Communication from the Commission to the Council and the European Parliament - E-commerce and financial services
Date: 2001-02-07
Institutions: European Commission
Subjects: consumer protection, data protection, electronic commerce, electronic money, financial market, single market

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 07.02.2001
COM(2001) 66 final

.

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE
EUROPEAN PARLIAMENT

E-COMMERCE AND FINANCIAL SERVICES

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE
EUROPEAN PARLIAMENT

ON E-COMMERCE AND FINANCIAL SERVICES

Executive Summary

The Lisbon European Council’s deadline of 2005 to establish an integrated European market
in financial services is central to the Community’s employment and growth agenda.

Providing an environment conducive to the development of e-commerce in the Community is
of crucial importance in meeting that objective. The e-commerce Directive is designed to
ensure that on-line services can be freely provided throughout the Community. Its cornerstone
is the “internal market clause”, which enables on-line providers to supply services throughout
the Union based on the rules of the Member State where they are established. The Directive
provides for a number of derogations from the internal market clause and creates a distinct
regime in respect of electronic cross-border trade from that using other distance selling
modes.

How the e-commerce Directive interacts with existing financial services legislation is of
central significance to the development of a clear and coherent policy for cross-border trade in
financial services. We must: build on the approach set out in the directive to establish a fully
functioning internal market for retail financial services; secure coherence between financial
services legislation and the e-commerce Directive; secure coherence also between on-line and
more traditional provision of financial services; and examine how the internal market clause
will apply in areas where national rules significantly diverge, to avoid exposing consumers
and investors to legal regimes that may differ substantially from their own.

To assist Member States and service providers, and to ensure compliance with the e-
commerce Directive, the Commission will conduct an analysis, in the course of this year (for
review in 2003), indicating certain types of national provisions that Member States may apply
to incoming services. To prepare this analysis, the Commission will undertake a review,
paying particular attention to the way the derogations in the directive will be applied to on-
line financial services offered from another Member State. Any restriction to the free
provision of services, which can be justified under the derogations by the need to protect
consumers and investors, must not be disproportionate with regard to the Union’s objective of
free movement of information society services.

More generally, there are significant divergences in national rules and they fragment the
financial services internal market. A new policy framework will be developed, covering three
policy areas:

-

a programme of convergence covering contractual and non-contractual rules. To
pave the way for a country of origin approach to work in practice covering all
financial services sectors and distance trading modes, further convergence is required
in core marketing rules and at the service or sector specific level to provide high
quality and comparable information to consumers. For contractual obligations,
consideration will be given to how retail financial services can be freely offered
throughout the Community in a framework of legal certainty;

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-

-

targeted steps to encourage consumer confidence in cross-border redress and
internet payments. A Community-wide network of financial services complaints
bodies will be established to provide effective and rapid out of court redress on a
cross-border basis. Steps will be taken to improve security and provide consumers
with legislative safety when making payments on-line within the Union;

enhanced supervisory co-operation. Host
increasingly
dependent on the authorities in the country where the provider is established. The
Commission, together with Member States, will keep the arrangements for the
monitoring of cross-border services under continuous review.

state authorities are

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COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE
EUROPEAN PARLIAMENT

E-COMMERCE AND FINANCIAL SERVICES

1.

INTRODUCTION

The Financial Services Action Plan1 sets out the Commission’s goal of building by 2005 a
fully integrated European financial services market to complement the introduction of the
euro. Achieving that objective will significantly benefit
the Union: more jobs, stronger
economic growth and a dynamic, innovative financial services industry that will better serve
the consumer’s and investor’s interests and the development of European companies, large
and small. At the wholesale level a more efficient allocation of capital will lead to lower
borrowing costs for business and higher investment and pension returns for citizens. At the
retail level direct access to cross-border providers has the potential, provided consumers have
sufficient confidence, to lead to increased choice and competition.

New technology is already having a profound impact on the financial services industry. It is
revolutionising the operation of, and access to, wholesale markets; it is transforming cross-
border service provision; and acting as a catalyst for the creation of new financial services and
new business models, often triggering new alliances
involving telecommunications,
information technology, retail, and financial services providers.

An environment conducive to the development of both the European Union’s financial
services industry and the information society is of vital importance for the Union’s future
competitiveness. The Commission recently issued a Communication outlining its strategy to
respond to the Lisbon Council’s call for urgent action to harness the benefits of e-commerce2.
The Lisbon Council also set the completion of the internal market for financial services as a
priority, in particular by implementing the Financial Services Action Plan.

The present Communication examines the steps that are required to tackle the interface
between e-commerce and financial services, end the fragmentation of the market for retail
financial services and boost consumer confidence. Its main focus is on business to consumer
issues where barriers to the establishment of an integrated market tend to be greater than with
the provision of services to business or professional clients (business-to-business).

The defining characteristic of e-commerce is its borderless nature. For the first
time
consumers themselves can initiate contacts with service providers throughout the Community
despite the barriers that remain to the cross-border provision of financial services. Financial
services are, in theory, perfectly adapted to e-commerce. However, many consumers remain
hesitant about shopping across borders, particularly doubting the use of the internet. Concerns
such as these need to be addressed to foster consumer confidence. As well as making it as
easy for providers to sell across borders as domestically,
it has to be as attractive for
consumers to buy across borders as domestically, if the internal market is to reach its full
potential.

Much of the Union’s existing legislative framework was developed before the on-line
revolution. There remain diverging rules governing consumer and investor protection
(contractual and non-contractual) and thus fragmented markets persist, depriving European
consumers of the benefits of increased choice, more competitive prices and economies of
scale.

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The Union needs to update its legislative and non-legislative policy framework. At its core we
need a transparent and coherent legislative environment for cross-border services, which
delivers an effective prudential and consumer protection regime that fosters consumer
confidence and systemic stability. The challenge is to develop a policy for financial services
in line with the demanding Lisbon European Council deadline of 2005.

To achieve this objective the Commission explores three policy areas in the Communication,
particularly in the context of the adoption of the electronic commerce Directive which has to
be implemented by 17 January 2002:

• Policy Area I: to adapt present rules and regulations, notably to bring about convergence in
for both contractual and non-contractual

consumer and investor protection rules
obligations;

• Policy Area II: to develop measures to provide secure payment systems and out-of-court

redress on a cross-border basis;

• Policy Area III: to achieve enhanced supervisory cooperation that can meet the new cross-

border challenges.

