  the 
directives  on  life  and non-life  insurance, banking  and UCITS), the  legislation  is  already 
implemented  by all Member States and its effects  are beginning to be felt.  In other cases, 
however, certain Member States are still implementing the legislation, with the result that 
its  impact  (notably  in  relation  to  the  investment  service  directive)  is  still  largely 
unknown. 

The  Commission  therefore  considers  that  it  is  opportune  at  present  to  examine  the 
position  of  consumers  with regard  to the development  of distance  selling. This does  not 
mean  that  action,  including  the  possibility  of  binding  legislation,  is  ruled  out.  The 
Commission  is committed  to  ensuring  that  consumers  of  financial  services  enjoy,  when 
buying  at  a  distance,  a  level  of  protection  which  is  equivalent  to  the  one  they  receive 
when  purchasing  other  goods  and  services.  In  order  to  assess  clearly  what  problems 
might  need  to  be  addressed  and  how  best  to  tackle  them,  the  Commission  invites 
comment  on  the  present  and  anticipated  development  of  distance  selling  of  financial 
services.  This  should  allow  the  Commission  to  assess  new  market  possibilities  for  the 
industry concerned and potential risks for the consumer and to consider whether and if so 
what further  initiatives, including legislative action, are called  for. 

14 

CONCLUSION 

This  Green  Paper  demonstrates  that  the  financial  services  directives  already  make  some 
provision  for  consumer  protection.  However  more  may  need  to  be  done,  given  the 
problems  already  identified  and the expected developments  in the cross-border  provision 
of  financial  services.  The  Commission  also  wishes  to  engage  in  a  wide-ranging  debate 
with all interested parties. It welcomes comment about the issues discussed  in this Green 
Paper,  in order to assess the need for  further  initiatives. Comment  should  focus  on those 
issues which call for Community action: 

• 

• 

• 

to  what  extent  are  consumer  interests  already  adequately  taken  care  of  under 
information, 
Community  and  national  law,  for  example  as  regards  consumer 
transparency, legal protection and redress mechanisms? 

to  what  extent  does  existing  legislation  provide  an  adequate  level  of  consumer 
protection in the specific case of the distance selling of financial services? 

are  consumer  interests  or the  operation  of the  single  market  prejudiced  by  differing 
national consumer protection  standards? 

•  what  are  the  obstacles  preventing  consumers  from  fully  benefiting  from  the  single 

market in financial  services? 

•  what  other  major  consumer  concerns  not  dealt  with  in  this  Green  Paper  should  the 

Commission be made aware of? 

• 

does  the  introduction  of  new  technologies  and  new  marketing  techniques  call  for 
additional consumer protection rules in the area of financial  services? 

Responses  to this Green  Paper  should  be made in writing  no  later than  15 October  1996 
to: 

The Director General - DG XV 
European Commission 
Rue de la Loi 200 
B-  1049 Brussels 
Fax: (+32 2) 295.65.00 
E-mail: John.MOGG(5)DG 15.cec.be 

In  addition,  the  Commission  will  be  organising  a  hearing  over  the  next  few  months  to 
permit interested parties to discuss the issues raised. 

15 

ISSN 0254-1475 

COM(96) 209  final 

DOCUMENTS 

EN 

09  10 

Catalogue number  : CB-CO-96-248-EN-C 

ISBN 92-78-04530-6 

Office  for Official  Publications of the European Communities 

L-2985  Luxembourg