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.

Interest rate modifications are not separate contracts - CJEU in C-639/18 Sparkasse

On the 18th of June 2020 the CJEU delivered its judgement in C-639/18 KH v Sparkasse Südholstein on the interpretation of Art. 2(a) of Directive 2002/65/EC on Distance Marketing of Financial Services. Unfortunately, the CJEU did not follow AG Sharpston's consumer friendly opinion (on which we reported here).

The facts

To remind us of the facts, KH concluded three contracts with her regional Sparkasse. These contracts were with a fixed interest rate for a fixed period of time after which they would switch to a variable rate in the absence of an agreement between the parties on a new fixed rate (for a newly fixed period). The original contracts were concluded at a branch, but the renegotiated agreement on the interest rates were concluded at a distance, thus KH claimed that Directive 2002/65/EC was applicable giving her a right of withdrawal, which KH intended to use.

The legal question

The legal questions thus arose, whether the newly reached agreements on interest rates were separate contracts (to which the Directive would apply), or as the bank claimed, just 'operations' or amendments of the initial contracts (to which the Directive would not apply). Hence, KH's right of withdrawal depended on the interpretation of Art. 2(a) of Directive, i.e. whether the transactions setting out the new interest rates where covered with the concept of a 'contract concerning financial services' and a contract 'concluded under an organized distance sale or service-provision scheme'.

The ruling

In interpreting the phrase 'contracts concerning financial services' the CJEU concluded that the present agreements on the alteration of the interest rates are not separate contracts, they are not 'contracts concerning financial services' within the meaning of the Art. 2(a) of the Directive because they do no more than to alter the originally agreed rate of interest without changing the duration or the amount of the loan.

In its analysis, the CJEU referred to Art. 2(b) of the Directive that defined the concept of 'financial service' as including, among others, contracts of credit. In determining more closely the essence of a credit contract, the CJEU referred to its previous case-law (C-249/16) that clarified that the characteristic obligation of the contract is the granting of the sum lent, whereas the borrowers obligation to repay the sum borrowed is 'merely a consequence of the performance of the the service by the lender'.

In discussing the argument that the newly agreed interest rates are just operations of the initial credit contract, the CJEU disagreed. Having regard to the examples given in Recital 17 (such as opening a bank account as an initial service agreement and withdrawing money from the account as its operation), an amendment that sets a new rate of interest as a result of a renegotiation of a clause in the initial contract (which provides for a variable, 'back-up' rate of interest) is neither an 'operation' of the initial agreement nor an addition to the elements of the initial agreement. 

The CJEU concluded that in order for a contract to qualify for a 'contract concerning financial services' under Art. 2(a) of the Directive it must be for a supply of 'such service' and this condition is not fulfilled here. These were only amendments of the rate of interest payable for the service that was previously agreed.

Finally, although the CJEU noted that one of the objectives of the Directive is to ensure a high level of consumer protection, in order to enhance consumer confidence in distance selling of financial services that would facilitate the free movement of financial services, according to the CJEU, 'such an objective does not necessarily require' that an agreement setting out the new interest rate is  considered as a new contract for financial services.

Given the above conclusion, the CJEU considered unnecessary to answer the other question asking for the interpretation of the meaning of a contract concluded 'under an organized distance sale or service-provision scheme run by the supplier.'

Our evaluation

This judgment deals with an important question in (long term) financial services contracts such as credit, insurance, investment and pensions, where the initial agreement is subject to later changes by way of amendments, ruling that the status of these later agreements are not separate contracts. 

This important and potentially far reaching conclusion (given that the Directive applies to all financial services) is not well supported with analysis. The key line of thinking in this judgement seems to be that the 'contract concerning financial services' must provide for a service, must be for a supply of a financial service, and anything short of this, would not be considered a separate contract. While this argument may have merits, there is very little engagement with what is meant by a 'service.'

