Paying your dues - a new package on Payment Services

On July 24, the European Commission published a new, revised version of the Payment Services Directive as well as a proposal for a Regulation on interchange fees for card-based payment transactions. This package is supposed to update and harmonise the existing Payment Service Directive from 2007. The role of the PSD is to increase competition among payment institutions, thereby offering more payment choices to consumers. Consumers are also supposed to benefit from these measures due to more attention being given to transparency of payment services to consumers (better information on fees, e.g.), as well as enforcement of consumer rights (e.g., refund rights, liability of payment institutions). 

The new PSD2 takes into account certain new types of payment services, such as internet payments where consumers are often enabled to pay instantly for their online shopping without the need to use a credit card (interestingly, still ca 60% of EU population does not possess a credit card - FAQ), but instead paying directly to the online trader through the payer's online banking module, e.g., iDeal in the Netherlands, Sofort in Germany, Trustly in Scandinavia. Such providers would fall under the EU rules upon the adoption of the revision of the PSD.

The mentioned Regulation would also contribute to better consumer protection by taking away a possibility of the traders to surcharge consumers for using their payment cards.The interchange fee levels will be capped at 0.2% and 0.3% for debit and credit cards which is below the level of interchange fees in most Member States currently. This cap could result also in lowered retail prices. (New rules on Payment Services for the benefit of consumers and retailers)

Additionally, the new rules would strengthen consumer protection against fraud by capping the maximum amount of payment that consumers could be obliged to pay in case of an unauthorised payment from 150 to 50 Euro. Consumers would also be granted an unconditional refund right, even when a payment would be under dispute, unless the trader had already fulfilled his contractual obligations and the goods have been consumed.

The European Commission advises readers to keep apart the previously discussed proposal for a Directive on Payment Accounts from the PSD2 (Proposal for a new Directive on Payment Accounts). While the PSD2 targets fee transparency, aiming at consumers' awareness of full terms and conditions linked to payment services (e.g., possibilities of refund, execution of payment), Payment Accounts Directive focuses on core services linked to a payment account, e.g., the annual fee for a debit or credit card, but also separate aspects of payments services and fees. Honestly, to me the difference does not sound that obvious and I wonder why are these two instruments kept separate.

The proposal will now have to be accepted by the Parliament and by the Council.

Europe - no hiding place for debtors

Last week the European Parliament was busy with many draft EU laws that could affect consumers in Europe. One of the not-mentioned here yet issues was the matter of cross-border debt recovery. At the moment, both small businesses and consumers may resign themselves to losing some money instead of pursuing often costly (hiring foreign lawyers), timely (translating documents) and complex (understanding different legal system) debt recovery procedures in another Member State (approx. 600 million euro a year in debt is due to such reasons written off). The European Commission proposed already in 2011 a Europe-wide preservation order to ease this debt recovery process (which we have in depth discussed: Cross-border debt recovery to be made easier for consumers and SMEs). Last week (finally) the European Parliament voted on it, and in June the proposal will be discussed in the Council. (European Commission welcomes progress on proposal to help recover cross-border debts)

Financial complaints in the British Isles

The British Financial Ombudsman Service (FOS) published an annual report documenting its work in settling disputes between consumers and financial businesses (with issues ranging from mortgages and payday loans to mobile phone insurance or pet insurance). FOS is a free service for consumers and it's an independent organisation from the financial world. It is interesting to see that compared to the previous year an increase of 92% was noted in tackled cases. This data could suggest that consumers are more aware of their rights and more willing to complain or/and their trust in financial institutions decreased (this could be claimed due to spikes in complaints after financial scandals). On average, one in four initial inquiries went on to become a formal dispute (previous year: one in five) and in nearly half of these formal cases compensation was paid. The most of cases (74%) concerned complaints about the payment protection insurance (PPI) and four of the UK's largest banking groups accounted for 62% of all complaints. This data could point out continued failure of banks and other financial institutions to help consumers get the compensation they are entitled to. (Financial gripes reach 7,000 a day, says ombudsman)

