Source: https://tilburglawreview.com/articles/10.5334/tilr.143/
Timestamp: 2019-04-23 01:08:20+00:00

Document:
The article1 argues that the ‘information paradigm’, within which the concept of ‘average’ consumer operates, is unfit to provide adequate financial protection to consumers in the aftermath of the 2008 financial crisis and in the wake of the digital age. As the complexity of financial and digital financial services increases, consumers are expected to educate themselves and become financially literate, while traders’ liability and state intervention are reduced to a minimum. ‘Average’ consumers are turned into ‘responsible’ ones.
Using as examples the Mortgage Directive and European Securities and Markets Authority (ESMA)’s position on Initial Coin Offerings (ICOs), the article shows that the former ‘paternalistic’ attitude towards consumer protection in both EU legislation and policy making was replaced with a ‘self-help’ approach and contests the general wisdom regarding consumers’ ability to participate in financial markets or understand the risks posed by novel products and services facilitated by technical innovation and digitization.
The article calls for a reconsideration of the information paradigm and for a pro-active approach of the EU regulatory bodies to provide consumers with efficient protection.
In the aftermath of the 2008 financial crisis, three strands in the related research and policy discussions could be discerned. One focused on understanding the causes and the path that led to the crisis. The second focused on prevention and methods to preclude such a crisis from reoccurring. The third focused on mechanisms to deal with the effects of the crisis and offer relief to parties involved. However, the solutions mainly addressed the financial sector and the restoration of stability and solvency of banks, without appropriate tools for aiding consumer debtors in distress.
By 2009, around one hundred legal proposals were already generated by the financial crisis.2 More than forty financial reform measures were implemented by the European Commission.3 However, not only that the situation of consumer debtors in distress was not addressed, but the proposed insolvency regimes for banks and companies showed extensive bias in their favor. Instead of risk sharing and stronger regulation of financial products, the measures adopted focused on more disclosure, transparency, financial education and assessment of consumer creditworthiness in order to make financial services more sustainable.4 However, as the article shows, these measures were generally not backed by sanctions, thus leaving prospective borrowers at the whim of the financial institutions. In addition, legislators and supervisory bodies are still unable to keep up with products of financial innovation, such as ICOs.
The article argues that while regulators and enforcers expect consumers to protect themselves with the data provided by disclosure requirements, consumers are still vulnerable to the craftiness of professionals offering financial services despite obvious risks posed. Things are even more complicated today when financial and technical innovation flood the market with complex products whose effects not even professionals are able to fully predict or understand.
Nevertheless, the current legal framework is more lenient on financial institutions and places the hardest burdens on consumers – burden of proof, burden of understanding and comparing characteristics of complex financial products and bearing the entirety of the negative consequences that might derive from the deals they entered into – disregarding their weaker status, and without questioning their capacity to comprehend the information.
The article claims that the increasing emphasis on mandatory disclosure increases the responsibility of consumers, not their protection. As apparent from practice, if the disclosed information proves accurate, the consumer is deemed responsible for his own acts.5 In addition, in cases where self-protection is not possible due to the complexity of the financial product, the weaker position of the ‘average’ consumer is blamed on his lack of financial education (translating also into a lack of information).6 The remedy offered is education itself. Thus, there is more to this phenomenon than ‘a shift of responsibility risk’7 as identified by Micklitz, Stuyck and Terrin. It is a shift of concepts.
The ‘average’ consumer shifts into a ‘responsible’ consumer. Consumers are now expected to help themselves by pursuing financial education, raising their knowledge and awareness levels, seeking advice, keeping updated with technological or financial innovations and making rational decisions, even though the complexity of the products and services offered is only increasing. This position of the EU policy makers and judiciary raises the question whether consumer protection did not turn into a self-help mechanism for most of the consumers, from vulnerable groups upwards. How informed should consumers be in the digital age? How informed can they be? The article answers these questions and proves that the classic information paradigm, the average consumer benchmark and the policies focusing on financial education are insufficient to protect consumers, unless coupled with regulation of financial products.
At its core, the EU aims to achieve a high level of consumer protection8 and to increase the smooth functioning of the internal market.9 These two aims are at times incompatible, which is reflected in the policy choices of Member States. For instance, in the UK, the consumer policy is aimed at ‘making competition more effective’, which means ‘the rationale for consumer protection becomes in part the health of the economy, rather than merely the protection of the consumer’.10 This policy orientation influenced and inspired by the assertiveness of US consumers, is deemed an appropriate model in the UK.11 One should notice, however, that consumer protection by consumer action and assertiveness, means that the authorities recognize their limitations in ensuring adequate protection and not only empower, but also incentivize consumers to take action into their own hands. The incentivizing factor is unfortunately lacking in the EU.
Under the information paradigm, the consumer is expected to be ‘reasonably well-informed’, ‘reasonably observant’, and ‘circumspect’ about the information he receives and thus able to protect himself from wrong decisions. Each of the three characteristics has its own implications: being informed relates to the level of knowledge the consumer is assumed to have, being observant refers to the intensity and absorption of information, while being circumspect tackles the degree of critical attitude the consumer should have when processing information. These are the traits of a concept in abstracto, that of an ‘average’ consumer.
The solution of protecting consumers solely by providing (standardized) information is inadequate for two main reasons. Firstly, not all consumers deemed ‘average’ are able to properly understand the information given and to protect themselves. The fact that a consumer meets the requirements of being reasonably circumspect does not mean that he fully understands the information or that he is able to make the right decision, especially when he needs to choose between the product and no product, or when the information relied upon is manipulated by the provider.15 This raises the question of how adequate is the application of the average consumer standard in consumer financial protection.
Secondly, the complexity of financial products and the uncertainty of their usage has many times eluded even professionals, as seen in the case of subprime mortgages that caused the 2008 financial crisis. There, both corporate greed and consumer over-confidence led to a financial crash. However, although the guilt was shared, the risks were left entirely on the consumers. One would have expected that in the aftermath a reallocation of risks will occur, but that was not the case, especially in the EU where the focus is on financial literacy and advice. Beside the issue of fairness, this raises the question whether financial education can be the panacea envisioned by the EU institutions, or whether information and education should be coupled with financial product regulation and sharing risks,16 in case of business misconduct, to avoid unfair distributional outcomes.
The article is structured in two main sections. The first analyzes the fitness of the average consumer benchmark and finds it unsuitable for the purpose of consumer financial protection. The second argues that by placing more burden on the consumer, the ‘average’ consumer became a ‘responsible’ one and that the self-help approach behind the ‘responsible’ consumer not only exposes him to significant risk but deprives him of protection.
