FinancialServicesthroughtheInternetunderDutchLaw

28 February 2003

Jeroen van der Lee and Pauline Vos

The Directive on the Distance Marketing of Consumer Financial Services has recently come into force. As a consequence, the on-line financial services supplier, who must already take into account many complex rules, will encounter even more information requirements and a right of withdrawal for the consumer. This article provides you with a practical overview of the relevant legislation (with a particular emphasis on the Netherlands) and then deals in more detail with the information requirements and the rights of withdrawal.

I. Introduction

Internet is naturally suited to the sale of financial services. The consumer can arrange his financial affairs at home at such time as suits him. He can also compare prices and conditions at his ease. It is therefore not surprising that a growing number of people have started electronic banking, and that quite a lot of financial services are already provided via the Internet (see for example www.alex.nl, www.wellowell.nl and www.parq.nl).

When contracts for financial services are concluded on the Internet, this may involve extra risks for the consumer: electronically provided information is hastier than information provided on paper, the chance of impulsive behaviour is bigger and the supplier’s identity is harder to ascertain. The Directive on the Distance Marketing of Consumer Financial Services[1] which has entered into force recently aims to protect consumers against these risks.

In this article we will discuss the Directive from the perspective of the supplier of on-line financial services. We will first discuss the legal framework, including a number of national financial laws. Subsequently, we will deal with two major aspects of the Directive, i.e. the information requirements and the right of withdrawal of the consumer. Finally, we will draw some conclusions.

II. Legal Framework for the On-line Sale of Financial Services

On-line suppliers of financial services fall under a wide range of rules, a significant number of which are of recent date. We will give an overview of the most important:

Distance Selling Directive. The Distance Selling Directive
[2] has been implemented by the Distance Selling Act (‘Wet verkoop op afstand’)[3]. This Act does not apply to financial services. However, this Act may be of interest to suppliers of on-line financial services, for example because of article 7:46g of the Dutch Civil Code on the fraudulent use of credit cards and the fact that article 7:46e of the Dutch Civil Code includes a provision for a loan contract related with a ‘normal’ distance sale. In addition, a supplier of financial services will have to take this Act into account if he also provides non-financial services.

Electronic Money Directive. The Electronic Money Directive
[4] was implemented on 1 July 2002 in the Act on the Supervision of the Credit System (‘Wet toezicht kredietwezen 1992’) (‘SCS Act’). As a consequence of this, electronic money institutions (so-called ‘emis’) fall under the applicability of the SCS Act, and therefore, as from 1 July 2002, under the supervision of the Dutch Central Bank. As a result, electronic money that is spent on the Internet or beyond this (i.e. network money and chip card) is bound by rules.

Electronic Signatures Directive. The Dutch Upper Chamber[5] is now handling the legislative proposal for the implementation of the Electronic Signatures Directive[6]. This directive is important for on-line financial service suppliers, as this will give them certainty about the legal status of an electronic signature, which may promote electronic contracting.

Electronic Commerce Directive. The Lower Chamber is still handling the implementing act
[7] for the Electronic Commerce Directive[8], although this directive should already have been implemented on 17 January 2002. The directive also imposes obligations on on-line suppliers of financial services with respect to information requirements and the obligations with respect to placing an order. At the same time, the implementation of the directive facilitates the provision of on-line financial services, as the proposed article 6:227a of the Dutch Civil Code provides that the requirement for a written contract is also met if the contract is concluded in an electronic way (provided that certain conditions are fulfilled[9]). At this moment, the procedural requirements in article 30(1) of the Act on the Consumer Credit (‘Wet op het consumentenkrediet’) for example make that banks will not easily conclude credit transactions with consumers for amounts exceeding € 1,000, as these transactions are subject to annulment by virtue of article 30(5) of that Act.

Distance Marketing Directive of Consumer Financial Services. On 23 September 2002, the Directive on the Distance Marketing of Consumer Financial Services
[10] entered into force. It must be implemented by October 2004. This Directive introduces information requirements and a right of withdrawal for the consumer, and includes provisions on unsolicited services, unsolicited information and fraudulent use of credit cards.