"As levels of confidence in financial services have eroded, it is disappointing that we still haven’t seen any significant improvement in complaints handling. Too many financial businesses still seem unable to sort out problems themselves, without the ombudsman having to get involved." said Natalie Ceeney, chief ombudsman (Stronger consumer voice sees half a million people bring disputes)

Objectivity of financial advice to consumers still not a given

Last week BEUC issued a press release in which it expressed its concerns about the European Parliament's plans to update the MiFID (Markets in Financial Instruments Directive). (Consumers left stranded: self-serving financial commissions survive EU vote) The draft of the EP's Economic Affairs committee apparently permits financial intermediaries to keep all their commissions and incentives received from the parties they are representing, as long as they disclose to consumers that they have received them. This system of disclosure is not seen as guaranteeing sufficient protection to consumers, taking into account the often aggressive practices that intermediaries use to sell the product from which they are themselves earning the most, and not the one that would be the most suitable for the consumer. Another proposal that may endanger consumers is the qualification of certain investment products as 'non-complex' at a European level (e.g. Undertakings for Collective Investment in Transferable Securities - UCITS), which would reduce the level of advice and warning about their risks that needs to be provided to consumers.

Ensuring integrity of financial benchmarks

The European Commission opened today a new public consultation related to the production and the use of indices serving as benchmarks in financial and other contracts. (Consultation on benchmarks and market indices launched following LIBOR manipulation) Certain of such indices refer to consumer data  (e.g., consumer price index - CPI, interest rate benchmarks) and may be used as benchmarks in consumer financial products (e.g., to determine the reference interest rate in a retail mortgage or consumer credit contract). As you can imagine, using a wrong benchmark to determine what the interest rate payable on variable rate mortgages, for example, should be, could lead to serious detriments for both consumers and investors. (see: Consultation document) Recently, a vulnerability of certain various, important indices, such as LIBOR, EURIBOR and TIBOR was revealed (see, e.g.: FSA final notice). Therefore, the European Commission decided to start looking for a solution that would allow it to ensure the integrity of financial benchmarks. The consultation is open to 15 November.

Investing consumers should be treated like/with (cross out inapplicable word) KIDs

Yesterday the European Commission presented a new legislative package that is supposed to restore consumers' faith in the financial services. It is an ambitious undertaking, no doubt, taking into account the consumer experience of the last few years with one financial crisis following another and big financial companies failing to provide much needed security and reliability. Many consumers found themselves in financial troubles due to wrong information or financial advice they had received, which often led them to invest in unsuitable for them financial products. To prevent this from happening again, an action at a European level was deemed to be necessary.

"In the aftermath of the biggest financial crisis in recent memory, the financial sector must place consumers at its heart. Retail products must be safer, information standards must become clearer, and those selling products must always be subject to the highest standards. That is why we have adopted a package solely dedicated to consumers, so that they can choose financial products based on clear and sound information and professional advice which puts the consumer's interests first." said Internal Market and Services Commissioner Michel Barnier (Commission proposes legislation to improve consumer protection in financial services)

And so, the European Commission presented three new documents: a proposal for a regulation on key information documents for packaged retail investment products (PRIPS), a revision of the Insurance Mediation Directive (IMD), and a proposal to boost protection for those who buy investment funds which is governed by the Directive on Undertakings for Collective Investment in Transferable Securities (UCITS). The first two of these documents are especially relevant for consumer protection so let's take a closer look at them.

PRIPS

Anyone who ever tried to make an investment knows that financial products are, ehm, complex (this really is too mildly put). In order for consumers to understand what they may expect from a given financial product and what risks they are taking on themselves the information provided to them has to be more transparent and comprehensive. This proposal aims at improving quality of such information by introducing a new, innovative standard for product information. It is intended to be short, plain-speaking and consumer-friendly. Every investment product (investment funds, insurance-based investments, retail structured products, private pensions, etc.) will need to have such a document attached to it. I just love the new name for it: KID - Key Information Document. Let's be honest, most of us have a childlike approach to financial matters - lots of faith in things ending up right even if we climb that highest (financial) tree branch without any security. Each KID will convey information on the product's main features, risks and costs associated with the investment in the product. The intention is to make it clear to consumers whether they can lose money on that product and to show them its complexity. Consumers will easily be able to compare KIDs of different investment products since they will follow the same structure, content, presentation. More information on this proposal may be found here.

