As a result of the COVID pandemic, more of the world has moved online.
As the speed of technological change occurs at a rapid pace, it increasingly brings with it a number of risks and challenges for consumers in the online financial services market.
Aggressive, misleading and inadequate online advertising – alongside the use of opaque, automated decision-making tools, algorithms and a blatant misuse of personal data – can lead to financial exclusion and significant financial losses due to mis-selling.
The emergence of new non-traditional financial services providers in the online market whose activities are not supervised also leaves many exposed to consumer protection risks.
Alongside the issue of complex and long financial services product disclosures, this provides a dangerous mix for consumers purchasing financial products.
As the EU’s consumer protection rules for the online financial services market – the Distance Marketing of Consumer Financial Services Directive (DMFSD) – is currently being reviewed, there is a significant opportunity to address the challenges and risks above.
In May 2022, the European Commission tabled its legislative proposal, which is a step in the right direction to better protect consumers. However, the co-legislators need to be far more ambitious than the Commission proposal, in order to fill existing regulatory gaps in the online financial services market and ensure that there is an adequate safety net in place for consumers with regards to new products that are to-date unregulated.
Why a safer online financial services market is needed
In recent times, consumers have turned to unregulated products such as crypto assets. These products have been aggressively advertised on social media, including with the use of social media ‘influencers’, promising consumers fast and high returns.
In advertising this investment, many providers only suggest there are gains to be made but do not mention the high risks involved. This problem with advertising goes beyond crypto-assets, a broader range of products on the financial services marketplace.
In addition, now more than ever, interactive tools explaining pre-contractual information are very useful, but must be properly regulated to ensure explanations are adequate and cover all key information to enable informed consumer decisions.
The concept of fairness must be adequately undertaken in these interactions between consumer and operator as well. This fairness is severely undermined by techniques such as dark patterns which take advantage of behavioural biases of consumers. These dark patterns are deceptive online interface designs (e.g. colouring of decision buttons) which are used to trick people into making decisions that are in the interests of the online business, but at the expense of the user.
The European Commission proposal which is being discussed within the Council and European Parliament would bring welcome change.
It would create a standalone chapter in the Consumer Rights Directive (CRD) for financial services which not only includes the key provisions of the DMFSD, but also improves the DMFSD in key areas.
With the proposals, consumers would receive streamlined pre-contractual information about financial services products online, addressing the current situation where consumers are receiving disclosures that are too long and complex. Moreover, the proposals would ensure that consumers receive adequate explanations of financial services and products prior to purchasing them via online tools such as live chats, chat bots, Q&As, robo-advice and other similar tools.
In addition, the proposed “right of withdrawal button” would make the ability for consumers to withdraw from products easier. This is important in a digital market where the sales process is very speedy (e.g. through speedy, or ‘one-click’ products).
….. But more still needs to be done
Finance Watch has identified further key areas, which would make a considerable difference in enhancing protections. For one, making sure the customer has all the right information to make an informed decision on their purchase of the financial product.
This would be by ensuring information about all possible risks and the total cost of the product always have to be communicated upfront (ie. on the first page).
Secondly, the current proposals lack any provisions to address the issue with online advertising, including on social media.
There is also currently little which governs how financial product comparison websites operate, which are used by many people seeking information before purchasing financial services. As more and more consumers are using comparison websites to compare offers before purchasing them, it is important that these websites are unbiased and truly independent.
Furthermore, the tightening of rules which govern the profiling and automated processing of personal data from consumers must be added to the Commission’s proposals. There is a need to introduce rules on what kind of data can be used in this context, in order to avoid the use of irrelevant data that can lead to unfair discrimination and as a result, unjustified financial exclusion.
In addition, rules on the governance and supervision of algorithms used by automated tools are needed. Further to this, personal data should not be allowed to be misused by providers for unfair price optimization practices.
It would also be beneficial to have requirements that all entities (including non-financial institutions such as fintechs), which offer financial services online must be registered and supervised.
These further amendments are key, because as finance becomes more digitised, it becomes increasingly difficult for those writing and making the rules to stay ahead. That is why it is vital the co-legislators are ambitious in their proposals on the review, in order to take full advantage of sporadic legislation change in the face of rapid technological evolution.