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2.

LEGISLATIVE FOUNDATIONS - THE COMMUNITY’S E-COMMERCE POLICY

Three years ago, the Commission’s initiative in electronic commerce3 defined the broad lines
of the Commission’s policy. Good progress has been made since then. A series of directives
including those on a transparency notification procedure, electronic
has been adopted,
signatures, and electronic money. To speed up the provision of cheaper and faster internet
access, the Council has reached a political agreement on a regulation to unbundle the local
loop. The directive on copyright and related rights in the information society is also near to
adoption. And the eEurope initiative has succeeded in raising the information society to the
top of the Union’s policy agenda.

Scope and relation of the e-commerce Directive with sectoral directives

A coherent and appropriate legislative framework is essential to develop electronic commerce
within the European Union. Of central importance is the recently adopted e-commerce
Directive4. That directive is designed to ensure that information society services can be freely
provided throughout
lays the foundations on which further policy
the Community. It
developments, including those for financial services, will be based.

The e-commerce Directive is a horizontal
framework directive that applies to all
information society services5: those provided at a distance and by electronic means (so-called
“on-line” services). Off-line activities are not within the directive’s scope even if connected
with an “on-line service”. Thus where financial services are provided in part off-line and in
part on-line, different legal regimes will be applied to each part. So, when a service is
promoted on-line but provided off-line, only the on-line promotion is covered by the e-
commerce Directive. However, the Commission’s overall objective is to establish a coherent
set of internal market rules for all modes of trade (on or off line). Several initiatives contained
in the Financial Services Action Plan, notably the review of the Investment Services
Directive6 and the proposal for a Directive on the Distance Marketing of Financial Services7
are designed to secure that coherence.

The e-commerce Directive applies only to service providers established within a Member
State8. It does not cover service providers from third countries nor does it allow them to
benefit from the free movement of information society services. Each Member State may
define its policy with respect to those third country service providers, provided that policy
conforms with international trade agreements. The Union may well need to develop a co-
ordinated approach to third country providers.

The e-commerce Directive also does not affect the existing level of protection resulting
from general interest objectives that are set down in existing Community law9, including
those relating to the level of consumer protection. However national measures cannot restrict
the free movement of information society services as defined in the e-commerce Directive.

The e-commerce Directive complements sector-specific financial services legislation,
including the information requirements in the Consumer Credit Directive, certain insurance
directives, and the proposed Directive on the Distance Marketing of Financial Services. The
information requirements in the e-commerce Directive supplement others established by
Community law. Importantly, where the proposed Distance Marketing Directive does not
prescribe information requirements (notably in respect of promotional sites which do not offer
the possibility to transact on-line), the provisions of the e-commerce Directive play a crucial
role.

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Central to the understanding of the e-commerce Directive is the so-called “internal market
clause”. This enables information society providers to supply services throughout the Union
on the basis of the rules and regulations prevailing in the Member State in which they are
established (ie. country of origin). The e-commerce Directive also removes legal obstacles:
complementing the electronic signatures Directive, it obliges Member States to ensure that
their legal system allows contracts to be concluded by electronic means.

The e-commerce Directive seeks to guarantee the freedom to provide information society
services in accordance with Article 49 of the Treaty. Member States must ensure that service
providers established on their territory comply with the national requirements falling within
the directive’s “co-ordinated field”10. Member States may not restrict the freedom to provide
services – that is to say they may not take measures which hamper or otherwise make less
attractive the provision of information society services from other Member States. Such
restrictions are justifiable only if they are covered by one of the derogations in the Annex to
Article 3 of the directive or are notified by a Member State under Article 3(4-6).

Policy objectives of the directive

The approach developed in the e-commerce Directive reflects the new reality of electronic
commerce. Services available over a web-site are automatically and simultaneously accessible
in all Member States. It would be unjustifiably burdensome if a financial service provider had
to comply with fifteen different sets of rules and regulations. If that were the case, service
providers would be forced to design different services in order to comply with different
Member State requirements, discouraging the use and take up of e-commerce throughout the
European Union. Customer choice would be limited. Worse still, providers may tend to
concentrate on the major markets, to the detriment of the smaller Member States. And EU
consumers would look elsewhere in the world to trade electronically. The existence of a wide
variety of legal rules and practices is also likely to undermine attempts to convince consumers
to be confident in conducting transactions outside their national market or with unfamiliar
brands.

On-line services can be provided to other Member States without any physical presence or
activity. This can raise concerns about how such services will be satisfactorily monitored or
controlled. Given the nature of such on-line services, control may be exercised more rapidly
and more efficiently in the Member State where the service provider is established and from
which it operates its website (the Member State of origin). Another Member State could, in
practice, find it difficult to enforce measures against a service provider located outside its
borders. The state where the service is received will therefore rely on measures taken by the
authorities in the Member State of origin.

Mutual confidence and cooperation between Member States is thus of central importance and
the e-commerce Directive, through Article 19, obliges not only the Member State of origin to
exert efficient control for services provided to consumers in other Member States. It also
provides the Member State where the service is received with the right to obtain any relevant
information.

Derogations to the internal market clause of the e-commerce Directive

There are significant derogations in the e-commerce Directive from the internal market
approach described above. They fall into two categories – first, general derogations and,
second, specific case by case derogations.

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A number of general derogations (listed in the directive’s annex) reflect different legal
solutions provided by other general instruments and include certain provisions that are
specific to existing Community financial services legislation. These include the provisions
laid down in the insurance directives regarding the taking up and the carrying out of insurance
business11, the advertising of UCITS12 and the issue of electronic money by institutions which
do not benefit from a European passport 13. More derogations from the internal market clause
had been sought by some Member States, in particular for financial services and more
specifically in respect of investment services. However, the Council and the Parliament
agreed to limit the number of derogations to those originally proposed by the Commission.14

There are other general derogations which relate to the law applicable to contracts and which
are important for the provision of financial services. These concern the freedom of the parties
to choose the law applicable to their contract, the law applicable to contractual obligations in
consumer contracts, and the formal validity of contracts creating or transferring rights in real
estate.

