Thursday 22 October 2020

Consumers' income and mortgage loans: the CJEU in C-778/18

Last week the CJEU delivered its judgment in C-778/18 Association francaise des usagers de banque v Ministre de l'Economie et des Finances, interpreting Directive 2007/64 on Payment Services as repealed by Directive 2015/22366, Directive 2014/17 on Mortgage Credit and Directive 2014/19 on Payment Accounts.

This judgment answers a very interesting question on a practice that may be common in some Member States: is it compliant with EU law to require the transfer of consumers' income to the mortgage provider as a condition for approving their mortgage loan applications? 

The facts

This claim was initiated by a consumer association representing banking clients. It sought annulment of the relevant French law implementing the above directives on grounds of misuse of power. The organization explained that the law disregards the objective of customer mobility pursued by the directives because it authorizes credit institutions to require consumers to deposit their salaries or other income with them and fixes the maximum period of 10 years for which consumers can ripe advantage of such deposited money irrespective of the amount, maturity and duration of the loan they were applying for.

The scope of Art. 12(2)(a) Directive 2014/17/EU

The CJEU was in effect faced with interpretation of the scope of Art. 12(2)(a) Directive 2014/17/EU. This provision provides an exception from the general rule of the Directive in Art. 12 that prohibits tying practices. The exemption in Art. 12(2)(a) provides creditors with an option to request from consumers or their family members to 'open or maintain a payment or a savings account, where the only purpose of such an account is to accumulate capital to repay the credit, to service the credit, to pool resources to obtain the credit, or to provide additional security for the creditor in the event of default'. Given this exemption, the CJEU noted that the obligation to deposit income is in principle consistent with the Directive (para. 54). However, the CJEU goes on to clarify that the exemption must comply with the requirements of proportionality, that is, it should provide account of the characteristics of the loan concerned, its amount, maturity and duration (para 56). Any different interpretation would jeopardize the achievement of the objectives of the Directive to provide a high level of protection for consumers, and to secure consumer mobility between banks, especially in circumstances when consumers wish to conclude a number of loans with different lenders. Tying them to a single bank would stand on the way of having an opportunity to shop around and  make informed decisions for better deals. The CJEU therefore concluded that Art. 12(2)(a) must be interpreted to preclude national legislation that allows lenders to grant loans conditional on the deposit of all borrowers income on the payment account opened with the creditor (para 58).  In regard to the duration of this obligation to have the account opened with the mortgage lender, the CJEU highlighted that the Directive does not provide  any limitations as to the duration of the loan, and in principle therefore, this requirement is not inconsistent with the Directive, as long as the purpose of the deposit/account complies with the requirements set out in Art. 12(2)(a) (para. 61).

The meaning of ‘charges’ or ‘fees’ in Directive 2007/64, Directive 2015/2366 and Directive 2014/92 

The second question raised in this case related to the meaning of 'charges' and 'fees' within Directive 2007/64, Directive 2015/2366 and Directive 2014/92. To promote consumer mobility and account switching, these rules provide consumers with a freedom to terminate framework contracts such as a current account contract without being liable to pay compensation in the form of fees or charges. French law however provides that if borrowers case to satisfy the income deposit requirement, lenders may terminate for remainder of the duration of the mortgage loan any individual advantages that were conferred on consumers, for instance, a better interest rate. The question infront of the CJEU was whether this denial of the benefit can be understood as a fee or charge within the meaning of the above directives. The CJEU ruled that it cannot.

Our evaluation 

This judgment tackles a very interesting legal question. However, in addition to the bank account being extra security for the provided loan, another important aspect of transferring income in the mortgage provider bank is not considered in the judgment. Namely, not only that consumers' incomes provides additional security for banks that loans are going to be or at least they can be repaid, it also provides banks with additional data on customers. This enables banks to pull on a larger amount of data for profiling customers and monitoring their behavior. On the one hand, this may be beneficial for consumers, data could help banks to identify problems in repayment and income stream of the customer and address this with early intervention measures such as payment holidays. On the other hand, this additional information can help banks to provide new products to consumers that are tailored to their behavior and needs, that are arguably more likely to be taken by consumers than any products or services that does not suit them as much. The use of big data in banking is still in its infancy but having a bank account certainly provides extra opportunities for banks to get to know their customer, and represent a potential for extra profit. Perhaps this aspect could have also been taken into account in shaping the concept of fees and charges in the present context.

