Distance Marketing of Financial Services

1. 1 Distance Marketing of Financial Services Assoc. Prof. Christian Tanushev May 28, 2012

2. 2 Agenda Pitfalls in Distance E-commerce Legal Issues in Distance Marketing of financial services Structure of the relations in IM EU Directive 2002/65/EC

3. 3 Pitfalls in Distance E-commerce Jurisdiction and applicable law Taxation Intellectual property rights Payments Protection of personal information Protection of investors

4. 4 Jurisdiction Electronic site from Hungary offers securities traded on the stock exchange in Budapest Bulgarian consumer buys these securities His/Her credit card is debited but there is no delivery of the securities Where should be decided the dispute: in Hungary or in Bulgaria

5. 5 Applicable Law Investment company wants to sell its shares abroad It creates a special site where the securities could be purchased by entering an electronic order Is it supposed to respect only the Bulgarian legislation (the home country)... Or should it comply with the law of each country of its clients in Europe?

6. 6 Rights of intellectual property Financial product is proposed in an Internet site Financial institution in other country copies the overall view of the site: colors; allocation of windows, graphs, information; style of letters Are the rights of the institution that created the product protected?

7. 7 Taxation Are profits from e-trading of shares tax deductible? How do tax payer prove the “historic” “buy” price? And “sell” one? What if there are an “arbitrage’ opportunities? Will one catch them or consider the tax implications?

8. 8 Payments Trust, irrevocability and assurance for the consumers and the financial institutions Creation of possibilities for competing with the other members of EU in the electronic trade with financial products

9. 9 Personal Information Protection Synonymous identification of the client E-signature: liability of certification service providers Personal information protection guarantees in case the deal is cancelled Host service provider’s liability

10. 10 Jurisdiction – an answer? Brussels Convention – 1968 Defendant’s place of domicile Rome Convention - 1980 Consumer can choose if she has been “intentionally targeted” Does the website “target” the consumer? Geists Targeting Test. Combination of web site activity and Contract Technology Actual or implied knowledge Three stage targeting test Directs electronic commerce activity Manifest intent in engaging in business Activity creates potential cause of action Active*interactive web sites satisfy this test. Geists Targeting Test. Combination of web site activity and Contract Technology Actual or implied knowledge Three stage targeting test Directs electronic commerce activity Manifest intent in engaging in business Activity creates potential cause of action Active*interactive web sites satisfy this test.

11. 11 Applicable Law Rome Convention General rule – choice of law For consumers – law of the country of residence Equals “Country of destination” if consumer has been “targeted” A Clash of Interest Consumer protection: country of destination E-business development: country of origin

12. 12 Investors’ Protection Adequate info provided to the consumer for a reasonable decision Consumers should be protected against unsolicited services Expression of the consent to conclude the deal Open and clear The absence of reply is not signifying consent No expenses for consumer when the deal is broken Securing effective procedure for laying claims against suppliers from the consumers

13. 13 The European Directives Creation of regulative framework Supporting for self regulation Directive 2002/65/EC from 23 September 2002 concerning the distance marketing of consumer financial services Directive 97/7/EC from 20 May 1997 concerning protection of the consumers to concluding distance contracts

14. 14 Structure of the Relations in IM

15. 15 Stages of Internationalization (Marketing Strategy) ?-st stage – Primary penetration – experimental approach ??-nd stage – Expansion on the external markets (engagement for adapting) ???-rd stage – Global rationalization

16. 16 I. Primary Penetration

17. 17 II. Local Expansion in External Markets

18. 18 III. Global Rationalization

19. 19 Directive 2002/65/EC Objectives Key Concepts Information to the consumer prior to the conclusion of the distance contract (art.3) Additional information requirements (art.4) Right of withdrawal (art.6) Unsolicited communications (art. 10)

20. 20 Objectives Securing competitiveness on the consolidated European market of financial services Guarantee of access of the consumers to wide number of quality financial services Increasing the confidence of consumers in new technologies and electronic trade To harmonize the legislation and administrative procedures in the member states about distance offering of financial services

21. 21 Definitions “Distant contract”. Concluded as a result of: An organised distance sales or service-provision scheme run by the supplier: “center for services”, internet site Using means of distance communication up to and including the time at which the contract is concluded “Financial service”: banking, credit, payment, insurance, pension and investment services

22. 22 Participants and Communication “Supplier”: natural or legal person; public or private “Consumer”: any natural person who is acting for purposes which are outside of his trade (doesn't include sole proprietorship, general partnership) “Means of communication”: does not require simultaneous physical presence of the supplier and consumer (for example phone, internet, fax, electronic mail)

23. 23 Distance Contract The two poles Concluding a contract for pension insurance “over the counter” Concluding a contract for pension insurance by “electronic mail” Picking an advertising brochure with “Application form” and sending the application into a special mailbox in the pension company without a contact with an employee Call on the cell phone from the office of the pension company to “call center”

24. 24

25. 25 The supplier The financial service The distance contract Redress In the case of phone call The data about the supplier and the aim of the phone call should be completely cleared at the start of the talk with the consumer Disclosure of Prior Information

26. 26 Prior Contract Info – The Supplier The identity, main business and address The identity of the representative in the host country of the consumer and its address Communication with an agent of the supplier – data about the agent, his address Registration in the trade register Supervisory authority, if the supplier’s activity is subject to authorization

