Consumer and investor protection
In this chapter, you will learn about:
- • the different legislative regimes to protect consumers and investors;
- • the main duties of banks in the context of credit agreements with consumers;
- • different categorisations of clients; and
- • the main duties of investment firms vis-a-vis their clients.
The principle of party autonomy entails that individuals must be free to choose with whom to contract and under which conditions. In line with this liberal principle, the law has generally refrained from intervening in relationship between contracting parties. However, the presumption on which this approach lies, namely that parties in principle can be regarded to have equal bargaining power, has proven to be unrealistic: consumers neither poses the economic power, nor the necessary knowledge to negotiate with businesses on an equal footing. The overarching reason to regulate contractual freedom between businesses and consumers therefore is the inequality in bargaining power which may lead to the exploitation of the vulnerabilities of individuals. In financial relationships, the vulnerability of consumers is even more pressing. This has to do with the greater information inequality between consumers and the suppliers of financial instruments. Financial instruments are often characterised by a high level of complexity, whilst consumers tend to be financially illiterate. For example, there is evidence that only a third of the US population understands credit card agreement terms on how compound charges are calculated.
In this light, the EU legislator has promulgated several general and specific protection regimes. Some of these regimes aim to protect consumers generally, i.e. these regimes are not limited to certain financial instruments or financial institutions. Other regimes aim to protect investors generally, i.e. these regimes are not limited to consumers. Section 5.2 will discuss the Unfair Terms Directive, which applies to all types of contract between a seller or supplier and a consumer. Therefore, also financial contracts are subject to it, in as far as these contracts involve the sale or supply of goods and services. Section 5.3 will examine EU legislation on distance financial services, which is becoming more relevant as more contracts are concluded electronically. Section 5.4 concerns EU legislation on consumer credit and mortgage credit agreements, which also represent EU consumer protection law regarding specific types of financial services. In section 5.5, attention is drawn to the Markets in Financial Instruments Directive (MiFID), which has also been discussed in previous chapters where it regards its rules on secondary markets. Here, the focus is on MiFID’s extensive investor protection regime. Whereas sections 5.2 to 5.4 regard the protection of consumers, section 5.5 and MiFID concerns the protection of investors. These categories may overlap, but not necessarily so. Moreover, in contrast to the MiFID investor protection regime, EU consumer protection law is a specialist body of law built on a wealth of CJEU case law, which the following sections can only superficially touch upon.
Unfair Terms Directive
A general set of EU rules on consumer protection can be found in the Unfair Terms Directive. The aim of this Directive is to harmonise “the laws, regulations and administrative provisions of the Member States relating to unfair terms in contracts concluded between a seller or supplier and a consumer”.  As a matter of principle, the Unfair Terms Directive applies to all types of contract, including financial contracts, i.e. agreements concluded between consumers and financial institutions such as banks, investment firms and insurance companies. The Directive is limited in its personal scope, defining a consumer as a “natural person who [. . .] is acting for purposes that are outside his trade, business or profession”? The legal consequence of an unfair term is that the term does not bind the consumer, although the contract shall continue to exist minus the unfair term.
-  See J Armour, D Awrey, P Davies, L Enriques, J Gordon, C Mayer and J Payne, Principles of Financial Regulation (Oxford University Press, Oxford 2016) 207.
-  In full: Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts PB L 95.
-  The exception are consumer credit contracts, subject to the Consumer Credit Directive (Directive 2008/48/EC). M Furmston and J Chuah, Commercial Law (2nd edn Pearson, Harlow 2013), and see section 4.6.
-  Art. 1(1) Unfair Terms Directive. A brief description of the Directive under discussion can be found in W Hemetsberger, H Schoppmann, D Schwander and C Wengler, European Banking and Financial Services Law (Kluwer Law International, in association with European Association of Public Banks, Alphen aan den Rijn 2006) 151; see also A Gkoutzinis, Internet Banking and the Law in Europe (Cambridge University Press, Cambridge 2006) 191, 193.
-  Art. 2(b) Unfair Terms Directive. See R Cranston (ed), European Banking Law: The Banker-Customer Relationship (LLP, London and Hong Kong 1999).
-  Art. 6 Unfair Terms Directive.