The Consumer Rights Directive and insurance

Out-Law Guide | 17 Nov 2008 | 12:38 pm | 8 min. read

This guide is based on UK law. It was last updated on 17th November 2008. The European Commission has published proposals that would give consumers across the EU uniform protection whether they buy...

This guide is based on UK law. It was last updated on 17th November 2008.

The European Commission has published proposals that would give consumers across the EU uniform protection whether they buy goods and services in person or online.

The Consumer Rights Directive, a cornerstone of the European Commission's consumer strategy, would replace four existing Directives that deal with doorstep sales, unfair terms in consumer contracts, distance contracts and the sale of goods and associated guarantees.

Launching the draft Directive on 8th October, European Consumer Commissioner Meglena Kuneva described it as "the most far-reaching overhaul of consumer rights in 30 years".

But for insurers and providers of other financial services, the draft Directive has a more limited application.

"The existing Community legislation on consumer financial services contains numerous rules on consumer protection," the preamble states. "For this reason the provisions of this Directive cover contracts relating to financial services only insofar as this is necessary to fill the regulatory gaps".

Consequently, neither the proposals for improving consumer's rights when buying online, nor the protections introduced for contracts made or negotiated away from business premises apply to insurance.

Insurers would, however, be subject to the draft Directive's restatement of the rules on unfair contract terms, including the proposed new ban on default pre-ticked boxes and the black and grey lists of unfair terms.

Distance contracts

One of the main aims of the proposed Directive is to encourage cross-border commerce by tightening up the law on selling goods and services via the internet and other forms of distance communication. 

The draft distance contract rules include provisions about the information to be provided to the consumer and introduce a new 14-day cooling-off period during which the consumer can withdraw from the contract. General rules on the sale of goods (whether sold by distance contract or otherwise) also deal with delivery, damage in transit, conformity with the contract and guarantees.

The provisions, however, do not apply to insurance and other financial services. These would remain subject to the Distance Marketing of Consumer Financial Services Directive, implemented in the UK by the relevant conduct of business rules in the Financial Services Authority's Handbook and (for firms not subject to FSA regulation) by the Financial Services (Distance Marketing) Regulations 2004.

Off-premises contracts

The draft Directive combats pressure-selling by updating existing rules on doorstep sales, which it widens to cover contracts concluded anywhere where both parties are face-to-face and the contract is negotiated or concluded away from business premises.

As with distance contracts, the draft Directive introduces formal information requirements and a standard withdrawal period.

The off-premises proposals, however, do not apply to insurance at all and only to certain other financial products. Credit agreements that fall within the Consumer Credit Directive are outside their scope. Sales of insurance would continue to be governed by the relevant conduct of business rules in the FSA's Handbook.

Unfair contract terms

For insurers, the main area of interest lies in the section on consumer contract terms. These apply to standard terms, i.e. terms drafted in advance by the trader or a third party to which the consumer agrees without being able to influence their content. The fact that the consumer may have been able to influence all or part of a term would not prevent the Directive applying to other parts of the contract. 

For the most part, however, the proposed new rules are a restatement of existing requirements in the Unfair Terms in Consumer Contracts Directive, implemented in the UK by the Unfair Terms in Consumer Contracts Regulations 1999.

Standard terms must still be "expressed in plain, intelligible language", although there is now a requirement that they be legible (rather than just "written"). As under the Regulations, a term will be judged unfair if "contrary to the requirements of good faith, it causes a significant imbalance in the parties' rights and obligations arising under the contract to the detriment of the consumer". Unfair terms are not binding on the consumer.

There are, however, some proposed additions and some rearrangements that reflect the European Commission's desire to bring consumer protection up-to-date to take into account modern forms of communication. 

The test for unfairness, for instance must (as now) consider all the circumstances, but these now expressly include "the manner in which the contract was drafted and communicated to the consumer by the trader".

There is also a requirement that standard terms must be made available to the consumer "in a manner which gives him a real opportunity of becoming acquainted with them before the conclusion of the contract". This is not new, but it has been promoted from the schedule to the Regulations to the body of the draft Directive. And, in providing the terms, the trader must pay "due regard to the means of communication used".

It would not be practical for a trader to set out all its terms and conditions in a text message, for example, but it could make them available on a website and direct the consumer to that site before concluding the contract by text.

A new departure is the proposed prohibition on sales by default. A trader must obtain the express consent of the consumer to any payment in addition to the main contract price; otherwise the consumer is entitled to that money back.

The Commission here is targeting pre-ticked "optional" boxes for buying extras, such as travel insurance, priority boarding or baggage. Under the new rules the consumer would have to make an active choice (e.g. by ticking an empty box) to purchase the additional item. 

