The European Commission’s new rules for the online retail financial services market introduce much-needed improvements which will strengthen consumer protection. However, additional new rules are needed in some key areas.
The European Commission’s legislative proposals reforming the former Distance Marketing of Consumer Financial Services Directive (DMFSD) published on 11 May 2022 are a very welcome step in the right direction to better protect consumers in the increasingly digital financial services market. While digitalisation brings opportunities for suppliers and consumers alike, it also brings a number of risks, making a proper regulation of the market necessary. The DMFSD is outdated and needs not only updating but strengthening, including by filling existing regulatory gaps in the online financial services market.
Therefore, Finance Watch very much welcomes that the European Commission proposes to 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. Financial services are very different from other consumer goods and services covered by the CRD and therefore creating a specific chapter and rules for financial services is crucial.
Much-need significant improvements on pre-contractual information provided online
The Commission’s proposals to streamline the pre-contractual information provided in the online financial services market are much-needed and long overdue. The current pre-contractual disclosures provided online are much too long and complex, resulting in consumers not reading this important information prior to purchasing a financial service. As a consequence, consumers are often not able to make an informed choice. Likewise, the proposal to layer the information, requiring the key information to be provided prominently on the first layer/page is crucial. In addition, the proposed requirement to provide pre-contractual information at least one day before the conclusion of an agreement is a huge improvement to give consumers enough time to read and digest the information.
The strengthened right of withdrawal is crucial in the digital context
The Commission’s proposals making it easier for consumers to exercise their much-needed right of withdrawal must be kept. Too often consumers complain about the process for exercising the right of withdrawal not being easy/straightforward. This often results in consumers not making use of this right even where needed. Therefore, the proposed “right of withdrawal button” is an important measure to simplify this process for consumers. In the digital financial services market, the sales process is very speedy (e.g. through speedy, or ‘one-click’ products). Consequently, rules making it easier for consumers to reverse ill-advised and rushed decisions are key.
The important proposals regulating online tools and interfaces should be beefed up
Finance Watch welcomes the proposals to 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. Financial services are difficult for most consumers to understand and, therefore, interactive tools explaining the pre-contractual information are very useful but must be properly regulated to ensure that the explanations are adequate and cover all key information to enable informed consumer decisions.
Finance Watch also very much welcomes that the Commission’s proposal addresses online fairness. Financial service providers are increasingly using techniques such as dark patterns that take advantage of behavioral biases of consumers. Dark patterns are deceptive online interface designs (e.g. coloring of decision buttons) that are used to trick people into making decisions that are in the interests of the online business, but at the expense of the user. These practices need to be properly regulated to protect consumers from mis-selling.
Equally important, the proposals include a right for consumers to request human intervention in cases where online tools such as robo-advisers are used by providers. These tools do not always deliver the best outcomes for consumers due to factors such as bias of the data used by these tools, as well as a lack of commercial surveillance and accountability of these tools. In this respect, the proposed regulatory requirements should be further strengthened by specifying what kind of data is allowed to be collected for profiling in the robo-advisor context. Limits should also be put on collecting data from third parties and sources.
Peter Norwood, Senior Research & Advocacy Officer at Finance Watch, said: “The European Commission’s legislative proposal published today would bring some much needed improvements to consumer protection in the growingly digitalised retail financial services market.
The Commission proposals would ensure that consumers are in a better position to make informed decisions as well as reverse ill-advised or rushed decisions. We see scope for more, however, in particular around more robust rules for online advertising and the supervision and regulation of non-traditional players such as comparison websites and other fintech firms”.
Some essential elements are missing in the proposals
While the Commission´s proposal brings key improvements, some much-needed measures are missing and should be added by the co-legislators as the proposal now moves along the legislative process:
1- Robust rules on online advertising are necessary. As pointed out in numerous studies, including the recent advice from ESMA on the retail investment strategy, misleading advertisements have become a huge problem for financial services sold online, including on social media. Horizontal rules are badly needed to regulate the content, format and presentation of advertisements. Also, firms should be obliged to conduct proper oversight and be held accountable for online advertisements on third party platforms such as social media.
2- The new financial services chapter of the CRD should regulate comparison websites. Consumers increasingly make use of comparison websites to get a market overview of the best offers when purchasing a financial product. Comparison websites are, however, often not independent nor unbiased and therefore do not provide consumers with an objective and complete overview of the market. Rules are needed to ensure that only those websites that are truly independent and provide a full overview of the market and providers can label themselves as comparison websites.
3 – Currently unregulated entities selling financial services should be registered and supervised. New non-bank entities (e.g. fintech companies) have entered the digital financial services market and their number is expected to grow. Currently, legal uncertainty exists about whether these entities fall under the scope of the DMFSD and their activities are not being sufficiently supervised. Therefore, a legal requirement is needed in the new financial services chapter of the CRD obliging all of these entities to be registered and supervised by a competent authority.
Julia Symon, Head of Research & Advocacy at Finance Watch, said: “There is an urgent need to better regulate online tools and interfaces in order to ensure that they are designed and perform in a way that delivers fair and unbiased outcomes in the best interests of consumers. Therefore, we very much welcome the Commission’s new rules on online interfaces and online tools. However, more ambition is needed in this area. We urge the co-legislators to beef up the proposals and introduce rules on the kind of data that is allowed to be collected for profiling in the robo-advisor context“.
