European Matters: Distance selling of financial services

Distance selling of financial services

On 14th October, the Commission finally adopted a proposal for a directive on the distance selling of financial services. There are a number of changes from the earlier draft of the directives which will impact upon those who provide financial services covered by the directive.

For the purposes of the directive, a 'distance contract' is any contract concerning financial services (this definition broadly equates to business regulated under the FSAct) concluded between a supplier and consumer under an organised distance sale or service provision scheme run by the supplier who makes exclusive use of means of distance communication up to and including the moment of which the contract is concluded.

In any such contract, the consumer is to be given either a 'warming up' period or a 'cooling down' period. This means that the supplier will either have to communicate all the contractual terms and conditions to the consumer, and give them a period of reflection of 14 days prior to the contract becoming operative (a 'warming up' period), or, if the contract is signed prior to the supply of all the contractual terms to the customer, the customer will be given a right of withdrawal of 14 days (a 'cooling down' period), which is extended to 30 days in the case of mortgage contracts. The contractual terms must be transmitted in writing or in a durable medium and at the customer's disposal.

If the customer exercises his 'cooling off' rights, he may be required to pay the price of the financial service effectively provided by the supplier before conclusion of the contract, and the part of the total price of the financial service covered by the contract on a pro-rata basis.

The use by a supplier of automated calling systems without human intervention, or faxes, requires the prior consent of the consumer.

Member states are required to bring the directive into force within two years.

This directive will be very important in shaping the future of 'cooling off' rights, in particular given the introduction of 'warming up' rights which will undoubtedly require amendments to the rule books.

The need for a directive has been questioned by the BBA in its response to the proposal, arguing that financial markets are already sufficiently regulated so as not to need special protection in relation to the distance selling of financial products. In particular, the feasibility of allowing a 'warming up' period is questioned as it will be difficult for the price of many financial products to remain the same over this period.