Essentially the parties are free to choose the law applicable. In the absence of choice, the law
of the state to which the contract has the closest connection will govern the contract. It is
presumed that this is the state where the party performing the characteristic obligation is
established. An exception to these basic rules is for consumer contracts so that when the
acquirer of goods or services under a contract is a consumer (i.e. acting outside his trade or
profession), an express choice of law cannot exclude the protection of the ‘mandatory rules’
of the law of the country of his habitual residence; and in the absence of a choice of law, the
whole contract is governed by the law of the consumer’s habitual residence. However the
application of this exception is subject to the condition that the conclusion of the contract was
preceded by a specific invitation addressed to the consumer or by advertising in the
consumer's Member State, and that the consumer had taken in his Member State all the steps
necessary for the conclusion of the contract. The effect of the derogation in the field of
contract law is to allow Member States other than the State in which a service provider is
established to apply rules which restrict the freedom to provide information society services,
subject to compatibility of such measures with Article 49 of the EC Treaty.

The second category of derogation permits a Member State, on a case by case basis, to apply
restrictions to an information society service from another Member State under the conditions
outlined in Article 3(paragraphs 4 to 6) of the e-commerce Directive15 which allows Member
States to take measures to protect general
in particular to protect
consumers and investors. This derogation is subject
to a Community procedure, which
requires,
the proposed action to the Commission for
examination, in particular to avoid cases of disproportionate and unjustified restrictions to the
free movement of information society services.

the notification of

interest objectives,

inter alia,

An outline of the Commission’s approach in the coming years

The application of the e-commerce Directive from 17 January 2002 raises important issues if
the Community is to maintain a coherent legislative framework for an internal market in
financial services. First, the directive provides for a number of derogations from the internal
market clause, concerning financial services, which merit review in order to establish a fully
functioning internal market in retail financial services. The objective of that review must be to
deliver a sufficiently high degree of convergence in consumer protection rules to pave the
way for a country of origin approach. Second, where the internal market clause applies, it
creates a distinct regime in respect of electronic cross-border trade from that using other
distance selling modes. This may create an uneven playing field between trading modes. And

8

third, the internal market clause will apply in some areas where national rules continue to
diverge significantly, notably, in non-harmonised areas. This may expose consumers and
investors to regimes which may differ substantially from that with which they are familiar.

Consumer confidence requires that there are sufficiently harmonised levels of consumer
protection throughout the Union – so that they are as effectively and transparently protected in
other Member States as they are in their own. Similarly, suppliers need to be able to operate
across the Union without being confronted with widely differing legal requirements. This will
clearly require further convergence of national rules particularly in key areas such as conduct
of business rules for investment services and pre-contractual
information requirements
covered by the proposed Directive on the Distance Marketing of Financial Services.

To achieve such convergence will require a mix of different policies: legislative proposals to
guarantee high levels of harmonised consumer protection throughout the Union, and where
appropriate and necessary the possibility for mutual recognition within such a framework by
Member States of any other respective arrangements. These issues are explored more fully in
the next section along with consideration of the impact of the e-commerce Directive during
the limited period required to deliver that policy mix.

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3.

POLICY AREA I: ENSURING COHERENCE IN THE LEGISLATIVE FRAMEWORK FOR
FINANCIAL SERVICES

The Union’s financial services legislation is in large part geared toward providing financial
institutions with access to Community markets on the basis of a European passport. However,
in practice, firms operating in a number of Member States tend to do so through branches
which usually comply with the rules of the Member State where the branch is based. This
tends to reinforce market fragmentation. Moreover, where national rules diverge significantly,
notably in non-harmonised areas, a host Member State usually applies its domestic rules for
reasons of general good in respect of incoming services.

The inherent borderless nature of e-commerce brings a new dimension to the operation of the
internal market. Consumers have access to the providers of services throughout
the
Community. However, on-line supply and demand for cross-border financial services will
only develop in an environment of legal clarity and certainty that fully safeguards the interests
of consumers and investors. To produce such an environment means addressing the issues that
arise from the development of e-commerce, and in particular the introduction of the e-
commerce Directive. This requires a major policy initiative for the financial services sector.

The Commission will launch a three-strand policy to secure increased levels of convergence
in respect of consumer and investor protection rules. First, a strategy of high level
harmonisation will be introduced in respect of core marketing rules. Second, steps will be
taken towards achieving further convergence in sector-specific or service-specific rules, in
particular to standardise the content and presentation of the information consumers receive, to
allow easy comparison of prices and conditions between cross-border and domestic services.
To pave the way for a country of origin approach to work in practice covering all financial
sectors and distance trading modes, this convergence of rules must be at a sufficiently high
level. And thirdly, the Commission will undertake a review of national rules relating to retail
financial services contracts. This review will provide an analytical basis for possible future
measures aimed at creating legal certainty in relation to cross-border trade of financial
services. Separately, in response to the European Council of Tampere and a request of the
European Parliament, the Commission is preparing a Communication launching a debate on
the possible harmonisation of contract law in order to improve the functioning of the internal
market.

An ambitious policy such as this will, inevitably, take time to develop and require a high
degree of political commitment. Given that the e-commerce Directive will come into effect on
17 January 2002 the Commission will conduct an analysis on the way the directive should be
applied pending further convergence. This analysis is described later in this section.

Legislative and Co-Regulatory Initiatives

This section sets out on-going and new initiatives that are designed to achieve high levels of
harmonised protection within the Community. They fall into horizontal initiatives, sector-
specific policies, and possible future measures in the area of contract law.

Strand I

Horizontal Issues

Commercial Communications: The services involved in commercial communications

(i)
include advertising, direct marketing, sponsorship, sales promotions and public relations.

10

They are already subject to some harmonisation at Community level: misleading advertising
has been banned, comparative advertising has been regulated and strict conditions have been
set for TV advertising in the Television without Frontiers Directive. Television advertising –
including of financial services – is submitted to the application of the country of origin
principle (where the broadcaster is established). A similar approach is also taken in the e-
commerce Directive which includes additional transparency requirements for all on-line
advertising. Commercial communications are required to be identifiable as such; make clear
on whose behalf the commercial communication is being undertaken; and set out clearly and
unambiguously the conditions either for qualifying for promotional offers (such as discounts,
premiums and free gifts) or for entering promotional competitions. The Commission is
examining these issues to establish whether or not further initiatives are necessary in this area.

