Source: https://www.juridicainternational.eu/index.php?id=12750
Timestamp: 2019-04-19 12:59:50+00:00

Document:
The problems related to provision of information are extensive and multifaceted in the case of financial services contracts. Promotion of security, sustainability, and general reliability of commerce is what contract law provisions should ensure, and, to this end, an ex ante approach must be guaranteed with contractual relations in financial services. Because of the limited scope of this article, it focuses on the specifics of the problems surrounding the information duties in entering into financial services contracts. It also discusses the imperative regulations with regard to notification applicable to financial services contracts under current Estonian law as part of the aftermath of the changing security situation in society. The security of society is a prerequisite for the preservation of human dignity, thus outweighing other values. The author considers to what extent the legislator has, in order to protect this prevailing public interest, imposed on the credit and financial institutions the obligation to gather information on customers. For the purposes of this article, the term ‘financial services contracts’ refers to contracts for provision of investment services and services allowed to management companies, as well as services specified in § 6 (1) of the Credit Institutions Act (CIA)*9 and insurance contracts.
2) the problem of comprehensibility of information and that of the ability to use information.
In the case of using a financial service under a long-term contract, often problems are encountered that are related to the timeliness and reliability of the information available to the parties. On the one hand, the information available to a service provider regarding the customers and their needs changes. Information is of paramount importance for enterprises in the financial sector in their everyday practice in evaluating risks*15 and making management decisions.*16 According to the new regulation on the adequacy of the banks’ capital, the amount and quality of information have a direct effect on the calculation of capital requirements.*17 Therefore, the economic value of information, including information on the person of the customer, changes over time and the provider of the service wants, at all times, more information on the customer.
On the other hand, over time the actual value becomes less and less transparent for the customer.*18 It is difficult and costly for the customer to obtain relevant information about the financial services because collecting information on the usefulness of a service requires specific knowledge about the realm of financial risks. In using services, especially those provided over the Internet, investors have at their disposal many different sources in addition to the information disclosed to them by the contract partner. Those other sources include the information disclosed by enterprises providing services of advising about financial information and related consultancy services and that are not subject to regulation under public law. The legal regulation of advising and consultation focuses more on the methods of providing traditional financial services.*19 Overabundance of available information does not necessarily ensure reasonable decision-making, as it makes it more difficult to evaluate the existing information.
The problem of comprehensibility of information and the ability to use it may, in other words, be treated also as a problem of forming a declaration of intention. In the realm of financial services there is a huge difference between the objective content of reasonableness and the ability of a person to rationally weigh his decisions. A customer does not necessarily know which kind of information would aid his decision‑making, and, from his existing experience, the customer is incapable of foreseeing future development trends.
Individuals who are capable of estimating financial information contribute to effective functioning of the financial markets. They sense the risks of different financial services better. As the financial markets become increasingly complicated and consumers are expected to demonstrate greater responsibility and risk-tolerance in making decisions, individuals’ awareness is necessary not only for their own welfare but also to facilitate smooth functioning of the financial markets.*22 On the basis of the above, one can conclude that the information disclosed upon entry into financial services contracts and the comprehensibility of that information in forming the intention of the parties to the contract have a great impact both on the contractual parties and on society as a whole.
Readiness to trust expert systems is of key importance in the case of transactions over the Internet or via other means of communication, and also in electronic banking, insofar as such innovative practices assume that a technically advanced and abstract system is trusted and occur disembedded from time and space.
Because of the special role discussed above, the legislator has imposed certain obligations in public law on the banks and other providers of payment services whose purpose is to increase the reliability of commerce and society as a whole.
From the above reasoning, it is not justifiable for legal literature to consider information duties in financial services contracts and other contracts for goods and services without drawing a clear distinction between them.
The extent of information duties and the content of information are greatly affected by market conduct rules; also other restrictions are applicable to the reliability of the activities of providers of financial services. We will proceed to treat just one aspect of these: legal provisions concerning prevention of money laundering and financing of terrorism.
Because of the threats posed by the crimes of money laundering and terrorism, prevention of such crimes may be treated as serving prevailing public interest,which gives the public authorities sufficient grounds to impose obligations on persons and restrict the rights of persons*43 , inter alia,to restrict the freedom of contract and to imperatively regulate information duties in the course of pre-contractual negotiations.
