Towards the creation of the EU Financial Consumer Protection Agency?

A couple of months ago we reported on the results of the public consultation on the Operation of the European Supervisory Authorities (ESAs), and mentioned that civil sector representatives (Better Finance) advocated a complete overhaul of the existing system of EU financial supervision as opposed to partial improvements in the interest of consumers. This voice has now become lauder, and several representatives, including BEUC has joined their forced to request this reform. Today they posted an Open Letter to the EU Commission on the Proposal for the EU financial supervisory reform.

In this letter they explain that the current supervisory framework is not adequate to effectively protect consumers. Consumer protection comes as the last objective of the ESAs enjoying low priority as compared to other objectives. This low priority is evidenced for example by a failure to ever use one of their most significant powers, a power to temporarily prohibit the use of dangerous financial products. The letter also highlights that the ESAs has also failed to adequately coordinate national supervisory authorities, and that consequently consumer protection, or conduct of business supervision is neglected in some Member States.

In order to priorities consumer protection, the letter advocates the move towards a 'twin peak' model in the EU, that is, a towards a creation of a separate supervisory authority that would be in charge to control the ways in which financial firms conduct business with their customers. This separation of the consumer protection objective from other supervisory objectives (the 'twin peak' model) is already working well in some EU countries like the UK and Belgium, and outside the EU, for example, in the US. The letter therefore urges the EU Commission to reconsider its current approach to keeping the regulatory/supervisory structure as it is, and to give thought, and preferably action, to the 'twin peak' model.

Importantly, in addition to raising the importance, the letter also sets out a basic strategic plan for moving towards the new model. Phase 1 would include a clear separation of consumer protection mandate from other mandates of the existing ESAs, by reforming the Consumer Protection Divisions of these authorities and in phase 2, these would then be merged into a newly created  single authority, the EU Financial Consumer Protection Agency. The letter addressed other important questions such as funding, governance and mandate.

Is a single supervisory authority for consumer protection viable in the EU, or could consumers be just as effectively protected by prioritizing the consumer protection objective of the existing authorities? What do you think?

More consumer access to cross-border online services

The European institutions reached an agreement on further EU approach to "unjustified" geoblocking of online consumer products or services (EU negotiators agreed to end unjustified geoblocking). What does it mean "unjustified"? First, it would apply to situations where traders prevent consumers from other Member States to conclude online contracts for the sale of goods, even if traders are released from the obligation of delivery to the consumer's Member State. If the consumer undertakes to pick up the good at the trader's premises or arrange the delivery himself, preventing the sale of goods contract from being concluded based on the geographical location of the consumer seems unjustified. Also, when consumers wish to purchase electronically supplied services (such as hosting services for their websites), they should not be required to pay additional fees than consumers located in the same Member State as the service provider. The same should apply to the situation when the services are provided in a specific physical location, as it should not matter then who purchases these services. Does this mean that traders will now have to sell cross-border? No, there won't be an obligation to sell to consumers from other Member States, but rather an obligation not to discriminate against them, without a justification. It could be seen as unjustified to require consumers to pay only with the debit or credit card issued in the Member State of the trader's location. The plan is for the new Regulation to enter into force within the next year.

New Commission study on insurance services

On 27^th October the European Commission published a study on consumers’ decision making in insurance services. Insurance services are particularly important due to the size of the market (with non-life premiums rising to € 343bn in 2015, according to Insurance Europe) as well as for ensuring financial stability.

The study focused on non-life insurance products purchased domestically and cross-border, with cross-border purchases being key for the internal market. The methodology of the study combined a systematic literature review, market data collection and stakeholder interviews along with behavioural experiments both online and in the laboratory. The use of behavioural experiments shows the increasing influence and status of behavioural economics in EU policy making, as the results of the study are meant to inform the European Commission’s Consumer Financial Services Action Plan. 

The study produced some interesting findings. For example it highlighted that consumers are more likely to engage with the information provided when it is presented in a concise, salient and user-friendly way. However, the real challenge lies in pointing out exactly the strategies that would make the presentation of the info user-friendly, and the study provides some insights on that. For example, separating sections using boxes and presenting text in two columns, using icons to indicate the subject of each section, and using traffic light coloured ticks as bullet points to indicate risks covered and not covered. Weight is placed on national authorities frequently monitoring the provision of information and harmonising the rules on provision of information where possible. Price comparison websites, another informational aspect, can be helpful for consumers but the study raised concerns as to their impartiality and independence.