There is also a new requirement that member states should "refrain from imposing any presentational requirements as to the way contract terms are expressed or made available to the consumer".

The preamble to the draft Directive states: "Traders should be free to choose the font type or size in which the contract terms are drafted". The motive here is full harmonisation – preventing member states coming up with their own, slightly different requirements. If the term is illegible, then the trader would be in breach of the requirement for clearness and legibility in any event.

Grey and black lists

Annexed to the unfair contract terms section is a list of terms that are considered unfair in all circumstance (the black list) and a list of terms that are considered unfair unless the trader proves otherwise (the grey list).

Almost all of these appear in similar form in the schedule to the current Regulations. One difference is that the terms in the existing schedule are merely indicative of terms that "may be regarded as unfair", whereas terms on the black list will automatically be unfair.

Another is that the grey list expressly places the burden of proving whether or not a term is unfair on the trader. The current Regulations and Directive are silent on the point, leaving some doubt as to whether the burden of proof follows member states' national law or whether fairness will be neutrally assessed by the court.

Promoted from the existing schedule to the new black list are terms excluding or limiting liability for death or personal injury, or which limit the trader's obligation for commitments undertaken by his agent, or make the trader's commitments subject to some condition wholly within his own control.

Similarly upgraded are terms that limit the consumer's right to take legal action (e.g. a compulsory arbitration clause), restrict the evidence available or reverse the burden of proof on to the consumer. Terms that give the trader the right to decide whether goods or services comply with the contract or to interpret any term of the contract are also banned.

All the terms on the proposed grey list currently appear in some form in the schedule to the current Regulations. The only completely new item is a term enabling the trader unilaterally to amend contract terms that have already been communicated to the consumer in a durable medium by amending online contract terms that have not been agreed.

Like the schedule, the grey list includes terms that allow unequal right of termination, or termination by the trader without reasonable notice except where the consumer has committed a serious breach of contract. Also on the list are terms enabling the trader to increase the price without giving the consumer the right to terminate, or which enable the trader unilaterally to alter the terms of the contract.

As under the current schedule, however, this list is modified in the case of contracts for the supply of financial services.

A supplier of financial services may, for instance, include a term allowing it to terminate an open-ended contract unilaterally and without notice, provided it is required to give notice to the consumer immediately.

Terms that reserve the trader's right to alter the terms of a financial services contract without notice may also not be unfair where there is a valid reason and provided the supplier informs the consumer as soon as possible and the consumer has the right to dissolve the contract immediately.

For insurers, therefore, there would not be much change in the sort of standard contract terms that should be avoided, or at least treated with caution. The FSA's current statement of good practice "Fairness of terms in consumer contracts", which includes guidance on the use of variation clauses (such as payment review clauses), remains relevant.

Inertia sales

The Consumer Rights Directive would also close a loophole by providing a contractual remedy for consumers who fall victim to "inertia selling".

This provision, which would apply to unsolicited goods and services (including insurance), confirms that the consumer does not have to pay for such goods or services and that a lack of response from the consumer does not constitute consent or agreement.

The Unfair Practices Directive (which came into force in the UK in May 2008) includes demanding payment for or the return of unsolicited products in its list of banned practices. This provision completes the picture by confirming that the consumer has the right not to pay.

Full harmonisation

One of the potential benefits of the proposed Directive lies in the principle of full harmonisation across the European Economic Area (which comprises all the EU states, Iceland, Liechtenstein and Norway).   

Unlike its predecessors, the Consumer Rights Directive would not give member states the option of introducing stricter controls into their national law - a practice the European Commission believes has resulted in inconsistencies from state to state that are holding back growth in cross-border sales.

And as long as the applicable law of a contract is the law of a member state, consumer's rights under the Directive could not be waived. Determining which law applies to a contract would be governed by the Rome I Convention, which will apply to all contracts in the EEA concluded after 17th December 2009.

Full harmonisation means traders would be able to use a single set of contract terms across all member states. The European Commission believes its proposals could save up to 97% of some traders' compliance costs.

But member states that have introduced additional consumer rights may be reluctant to give them up for the sake of full harmonisation. The UK Government, for instance, has raised concerns that consumers may lose the automatic right to a refund for faulty goods currently available to them in the UK.

Next steps

The Directive is still quite a long way off. Consumer law in the EU is subject to the co-decision procedure, which means that, before they can come into force, the proposals will be reviewed separately by the European Parliament and the Council, who have to agree on a final version of the text.

Once approved, the Directive would come into effect between 18 months and two years after publication in the Official Journal.

In the UK, the Department for Business Enterprise and Regulatory Reform (BERR) has launched a consultation on the proposals. Responses are required by 2nd February 2009.

Contact: Emily Bourne ([email protected] / 020 7418 7099)

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