Financial Services Regulations 2004 - HM Treasury feedback statement and response

HM Treasury has published its summary of consultation feedback and government response on the implementation of the Distance Marketing of Consumer Financial Services Directive (the "Directive") (the "Response Paper"). HM Treasury's consultation feedback and response document includes the final form of the Financial Services (Distance Marketing) Regulations 2004, which will commence on 31 October 2004 (the "Regulations").

The Directive sets common standards for the information that must be supplied to consumers of financial services prior to a contract being concluded at a distance, where the supplier makes exclusive use of one or more means of distance communication (for example, telephone, internet, fax or mail). There are also provisions for rights of withdrawal (cancellation rights) in many circumstances. The aim is to enhance the working of a single market by giving consumers the confidence to buy products on a cross-border basis, with providers being governed by a common set of core standards across the European Union. The impact of the Directive is potentially wide-ranging because it applies to "any service of a banking, credit, insurance, personal pension, investment or payment nature", so it covers most financial products that the ordinary consumer is likely to buy.

The main points in the Response Paper

Interpretation of Distance Contract

Very often, it will be quite simple to determine whether or not a contract is a "distance contract". If a consumer enters into a contract for financial services and that transaction is conducted wholly at a distance, for example, over the internet, by telephone, fax or by mail from his or her home, there will be a distance contract within the meaning of the Directive.

Similarly clear is the scenario where a consumer enters the premises of the supplier and obtains advice on the product from staff there. This is likely to be outside the scope of the Directive, as the supplier will have used little, if any, means of distance communication in making the sale.

However, there is rather a grey area between these two certainties, which will be particularly important to financial institutions that have large national branch networks, but also sell financial products by such means as post, internet or telephone. It remains unclear whether there is a distance contract in circumstances where a consumer enters a branch of a bank, picks up a leaflet about a service offered, leaves the branch without talking to anyone about the product and later returns an application form by post, or completes it online. There is a further lack of clarity in circumstances where a consumer may enter a bank and use a terminal provided there to conclude a contract, without talking face to face with bank personnel about it. There are various variations on these themes, for example, where the consumer returns an application form to the branch and hands it over the counter, or completes it and hands it over without leaving the branch, but without talking to anyone.

The Response Paper provides little assistance on these issues. In the original consultation document, the Government took the view that in certain circumstances, a distance contract might arise even where a consumer has at some stage in the process been simultaneously physically present with the supplier, which would cover the scenarios outlined above, where the consumer has simply entered the premises of the bank. However, this interpretation of "distance contract" was disagreed with by most respondents to the consultation paper, as in entering a branch of the supplier and exercising a choice about whether or not to speak to someone there, the consumer has taken advantage of all the face-to-face services offered. Where a consumer enters the supplier's premises and there is no communication with staff, there has still been "simultaneous physical presence" between the supplier and the consumer and any contract entered into as a result would not be a distance contract.

Having considered the responses, HM Treasury has decided that the position may be arguable either way. It has therefore simply decided to replicate the definition of "distance contract" from the Directive into the Regulations, leaving the interpretation and guidance to the "competent enforcement authorities" (that is, the FSA) and ultimately, to the courts. HM Treasury states unhelpfully that "it would be wrong to mislead by giving the impression that the issue is clearer than it is" and firms are left to make their own interpretation of this point.

Country of Origin

The Directive contains no explicit provision as to whether it is the competent enforcement authorities of the supplier's or the consumer's home state that should be responsible for enforcing its provisions in respect of transactions involving more than one member state. However, HM Treasury has taken the view that it will implement the Directive on a country of origin basis, in line with the objective of achieving a single financial services market. A difficulty with this, however, is that other member states could apply an alternative interpretation.

Intermediaries and Financial Advice

In the initial consultation, HM Treasury considered financial advice to be outside the definition of "financial services", but has now accepted that financial advice is a financial service to which the Directive may potentially apply.

"Gap" Financial Services

Certain financial services are considered to be financial services for the purpose of the Directive, but are not regulated by either the FSA or the Office of Fair Trading. Such financial services were referred to in the consultation paper as "gap" financial services. HM Treasury recognises the need for all financial services to comply with the requirements of the Directive and thus, for there to be an appropriate enforcement authority able to enforce the provisions of the Directive for each of the "gap" financial services. Thus, HM Treasury has decided that the Regulations will apply to "gap" services and there will not be a separate set of regulations in relation to consumer credit, as was originally suggested. However, HM Treasury remains of the view that occupational pensions are outside the scope of the Directive, on the basis that these are not financial services of a banking, credit, insurance, personal pension, investment or payment nature.

Appointed Representatives

Appointed Representatives will be subject to the FSA's Handbook in respect of the Directive's prior information requirements and its provisions on unsolicited supplies of financial services, and to the Regulations in respect of cancellation rights and the other matters dealt with in the Directive, where there is a contract between the Appointed Representative and the consumer. Contracts between the consumer and the Appointed Representative's principal will be subject to the FSA's Handbook.

Cancellation Rights

Consumers will be given cancellation rights for certain types of financial services sold at a distance - not less than 30 days for life insurance and pensions contracts and 14 days for most other financial products. There will be no additional requirements in respect of "gap" financial services.

In relation to insurance products which are "gap" financial services (for example, breakdown insurance or travel insurance), HM Treasury considers that it would be reasonable to allow insurers to make a proportionate charge for those services (including cover) actually provided up to the time the consumer exercises the cancellation rights. The detailed regulation of life and general insurance, however, remains largely a matter for the FSA.

Timing for Implementation

HM Treasury has set the date for compliance with the Distance Marketing Regulations at 31 October 2004. This will coincide with the other planned changes to mortgage regulation and insurance mediation and the proposed reforms to the Consumer Credit Act 1974.

If you would like to find out more about how the Directive and the HM Treasury proposals will affect your business, please contact Charlotte Hill at [email protected] or on +44 (0)20 7367 2501.