Another key finding of the study is the negative effect of pressure in the decision making of consumers, with pressure selling being particularly prevalent in car rental and add-on insurance. Pressure selling makes consumers make sub-optimal decisions or buy products they do not need. Beyond improving enforcement, what is suggested could help with pressure selling is better information, especially underlining the existence of alternatives and presenting the product in a balanced way. Timing is key for addressing pressure, as well as for processing information. Allowing consumers time to reflect on their decisions and to modify them at a later date can prove to be helpful, according to the results of the study. However, there is the issue of how much consumers make use of such measures and what can be done for addressing pressure selling ex ante.

As most behavioural studies, this one also points out that consumers tend to be passive, they prefer the familiar and do not devote sufficient time and effort in comparing alternatives in the market. Consumers have a low awareness and understanding of contract terms. Behavioural biases play a role in consumers buying excess that is too low for their needs or choosing not to buy insurance at all. The image of the consumer painted in this study is at odds with the that of the average consumer as used in CJEU case law, a consumer who is expected to be ‘reasonably well-informed, observant and circumspect’.

In relation to cross-border shopping for non-life insurance the study found that although there is some interest for it, there are barriers preventing consumers from cross-border purchases, including low awareness of the possibility for cross-border purchases, language barriers and the complexity of the market, as well as regulatory differences and concern over problem solving. Harmonisation is key for promoting cross border purchases and it is one of the suggestions made, especially for harmonising definitions and contract formats.

Though the study itself calls for further research and collection of more data, it is a welcome systematic effort to study the European insurance market with robust methodology and concrete suggestions. It remains to be seen how much it will influence EU policy when it comes to taking concrete measures.

Is Max Schrems a consumer? AG Bobek in C-498/16

On Tuesday, 14th November, Advocate-General Bobek delivered an important opinion in case C-498/16 Schrems v Facebook. Readers of this blog will certainly remember an earlier court battle involving the same parties, fought entirely on the grounds of data protection law, which resulted in the invalidation of the Commission's Safe Harbour decision and its later replacement with a somewhat more robust, yet no less controversial, framework renamed as Privacy Shield. The present case also revolves around data protection issues, albeit in a more horizontal setting. These, however, are not the focal point of the commented opinion as the preliminary reference had been made before  national courts even began to assess the merits of the action. This was due to the doubts as to whether the court seised was at all competent to try the case.

Legal framework and the contested issue 

In the EU competence of national courts to hear and adjudicate disputes in civil and commercial matters is established under the so-called Brussels framework. The instrument which currently lies at its heart is Regulation No 1215/2012 (Brussels I bis), which, as of 2015, repealed and replaced Regulation No 44/2001 (Brussels I). The case at hand still refers to the previously applicable act, but – as the provisions under analysis have not been affected by the reform (recast) – the interpretation provided by the AG and, ultimately, the Court remains of direct relevance also to the law as it currently stands.

Key provisions under dispute are Articles 15 and 16 of Regulation No 44/2001. Both of them form exceptions to the general rule of actor sequitur forum rei set out in Article 2(1) and aim to assist consumers in the pursuit of their claims against traders. Pursuant to Article 15(1)(c) if a matter relates to a contract concluded by a person for a purpose, which can be regarded as being outside his or her trade or profession (the consumer) and the contract has been concluded with a person who pursues commercial or professional activities in the Member State of the consumer's domicile or, by any means, directs such activities to that Member State or to several States including that Member State, and the contract falls within the scope of such activities, the special regime laid down in the subsequent provisions kicks in. This includes Article 16(1) according to which "a consumer may bring proceedings against the other party to a contract either in the courts of the Member State in which that party is domiciled or in the courts for the place where the consumer is domiciled".

Relying on these provisions, Max Schrems – an Austrian national domiciled in Austria – lodged a number of claims both on his own behalf as well as on behalf of several others Facebook users who assigned claims to him concerning the company's alleged infringements of the data protection rules. The defendant contested the jurisdiction of the Austrian court, submitting that Schrems cannot rely on the consumer status as he has been using the platform not only for personal, but also – and increasingly – for professional purposes. According to the defendant, the fact that Schrems specialises in data protection law, publishes books, delivers lectures for remuneration, operates a website and a Facebook page concerning the ongoing litigation, coordinates collective redress and collects donations for that purpose suggests that he no longer acts merely in his private capacity. Secondly, in view of the defendant, jurisdiction established for Schrems was, in any case, not transferable onto other persons who assigned claims to him.