One the other hand, one would have expected that there will be a much better analysis of the contractual aspect of the transaction, the meaning of the contract and its formation especially that this was the focus of AG Sharpston's opinion. Apart from the reference to one previous case-law there is no engagement with the meaning of contract and its essential elements. Examples of European solutions would have been useful and they might have lead to a different conclusion. For instance, Section 6:383 of the Hungarian Civil Code defines loan contract by reference to the obligations of the parties under which the creditor is obliged to provide the agreed sum of money, and the debtor is obliged to repay this sum with interest. Interest thus appears as named essential element of the contract and clearly one could argue that changing an essential element of the contract can only be done by way of a new contract?

Finally, there is no mention of power imbalances and the consumers' weaker position in negotiating with the bank, even in this case, where the consumer is likely to engage with the process (by contemplating options and accepting one option offered by the bank). It would have been useful to take into account the way in which these contracts (and their amendments) are concluded in practice.

In addition, the line of reasoning is also weakened by the CJEU's intention to give special status to these amendments (as they are nether separate contracts nor are they the operations of the initial service agreement) without clarifying the details of this special status and what it entails in terms of the rights and obligation of the parties.

Finally, it remains unclear why amendments to (long term) financial contracts are unimportant for the facilitation of a high level of consumer protection and the internal market in financial services. I would argue the contrary, it is indeed important to consider amendments as separate contracts to enhance consumer confidence in concluding (long term) financial contracts and to provide consumers with the protection guaranteed by the Directive, including the important right of withdrawal.

Interest rate modifications in credit contracts should be covered by Directive 2002/65/EC- AG Sharpston in C-639/18 Sparkasse Südholstein

On the 12th of March 2020 Advocate General Sharpston delivered her Opinion in C-639/18 KH v Sparkasse Südholstein on the interpretation of Article 2(a) of Directive 2002/65/EC on Distance Marketing of Financial Services.

The facts

This case involves the German Sparkasse Südholstein regional bank. While mortgage contracts are only concluded face to face in its branches, in some cases, in the context of ongoing banker-customer relationship, additions or amendments to these contracts can also be made with the use of distance communication.

In the period of 1994-99 the parties concluded 3 contracts. Two in July 1994 for purchase of immovable property and one in 1999 for personal loan. All three contracts were concluded with an initial fixed interest rate that would switch to a variable rate following the expiry of the period for which the interest rate was initially fixed. As it is usually the case, before the end of this fixed period, the contract was open for negotiation, and a new fixed rate for a newly agreed period could have been agreed between the parties. The present parties negotiated new interest rates in 2008, 2009 and 2010 respectively.

However, in 2015 KH withdraw from the above three contracts setting out the new interest rate claiming that these contracts involved distance selling thus entitling KH for a right to withdrawal under the national provision implementing Directive 2002/65/EC.

The legal problem

The legal issue in this case was whether KH had a right of withdrawal, and this depended on the interpretation of Art. 2(a) of Directive 2002/65/EC, whether the transactions setting out the new interest rates where covered with the concept of a 'contract concerning financial services' and a contract 'concluded under an organized distance sale or service-provision scheme.' In other words, whether the newly agreed interest rates were considered to be new distance contracts or merely 'operations' of the initially concluded credit contracts.

The analysis: a 'contract concerning financial services'

After careful analysis, AG Sharpston answered the first question positively, holding, that a 'contract concerning financial services' in Art. 2(a) of Directive 2002/65/EC indeed includes contracts for the modification of the interest rate that makes no other (substantial) changes to the contract, it neither extends the term of the contract nor modifies the amount of the loan. 

In her interpretation AG Sharpston relaid on the wording of the provision, the purpose of the Directive and the explanations of the aims of the provisions of the Directive contained in the recitals of the Directive. 

First of all, AG Sharpston highlighted the purpose of the Directive to give a number of rights to consumers in distance financial services contacts that is important for the provision of a high level of consumer protection and the increase of consumer confidence in the internal market.