IMD

Another matter that often leaves consumers flabbergasted is the risks associated with taking an insurance cover. Most often taking an insurance is seen as purchasing more security, without realising that it may also endanger consumers' interests. Anyone who studied law knows that insurance law is not a thing to trifle with, but consumers often remain blissfully unaware of its complexity. The EC aims at revising the IMD which regulates selling practices for all insurance products. Currently, the Directive applies only in cases when insurance was bought through an intermediary, but the revision aims at giving the same level of protection to consumers regardless of the character of the person they had purchased the insurance from. Moreover, sellers of insurance will need to inform consumers of their professional character, links to the insurance company as well as reveal their remuneration for selling an insurance cover. Most importantly, a professional, honest advice will have to be given to consumers interested in purchase of insurance products. Currently, more than 70% of insurance products are sold without appropriate advice. More information on this document may be found here.

How do consumers choose their financial products?

Towards secure internet payments

On 11 April 2012 the European Central Bank (ECB) endorsed for public consultation the "Recommendations for the security of internet payments" that apply to the retail payments. By issuing these Recommendations the European authorities hope to increase consumers' trust in internet payments and to combat payment fraud. These Recommendations are applicable to all internet payment service providers (PSPs) as defined in the Payment Service Directive, whether such payments are done by means of the execution of card payments online or credit transfers on the internet. The method of implementation of these Recommendations will depend on national legal systems, but the creators of Recommendations promise to try to ensure consistency across Member States.

Comments on the draft of the Recommendations are welcomed by 20 June 2012. If further information is needed, the national central banks and national supervisors of PSPs serve as contact points regarding the Recommendations. All received comments will be published online unless a restriction to the contrary is made by the author of the comments (Consultation announcement).

EU households still in the financial crisis

The European Commission published some new surveys results as to EU citizens dealing with the financial crisis and its effects on both the employment market and household expenses (Employment and Social Situation Quarterly Review). In general, it is estimated that since 2008 the level of financial distress in EU households remains more or less the same, despite a moderate improvement over recent months. The slight improvement manifests itself by a fewer number of households reporting that they are running into debt. Not surprisingly, the lingering effects of the financial crisis influence more the households with lower income. Additionally, there is a difference across Member States with consumers in Germany and Sweden reporting improvement of their situations and households in Greece, Spain and Romania - deterioration of their finances.

On the effects of the financial crisis on the labour market and child poverty see this quarterly review.

Insurance contract linked to investment funds is just an insurance contract - CJEU in González Alonso case C-166/11

1 March 2012: CJEU judgment in the case C-166/11 (González Alonso)

The dispute in this case concerned a consumer concluding a life insurance contract outside the premises of the insurance company. The contract concluded provided consumer with life assurance offered in return for payment of a monthly premium. That monthly premium was to be invested, in varying proportions, in fixed-rate investments, variable-rate investments and financial investment products. The question asked to the CJEU was whether such a contract falls under the scope of the Doorstep Selling Directive. If it did, then the consumer could withdraw from a contract. If it didn't, then the consumer was bound by the contract he had concluded.

Insurance contracts are excluded from the scope of the application of the Doorstep Selling Directive (art. 3(2)(d)). However, the consumer claimed that in this case he had concluded a "unit-linked" contract (of contract linked to investment funds) that is not excluded from the scope of the application of the Directive. The CJEU decided, however, that:

"(...) contracts which are ‘unit-linked’ or ‘linked to investment funds’, such as that concluded by Mr González Alonso, are common in insurance law. Thus, the European Union legislature took the view that that type of contract falls within a class of life assurance, as is clear from Annex I, point III to the Life Assurance Directive, read in conjunction with Article 2(1)(a) of that directive." (Par. 29)