In terms of methodology the article employs black letter and case law analyses, as well as, examples and anecdotal evidence. The article uses the Mortgage Directive and the example of Initial Coin Offerings (ICOs) to prove the inadequacy of the information paradigm in consumer financial protection. The discussion on the Mortgage Directive’s emphasis on financial education and responsible lending shows that although the responsibility for a mortgage loan is shared, it is not joint. In case of default, the risk of non-payment lies solely with the consumer, even if the bank granted the credit after conducting a wrong assessment or by choosing to ignore it.
The example of ICOs proves, on the one hand, that the usage of technical slang (tokens, distributed ledger or blockchain) is not comprehensible, and many consumers – whether financially literate or not – would have problems understanding it, even if the information provided would be entirely accurate. On the other hand, the lack of regulatory response to the risks posed by ICOs emphasizes the inadequacy of the minimalist attitude adopted by the supervisory body at Union level in ensuring adequate consumer financial protection.
The article concludes with recommendations for restoring the high level of consumer protection that was promised in the Treaty.
To discuss consumer financial protection and the details of such protection, one must first establish who is worthy of protection and how to determine the benchmark. That is because once provided with the regulated tools – minimum disclosure of relevant information regarding the risks involved by accessing the product or service – consumers may find themselves above the threshold that would entitle them to the additional protection granted to vulnerable categories.
The current perception on consumers and the effects of the information paradigm were not established from the outset. They are the result of a continuous change.18 However, as complexity of financial products increases together with the expansion of e-commerce, technical innovation, or digitization, the lowering standards are not fit to offer the adequate protection promised.
In the Gut Springenheide case,24 the CJEU established the concept of an ‘average consumer’ by reference to a triad of factors. The consumer was expected to be ‘reasonably well-informed’, ‘reasonably observant’, and ‘circumspect’. Each of the three characteristics has its own implications: being informed relates to the level of knowledge the consumer is assumed to have, being observant refers to the intensity and absorption of information, while being circumspect tackles the degree of critical attitude the consumer should have when processing information.
Summing up, the average consumer became the rule, while the vulnerable one the exception. The largest ‘chunk’ of consumers has been excluded from protection, which was replaced with standard information about everything and then left to take care of its own interests.
2.2 Overstretching the Average: Just How Informed Should a Consumer Be?
Some authors noticed ‘the ECJ’s tendency to impose an obligation on the consumer to take responsibility for protecting his own interests.’51 They further pointed out that, ‘The consumer, who has a right to information […] must also take note of this information and consider it.’52 This position of the Court raises the question whether consumer protection turned into a self-help mechanism for the majority of consumers, from vulnerable groups upwards. Additionally, one may legitimately ask whether an average consumer can properly protect their economic interests and make adequate decisions when it comes to financial services or digital financial products.53 It is certain that by assuming consumers are rational in their decision making process and responsible for their own actions, the liability of traders is greatly reduced.54 Thus, while the ‘average consumer’ standard might boost consumers’ ego as self-determined beings,55 free from paternalistic protection, in reality, it increases their responsibility, while decreasing that of the traders and allows the resources of authorities to be diverted towards other areas.
In a consumer financial protection setting, the authority appears to tolerate certain practices, which consumers are expected to read through, the emphasis being on the authority’s expectation and not as much on the actual result of the practice employed by traders.
Thus, the ‘average consumer’ concept is nothing but ‘a normative abstraction, derived from an economic fiction that has little in common with the behavior of the real average consumer.’56 Or, as the Advocate General Geelhoed put it in his Opinion rendered in Douwe Egberts v Westrom Pharma, the average consumer benchmark is not meant to reflect actual consumer behavior, but rather it is a reflection of a desired behavior.57 His position is also confirmed by the fact that the UCPD did not require Member States to provide individual remedies to consumers and appeared to focus more on protection of presumed collective interests of consumers.58 Only by rejecting any potential differences between individuals, which might have justified case by case solutions, was the UCPD able to create and promote its ‘one size fits all’ standard of average consumer.
In parallel with the expansion of expectations and burdens placed on the consumer, the instruments of protection appear to be constantly limited to providing the consumer with information, without adequately considering his capacity to comprehend it.63 The shortcomings of the information paradigm are even more apparent in the case of financial products or digital financial services, involving a high level of complexity.
The European Parliament’s view is contradicted by recent studies, which show that if the consumer is not sufficiently financially literate,70 he will receive even less relevant information from advisors or financial institutions, in comparison to most knowledgeable investors.71 While this might serve as an argument for raising the levels of financial literacy, it also proves that information provided does not offer protection, because it is both insufficient and incomprehensible, which reduces to rubbles the entire fundament of the information paradigm. This issue led authors across the Atlantic to suggest that where consumers have limited financial literacy it would make sense from a policy perspective ‘to encourage contractual terms for mortgages that are less likely to cause later regret.’72 In other words, consumer financial protection needs to supplement regulated standard information with regulation of standard contracts.73 So far, this view is not shared on this side of the Atlantic.
This perception, which clearly states that more information would have alleviated all risks, is staggering in its narrow-mindedness. One cannot honestly believe that the financial crisis would have been avoided if consumers would have had more understanding of the currency exchange risk or securitization. Nor can one assume that a new crisis can be prevented by printing flyers and organizing seminars or TV-ads campaigns to educate consumers about credit and finance.
The explanation resides in the fact that regulatory reaction to financial innovation (hence also the concomitant financial education) occurs solely ex post as legislators try to keep up with it. It also fails to consider the interconnectivities of the global market, of which the EU internal market is just a part, unable to insulate itself of tidal shocks, such as the one coming from across the Atlantic in 2008.
If financial literacy is the key, then EU consumers should become experts in global financial markets, not just the EU one, to be able to discern between risks and adverse effects of their informed decisions. Yet, such expectation is unrealistic. Not only that the financial products and services are increasingly complex, but the large array of choice makes comparison extremely difficult because many of them have their own specific features. In addition, most of the financial products are one-off purchases83 and the majority of the consumers are not ‘repeat actors’, able to learn from their own or from others’ experience. In fact, for many of them, a failed experience caused by a bad decision would have catastrophic consequences, resulting in loss of home, deficiency payments, decrease in life-style and income, which would deter or preclude them from trying again. Last, but not least, financial education might generate effects, but only after education has been obtained and with results that are difficult to foresee, given the said complexity and multitude of financial products.84 Thus, it offers no respite to those that already acquired a mortgage or are on the verge of acquiring one.
In conclusion, the Mortgage Directive is increasing the threshold for protecting consumers, from average, to ‘responsible’ ones. However, the Directive is not fully clear whether ‘responsible borrowing’ should be perceived as awareness or liability in case of default. Both meanings deserve additional attention.
In its ‘Briefing on improving the financial literacy of European consumers’, the European Parliament further defined the meaning of financial literacy as ‘a combination of awareness, knowledge, skill, attitude and behavior necessary to make sound financial decisions and achieve financial well-being.’88 It relied significantly on an OECD Policy Paper on Financial Education and the Crisis89 to state that the policy aim should be to restore the information imbalance between households and financial institutions by regulating the information to be provided to consumers and not the product. In other words, by standardizing information to be provided to consumers, instead of implementing also standard contracts regulated by law. Since in the Commission’s view consumers and financial institutions shared the blame for the financial crisis, it would have made sense to share also some of the risks among them.
