Chapter 4
Financial consumer protection
From ‘caveat emptor’ to consumer protection
Caveat Emptor
The law has generally refrained from meddling with the purchaser/seller relationship, as this area is
typically deemed to be of a private nature (party autonomy). The Latin maxim ‘caveat emptor’ (be
aware, purchaser) typifies this liberal approach and its paradigm that the burden, during the
negotiations, to investigate the different terms and conditions of a prospective contract rests with the
purchaser.
Consumer protection
With the Unfair Terms Directive (Directive 93/13/EEC) the landscape shifted to a include more
consumer protection, because the consumer has a weaker position than the seller. The directive
stipulates that, in any contract with a consumer, disparities in the terms and conditions which are to
the detriment of the weaker party shall not be binding on the consumer. The directive applies to all
contracts between a seller and a consumer, including financial contracts. Furthermore, there is specific
legislation relating to ‘distance contracts’ (Distance Financial Services Directive) and the investment
business (MiFID II and MiFIR).
Unfair Terms Directive
The Unfair Terms Directive is the first set of European rules aimed at harmonising ‘the laws,
regulations and administrative provisions of the Member States relating to unfair terms in contracts
concluded between a seller/supplier and a consumer’ (art. 1). The term ‘consumer’ is defined as the
‘natural person who … is acting for purposes that are outside his trade, business or profession (art.
2(b)). A company is not included in this definition (‘natural person’) and not protected by the
directive. An individual is not protected when he acts for purposes connected with his
profession/business, because then he is not considered to be a weak party.
Article 3
The protection of the consumer offered by the Unfair Term Directive is predominantly achieved
through article 3. A terms is not binding upon the consumer when the term has not been individually
negotiated and it is ‘contrary to the requirement of good faith’ while ‘it causes a significant imbalance
in the parties’ rights and obligations arising under the contract, to the detriment of the consumer’.
Article 3(2) clarifies the circumstances under which a term shall be regarded as ‘not individually
negotiated’ and therefore possibly unfair.
Good faith
The duty of good faith entails an obligation on the part of the seller/supplier that he should not take
advantage of the state of necessity or lack of experience of the consumer, and that terms should be
written in a legible and clear way and without traps.
1
, Significant imbalance
For the term to be unfair, the lack of good faith must cause a ‘significant imbalance’. The adjective
significant can be construed from two viewpoints. On the one hand, an interpretation that the
imbalance should be ‘serious and exceptional’ (more consistent with the common law tradition). On
the other hand, a broader interpretation that the imbalance shall be deemed ‘significant’ so long as it is
not trivial (civil law perspective).
To the detriment of the consumer
In some jurisdiction, it was held that the expression does not add anything. Some scholars, however,
think that it has a meaning of itself. Furthermore, the consumer to be considered, in order to assess the
detriment, is not the specific consumer affected but rather a general consumer in that position
(objective).
Interpretation
Whether or not a term is unfair, is ultimately a matter of interpretation, specifically taking in account
certain things (art. 4). Nonetheless, the Annex provides a list of terms that are presumed to be unfair,
irrespective of whether they have been individually negotiated (art. 3(3)).
Article 5 & 6
If the terms of the contract are in writing, the wording should be in plain, intelligible language. Where
there is doubt about the meaning of a term, the interpretation most favourable to the consumer shall
prevail (art. 5). When a term is unfair, the term shall not bind the consumer, although the contract
shall continue to exist (art. 6). The validity of the contract as a whole cannot be affected by the
invalidity of a specific clause.
Financial contracts
The provisions of the Unfair Terms Directive apply to financial contracts, in as far as they involve the
sale or supply of goods and service to consumers. However, the Annex does not apply to financial
contracts (art. 2 of the Annex).
Distance contracts
The consumer may be in an even more delicate position when the negotiation with the counterparty
does not occur in the same physical space, but at a distance by use of phones or the internet. The two
principal pieces of EU legislation in relation to distance contracts are: the Consumer Rights Directive
and the Distance Financial Service Directive (2002/65/EC). The Consumer Rights Directive excludes
‘financial services’ (art. 3(d)).
Distance Financial Services Directive
A ‘distant contract’ is defined in article 2(a), and refers to ‘financial service’ (art. 2(b)) and ‘means of
distance communication’ (art. 2(e)). The mechanism of consumer protection operated concerns three
pillars: prior information (art. 3), written confirmation of information (art. 5), and right of withdrawal
(art. 6). The right of withdrawal does not apply to derivatives (art. 6(2)(a)).