(ii) Marketing

Significant divergences remain in the national rules that govern the marketing of financial
services. They are addressed in the proposed Directive on the Distance Marketing of Financial
Services, in particular through harmonisation of key marketing rules in respect of all modes of
marketing (including withdrawal rights, cold calling and the provision of generic information
prior to the conclusion of the contract). The Commission calls for the directive’s rapid
adoption to demonstrate the Union’s commitment to consumer protection, especially in the
on-line environment.

Strand II

Sectoral Issues

Further initiatives will also be needed at the sectoral or service-specific level. Recent analyses
of the divergences in prior information requirements at the national level have identified a
number of priorities for further work (set out in Table 1). An analysis of Member States’
conduct of business rules has also revealed significant differences throughout the Community
in the level of protection afforded to retail investors.

A number of initiatives – some underway, some new – are targeted at improving convergence
of consumer and investor protection rules. They are briefly discussed below. In most cases,
these initiatives are in line with the strategy outlined in this Communication. Where they are
not, action will be taken. With regard to information requirements concerning the most
commonly used financial services, the Commission believes the consumer to be best served
with as high a degree of standardisation as practicable to facilitate understanding and
comparison between service providers.

(i) Banking

For mortgage credit, a European voluntary code of conduct for the marketing of home loans
will shortly be agreed between consumer and industry representative organisations. It will aid
comparison of cross-border offers. The Commission will shortly issue a Recommendation
calling for its implementation.

For consumer credit, the Commission will propose a revision to the 1987 Consumer Credit
Directive. This will widen its scope, establish a high and exhaustive level of consumer
protection, and streamline the existing rules on Annual Percentage Rate of Charge (APRC).
That approach will complement the introduction of generic prior information requirements in
the proposed Distance Marketing Directive.

11

Table 1: Additional information requirements - breakdown by financial service

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300

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200

150

100

50

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In the context of the negotiations on the Distance Marketing Directive, Member States submitted a list
of additional national prior-information requirements. These are indicated by financial service in the
above chart. Some of the greatest divergences occur with respect to non-harmonised funds, UCITS,
life assurance and mortgage credit.

(ii) Investment Services

investors to enter

The Investment Services Directive (ISD) imposes host country requirements on services
provided within the territory of the host country in a number of areas, key amongst which are
the conduct of business rules under Article 1116. In its Communication on Article 11 of the
ISD17, the Commission concluded that, while national conduct of business regimes offer
sufficient protection to allow professional
into investment service
transactions subject only to the rules in force in the home country of the service provider,
significant differences persist in the level of protection afforded retail investors by national
rules. Thus host countries impose local business rules for such investors in accordance with
Treaty principles and secondary legislation. However, the widespread application of host
country rules can also act as a potential barrier to the cross-border provision of investment
services. The task of designing and implementing an amended ISD must thus ensure that there
is a smooth transition to a home country approach. This will be based on sufficient
convergence in the content and enforcement of national conduct of business rules for retail
investors. A (non-binding) process of approximation of the substance of conduct of business
rules for both retail and professional investors is already well advanced within the Forum of
European Securities Commissions (FESCO). The Commission’s analysis will
take full
account of this work.

For UCITS (harmonised funds), the second proposal introduces a simplified prospectus
based on a maximum harmonisation approach for the marketing of harmonised funds.

For Prospectuses, the Commission will shortly propose a directive to introduce an effective
single European passport for issuers based on an obligation to accept the prospectus approved
by the home competent authority. Until the date of the entry into force of this new directive
the existing directives on listing particulars (80/390/EEC) and public offer of securities
(89/298/EEC) will be fully applicable.

12

(iii) Insurance

Greater convergence of pre-contractual information is needed for the insurance sector. For
non-life insurance, the need for, and the content of, specific rules on prior information will
be explored. For life assurance, the Commission will consider whether further rules are
needed in addition to existing rules on information requirements which currently provide for a
minimum harmonisation approach. The proposed Insurance Intermediaries Directive already
sets out minimum requirements required for potential customers (mainly concerning the
relationship the intermediary has with insurance companies, the obligation to clarify the needs
of the customer and the reasons underpinning the advice). The Commission will consider
whether these requirements need to be strengthened by full harmonisation or mutual
recognition.

(iv) Non-harmonised areas

investment purposes or similar market

The Commission does not envisage action for those non-harmonised fields that relate,
primarily, to the provision of services to professionals (for example the supply of analytical
research for
there is no
comprehensive list of other non-harmonised areas, non-harmonised funds and certain non-
core services under the ISD are of particular concern. They include financial advisors and/or
financial planners, commodity brokers, and dealers and market-makers on futures and options
markets. The Commission will examine, on the basis of input from Member States, whether
further initiatives for these, and other non-harmonised areas, are necessary.

information). Whilst

Strand III

Reviewing Financial Service Contracts

Financial services - particularly banking and insurance services - are contract based (for
example, the terms of a bank loan - fixed or variable interest, duration or possibility for early
repayment). The contractual terms and conditions determine, along with the price, what
makes a product more (or less) attractive to consumers and investors. Over time, Member
States have developed diverging contractual rules for the protection of consumers and
investors and they play a significant role in determining the shape of the financial service
offered. Services accepted as standard in some Member States (for example, an interest
bearing current account) may be illegal in others. Such rules, if not essential for the protection
of the general good, inhibit the establishment of an internal market in retail financial services.

The Commission will carry out a review, the objective of which is to minimise the risk of
market fragmentation from many different sets of mandatory obligations relating to consumer
contracts18. In the review, how consumers access retail financial services governed by the law
of another Member State will be examined. As with marketing rules, further convergence of
consumer protection measures may be needed in order to balance the need for greater
uniformity between convergence of national rules with the need to maintain product
innovation and choice.

Application of article 3(4)

Until an adequate level of convergence of national rules is achieved, Member States may, in
certain areas, need to continue to apply their domestic rules to consumers and retail
investors.However, that application would have to be in conformity with the derogations
provided in the e-commerce Directive, in particular the derogation under Article 3.

13

To assist Member States and service providers and to ensure compliance with the directive,
the Commission intends to identify certain types of legal provisions in respect of which
Member States may wish to use the derogation. The Commission will consult Member States
and interested parties during the course of 2001. The objective of this consultation is to
analyse the divergences in the level of protection between certain national provisions which
Member States might wish to continue to impose on incoming services, and to facilitate the
examination of such provisions with respect
to their proportionality under Article 3
(paragraphs 4-6).