On the positive side, the Mortgage Directive places more emphasis on information provided in clear language,90 thus acknowledging the fact that information does not suffice, if it is incomprehensible or inadequate for being used by the consumer. It is a signal that compliance with information requirements for the sake of compliance is not acceptable as a matter of policy.
The idea of using education in connection to consumer protection is not new and is featured in the TFEU. The text speaks of the Union’s obligation to ensure a high level of consumer protection as well as to promote their right to information and education (emphasis added).98 It must be noticed that the TFEU uses the collocation as well as, not by, which means that in the view of the TFEU’s drafters, consumer protection and the rights to information and education are complementary, not means to an end. Nevertheless, the current policy trend of the EU Parliament seems to be that consumer protection is to be achieved through information and education, not together with them. This is a clear deviation from the drafters’ intention and constitutes another evidence of the shift towards a responsible consumer.
However, the bulk of methods employed to increase consumer awareness and financial literacy is by ‘organization of national and regional conferences, seminars, media and awareness campaigns or cross-border educational programs’,106 websites, games and apps.107 What none of these measures seems to adequately consider is that all of them require tools, time, money and effort from the side of the consumer and that, despite their best efforts to learn, they will still be solely responsible for potential negative results. Whilst educating future generations of consumers might prove beneficial in a decade or two, for the consumers who suffered the consequences of the financial crisis the emphasis on (self) education provides no solution and no relief.
It may also be that when talking about responsible borrowing, the drafters of the Mortgage Directive had in mind the issue of liability. Thus, whether informed, educated, financially literate or not, the consumer must understand he will be bound by the credit agreement entered, if he was provided with information.
A first indication of understanding the term as liability is that the Mortgage Directive speaks of various ratios – such as loan-to-value, loan-to-income, debt-to-income – as well as of minimum levels below which no credits should be granted.108 These should not be read to mean that lenders will be solely responsible when the aforementioned ratios or levels are not observed. Among the causes of the financial crisis, the Commission mentioned not only irresponsible lending, but also irresponsible borrowing, placing consumers in the same pool of irresponsible market participants.109 Hence, as part of the problem, consumers are deemed to be also part of the solution. They need to observe the ratios and avoid over-indebtedness.
This implies a per a contrario legal obligation from the side of responsible consumers to provide clear and correct data that can ease the assessment of their creditworthiness. One must notice that leading consumers to believe they could afford a credit and, thus, exposing them to the risk of default would not subject lenders to the same type or level of sanctions, which raises the question, who is the Mortgage Directive really trying to protect?
So far, the article has shown that in the aftermath of the 2008 financial crisis – a crisis caused by financial innovation and usage of complex financial instruments not fully understood by professionals themselves, combined with corporate interests – and of its catastrophic effects for consumers, the answer of the Commission was to provide consumers with more information and to try to convince them to undertake a financial education.
Hence, if financial products are complex, it is the duty of the consumers to elevate themselves to the level of understanding required.118 One needs to underline here the word ‘aftermath’, which means these measures were implemented in full hindsight, looking back, and not as much into the future. The Commission’s position is short-sighted, for whatever financial education or protection can be provided to consumers via flyers and T.V. commercials cannot insulate them from the risks posed not only by financial innovation, but also by digitization or a combination of the two.
It is beyond the purpose of this article to investigate ICOs.122 What the article is trying to show by referring to this financial digital product, is the range of consumer protection issues stemming from their usage and accessibility to virtually any Internet user. In the EU, these financial instruments are almost completely unregulated, as the relevant bodies cannot yet determine the legal classification of the products/tokens created by ICOs, which would then enable them to establish a legal regime. EU institutions do not have a pro-active approach and lag behind their counterparts in the U.S. Although there is no definition of investment contracts in the Securities Act123 or in the Securities Exchange Commission Act,124 US courts and the SEC widely rely on the test established by the US Supreme Court in SEC v Howey Co.125 In the absence of a similar test to aid courts in their judicial assessment, EU consumers are exposed to potential abuses and lack adequate protection.126 This is best emphasized by the weak response from the European Securities and Markets Authority (ESMA), a counterpart (yet not entirely an equivalent) of the SEC, to the kind of threats posed to consumers by ICOs. For a better understanding, this section will first investigate ESMA’s role and powers, after which it will analyze the ESMA’s reaction to the threats posed by ICO’s.
Of importance are ESMA’s responsibilities regarding new financial activities. For instance, ‘the Authority should be able to temporarily prohibit or restrict certain financial activities that threaten the orderly functioning and the integrity of financial markets or the stability of the whole or part of the financial system in the Union.’131 Prima facie, this appears sufficiently broad to enable ESMA to tackle any new financial product generated by the digital age (such as ICOs). However, ESMA’s powers in this regard are curbed by the requirement that the financial activities in question represent a systemic risk at Union level.132 Moreover, the authority is to consider the impact of its activities on both ‘competition and innovation within the market [and] the Union’s global competitiveness’ every time it makes a decision, which ultimately implies that ESMA is more restrained by business considerations, than it is concerned with the welfare of consumers. As it will be seen, this is reflected in the minimalistic approach of ESMA towards financial innovation.
In addition, there are also normative tasks specifically related to consumer protection and financial activities.137 These are mainly based on the information paradigm and the general wisdom that financial education is the key to consumer protection. Thus, they are focused on ensuring transparency, simplicity and fairness in the market for financial products or services in the EU: ‘collecting, analyzing and reporting on consumer trends; reviewing and coordinating financial literacy and education initiatives; developing training standards in the industry; aiding in developing common disclosure rules.’138 However, as it will be shown139 the information paradigm is unfit for the ICOs market, because ICO white papers use a technical slang that even professional investors might not be able to understand.
Summarizing, ESMA has at its disposal a wide range of powers concerning risks posed by financial innovation. However, these powers are curbed both by the Regulation’s provisions regarding the existence of systemic risk, the principle of complementarity and the bureaucratic hurdles at EU level. In regard to consumer financial protection, ESMA fits perfectly into the general view that consumers are better protected from dangers posed by financial innovation when provided with transparent information regarding risks and financial education to better comprehend such risks than by direct intervention on the market, which is reserved as a remedy of last resort.
The minimalist approach of ESMA towards such new and dangerous financial instruments is best exemplified by its attitude towards ICOs, deeply contrasting with that of its counterpart in the US, the SEC. After several years from their emergence the specialized Committee on financial innovation settled for a two pages warning on the risks of ICO’s.144 This is addressed in the following subsection.