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Financial consumer protection
From ‘caveat emptor’ to consumer protection
Caveat Emptor
The law has generally refrained from meddling with the purchaser/seller relationship, as this area is
typically deemed to be of a private nature (party autonomy). The Latin maxim ‘caveat emptor’ (be
aware, purchaser) typifies this liberal approach and its paradigm that the burden, during the
negotiations, to investigate the different terms and conditions of a prospective contract rests with the
purchaser.
Consumer protection
With the Unfair Terms Directive (Directive 93/13/EEC) the landscape shifted to a include more
consumer protection, because the consumer has a weaker position than the seller. The directive
stipulates that, in any contract with a consumer, disparities in the terms and conditions which are to
the detriment of the weaker party shall not be binding on the consumer. The directive applies to all
contracts between a seller and a consumer, including financial contracts. Furthermore, there is specific
legislation relating to ‘distance contracts’ (Distance Financial Services Directive) and the investment
business (MiFID II and MiFIR).
Unfair Terms Directive
The Unfair Terms Directive is the first set of European rules aimed at harmonising ‘the laws,
regulations and administrative provisions of the Member States relating to unfair terms in contracts
concluded between a seller/supplier and a consumer’ (art. 1). The term ‘consumer’ is defined as the
‘natural person who … is acting for purposes that are outside his trade, business or profession (art.
2(b)). A company is not included in this definition (‘natural person’) and not protected by the
directive. An individual is not protected when he acts for purposes connected with his
profession/business, because then he is not considered to be a weak party.
Article 3
The protection of the consumer offered by the Unfair Term Directive is predominantly achieved
through article 3. A terms is not binding upon the consumer when the term has not been individually
negotiated and it is ‘contrary to the requirement of good faith’ while ‘it causes a significant imbalance
in the parties’ rights and obligations arising under the contract, to the detriment of the consumer’.
Article 3(2) clarifies the circumstances under which a term shall be regarded as ‘not individually
negotiated’ and therefore possibly unfair.
Good faith
The duty of good faith entails an obligation on the part of the seller/supplier that he should not take
advantage of the state of necessity or lack of experience of the consumer, and that terms should be
written in a legible and clear way and without traps.
1
, Significant imbalance
For the term to be unfair, the lack of good faith must cause a ‘significant imbalance’. The adjective
significant can be construed from two viewpoints. On the one hand, an interpretation that the
imbalance should be ‘serious and exceptional’ (more consistent with the common law tradition). On
the other hand, a broader interpretation that the imbalance shall be deemed ‘significant’ so long as it is
not trivial (civil law perspective).
To the detriment of the consumer
In some jurisdiction, it was held that the expression does not add anything. Some scholars, however,
think that it has a meaning of itself. Furthermore, the consumer to be considered, in order to assess the
detriment, is not the specific consumer affected but rather a general consumer in that position
(objective).
Interpretation
Whether or not a term is unfair, is ultimately a matter of interpretation, specifically taking in account
certain things (art. 4). Nonetheless, the Annex provides a list of terms that are presumed to be unfair,
irrespective of whether they have been individually negotiated (art. 3(3)).
Article 5 & 6
If the terms of the contract are in writing, the wording should be in plain, intelligible language. Where
there is doubt about the meaning of a term, the interpretation most favourable to the consumer shall
prevail (art. 5). When a term is unfair, the term shall not bind the consumer, although the contract
shall continue to exist (art. 6). The validity of the contract as a whole cannot be affected by the
invalidity of a specific clause.
Financial contracts
The provisions of the Unfair Terms Directive apply to financial contracts, in as far as they involve the
sale or supply of goods and service to consumers. However, the Annex does not apply to financial
contracts (art. 2 of the Annex).
Distance contracts
The consumer may be in an even more delicate position when the negotiation with the counterparty
does not occur in the same physical space, but at a distance by use of phones or the internet. The two
principal pieces of EU legislation in relation to distance contracts are: the Consumer Rights Directive
and the Distance Financial Service Directive (2002/65/EC). The Consumer Rights Directive excludes
‘financial services’ (art. 3(d)).
Distance Financial Services Directive
A ‘distant contract’ is defined in article 2(a), and refers to ‘financial service’ (art. 2(b)) and ‘means of
distance communication’ (art. 2(e)). The mechanism of consumer protection operated concerns three
pillars: prior information (art. 3), written confirmation of information (art. 5), and right of withdrawal
(art. 6). The right of withdrawal does not apply to derivatives (art. 6(2)(a)).
2
