Are expert retail investors consumers? The Opinion of AG Tanchev in C-208/18

Last week AG Tanchev delivered his Opinion in case C-208/18 Jana Petruchová v FIBO Group Holdings Limited involving a very interesting question on the notion of consumer in complex financial transactions.

The facts

On 2 October 2014 the claimant, a resident of Ostrava, Czech Republic entered into a contract (a 'Framework Agreement') with the defendant, FIBO Group Holdings Ltd, a brokerage company established in Limassol, Cyprus. The purpose of the Framework Agreement was to enable the claimant to make transactions on the FOREX market by placing orders for the purchase and sale of the base currency which would be executed by the defendant. To that end, the Framework Agreement enabled the conclusion of individual contracts for difference (CfD's) between the claimant  and the defendant. With the CfD’s the claimant bought and sold the base currency (in the present case USD) and made profit on the difference in the exchange rates applicable to the sale and purchase of the base currency in relation to the quote currency (here JPY).

On 3 October 2014 the claimant entered into a CfD with the defendant. At 15:30:00 she placed an order to buy a certain amount of USD.  The trading system promptly informed her that the up-to-date exchange rate that she accepted and confirmed the order to buy. However, long queues of orders built up in FIBO’s trading system as a result of a jump in the rate of the USD against quote currencies. Consequently, the required amount of USD was purchased later, at 15:30:16, at a slightly less favorable exchange rate and for a higher price. At 15:48:11 on the same day, the claimant instructed the defendant to sell the purchased amount of USD making a gross profit in the equivalent of USD 4 081.33. However, had the claimant’s order to purchase the base currency been executed in a timely manner, not with a delay of 16 seconds, she would have made a profit of USD 13 009.23 that is three times higher of what she actually achieved.

On 12 October 2015 the claimant sued the defendant for unjust enrichment, lodging the claim before the Regional Court, Ostrava; contrary to the Framework Agreement that provided for the jurisdiction of Cypriot courts. The court enforced the jurisdiction clause, and rejected the applicability of Article 17(1) of Brussels Regulation that would enable the claimant as a consumer to bring her claim in a Czech court. This was because, according to the court, the claimant did not enter into the CfD at issue in order to meet her private needs, she had the knowledge and the expertise required to conclude CfD's, and she had been warned that CfD's were not an appropriate instrument for ‘retail clients’ within the meaning of Directive 2004/39. In any event, the view of the court was that  Article 17(1) of the Brussels Regulation had to be interpreted in the same manner as Article 6(1) of he Rome I Regulation, and that consequently financial instruments were excluded from the scope of Brussels Regulation. The appellate court confirmed the lower court's decision, but the Czech Supreme Court disagreed, and turned to the CJEU.

The question

The Supreme Court asked the CJEU whether a natural person who engages in trade on the FOREX market must be regarded as a consumer within the meaning of Article 17(1) of the Brussels Regulation or whether, by reason of the knowledge and expertise required to engage in that trade, the complex and atypical nature of the contract at issue, and of the risks involved, that person cannot be considered a consumer.

The answer 

In delivering his option, AG Tanchev first of all clarified that although Art. 17(1) the Brussels Regulation provides a special jurisdiction for consumer disputes, it does not define the notion of a consumer. The provision only provides that a person, the ‘consumer’, must conclude a contract ‘for a purpose which can be regarded as being outside his/her trade or profession’ (para. 35). Following the CJEU's settled case law, AG Tanchev explained that  Article 17(1) of Brussels Regulation should be interpreted independently by reference principally to the general scheme and objectives of that Regulation, rather than by reference to other, related EU legislation (para. 36, see also parts E and D of the Opinion). Finally, AG Tanchev highlighted that the notion of a consumer must be strictly construed, taking into account the nature and objective of the kind of the contract rather than the subjective position of the consumer in the contract under scrutiny (para. 37).

Looking at the only requirement of Art. 17(1) of Brussels Regulation, the purpose of the contract that must be non-professional, AG Tanchev is immediately inclined to say that the claimant in question is a consumers, given that at the time of conclusion of the Framework Agreement and of the CfD at
issue, the claimant was a university student and although she was also working part time, the CfD was not concluded within her (part-time) profession. This was not disputed between the parties. However, before he would have made his final recommendation, AG Tanchev carefully scrutinized the arguments raised by the Czech courts and the elements of the question referred to for preliminary ruling.