As a result, insurance contracts linked to investment funds should be seen as insurance contracts that are excluded from the scope of the application of the Doorstep Selling Directive. (Par. 31-32)

How to switch bank accounts remains a mystery

Last week a consumer market study was published on consumers' experiences with bank account switching (Consumer Market Study on the consumers' experiences with bank account switching with reference to the Common Principles on Bank Account Switching). Already in 2007 the European Commission discovered that banks don't enable consumers to easily move their accounts if they choose to do so and urged the Banking Industry Committee (EBIC) to remove existing barrierts to customer mobility. As a result, the EBIC esatblished a self regulatory initiative which was intended to bring clarity to consumers. Therefore, as of November 2009 it was supposed to be easier for consumers to change their bank account from a current bank to another bank (Changing your bank). In general, the consumers were only supposed to make a request to a new bank who would then, in theory, help the consumer through the switching process, transfer all standing orders and direct debits to the new bank etc. Unfortunately, the new study showed that this clarity was not achieved.

Only 19% of mystery shoppers were able to successfully open a bank account with a new bank and switch a standing order based on the process described in the new self-regulatory guidelines. Shoppers claimed that 71% of banks did not assist in the transfer, which meant that they did not follow self-regulatory guidelines, 7% took more than 14 working days to open an account or switch an order. The study also showed that bank staff was not always aware of switching accounts' procedures and that the level of information that consumers could receive about this varied significantly (14% consumers received no information at all).

EU Internal Market Commissioner Michel Barnier said "The results of the study published today explain why consumers change their banks so rarely. If consumers are not able to easily switch bank accounts, they cannot take advantage of better and cheaper banking services on offer elsewhere. The single market is thus deprived of the competitive drive that leads to innovation, cost savings and better quality banking services. This, in the long-run, can prove to be an obstacle to growth". (Consumers: Switching bank accounts - 8 out of 10 mystery shoppers faced difficulties)



Simplified cross-border money transfers thanks to SEPA

Yesterday, the European Parliament adopted in the first reading a new Regulation establishing technical requirements for credit transfers and direct debits in euros and amending Regulation (EC) No 924/2009 (position of the EP may be found here, the final text of the Regulation is not yet available). This new regulation establishes a single Euro payments area (SEPA) with the same rules and standards for euro credit and direct debit transactions among banks. While its provisions do not apply to personal credit or debit card payments, it is still of great relevance for European consumers. Since all national banks will now have to apply the same charges, this means that as of 1 February 2014 there should be no more hidden charges in cross-border transactions, which led to unfair competition and hindering of cross-border trade. For example, if a EU citizen moves to another Member State, he may continue using the same bank account, e.g. in his home country, for receiving salary or paying bills in another Member State. 

"This regulation really benefits citizens. It will enable them to make payments from one bank account to others all over Europe, just like a normal domestic payment. It will be possible to make all cross-border credit transfers and direct debits in the same way as normal domestic payments. A person working abroad will not need to open a new bank account in the host country, but may receive his or her salary in the home country bank account. Companies will benefit too, by not needing more than one bank account in Europe for each payment purpose" - this statement has been made by the SEPA rapporteur Sari Essayah (EPP, FI). (Simple and efficient cross-border payments)

If you can't explain it simply, you don't understand it well enough - on clear bank account terms

A week or so ago the NYT published an editiorial "Clearer Bank Account Terms" in which it mentioned the need for more transparent and easier to understand terms in contracts that consumers conclude with banks (e.g. about a monthly fee when opening a checking account). In the US there is currently pressure being put by consumer organizations on the Consumer Financial Protection Bureau to require banks to disclose more, and more straightforward, information to their clients. One of the data that is being quoted is that of the Pew Charitable Trust that has recently found that banks may charge consumers with up to 54 different fees, e.g. for online transfers, making large deposits in coins or just providing customer assistance (see, e.g.: Consumers need a simple, easy-to-read disclosure box for checking accounts, or: Hidden Risks: The Case for Safe and Transparent Checking Accounts). It is no wonder that consumers get lost in all this information (contracts and all the documents surrounding them often have many, many pages - more than 100 pages - filled with information) and are not able to make informed transactional decisions (see our earlier post: Write as if you were writing it for your Grandma - tips on simplifying legal language). Another quoted study discovered that more people close their bank accounts due to unexplained fees than, e.g., because they lost their jobs. Unfortunately, when customers are closing bank accounts it creates problems not only for the bank but often for these customers, as well, e.g. by making their saving more abstract and less likely to happen.