This analysis would, of course, not be legally binding nor prejudice any interpretation by the
ECJ, nor affect the derogations under the electronic commerce Directive. It will, however, be
of great assistance in the assessment of the necessity and proportionality of certain measures
which may be taken by Member States under Article 3(4-6). It will thus aid Member States in
identifying which, if any, of their national consumer and retail investor protection rules they
wish to apply to incoming services and to inform service providers accordingly.

Such analysis would evolve with the operation of the Directive, with market developments,
progress in achieving greater convergence and in the light of the 2005 deadline set for the
completion of the Financial Services Action Plan.”

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4.

POLICY AREA II: BUILDING CONSUMER CONFIDENCE IN REDRESS AND INTERNET
PAYMENT SYSTEMS

This section briefly considers a number of additional measures (many non-legislative)
designed to enhance consumer confidence in the provision of financial services on-line. They
fall under two broad headings. First, the need for effective and rapid access to redress in the
event of problems. Second, consideration of a number of concerns specific to the use of new
technology, including the security and reliability of internet payments.

Cross-Border Redress

Consumers must have both confidence and trust in cross-border transactions in financial
services. E-Commerce has transformed the current situation. Consumers and providers from
different countries come together in a single market. Access to effective cross-border redress
in the event of a dispute is of fundamental importance. All consumers must have access to
justice through a Member State’s legal system. The recent transposition of the Brussels
Convention into a Community regulation19 should provide the consumer, subject to certain
conditions, with a choice of jurisdiction in the event of a dispute. However, the cost of
litigation compared to the value of the product or service, as well as the time and effort
frequently involved in mounting court proceedings, tend to make action through the courts a
last resort.Therefore, if consumers are to have sufficient confidence in other markets than
their own, they need assurance that if things go wrong they can seek cheap, simple and
effective redress.

For those consumers that do not obtain satisfaction from the provider, some form of third
party resolution is essential. Alternative Dispute Resolution (ADR) systems could offer an
effective way of meeting that need, accepting that such systems must not compromise access
to judicial review in a court of law. The Lisbon European Council called for the establishment
of ADR at Community level to promote consumer confidence in e-commerce within the EU.
The pivotal role of ADR in an on-line environment has also been recognised internationally
(for example, by the OECD and the Global Business Dialogue). There are encouraging
market driven ADR initiatives (for example,
those being developed by Eurochambers,
Webtrader, ECODIR, Cybercourt, e-Mediator and ODR.NL).

The Commission has also launched a number of initiatives. They include the EEJ-NET
(European Extra Judicial Network) which establishes a network of ADRs notified to the
Commission as applying with core principles20 to guarantee their fairness and effectiveness.
The EEJ-Net will provide a communication and support structure made up of national contact
points (or ‘Clearing Houses’) established by each Member State. If a consumer has a dispute
with an enterprise he can then contact his Clearing House for advice and support to assist him
in filing a complaint with a notified body where that enterprise is located. In cross-border
disputes the Clearing Houses will address existing barriers to seeking extra-judicial redress
such as language differences and lack of information and then pass the complaint through the
network to the appropriate body.

For financial services, FIN-NET (FINancial Services complaints NETwork) has recently
been launched providing a specific redress network for disputes involving financial services.
It
links together the schemes that are responsible for alternative dispute resolution for
to form a Community-wide network. Unlike other
financial services at national
commercial areas, there are structures already in place in every Member State. Thus FIN-NET
builds on an established tradition of providing out-of-court solutions using the knowledge and

level

15

experience at national level. Consumers can seek redress in a flexible manner, particularly
through redress bodies in their own country. Information exchange between redress bodies is
enhanced and participants have agreed on procedures of cooperation throughout the Union.
The form of each participating scheme varies, but
it must comply with Commission
Recommendation 98/25721 which sets out principles applicable to bodies responsible for out-
of-court settlement of consumer disputes, and guarantees a fair and impartial process that is
reasonably comparable to court proceedings. The practical day-to-day co-operation of the
network is underpinned by a voluntary Memorandum of Understanding (MoU) between
participating schemes. The MoU sets out the basic principles of the cooperation and its
procedural framework.

The Commission will continue to encourage the development of redress bodies at national
level and their membership of FIN-NET. Separately, the Commission is funding a research
programme to develop on-line methodologies for use by cross-border networks in order to
make the access to and operation of ADR as efficient as possible.

Secure Internet Payment Systems

Secure electronic payments are essential for the development of business to consumer e-
commerce. Today, there is no widespread, effective, secure and cheap way to make cross-
border internet payments. Consumers lack confidence in the security of internet payments22 -
a concern that has been heightened by a number of high profile errors in the provision of on-
line financial services.

There is Community legislation designed to provide consumer protection in the area of
electronic payments (see Table 2). Payment cards are currently the most commonly used on-
line payment instrument whilst other forms of electronic payment system include those based
on digital cash on the internet (“cyber cash”) and those on book entries23. The present
legislative framework provides consumers with some protection but it does not meet many of
the concerns associated with on-line trade within the Community24. The patchwork of
national provisions similarly accentuates the risk of legislative fragmentation in the internal
market. Improvements are needed in technical security and in the establishment of a
legislative “safety net” in the event of payment problems.

On technical security the Commission’s e-Europe initiative25 promotes the use of new
technologies, including a smart card action plan, and plans further work on identification and
authentication techniques. As smart cards are a personal possession, they are perceived to be
private and secure and thus a trusted means of holding and transferring data. Smart cards also
provide access to electronically based applications and services. The proposed Framework
Decision on combating fraud and counterfeiting proposes the criminalisation of these
activities throughout the Union. In a linked Communication, the Commission proposes a
series of measures (study of security features of new payment solutions for e-commerce,
exchange of information, training, and provision of educational material) to deter fraudsters
and raise consumer confidence.

Building consumer confidence in electronic payments may well require a legislative
framework that provides reassurance that a refund will be made if problems occur. In the US,
under framework legislation, the major international payment card companies play a central
role in meeting consumer protection objectives through their “chargeback” system26. In the
Union, with a few exceptions, such industry schemes are not generally grounded in Member
State law, but instead are governed by the contract between the card issuing bank and the
merchant’s bank under the card company scheme. The decision on whether to trigger a

16

chargeback on a cardholder’s complaint rests with the issuing bank. There is thus a lack of a
coherent legislative basis to support refunds in the internal market. This undoubtedly inhibits
chargeback from operating, particularly in respect of cross-border transactions.

