ESMA imposes first temporary bans on investment products

In June 2018 the European Securities and Markets Authrity (ESMA) for the first time formally adopted new, temporary rules on the provision of contracts for difference (CFDs) and binary options for retail investors. ESMA temporarily banned the marketing, distribution and sale of binary options to consumers (effective from 2 July 2018), and has restricted the marketing, sale and distribution of CFDs (effective from 1 August 2018).

Binary options and CFDs are high risk investment products unsuitable for average consumers. They allow 'betting' on financial indices such as the price of gold, or currency will rise or fall over a fixed period of time, with such an uncertain outcome that they can also be classed as gambling products (see also an interesting article here). Binary options and CFDs became specially dangerous when their online marketing consumers as a way to get rich quickly took up. Unfortunately, instead of getting rich, 74-89% of consumers suffered detriment. As a result, countries around the world started to regulate, and ban these products, and now the EU has joined these efforts.

ESMAs action is landmark because it is the first time that an EU supervisory authority (ESA) has used its product intervention power. The ESAs that have been established following the financial crisis, has been vested product intervention powers to protect EU consumers from the marketing and sale of dangerous products. This power is provided in Article 9 of the regulations establishing the authorities (Regulation 1093/2010, Regulation 1094/2010, and Regulation 1095/2010) and has been concretized in more specific legal acts, such as Regulation 600/2014 of Markets in Financial Instruments (MiFIR). In this case ESMA relied on Article 40 MiFIR.

With its decision from 24 August 2018 ESMA decided to extend the prohibition related to binary options for another 3 months (effective from 1 October 2018), this time refining its approach, and excluding some types of binary options that it found not to impose a sufficient degree of risk onto consumers. The decision is limited to binary options and makes no reference to CFDs, restriction of which came into force a month later than binary options.

While ESMAs actions is undeniably a positive step towards improving the protection of consumers on EU financial markets, one may wonder why are the powers of the EU supervisory authorities limited in time? Binary options (at least some kinds of binary options) are not going to get to be better products. Should the EU supervisory authorities have extended product intervention powers, powers that would enable them to ban products from the EU internal market permanently?

EDPS on the compliance with new GDPR rules

The Washington Post posted an article Big tech is still violating your privacy written by the European Data Protection Supervisor, Giovanni Buttarelli, addressing the implementation in practice of the GDPR rules and what his office is doing to enforce them. In this piece he places emphasis on the need to stop the abuse of privacy, which has become the norm by companies collecting personal data to share them with other parties. The first results of the enforcement proceedings against companies not adhering to the GDPR rules are promised for the end of this year. He also draws attention to the paradox of informed consent:

 

"One key principle to remember is that asking for an individual’s consent should be regarded as an unusual request, given that asking for consent often signals that a party wants to do something with personal data that the individual may not be comfortable with or might not reasonably expect."

Is a stand in a fair business premises? Only the average consumer can tell!

On 7^th August 2018, the ECJ published its ruling for case Verbraucherzentrale Berlin eV v Unimatic Vertriebs GmbH (C‑485/17/) on the meaning of the term ‘business premises’ in the Consumer Rights Directive (Directive 2011/83/EU, hereafter CRD).

Facts of the case

Unimatic, a distribution company that sells products exclusively in trade fairs was participating in one such fair in Berlin, called ‘Grüne Woche’ (Green Week). There a customer bought a steam vacuum cleaner from the stand of Unimatic. The customer was not informed about the right of withdrawal. 

The consumer organisation Verbraucherzentrale Berlin eV considered the transaction to have been an off-premises contract, according to art.2(8) CRD and therefore the trader was obliged to inform consumers about the right to withdrawal according to art.6(h) CRD. Verbraucherzentrale Berlin Ev proceeded to bring an action against Unimatic to stop them from selling their products without providing information to such consumers on their right of withdrawal.

Questions

The referring court is asking whether ‘a trade fair stand in a hall which is used by a trader for the purpose of selling his products during a trade fair taking place for a few days each year constitute “immovable retail premises” within the meaning of Article 2(9)(a) of Directive 2011/83 or “movable retail premises” within the meaning of Article 2(9)(b) CRD’. Furthermore, the referring court asked how the meaning of a trader conducting his business ‘on a usual basis’ is to be interpreted and especially if the perception of the consumer is relevant.

The court summed up the referred questions into whether a trade stand in a fair, such as the one in the case in question, constitutes business premises in the context of Article 2(9) CRD.