Other financial laws. The provision of on-line financial services and products usually falls under various Dutch financial supervision acts, such as the Act on the Supervision of Securities Trade 1995 (‘Wet toezicht effectenverkeer 1995’) (‘SST Act’), the Act on the Supervision of Investment Institutions (‘Wet toezicht beleggingsinstellingen’) (‘SII Act’) and the SCS Act. The purpose of these acts is to protect purchasers of services and products provided by financial institutions. The application of these acts implies that the supplier is under supervision of the Dutch Central Bank or the Netherlands Authority for the Financial Markets (‘Autoriteit Financiële Markten’) (‘NAFM’)[11].

The increasing use of the Internet for data exchange and financial services made the Dutch Central Bank and the NAFM decide to publish policy rules for the use of the Internet for securities transactions and financial services (the Media Policy Rules SII Act[12], the Media Policy Rules SCS Act[13] and the Policy Memorandum Internet[14]). These policy rules give the criteria on the basis of which it will be judged whether the services are provided ‘in or from’ the Netherlands, which is a requirement for the applicability of the SST Act and the SII Act[15]. This is particularly hard to determine for services provided on the Internet.
The NAFM and the Dutch Central Bank have adopted the point of view that the mere fact that services provided on the Internet by foreign securities and investment institutions can come to the attention of Dutch residents does not automatically imply that these institutions fall under their supervision. The question whether the activities are aimed at Dutch residents is determined by means of a number of indicators, such as the determination whether Dutch residents are explicitly excluded or whether reference is made to Dutch tax rules or other legislation
[16]. In this respect, the Dutch Central Bank has stated that an investment institution is in any case active on the Dutch market if it sends publicity or prospectuses to Dutch residents[17].

III. Applicability of the Distance Marketing Directive of Consumer Financial Services

The Direct Marketing Directive of Consumer Financial Services (‘the Directive’) is applicable if the following cumulative criteria are met: (i) There is a system which the supplier has organised for the distance sale or service performance, (ii) financial services are provided, including a kind of banking service or a service in the field of credit provision, insurance, individual pensions, investments or payments[18], (iii) the services are provided on a business or professional basis, (iv) the services are sold to consumers and (v) until the conclusion of the contract, only a means that can be used to conclude a contract is used, without the simultaneous physical presence of the parties.

Therefore, the Directive’s scope of application is broader than merely the sale of financial services on the Internet. It also includes the sale by telephone, post or fax. These last variants however fall beyond the scope of this article.

IV. Some Legal and Practical Consequences of the Directive for On-line Suppliers of Financial Services

Information Requirements

Pursuant to the Directive, the on-line supplier of financial services must provide the consumer with the contract conditions and the information referred to in article 3 and 4 of the Directive a considerable time before the contract is concluded. Pursuant to article 5, this information must be provided in writing or via a durable medium. A durable medium is defined as follows in article 2(f):

any instrument which enables the consumer to store information addressed personally to him in a way accessible for future reference for a period of time adequate for the purposes of the information and which allows the unchanged reproduction of the information stored.

As examples of a ‘durable medium’ the Directive gives floppy discs, CD-ROMs, DVDs and the hard drive of the consumer’s computer on which the electronic mail is stored[19]. This means that suppliers in any case are able to meet their information requirements by email. The question, however, is whether this is also possible via the supplier’s website.

In recital no. 20 of the Directive it is indicated that websites in principle are not durable media, unless the website fulfils the criteria contained in the definition of this concept. This could be the case if the information can be found on a web page with a user-friendly print and store function, while in the application procedure for the service reference is made to this information in a clear way and by a hyperlink. By providing the opportunity to print and store the information from the website, the consumer can also read this information later on and he can make a copy of it, which means that the definition of durable medium seems to be fulfilled. However, it speaks against this last observation that the terminology of the Directive seems to state that the supplier does not only have to make the information available but also has to communicate it to the consumer[20]. The question is whether including a hyperlink to the information in question can fulfil this condition[21].

Furthermore, the consumer must be informed about the contractual conditions and other required information. This must take place before he is legally bound to the contract or to his offer to conclude a contract
[22]. If this information is provided by email or through the website, the consequence seems to be that the consumer cannot simultaneously receive the required information and conclude the contract in one visit to the website. At the occasion of his first visit to the website the consumer will have to indicate that he is interested in a certain product, after which he will receive the required information by email or through a hyperlink[23]. Only a considerable time after this (and in our opinion this is not a question of minutes), the consumer can conclude the contract on the website after all.