The author believes that the above-mentioned approaches do not exhaust all of the important types of information. They do not take into account the customer’s obligation to give to the financial services provider information necessary for the latter to meet the obligations imposed in public interests. Indubitably, the service provider has identifiable essential interest in such information. This issue cannot be approached solely on the basis of the relevant provisions of contract law.
– the options for termination of the contract.
Whether or not anti-money-laundering or anti-terrorism due-diligence methods can be applied depends largely on the personal and other information received from the customer in the course of concluding a settlement contract or a long-term contract for the use of other financial services. In conclusion of a settlement contract or other long‑term contract entailing rights of account, it is paramount that the service provider meet the obligation, in conformity with the principle of the formal right of account, to ascertain the identity of the person declaring intention to enter into the contract, and to validate such information. A bank must verify the real name and identify of the customer and be sure that the customer is not using a false name. Pursuant to § 89 (2)1 of the Estonian Credit Institutions Act, upon entry into a contract or transaction, the credit institution is required to identify the customer or the representative thereof.
These days in Europe, the positions and practices of theorists are largely influenced*48 by the Basel Committee on Banking Supervision guidelines ‘Customer Due Diligence for Banks’*49 and its annex ‘General Guide to Account Opening and Customer Identification’.*50 Because of the regulative arbitrage argument, it is of utmost importance that the content and extent of the information disclosed by the customer upon entry into a financial services contract be similarly regulated by law in the countries in the same region.
Next we shall look at the legal provisions to which a financial services provider must adhere in Estonia in obtaining information about the customer during pre-contractual negotiations.
In Estonia, active information duties have been prescribed for the customer to be followed upon entry into long-term contracts pursuant to MLTFPA § 23 (4). During negotiations with a credit or financial institution, a customer has no right to remain silent about information the service provider needs for application of due-diligence measures. Such a legal provision induces creation of a trust-based contractual relationship between both parties and reduces to a minimum the risk of errors related to the identity of a customer. This represents a special provision of the customer’s information duty and should ultimately support acting in good faith. The information duties of the customer arising out of the special provisions are significantly wider and more precise than is traditionally required in relative obligation relations. Therefore, one can conclude that the requirement of society’s security and sustainability significantly extends protection obligations in contractual relations to those who are not actually party to the contract.
In addition to the aforesaid, a payment services provider needs to consider, during pre‑contractual negotiations, regulation (EC) 1781/2006 of the European Parliament and of the Council of 15 November 2006 on information on the payer accompanying transfers of funds.*57 Complete traceability of money transfers may be especially important and valuable in prevention, investigation, and detection of money laundering or terrorism. To achieve this goal, payment service providers are required to communicate precise and concise information about the payer when making the transfer. Pursuant to Article 4 of the above-mentioned regulation, complete information on the payer shall consist of name, address, and account number. The address may be substituted for with the date and place of birth of the payer and his customer identification number or national identity number. Where the payer does not have an account number, the payment service provider of the payer shall replace this with a unique identifier that allows the transaction to be traced back to the payer. The payment service provider of the payer shall, before transferring the funds, verify the complete information on the payer on the basis of documents, data, or information obtained from a reliable and independent source. Therefore, each person who submits a payment order to the credit institution (irrespective of whether that person has entered into a settlement contract) must be properly identified by the credit institution.
On the basis of the above discussion, it is clear that both the European and Estonian legislator consider it very important that credit and financial institutions gather precise information about the identity of their customers and have granted the financial services providers legal means to minimise the risk of making an error in the identification of the other party to the contract.*58 Credit and financial institutions can reduce the risks of not knowing the personal data of the customer in conformity with their general terms and conditions, standard terms, and internal provisions.
Nowadays, contract law carries a general protection function. The general principle of human dignity should be a potential source for new restrictions on the freedom of contract under European law. The positions of the market failure thesis affect the regulation of information duties applicable upon entry into financial services contracts. Such a regulation is not so much connected with consumer protection as conditioned by the specific nature of the financial market and can be justified by the special role banking plays in society. Security of society is a condition prerequisite to the continuation of mankind and outweighs other values. Because of the dangers posed by the crimes of money laundering and terrorism, prevention of such crimes can be treated as serving prevailing public interest, which sufficiently justifies the public authorities’ imposing obligations on credit and financial institutions, including restricting the freedom of contract. It is sufficient grounds to require customers to provide during pre-contractual negations information about themselves to the extent provided for by law. The need to ensure security and the sustainability of society extends the protection obligation in contractual relations to those who are not party to the contract.
