The Consumer Rights Directive and insurance
This guide is based on UK law. It was last updated on 17th
November 2008.
The European Commission has published proposals that would give
consumers across the EU uniform protection whether they buy goods
and services in person or online.
The Consumer Rights Directive, a cornerstone of the European
Commission's consumer strategy, would replace four existing
Directives that deal with doorstep sales, unfair terms in consumer
contracts, distance contracts and the sale of goods and associated
guarantees.
Launching the draft Directive on 8th October, European Consumer
Commissioner Meglena Kuneva described it as "the most far-reaching
overhaul of consumer rights in 30 years".
But for insurers and providers of other financial services, the
draft Directive has a more limited application.
"The existing Community legislation on consumer financial
services contains numerous rules on consumer protection," the
preamble states. "For this reason the provisions of this Directive
cover contracts relating to financial services only insofar as this
is necessary to fill the regulatory gaps".
Consequently, neither the proposals for improving consumer's
rights when buying online, nor the protections introduced for
contracts made or negotiated away from business premises apply to
insurance.
Insurers would, however, be subject to the draft Directive's
restatement of the rules on unfair contract terms, including the
proposed new ban on default pre-ticked boxes and the black and grey
lists of unfair terms.
Distance contracts
One of the main aims of the proposed Directive is to encourage
cross-border commerce by tightening up the law on selling goods and
services via the internet and other forms of distance
communication.
The draft distance contract rules include provisions about the
information to be provided to the consumer and introduce a new
14-day cooling-off period during which the consumer can withdraw
from the contract. General rules on the sale of goods (whether sold
by distance contract or otherwise) also deal with delivery, damage
in transit, conformity with the contract and guarantees.
The provisions, however, do not apply to insurance and other
financial services. These would remain subject to the Distance
Marketing of Consumer Financial Services Directive, implemented in
the UK by the relevant conduct of business rules in the Financial
Services Authority's Handbook and (for firms not subject to FSA
regulation) by the Financial Services (Distance Marketing)
Regulations 2004.
Off-premises contracts
The draft Directive combats pressure-selling by updating
existing rules on doorstep sales, which it widens to cover
contracts concluded anywhere where both parties are face-to-face
and the contract is negotiated or concluded away from business
premises.
As with distance contracts, the draft Directive introduces
formal information requirements and a standard withdrawal
period.
The off-premises proposals, however, do not apply to insurance
at all and only to certain other financial products. Credit
agreements that fall within the Consumer Credit Directive are
outside their scope. Sales of insurance would continue to be
governed by the relevant conduct of business rules in the FSA's
Handbook.
Unfair contract terms
For insurers, the main area of interest lies in the section on
consumer contract terms. These apply to standard terms, i.e. terms
drafted in advance by the trader or a third party to which the
consumer agrees without being able to influence their content. The
fact that the consumer may have been able to influence all or part
of a term would not prevent the Directive applying to other parts
of the contract.
For the most part, however, the proposed new rules are a
restatement of existing requirements in the Unfair Terms in
Consumer Contracts Directive, implemented in the UK by the Unfair
Terms in Consumer Contracts Regulations 1999.
Standard terms must still be "expressed in plain, intelligible
language", although there is now a requirement that they be legible
(rather than just "written"). As under the Regulations, a term
will be judged unfair if "contrary to the requirements of good
faith, it causes a significant imbalance in the parties' rights and
obligations arising under the contract to the detriment of the
consumer". Unfair terms are not binding on the consumer.
There are, however, some proposed additions and some
rearrangements that reflect the European Commission's desire to
bring consumer protection up-to-date to take into account modern
forms of communication.
The test for unfairness, for instance must (as now) consider all
the circumstances, but these now expressly include "the manner in
which the contract was drafted and communicated to the consumer by
the trader".
There is also a requirement that standard terms must be made
available to the consumer "in a manner which gives him a real
opportunity of becoming acquainted with them before the conclusion
of the contract". This is not new, but it has been promoted from
the schedule to the Regulations to the body of the draft Directive.
And, in providing the terms, the trader must pay "due regard to the
means of communication used".
It would not be practical for a trader to set out all its terms
and conditions in a text message, for example, but it could make
them available on a website and direct the consumer to that site
before concluding the contract by text.
A new departure is the proposed prohibition on sales by default.
A trader must obtain the express consent of the consumer to any
payment in addition to the main contract price; otherwise the
consumer is entitled to that money back.
The Commission here is targeting pre-ticked "optional" boxes for
buying extras, such as travel insurance, priority boarding or
baggage. Under the new rules the consumer would have to make an
active choice (e.g. by ticking an empty box) to purchase the
additional item.
There is also a new requirement that member states should
"refrain from imposing any presentational requirements as to the
way contract terms are expressed or made available to the
consumer".