Table 2: Consumer protection in the area of payment

Recommendation 97/489/EC27 covers transactions by electronic payment instruments. It includes
provisions on liability in case of unauthorised transactions and covers electronic transfer of funds,
including home banking.

Directive 87/102/EEC28 on consumer credit provides that
the consumer can, under certain
circumstances, exercise claims against the grantor of the credit (“connected lender liability”). It does
not apply to debit or charge cards.

Directive 97/7/EC29 protects consumers in respect of distance contracts and provides that they have the
right to request cancellation and be refunded with their payment where fraudulent use has been made
of their payment card. However the scope of payment protection offered is limited and wider issues
concerning remote payments have arisen. For financial services, similar protection is envisaged in the
proposed Directive on the Distance Marketing of Financial Services.

Directives 2000/28/EC30 & 2000/46/EC31 on e-money provide that electronic money may be issued
only by supervised institutions meeting certain legal and financial conditions, ensuring technical
security.

Directive 97/5/EC32 on cross-border credit transfers contains rules regarding the execution of cross-
border transfers and transparency of conditions.

The Communication on fraud prevention33, inter alia, calls for use of the highest economically viable
level of security for payment instruments and establishes a Fraud Prevention Action Plan setting out
comprehensive preventative measures aimed at reducing fraud.

The Proposed Framework Decision34 proposes harmonisation of certain Member State criminal law
provisions relating to fraud and counterfeiting involving all non-cash means of payment so that they
are recognised as criminal offences throughout the Union and punished with appropriate sanctions.

Directive 99/93/EC35 establishes rules on the legal
certification procedures.

recognition of electronic signatures and

Directives 95/46/EC36 and Directive 97/66/EC37 - the Data Protection Directives - deal with the
protection of individuals with regard to the processing of personal data and the right to privacy in the
context of electronic commerce.

Legislative backing for a refund system that establishes a right and basic conditions for
refunds in the event of non-authorised transactions and non-delivery on a Community level is
needed urgently. Such an approach would be reinforced with other non-legislative measures.
These could define the objectives and framework on which the industry could decide how
best to meet their obligations, for example, by building on existing chargeback schemes.
There should be an active involvement of the payments industry (particularly when there is a
itself - a processing error or fraudulent use of the payment
problem with the payment
instrument on the internet). Industry also needs to be involved in resolving disputes between
the consumer and the merchant about the non-delivery (but not quality) of the product or
service for which the consumer has already paid. The burdens on those involved in the
payment process also need to be kept to a minimum. Systems that enable merchants in one
Member State to verify the identity of consumers in another are essential if abuse of a refund
system is to be minimised.

17

5.

POLICY AREA III: ENHANCED SUPERVISORY COOPERATION

The legislative convergence of regulatory requirements and their enforcement in the internal
market has been underpinned by a comprehensive system of memoranda of understanding
between the Union’s financial supervisors as well as cooperation bilaterally and through
existing Community committees38. These arrangements provide the basis for prudential
supervision in the internal market
in financial services. Host country supervisors are
increasingly dependent on the supervisor in the country of establishment of the financial
service provider to monitor the provision of financial services at source. The changes that are
occurring as a result of e-commerce necessitate the closest monitoring and appropriate
adaptation of those arrangements to ensure that they remain equal to the task of ever closer
the interim report of the Lamfalussy Group 39
integration in financial markets. Indeed,
proposed institutional changes in rule making and implementation in order to adapt to rapid
market developments.

Responsibility for Prudential Supervision and Applicable Prudential Framework

The e-commerce Directive does not change the existing arrangements for the prudential
supervision of financial service institutions. The directive places responsibility for the
enforcement of rules with the public authorities in the country of establishment of the
information society service provider40. Generally, this coincides with the “home country” as
prescribed in the financial services directives. For insurance, the derogation from Article 3(1)
and (2) leaves the existing approach to supervision unchanged. For banking and investment
services, however, the definition of establishment in the e-commerce Directive might not in
all cases be the same country as the “home country” within the meaning of the sectoral
directives.

This is true in respect of how branches are supervised. Although, the e-commerce Directive
places responsibility for the enforcement of rules with the public authorities in the country of
establishment of the information society service provider, for branches, this does not affect
transfers of responsibilities between Member States which are dealt with by existing financial
services legislation. So, the existing transfers of competence from host to home country (for
example, of licensing, prudential control, deposit guarantee, and supervision of branches)
remain entirely valid. Consequently, as a result of previous express transfers made by the EU
sectoral directives, prudential control of branches remains with the "home country" in the
meaning of these sectoral directives.

Oversight of the firm/client relationship

At the Community level, banking and insurance supervisors are concerned principally with
prudential
issues. Responsibility for handling complaints in the firm/client relationship
frequently rests with banking and insurance Ombudsmen. Securities supervisors or delegated
authorities oversee conduct of business rules which deal with the relationship between the
provider and the client. A coherent approach in dealing with cross-border trade needs to be
developed: rules, and the responsibility for their enforcement, should increasingly shift to the
country of origin of the service provider. However, whilst this switch is taking place, existing
procedures for handling oversight of conduct of business rules in cross-border cases will
remain. Those rules will also be updated in line with the Commission’s Communication on
Article 11 of the ISD.

18

Notification Procedures

Enhanced cooperation between public authorities will be required to ensure effective control
of cross-border on-line services. Article 19 of the e-commerce Directive is intended to
provide an appropriate framework for that cooperation: Member States are required to have
adequate means in place to supervise at source the provision of all e-commerce cross-border
services (including financial services). Article 19 also provides for the transfer of information
between public authorities concerning that cross-border provision.
sense it
complements procedures for cooperation foreseen in a number of sectoral directives. The
Commission will discuss with Member States where and how the cooperation provided for
under Article 19 might be developed to ensure effective oversight of on-line cross-border
trade in financial services. However, it is anticipated that the need for notification procedures
will decrease as national rules converge. The need for and form of notification procedures will
be considered as part of the 2003 review of progress in that convergence.