As already said, ESMA’s position towards ICOs is limited to a warning published in November 2017, alerting investors of ‘the high risk of losing all of their invested capital.’145 The statement is addressed to those who ‘[…] are considering investing in ICOs or have already done so […],’146 which means that for at least one category of consumers, ESMA’s reaction is tardive and useless for it offers no remedy.
In this instance, the inadequacy of the information paradigm is underlined by two facts. The first is that in the case of ICOs (as well as other digital financial products) the main piece of information provided to the consumer is that … there is no protection, because the legislators and regulators have failed to address these financial instruments.147 ESMA’s statement repeats it on several occasions: ‘In particular, be aware that you will have no protection in the case where the ICO is unregulated’, ‘ICOs, depending on how they are structured may fall outside of the regulated space, in which case investors do not benefit from the protection that comes with regulated investments,’ and ‘[d]epending on how they are structured, ICOs may not be captured by the existing rules and may fall outside the regulated space […] In the case where an ICO does not fall under the scope of EU laws and regulations, investors cannot benefit from the protection […].’148 Given its regulatory powers, ESMA should have done more about it, than to issue a warning.
The issue of misleading information has been raised by empirical studies as well. After analyzing more than 50 ICO’s, Cohney et al found discrepancies between promises made in white papers and the concomitant smart contracts’ coding.151 Yet, scholars cannot substitute law makers and regulatory bodies, which is why the two pages warning of ESMA cannot constitute an adequate response.
How the problem of making technical information comprehensible for consumers may be addressed remains a mystery, as one may dispute even ESMA’s capability of explaining ICOs in a clear simple language. ESMA’s statement defines an ICO as ‘an innovative way of raising money from the public, using coins or tokens. […] The coins or tokens are typically created and disseminated using distributed ledger or blockchain technology (DLT).’152 The usage of technical slang – tokens, distributed ledger or blockchain – cannot be deemed comprehensible, and many consumers – whether financially literate or not – would have problems understanding it, even if the information provided would be entirely accurate.
This is just the beginning. ESMA warns also of additional risks associated with ICO investments, such as vulnerability to fraud and illicit activities, high risk of losing all the invested capital, lack of exit options and extreme price volatility, or flaws in the technology used. Nevertheless, the two pages written in plain language, in a concise and clear manner, not only come too late given that ICOs were already offered to EU consumers, but also their ‘consumer beware’ approach does not seem to function. By 2017 blockchain projects raised no less than 1,6 billion dollars via ICOs,153 which makes them a dangerous, yet very desirable and frequently consumed forbidden fruit, for both consumers and businesses. Conspicuously, just because consumers chose to invest in ICOs or other unregulated financial products, it does not mean they are automatically harmed by them. However, one cannot overlook the fact that in cases where problems would arise, the EU consumers would be left to suffer the consequences.
As shown before, a potential explanation for the appeal of risky financial products to consumers, lies in the trader’s ability to either alleviate consumers’ concerns or to shift consumers’ attention towards certain aspects of the product or service. In other words, beside the skill of the trader in gaining the trust of the consumers or misusing their blind faith in the protection from the authority, the additional benefits stemming from the information are sufficient to change their perspective with regard to the risks involved. Nevertheless, real life examples prove things are much more complicated.
The company restates the fact that tokens may have no value and buyer may lose all amounts paid, and provides a non-exhaustive list of concomitant risks related to the functionality of features of the tokens, the stability of the EOS Platform, the token price and its tradability, the timing of the block-chain production, periodic congestions of the blockchain, the token’s security, third-party reliance, changes in software, project completion, or the uncertainty of the regulatory framework or of governmental action.157 This long list of risks and investor concerns158 did not preclude EOS from becoming one of the most successful ICOs. After just one year-long token sale, it managed to raise almost 4 billion dollars,159 even if the product’s release was significantly delayed and affected by technical issues.160 Although one cannot exclude the possibility that consumers consciously accepted to assume the risks, consumers’ aversion towards risky investments suggests this likelihood is rather low and the explanation must be sought elsewhere.
Where does the money come from? According to the EOS Token Purchase Agreement, not from US or China, as ‘EOS Tokens are not being offered or distributed to US persons […] or Chinese persons […].’161 The explanation for the exclusion of these categories of consumers comes from the regulatory framework applicable in the two jurisdictions, which the offer is trying to avoid. That means the target will be consumers from other parts of the globe, EU included.
Such staggering amounts of money raised by EOS via Token sales brings back the old question: why do consumers ignore the risks? Why does the information provided to them not have a deterrent effect? Since there is no apparent logic behind it, and there is no hard evidence to support the idea that the consumers overnight, became so literate in digital financial products that they can see beyond the concerns of the regulators, the explanation must come from other areas, beyond legal science, such as behavioral studies. The EU regulators cannot just sit on the side, issue warnings, and call it the ‘high level of consumer protection’ promised in the Treaty. They need to act and regulate or ban potentially harmful products.
Therefore, one of the study’s major findings is that ‘when people are unaware and unconcerned, the asymmetry between platforms and consumers calls for regulatory attention.’171 Nevertheless, the proposed solution falls short. After proving that people ignore information, the authors of the study suggest providing consumers with even more data, this time regarding search results, contractual identity and user reviews or ratings.172 In other words, to alleviate the risk posed by the fact that consumers tend to ignore information, more information is being given to them to ignore, while traders can go on about their usual business. The proposals for amending consumer legislation do not address or solve the issues posed by innovative and sophisticated financial products either.173 It is safe to assume that the information paradigm and the self-help type of consumer protection, as unfit as they appear, are here to stay.
The article revealed the inefficiency of protection by way of information and showed that instead of adequate product regulation and effective consumer protection, legislators provide consumers with data or mandatory disclaimers, shifting the task of protection from the EU authorities, to the consumers themselves.
In the aftermath of the financial crisis caused by unregulated and misconstrued innovative financial products and in the wake of digital financial revolution, the burden of protection has been placed on the consumers who now must be ‘responsible’. This concept entails that given the passivity of EU regulators in addressing digital and financial challenges the consumer must take a pro-active approach, become financially and digitally literate, evaluate all the risks, make the right assessments, or suffer the consequences. However, there are risks that cannot be removed by simply informing consumers of their existence and such full delegation of responsibility would be extremely unfair. Controls on or bans of unsafe products and services is expected174 and regulators’ intervention must go beyond educational campaigns and ads.
While the desire of the EU to preserve innovation on the (digital) internal market is legitimate, the treaty promise of high level of consumer protection in the digital age should not be turned into an empty slogan and handled only with ‘increased transparency’ or by shifting all burdens on the consumer. On the contrary, given that consumers face increasing sophistication and complexity of financial (digital) products, the regulators should also increase the level and effectiveness of consumer protection measures by becoming pro-active themselves and resorting to a functional approach of regulatory measures or bans, where product regulation is needed. This way, by catching financial and digital innovation within legal requirements and regulatory safeguards, the EU would provide adequate, efficient and harmonized protection to its consumers without hindering the functioning of the market.