This is of little attraction to the supplier. He obviously prefers the consumer to conclude the contract immediately at the occasion of his first visit to the website. A solution to this might be to lay down in the contractual conditions that only after a few days (at least the ‘considerable time’) the consumer is bound to his offer to conclude the contract and that only then the possible acceptance of this offer by the supplier takes place[24]. Actually, the consumer will then have a double right of withdrawal: one right of withdrawal that applies until the moment that the consumer’s offer becomes irrevocable, and one that applies from that moment until the term as referred to in article 6(1) of the Directive has lapsed.

The information referred to in article 3(1) of the Directive must be communicated in a clear and understandable way. The same applies to the contractual conditions pursuant to article 6:238(2) Dutch Civil Code. In our opinion, this implies that the information may not be ‘hidden’ but must be set out in a logical place. If the required information were allowed to be communicated on the website, information about the supplier’s identity could be ranged for example under the “about” or “contact”-button, but in our opinion not under “news” or “partners”. Obviously, it is preferable that the consumer is directly referred to the information in question through a hyperlink.

The information that must be communicated by virtue of the Directive, is divided into information about (i) the supplier (information about his representative in the consumer’s country, other professionals with whom the consumer must deal and supervisory authorities), (ii) the service (characteristics and price of the service and notice of risks and the fact that historical performances are no indicators for future performances), (iii) the contract (right of withdrawal, duration and termination, applicable law and competent court), and (iv) redress (the existence of guarantee schemes and out-of-court complaint and redress mechanisms).

In addition, that information must be communicated that is required by virtue of other legislation, for example the information which investment and securities institutions must provide to the NAFM, the Dutch Central Bank, investors and other purchasers of financial services by virtue of the financial laws and regulation. We will leave the extensive information requirements undiscussed, except that we will briefly discuss the financial leaflet.

Financial service suppliers are obliged to provide consumers with a financial leaflet
[25] in the case of complex financial products (for example an investment-based mortgage, a life insurance with an investment component or securities lease products). This financial leaflet must be provided to the consumer in time, i.e. before the conclusion of the contract[26]. In the case of distance contracts it is assumed that this condition is met by providing the financial leaflet at such moment that the consumer has sufficient time to read it before concluding the contract. Furthermore, the consumer must be able to print or store the financial leaflet. This condition can be fulfilled by organising the website in such a way that the purchaser is obliged to scroll through the financial leaflet or to download it before the contract can be concluded. As indicated by the explanation to the Further Regulation Financial Leaflet 2002, it should not be possible that the consumer can click away the financial leaflet without actually having taken note of it.

Pursuant to the presently applicable financial laws and regulation it is not yet possible to provide on-line financial services at a full scale. The NAFM[27] has stated that making the required information available on the Internet only does not fulfil all statutory information requirements: this information must also be provided or made available in a writing. This applies, for example, to contract notes, unless an exemption granted[28]. In addition, securities institutions must dispose of an agreement holding the original signature of the client and the date on which it was signed[29][30].

Right of Withdrawal

The Directive gives consumers the right to withdraw from the distance contract with respect to a financial service without giving reasons for this and without a penalty. Under Dutch law, this will probably mean that the consumer may dissolve the contract[31]. In addition, the member states may provide that the effectiveness of distance contracts with respect to investment services is suspended during the withdrawal term.

In some cases however, the right of withdrawal does not apply:

a. for services of which the price depends on fluctuations on the financial markets, such as securities and foreign currencies (article 6(2)(a)) [32].

b. for short-term insurance policies, such as travel and luggage insurances (article 6(2)(b))

c. for contracts that have been performed at the consumer’s explicit request, before the consumer uses his right of withdrawal (article 6(2)(c)). Anyhow, the requirement of explicitness seems to exclude that the consumer is deemed to have made this request by virtue of a stipulation in the general terms and conditions[33].

d. for credit contracts that have been dissolved under the conditions of article 6(4) of the Distance Selling Directive or of article 7 of Directive 94/47/EC (the ‘time-sharing’ directive) (article 6(7)). In other words: cases in which a right of withdrawal already accrues to the consumer.

Furthermore, the member states may provide in a number of other cases that the right of withdrawal does not apply, although with the complicating factor that consumers residing in a member state where that right of withdrawal does exist can simply invoke their right of withdrawal. This regards credit contracts that are covered by a mortgage and statements of the consumer that are made with the cooperation of a ‘public civil servant’.

