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Contracts may become unenforceable under forthcoming distance marketing regulations Back  
With transposition of the Distance Marketing Directive imminent, it is advisable for financial services firms to commence a review of their documentation now and at the very least draft addenda to existing contracts/ terms of business, Orla Beaton recommends.
IIt is now commonplace for consumers to purchase financial products without face-to-face contact with the provider. In fact, intangible products such as financial services are particularly suited to this method of trading particularly when sold cross-border. Today, bank accounts are opened, insurance policies are purchased and investments are made more often than not online or over the telephone.

Whilst efficient and cost-effective, distance selling places an onus on the provider to ensure that any essential information, which would have otherwise been provided in a face-to-face meeting, continues to be provided when trading at a distance from the customer. The customer is very much reliant on receiving accurate and clear product descriptions and terms from the provider in order to make a well-informed choice.
EC Directive 2002/ 65/ EC on the distance marketing of financial services (hereinafter referred to as the New Directive), which is due to be transposed imminently in Ireland, attempts to regulate the distance selling of financial products to consumers across Member States. The New Directive extends the existing distance selling regime, initiated by EC Directive 1997/ 7/ EC, on the protection of consumers in respect of distance contracts (hereinafter referred to as the Original Directive).

By way of background, under the New Directive, distance contracts are those where the offer, negotiation and conclusion are carried out at a distance. Contracts negotiated ‘at a distance’ involve the use of distance communication methods, which do not require the simultaneous presence of the provider and the consumer.
Distance communication will typically refer to communications via email, telephone, by post, by fax, by television/ videophone or over the internet. In the context of the New Directive, the term ‘financial services’ includes any service of a banking, credit, insurance, personal pension, and investment or payment nature.
The New Directive is intended to protect consumers i.e. natural persons who are acting outside their trade, business or profession.

In addition to provisions relating to unsolicited sales and cancellation rights, the New Directive sets out the information, which must be provided to the customer by the provider of the financial service before the distance contract is concluded. The extensive list of disclosures includes the identity and main business of the provider, details of appointed representatives, whether or not a right of cancellation is offered and arrangements for complaints and redress. Full written disclosures must be provided in a ‘clear and comprehensible’ manner before the contract or offer binds the customer. However, if the means of distance communication does not allow the full disclosure of the requisite information either in writing or over the telephone before the contract is concluded, the provider can comply with the requirements by providing the information immediately after the conclusion of the contract. Providers are also obliged to have due regard to the principles of good faith in commercial transactions, and to any principles governing the protection of those who are unable to give their consent, such as minors.

In the case of telephone sales of financial services, certain key information must be provided explicitly at the beginning of the conversation, such as a description of the product characteristics, the price information, the minimum duration of the contract (if any) and the existence of a right to cancel. Full terms and conditions of the contract must be sent to the customer preferably before the conclusion of the contract or immediately after where this is not possible. The New Directive gives consumers the right to change the means of distance communication used at any time, unless this is incompatible with the nature of the financial service.

Draft Regulations entitled the EC (Distance Contracts for the Supply of Financial Services) Regulations, 2004 (hereinafter known as the Draft Regulations) to transpose the New Directive in Ireland were published for consultation by the Department of Finance back in September. In the consultation paper it was clearly specified that the aim in preparing the Draft Regulations was to reflect the provisions of the New Directive as closely as possible. However, the Draft Regulations go further than is strictly required by the New Directive in some respects. In fact, the New Directive itself encourages the introduction of more stringent provisions on prior information by Member States pending further harmonisation at EU level. As a result, the Department of Finance has received a large number of responses to the consultation, which caused a delay in finalising the Regulations (the deadline for transposition was 9 October 2004). In fact, it is believed that the Draft Regulations have been substantially re-drafted to reflect the comments received from interested parties. The Minister for Finance is expected to sign the Draft Regulations prior to the Christmas break at which point it will be possible to identify any changes made. One important provision contained within the Draft Regulations is that distance contracts will become unenforceable if the requisite prior information has not been supplied within the time period specified. Whilst not specifically required by the New Directive, this provision reflects similar requirements contained within the Original Regulations and is therefore likely to remain in the final version. This clearly places a large onus on financial service providers to ensure that their contractual documentation incorporates the prior disclosure requirements of the Draft Regulations.

The Draft Regulations give the Central Bank and Financial Services Authority of Ireland and the Director of Consumer Affairs the power to carry out onsite inspections of the financial service provider’s premises and records and to apply to the High Court for an order to enforce compliance. It does, however, remain to be seen whether either of these authorities will have the resources to supervise and enforce compliance with the Regulations. Summary conviction for an offence under the Draft Regulations carries a fine of up to €3000 and a maximum prison term of 6 months or both.

Finally, under the Draft Regulations, the Financial Services Ombudsman is given the jurisdiction to investigate and adjudicate a dispute between a consumer and a provider of a financial service arising in connection with a distance contract. The Financial Services Ombudsman, provided for in the Central Bank and Financial Services Authority of Ireland Act, 2004, is not due to come into effect until 1 April 2005.

Due to the delay in transposition and the uncertainty regarding the extent of the prior disclosure provisions many firms are putting off full consideration of the impact of the New Directive on their documentation. This in itself may be problematic. Other than the unenforceable contract provisions discussed above, by and large the prior information provisions in the Draft Regulations are the same as those contained within the New Directive.

As a consequence, in this context it is difficult to see where the amendments will arise in the final version. Therefore, given that transposition is imminent, it would be advisable for financial services firms falling within the Directive to commence a review of their documentation now and at the very least draft addenda to existing contracts/terms of business. Furthermore, the information, which requires to be disclosed in respect of telephone sales, will necessitate substantial staff training for a large number of providers in the marketplace and preparations should be made in this regard.

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