Relevance of knowledge and expertise
AG Tanchev discarded the relevance of knowledge and expertise for defining the notion of a consumer within the meaning of Art. 17(1) of Brussels Regulation. First of all, accepting that CfD transactions require special knowledge will make these a commercial transaction, would effectively exclude these types of contracts from the scope of the Regulation, and this would be contrary to the intention of the Regulation that does not provide for the exemption of any financial contracts/instruments. Secondly, it is also irrelevant that the claimant had some previous experience with CfD's as the Regulation does not require evidence of no prior knowledge and experience in the field. It only requires that a contract is concluded outside the person's trade or profession (paras 43-45). Finally, taking into account the claimant's level of knowledge and information would give priority to the claimant's subjective situation as opposed to the nature and objective of the contract (para 46). This approach would be contrary to the CJEU's established case-law in interpreting the notion of a consumer (referring here primarily to Schrems and Costea).


Relevance of the value of transaction
AG Tanchev also rejected the argument that the high values involved in the transaction make them a commercial transaction rather than a consumer contract. According to the AG Tanchev, in the absence of any specific threshold in the Regulation, this approach would be contrary to legal certainty, making the applicability of the Regulation subject to a variable and not precisely defined factor (para. 51)

Relevance of the amounts of profit made by the transaction 
AG Tanchev discredited the argument that a person should not be considered a consumer if the profit made on the FOREX market accounts for the greatest part of the person's income. According to the AG, it would be contrary to equal treatment if persons achieving the same profit would enjoy different classification (and hence protection) depending on amount of profit relative to their income (para. 52).

Relevance of the consumers involvement 
AG Tanchev also discredited the argument that the claimant should not be considered a consumer because she actively placed orders on the Forex market. Art. 17(1) of Brussels Regulation does not require that the consumer acts in any special way, it neither requires the consumer to stay passive nor to be active (para. 53).

Relevance of the risks involved in the transaction

Finally, AG Tanchev also rejected the importance attached to the risks involved in the transaction, primarily because risks are inherent in the conclusion of CfDs. Therefore, should classification as a
consumer be denied on account of the risks taken, CfDs would systematically fall outside the scope of Article 17(1) of the Brussels Regulation, and this would be contrary to the express provisions of the Regulation that only exempts certain type of transport contracts from its scope (para. 56). On the contrary, the high risks involved in the transaction justify the protection of Brussels Regulation to persons dealing with CfDs (para 57).

Relevance of the number and frequency of transactions 
Finally, the AG considered the relevance of the number and frequency of the transactions executed. Although recognizing that a person carrying out financial transactions regularly over an extended period of time and for significant amounts of money would classify those transactions as a (secondary) profession (para. 58), referring to interpretations of national courts AG Tanchev finally rejected the relevance of this criteria. Reliance on individual circumstances would lead to uncertain outcomes, and would also be inconsistent with the CJEU's approach to look at  nature and objective of the contract rather than the subjective situation of a person in question (paras. 59-63).

Concluding thoughts

This is an interesting case that once again raised the problem of delimiting consumers from non-consumers, now in the context of Brussels Regulation. Taking a 'black letter' approach to interpreting Art. 17(1) of Brussels Regulation, AG Tanchev provided a protective view to the notion of the consumer. However, given his approach of looking at the Regulation isolated from other EU legal instruments, the entire system of protection that comes with the notion of a consumer in EU law might not have been triggered. In fact, taking this approach, could we end up in classifying an individual under one act as a consumer and under another EU  legislation as a business, and would this be a problem? Secondly, do you agree with AG Tanchev's approach in not limiting the scope of the notion of a consumer? Should wealthy consumers likely to engage financial advisers and/or knowledgeable consumers who are able to make prudent decisions deserve the special EU consumer protection regime? More generally, we could also ask whether certain categories of consumers such as high-net-worth individuals need this protection, whether the many protective rules of EU consumer law, primary those on information provision slow down their business, especially their financial dealings? What do you think?

Would you trust your retirement to a pan-European personal pension product?

In June 2017 the EU Commission adopted a proposal for a Regulation of pan-European personal pension product (PEPP). As any other personal pension product PEPPs are intended to be long term investment products that complements state and workplace pensions and that consumers sign up for on voluntary basis. PEPP will be an addition to the existing markets for pensions, and will not replace or harmonize national personal pensions schemes. Given the recent attention to this Proposal, having just been approved by the Parliamentary Committee for Economic and Monetary Affairs (on 3 September 2018) we thought the proposal finally deserves to be commented on our blog. So what is special about PEPP and would it benefit consumers?

Who will offer PEPPs?