For more information, contact Peter Norwood, Senior Research & Advocacy Officer, Finance Watch
+32 (0)2 899 04 35, email@example.com
Notes to editors
- 24/03/2022 – Report: Tackling causes of over-indebtedness in the EU consumer credit market.
Finance Watch published a report based on a mystery shopping exercise. It highlighted the need to expand the scope of the Consumer Credit Directive (CCD) to all of the credit products the European Commission proposed to bring into the scope of the directive in June 2021. It also proved there is a strong need for more robust creditworthiness assessment and advertising rules to avoid over-indebtedness. Read the report
- 27/09/2021 – Consultation response: Directive on Distance Marketing of Consumer Financial Services
For Finance Watch, the ‘safety net’ feature of the DMFSD is useful for all types of retail financial services products that are not (yet) covered by product-specific legislation. Read the response
- 04/08/2021 – Consultation response: Retail investment strategy for Europe
Important improvements are needed to the retail investor protection framework to ensure that EU citizens can safely invest in capital markets, said Finance Watch in its response to the European Commission public consultation on the retail investment strategy for Europe. Read the response
- 02/07/2021 – Press release: Commission CCD review proposal: A much-needed, significant improvement with room for more.
Finance Watch stated that proposals on new rules regulating the consumer credit market introduce much-needed improvements to protect consumers, but a few tweaks are still needed in some key areas. See the press release
- 08/04/2021 – Report: A Wrinkle in the Process: Financial Inclusion Barriers in an Ageing Europe.
A groundbreaking look at vulnerability among older people in the European Union and the barriers they face that limit their access to basic, mainstream-market financial services and products appropriate to their needs in their communities. See the report
- 09/02/2021 – Report: Consumer credit market malpractices uncovered.
Finance Watch released in February 2021 an in-depth study of consumer credit markets in Spain, Romania and Ireland and what it means for the Consumer Credit Directive (CCD) review. See the report
- 10/10/2020 – Press release: The EU can reduce irresponsible consumer lending and data misuse.
Finance Watch published a discussion paper on ways that EU policymakers could help to reduce irresponsible consumer lending in the wake of the Covid-19 crisis and data misuse following recent changes in the EU payments industry. See the report
- 07/07/2020 – Report: Basic Financial Services: A European-wide study on financial services and products needed to tackle financial exclusion of citizens.
Finance Watch published a report which identifies a shortlist of basic financial products and services that should be made available to all European citizens to help combat financial and social exclusion. See the report
Background on the consumer credit market
The retail financial services market is increasingly becoming digitalised at a face pace. More and more consumers are purchasing credit, banking, investment, insurance and other financial products online, mainly from providers in their own member state but also cross-border. This trend has led many traditional financial services providers and intermediaries to adapt their business models and to distribute their financial services products through digital channels, including by partnering with new Fintech companies. A study commissioned by the European Commission shows that the average population per local bank branch has increased in the Eurozone from 2,102 to 2,278 between 2014 and 2016 as banks are moving their business from branches to the online world.
New non-bank players have also entered the market. The fintech sector is seeing a higher expected growth rate compared to the expected growth rate of the general economy. Thus, the importance of the fintech sector to the European economy is predicted to continue to grow.
The digital trend of the market has also seen the emergence and growing use of new financial services in recent years. For example, peer-to-peer lending, crypto assets, and digital payments have emerged. The digital revolution has also significantly enhanced the availability of a vast amount of data on consumers online. This data is increasingly used by financial services providers to tailor and price their products for individual consumers. Innovation has also led to the emergence of automated decision making tools by financial institutions which also use personal data to perform important sales practices such as automated advice or automated creditworthiness assessments.
While the digitalisation of the financial services market has brought important opportunities for consumers such as faster and easier access to financial services, it also bears serious consumer protection risks. Many of the new financial services products are complex and risky for vulnerable consumers and are currently unregulated. In addition, digitalisation has increased the speed of the sales process (e.g. speedy, or ‘one-click’ products), often resulting in rushed purchasing decisions which are not well thought through. Moreover, the availability of vast amounts of personal data for providers bears the risk of irrelevant data being used by providers that can lead to discrimination and financial exclusion. In the case of automated processing of personal data, there are also consumer protection risks arising from the lack of transparency, bias of the data used, and lack of commercial surveillance and accountability linked to automated decision-making tools.
Moreover, the online retail financial services market is increasingly witnessing misleading advertising. Key information about a product such as its costs and risks are often either omitted or hidden/not prominently displayed. In addition, the European Supervisory Authorities have observed a growing role for social media as part of overall communication and advertising activities for the provision of financial services, ranging from product display to marketing activities and online advice. This activity currently lacks supervisory oversight and legal clarity with regards to whether and in what way it is regulated.
About Finance Watch
Finance Watch is an independently funded public interest association dedicated to making finance work for the good of society. Its mission is to strengthen the voice of society in the reform of financial regulation by conducting advocacy and presenting public interest arguments to lawmakers and the public. Finance Watch’s members include consumer groups, housing associations, trade unions, NGOs, financial experts, academics and other civil society groups that collectively represent a large number of European citizens. Finance Watch’s founding principles state that finance is essential for society in bringing capital to productive use in a transparent and sustainable manner, but that the legitimate pursuit of private interests by the financial industry should not be conducted to the detriment of society.
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