1The article was presented at the International Conference “The Responsible Consumer in the Digital Age. International and Nordic Perspectives on Financial Consumer Protection”, organized in 2018 by the Centre for Enterprise Liability, Faculty of Law, University of Copenhagen, with the support of the Carlsberg Foundation, the Dreyers Fond and the Romanian Embassy to the Kingdom of Denmark and Iceland. The author would like to thank for feed-back to all participants, the reviewers and for comments on the early versions of the article to Prof. Tibor Tajti, Dr. Liviu Damsa and Dr. Asress Adimi Gikay. Any potential errors, however, belong to the author.
2PR Wood, ‘Legal impact of the financial crisis: a brief list’ 4 Capital Markets Law Journal 436, 436.
3L Kastner, Civil society and financial regulation consumer finance protection and taxation after the financial crisis (Routledge, Abingdon, Oxon New York, NY 2018) 77.
4A notable exception is the Dodd-Franck Act in the US. However, in the EU, none of the measures implemented matched the American initiative, despite the existence of a proposal to set-up a pan-EU Consumer Protection Agency alongside with new supervisory authorities or arguments in favor of the creation of a European Financial Users Authority, to act as a consumer regulator and protect consumers of financial services. Explanations can be found in the influence of financial sector groups and their lobbying efforts at preventing regulation. Ibid. 77, 90, 92.
5H-W Micklitz, J Stuyck and E Terryn Cases, Materials and Text on Consumer Law (1st edn Hart Publishing, North America 2010), 373. The increase in consumer responsibility in regard to financial products was noticed both in the US and Australia. For US, see JY Campbell and others, ‘Consumer Financial Protection’ 25 The Journal of Economic Perspectives 91, 2. ‘Consumer finance has increasingly become a ‘do-it-yourself’ activity. Households are expected to make decisions about pension plan contributions and payouts, to choose from a wide array of credit instruments to fund everything from home purchase to short-term cash needs, and more generally to assume a greater level of responsibility for their financial well-being.’ For Australia, see R Sandlant, ‘CONSUMER FINANCIAL PROTECTION: FUTURE DIRECTIONS’ Jassa-The Finsia Journal Of Applied Finance 42, 42, noticing that ‘financial services grow in complexity faster than the capacity of regulators (let alone consumers) to stay ‘one step ahead’‘ and that consumers are ‘increasingly being given more, not less, responsibility for their own long-term financial security’.
7Micklitz, Stuyck and Terryn, 373.
8See the corroborated provisions of Art 114, Para 3 of TFEU (‘The Commission […] concerning […] consumer protection, will take as a base a high level of protection, taking account in particular of any new development based on scientific facts’) with those of Art 169, Para 1 of TFEU (‘In order to promote the interests of consumers and to ensure a high level of consumer protection, the Union shall contribute to protecting the […] economic interests of consumers, as well as to promoting their right to information, education and to organize themselves in order to safeguard their interests’) (emphasis added).
9BB Duivenvoorde, Consumer Benchmarks in the Unfair Commercial Practices Directive (Springer International Publishing, 2015), 30.
10G Howells, ‘The Potential and Limits of Consumer Empowerment by Information’ (Oxford, UK) 32 Journal of Law and Society 349, 350.
12Micklitz, Stuyck and Terryn, 372.
13A-F Lefevre and M Chapman, ‘Behavioural economics and financial consumer protection’, 15–25.
14A survey conducted by the FSA, under the title Financial Capability in the UK: Delivering Change, dated March 2006, shows that these issues were already visible prior to the financial crisis, <http://www.fsa.gov.uk/pubs/other/fincap_delivering.pdf>, accessed 26 October 2018. However, there is no substantial evidence that the measures recommended and implemented, such as: personal financial education in schools, better, more targeted financial communication with consumers, availability of financial advice helped defer the crisis or alleviate its effects. See: Micklitz, Stuyck and Terryn 375. Campbell and others, 3.
15An unpublished survey organized by the Danish Competition and Consumer Authority, presented at the Responsible Consumer in the Digital Age Conference, organized at the University of Copenhagen in 2018, showed that consumers rarely read or compare the mandatory disclosures offered by the banks in the case of mortgage loans. Moreover, the behavioral study used cameras that followed the eyes of the subjects and was able to determine the reading habits of consumers, concluding that it is possible for relevant information to be ‘hidden’ in plain sight.
16Campbell and others, 3, Sandlant, 45.
17Case C-186/16, Ruxandra Paula Andriciuc and Others v. Banca Romaneasca SA, Judgement of 20 September 2017 and Case C-51/17, OTP Bank Nyrt., OTP Facktoring Koveteleskezelo Zrt v. Terez Ilyes and Emil Kiss, Decision 20 September 2018.
18The evolution happened in stages which can were identified either chronologically, or by concepts employed by the legislators. See Hans Micklitz, The Consumer: Marketised, Fragmentised, Constitutionalised in D Leczykiewicz, The Images of the Consumer in EU Law, Legislation, Free Movement and Competition Law (1. ed. edn Bloomsbury Publishing PLC, London 2016), 29.
20Case C-484/08 Caja de Ahorros y Monte de Piedad de Madrid v Asociación de Usuarios de Servicios Bancarios (Ausbanc) , Para 27.
21Directive 2005/29/EC concerning unfair business-to-consumer commercial practices in the internal market, <https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32005L0029&from=EN>, accessed 27 October 2018.
22C Poncibo and R Incardona, ‘The Average Consumer, the Unfair Commercial Practices Directive, and the Cognitive Revolution’ 30 Journal of Consumer Policy Issue 21, 36 and G Howells and T Wilhelmsson, ‘EC consumer law: has it come of age?’ 28 European Law Review 370, 370.
23David Byrne, ‘Principles of Consumer Protection in the European Union (Ministerial Meeting on Consumer Policy, Rome, 21 November 2003, p. 2 <http://europa.eu/rapid/press-release_SPEECH-03-561_en.pdf>, accessed 28 June 2018.
24C-210/96 Gut Springenheide and Tusky v Oberkreisdirektor des Kreises Steinfurt , Para 31.
27Ibid. 166. For a summary of several consumer behavior studies and reports applicable to financial services, see Lefevre and Chapman, 15–25. The idea of one size fits all solutions was criticized also in the US. Campbell and others, 16.
28J Trzaskowski, ‘The Unfair Commercial Practices Directive and Vulnerable Consumers’ (‘14th Conference of the International Association of Consumer Law’ 2013) 3, <http://www.legalriskmanagement.com/PUBLICATIONS/2013_IACL.pdf> accessed 28 October 2018.
30Ibid. 167–169. See also Trzaskowski, p. 3, Lefevre and Chapman, 9, 12–14.
