9 May 2024
For the first time in more than 20 years, the regulatory framework surrounding the distance marketing of financial services will be modernised by the repeal of the existing Distance Marketing Directive (2002 DMD) (originally enacted in 2002), and the enactment of the new Directive regarding financial services contracts concluded at a distance [1] (amended DMD). The amended DMD will be incorporated into a new chapter within the Consumer Rights Directive. [2]. Chris Martin and our Financial Services Regulations team explain below.
The amended DMD was necessitated in part by the digitisation of many business-to-consumer contracts as well as intervening legislation directed toward specific financial products, which rendered the 2002 DMD obsolete in certain respects.[3] The amended DMD is a part of the European Commission’s new consumer agenda, titled “Strengthening Consumer Resilience for Sustainable Recovery”, which aims generally to tackle challenges brought about by digitalisation, particularly in the aftermath of the Covid-19 pandemic. [4]
The focus on consumer rights is evident as well in recent Irish legislation, including the Consumer Rights Act 2022, and in the current review of the Consumer Protection Code (CPC) by the Central Bank of Ireland (Central Bank). The draft CPC makes specific reference to the DMD, and, in so doing, recommends the enactment of rules regarding the provision of information to consumers by regulated entities prior to entering into a binding agreement. [5]
The updated CPC is still in the consultation phase and will, when final, include reference to the newly amended DMD. [6]
The new DMD includes the following key elements and applies to all consumer financial services contracts that are concluded at a “distance”, meaning via telephone, e-mail or over the internet.
Those offering financial services at a distance must ensure a range of pre-contractual information is provided to the consumer “[i]n good time before the consumer is bound”. The information requirements should be “modernised and made future-proof” and include, among other things: [7]
The total price to be paid by the consumer to the trader including all related fees, charges and expenses and all taxes paid via the trader, and, where an exact price cannot be indicated, the basis of calculation;
Where the above information is provided less than one day before the consumer is bound by the distance contract, the trader will need to send a reminder to the consumer of the possibility to withdraw from the distance contract and the procedure for withdrawing. The reminder must be sent to the consumer, on a durable medium (e.g. by e-mail), between one and seven calendar days after the conclusion of the distance contract.
If the consumer does not receive the contractual terms and conditions and the above pre-contractual information, the withdrawal period will, in any event, expire 12 months and 14 days after the conclusion of the distance contract. If the consumer has not been informed about his or her right of withdrawal, no time limit will apply.
These provisions emphasise the importance of notifying the consumer of the withdrawal period, and ultimately the burden of proof rests on the trader to prove its compliance with the pre-contractual requirements. [9]
The amended DMD does however helpfully confirm that where pre-contractual information requirements are provided for in other EU financial services legislation (e.g. under the Consumer Credit Directive), only the pre-contractual information requirements of that piece of legislation will apply unless otherwise provided [10].
As currently provided for under the 2002 DMD, the amended DMD reiterates the right of consumers to withdraw from a financial services contract concluded at a distance. [11] Consumers will continue to have 14 calendar days to withdraw from a contract and 30 calendar days to withdraw where the contract relates to personal pension operations. [12]
Again, the right of withdrawal will not apply to financial services whose prices depends on fluctuations outside the traders control including foreign exchange, crypto assets, UCITS, money market instruments and transferable securities. [13]
The right of withdrawal will also not extend to short term insurance policies of less than one month’s duration and travel and baggage insurance policies. Where other EU legislation provides for a right of withdrawal, those provisions will instead apply, unless otherwise provided. [14]
Where a consumer has exercised the right of withdrawal the consumer must only pay for the service actually provided by the trader, and that payment must not exceed the portion already provided when compared with the full coverage of the distance contract. [15] It is also expressly provided that a penalty or any payment that may be considered a penalty shall not be payable. [16]
A key change is the introduction of a withdrawal function for distance contracts concluded by the means of an online interface, for example, a chatbot or roboadvisor. Article 11a requires the trader to provide the consumer with a specific withdrawal function that they can use to withdraw from the contract.
This withdrawal function must be labelled with the words "withdraw from contract here", or an unambiguous equivalent formulation, in a clear and legible way. The withdrawal function must be available throughout the withdrawal period and must be prominently displayed on the online interface, as well as being easily accessible to the consumer.