Thursday 15 October 2020

Retail Payments Strategy: faster payments for the connected world

As mentioned in our previous post on the Digital Finance Package (see here) on the September 24 the EU Commission also published a renewed Retail Payments Strategy as part of the Digital Finance Package. 

The logic behind the need for a renewed strategy is the ever-increasing importance of payments for EU financial markets. Payments are the lifeblood of European economy. This is a very dynamic market, highly innovative and fast changing raising new opportunities and risks that needs to be dully mitigated. As the Commission notes: 

"Innovation and digitalisation will continue to change how payments work. Increasingly payment service providers will abandon old channels and traditional payment instruments and develop new ways to initiate payments, such as ‘wearables’ (watches, glasses, belts etc.) or parts of the body, sometimes even eliminating the need to carry a payment device, building on advanced authentication technologies such as those relying on biometrics. As the internet of things further evolves, devices such as fridges, cars and industrial machinery will increasingly connect to the internet and become conduits for economic transactions".

The renewed strategy sets out the EU Commission's vision of payments market: 

  • Citizens and businesses in Europe benefit from a broad and diverse range of high-quality payment solutions, supported by a competitive and innovative payments market and based on safe, efficient and accessible infrastructures;
  • Competitive home-grown and pan–European payment solutions are available, supporting Europe’s economic and financial sovereignty; and
  • The EU makes a significant contribution to improving cross-border payments with non-EU jurisdictions, including remittances, thereby supporting the international role of the euro and the EU’s ‘open strategic autonomy’.

The vision will be achieved by following four strategic aims set out in detail; some of the key points would be the following:

1) Increasingly digital and instant payment solutions with pan-European reach

The development of instant payment systems is the top priority or is envisaged as the 'new normal'. Instant payments make payment immediately available- the framework should result in payment solutions that are efficient and work cross-border. Consumer trust is also of key importance here, and instant payments can create instant fraud. It is therefore crucial that payment service providers have in place appropriate and real-time fraud and money laundering/terrorist financing prevention tools.

Further in this context and within the upcoming revision of PSD2 the Commission will assess the extent to which the EU’s existing consumer protection measures (e.g. rights to refunds) can provide consumers with the high level of protection offered by other payment instruments. The Commission will assess the impact of charges levied on consumers for instant payments and, if relevant, require that they are no higher than those levied for regular credit transfers.

Finally, the Commission is keen on supporting European or home-grown payment solutions that will withstand competition from foreign big-tech companies that increasingly penetrate the payments market. Payments is a network industry yet at EU level there is no trend of fintech companies scaling up in the internal market to become global players. 

2) Innovative and competitive retail payments market

Within this strategic aim the Commission is strongly in favour of fully supporting open banking. Again, open banking will come under scrutiny within the review of PSD2 and interestingly the Commission also plans to present a legislative proposal for open finance that would include a broader range of providers in data sharing than only banks. 

Further, within this strategic pillar the Commission needs to make sure the regulatory parameter is working well and that it is coupled with efficient supervision. As the Strategy notes, "big payments conglomerates may include both regulated and unregulated entities. Problems encountered by unregulated entities providing technical services to support some of the Group’s affiliates could potentially have a spill-over effect."

The payments market should also secure a fair level playing field, as "the world increasingly dominated by digital platforms, large technology providers are taking advantage of their vast customer base to offer front-end solutions to end-users."

3) Efficient and interoperable retail payment systems and other support infrastructures

For a retail payment market to fully function it is necessary that there is efficient interoperability between clearing and settlement mechanisms. Payment service providers now must connect to several (national and/or European) clearing and settlement mechanisms.

In addition, it is also crucial to secure access for all payment service providers for necessary technical infrastructure, hardware and software for developing and offering innovative payment solutions.

Developing this pillar will require a cooperative approach of DG FISMA with at least the European Central Bank, DG Competition and DG Connect 

4) Efficient international payments, including remittance 

The EU being not just a regional market but also an important global market player and to this effect, the Commission highlights the importance of supporting the development of payment solutions with third countries. Payments across the EU’s external borders are slower, costly, opaque and complex. The objective therefore is to have faster and more efficient payments systems set up with third countries. The Commission aims to help this by supporting the use of payment standards such as ISO 20022 and SEPA-like initiatives across the globe.

