Why it matters to consumers

With the spread of digitalisation, which has been accelerated by the Covid-19 crisis, the

sale and marketing of financial service products, such as consumer credit, insurances,

or payment accounts, is increasingly moving online. This creates new opportunities, but

also substantial risks for consumers, who may be mis-sold overly complex or costly

products that they do not always need. At the same time, traditional distance-marketing

techniques such as cold calling, are still used to lure the most vulnerable consumers,

such as the elderly, into purchasing complex or costly financial service products. In that

context, it is crucial for EU legislation to adequately protect consumers when they

purchase financial services at a distance, regardless of the means of communication

used.

Summary

• The Distance Marketing of Financial Services Directive (“DMFSD”) provides a legal

framework governing the distance marketing of financial services. It has increased

the protection of consumers purchasing financial services at a distance by laying down

rules on (i) the information that consumers must receive before concluding a contract

(ii) introducing a 14-day right of withdrawal (iii) and by regulating unsolicited distance

sales and communications.

• Since the entry into force of the DMFSD (2002), horizontal and product-specific

legislation has been implemented (for example, the Insurance Distribution Directive,

or the Consumer Credit Directive). However, the DMFSD is still relevant to protect

consumers when it comes to aspects not covered by product-specific legislation and for

new products which constantly come into the market.

• Indeed, digitalisation means that new financial products come into the market at an

increased pace and are increasingly offered online (recent examples include peer-to-

peer lending, increased online offers of short-term high-cost loans also called “payday”

loans, and buy-now-pay-later schemes such as Klarna). At the same time, the number

of physical bank branches is steadily decreasing.

• It is therefore important for consumers to be duly protected whenever new financial

products and technologies are launched into the market, and when they purchase

financial products at a distance (e.g. online or on the phone) which are not, or not

entirely covered by product-specific legislation.

• In particular, the receipt of relevant pre-contractual information by consumers

before purchasing such products, including information on costs and on the right of

withdrawal, is crucial in order to enable consumers to make an informed choice. It also

prevents consumers from purchasing predatory products which they do not need, or

which comprise hidden costs, such as certain payday loans offered online, or insurance

products offered via the phone. The existence of a right of withdrawal is also crucial

in order to enable consumers to change their minds, in particular when they are mis-

sold a product which does not suit their needs.

• While there are both compliance and enforcement problems related to the application

of the DMFSD, these problems should urgently be solved by revising the Directive