Answers

The court states that whether the business premises are movable or immovable is secondary; what is important is whether the activity is carried out on a usual basis or a permanent basis. The Consumer Rights Directive does not specify what is meant by usual or permanent basis and the concepts should be given their autonomous European meaning taking into account the objectives pursued by the CRD (para 27). 

The reason for distinguishing off-premises contracts is the element of surprise and the psychological pressure the consumer may be faced with as they do not expect to be approached by a trader and nay not have time to properly consider the offer or compare prices. (paras 33,36). Therefore, if a consumer goes to a trader’s premises they can expect to be solicited and cannot claim they were surprised (para 34).

It should be highlighted that according to rec.22 CRD, market stalls can also be considered business premises provided that they serve as a usual place of business for the trader. (para 41).

The court stresses the importance of the perception of the average consumer in determining whether a stand in a trade fair can be considered business premises. Even though it refrains from making a judgement as to whether the trade stand in question qualifies as business premises it sets out the criteria to be used by the national court.

A court stand in a trade fair can be business premises if, if,’ in the light of all the factual circumstances surrounding that activity, in particular the appearance of the stand and the information relayed on the premises of the fair itself, a reasonably well-informed and reasonably observant and circumspect consumer could reasonably assume that the trader is carrying out his activity there and will solicit him in order to conclude a contract’.

Once more, it is seen that the concept of the average consumer is central to EU consumer law, yet the court does not provide any guidance to the national court as to how is the view of the average consumer to be ascertained. This may lead to divergent approaches in the Member States, which go against the objective, stated also in para 27 of this judgement of uniform application of EU law.

Double default: on default interest and default rules

Tuesday 7 August 2018, the last date on the judicial calendar of the CJEU before summer recess, was a busy day. Two of the cases on the dock in which the CJEU gave judgment concerned preliminary references from Spain: Joined Cases C-96/16 and C-94/97 (Escobedo Cortés), discussed earlier on this blog. The judgment relates to, in short, the case law of the Spanish Supreme Court (Tribunal Supremo) on default interest clauses and the Unfair Contract Terms Directive.

Both cases pertained to (mortgage) loan agreements concluded between consumers and banking institutions, containing a default interest clause ("interés moratorio"). This clause entailed that the consumers would have to pay interest rates of 18.50%, 23.50% and 25% respectively in case they were late on meeting their payment obligations. The purpose of this clause was to penalise the debtor's non-compliance, to deter delays in payment and to compensate the creditor in case of such delays.

The Spanish Mortgage Act (Article 114.3) stipulated since 2013 that the maximum default interest rate was three times the statutory interest rate. However, there was still a great degree of divergence in the unfairness assessment of default interest clauses in consumer contracts by Spanish courts, as well as in the determination of the consequences of a finding of unfairness. This resulted in legal uncertainty and arbitrary differences in treatment.
Therefore, the Tribunal Supremo had defined criteria. First, it had examined the national default rules that would be applicable in the absence of agreement between the parties, in order to determine a default rate of interest which could reasonably be agreed to and was not disproportionate. It found that a default interest rate exceeding more than two percentage points of the ordinary interest rate agreed between the parties was unfair. [Note that the criterion is linked to the ordinary interest rate agreed between the parties, not the statutory interest rate.] Secondly, it held that after a finding of unfairness, the increase that the default interest represents (as compared with the ordinary interest) must be eliminated entirely.

The referring courts doubted whether the judicial interpretation given by the Tribunal Supremo was compatible with the Unfair Contract Terms Directive. This had to do with the question whether the judge-made criteria were binding or mandatory on lower courts.
As regards the first criterion, the CJEU concludes that national courts were not deprived of the possibility of considering that terms not exceeding more than two percentage points are still unfair, and have to be set aside; the Tribunal Supremo had merely established an "irrebuttable presumption" (paras 58-59 of the judgment). Yet, as we observed earlier on this blog, there does not seem to be much space for lower courts to deviate from this presumption in an individual case. The CJEU seems to be aware of this, but considers that the Directive is based on the idea that the consumer is in a weak position vis-à-vis her professional counterparty (para 64). The criteria developed by the Tribunal Supremo are consistent with the objective of consumer protection pursued by the Directive. To ensure consistency in the interpretation of law and in the interests of legal certainty, the supreme courts of Member States may elaborate certain criteria for the assessment of the unfairness of contractual terms. The CJEU adds (para 69):

"It follows from Article 3(1) of Directive 93/13 and from the general scheme of the directive that the latter does not so much aim to guarantee an overall contractual balance between the rights and obligations of the parties to the agreement as to prevent an imbalance between those rights and obligations from arising to the detriment of consumers."

