The distance marketing of consumer Financial Services

This guide was last reviewed in 2008. 

Background and required information

Introduction

The European Union's Directive on the Distance Marketing of Financial Services (the "Directive") came into force on 23 September 2002. It governs the sale of pensions, mortgages and other financial services products by means of distance communication, which includes sales taking place on-line or by e-mail, telephone, fax or regular mail.

A major goal of the Directive is to encourage competition between suppliers throughout the UK and Europe. Many financial services, such as banking, credit, insurance, personal pensions, investment or payment services, lend themselves to being sold at a distance, with consequent cost and access benefits for consumers and sellers alike.

The Directive aims to ensure that consumers using distance sales channels are not at a disadvantage to those using the more traditional sales channels. The consumer should have confidence in the security of the transaction, which in turn should lead to increased use of new technology for the sale and purchase of financial services.

The UK implemented the Directive in October 2004 through The Financial Services (Distance Marketing) Regulations (the "Regulations").

Who do the Regulations apply to?

The Regulations apply to suppliers of financial services. These include the providers of the product, for example the bank or insurance company, and also intermediaries, such as Independent Financial Advisers. All members of the financial services industry should be aware of Regulations and the impact they will have.

When do the Regulations apply?

The Regulations apply to contracts made on or after 31 October 2004 which use a means of distance communication in making the sale.

For the purposes of the Regulations "distance communication" includes any contract where the supplier contracts with the consumer without them meeting face to face, including at the point when the contract is concluded. This will therefore include sales taking place through a website, as well as sales over the telephone, or sales taking place by written correspondence (including e-mail).

Financial services is widely defined, and includes any service of a banking, credit, insurance, personal pension, investment or payment nature.

It should be noted that the Regulations only apply to consumer contracts.

Requirements of the Regulations

The Regulations seek to protect the consumer and ensure that the supplier discloses sufficient information both before and after the contract is concluded. The consumer must also have an opportunity to withdraw from the concluded contract without incurring liability during a specified cancellation period (often referred to as a "cooling-off" period).

Required information

Before the consumer is bound into the contract the supplier (or their intermediary) must supply the following information:

Supplier's identity

• the identity and main business of the supplier, geographical address at which the supplier is established and any other address relevant to the consumer's relationship with the supplier;
• where the supplier is not based in the consumers' EU Member State, but has a representative in that country, the identity of the representative should be given along with the geographical address;
• the identity and geographical address of any other professional who will have dealings with the consumer;
• particulars of registration in any trade or public register, for example a Companies House registration number;
• particulars of any relevant supervisory authority, for example a FSA registration number and a link to their web site;
• description of the main characteristics of the financial service;

Product details

• the total price to be paid by the consumer including all related fees etc.;
• where relevant, details should be given regarding any fluctuations in price that are dependent on factors out-with the supplier's control;
• notice of any extra taxes that may exist that are not paid via the supplier or imposed by him;
• any limitations of the period for which the information provided is valid;

Contract particulars

• arrangements for the payment and performance and any additional costs for the consumer for using distance communication;
• whether there is a right of cancellation and if so, cancellation information;
• the minimum duration of the distance contract in the case of financial services to be provided immediately;
• information on any rights of termination and any penalties imposed;
• practical instructions for exercising the right of cancellation;
• the European Economic Area member state whose laws the supplier is taking as the basis for the contract;
• any contractual clause on the law applicable to the distance contract or on the law applicable to the competent court;
• the languages that the contractual terms will be made in and in which the supplier will communicate for the duration of the contract;
• whether there is an out-of-court claim and the methods for accessing this; and
• the existence of guarantee funds or other compensation agreements.

The above information must be provided to the consumer in a clear and comprehensible manner on paper or another durable medium appropriate to the means of distance communication used before the contract can be concluded.

Telephone

The Regulations recognise the impracticalities of a supplier providing all of the above information to a consumer where the means of distance communication is over the telephone. In these circumstances the regulations allow a reduced requirement on what information is to be provided.

Best practice recommendation is that when suppliers promote and sell their products by telephone, they should begin by stating the caller's name and the fact that they are a sales representative employed by or acting on behalf of the supplier (naming the supplier). The caller should then clearly describe the product including the main characteristics. They should also clearly state the total price including taxes, or if it is not possible to give a fixed price then the means of calculating the price. The consumer should also be advised that further information is available on request and that there is the right to withdraw from the contract within the cancellation period.

As the call progresses and the consumer expresses an interest in entering the contract the supplier should provide information to the consumer regarding the respective contractual obligations.