In this

Money Laundering

Under Community law, a home country approach is taken for money laundering requirements
in cross-border cases41. In the case of on-line transactions, such requirements are more
difficult to meet and therefore, as the Commission’s proposal for a revised directive on money
laundering recognises, carry a greater risk given the absence of face-to-face contact. In fact,
many Member States require that service providers receive documentation from, and in some
cases meet with, potential depositors.

There is thus an urgent need to examine the risks associated with on-line and cross-border
transfers. Digital signatures and other identification and authentication techniques will
certainly contribute towards resolving such issues and the Commission will discuss the
potential threats with Member States and other interested parties in, inter alia, the Money
Laundering Contact Committee and the Financial Action Task Force.

Prudential Risk Profiles

The emergence of new risk profiles in financial services, associated with electronic business
models, has triggered work on prudential issues in a number of fora. A substantial part of
these risks adds to the well-known categories of risk including credit, market, interest rate,
and insurance risks. Regulatory and supervisory authorities are currently examining a range of
issues including those set out in Table 3.

Failures arising from any of the risks associated with the on-line provisions of financial
services could lead to significant legal and reputational risk. Such risks are not new, but their
relative importance grows given the increasing reliance on technology. To respond to these
challenges, there is regular monitoring and ongoing work at Community and international
level. The current review of prudential capital is also providing a clearer understanding of the
nature and magnitude of such risks and this will be taken into account when drafting the new
capital requirements directive for credit institutions and investment companies. For insurance,
the so-called Solvency II exercise will involve a wide ranging review of the overall financial
position of an insurance undertaking. This review will go well beyond the traditional solvency
margin requirements and will also take full account of the new risks posed by e-commerce.

19

Table 3

• Strategic concerns: The design and implementation of internet strategies needs to be well

thought through and the consequences understood by senior management.

• Increased use of technology: New systems are often integrated with legacy systems or the
systems of third parties. Financial institutions need to have confidence in the systems
provided by external parties, as it is they that will have to take responsibility for the control
and management of service delivery. The interaction between systems also raises issues
regarding the integrity of data received and transmitted.

• Security: The security of electronic delivery channels and information stored internally
needs to be guaranteed. Customer data needs to be safeguarded. Threats posed by hackers
or “denial of service” attacks need to be addressed. Increased use of “straight-through
processing” needs to be matched by new ways of detecting and correcting errors.

• Availability: Measures, including contingency plans, are needed to guard against system
downtime caused by capacity constraints, “denial of service” attacks or technical problems.
Financial service providers need to be wary of a gap between customer expectations and
what they can in reality guarantee to deliver.

• Outsourcing: Increased reliance on information service providers and the low cost of “off
the peg” solutions makes provision of e-financial services relatively cheap. Regulated
financial institutions need to conduct due diligence tests and monitor the viability of third
party service providers that may lack knowledge of the regulated financial services
environment. Third party use of customer data is an issue of particular concern

20

6.

NEXT STEPS

Rapid progress must be made on the measures outlined in this Communication if an integrated
market in retail financial services is to be established by the 2005 deadline set by the Lisbon
European Council.

The Commission will immediately meet with Member States’ experts to gather information
on national requirements in financial services on which to base the analysis on the application
of Article 3(4-6) of the e-commerce Directive. Input will also be sought from other interested
parties, in particular, industry and consumer organisations.

Extensive consultations will be held to identify where further harmonisation might be
necessary and to review national rules protecting consumers in contracts to determine how
retail financial services can be freely offered throughout the Community in a framework of
legal certainty, delivering increased choice and lower prices.

The supervisory and prudential issues raised in the Communication will be taken forward by
the appropriate financial services’ committees, in particular, to monitor and contain any new
risks which may arise in the e-financial services environment.

Having recently launched FIN-NET to provide Community-wide alternative dispute
resolution, the Commission will hold regular meetings of the network in order to provide a
forum for the sharing of information and experience.

The proposals concerning internet payments will be discussed initially in the Payment
Systems Groups. The Commission will include, on the basis of these discussions, proposals
for further action in its report to the European Parliament and Council scheduled for the end
of this year.

1

2

3

4

5

6

7

8

9

COM(1999)232, 11.05.1999

COM(2000)888, 29.12.2000
COM(97)157, 16.04.1997

Directive 2000/31/EC on certain legal aspects of information society services, in particular electronic
commerce, in the internal market, OJ L 178, 17.07.2000, p. 1-16

Defined as any service normally provided for remuneration, at a distance, by means of electronic
equipment for the processing and storage of data and at the individual request of a recipient of a service

COM(2000)729, 15.11.2000

COM (1999) 0385, 23.07.1999

The definition of establishment
in the e-commerce Directive is based on the Treaty and on the
jurisprudence of the Court of Justice. Accordingly, a service provider is established in a Member State if
he effectively pursues an economic activity using a fixed establishment for an indeterminate duration. As
they are not European companies within the meaning of Article 48 of the Treaty, EU branches of non-EU
companies are not within the scope of this definition.

Recital 11 of the e-commerce Directive specifies that the directive is without prejudice to existing levels
of protection established by directives such as the misleading advertising directive (Council Directive
84/450/CEE, OJ L 250, 19.09.1984, p. 17-20 modified by Parliament and Council Directive 97/55/EC, OJ
L 151, 18.06.1999, p. 40) , the unfair contract terms directive (Council Directive 93/13/EEC, OJ L95,

21

10

11

12

13

14

15

16

17

18

19

21.04.1993, p. 29-34),
the consumer credit directives (Council Directive 87/102/EEC, OJ L 278,
11.10.1988, p. 33 last modified by European Parliament and Council Directive 98/7/EC, OJ L 101,
01.04.1998, p. 17-23) or the future Directive on Distance Marketing of Financial Services.

The service provider has to comply with certain requirements in respect of the taking up of an information
society service activity (qualifications, authorisations, etc.) or the pursuit of an information society
service activity (quality or content of the service, advertising, contracts, liability of the service provider).
Those requirements do not apply to services not provided by electronic means.