The term within which the right of withdrawal must be invoked is 14 working days[34]. When the supplier has met all information requirements, the term will start at the moment of conclusion of the agreement[35]. The sanction upon the non-fulfilment of the information requirements holds that the term will only start at the moment that the consumer receives the contractual conditions and the other information after all. In other words, the term of the right of withdrawal does not run, as long as the required information has not been communicated to the customer. Particularly when the contract is concluded for a definite time, the supplier runs a risk if he does not completely fulfil his information requirements. In that case, the consumer who wants to be rid of the contract can ask for the missing information and use his right of withdrawal after he receives it.

Article 7(1) provides that in case of withdrawal from the contract the supplier may charge an amount that is proportional to the service already supplied and the complete fulfilment of the distance contract. Certain conditions apply though. In the first place, the supplier must be able to demonstrate that he did inform the consumer about the amount the latter is due to pay when he invokes his right of withdrawal. If the supplier has already started contract performance within the withdrawal term (and this can also be the extended withdrawal term of article 6(1) second dash), this must have taken place at the consumer’s request (which request does not have to be made ‘explicitly’ in contrast with the request referred to in article 6(2)(c)). In the case of withdrawal, both parties must return the products and amounts received within 30 days, provided that the supplier may deduce the proportional payment for the services from the amount to be returned.

The member states may provide that no payment may be requested from the consumer upon withdrawal from an insurance contract (article 7(2)). It is not fully clear to us why an exemption would apply to insurance services. It also applies to these contracts that the consumer ‘benefited’ from the contract during the withdrawal term. During the withdrawal term he was insured and he will certainly also request payment if the insured risk becomes reality in the course of that term. If member states use this exception, it becomes really attractive for consumers, who for whatever reason want to be rid of the insurance contract, to try and withdraw this on the basis of article 6(1), second dash. If this works, they will also recover the already paid insurance premium.

V. Conclusions

The legal framework for on-line financial services is complex, as the
e-commerce legislation as well as the financial legislation must be taken into account. The Directive on the Distance Marketing of Consumer Financial Services does not make this easier. The on-line financial service supplier will soon have to cope with even more information requirements and a right of withdrawal of the consumer.

Furthermore, the Directive contains some unpractical aspects for financial service suppliers. There is for example the question whether upon his first visit to the website the consumer is able to immediately conclude the contract and the risk exists that consumers seize a minor deficiency in the information provision to be rid of the contract in an economical way.

Furthermore, it would be practical for the on-line financial service supplier if he could meet his information requirements through a hyperlink. It is the question however, whether this procedure would be in conformity with the Directive. In any case, it is preferable not to ‘hide’ the required information but to put it in obvious places.

The current large financial service suppliers will probably be able to manage with the new Directive. For newcomers however it does not seem easy to find their way in the forest of e-commerce and financial rules. And that is a pity because the extra consumer protection which the Directive offers seems to damage competition in the financial sector.

* Jeroen van der Lee (jeroen.lee@twobirds.com) and Pauline Vos (pauline.vos@twobirds.com) are attorneys at Bird & Bird’s in The Hague

