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Distance selling: many more hurdles for e-banking Back  
The proposed EU distance selling directive for financial services will impose new, sometimes thorny, regulations on e-banking and e-insurance, writes Edward Madden, and these could have the effect of undermining the advantages of internet financial services.
Further regulation geared towards those who provide financial services on a strictly business-to-consumer level has been proposed by the European Commission. The proposed Directive on the Selling of Financial Services by Distant Means (which includes e-banking) was first introduced in 1998. After an amended version of the legislation appeared last year, the time is fast approaching for the draft legislation to pass the final hurdle of the European legislators. Irish financial institutions hoping to sell or market financial services online will be faced with even more regulation than currently exists.

Why more regulations?
The need for the proposed legislation was tabled by the Commission on the basis that consumers need more protection where financial institutions are selling their services by means of distance communication. Already a Directive exists to protect consumers who purchase goods and services by distance means (Distance Selling Directive). But consumers of financial services will not gain any protection under this Directive when it comes into force in Ireland later this year. The proposed legislation was drafted in order to ensure continuity of consumer protection by filling the gap which the Distance Selling Directive created.

Further obligations
The proposed Directive does not differ drastically from the Distance Selling Directive, and to a large extent some of the key consumer rights provisions in that legislation are reflected in the new proposed obligations and rights. Indeed, the rights to be conferred by the Directive will not be totally novel to Irish law as similar rights currently exist under the Consumer Credit Act 1995.

• Right to information
Financial service providers (FSPs) will now have to provide certain information to potential customers before any contract is concluded. Contracts which inherently entail greater risk or greater financial contribution by a consumer will warrant the provision of more information than less ‘onerous’ contracts.

The information to be provided must have a clear commercial purpose and must be displayed to the consumer in a clear and comprehensible manner. Moreover, the FSP will now be obliged to communicate the terms to the consumer in paper or other durable format. This has the effect that if an internet user wishes to subscribe to some service online, the terms and conditions of use of that service will have to be sent to the consumer thereafter in non electronic format.

• Rights of withdrawal / cooling-off period
With certain exceptions (such as in the case of contracts for foreign exchange, investment in stocks or financial futures, where the ultimate price is beyond the control of the FSP) the consumer will have a right to withdraw from the contract he made over a period of 14-30 days.

The extent of the cooling off period will depend on the nature of the financial services concerned and whether or not terms were available before the contract was concluded (e.g. the consumer already had a brochure in his possession which outlined the terms and conditions). What is remarkable is that the consumer does not have to indicate his grounds for cancellation, and no penalty for such withdrawal can be levied on him. This has far reaching repercussions for FSPs contemplating an online trading presence, where consumers will have a right to totally withdraw up to 30 days after concluding the agreement.

In some cases the FSP may already have started to provide the service in question. Certainly this provision goes against normal principles of contract law where performance of the terms are obligatory once agreement has been reached. Cooling-off periods are not unheard of though: The Consumer Credit Act 1995 also provides for a cooling-off period of up to 10 days for agreements coming within the terms of that legislation i.e. agreements whereby consumers can purchase goods/products on credit over a certain period of time. However in the context of online trade, this provision could act as a deterrent to potential online banks, who may feel obliged to sit-out the cooling-off period before beginning to provide the service. This very provision transcends one of the main reasons for the exponential development of the internet: the increased speed with which business can be conducted.

• Additional consumer rights
The proposed Directive also recognises that modern communications will enable FSPs to contact potential customers quite easily, and sometimes without their permission. The legislation proposes to outlaw unsolicited communications unless the consumer has consented to receiving such information.

• Remedies
In most cases of infringement of the terms of the Directive, the consumer will be provided with the right to cancel the contract. Member States will also be free to provide appropriate penalties using existing procedures under national law provided adequate judicial and administrative redress is available.

Doubts over enactment
It remains to be seen whether or not this legislative proposal will be adopted at EU level. The single argument of the EU Commission that a gap in consumer protection needs to be filled will not on its own justify the imposition of further regulation in an area which is already regarded by many commentators as over regulated.

Perhaps the principal difficulty, which could turn out to the final nail in the coffin of the proposed legislation, is the fact that if the legislation is implemented the obvious advantages associated with trade online (principally, speed) will be negatived. For example cooling-off periods which last longer than in the case of non-electronically formed agreements, can only act as a deterrent to an industry which is increasingly turning to electronic communications in order to appease customer dissatisfaction with the current system for purchasing financial services.

Similar criticism was mounted against the Distance Selling Directive during its journey through the EU legislature. The main difference in this case is that financial services law, and banking law in particular, are already consumer friendly. In any event should the unfavourable arguments against the proposed directive continue (as happened after the release of the first draft in 1998), the Commission may decide to produce a further revised draft before a final legally binding version. Even then, should the current opposition prevail, the Commission may ultimately be forced to retire the proposal to the waste-paper basket, a move which would be supported by most Irish financial institutions.

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