Call to update digital disclosure rules in financial services

Out-Law News | 29 Oct 2019 | 9:41 am | 3 min. read

Rules on disclosure that apply to financial services companies selling online should be updated for the digital age, the European Banking Authority (EBA) has said.

In a new opinion it has published, the EBA set out a range of proposals which it said could be incorporated into a revised EU Directive on Distance Marketing of Consumer Financial Services (DMFSD).

The DMFSD came into force in 2002, and the EBA said a revision of rules should take place to reflect the fact that financial services are "being increasingly sold through digital means", such as via the internet or mobile devices.

"The current DMFSD sets out important disclosure requirements, which have succeeded in bringing about a high-level of protection for consumers considering to buy financial services at a distance," the EBA said. "However, consumer detriment has arisen from their ever increasing use of digital marketing channels, such as the internet and mobile devices. As a result, the requirements in the DMFSD should be revised to focus much more on the presentational aspects of disclosure for those channels. This should include rules regarding the form, prominence and timing of disclosure, which should be adapted to the specific product or service, the digital channel(s), and the consumer’s device."

"The disclosure requirements in the DMFSD should be reviewed for potential overlaps and/or inconsistencies with disclosure requirements in other, product–specific Directives and Regulations applicable in the EU, such as those governing payment services, payment accounts, or mortgage credit," it said.

Andrew Barber of Pinsent Masons, the law firm behind Out-Law, said the EBA's proposals, if adopted, would see a focus on ensuring customers understood the disclosures that were made rather than simply following prescriptive formatting and information requirements. "Allowing firms to use a more intuitive and tailored approach for personal devices like phones and tablets could lead to a more effective way of delivering product and service information," he said.

In relation to the presentation and formatting of information provided in the context of digital sales, the EBA said the details consumers are provided with "should be concise, focused to serve its intended purpose, and presented in a clear and understandable format".

The regulator said firms should be obliged to use "short and direct sentences, key words, boldface, bullet points, comparative tables or other such features so as to highlight relevant information and improve clarity", and either strip out legalese and technical jargon or provide a glossary for reference to explain what terms mean.

To help "draw attention to relevant information and display disclosures prominently", the EBA outlined issues concerning font size that firms could act on too.

"Information should be presented in plain and intelligible language and in a readable font size, which should easily adapt to work on any kind of device," the EBA said. "Ideally, providers should also enable the option for consumers to increase the default font size. In addition, most relevant information for consumers should not be displayed in a smaller font size than the rest of the disclosure, in particular charges and withdrawal conditions, if applicable."

The regulator also gave its support to the use of features such as "boxes, pop-ups, [and] simulations" to help firms, at the pre-contract stage, to draw consumer’s attention and increase their understanding of product risks.

New language requirements could also be introduced under the EBA's plans.

"Providers should be required to use at least the official language(s) of the country where they are marketing the service, unless the consumer agrees to use another language," it said.

The EBA further suggested that the definition of 'durable medium', which dictates the form in which how pre-contract information should take current under the DMFSD, should be amended so that it is possible for the information to be provided via digital channels and to recognise the potential for that information to be downloaded as a stand-alone document by consumers.

The EBA said that it could take "several years" for legislative reforms to materialise, so it urged national regulators in the process of updating disclosure requirements to consider incorporating its proposals now.

The proposals were set out after the EBA "assessed the extent to which the disclosure requirements in EU law are suitable to achieve a maximum level of consumer protection and facilitate the operation of the single market in the EU in an era that has seen such services being increasingly sold through digital means". That assessment included "a more detailed analysis into disclosure rules", it said.