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European Union

Commission proposes regulatory framework for distance-selling in the financial services sector

The Commission has proposed a Directive to establish a clear regulatory framework for the distance-selling of financial services within the single market.

The aim of the proposal is to ensure a high level of protection for consumers of retail financial services, for example insurance, banking and investment services, marketed by telephone, electronic means (such as the Internet) or mail. This proposal aims to encourage consumer confidence in these services and provide financial service suppliers with a clearly defined legal framework valid for distance-selling throughout the EU.

The proposal covers distance-contracts concerning financial services concluded under an organized distance-sales or services provision scheme, for which the supplier and the consumer make exclusive use of communication at a distance, up to and including the moment at which the contract is concluded. The proposal would fully harmonize member states' rules on distance-selling of financial services, and therefore would ensure identical standards throughout the EU. In particular, the Directive would contain rules concerning:

  • the consumer's right to a period of reflection (warming up) before agreeing to a contract. The consumer would have to be informed a priori of the contractual terms and conditions proposed by the supplier, and the supplier would have to maintain these terms for 14 days. This would allow consumers the opportunity to compare various offers and adequately examine the contract before giving their consent;
  • the consumer's right of withdrawal — the consumer would have the right during a 14-day period - extended to 30 days for consumer mortgages, life insurance and pensions - to withdraw from the contract without penalty and without giving any reason (cooling off). This right of withdrawal would only apply if the contract was signed before the consumer had received its full terms and conditions or the consumer was put under unfair pressure during the reflection period;
  • basic consumer rights in cases where financial services ordered were partially or totally unavailable, such as the right to be refunded;
  • the supplier's right to be compensated if the consumer decided to withdraw once performance of the service has already begun;
  • a prohibition on 'inertia selling' which is the selling of distance-services when they have not been requested;
  • limitations on the supplier's methods of distance-communications, such as limitations on cold-calling, where a consumer is contacted without his prior consent; and
  • complaints and redress procedures for the settlement of disputes between a consumer and a supplier.

The proposed Directive would complement Directive 97/7/EEC, which establishes distance-selling rules for goods and services other than financial services.

The proposal fulfils the commitment made by the Commission in its follow-up to the June 1997 'Communication on Financial Services: Enhancing Consumer Confidence', to produce a proposal for an appropriate legal framework for distance selling of financial services. The proposal will now be submitted to the EU's Council of Ministers and the European parliament for adoption under the co-decision procedure.

Commission proposes a Council Directive on taxation of savings

The Commission has proposed a Council Directive to ensure a minimum effective taxation of savings interest income. Despite the European Savings Bank Group (ESBG) welcoming the Commission's initiative "to tackle harmful tax dumping and fraud", the ESBG is concerned about one of the central features of the proposal, the co-existence model. The co-existence model gives member states a choice of taxation system:

  • the withholding-tax system, where the member state can operate a withholding tax on interest paid in their territory to non-residents; or
  • the information system, where a member state can allow the member state of residence for tax purposes of the beneficial owner of the interest, to tax that interest through the communication of relevant information by the member state of the paying agent.

The ESBG is concerned that the outcome of the model will result in the burden of fighting tax evasion falling to the banks. They believe that the information system in particular, would create a large administrative burden for the savings banks because it would establish information obligations for all kinds of payments which would result in high costs for the banks and ultimately their customers.

In addition, the ESBG feel that the system will discourage savings. Member states which have no tax on savings interest income at all, either for residents or non-residents, will be obliged to introduce a withholding tax not only for non-residents but also for residents if they opt for the withholding tax system.

The proposed rate for withholding tax is 20%., which the ESBG feels is too high. Most savings are made by private individuals and are the result of surpluses from earned income already taxed. The introduction of the tax may therefore have a psychological effect and the effect of this should also be considered.

The ESBG are concerned that the proposal will not only affect individuals who reside in a member state other than the one where they receive interest payments, (the intended targets of the new rules), but also individuals who reside in the same member states where they receive interest payments. The proposal may also create competitive distortions with non-EU countries, because savers may be encouraged to put their savings into countries with less demanding tax levels. To avoid economic distortions and tax loopholes in economic relations with the most important third countries, a minimum of effective taxation of interest income has to be pushed forward to the other European Economic Area (EEA) countries as well as to the European and non European OECD member states. The proposal has now been forwarded to the Council.

Michael Reynolds
Allen & Overy

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