AG opinion

The opinion of AG Bobek does not bring a clear win for either of the parties. Indeed, the AG ultimately sides with Schrems on first account and with the social network's operator on the other. The proposed reading of the regulation is supported by an extensive reasoning, which appears to be well grounded in the existing case law and not particularly ground-breaking. On a closer look, however, the opinion offers several hints which could lead to important developments in the jurisdictional regime for consumer contracts.

Question 1: Consumer status

As regards the interpretation of the notion of a consumer for purposes of Article 15(1), the AG points out, in a seemingly conservative way, that the assessment should always be contract-specific, that the parties should generally able to rely on the status of the other party determined at the time of the contract’s conclusion and that in case of ‘dual purpose’ contracts the Gruber case law should be applied (paras. 29-34).

However, on a more careful reading, the opinion appears to be more nuanced. Starting from the last point: the AG first reminds that, in line with Gruber, if a contract serves both professional and private purposes "the consumer status is maintained only if the connection between the contract and the trade or profession of the person concerned is 'so slight as to be marginal', meaning it had only a negligible role in the context in which the contract was concluded" (para. 34). Direct reference to the key passage of that judgment highlights the discrepancy between the Court's early case law on dual purpose contracts and the subsequent legislative developments on that matter. Indeed, in a number of more recent acts such as Directive 2011/83/EU on consumer rights (recital 17) or Directive 2013/11/EU on consumer ADR (recital 18) the EU legislator opted for a somewhat different – and more consumer-friendly – approach towards mixed purpose contracts. Naturally, indications included in the preambles of several acts do not preclude the applicability of the CJEU's test, especially in other contexts. By way of illustration, a more stringent stance towards consumer status in private international law can potentially be justified by reasons of procedural certainty.

This, however, does not seem to be the reading the AG is after. Despite direct references to the fairly tough standpoint in Gruber, he also presents some very interesting points as to how he understands that ruling and, ultimately, considers Schrems to qualify as a consumer. In this respect, two observations made by the AG in para. 59 are worth highlighting.

In the words of the Advocate-General: "First, what Gruber aims at, in my view, and what should remain negligible within one single contract, are activities having immediate commercial aim and impact, in the sense of structured and profit-making activity being the driving purpose of such use."

This may appear somewhat contradictory to one of his earlier observations regarding the interpretation of the phrase 'trade or profession'. Indeed, one can read in para. 31 that the term relates "in broad terms to one's economic activity" meaning that for a person to be disqualified as a consumer the contract at issue does not have to be "necessarily connected with immediate economic profit", but what matters is rather that it is "entered into in connection with an ongoing, structured economic activity". On the whole, however, it seems that the AG seeks to align, step by step, the reading of Gruber with the more recent trend concerning the issue of mixed purpose, which, in itself, is to be welcomed.

The second observation made by the AG in para. 59 is equally non-standard and goes back to his earlier discussion on the possibility of losing (or gaining?) the status of a consumer over time (paras. 35-41). While the AG confirms that the status of a party should generally be determined at the time of the contract's conclusion and not at the moment when the action was lodged, he does not consider this point to be absolutely fixed. "In abstract terms" and "in rather exceptional cases" a dynamic approach to consumer status could be envisaged (para. 39). This could be true particularly for long-term relationships, in which the aim of a contract is not specified or the contract is open to different uses. If, under these circumstances, there is "a clear evolution" of the type of the capacity in which the applicant has made use of the contract, the potential dynamism of the contractual relationship would need to be assessed (para. 59). While the application of this more flexible approach towards consumer status has not changed this assessment with regard to the claimant, if shared by the Court, the reading proposed by the AG could shake the foundations of consumer law as we know it.

Question 2: Collective redress

By contrast, the AG was not inclined to go into similarly subtle distinctions with regard to the second question and considered that Article 16(1) of Regulation No 44/2001 simply does not leave room to the interpretation advocated by the applicant (with the support of the intervening governments). It his view neither the text, not the context and the purpose of that regulation, support the establishment, solely on the basis of that act, of a new special jurisdiction with respect to claims assigned to a consumer on the same subject by other consumers domiciled in the same or another Member State or in a non-member state. This remains in line with the earlier case law, in which the CJEU  prevented both private companies (Shearson Lehman Hutton) and consumer organisations (Henkel), acting as assignees of the rights of the consumers, from relying on the special head of jurisdiction designed for the protection of the latter. According to the AG, the Court did so not only because those legal persons were not 'weaker parties', but also because they were not parties to the contract in question, which was also the case for Schrems (para. 96).