*1 J. W. Rutgers. An Optional Instrument and Social Dumping. – European Review of Contract Law 2006 (2) 2, pp. 198.
*2 R. Brownsword. Contract Law Themes for the Twenty-First Century. Oxford University Press 2006, pp. 65.
*3 See Article 2 (2) and (3) of the Treaty of Lisbon, which amended the Treaty on European Union and the Treaty establishing the European Community. – OJ C 306, 17.12.2007, p. 10.
*4 M. R. Marella. The Old and the New Limits to Freedom of Contract in Europe. – European Review of Contract Law 2006 (2) 2, p. 274.
*5 The Principles of European Contract Law. Parts I (1995, 1999) and II (1999). O. Lando, H. Beale (eds.). The Hague 2000; Part III. O. Lando, E. Clive, A. Prüm, R. Zimmermann (eds.). The Hague 2003. See also O. Lando. The European Principles in an Integrated World. – European Review of Contract Law 2005 (1) 1, p. 18.
*6 C. von Bar, E. Clive, H. Schulte-Nölke (eds.). Principles, Definitions and Model Rules of European Private Law: Draft Common Frame of Reference. Interim Outline Edition. München: Sellier 2008, p. 18. Available at http://www.law-net.eu/ (27.11.2008).
*7 E. Tikk, A. Nõmper. Informatsioon ja õigus (Information and Law). Tallinn: Advokaadibüroo Raidla Partnerid, Juura 2007, pp. 18–19 (in Estonian).
*8 See T. Wilhelmsson, C. Twigg-Flesner. Pre-contractual information duties in the acquis communautaire. – European Review of Contract Law 2006/4, p. 446.
*9 Krediidiasutuste seadus. – RT I 1999, 23, 349; 2008, 3, 21 (in Estonian); available in English at http://www.just.ee/23295 (version dated 1.01.2007).
*10 R. Cooter, T. Ulen. Law and Economics. 4th edition. Boston: Pearson, Addison Wesley 2004, pp. 205–206.
*11 C. Goodhart, P. Hartmann, D. Llewellyn, L. Rojas-Suarez, S. Weibrod. Financial Regulation: Why, How and Where Now? London: Routledge 1998, pp. 4–8.
*12 H. Mcvea. Financial Services Regulation. Under the Financial Services Authority: A Reassertation of the Market Failure Thesis. – The Cambridge Law Journal 2005, pp. 421–422.
*13 P. Cartwright. Banks, Consumers and Regulation. Hart Publishing 2004, p. 51.
*14 M. Ebers. Information and Advising Requirements in the Financial Services Sector: Principles and Peculiarities in EC Law. – Electronic Journal of Comparative Law, June 2004 (8.2). Available at http://www.ejcl.org/82/abs82-2.html (20.03.2008).
*15 According to the general approach, risk means the danger of wrong decisions, i.e., the danger that the chosen goal is not achieved in full or at all; the risk inherent in making a decision always is due to the uncertainty of the consequences of such a decision.
*16 O. Karma, T. Paas. Riski mõiste ja majandusriskid – Riskid Eesti majanduses (The Concept of Risk and Economic Risks — Risks in Estonian Economy). Tartu: Tartu Ülikooli Kirjastus 2000, pp. 51–53.
*18 Due to the risks related to exchange rate fluctuations, stock exchange listing or the stock exchange index and other risks inherent of the financial market, the solvency and general financial soundness of the service provider, the quality of the service, variable rate interest and the related service charges — they all change. The legislator accepts the impact of the market situation also in the regulation of general conditions for providing financial services in conformity with clause 2 of the Annex of the Council Directive 3/13/EEC of 5 April 1993 on unfair terms in consumer contracts, transposed into Estonian law by LOA § 43.
*19 See D. Kingsford-Smith, K. Williamson. How Do On-line Investors Seek Information, and What Does This Mean For Regulation? – Electronic Law Journals. Journal of Information, Law and Technology 2004/2. Available at http://www2.warwick.ac.uk/fac/soc/law/elj/jilt/2004_2/kingsford-smithandwilliamson (28.04.2008).