Article 30 and Title IV of Directive 92/49/EEC, (OJ L311, 14.11.1997, p. 42), Title IV of Directive
92/96/EEC,(OJ L 311, 14.11.1997, p. 43), Articles 7 and 8 of Directive 88/357 EEC, (OJ L 172,
04.07.1988, p. 1) and Article 4 of Directive 90/619/EEC,( OJ L 330, 29.11.1990, p. 50-61). These
derogations are motivated by the fact that the above provisions clearly provide that the applicable law to a
contract are those of the country where the risk is located. However, these derogations concern only the
activities of the insurance companies covered by the relevant directives but not the activities of insurance
intermediaries, who as a result – with respect to their on-line activities – are covered by the internal
market clause of the directive.

Article 44(2) of Directive 85/611/EEC, OJ L 375, 31.12.1985, p. 3-18. This derogation is motivated by
the fact that the interpretation of Article 44(2) could lead to possible conflicts with the e-commerce
Directive.

Institutions in respect of which Member States have applied one of the derogations provided for in Article
8(1) of Directive 2000/46 EC, OJ L 275, 27.10.2000, p. 39-43.

It has to be recalled that the general derogations from the internal market clause, listed in the annex, have
a two-fold effect: not only do they allow Member States to take measures, in conformity with Community
law, against incoming Information Society services provided via web-sites by providers established in
other Member States. They also mean that the Member State where the service provider is established
does not have to take responsibility for protecting customers in other Member States where the service is
accessible and can be received. Indeed, a derogation from the internal market approach allows Member
States to provide for “off-shore regimes” and to apply less protective rules to transactions with customers
in other Member States compared to transactions with domestic customers.
The service in question must prejudice one of the general interest objectives listed in paragraph 4, and in
particular prejudice the protection of consumers including investors, or at least present a grave risk of
prejudice to these objectives. The measure taken by the Member State must be proportionate. The
Member State must first have asked the Member State in which the service provider is established to take
measures, and the latter either did not take measures or they were inadequate. Finally the Member State
must have notified the Commission of its intention to take a measure. The latter conditions can be waived
in the case of urgency. In this case a measure has to be notified to the Commission in the shortest possible
time. The Commission has to examine the compatibility of such a measure with Community law in the
shortest possible time and where it comes to the conclusion that the measure is incompatible with
Community law, it will ask the Member State in question to refrain from taking the proposed measure or
to bring it urgently to an end.
Most notably: application of conflict of interest rules to branches (Article 10, 5th indent); application of
conduct of business rules in accordance with general good (cf. COM(2000)722, 14.11.2000); advertising
of investment services under Article 13; concentration rule allowing firms to be subjected to requirement
to perform certain transactions on a local “regulated market”, statistical reporting requirements (Article
19(1)); contingency powers for the host country authority to require compliance with local requirements
(Article 19(2)-19(8)).

COM(2000)722, 14.11.2000

Although for certain insurance services, for example, compulsory and social insurances, the link with the
national legislative framework may be so intricate as to demand that products be tailored to the
mandatory rules governing each national market.

Council Regulation on jurisdiction and the recognition and enforcement of judgements in civil and
commercial matters, OJ L 12, 16.01.2001, p. 1-23.

22

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

Seven core principles governing ADRs which either propose or impose a decision are contained within
Commission Recommendation (98/257/EC, OJ L 115, 17.04.1998, p. 31) on principles applicable to
bodies responsible for out-of-court settlement of consumer disputes.

Commission Recommendation (98/257/EC, OJ L 115, 17.04.1998, p. 31) on principles applicable to
bodies responsible for out-of-court settlement of consumer disputes.

A recent Eurobarometer survey (Eurobarometer 52: Consumers and Financial Services) reported that 80%
of consumers lack confidence in the use of new payment technologies. Furthermore, industry estimates
indicate that while use of payment cards on-line accounts for only two per cent of total card transaction,
they account for more than half of the complaints.

Book entry payments do not raise major practical problems, but are mostly limited to debit/credit
transfers at national level, executed between bank accounts. New forms of electronic payments, such as
Electronic Bill Presentment (EBPP) or WAP based payments, are emerging at national level but need to
operate also in the cross-border context in order to match the borderless nature of e-commerce. Use of e-
money on the internet is not yet significant, particularly in cross-border payments. For now, cyber cash
plays little role. A more radical and comprehensive “Re-engineering of payments systems for the e-
world” is presented in Discussion Paper No 17/2000 of the Bank of Finland.

Some national provisions apply domestically but not cross-border;
there are diverging national
approaches to the question of irrevocability of payments; and some provisions apply to credit cards but
not to debit cards.

The eEurope initiative is a two year action plan which aims to provide all citizens of the European
Community with access to Information and Communications Technology (ICT) based services and
applications.

If the merchant does not address the consumer’s complaint, the consumer receives a refund from his/her
card issuer. Thereafter the card issuer and card acquirer (normally the merchant’s bank) settle up through
internal procedures. The card industry has an established set of conditions which trigger such a refund
which ensure that, at a minimum, the consumer’s rights under law are met. The system also caters for the
contingency that the merchant disputes the consumer’s claim. At its simplest, chargeback provides a
quick and effective refund mechanism for the consumer.

Recommendation 97/489/EC, OJ L 208, 02.08.1997, p. 52.

Directive 87/102/EEC, OJ L 278, 11.10.1988, p. 33.

Directive 97/7/EC, OJ L 144, 04.06.1997, p. 19-27.

Directive 2000/28/EC, OJ L 275, 27.10.2000, p. 37-38.

Directive 2000/46/EC, OJ L 275, 27.10.2000, p. 39-43.

Directive 97/5/EC, OJ L 307, 02.12.1999, p. 63.

Written Procedure (2001)03

COM(1999)438, 28.12.1999

Directive 99/93/EC, OJ L 13, 19.01.2000, p. 12-20.

Directive 95/46/EC, OJ L 281, 23.11.95, p31-50.

Directive 97/66/EC, OJ L 24, 30.01.98, p. 1-8

Eg: Groupe de Contact, FESCO, Conference of Insurance Supervisors and their parent committees –
Banking Advisory Committee, High Level Securities Supervisors and Insurance Committee.

23

39

40

41

On 17 July, 2000, ECOFIN mandated a Group of Wise Men, led by Baron Alexandre Lamfalussy, to
consider developments in EU securities markets.

The established service provider is defined as a service provider which effectively pursues an economic
activity using a fixed establishment for an indefinite period. The presence and use of the technical means
and technologies required to provide the service do not, in themselves, constitute an establishment of the
provider.

In the case of branches however, the rules of country in which the branch is established apply.

24