Friday 9 October 2020

Online dating sites and the right of withdrawal - CJEU in PE Digital (C-641/19)

Yesterday, the CJEU issued a judgment - PE Digital (C-641/19) - regarding the interpretation of Articles 14(3) and 16(m) of the Consumer Rights Directive. Both these provisions regulate some aspects of the consumer's right of withdrawal. Article 14(3) CRD addresses the situation where a consumer explicitly requested the service provider to start performing a service during the cooling-off period. When the consumer then still decides to withdraw from a contract, this provision entitles the service provider to demand a part payment, 'in proportion to what has been provided'. Article 16(m) CRD specifically excludes the right of withdrawal from distance or off-premises contracts for the supply of digital content, not supplied on a tangible medium, where the performance of the contract begun during the cooling-off period upon consumer's explicit consent (following the consumer being informed about losing the right of withdrawal in such a case).

In PE Digital the issue arose from a contract concluded between a consumer and a German dating website - Parship - operated by PE Digital. This dating website allowed consumers to either enter into a free contract, with very limited opportunities to contact other persons on the site, or into a paid 'premium' contract for a period of 6, 12 or 24 months. The premium membership made it possible to contact any other premium member - ca 186000 users in Germany. The consumer in the case at hand concluded a 12 month membership contract for a high price of over 500 Euro, which was more than twice as high price as that which PE Digital charged other consumers for this contract duration (para 16). The consumer was informed about their right of withdrawal, but requested PE Digital to begin to supply the services during the cooling-off period. After 4 days, the consumer withdrawn from the contract and was charged almost 400 Euro for the provided services. The dispute arose from the consumer questioning this reimbursement.

The national court adjudicating the case asked the following questions:
1. Whether the proportional reimbursement awarded to consumers withdrawing from a partially performed contract should be calculated on the basis of how much time consumers have been bound to the contract or considering the value of the already performed services? (these were two questions answered jointly, see para 26)
2. On what basis should the national court examine whether the total contract price was excessive?
3. What consequences, if any, should be attached to the fact that under the concluded contract the consumer has received also, but not exclusively, digital content to which Article 16(m) CRD applies?

Proportional reimbursement 
The CJEU advises the national court that in general the proportional reimbursement should be calculated on a pro rata temporis base. This means that a consumer who was only bound by an agreement for 4 days out of a 1 year contract, could legitimately expect to recover the majority of the contract price he had paid. However, if the contract expressly stipulated that one or more services would not only be provided to consumers in full from the beginning of the performance of the contract, but also separately, which means that consumers were given a price to be paid for these services, separate from the total contract price, then the full price for such services could be seen as owed to the trader (para 32). Only when the consumers had the information that a particular service will be provided in full at the beginning of the contract's performance and knew its price, could they make an informed decision about asking the trader to start providing the services during the cooling-off period (knowing then of the reimbursement risk) (para 29). This was not the case with the dating site contract, as it did not specify a separate price e.g. for the personality test/report that would be delivered to a client upon the conclusion of the membership agreement.

Excessive price
Article 14(3) CRD specifies that if the contract price was excessive then the proportionate amount should be calculated on the basis of the market value of what has been provided to a consumer. Recital 50 further states that the market value should be identified by comparing the price of an equivalent service performed by other traders at the time of contract's conclusion (para 35). Therefore, the CJEU advises the national court to take into account both the price charged for the same services to other consumers by a given trader, but also the price charged by equivalent service providers (para 37).

Digital content
As part of the membership contract in the dating site, the consumer was issued with a personality report, which could classify according to the national court as digital content. Article 2(11) CRD defines digital content as 'data which are produced and supplied in digital form'. Recital 19 gives further examples of digital content to which the CRD applies. Article 16(m) CRD excludes the application of the right of withdrawal to contracts for the supply of digital content when the consumer has consented to the performance starting in the cooling-off period. As an exception, this provision requires strict interpretation (para 43). This leads the CJEU to decide that neither the provision of an online dating service to consumers, which allows them to 'create, process, store or access data in digital form and allows the sharing of or any other interaction with data in digital form uploaded or created by the consumer or other users of that service', nor the generation of a personality report, could be perceived as supply of digital content that qualifies for the application of Article 16(m) CRD... Why though? The CJEU does not further expand its reasoning on this point. Is it because the provided digital content is a part of a bigger digital service? This might be, but it would be good to have this clarification as that would exclude the application of Article 16(m) CRD to most contracts for the supply of digital content that would be part of a relational contract.

Wednesday 7 October 2020

The New EU Digital Finance Package: the Digital Finance Strategy

In addition to the new Action Plan on Capital Markets Union (see our report here),  on the very same day, the 24 September 2020, the EU Commission also presented its Digital Finance Package. This very board package consists of: 1) the Digital Finance Strategy; 2) the Retail Payments Strategy; 3) the legislative proposal for an EU regulatory framework for digital operational resilience and 4) the legislative proposals for crypto-assets.