Similarly, the required pre-contract information must be provided prominently and up-front when the end user is accessing the information via a mobile phone or other similar device. Firms will therefore likely need to make changes to their online interfaces to accommodate this requirement.
Consumers must be provided with information to assess whether the services being offered are adapted to their needs and financial situation. [17] Where the trader uses online tools to offer services, consumers will also have a right to request and obtain human intervention at the pre-contractual stage or thereafter (in justified cases). [18]
Similar suitability and customer knowledge requirements are reflected throughout the new CPC, and are reflective of the larger efforts of the European Commission to improve consumers’ rights and bargaining power.
One of the main pillars of the EU’s new Consumer Agenda is the mandate on so-called “dark patterns”; user-interface designs aimed at manipulating consumers. In 2022, the EU published its “Behavioural Study on Unfair Commercial Practices in the Digital Environment”, which analysed the impact of these practices on consumer choice and decision-making.
Interestingly, the study noted that (according to at least one mystery shopping exercise) 97% of the most popular websites and apps used by EU consumers deployed at least one dark pattern. The most prevalent of these are: (i) hidden information/false hierarchy; (ii) preselection; (iii) nagging; (iv) difficult cancellations; and (v) forced registration.
The preamble to the amended DMD recommends that traders should be prohibited from “nudging” consumers. For example, a website that attempts to influence consumers by presenting choices in a non-neutral manner will be prohibited.
Traders must therefore ensure that they do not design, organise or operate their online interfaces in a way that deceives or manipulates consumers, or otherwise distorts or impairs their ability to make free and informed decisions. [19]
The amended DMD does not specify particular penalties and instead recommends that penalties should be in line with, Article 21 of Directive 2017/2394 on cooperation between national authorities responsible for the enforcement of consumer protection laws and repealing Regulation (EC) No 2006/2004. Fines should be imposed by either administrative procedures or legal proceedings or both.
In Ireland, breach of the amended statutory instrument by a regulated entity will be a prescribed contravention, subject to the Central Bank’s administrative sanctions regime. It will also be important from an individual accountability perspective that reasonable steps are taken to properly implement the requirements of the amended directive once transposed, to avoid individual liability or enforcement action.
Member States are required to adopt and publish implementing measures by 19 December 2025 and those measures will apply from 19 June 2026. [20] It expected that Ireland will not choose to goldplate measures and requirements will likely remain as those set out in the text of the Directive as published in the Official Journal.
KPMG Law’s Financial Services Regulation and Outsourcing and Commercial Contracts teams are at hand to assist your organisation in understanding implications of the new distance marketing requirements.
Please do not hesitate to contact our team below.
[1] L_202302673EN.000101.fmx.xml - https://eur-lex.europa.eu/. The amended DMD entered into force in December 2023, Member States are obligated to implement the Directive by 19 December 2025, and the transposing legislation will apply from 19 June 2026.
[2] Directive (EU) 2023/2673 (amending Directive 2011/83/EU as regards financial services contracts concluded at a distance and repealing Directive 2002/65/EC.
[3] https://www.consilium.europa.eu/en/press/press-releases/2023/10/23/council-adopts-legislation-that-makes-it-safer-to-contract-financial-services-online-or-by-phone/
[4] Communication from the Commission to the European Parliament and the Council: New Consumer Agenda, dated 13 November 2020
[5] Unofficial Consolidation of the Consumer Protection Code 2012 (revised 13 December 2023), sections 4.21; 4.22.
[6] The DMD applies to all “traders” while the CPC applies to specified regulated entities.
[7] L_202302673EN.000101.fmx.xml - https://eur-lex.europa.eu/ (preamble clause 27).
[8] There is a corollary provision within Art. 22 of the GDPR which gives consumers the right not to be subjected to a decision based on automated decision-making.
[9] Article 16a(8)
[10] Article 16a(6)
[11] The new DMD extends the withdrawal rights to cover financial services contracts concluded at a distance, preamble clause 10. Financial services contracts not concluded at a distance are out of scope of the amended DMD.
[12] Article 16b(1)
[13] Article 16b(2)
[14] Article 16(b)(6)
[15] Article 16c (1)
[16] Article 16c (1)(b)
[17] Article 16d (1)
[18] Article 16d (3)
[19] Article 16e (1)
[20] Article 2 of Directive (EU) 2023/2673 (amending Directive 2011/83/EU as regards financial services contracts concluded at a distance and repealing Directive 2002/65/EC.