31Case C-186/16, Ruxandra Paula Andriciuc and Others v. Banca Romaneasca SA, Judgement of 20 September 2017.
36M Dani, ‘Assembling the fractured European consumer’ 36 European Law Review 362, 6.
37Noticing the same issue, Trzaskowski speaks of ‘a kind of expert consumer’ while Poncibo and Incardona speak of a ‘Mr/Mrs. I Know It All’. See: Trzaskowski, 9 and Poncibo and Incardona, 36.
38Duivenvoorde, 177. See also: Dani, 6, Lefevre and Chapman, 4.
39Recital 30 of the UCPD.
40See for instance: E Theocharidi, ‘Effectiveness of the ADR directive: standard of average consumer and exceptions. (Alternative dispute resolution)’ 24 European Review of Private Law, 108–111. The author argues that in the absence of explicit provisions one cannot exclude the application of the average consumer concept. Among the reasons provided the author notes that even the jurisprudence of the Court of Justice has used the concept in other areas of consumer protection, such as unfair contract terms, although the Directive does not make any reference to the concept.
42However, the latter were excluded from the full harmonization effect. Duivenvoorde, 53. Also: Trzaskowski, 6. By allowing Member States to go beyond the full harmonization sought by the Directive, legislators seem to recognize both the importance and the impact of the financial products and services in the life of consumers as well as the potential non-suitability of the average consumer benchmark.
47For details see: Poncibo and Incardona, 30–33, Howells, 359–360, Howells and Wilhelmsson, 381. For similar findings regarding consumers in the US: AH Raymond, ‘Yeah, but did you see the gorilla? Creating and protecting an informed consumer in cross-border online dispute resolution’ 19 Harvard Negotiation Law Review 129, 138–146.
48See infra the example of EOS Token disclosure, Subsection 2.2.
50See Decision in Case C-26/13 – Arpad Kasler, Hajnalka Kaslerne Rabai v. OTP Jelzalogbank Zrt, Para 71, available online at: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:62013CJ0026&from=EN, accessed 28 June 2018.
51H Schulte-Nölke, A casebook on European consumer law (Hart Publishing, Oxford 2002), 114. Also: Dani, 6.
53The potential changes implied by digitization were briefly touched upon also by Trzaskowski, p. 12. Regarding the effects of the increasing complexity of financial products and the challenges of digitization, see Lefevre and Chapman, 8–10.
55Behavior studies reveal for instance that one of the biases many people display is overconfidence in their ability to successfully make accurate financial decisions, such as picking winning stocks. Lefevre and Chapman, p. 13. Hence, adopting a high standard for average consumers is likely to feed this type of bias.
57Case C-239/02, Opinion of Advocate General Geelhoed, delivered on 11 December 2003, para 79, <https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:62002CC0239&from=EN>, accessed on 29 October 2018.
59Poncibo and Incardona, p. 35.
60Recitals 18 and 19 corroborated with Art 5, Para 3 of UCPD.
61For more details regarding the concept of ‘responsible consumer’, see Section 2 of this paper.
63For a discussion on the ineffectiveness of the informed consumer concept see: Poncibo and Incardona, 31–33.
64European Parliament resolution of 22 May 2012 on a strategy for strengthening the rights of vulnerable consumers (2011/2272(INI)), Para 3, <http://www.europarl.europa.eu/sides/getDoc.do?type=TA&reference=P7-TA-2012-0209&language=EN>, accessed 28 June 2018.
65‘Emphasizes the need to empower consumers by providing them with useful, targeted and understandable information; insists that the EU and national authorities, and consumer organizations and companies, need to step up their efforts to improve consumer education; calls on the Commission to propose ‘consumer-friendly’ Single Market legislation, so as to ensure that consumer interests are fully taken into account in the functioning of the Single Market’. See: European Parliament resolution of 15 November 2011 on a new strategy for consumer policy (2011/2149(INI)), Para 21, <http://www.europarl.europa.eu/sides/getDoc.do?type=TA&reference=P7-TA-2011-0491&language=GA&ring=A7-2011-0369>, accessed 28 June 2018.
66‘Stresses the importance of access to financial education and financial advice […]’, Id Para 38.
68Directive 2014/17/EU on Credit Agreements for Consumers Relating to Residential Immovable Property, consolidated, (Mortgage Directive), <https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:02014L0017-20180101&from=EN>, accessed 28 June 2018.
69As per Recital 29 the task is prima facie shared between Member States, the Commission and consumers: ‘In order to increase the ability of consumers to make informed decisions for themselves about borrowing and managing debt responsibly, Member States should promote measures to support the education of consumers in relation to responsible borrowing and debt management in particular relating to mortgage credit agreements. […] In that regard, the Commission should identify examples of best practices to facilitate the further development of measures to enhance consumers’ financial awareness.’ However, in the absence of liability for Member States or the Commission for failure to educate consumers, the latter bear the burden of educating themselves. See also Art 6 of Mortgage Directive.
70For instance, in the 2014 Report from the Commission on the implementation of Directive 2008/48/EC on credit agreements for consumers, p 6, <https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52014DC0259&from=EN>, accessed on 28 June 2018, it was noted that ‘the APR is [presupposed] likely to help a consumer (if sufficiently financially literate) to compare different offers and make an informed decision.’ Per a contrario, those consumers who are not sufficiently literate in finance, cannot compare and thus, cannot be deemed to have made an informed decision.
71R Calcagno and C Monticone, ‘Financial literacy and the demand for financial advice’ 50 Journal Of Banking & Finance 363, 364; U Bhattacharya and others, ‘Is Unbiased Financial Advice to Retail Investors Sufficient? Answers from a Large Field Study’ [Oxford University Press/USA] 25 Review of Financial Studies 975, 1017.
73The emphasis here is on the word supplement. As standard mortgages are also affected by problems (see ibid. p. 8) and would preclude the emergence of better types of mortgages, relying entirely on regulated products would also prove inefficient in the long run. However, a combination of mandatory disclosures, comprehensible information and standard terms should improve the financial protection offered to consumers, notwithstanding the level of their financial literacy. On the need for state intervention in regulation of standardized contracts see also, Irina Domurath, ‘A Map of Responsible Lending and Responsible Borrowing in the EU and Suggestions for a Stronger Legal Framework to Prevent Over-Indebtedness of European Consumers’, in HW Micklitz and I Domurath, Consumer Debt and Social Exclusion in Europe (Taylor & Francis, 2016), 158.
74Recital 3 of Mortgage Directive.
75C Whalen, The Subprime Crisis: Cause, Effect and Consequences (2008), 3–9.
77The financial crisis evidenced instances where market players provided loans to consumers knowing that they are likely to default. See for instance the case of NINJA loans (‘No Income, No Job or Asset’ loan). This allowed financiers to securitize sub-prime mortgages and sell them to investors. The more the bank lent, the more it could sell. Hence, for the lenders, in the short-run, it was a good business decision, but one that consumers were ultimately left to pay. See for instance: M Simkovic, ‘Competition and Crisis in Mortgage Securitization’ 88 Indiana Law Journal, 214–215.