The editorial encourages the CFPB to adopt and enforce uniform and transparent disclosure forms, that would allow consumers to avoid paying exorbitant fees, as well as make them better informed as to which services to choose. One may wonder whether such lack of disclosure would not be able to be perceived as a misleading commercial practice that is prohibited under the Unfair Commercial Practices Directive in the EU? (see also our earlier post: Unfair commercial practice ≠ unfair contract term ≠ void contract - AG's opinion in case C-453/10 Pereničová and Perenič)

As Jeff Sovern argues in response to this editorial, however, disclosure by itself could not fulfil the role of efficiently protecting consumers, since even the transparent conditions seem to be too much for consumers to understand. While it is true that the information load might be too big to be thoroughly analyzed by most consumers, a uniform disclosure form (e.g. the Chase form) will still put consumers in a better position by making comparisons of any data that is crucial to them easier.

When the going gets tough... get tough on insider dealing and market manipulation

A few days ago the European Commission released a new proposal for a Regulation on insider dealing and market manipulation (together these practices constitute market abuse) (Getting tough on insider dealing and market manipulation). It has been mentioned a few times on this blog that the European Commission tries to contribute to the process of sanation of financial markets by recognizing and dealing with some of its issues (e.g. Shortcoming of a financial market to be healed by shortselling regulation, Cross-border debt recovery to be made easier for consumers and SMEs). One of them is an increase in the possibilities of market manipulation due to globalization of financial markets, their complexity and new technologies. Insider dealing means that a person is trading in financial instruments after having obtained possession of price-sensitive inside information in relation to those instruments. Market manipulation is understood as artificial manipulation of prices of financial instruments through practices such as spreading of false information or rumours and conducting trades in related instruments. These practices concern consumers only indirectly by influencing the stability and transparency of the financial market. However, this indirect influence can have quite a strong effect on consumers, which means this new development in European law is worth mentioning here (see also previous post on Inside Job).

The new proposal intends to strengthen investor protection already offered by the Market Abuse Directive (2003/6/EC). It extends the scope of protection to financial instruments that are only traded on new platforms (e.g. multilateral trading facilities) and over the counter as well as adapts the existing rules to new technologies (e.g. high frequency trading within which certain practices, like "quote stuffing" - i.e. submitting orders without an intention to trade but to disrupt a trading system - will be recognized as prohibited market manipulation).

"The proposal clarifies that market abuse occurring across both commodity and related derivative markets is prohibited, and reinforces cooperation between financial and commodity regulators. The proposal includes a number of measures to ensure regulators have access to the information they need to detect and sanction market abuse. Since the sanctions currently available to regulators often lack a deterrent effect, the proposal introduces tougher and greater harmonisation of sanctions, including possible criminal sanctions which are the subject of a separate but complementary proposal."

This means that regulators will also gain the power to access phone and data traffic records from telecoms operators or to access private documents and premises (upon prior judicial warrant) where a reasonable suspicion exists of insider dealing or market manipulation. Whistleblowers will be granted protection and incentives for reporting market abuse. Also suspicious unexecuted orders and suspicious OTC transactions are to be reported. Additionally, an offence of 'attempted market manipulation' is introduced to protect the parties in the financial market from attempts to manipulated the market, where that manipulator does not succeed in actual trading practices. As far as sanctions are concerned: fines are not to be less than the profit made from market abuse, and not more than two times any such profit.

A proposal for a Directive on criminal sanctions was introduced as well, according to which, criminal sanctions will be applied for intentional offence of insider dealing and market manipulation (European Commission seeks criminal sanctions for insider dealing and market manipulation to improve deterrence and market integrity). Currently, the Member States differ in regulation of such offences which means that investors might avoid sanctions by 'forum shopping'.