It follows, that the concept of a 'distance contract' must be interpreted broadly, because Art. 2(a) refers to 'any' contract concerning financial services. The same approach would be suggested by recital 14 that suggest the Directive covers 'all' financial services.

Further, AG Sharpston discarded Sparkasse Südholstein's argument that the subsequent contracts for the modification of the interest rate are only 'operations' within the meaning of the Directive that follow the initial service agreement, according to which, the subsequent contracts for the modification of the interest rate are not self-standing, separate contracts, i.e. 'contracts concerning financial services'. Following Article 1(2) of the Directive, a contract that is comprised by an initial service agreement followed by successive operations or series of separate operations of the same nature performed over time, would not fall within the scope of the Directive. Referring to Recitals 15-17 AG Sharpston explained the difference between an 'operation' of an existing contract and a new contract, emphasizing that adding new elements to an existing service agreement is not an operation of the existing contract but a new contract. Relying on Recital 15 that defines distance contracts as those where the offer, negotiation and conclusion are done at distance, AG Sharpston concludes that  constitutive elements of contract formation under the Directive are the offer, the acceptance and the meeting of the minds. While this conclusion seems somewhat unsubstantiated without at least some reference to national jurisdictions where these requirements are applied, her overall analysis seems to be well supported. Thus a key element for a 'contract' to exist under Article 2(a) of the Directive is that there is an agreement between the parties. An 'agreement' can be defined by contrast to an 'operation'. An operation is 'an act of executing agreement without adding elements for which a new meeting of minds would be required' (para. 51). The AG rightly asserts that in the context of a credit contract, an operation would thus cover transactions such as payments reducing the total amount owed to the bank. Further on, an 'agreement' can also be defined by looking at the conclusive elements of a contract. AG Sharpshon explains that a 'characteristic obligation' or essential element of the contract is the granting of the sum borrowed (lenders obligation), the repayment of the sum borrowed (borrowers obligation), agreement on the structure and the duration of the repayment period and the interest rate. The interest rate can be fixed or variable, and as this case also shows, the usual banking practices when concluding contracts with a fixed rate is that this fixed rate is only for  fixed period of time, following which, if no agreement on a new fixed rate is agreed, the banks variable rate will apply. Thus without an agreement on a new fixed rate, the initial contact would not remain unchanged, AG Sharpston emphasizes that it would change substantially, as one of the main elements of the contract would change, i.e. the interest rate. AG Sharpston then concludes that since the importance of this element, an agreement on the new fixed interest rate cannot be a mere operation of the existing contract but it is rather a new contract between the same parties.

The analysis: a contract 'concluded under an organized distance sale or service-provision scheme' 

This case also involved the interpretation of a phrase 'concluded under an organized distance sale or service-provision scheme' given that the bank did not solely use distance communication for contract conclusion. The AG concluded again positively, establishing the necessary elements. According to AG Sharpston, contacts are concluded under an organized distance sale or service-provision scheme 'where a supplier, in order to conclude a subsequent interest rate agreement, makes exclusive use of means of distance communication, where the use of those means in exclusive and not strictly occasional but forms part of a framework set by that supplier, in terms of its commercial structure, including staffing and resources, allowing it to conclude contracts without the simultaneous physical presence of the parties'.

In her analysis, AG Sharpston referred back to Article 2(a) and the necessary elements there for a distance contracts. First, that the two parties must not be physically and simultaneously present when the contract is prepared and concluded but rather they exclusively used some means of distance communication such as phone, email, etc. Importantly, the AG asserts that any prior face to face contact between the parties for the purposes other than the conclusion of the contract in question are of no relevance. The second and the more disputed element here is that the transactions much be carried out under an organised distance sale or service provision scheme run by the supplier, who makes exclusive use of distance communication. Apart from Recital 18 that excludes services provided on occasional basis and without a dedicated commercial structure, the Directive does not give any further guidance. However, relying on the wording of Article 2(a) AG Sharpston determined that the scheme must fulfill several criteria. First, it must be an organized scheme, the supplier must have the necessary commercial structure including staffing and resources to conclude contracts at distance. Second, the scheme must be run by the supplier. The supplier must set up the framework to offer the conclusion of distance contracts. Third, running such a scheme must be exclusive for the purpose of the contract in question, that is, it must cover the offer, the negotiation and the conclusion of the contract. Finally, the conclusion of a distance contract should be a normal or regular possibility when concluding contacts. Importantly, the AG clarifies, that once the system is set up, it does not have to be used frequently or systematically, as all the Directive requires is that it is not used 'strictly occasionally'.