The Advocate-General thus denied the consumer-assignee the possibility of collecting numerous claims in the single proceedings carried out in his domestic court. This, however, was not yet his final word. In his concluding remarks the AG decided to share some broader views concerning the need for  an EU-wide collective redress in consumer matters. According to Bobek, collective redress undoubtedly "serves the purpose of effective judicial consumer protection" and may provide "further systemic benefits to the judicial system". He notes that the question is not only extensively discussed in the legal scholarship, but has also already led to several attempts at a legislative action and that, all in all, the EU legislator appears to be best placed to devise the relevant system, including its jurisdictional dimension. Consequently, even if it does not propose a major shift with respect to the assignment of claims under the applicable regime, the AG's opinion could provide for an additional impulse to revive these important discussions. This will, nevertheless, largely depend on whether the Court actually picks up on the many interesting proposals put forward by its advisor.

No bargains for Scottish whisky

Following on the recent line of posts on consumer health, it may be interesting for our readers to hear about the UK Supreme Court deciding this week that Scotland is allowed to set minimum prices per unit of alcohol sold (Supreme Court back Scottish minimum alcohol pricing). The legislation to this effect has been adopted a few years ago but has not entered into force, due to its legality being questioned by the whisky association (unsurprisingly). It was claimed that the rule was against EU freedom of movement of goods, creating unjustified and disproportionate barriers. The UK Supreme Court disagreed. The law is perceived as setting valid aims to discourage Scots from buying strong alcohol cheaply by asking a minimum price of 50p per unit of alcohol sold (regardless the country of origin of the alcohol, which means the measure is non-discriminatory). The price of lower in percentages alcohol, such as beer, would not be influenced by the reform (to reassure some of our readers). No reference was made to the Court of Justice to try to establish whether despite the non-discriminatory character the measure could still be perceived as hindering market access. It will be interesting to examine the results of such changes in pricing - how they impact consumer behaviour - and whether they could indeed be perceived as an efficient measure to improve consumer health.

Consumer protection rights after Brexit

Anyone eagerly anticipating what the change to UK policies in consumer protection may be after Brexit, should monitor the EU Justice Sub-Committee's website on this topic. The written evidence has so far been submitted by prof. Chris Willett.

Who needs a diet when there are taxes?

Recently we mentioned that the fight against obesity is moving to the top of the political agenda of the Member States. Aside new rules on labelling (How to get consumers to eat healthier?), which aim to allow consumers to make more conscious choices (hopefully healthier), there are more political debates as well as attempts to regulate the food market. UK medical circles increasingly argue for food taxation to be introduced (The fight against obesity: To tax or not to tax?). Ireland introduced a 'soda tax' following on the French example. However, other news (The 'nanny state' in consumer health needs to go) report on the failed experiment with a 'fat tax' in Denmark. This tax was repealed within 15 months from its introduction due to no reported beneficial impact on consumer health, but rather noticed trend of lower income consumers switching to cheaper and potentially even more rich in fat food. It is not easy - trying to get consumers to make all the 'right' choices - but it is encouraging to see that various policymakers are trying various methods to improve consumer wellbeing. From the research perspective - the comparison of the different policies adopted by various Member States may provide the winner, i.e. the most effective policy measure in this area.

Towards a more coherent European contract law (once again)? Major amendments to the sales proposal

Last Tuesday the Commission published an amended proposal for a directive on certain aspects concerning contracts for the (online and other distance) sales of goods, introducing far-reaching changes to the original file. Most importantly, the scope of the proposal was extended to cover face-to-face sales of goods, meaning that the European lawmakers are now looking into a much broader reform of consumer contract law. Like the original proposal, which extended only to distance sales, but unlike the currently applicable Directive 1999/44/EC, the amended proposal is based on a full harmonisation approach. Impact of such a fully harmonised set of rules is discussed in the Staff Working Document accompanying the proposal. Should the newly presented file go through, Directive 1999/44/EC on consumer sales would be repealed completely. 

