A directive on the distance marketing of investment funds and broader consumer financial services was introduced in 2002 (please find the directive here). The main aim of the initiative was to further ensure the free movement of financial services in the single market in Europe. The directive, amongst other things, defines some of the main concepts surrounding the distance marketing as well as stipulates the main rights for consumers with respect to transactions concluded by means of distance communication.
The purpose of this brief post is to give some background concept on the directive and see how it relates to investment funds.
Distance Contract and Means of Distance Communication
The directive aims at homogenising the laws and regulations applicable to the distance marketing of investment funds and financial services to retail investors, whilst at the same time containing details on the information that a consumer should receive with regards to a financial service or product and its provider before entering into a distance contract. In certain situations, and for certain financial products, the directive also grants the consumer with 14 days cooling off period in order to withdraw from a contract.
Against this backdrop, the directive lays out a few useful definitions, like the one of distance contracts and means of distance communication.
- Distance contract
is any contract for financial services entered into between a supplier and a consumer by means of an organised distance sales or service provision scheme, where the supplier utilises one or more means of distance communication.
- Means of distance communication
are any means which may be used for the distance marketing of a service and that does not entail the simultaneous physical presence of both parties – the supplier and the consumer.
Distance Marketing of Investment Funds
The directive as such touches upon investment funds and the sale of their units by means of distance selling techniques merely with regards to the right of withdrawal. More generally, the directive introduces a period of 14 calendar days for the consumer to withdraw from a contract without both incurring into a penalty and having to provide any reason or explanation for such withdrawal. In some cases, like for life insurance as well as personal pension, this period is extended to 30 days. The right of withdrawal shall not apply to any financial service whose price is dependent upon market fluctuations that are outside of the control of the supplier, including the cases of units in collective investment undertaking.
There is also another way to look at the application of the directive to the broader ecosystem of fund distribution. The evolution of digitalisation modified consumer behaviour with more services and products consumed and purchased over the internet, investment funds included. Whilst the directive as such governs the distance sale and purchase as such, of course product manufacturers and providers, who make available these products online, are not exempted from compliance with any additional requirement and formality related to the sale and distribution of the products in the various European domiciles where the consumers are resident. Accordingly, to stick with the example of an investment fund, product manufacturers and providers shall make sure that those funds are registered for distribution and sale in the domiciles where consumers are resident, even though the sale might take place over the internet, for instance, rather than physically in the relevant EU domicile.
What is the review about?
The European Commission kicked-off a public evaluation of the directive (please find more about it here). The purpose of the evaluation is to ascertain whether the directive is still relevant, effective and efficient and whether it is in line with EU legislation. The directive is dated 2002 and in over fifteen years now there have been a few developments in the commercial practices employed by online providers. At the same time, the framework for retail financial services has undergone significant evolution both in terms of expansion of product-specific legislation as well as specific consumer protection elements. The evaluation will analyse the directive against the main principle of effectiveness, efficiency as well as EU value added. A similar exercise was carried out recently with regards to the AIFM directive (find out more about it here).