For more information see FAQ about these two proposals. See also the website of The EU Single Market on Market Abuse.

Shortcomings of a financial market to be healed by a short selling regulation

In May this year we reported that a draft Regulation on short selling and credit default swaps (Short selling regulation?) is being prepared by the European institutions. Last week an agreement has been reached between the Council and the Parliament on this matter and only a formal endorsement lacks before this Regulation enters into force. The new rules are supposed to increase transparency, responsibility and stability in short selling transactions that are so often difficult to understand by consumers. After the regulation is enacted the short positions will need to be disclosed to regulators and they will have the power to limit short selling on a temporary basis in exceptional situations. This regulation is one of the measures that is seen as necessary to restore a healthy financial market and prevent future financial crisis (since short selling was seen as an aggravating factor in price declines in distressed markets).

"In a welcome improvement to our original proposal, so-called "naked" sovereign CDS positions will be prohibited where sovereign CDS are not acquired to hedge an exposure which is correlated to the value of the sovereign debt. The restriction will not apply to primary dealers and market makers. A competent authority will be able to temporarily suspend these restrictions where it believes, based on objective elements, that its sovereign debt market is not functioning properly and that such restrictions might have a negative impact on the sovereign credit default swap market. These balanced measures will ensure that sovereign CDS are used for the purpose for which they were designed, hedging against the risk of sovereign default, without putting at risk the proper functioning of sovereign debt markets." (Commissioner Michel Barnier welcomes trilogue agreement by Council and Parliament on new rules for short selling and Credit Default Swaps).

See FAQ for more details on this new regulation.

Cross-border debt recovery to be made easier for consumers and SMEs

What caught my interest today was news that are not pertaining to the core of the consumer law, but then I think that many subjects can be connected to the legal situation of consumers and we should not be too traditional in looking at consumer law, since we might miss lots of interesting relations and new insights. Of course, there is also this little fact of there not always being news to report on that are connected to the core of consumer law and my wish to keep this blog active. ;)

For some time now there have been voices raised in the legal academic world comparing the situation of SMEs (small and medium enterprises) to the position of consumers and asking why we are not offering the same protection to the SMEs as we do for consumers. After all, consumer laws were introduced in order to protect the 'weaker' contractual parties, i.e. consumers. But if we look at businesses entering into contracts we might quite clearly see that one business is not alike the other. Especially these companies that employ only a few people, have a small revenue, etc. may be seen as 'weaker' parties when they conclude contracts with big suppliers, distributors, producers. If the aim of legal systems is to protect weaker contractual parties and to restore the balance between contractual parties, would it not make sense to start either adjusting consumer laws to apply to SMEs or adopting new laws that would regulate SMEs situation?

Well, the new Consumer Rights Directive had a chance to extend (a bit) the protection granted by it to parties who purchase goods/services not only for their private use, but mainly for their private use. This broad definition of a 'consumer' was introduced by the European Parliament and was complying to the popular demand of granting consumer protection to more parties than it does now. However, the final (so far) version of the Consumer Rights Directive (from 23 June 2011) restored the narrow definition of a notion 'consumer'. Opportunity lost.

Well, today the European Commission notified that they intend to introduce a new regulation that would protect mostly interests of the SMEs (but you should not miss the fact that it would apply to consumers, as well!). This regulation would regulate cross-border debts. Imagine purchasing a good online from a trader in another country, paying for it, but never receiving the good. The thought of having to figure out how to claim their money back stops many consumers from concluding such online transactions, just in case something went wrong... The situation might be even more drastic when we are talking about an SME, i.e. a small, local shop that delivered its goods to a big distributor located in another country and at a certain time it stopped receiving payments for delivered goods. The amount of money that would be owed in this case would be much higher and might be crucial for the survival of this local business. From the estimations of the European Commission around 1 million SMEs have problems with cross-border debts and up to 600 million euro each year in debt is unnecessarily written off because businesses find it too daunting to pursue expensive (costs of translating documents and hiring lawyers), confusing and complicated (different national requirements) lawsuits in other countries.