The idea of having two distinct sets of contract rules for distance and face-to-face sales did not seem to sit well with anyone from the very beginning. A potential extension of the scope was already envisaged in late 2015, when the original proposal was tabled. Concerns with regard to the original file were also voiced by stakeholders and co-legislators. Indeed, up till now reports about the progress made in the European Parliament and the Council with regard to the sales proposal were not very encouraging. Much more attention seemed to be devoted to the second proposal adopted at the same time, concerning contracts for the supply of digital content. Analyses were nevertheless ongoing - for further reading see in particular the results of the Commission's REFIT exercise or the impact assessment carried out the the European Parliamentary Research Service. 

This is not to say that the amended proposal will not be a source of controversy. Past experience with regard to the harmonisation of European contract law shows that this is a very tricky ground. Even if the potential inconsistency between the rules applicable to different sales channels is now removed and material scope of the proposal is largely based on Directive 1999/44/EC, the full harmonisation approach is bound to raise concerns. Suffice it to recall that this was one of the key issues raised by BEUC with regard to the original proposal. Heated discussions concerning the particular solutions provided for in the proposal are thus to be expected.

DG FISMA published a report on national responses to the financial crisis

Our readers may be interested in the recently published report by DG Financial Stability, Financial Services and Capital Markets Union (FISMA) titled: Coping with the international financial crisis at the national level in a European context Impact and financial sector policy responses in 2008 – 2015

The comprehensive report is about national responses to the financial crisis. It focuses on those Member States that encountered the most reforms following the crisis: Hungary, Latvia, Romania, Greece, Ireland, Portugal, Spain, and Cyprus. The further  twelve Member States at least once received a country specific recommendation for their financial sector: Belgium, Bulgaria, Denmark, Germany, Croatia, Italy, Malta, the Netherlands, Austria, Slovenia, Sweden and the United Kingdom. The rest of the Member States, Czech Republic, Estonia, France, Lithuania, Luxembourg, Poland, Slovakia, and Finland are outside the scope of the report, and are only used for comparative purposes.

Although the report primarily tackles the macro aspects of the post-crisis changes, it provides valuable insights into the reforms designed to protect consumers such as measures responding to foreign currency lending in affected Member States, and national initiatives in reforming personal insolvency laws. It is therefore an interesting read for everyone interested in EU financial consumer protection and financial consumer law.

How to get consumers to eat healthier?

As obesity is becoming a bigger health issue in Europe with every year, policymakers are paying more attention to consumers' shopping and eating habits. The ideal of an informed consumer making best possible (which should also mean the healthiest possible) choices is still alive. The discrepancy between this ideal and the reality could result from consumers' not being properly informed, e.g. from the nutritional information not reaching them or being too difficult for them to understand. To solve the first issue (hidden information), nutritional labels could be placed front-of-pack on food products. This is not a novel idea, as previously commissioned by European legislators' studies have already suggested an increased effectiveness of nutritional labelling if the position of the label is at the front of the packaging. The European legislator was not, however, ready to oblige traders to adjust their labelling policies to this extent. The second issue (too difficult labels) could be tackled by simplifying labelling - adopting colour-coding (traffic lights scheme) or other visual shortcuts to better inform consumers. 

The French government has just backed such a nutritional labelling system (Nutri-Score - read more here). The decree doesn't prescribe but rather leaves an option to the traders to adopt the recommended labelling system, which requires nutritional label to be placed on the front of the package and uses colours (green to orange) and letter symbols (A-E - like with washing machines) to inform consumers on 'better' food choices. This is not the first time such an experiment was undertaken by national policymakers, see e.g. the Dutch experience with Vinkje logo (see for an example of this logo on the picture on the left) (to read further on the Vinkje logo see here in Dutch). The Dutch abandoned this labelling system as it was seen to mislead consumers - the 'better' food choices could have been perceived for 'good' choices. It will be interesting to observe the impact that the French labelling change will have on marketing practices and consumer behaviour, as the French policymakers hope to encourage the European ones to further act on this issue.

The other option to help consumers take healthy food decisions is for the policymakers to regulate the food market. This week it was also reported that the Scottish government is considering restrictions on promotion of unhealthy food and drink (see here). For example, such promotions would be prohibited on routes leading to schools or around visitor attractions, where they could easily attract children attention or on TV before 9pm.