78Recital 3 of Mortgage Directive.
79Recital 4 of Mortgage Directive.
80A number of documents leaked from one of the biggest commercial banks in Romania revealed for instance that the banks board was fully aware of the high volatility of the Swiss franc’s exchange rate and that the bank’s customers were deliberately encouraged to either shift from loans in national currency or Euro to Swiss francs, or to take loans directly in Swiss francs, with the expectation of increased profits.
81Recital 4 of Mortgage Directive.
82Recital 30 of Mortgage Directive.
84For a case study on types of mortgages and options available to consumers, see Campbell and others, 5–9.
85Recital 29 corroborated with Art 6 of Mortgage Directive. Also: Irina Domurath, ‘A Map of Responsible Lending and Responsible Borrowing in the EU and Suggestions for a Stronger Legal Framework to Prevent Over-Indebtedness of European Consumers’ in Micklitz and Domurath, 161.
87Art 6 of Mortgage Directive.
88European Parliament Briefing, ‘Improving the financial literacy of European consumers’, May 2015, 2 (EP Briefing), <http://www.europarl.europa.eu/RegData/etudes/BRIE/2015/557020/EPRS_BRI(2015)557020_EN.pdf>, accessed 28 June 2018.
89OECD International Network on Financial Education, ‘Financial Education and the Crisis. Policy Paper and Guidance’, June 2009 (OECD Policy Paper), <https://www.oecd.org/finance/financial-education/50264221.pdf>, accessed 28 June 2018.
90See Recital 41 of Mortgage Directive.
91Case C-186/16, Decision of 20 September 2017.
92Case C-51/17, Decision 20 September 2018.
94Case C-186/16, Decision of 20 September 2017, and Case C-51/17, Decision 20 September 2018.
95See OECD Policy Paper, 7 and EP Briefing, 3.
98Art 169, Para 1 TFEU.
99The five fundamental rights of consumers established in 1975 were: 1) the protection of consumers’ health and safety; 2) the protection of consumers’ economic interests; 3) consumers’ right to information and education; 4) consumers’ right to redress; and 5) consumer representation and participation. See European Commission, Press Release Database, <http://europa.eu/rapid/press-release_MEMO-92-68_en.htm>, accessed on 28 October 2018.
100David Byrne, ‘Principles of Consumer Protection in the European Union (Ministerial Meeting on Consumer Policy, Rome, 21 November 2003, p. 3 <http://europa.eu/rapid/press-release_SPEECH-03-561_en.pdf>, accessed 28 June 2018.
101Id. at 3, accessed 28 June 2018.
104European Commission, Consumer Classroom, Explore Financial Literacy webpage, <https://www.consumerclassroom.eu/resources/theme/financial-literacy>, accessed 28 June 2018.
105European Parliament legislative resolution of 15 April 2014 on the proposal for a regulation of the European Parliament and of the Council on key information documents for investment products (COM(2012)0352 – C7-0179/2012 – 012/0169(COD)), <http://www.europarl.europa.eu/sides/getDoc.do?type=REPORT&reference=A7-2013-0368&language=EN>, accessed 28 June 2018.
107See for instance Financial Education – National Strategies in Europe. Good Practices Report, March 2015, <https://www.ebf.eu/wp-content/uploads/2017/01/GoodPracticesReport_EuropeanMoneyWeek-FINAL.pdf>, accessed 28 June 2018.
108Recital 3 of Mortgage Directive.
109Recital 4 of Mortgage Directive.
110See also, Irina Domurath, ‘A Map of Responsible Lending and Responsible Borrowing in the EU and Suggestions for a Stronger Legal Framework to Prevent Over-Indebtedness of European Consumers’, in Micklitz and Domurath, 166.
111Recital 56 of Mortgage Directive.
112V Mak, ‘What is Responsible Lending? The EU Consumer Mortgage Credit Directive in the UK and the Netherlands’ 38 Journal of Consumer Policy 411, 428. The lack of sanctions regarding the assessment of creditworthiness is not mentioned by Kastner either, although the author mentions that originally, the proposal suggested an obligation for lenders to deny credit. The proposal was deleted due to strong lobby from European banks. Kastner, 79, 95.
113Irina Domurath, ‘A Map of Responsible Lending and Responsible Borrowing in the EU and Suggestions for a Stronger Legal Framework to Prevent Over-Indebtedness of European Consumers’ in Micklitz and Domurath, 163, 165–166.
114Recital 22 of Mortgage Directive.
115In addition to information, the consumer is also provided with a minimum amount of time to (re)consider the transaction and its implications, during which it can withdraw, or to compare the offer with other credit products. See Recitals 23 and 40 of Mortgage Directive. While an effective tool to exit a bad deal, failure to exercise the right to withdraw also shifts all responsibility of the agreement on the consumer. The only exceptions appear to be those stemming from the interpretation given by the CJEU in the Swiss francs cases referred above.
116Recital 83 of Mortgage Directive.
117Recital 58 of Mortgage Directive.
118The reality is that even financial education would not have alleviated the risks for consumers. In Hungary and Romania, prior to the 2008 financial crisis, it was next to impossible to get but Swiss francs or Euro denominated mortgage loans. Credits in national currencies were only formally offered, at interest rates that made them unappealing. Moreover, the banks’ employees were instructed to do everything to convince clients to make or switch to Swiss francs loans, by emphasizing their immediate benefits and leaving out the volatility of the exchange rates. Unfortunately, the EU regulatory bodies and the European scholarship have failed gather empirical evidence of such practices, and the former preferred to pass the responsibility to the consumers.
119ESMA Statement of 13th November, available online at: https://www.esma.europa.eu/sites/default/files/library/esma50-157-829_ico_statement_investors.pdf, p. 2, accessed 28 June 2018. See also: A Gikay, How the New Generation Cryptocurrencies Decoded the Investment Contract Code: Analysis of US and EU Laws (2018), 311, 325.
120Nowadays, to evade being qualified as investment contracts, ICOs require payment only in cryptocurrency (which, presumably, do not constitute ‘money’. This solution did not stop the US SEC to make the same judgement concerning ICOs (SEC v. Shavers, et al. 2013 U.S. Dist. LEXIS 130781 (E.D. Tex., Sept. 18, 2014), case note <http://www.thompsonhine.com/uploads/1137/doc/ECLR_Volume_14_Issue_5_pg_22.pdf>, accessed 28 June 2018), while the EU is still to take a stance on the matter. For details see also: ibid. 321, 327–328 and A Gikay, Regulating Decentralized Cryptocurrencies Under Payment Services Law: Lessons from European Union Law, Case Western Reserve Journal of Law, Technology & the Internet, Vol. 9, 2018 (2018), 2.