*20 H. Mcvea (Note 12), p. 422. See also P. Cartwright (Note 13), p. 55.
*21 Questionnaire for the Attention of the Government Expert Group on Mortgage Credit. Letter of the Commission of the European Communities, dated 1 April 2008, No. MARKT/H3/CH D (2008).
*22 Improving Financial Literacy. Analysis of Issues and Policies. OECD Publishing 2005, p. 20.
*23 See H. Kümpel. Bank- und Kapitalmarktrecht. 2. Aufl. Köln 2000, p. 16.
*24 A. Giddens. The Consequences of Modernity. Stanford: Stanford University Press 1990, p. 27.
*25 A. de Jasay. The Failure of Market Failure: Part I. The Problem of Contract Enforcement. The Library of Economics and Liberty. Available at http://www.econlib.org/library/Columns/y2006/Jasayfailure.html (15.05.2008).
*26 LOA § 7 (2): In assessing what is reasonable, the nature of the obligation, the purpose of the transaction, the usages and practices in the fields of activity or professions involved and other circumstances shall be taken into account.
*27 Võlaõigusseadus. – RT I 2001, 81, 487; 2007, 56, 375 (in Estonian).
*28 P. Varul, I. Kull, V. Kõve, M. Käerdi (compilers). Võlaõigusseadus. Üldosa (§§ 1–207). Kommenteeritud väljaanne (Law of Obligations Act. General Part (§§ 1–207). Commented edition)­. Tallinn: Juura 2006, § 14 commentary 3 (in Estonian).
*29 Commission of the European Communities. Second Progress Report on the Common Frame of Reference. Brussels, 25.07.2007. COM(2007)447 final. Available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2007:0447:FIN:EN:PDF (27.11.2008).
*30 S. Grundmann, J. Hollering. EC Financial Services and Contract Law – Developments 2005–2007. Report. – European Review of Contract Law 2008 (1), pp. 45–64.
*31 M. Ebers (Note 14).
*32 G. Decocq. Cyber Consumer Protection and Unfair Competition. – Electronic Journal of Comparative Law, December 2007 (11.3). Available at http://www.ejcl.org/113/article113-18.pdf (23.04.2008).
*33 R. Polcak. In Law, We Trust: Shortly to Bumblebees and the Normativity of Law in Cyberspace. Conference paper Cyberspace 2005, Conference organised by Masaryk University, Faculty of Law with School of Social Studies 7–8 November 2005, Masaryk University, p. 7.
*34 M. Ebers (Note 14). See also H. Mcvea (Note 12), p. 421.
*35 See W. C. Gilmore. Dirty Money. The Evolution of International Measures to Counter Money Laundering and the Financing of Terrorism. Council of Europe Publishing 2004, p. 65–77. Estonia has acceded to the Vienna Convention (RT II 2000, 15, 926), Strasbourg Convention (RT II 2000, 7, 41), Palermo Convention (RT II 2003, 1, 1) and UN 1999 International Convention for the Suppression of the Financing of Terrorism (RT II 2002, 12, 45).
*36 The national provisions concerning the prevention of money laundering and terrorist financing must take into account the 40 recommendations and nine special recommendations against the financing of terrorism of the Financial Action Task Force, FATF (available at http://fatf-gafi.org). These recommendations represent one of the twelve standards of stable financial environment (http://www.fsforum.org) and they were also the basis from which Directive 2005/60/EC was developed.
*37 OJ L 309, 25/11/2005, pp. 0015–0036.
*38 The concept of ‘due diligence’ is provided for in § 13 of the Prevention of Money Laundering and Financing of Terrorism Act.
*39 See W. C. Gilmore (Note 35), pp. 93–97.
*40 I. Tibar. Rahapesu kujunemisloost ja olemusest (On the Evolution and Nature of Money Laundering). – Juridica 2007/8, p. 578 (in Estonian).
*41 Rahvusvahelise sanktsiooni seadus. – RT I 2002, 105, 612; 2004, 2, 7 (in Estonian).
*42 Application of International Sanctions within the Framework of the Common Foreign and Security Policy of the EU. Available at http://ec.europa.eu/external_relations/cfsp/sanctions/index_et_2006.pdf (22.04.2008).