Discussing the particular case, AH Sharpston asserted that Sparkasse Südholstein seems equipped both with staffing and resources to run an organized scheme of distance selling, and the fact that Sparkasse Südholstein concludes certain types of contracts exclusively at its branches should not be an obstacle for also running an organized distance selling scheme. Looking at the particular contracts concluded with KH, the AG emphasized that it should be of no relevance for the present analysis that the initial credit contracts were concluded at a branch, as the Directive does not require every single contract to be concluded at distance when there is an ongoing banker customer relationship between the parties. The application of Article 2(a) of the Directive should be observed independently from the rest of the relationship, taking into account only the particular contract, i.e. the contract setting out the new interest rate.

Concluding thoughts

This case involves a 'typical' legal problem in long term contracts where following the initial contact several other agreements are reached throughout the time that raises the question of the status of these new agreements: are they separate, independent contracts or are they just the operation of the initially concluded contract. The AG's conclusion seems to be correct as having these agreements as independent contracts provides a higher level of protection of consumers as if they were not separate contracts. In particular in regard to the right of withdrawal- this important right would not exist if the new agreement on the interest rate is not an independent contract. This case arose in the context of credit contracts. However, AG Sharpston's overall conclusion and the important message on the need to set out the Directive's scope of application broadly for achieving a high level of consumer protection is an important one. It could have far reaching implications, given that the Directive relates to all financial services and similar problems might arise in the context of other long term financial contracts such as life insurance or personal pensions.

If it looks like withdrawal, it quacks like withdrawal... it may still be financial services. AG Pitruzzella in Romano

Yesterday, AG Pitruzzella published his opinion in Romano v DSL, a case concerning a somewhat less well-known instalment in EU consumer protection: Directive 2002/65/EC. The concrete issues discussed in the case, however, are quite similar to typical consumer cases: they have to do with withdrawal rights and information provision. 

In 2007, the Romanos entered a distance consumer credit contract. They signed a form acknowledging that demanding immediate performance of the credit meant that they were forsaking their right of withdrawal. For more or less ten years, they went on paying back the credit, until they decided to sue the bank arguing that the contract should be terminated: they had not been provided appropriate information on their withdrawal rights, and hence should not be held to the contract. Additionally, as provided by German law, the creditor should pay them compensation for having all the while retained use of their money. 

The right of withdrawal in distance consumer credit contracts, as featured in the Directive, appeared to have been implemented in the various sub-provisions going under article 312 of the German Civil Code, or BGB. These excluded withdrawal from already performed financial contracts, when performance had taken place at the express requests of the consumers before their withdrawal period expired. However, it appears to be the case that the German Supreme Court had affirmed that the consumer’s right of withdrawal in distance financial services was still regulated by article 355 (and 495) of the BGB, where the general provisions on withdrawal in consumer contracts find their place. This meant that the contract’s performance did not exclude the right of withdrawal when consumers had not been properly informed.

The referring court asked, in essence:

1)   Whether it was precluded, under the Directive, to regulate the right of withdrawal in the field covered by it in a way different than what established by Article 6(2)(c) of the directive itself; 

2)   Whether the information to be given under the Directive and concerning the right of withdrawal must be aimed at the “average consumer” as defined by CJEU case-law, or whether the directive allows for a different consumer image. 