The package aims to improve Europe's global competitiveness in financial services and products provision not only by boosting consumer choice but also by ensuring consumer protection and financial stability. With the coronavirus pandemic and the rise in the use of digital services more than before, these sorts of initiatives from the Commission are more than welcome. Embracing digital innovation should not only create consumer choice, but also widen access to financial services for consumers, increase business opportunities for firms, especially SMEs, and thus facilitate Europe’s economic recovery.

The package is complex and far reaching. The strategies are necessarily general providing high level overall strategic aims, but some of the legislative proposals are concrete and ground-breaking. Most importantly, the package of proposals has been drafted based on careful consultation and intensive cooperation with business stakeholders and consumer advocates through public consultations and the innovative Digital Finance Outreach programme of DG FISMA over the summer (on which we reported here) that enabled anyone interested to get involved in shaping the solutions. DG FISMA continues its public approach, it is now holding biweekly seminars on the Digital Finance Package and these are open for attendance for anyone interested (see here). The first seminar focused on the Digital Finance Strategy and so does this post.

The first and broadest element of the Digital Finance Package is the Digital Finance Strategy. It provides for the overall strategic objective to embrace digital innovation and the ways in which the more concrete proposals and the existing legislative framework fits within the picture. As the Commission rightly states: 'The future of finance is digital: consumers and businesses are more and more accessing financial services digitally, innovative market participants are deploying new technologies, and existing business models are changing.' To reflect this the strategy is focused around four key priority areas:

1) Tackle fragmentation in the Digital Single Market: this is the most general aim that intended to enable consumers to access financial services and products fully remotely. 

To this effect, on the one hand, the strategy recognizes that the key to achieving this is the fitness of onboarding process (the recruitment of new customers) for digital age for which a crucial element is the interoperability of digital identities. Digital identification of customers remotely will be enabled with a review of the current regulatory framework provided by Regulation (EU) No 910/2014 on electronic identification and trust services for electronic transaction. In addition to securing a framework for the development and use of digital identities, this regulation should also enable data sharing between providers to facilitate the advantages of open finance. Taking identification fully online also requires the strengthening of the anti-money laundering and terrorism financing legislation. 

The other aspect of having access to digital financial services and product is passporting of firms. Passporting enables consumers and businesses to have access to cross-border services provided by firms established and supervised in another Member State in line with commonly agreed rules.  Although passporting currently may work for mainstream providers, it does not seem to work well for fintech companies that comprise the bulk of the digital finance ecosystem. To overcome this, the Commission is planning a one-stop-shop licensing system for these firms that combined with passporting rules should help their operation throughout the EU. In addition, special passporting rules for areas of particular interest such as crowdfunding are also being considered. Finally, the Commission proposed the establishment of a new EU Digital Finance Platform to facilitate cooperation and communication between firms and supervisory authorities. 

2) Adapt the EU regulatory framework to facilitates digital innovation: this aim relates to the creation and the review of the existing regulatory framework to fit the requirements of digital age. Within this aim, the EU Commission presented a legislative proposal on crypto-assets and placed as a strategic aim  for a technology-neutral regulatory framework. It also pledges for clarifying the supervisory standards on the application of this legislative framework to artificial intelligence applications.  

3) Create a European financial data space to facilitate data driven innovation: this dimension is connected to the European strategy for data and aims to facilitate access to data and data sharing within the EU, creating broader access to public and private data and real time data sharing. As part of these efforts, the Commission aims to set up a common financial data space through a number of more specific measures: promote innovative IT tools to promote supervision and promote business to business data sharing in EU financial sector and beyond. It is important to note that this open finance initiative is not going follow the UK's approach in mandating data sharing for firms (see our report here). Participation will be voluntary.  The Commission will therefore propose legislation on a broader open finance framework that will build on the upcoming initiative focusing on data access, including the upcoming Data Act, and the Digital Services Act. Finally, the Commission is also reviewing its competition approach and the upcoming review of PSD2 is also going to be part of this framework.  

4) Address new challenges and risks that come with digital innovation: with this aim, the EU Commission aims to work on future-proofing EU prudential and conduct supervision and regulation that should be fit to address both traditional firms as well as new entrants, especially technology companies that are increasingly present on financial markets. The objective will be proportionate regulation and supervision, based on the principle of “same activity, same risk, same rules” and pay particular attention to the risks of significant operators.