PEPPs may only be designed (manufactured) and sold (distributed) by EIOPA authorized firms in accordance with the conditions laid down in the proposed Regulation (Art. 4).  PEPPs will be offered throughout the EU by various financial firms already established in  Member States (Art. 5) that will offer PEPPs along with other products in their portfolio. Some will manufacture their own products (PEPP provider), others will act as intermediaries, sellers of products manufactured by other PEPP providers (PEPP distributor) (Art. 8).

What are the special features of PEPPs?

As part of the Capital Markets Union, PEPPs are intended to be a pan-European products. So the most important feature of PEPPs is their portability- consumers will be able to continue their contributions to their chosen PEPP even after moving their domicile to another Member States (Art. 12). Portability however is not as straight forward as it sounds at first. Given the very different national regimes across the EU especially the applicable tax incentives, PEPPs will operate as a series of national compartments, each compartment being compliant with national rules. A new compartment will be opened with every new PEPP account, that corresponds to the legal requirements and conditions for using tax incentives fixed at national level. The mechanism for opening new compartments, transferring the accumulated rights between these compartments and providing information about this option is laid down in the proposed Regulation. 

Switching is the other important feature. PEPP consumers can switch providers once every five years at a capped cost of 1.5 % of the PEPP's positive balance (Arts 46-48)

Are PEPP investments safe? 

The most important worry of with every investment is what will happen if the investment product does not perform as expected and what will happen if the provider goes bust. These questions are especially important with long term products as pensions, in which we might invest for years before we see any benefits of our investment, and on which we relay hugely as a source of income in times when we need it the most. The proposal provides for a Basic PEPP that protects at least the capital invested. This is however not the only version of the PEPP that consumers will be offered (the name of the proposal is misleading suggestions that there is only one PEPP product). Consumers will be offered up to five investment options, one of them being a default that protects at least the capital invested, from which consumers must choose. The investment choice can be changed free of charge once every five years (Arts. 34-36). Although the proposal provides for a guarantee of capital protection for the default investment option (Art. 37),  this protection does not seem to extend to other versions of PEPP. Anyone opting for a more complex or risky PEPP will not be protected.  It is also unclear what sort of guarantees are in place to protect the capital of basic PEPP.

As with every investment, the well-being of consumers is affected by the way their investments are managed. To this effect, the proposed Regulation contains basic rules on the type of acceptable investment for PEPP firms (Art. 33). 

What other rules are included into the proposed Regulation?

Similarly to other European legislation, the provisions of the current proposal are heavily weighted in favor of information rules. Transparency  is secured by electronic communication as the default (Art. 21). Prior to the conclusion of the contract, information is supplied on a PEPP key information document (KID), setting out specified standard information, building on existing rules in the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation. Importantly, KID will information on past performance over at least five years, or the maximum available (Art. 23). There are special rules on PEPP advice (Art. 25) and information communicated during the contract (Art. 27), including the PEPP Benefit Statement giving specified information on accrued entitlements or accumulated capital and any guarantees applicable (Art. 28), and information on how to access supplementary information such as information on annual accounts and annual reports of PEPP providers (Art. 29)

The role for Member State regulation?

Although the PEPP product is intended to be a pan-European product, the proposed regulation only seems to lay down some basics for the creation and sale of products leaving a large space for Member states to vary especially in the design of products. Features related to the accumulation phase such as age limits, maximum amounts of contributions and early redemption rules (Art. 40), and those related to decumulation phase such as forms of pay-outs (Arts. 51-52) are left to the discretion of Member States.

What if something goes wrong?

The proposal obliges PEPP providers and distributors to have in place adequate and effective internal complaint handling schemes (Art. 43) and Member States to have adequate out of court, alternative dispute resolution procedures in place (Art. 44).

Final thoughts

The Proposal is currently in the legislative process. It has already received substantial amendments but may be subject to more before the final shape of the text. For example, it has now been clarified that the overall costs and fees should not exceed 1% of the accumulated capital per year. Better Finance has also achieved for the proposal to provide for a special provision of collective redress for PEPP consumers. However, significant concerns remain over crucial features of the product, for example over how the capital protection will work (see here).

On a more fundamental level, I find it hard to understand: how is the PEPP a pan-European product? Apart from the possibility of portability (which I am unclear how it would work in practice and whether consumer interests are truly protected), I don't see much efforts for the creation of a pan-European product, or a a financial product for that matter. Most of the features of the product are left to be regulated by Member States- a product cannot be created by information provision! Why is there not one or let's say three kinds of standardized PEPP (if we want to give choice to consumers) that are the same everywhere in their basic product features, that are reasonable priced and safe (with adequate capital protections), and that are offered by various providers throughout the EU?

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?