Footnotes

[1] Directive 2002/65/EC of the European Parliament and of the Council of 23 September 2002 concerning the distance marketing of consumer financial services and amending Council Directive 90/619/EEC and Directives 97/7/EC and 98/27/EC, OJ L 271 of 9.10.2002, p. 16-24.
[2] Directive 97/7/EC of the European Parliament and of the Council of 20 May 1997 on the protection of consumers in respect of distance contracts, OJ L 144 of 4.6.1997.
[3] Bulletin of Acts and Degrees. 2001, 25, entry into force Bulletin of Acts and Degrees. 2001,617
[4] Directive 2000/46/EC of the European Parliament and of the Council of 18 September 2000 on the taking up, pursuit of and prudential supervision of the business of electronic money institutions, OJ L 275 of 27.10.2000 p. 39-43.
[5] Electronic Signatures Act (‘Wet elektronische handtekeningen’), TK 2000-2001, 27 743.
[6] Directive 1999/93/EC of the European Parliament and of the Council of 13 December 1999 on a Community framework for electronic signatures, OJ L 013 of 19.01.2000.
[7] Amendment Act Electronic Commerce Directive (‘Aanpassingswet richtlijn inzake Elektronische Handel’), TK 2001-2002, 28 197.
[8] Directive 2000/31/EC of the European Parliament and of the Council of 8 June 2000 on certain legal aspects of information society services, in particular electronic commerce, in the Internal Market, OJ L 178 of 17.7.2000.
[9] As will be demonstrated below, the implementation of the E-commerce Directive will induce the amendment of various provisions in the financial laws and rules.
[10] See footnote 1.
[11] In addition, the Pensions and Insurance Supervisory Authority (‘Pensioen- & Verzekeringkamer’) is a supervisor on the financial market.
[12] Netherlands Government Gazette.1999, 139. The Media Policy Rule SCS Act 1992 was amended in September 2002 in view of the expansion of the applicability of the SCS Act 1992 on emi’s.
[13] Netherlands Government Gazette. 1999, 139. See for the Media Policy Rules SII Act and SCS Act: www.dnb.nl.
[14] Policy Memorandum no. 99-0003, Dutch Government Gazette 1999, no. 114. Also see: www.autoriteit-fm.
[15] Although the different prohibitory provisions in the SCS Act with respect to the conduct of a credit business and the raise of money of the public do not include the phrase ‘in or from the Netherlands’, the Dutch Central Bank is of the opinion that this phrase must also be read in the various prohibitory provisions as much as possible.
[16] See for the criteria: paragraph 2 of the Policy Memorandum Internet (footnote 14) with respect to the provision of stock services on the internet, article 3 of the Media Policy Rules SII Act (footnote 12) with respect to investment activities and article 5 of the Media Policy Rules SCS Act (footnote 13) with respect to the provision of banking activities on the internet.
[17] An unaddressed publicity form on which only the name or the logo of the investment institution is mentioned, the incidental sending of information about the investment institution upon the direct request of the possible investor or the mere representation of the prospectus of the foreign investment institution, without any subscription possibility being shown, is not sufficient.
[18] The annex to the Distance Selling Directive includes examples of financial services. On the basis of article 18(2) of the Directive, this annex becomes ineffective, as we assume not because the abovementioned examples are incorrect but because they do no longer have a function next to the definition of financial service in article 2(b) of the Directive.
[19] See consideration no. 20 and the definition in article 2(f) of the Directive.
[20] The Directive speaks of the ‘provision’ of information by and the ‘communication’ of the consumer in article 1(1) respectively article 5(1).
[21] Van Esch for example expects that by the mere placing of the information on the website the requirement to provide the information is not fulfilled, see NTBR 2002/9, p. 435.
[22] See article 5(1) of the Directive.
[23] On the condition that this would be allowed, see above.
[24] Anyhow, the supplier must not forget to confirm the receipt of this temporarily revocable offer in conformity with article 6:227c(2) Dutch Civil Code respectively article 11(1) of the e-Commerce Directive, proposed in the legislative e-commerce proposal.
[25] Financial Leaflet Decision (‘Besluit financiële bijsluiter’), Bulletin of Acts and Decrees 2001, 670.
[26] Article 3(1)b of the Further Regulation Financial Leaflet 2002 (‘Nadere regeling financiële bijsluiter 2002’), Netherlands Government Gazette. 2002, 121. For complex products whereby a free right of withdrawal exists, there is an exemption from the obligation to provide a financial leaflet prior to the conclusion of the contract. A condition is though that the purchaser is able to inspect the financial leaflet during the withdrawal term.
[27] Paragraph 3 of the Policy Memorandum Internet.
[28] In March 2000, the NAFM made known in a letter that upon request an exemption can be granted from this ‘written’ requirement.
[29] Article 25 SST Act 1995 and article 27 Further Regulation 2002. This requirement would have to be erased by the implementation of the e-Commerce Directive.
[30] Paragraph 5 of the Policy Memorandum Internet. Furthermore, the first identification of the client may not be established on the Internet only.
[31] At least, it has been implemented this way in the Distance Selling Act.
[32] Actually, this article excludes all stock and investment products from the right of withdrawal.
[33] The Distance Selling Act (article 7:46i(5)(a) and the Distance Selling Directive (article 6(3), first dash) do not set the requirement that the request must have been must ‘explicitly’.
[34] This term is 30 working days for individual pensions and life insurances falling under Directive 90/619/EEC.
[35] With reference to life insurance contracts, the term will start at the moment on which the client is communicated that the contract has been concluded.