Following up

As well as providing the prior information listed above, the supplier should also ensure that he communicates all the contractual terms and conditions specified above to the consumer on paper or another durable medium (which includes sending a copy through e-mail or post). The supplier should do this in good time prior to the conclusion of the contract. Where the consumer has requested that the contract be concluded using a means of distance communication then it should happen immediately after conclusion of the contract. Suppliers must also provide the consumer with a copy of the terms and conditions when requested unless the supplier has already communicated these to the consumer and they have not changed.

It is worth noting that suppliers should try to provide a copy of the terms and conditions as soon as possible in order to effectively conclude the contract. The cancellation period (discussed below) only begins when the paper or other durable medium copy of the contract terms and conditions is received by the consumer. If the supplier provides the required information in a timely manner the cancellation period will be kept to a minimum and the consumer will have as little time as possible to cancel the contract. This is a win-win situation for the supplier, who appears to their consumer to be helpful and efficient, while at the same time ensuring legal compliance and protecting their commercial interests.

The consumer can request that the means of distance communication be changed and the supplier should comply unless this is incompatible with the distance contract or the nature of the financial service provided to the consumer. For example, where the contract is an on-line financial service and it would be incompatible for the supplier to change to telephone communications.

Cancellation right

The Regulations give consumers the right to withdraw from financial services contracts entered into through distance selling.

If specified conditions are fulfilled the consumer has the right to cancel the contract within the cancellation period. This terminates the contract from the notice of termination being given.

Cancellation period

The cancellation period begins on the date of the conclusion of the contract and ends 14 days from that date. As discussed above the contract is concluded at the point at which the copy of the prior information is sent on paper or other durable medium, hence the commercial interest in sending the information as soon as possible.

In life insurance contracts the cancellation period runs from the date the consumer is informed that the contract has been concluded. The cancellation period in life insurance or personal pension contracts runs for 30 days instead of 14 days.

Method of cancellation

A cancellation notice is to be treated as properly given to the supplier where the consumer delivers, posts, faxes or e-mails it to the supplier. The consumer may also send the notice to an website which the supplier has indicated to the consumer may be used for that purpose.

Where the supplier has indicated to the consumer that cancellation notice may be given over the telephone this is also an acceptable method. However, it is worth noting that in a recent review of the Consumer Protection (Distance Selling) Regulations 2000 (which do not apply to financial services, but contain largely similar provisions) the DTI concluded that suppliers should not be required to accept cancellation notices by telephone, because of the evidential problems for smaller suppliers. It is likely that the financial services Regulations would follow this route if the same issue was raised.

Exceptions to right to cancel

There are certain circumstances where it is unreasonable to allow a consumer a right to cancel a distance contract. For example, in a contract for travel insurance a consumer could take out travel insurance, go on a week's holiday and return to cancel the insurance. This is clearly unfair.

Therefore a consumer has no right to cancel a distance contract:

• which relates to a financial service where the price depends on fluctuations in the financial markets which are out-with the control of the supplier; or
• which has been fully completed by both parties at the consumer's express request before the consumer gives notice of cancellation.

These are the main exceptions but there are other specific contracts that a consumer has no right to cancel, and it is always worth exploring to check whether specific products are excluded.

Payment for services provided before cancellation

Where the consumer cancels a contract the supplier shall refund any sum paid by or on behalf of the consumer, less any charge made under the contract, as soon as possible and within 30 days from the cancellation date. The 30 days will run from the day of cancellation or, if the supplier can prove it to be later, the day the supplier receives the notice of cancellation.

Payment by card

Where an individual has entered into a distance contract for the provision of a credit, charge, debit or store card and that card is used fraudulently the card holder can request cancellation of that payment and is entitled to have the sum re-credited by the card issuer.

In the event of a dispute it is for the card issuer to prove that use of the card was authorised.

Unsolicited services

The Regulations set out to protect individuals having to pay for financial services that have not been requested. Suppliers who provide unsolicited services and then demand payment are guilty of an offence and liable to a fine. It is also an offence for a supplier to threaten legal proceedings to an individual for failure to pay, threaten to or place the individual's name on a defaulter's list or invoke collection procedures.

Implementation and regulation

The Regulations are being implemented by amendments to the rules of the Financial Services Authority. The FSA published its Distance Marketing Directive Instrument of 15 April 2004. This instrument makes changes to the FSA Handbook, and is made by the FSA under pre-existing powers, such as the Financial Services and Markets Act 2000. To the extent that any part of the Directive is not appropriate to the control under the FSA rules, the Regulations set out the basis on which the rights will be exercised.

Contacts

Tim Dolan
Biography
email Tim
+44 (0) 207 418 8259

Jacob Ghanty
Biography
email Jacob
+44 (0) 207 418 8265