The new regulation would establish a new European Account Preservation Order that would allow cross-border creditors (not only SMEs, even though the focus with this regulation is on them, but also consumer-creditors) to preserve the amount owed in a debtor's bank account. What would it change in practice? It would prevent debtors from removing their assets from a bank account during the time it takes to obtain and enforce a judgement on the merits of the case. This means that the debtor will not be allowed to empty or liquidate the bank account. Moreover, the same rules would apply to all Member States which would limit the legal costs that need to be made in order to recover the debt. Finally, the European procedure would exist alongside available national procedures, with the creditor having a choice which legal action to take. The only downside is that it would be an interim procedure, which means that creditors would not receive their money until they obtained a final judgement on the case in accordance with national law or e.g. by using European Small Claims Procedure. This new regulation will therefore not provide immediate financial release to the creditors, it would rather serve to safeguard their rights for the future. Interestingly, the debtor would not be notified of this procedure which means that such an order to block an amount of money on the debtor's account would have a necessary 'surprise element'.

Viviane Reding said on this subject:

“I want to make recovering cross-border debts as easy as recovering debts domestically," said EU Justice Commissioner Viviane Reding. "Companies lose around 2.6% of their turnover a year to bad debts. This is a weakness of our single market which we must remedy swiftly and energetically! Businesses need a simple solution – an account preservation order effective Europe-wide – so that the money stays where it is until a court has taken a decision on the repayment of the funds. In these difficult economic times, companies need quick answers. Every euro counts, especially for small businesses.” 

Press release on the introduction of the new regulation may be found here. FAQ on the new regulation (with examples when it might apply) may be found here. Statement on Commissioner's Reding website might be found here, together with a video. Finally, here you may find a European Business Test Panel on Commercial Disputes and Cross Border Debt Recovery.

Short selling regulation?

While the European Parliament works on funny videos that declare its resolution to fight against the financial crisis (see earlier post), the Economic and Financial Affairs Council agreed on a general approach on a draft Regulation on short selling and certain aspects of credit default swaps (on the 17th of May). This means that serious negotiations on this Regulation may now start with the European Parliament (and it will get its chance to make good on his resolution).

Short selling is one of the financial instruments that tend to be misleading and misunderstood by consumers. It basically allows consumers to sell a security that they do not own, but that is promised to be delivered, with the intention of buying it back later. What's the point of this practice? If the security price drops between the time the consumers short sell it and buy it back, the consumers make a profit from that price difference. Short selling is common for share trading but it can also be used for other financial instruments, e.g. government bonds. There are also two types of short selling: covered and uncovered (or naked - where at the time of the short sale the consumer has not borrowed the securities).

The European Regulation on short selling is something that is definitely missing in order to harmonize financial markets within Europe. It would guarantee common transparency rules (e.g. need to disclose net short positions either to regulator or, at a higher threshold, to the market) and would harmonize powers that regulators may use in exceptional situations, e.g. where there is a serious threat to financial stability (e.g. temporary powers to require more transparency or to restrict short selling transactions). Moreover, naked short selling (the more risky type) would be forbidden (with exception for short selling of sovereign debt).

Press release may be found here.

European Parliament to be known as a know-it-all?

I'm completely taken aback by the new video released by the European Parliament on the financial crisis. It's so insensitive, patronizing and just skims the surface of a really serious problem that influenced many people. I'm not convinced I should publish it here, since I don't want to be seen as spreading this clear propaganda around. But at the same time, I think we should be aware of this 'new' action plan and be ready to criticize it for the empty talk that it is.

Inside Job

I've seen yesterday the documentary "Inside Job" that has won an Oscar for the best documentary of 2010. It is a documentary about the financial crisis directed by Charles H. Ferguson explaining how changes in the policy environment and banking practices contributed to the financial crisis of the past few years. It shows clearly that if certain changes had been made, warnings listened and followed, corruption restricted - the financial crisis could have been avoided. The movie introduces certain financial instruments and explains clearly the risks involved with them, it follows year by year developments on the financial market, shows when the first warnings were given by economists as well as presents lack of political response to them. What caught most of my attention were the interviews with various reknowned economists who 'happened' to also be consultants either of the US government or/and major financial companies and banks. Presented in this movie their ignorance as far as morality of certain choices they had made is astounding. And it ends on a scary note: nothing seems to be changing in the US financial policy despite election promises of Obama...

