Financial services concluded at a distance in digital age - the new Directive 2023/2673

In 2023, European lawmakers were busy improving the protection of consumers in financial services. In addition to the new Directive 2023/2225 on consumer credit (on which we reported here), the regime distance marketing of financial service was also revamped. The new Directive 2023/2673 on financial services contracts concluded at a distance repeals the current Directive 2002/65/EC. The Directive entered into force on 18 December 2023, Member States are obliged to implement it by 19 December 2025 and apply the rules from 19 June 2026.

The 2023 Directive was driven by the need to ensure consumer confidence and trust in digital transactions. This need was underscored by the rapid development of digitalisation and the evolving means of distance communication, which have revolutionised how we use technology since the creation of the 2002 Directive. Digitalisation has also changed how products are marketed to consumers, with new products emerging in the online environment.

The other rationale was the progressive introduction of other sector-specific legislation that significantly overlapped the current, 2002 Directive, creating legal uncertainty.

The 2023 Directive clarifies its nature as a horizontal, general instrument that remains a safety net for matters not covered by other EU instruments or subject to exemptions. The Directive is a maximum harmonisation instrument and applies only to contracts concluded at a distance. Importantly, it amends Directive 2011/83/EU, which currently does not apply to financial services.

The Directive follows the current information approach to consumer production, detailing pre-contractual information duties and making the associated right of withdrawal more effective by mandating an easy-to-find 'withdrawal function' on the service provider online interface that should be continuously available during the withdrawal period. In laying down the rules on adequate explanations, the 2023 Directive adds the right to request human intervention when the trader uses online tools such as chatbots. 

Finally, the 2023 Directive recognises the realities of the online world and the difficulties in making informed decisions, thus protecting consumers against dark patterns or deceptive design patterns.

The new directive is a welcomed development of EU consumer law. It is based on the realities of the digital world and aims to tackle the most pressing problems for consumer decision-making.

Enforcement of consumer law in digital age: the EnfTech Project

In order to provide much-needed help to the enforcement of consumer law, our readers may be interested in the recently launched EnfTech Project.

EnfTech is a broad term for the use of technological innovations by enforcement agencies to help deliver enforcement activities. This could include market surveillance, such as scanning for misleading pricing or fake advertising; an investigative activity that uses machine learning to interrogate company documentation; preventative measures such as reviewing consumer contracts for unfair clauses before they reach the market. In the future, it may have the potential to directly execute or enable an enforcement action such as a warning, takedown, or sanction.

EnfTech was launched on the 20th of April via an online event. The recordings of the event, the associated blog, and contact details are available here.

Second Annual Digital Consumer Law Event

On the 21st of November 2022, the European Commission organised its second Annual Digital Consumer Event to reflect with the general public, academics, consumer and business associations, as well as authorities, on the problems consumers currently face in the digital transition.

The expert panels focused on the following topics: 

• Online consumer vulnerabilities: shedding light on dark patterns, personalisation, and structural asymmetries
• Online consumer purchases: challenges raised by digital subscriptions, virtual items, and the addictive use of digital products
• Online consumer contracts: mapping unfair contract terms and the lack of transparency, our Professor Luzak was one of the participants of this panel.

Our readers may be interested to know that the recording of the event is available to watch (see the link here).

A digital Euro?

Amid the rapid digitalization of our lives accelerated by the current pandemic, the European Central Bank (ECB) in cooperation with the European Commission is contemplating the introduction of the digital Euro. They are jointly reviewing a broad range of policy, legal and technical questions that are necessary for the introduction of the digital Euro, as well as their respective mandates and independences provided for in the Treaties. 

The digital euro would not be a cryptocurrency. A digital euro would combine the efficiency of a digital payment instrument with the safety of central bank money. In the words of the ECB, it would still be euro, a digital version of banknotes complementing and not replacing cash payments.

See the ECB's Report on a digital euro for more details.

The decision on the introduction of the digital euro will be announced later this year.

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.

Coronavirus and digital finance: public consultations and other initiatives

The current coronavirus pandemic made our financial lives exclusively digital. This raised new challenges but also opened new opportunities for the financial sector. It is of no surprise therefore that within the EU Commission's overall focal point on fighting the coronavirus health emergency and its social and economic consequences, digital finance gained a pivotal role. There are currently a couple of initiatives that we wished to share with you.

Public consultations 

A couple of days ago the Commission opened two important public consultations.

The first focuses more generally on setting out the new Digital Finance Strategy/FinTech Action Plan later in 2020 that would identify policy areas and policy measures for the next 5 years (on the current FinTech Action Plan we reported here). The consultation is organized around three priority areas:

1. ensuring that the EU financial services regulatory framework is fit for the digital age;
2. enabling consumers and firms to reap the opportunities offered by the EU-wide Single Market for digital financial services;
3. promoting a data-driven financial sector for the benefit of EU consumers and firms.

At the same time, the EU Commission opened a separate consultation on retail payments as a key step towards the adoption of a retail Payments Strategy for Europe.

Both consultations can be contributed to by the 26th of June 2020.

Online roundtables

Within its initiative of Digital Finance Outreach 2020 DG FISMA moved its planned roundtable events online. They are organized around current topical issues and are run weekly until the end of May. The events aim to raise awareness of the work of DG FISMA and to connect relevant stakeholders. They are free to attend and encourage contribution, so if you have anything to add, feel free to raise your hand.

Pan-European Hackaton

Finally, in collaboration with Member States the Commission opened a very interesting call for participation in a pan-European Hackaton, within the #EUvsVirus challenge, to develop innovative solutions for the new challenges raised by the current coronavirus crisis. One of the domains of the hackaton is digital finance with a range of challenges. One important challenge for us is how to develop innovative solutions to support the the most vulnerable, the digitally excluded such as the elderly, who currently struggle to access financial services and products. There is also a challenge to solve other problems in the current climate such as to development of coronavirus related health insurance (see the list of challenges here). The hackaton will be held 24-26 April. Registration is still open (access link here), so if you have ideas for workable solutions, please register. The full agenda is also available here and much of the event is livestreamed on Facebook.