As to the first question, the AG answers in the affirmative: the Directive must be understood as pursuing full harmonisation except when expressly providing otherwise.  A clause allowing for additional protection at MS level had been included with regard to information provision, but not to withdrawal rights. The fact that in this case the two issues were to an extent interrelated – the right of withdrawal being extended as a result of (allegedly) insufficient information provision – did not lead to a different conclusion, because the Directive (we must understand: intentionally) did not attach any consequences to the provision of insufficient information on the right of withdrawal. It only said that the withdrawal period only started running once the consumers were informed of their right. 

As to the second question, the AG engages in a sort of systematic interpretation, explaining that since the definition of “consumer” in Directive 2002/65 was essentially the same as the ones found in Directive 93/13 and 2005/29, and the Court of Justice has already clarified that the average consumer standard applies to both of those directives, the same consumer notion – postulating a reasonable, informed and circumspect consumer – should apply here. It is such a consumer, thus, that should be kept in mind when ascertaining whether sufficient information has been provided in the context of the Directive. In this case, the AG does not engage in a discussion concerning minimum and maximum harmonisation – likely because providing “additional protection” under the Directive is an activity that would only be open to national legislatures and is precluded to civil courts adjudicating on specific cases. 

The AG also answers the third question – which would fall if the court followed him on the first two points: can a member state require providers of financial services to pay the withdrawing consumers compensation for the availability of the consumers’ money between the contract’s conclusion/performance and the time of withdrawal? According to the AG, member states cannot introduce such a requirement: the Directive’s article 7 regulates exhaustively the consequences of withdrawal, without providing for such additional compensation. In light of the system of the Directive, which gives consumers two weeks to exercise their right of withdrawal, such additional compensation would make little sense. 

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The opinion contains some possibly controversial passages – such as the assumption that lending “imperialist” force to the average consumer standard is just a matter-of-fact operation – but does not come across as particularly surprising. Perhaps its most remarkable feature is to remind us of the complications arising from the EU’s resolve to treat consumer financial services as a field of its own, requiring national legislators and courts to fragment otherwise rather indistinguishable situations in accordance with the Union’s rather arbitrary legislative boundaries. Have a nice weekend!

Withdrawal from car insurance after having an accident

The European Commission started an action against Italy for incorrect implementation of the Directive 2002/65/EC concerning the distance marketing of consumer financial services. This Directive applies to situations in which consumers buy a service e.g. from a credit card company, an investment fund, an insurance company etc. over the internet of by telephone etc. Article 6 gives consumers a right to withdraw from such a contract within 14 calendar days of its conclusion. However, Italy has an exception to this right of withdrawal in its law. Namely, when a consumer concludes a car insurance contract he may not withdraw from it if within these 14 initial days an accident covered by the insurance policy has taken place. After having been informed by the European Commission of the non-compliance Italy agreed to adjust this rule, but the time for this has lapsed by now (see: Distance marketing of financial services: Commission refers Italy to the Court of Justice).

Swedish dilemma

The European Commission referred Sweden to the European Court of Justice for inadequate transpotition of the Directive 2002/65/EC on the distance marketing of consumer financial services. This Directive offers consumers similar level of protection as the Distance Selling Directive, however, it applies to the marketing and sale of financial services (and not goods) via means of distance communication, e.g. when a consumer takes a loan from a bank via telephone, or signs up for a credit card online.

Sweden infringed consumer rights by e.g. leaving an option open to the service providers to require from consumers who are trying to use their right of withdrawal a compensation for costs associated with screening before consumers are granted a loan. According to Article 7 of this Directive consumers using a right of withdrawal may only be required to pay for services provided to them directly.

Since Sweden did not timely amend its legislation after first being notified by the European Commission of its infringement, the matter will now be directed to the ECJ. The reference procedure is one of the most important elements in protecting indvidual rights and insisting on adequate remedies for consumers that European Commission may use. The EC does not make use of it too hastly, but sometimes the national legislative authorities are just too slow in giving their citizens the necessary (European) standard of protection.