27. 27 Prior Info - The Financial Service A description of the main characteristics of the financial service Common price which should be paid by the consumer to the supplier including all the expenses, taxes paid via the supplier or the way for defining the price which allows the consumer to check it Description of the risks of the financial instruments and indication that the price in the past does not guarantee profit in the future

28. 28 The Financial Service – cont. Warning for existence of tax obligation which are not paid by the supplier Period for which the info provided is valid Arrangements for paying and receiving the financial benefit Additional cost for the consumer of using the means distance communication

29. 29 Prior Info - The Distance Contract The existence or absence of a right of withdrawal, its duration and the conditions for exercising The minimum duration of the contract in the case of financial services to be performed permanently or recurrently Any rights the parties may have to terminate the contract early or unilaterally, including any penalties imposed

30. 30 The Distance Contract – cont. Practical instructions for exercising the right of withdrawal Member State whose laws are taken by the supplier as a basis for the establishment of relations with the consumer prior to the conclusion of the contract Any contractual clause on law applicable to the distance contract and/or on competent court; Language used to provide preliminary information and to communicate during the implementation of the contract

31. 31 Prior Info - Redress Does an out-of-court complaint and redress mechanism exists and the methods to implement it The existence of guarantee funds or other compensation arrangements without deposit guarantee schemes and investor compensation schemes (Directive 94/19/EC of 30 May 1994 and Directive 97/9/EC from 3 March 1997)

32. 32 Additional information Member states may introduce more stringent provisions European Commission will exert efforts to bring that requirements to the knowledge of the suppliers and consumers The contract should be given to the consumer in writing or on a hard disc in good time before the conclusion of the treaty The consumer has the right to receive the contractual terms at any time

33. 33 Right of Withdrawal The consumer has the right to withdraw from the contract in 14 calendar days without penalty and without giving any reason. (30 days for life insurance and pension operations) The period for withdrawal begins: From the day of the concluding of the distance contract The day on which the consumer receives the contractual terms

34. 34 Exempt from the “Right of Withdrawal” Financial services whose price depends on fluctuations in the financial market outside the supplier’s control Foreign exchange Money market instruments Transferable securities Units in collective investment undertakings Financial futures Forward interest rate agreements Interest rate, currency and equity swaps. Options on currency and on interest rates Insurance of travelers and luggage or insurance policies of less than one month duration

35. 35 Exempt from the “Right of Withdrawal” cont. Contracts whose performance has been fully completed by both parties at the consumer's express request Contracts which execution is finished before using the right for refusal The Directive allows the Member states to decide whether they should allow withdrawal in case of mortgage contracts – enough time for reflection The Directive allows the contracts to start after the deadline

36. 36 The consumer is obligated to pay only: For the services already provided Does not owe defaults The Member States may provide that the consumer cannot be required to pay any amount when withdrawing from an insurance contract Proportional payment, the insurance carries the risk during the period of refusal The supplier is obliged immediately but not later than 30 days to restore all received payments Payment of the Service Provided before Withdrawal

37. 37 Protection of the Consumer Payment with electronic cards Cancellation of a payment where fraudulent use has been made of his payment card (after informing the institution-issuer) Restoring the amount paid from the card Unsolicited services. Except on the tacit renewal it is prohibited: To supply the service without a prior request The lack of answer cannot be interpreted as an agreement and the consumer does not carry responsibility for rendered services

38. 38 Unsolicited Communications Prior consent of the consumer is needed for using of: Automated calling systems Faxes Rules about restriction to use of phones and electronic mail. Two variants: They may be used after receiving confirmation from the consumer “opt-in” They may be used if the consumer does not express his objection “opt-out” (Spain), for example by including his name in the respective register They cannot load up with expenses the consumer

39. 39 Implementation of the Directive The Member states are obliged to impose effective, proportional, dissuasive sanctions The consumers may not waive their rights The Member states secure the protection of the rights of their consumers against third countries which are not members The countries assign the execution to: Public institutions Organizations for protection of the consumers Self regulating professional organizations The burden of proof on respect of supplier’s obligations to inform the consumer and consumer’s consent to conclude the contract is placed on the supplier

40. 40 Entry into Force and Implementation Art. 19 takes this directive to the list with directives for protection of the interests of the consumers which forces supplementation of the legislation The member states were supposed to reduce their legislation in accordance and to create conditions for implementation of the Directive till 9 October 2004 On the 6.04.2006 European Commission receives data for implementation from 20 member states, partial communications were sent from 2 countries, 2 countries are discussed in the Court of Justice and 1 is under consideration The review for implementing was transferred to 2008 in order to evaluate not just the creation of the legislation but the implementation of the directive

41. 41 The Four Pillars of the Directive Prohibition of marketing practices which oblige the consumers to buy services which they do not want ("inertia selling") Rules for prohibition of unwilling telephone calls and e-mails ("cold calling" and “spamming") Obligations for the supplier to provide detailed information about the contract and the service prior to its conclusion Right of the consumer to withdraw from the contract in a period of time (“cool-off period”) - except in cases when there is a risk from variations of the prices of the financial markets

42. 42 Contact info ctanushev@yahoo.com Tel. +359 88 78 78 789 Fax +359 2 962 48 62 Christian Tanushev