*43 Seletuskiri rahapesu ja terrorismi rahastamise tõkestamise seaduse juurde (137 SE) (Explanatory Memorandum to the Money Laundering and Terrorist Financing Prevention Act (137 SE)). Available at http://www.riigikogu.ee/?page=en_vaade&op=ems&eid=163492&u=20080716212957 (27.11.2008).
*44 R. Zimmermann. The New German Law of Obligations. Historical and Comparative Perspective. Oxford University Press 2005, p. 212.
*45 M. Ebers (Note 14).
*46 P. Cartwright (Note 13), p. 56.
*47 H. Herrmann. Bank–Customer Relationship in German Law and Practice. – German Banking Law and Practice in International Perspective. N. Horn (ed.). Berlin, New York: Walter de Gruyter 1999, p. 99.
*48 See, e.g., Otmyvanye deneg. Bankovskii monitoring. Hypo Investment Bank (Liechtenstein) (ed.). Gratz: NWV Neuer Wissenschaftlicher Verlag 2006. See also W. C. Gilmore (Note 35), p. 108.
*49 Customer Due Diligence for Banks. Basel Committee on Banking Supervision. Publication No. 85. Available at http://www.bis.org/publ/bcbs85.htm (28.04.2008).
*50 General Guide to Account Opening and Customer Identification. Basel Committee on Banking Supervision. Publication No. 85. Annex. Available at http://www.bis.org/publ/bcbs85annex.htm (28.04.2008).
*51 Nõuded krediidi- ja finantseerimisasutuse poolt kehtestatavatele protseduurireeglitele ning nende rakendamisele ja täitmise kontrollimisele. – RTL 2008, 29, 428 (in Estonian).
*52 Rahapesu ja terrorismi rahastamise tõkestamise seadus. – RT I 2008, 3, 21; 2008, 27, 177 (in Estonian).
*53 Financial Action Task Force. The 40 Recommendations. Available at http://www.fatf-gafi.org/document/28/0,3343,en_32250379_32236930_33658140_1_1_1_1,00.html (30.04.2008).
*54 Pursuant to MLTFPA § 8, a beneficial owner is a natural person who, taking advantage of his or her influence, exercises final control and in whose interests or favour or on whose account a transaction or act is performed. A beneficial owner is also a natural person who has or exercises final control over management of a company by having over 25 percent of shares or voting rights through direct or indirect shareholding or control, including in the form of bearer shares; otherwise exercising control over management of a legal person. A beneficial owner is also a natural person who, to the extent of no less than 25 percent determined beforehand, is a beneficiary of a legal person or civil law partnership or another contractual legal arrangement, which administers or distributes property, or who exercises control over the property of a legal person, civil law partnership or another contractual legal arrangement to the extent of no less than 25 percent. A beneficial owner is also a natural person who, to an extent not determined beforehand, is a beneficiary of a legal person or civil law partnership or another contractual legal arrangement, which administers or distributes property, and in whose interests a legal person, civil law partnership or another contractual legal arrangement is set up or operates.
*55 Guidelines of the Swedish Finansinspektionen, 9 June 2005. Regulations and General Guidelines Governing Measures against Money Laundering and Financing of Particularly Serious Crimes in Certain Circumstances, § 8. Available at http://www.fi.se/Templates/SearchPage____1687.aspx?pattern=money+laundering; Standard 2.4 of the Finnish Rahoitustarkastus. Code of Conduct. Customer Identification and Customer Due Diligence, pp. 16 and 26. Available at http://www.fi.se/Templates/SearchPage____1687.aspx?pattern=money+laundering (1.05.2008).
*56 Council of the European Union. EU Best Practices for the effective implementation of restrictive measures, 14.06.2006. Available at http://register.consilium.europa.eu/pdf/en/06/st10/st10533.en06.pdf (22.04.2008).
*57 OJ L 345, 8.12.2006, pp. 0001–0009.
*58 Violation of the requirements of identification and verification and failure to apply international sanctions is punishable under the penal law. See MLTFPA §§ 57 and 63, and §§ 931 and 395 of the Penal Code (Karistusseadustik. – RT I 2001, 61, 364; 2008, 33, 200; in Estonian).

References: § 6
 § 89
 § 23
 § 43
 § 7
 V. 
 § 14
 § 13
 § 8
 § 8