121For details and examples see: Gikay, How the New Generation Cryptocurrencies Decoded the Investment Contract Code: Analysis of US and EU Laws, 311, 325–327.
122For a detailed and in-depth analysis of ICOs see: P Hacker and C Thomale, Crypto-Securities Regulation: ICOs, Token Sales and Cryptocurrencies under EU Financial Law (2017).
123The Securities Act, 1933, Section 2, letter a), point 1.
124The Security Exchange Act, 1934, Section 3, letter a), point 10.
125US Supreme Court, SEC v Howey Co. , 328 US 293. For a detailed discussion of the Howey test see Gikay, How the New Generation Cryptocurrencies Decoded the Investment Contract Code: Analysis of US and EU Laws, 311, 328–330.
127See Regulation (EU) no 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), amending Decision no 716/2009/EC and repealing Commission Decision 2009/77/EC (ESMA Regulation).
128Recital 1 of ESMA Regulation.
129Recital 3 of ESMA Regulation.
130Recital 11 and Art 1, Para 5 of ESMA Regulation.
131Recital 12 and Art 9, Para 5 of ESMA Regulation.
132Recital 15 provides a definition for system risk seen as: ‘a risk of disruption in the financial system with the potential to have serious negative consequences for the internal market and the real economy.’ See also Art 1, Para 5 and Art 23 of ESMA Regulation.
133Art 10 and 15 of ESMA Regulation.
134Art 16 of ESMA Regulation.
135Recital 26 and Art 8, Para 2 of ESMA Regulation.
136Recital 27 of ESMA Regulation. In this regard, ESMA is provided with investigative and recommendation powers regarding national supervisory authorities, but also with the capacity to adopt decisions addressed to individual financial market participants (Recitals 28 and 29) and to require national authorities to take specific remedial actions (Recital 31). However, the former is affected by the principle of complementarity (Recital 39) and must be used in exceptional circumstances when the competent authorities fail to take the adequate measures recommended by the authority and formally opinioned by the EU Commission (See also Art 18 of ESMA Regulation).
137Art 9 of ESMA Regulation.
138Art 9, Para 1 of ESMA Regulation.
140Art 9, Paras 2 and 3 of ESMA’s Regulation.
141Art 9, Para 4 corroborated with.
142Consumers are also part of the Securities and Markets Stakeholder Group (SMSG) established by Art 37 of ESMA Regulation. The SMSG is to be consulted on actions taken under Arts 10–15 of ESMA Regulation regarding adoption and implementation of technical standards and may issue opinions and advice to ESMA that do not have a mandatory or a binding character. See for instance SMSG’s Advice to ESMA – Own Initiative Report on Initial Coin Offerings and Crypto-Assets, issued on 19.10.2018, ESMA 22-106-1338 (SMSG ICO Advice), available online at: https://www.esma.europa.eu/sites/default/files/library/esma22-106-1338_smsg_advice_-_report_on_icos_and_crypto-assets.pdf, accessed on 13.12.2018.
143Art 9, Para 5 of ESMA Regulation.
144For details see infra Subsection 2.2.2.
145ESMA Statement of 13th November 2017, 1, <https://www.esma.europa.eu/sites/default/files/library/esma50-157-828_ico_statement_firms.pdf>, accessed 29 October 2018.
147Gikay, How the New Generation Cryptocurrencies Decoded the Investment Contract Code: Analysis of US and EU Laws, 311, 328.
149ESMA’s statement came only after a plunge of 29% in the value of Bitcoin and was not doubled by any bans or measures similar to those taken by the US SEC. See: Roger Aitken, EU Regulator Follows US SEC with Stark ‘ICO Risk’ Warnings, Forbes, Nov 13, 2017, <https://www.forbes.com/sites/rogeraitken/2017/11/13/eu-regulator-follows-u-s-sec-with-stark-ico-risk-warnings/#521752505ead>, accessed on 28.06.2018.
151Cohney, Shaanan and Hoffman, David A. and Sklaroff, Jeremy and Wishnick, David, Coin-Operated Capitalism (July 17, 2018). Columbia Law Review, Forthcoming; U of Penn, Inst for Law & Econ Research Paper No. 18–37, p. 51. Available at SSRN: https://ssrn.com/abstract=3215345 or https://doi.org/10.2139/ssrn.3215345, accessed on 05.12.2018.
153Chuan Tian, ‘$1.6 Billion> All-Time ICO Funding Climbs as Record $500 Million Invested in July, Coindesk (4 August 2017) <https://www.coindesk.com/1-6-billion-all-time-ico-funding-climbs-as-record-500-million-invested-in-july/>, accessed 28 June 2018.
154EOS Token Purchase Agreement <https://eos.io/documents/block.one%20-%20EOS%20Token%20Purchase%20Agreement%20-%20September%204,%202017.pdf>, accessed 28 June 2018.
155See Id, ‘Important Information’ section.
156Art 5.6 ‘Buyer Knowledge and Risks of Project’.
159Paul Vigna, ‘Investors Bet $4 Billion on a Cryptocurrency Startup’, The Wall Street Journal, (29 May 2018), <https://www.wsj.com/articles/investors-bet-4-billion-on-a-cryptocurrency-startup-1527591600?mod=e2tw>, accessed 28 June 2018.
160Brady Dale, ‘EOS Is Launched But Not Yet Live – Why?’, Coindesk, (12 June 2018), <https://www.coindesk.com/eos-launched-not-yet-live-heres/>, accessed 20 October 2018.
163Gikay categorizes ESMA as a ‘passive observer’ in comparison to the US SEC. He argues that ‘given the complexity of the issue [of ICOs] and the need to have legal clarity and to protect the market and consumers/investors from abusive behaviors, the ESMA should have given detailed guideline by now.’ Gikay, How the New Generation Cryptocurrencies Decoded the Investment Contract Code: Analysis of US and EU Laws, 311, 328 and Gikay, Regulating Decentralized Cryptocurrencies Under Payment Services Law: Lessons from European Union Law, Case Western Reserve Journal of Law, Technology & the Internet, Vol. 9, 2018, 18.
164European Commission, Directorate-General for Justice and Consumers, ‘Behavioral Study on the Transparency of Online Platforms. Final Report, 2018 (Transparency Report), <https://ec.europa.eu/info/sites/info/files/transparency_of_platforms-study-final-report_en.pdf>, accessed 28 June 2018.
173European Commission, Press Release, ‘A New Deal for Consumers: Commission strengthens EU consumer rights and enforcement’, 11 April 2018, http://europa.eu/rapid/press-release_IP-18-3041_en.htm, accessed 28 October 2018.
174Howells, 365–367. Irina Domurath, ‘A Map of Responsible Lending and Responsible Borrowing in the EU and Suggestions for a Stronger Legal Framework to Prevent Over-Indebtedness of European Consumers’ in Micklitz and Domurath, 167.

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