The preamble to the draft Directive states: "Traders should be
free to choose the font type or size in which the contract terms
are drafted". The motive here is full harmonisation – preventing
member states coming up with their own, slightly different
requirements. If the term is illegible, then the trader would be in
breach of the requirement for clearness and legibility in any
event.
Grey and black lists
Annexed to the unfair contract terms section is a list of terms
that are considered unfair in all circumstance (the black list) and
a list of terms that are considered unfair unless the trader proves
otherwise (the grey list).
Almost all of these appear in similar form in the schedule to
the current Regulations. One difference is that the terms in the
existing schedule are merely indicative of terms that "may be
regarded as unfair", whereas terms on the black list will
automatically be unfair.
Another is that the grey list expressly places the burden of
proving whether or not a term is unfair on the trader. The current
Regulations and Directive are silent on the point, leaving some
doubt as to whether the burden of proof follows member states'
national law or whether fairness will be neutrally assessed by the
court.
Promoted from the existing schedule to the new black list are
terms excluding or limiting liability for death or personal injury,
or which limit the trader's obligation for commitments undertaken
by his agent, or make the trader's commitments subject to some
condition wholly within his own control.
Similarly upgraded are terms that limit the consumer's right to
take legal action (e.g. a compulsory arbitration clause), restrict
the evidence available or reverse the burden of proof on to the
consumer. Terms that give the trader the right to decide whether
goods or services comply with the contract or to interpret any term
of the contract are also banned.
All the terms on the proposed grey list currently appear in some
form in the schedule to the current Regulations. The only
completely new item is a term enabling the trader unilaterally to
amend contract terms that have already been communicated to the
consumer in a durable medium by amending online contract terms that
have not been agreed.
Like the schedule, the grey list includes terms that allow
unequal right of termination, or termination by the trader without
reasonable notice except where the consumer has committed a serious
breach of contract. Also on the list are terms enabling the trader
to increase the price without giving the consumer the right to
terminate, or which enable the trader unilaterally to alter the
terms of the contract.
As under the current schedule, however, this list is modified in
the case of contracts for the supply of financial services.
A supplier of financial services may, for instance, include a
term allowing it to terminate an open-ended contract unilaterally
and without notice, provided it is required to give notice to the
consumer immediately.
Terms that reserve the trader's right to alter the terms of a
financial services contract without notice may also not be unfair
where there is a valid reason and provided the supplier informs the
consumer as soon as possible and the consumer has the right to
dissolve the contract immediately.
For insurers, therefore, there would not be much change in the
sort of standard contract terms that should be avoided, or at least
treated with caution. The FSA's current statement of good practice
"Fairness of terms in consumer contracts", which includes guidance
on the use of variation clauses (such as payment review clauses),
remains relevant.
Inertia sales
The Consumer Rights Directive would also close a loophole by
providing a contractual remedy for consumers who fall victim to
"inertia selling".
This provision, which would apply to unsolicited goods and
services (including insurance), confirms that the consumer does not
have to pay for such goods or services and that a lack of response
from the consumer does not constitute consent or agreement.
The Unfair Practices Directive (which came into force in the UK
in May 2008) includes demanding payment for or the return of
unsolicited products in its list of banned practices. This
provision completes the picture by confirming that the consumer has
the right not to pay.
Full harmonisation
One of the potential benefits of the proposed Directive lies in
the principle of full harmonisation across the European Economic
Area (which comprises all the EU states, Iceland, Liechtenstein and
Norway).
Unlike its predecessors, the Consumer Rights Directive would not
give member states the option of introducing stricter controls into
their national law - a practice the European Commission believes
has resulted in inconsistencies from state to state that are
holding back growth in cross-border sales.
And as long as the applicable law of a contract is the law of a
member state, consumer's rights under the Directive could not be
waived. Determining which law applies to a contract would be
governed by the Rome I Convention, which will apply to all
contracts in the EEA concluded after 17th December 2009.
Full harmonisation means traders would be able to use a single
set of contract terms across all member states. The European
Commission believes its proposals could save up to 97% of some
traders' compliance costs.
But member states that have introduced additional consumer
rights may be reluctant to give them up for the sake of full
harmonisation. The UK Government, for instance, has raised concerns
that consumers may lose the automatic right to a refund for faulty
goods currently available to them in the UK.
Next steps
The Directive is still quite a long way off. Consumer law in the
EU is subject to the co-decision procedure, which means that,
before they can come into force, the proposals will be reviewed
separately by the European Parliament and the Council, who have to
agree on a final version of the text.
Once approved, the Directive would come into effect between 18
months and two years after publication in the Official Journal.
In the UK, the Department for Business Enterprise and Regulatory
Reform (BERR) has launched a consultation on the proposals.
Responses are required by 2nd February 2009.
Contact: Liz Johnson (liz.johnson@pinsentmasons.com
/ 020 7667 0251)
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