As regards the second criterion, the CJEU holds that the Directive intends to restore the balance between the parties by not applying contractual terms declared to be unfair, whilst maintaining, in principle, the validity of the other terms of the agreement at issue. It does not follow that the unfairness of a default interest clause also brings about the unfairness of a clause fixing the ordinary interest (paras 75-76). The case law of the Tribunal Supremo implies that the national court must simply refrain from applying (a) the unfair default interest clause or (b) the increase it represents by comparison with the ordinary interest [NB: there is a significant difference between (a) and (b): a percentage of 0% vs. 8.50%, 11.20% and 4.75% respectively]. The national court cannot substitute supplementary national provisions for an unfair contractual term or revise the term in question (para 78). Thus, the term cannot be replaced by the statutory interest rate that would have applied by default if there had been no agreement.

It could nevertheless be asked whether the criteria formulated by the Tribunal Supremo are sufficiently deterrent. Creditors could be incentivised to increase the ordinary interest rates, with a view to both the 'unfairness' criterion and the 'comparison' criterion, allowing them to claim a higher interest, also in case of default.

Lastly, the CJEU finds the Directive does not apply to business practices consisting in the assignment or purchase of consumer debt, if there is no term in the contract at issue providing for this (para 40). The assignment was made on the basis of a regulatory provision in the Civil Code, which is excluded from the scope of the Directive. Article 1.2 of the Directive extends to national default rules that apply in the absence of other arrangements made by the parties (para 43). The procedural rules in question do not appear to affect the scope of the national court's powers to exercise unfair terms control (para 45). The CJEU does not address the referring court's reference to Article 38 of the EU Charter of Fundamental Rights.
This outcome may be understandable from a purely legal standpoint, but is disappointing from the perspective of consumer protection in respect of the sale of loans; see further our blog on this topic.

* * *

We commented earlier on party names in CJEU case law. It was recently announced that requests for preliminary rulings involving natural persons will be anonymised from 1 July 2018 onwards. This means we will have to refer to this kind of cases in the future as Banco Santander II (C-96/16) or even V (see here, here, here and here for previous cases involving the same bank); or we may need to think of a different system.

Commission fines electronics companies for fixing resale prices

On the 24th July, the EU Commission issued fines against four electronics companies for breaching antitrust rules by fixing resale prices on their online retailers.

All four companies, namely Asus, Denon & Marantz, Philips and Pioneer, did not allow their resellers to set their own prices and instead pressured them to maintain a minimum resale price. The fines issued ranged from more than 63 million for Asus to 7.7 million for Denon & Marantz. The fines were reduced as a result of the cooperation of the companies to the investigation. The prime target of this practice were online resellers, who tend to sell their products at lower prices.

As online resellers adjust their prices automatically to that of competitors, the practice had a wide effect on the market. Furthermore, the goods in question were widely used consumer goods from computers to kitchen appliances and personal care products, meaning a significant impact on consumers.

The practice of fixing resale prices is prevalent in online markets and Commissioner Margrethe Vestager highlighted the fact that the online market is ever growing and it is imperative to protect consumers.

What happens to the consumer affected by these high prices in electronics? They can seek damages in court, following Directive 2014/104/EU (The Antitrust Damages Directive) using the Commission decisions as proof of illegal behaviour of the companies.

When your clothes know more about you than... you

Vogue UK published an interesting article this week on clothing containing electronic tags, which would allow for far-reaching collecting and processing of consumer data (Is Trackable Clothing Fashion's Latest Trend?). RFID (radio frequency identification) tags have already previously been used on clothing items, but they usually come with a disclaimer that they are only active within the store, until the purchase is completed. Now, in order for traders to be able to track what happens with clothes after the purchase, they are nudging consumers towards accepting that these tags remain active after the clothes (and consumers with them) leave the store. Apparently, the idea comes from the Tommy Hilfiger's brand. If consumers choose buying and wearing their new line Xplore, they will be able to use an iOS app, which will register the use of the clothing (also possibly registering geo-location of where it is worn) and reward it (there is mention of concert tickets, gift cards etc as rewards). It is supposed to be the customers' choice whether to turn on the app, allow geo-tracking and collection of data, but obviously any disconnection will lead to a miss on the rewards. Consumers trying to protect their data will thus miss out. This is another sign of the ongoing commercialization of consumer data and technology changing consumer lifestyles. Any thoughts on this development readers?