I recommend this movie to anyone. I think it's interesting both for people who have in-depth knowledge as to financial markets, as well as regular consumers who are thinking about investing on the financial market or taking mortgages. Of course, you need to be a bit wary since this movie is definitely leaving you with a certain view that they intended to inflict upon you: bankers are corrupt and care only about their own money, and not about their clients' interests. Still, one cannot help but wonder how much of what is presented in it is more of a rule than an exception.

No more hiding money while filing for a divorce? - new regulations on recognition and enforcement of decisions in mattters of matrimonial and patrimonial property regimes

One of the four pillars of the European Union is the freedom of movement within the European Community. Since its establishment and enforcement with every year more and more European citizens travel within the borders of the EU, get jobs in other Member States, settle there and often also get partners from other Member States (today there are ca 16 million international couples in the European Union). This has all been made easier by the harmonisation of European laws. Now the European Commission and Council take a closer look to what happens to these international partnerships/marriages when they end - either via divorce or death. More specifically, it has become clear that a lack of harmonized rules regarding the property rights of such international couples leads to long-time disputes, forum shopping (since often it's not clear a court of which country is empowered to give a ruling), and as a result: many costs to European citizens as well as institutions. 

The European Council proposes now two new regulations that would provide for clear rules for recognising and enforcing court judgements on a couple's property in all EU Member States through a single procedure. These simplified, unified rules are supposed to save per case (per couple) ca 2000-3000 Euro. They will enable married couple to choose the law that applies to their joint property. Registered partners will also get legal certainty since their assets would be subject to the laws of the country where the partnership was registered. Finally, clear rules would be set for choosing the court that is responsible for adjudicating the case.

Hopefully, this will contribute to European consumers being more secure in their property and financial rights and it will decrease the uncertainty and confusion at a time that is not easy to begin with since you are either getting divorced or burying your spouse...

Press release on this subject may be found here.

Questions and answers on problems relating to this subject may be found here.

Council regulation on jurisdiction, applicable law and the recognition and enforcement of decisions in matters of matrimonial property regimes may be found here.

Council regulation on jurisdiction, applicable law and the recognition and enforcement of decisions regarding the property consequences of registered partnership may be found here.

Guidance for creditors on mental capacity

On December 2010, the UK Office of Fair Trading(OFT) launched a consultation on its draft guidance for creditors on mental capacity. On one hand, the draft guidance is designed to explain the steps the OFT expects creditors to take to identify borrowers who might lack the mental capacity to make informed borrowing decisions. On the other hand, it also outlines the appropriate way for creditors to deal with borrowers who do or might lack capacity, and explains the practices and procedures it considers they should put in place.

The OFT described mental capacity as ‘a person's ability to make decisions and depends in part on their cognitive abilities to: learn, remember and understand’. For many people, for reasons of illness or disability, their mental capacity can be affected in ways which may prevent them from making certain decisions that may impact on their lives.

The OFT’s guidance for creditors on mental capacity is a way to advance the principle of responsible credit. In the context of consumer credit, the principle of responsible lending concerns professional diligence in assessing creditworthiness and supporting education of consumers,warnings about the risk related to default on payment and over-indebtedness. In this particular case, the OFT expects creditors to form a view on whether the borrower is able, perhaps with support, to make an informed borrowing decision and whether they can afford to make repayments under the credit agreement in a sustainable manner.

Further, the principle of responsible lending have gained a considerable momentum in the European Consumer Credit Directive(Directive 2008/48/EC). Aimed at tailoring credit products to consumers’ needs and ability to repay. This has implications for evaluating the suitability of the product design as such and the suitability of the product for a particular borrower. The latter includes consumer’s understanding of the product and its risks and lender’s understanding of the creditworthiness.