Current status and recap on background to the new Directive
The European Commission adopted a legislative proposal on the proposed new Directive concerning financial services contracts concluded at a distance on 11 May 2022. On 6 June 2023, the Council and the Parliament announced that they had reached provisional political agreement on the revised text of the proposal. The European Parliament adopted the proposed Directive at first reading on 5 October 2023.
On 23 October 2023, the EU Council announced its adoption of the text of the Directive, which repeals the Distance Marketing of Financial Services Directive (2002/65/EC) (DMD) and transfers the consumer protections framework to the Consumer Rights Directive (2011/83/EU) (CRD) to form an additional chapter of that Directive.
The new Directive is part of the Commission’s New Consumer Agenda, which was launched in 2020 to update the EU’s overall strategic framework for its consumer policy.
The legislative proposal for the new Directive was introduced following the Commission’s review of the current DMD (part of its 2020 work programme), which found that:
- Following the entry into application of the DMD, its relevance and “value add” had been reduced by the introduction of several pieces of EU product-specific legislation (e.g. the Consumer Credit Directive) and EU horizontal legislation (the General Data Protection Regulation).
- A number of developments such as the increasing digitalisation of financial services had affected the DMD's effectiveness in achieving its main objectives.
- Despite the above, the DMD remained useful because its horizontal application ensured that consumers had a certain level of protection for contracts concluded at a distance for those financial products that were not yet subject to any EU legislation.
What are some of the key changes introduced by the new Directive?
Scope: The final text clarifies the scope of application. Where other EU legislation relating to specific financial services also provides for PCI, adequate explanations or a right of withdrawal the provisions of that sectoral legislation, rather than the provisions introduced by the new Directive, will apply unless otherwise provided in the relevant legislation. There is also confirmation of the continued application of the "safety-net" feature of the current DMD for financial services which are either not covered by EU sector-specific legislation or are excluded from the scope of such legislation.
Pre-contractual information (PCI): There are improvements to the rules on information disclosure and a modernisation of PCI obligations. Member States are also given the ability to impose stricter national rules in this area. Examples of the modernised approach to provision of PCI include specific reference to the practice of layering when providing PCI by electronic means (ie placing certain key elements of PCI prominently on the first layer and other detailed parts of PCI in accompanying layers). The new Directive introduces a requirement that where PCI is layered it must be possible to view, save and print it as one single document. The Recitals to the Directive include more guidance on the approach to layering.
- Robo-advice: The new Directive establishes the right of consumers to request human intervention on sites that display automated (AI) information tools like robo-advice or chatbots, so that they can better understand the effects of the contract on their financial situation. This is similar to provisions introduced in the recently adopted revised Consumer Credit Directive (CCD II) in relation to creditworthiness assessments conducted using automated processes (see our Engage article on the finalised CCD II for more information). CCD II is another one of the legislative initiatives forming part of the Commission’s 2020 New Consumer Agenda.
- Enhancements to right of withdrawal: The right of withdrawal from distance contracts must be facilitated through a prominent, easy to find 'withdrawal function' on the provider's interface. This is designed to raise consumers' awareness of their withdrawal rights and ensure that withdrawing from a contract is not more onerous than entering into it. The function must be continuously available during the withdrawal period for the contract.
- Dark patterns: Additional protection for consumers from dark patterns (i.e. a user interface designed to deceive or nudge users into making unintended and potentially harmful choices) is introduced. Member States must take measures to limit the use by financial services providers of dark pattern marketing techniques to influence consumers' choices. Again, Member States are also given the ability to impose stricter national rules in this area.
- Extension of some CRD rules to financial services: Certain other provisions from the CRD will also apply to financial services distance contracts. These include provisions on inertia selling, additional payments, enforcement, and reporting.
The new Directive will now be published in the Official Journal of the EU and enter into force 20 days later. Member States will then have 24 months to transpose it into national law and another six months to apply it.
Please contact us if you would like to discuss any aspect of this development.
Authored by Eimear O’Brien and Virginia Montgomery.
Hogan Lovells (Luxembourg) LLP is registered with the Luxembourg bar.