Insights

Background

The Distance Marketing Directive (transposed into Maltese law through the Distance Selling (Retail Financial Services) Regulations, 2005 (S.L. 330.07)) has been with us since 2002 with the aim of protecting retail consumers when entering into a ‘financial services contract’ sold ‘at a distance’. This Directive requires consumers to inter alia be given the right to withdraw from certain distance contracts. It complements the Consumer Rights Directive (Directive 2011/83/EU) which concerns the protection of consumers in respect of distance non-financial services contracts.

A ‘distance contract’ is defined in Article 2(a) as “any contract concerning financial services concluded between a supplier and a consumer under an organised distance sales or service-provision scheme run by the supplier, who, for the purpose of that contract, makes exclusive use of one or more means of distance communication up to and including the time at which the contract is concluded.”

A ‘financial service’ is defined in Article 2(b) as “any service of a banking, credit, insurance, personal pension, investment or payment nature.”

Article 1(2) of the Directive states that where a contract for financial services comprises an initial service agreement followed by successive operations or a series of separate operations of the same nature performed over time, the Directive’s provisions only apply to the initial agreement.

Facts of the Case

The case concerned follow-up agreements made at a distance between a bank and an individual on interest rates that applied to three loans already in place taken to finance the purchase of immovable property. The interest to service the loan was payable at a fixed rate for an initial term. Post-initial term, either party could request negotiations to adjust the interest rate. Failing agreement, ‘variable terms’ as specified by Sparkasse Südholstein (the “Bank”) would apply from a specified date. Post-initial term, various amendments were made to the interest rates due by the consumer, with the final amendment made through an interest rate amendment agreement concluded by means of distance communication.

The consumer was not informed of any right of withdrawal and he withdrew the three subsequent interest rate agreements on the basis that those agreements involved distance selling and that the Bank was running an organised distance sales scheme. He brought proceedings before the Regional Court in Germany (the “Referring Court”) and sought inter alia the repayment of interest and redemption payments made since the conclusion of the amendment agreements from which he had withdrawn. The Bank claimed that the consumer had no right of withdrawal and requested the Referring Court to dismiss the action.

Preliminary Ruling Request

The Referring Court observed that the existence of a right of withdrawal under the Directive turns on two main interpretation issues. Firstly, whether the follow-up interest agreements are ‘contracts concerning financial services’ within the meaning of the Directive. Secondly, whether the bank’s practice of concluding the original loan agreements only at its commercial premises with ongoing business dealings, such as amendment agreements, being concluded by making exclusive use of means of distance communication constitute ‘organised distance sales or service-provision scheme run by the supplier.’ The Referring Court requested a preliminary ruling from the CJEU on these two main issues which are intrinsically linked to the scope of application of the Directive.

The Opinion of the Advocate General of the CJEU

AG Sharpston (the “AG”) answers the two questions referred to the CJEU by focusing on three main elements of the Directive: (i) the definition of ‘financial services’; (ii) the distinction between a ‘contract’ and an ‘operation’; and (iii) the definition of an ‘organised distance sales or service-provision scheme’.

AG Sharpston looked back at the historical roots of the Directive and noted that the intention of the EU legislature at the time of enactment was that of formulating a definition of ‘financial services’ in a broad manner without referring to existing financial services directives. This approach was taken to ensure that all financial services offered to a consumer are covered. The AG declared that it is very clear from the wording of Article 2(b) that services concerning ‘credit’, such as a loan, are financial services.

When commenting on Article 1(2) of the Directive, AG Sharpston acknowledged that a single contract involving successive operations or separate operations of the same nature performed over time might be subject to different legal treatment in the Member States. It noted that as a maximum harmonisation directive, the Directive had to be given an interpretation that is common to all Member States. However, this did not mean that the consolidation of the single market should carry more weight than consumer protection. A high level of protection for consumers acting on the market had to be guaranteed by the Directive.

The AG distinguished between an ‘initial service agreement’ and an ‘operation’ by referring to examples extracted from the Directive’s recitals. The opening of a bank account, acquisition of a credit card and the conclusion of a portfolio management contract all constitute ‘initial service agreements’ whereas the deposit or withdrawal of funds to or from the bank account, payment by credit card and transactions made within the framework of a portfolio management contract are considered to be ‘operations.’ However, adding new elements to an initial service agreement, such as a possibility to use an electronic payment instrument together with one’s existing bank account, does not constitute an ‘operation’ but an additional contract to which the Directive applies. She continues by saying that an operation is an act executing an existing agreement without adding elements for which a new meeting of minds would be required. In the context of a loan contract, payments reducing the total amount owed would constitute an ‘operation.’

Applying the above to the preliminary ruling request at hand, the AG decided that an interest rate which was renegotiated between the parties on the basis of a new proposal by the bank constituted a new agreement which required a new meeting of the minds and was not a mere ‘operation’ covered by the previous agreement. The fact that the other elements of the loan, such as the loan amount and the duration remained unchanged did not mean that the interest rate amendment agreement was a mere operation to which the Directive did not apply.

Finally, the AG argued that for a scheme to be an ‘organised distance sales or service-provision scheme’ it must fulfil certain criteria. Firstly, it must be organised, meaning that the supplier must have the commercial structure, including staffing and resources to conclude contracts without the parties’ physical presence. Secondly, the conclusion of the distance contract must be proposed by the supplier. Thirdly, its use must be exclusive for the purpose of the contract in question and must cover all the stages of the contract as envisaged by the Directive (the offer, the negotiation and the conclusion of the contract). Fourthly, it must not be strictly occasional. It must be a normal possibility or option when concluding contracts and should not occur exceptionally, rarely or irregularly. This does not mean that the conclusion of distance contracts must be ‘frequent’ or ‘systematic’ as these terms do not feature in the Directive.

The AG decided that the Bank was equipped in terms of both staffing and resources to conclude supplementary agreements with existing customers by distance selling on a regular basis and that it satisfied the other elements mentioned above. This meant that the Bank ran an organised service-provision scheme for the purpose of concluding subsequent interest-rate agreements.

Commentary

This opinion is particularly important because it is one of the very few opinions expressed by the CJEU on the scope of application of the Distance Marketing Directive. Even though this Directive has been with us since 2002, it has been very limitedly studied and assessed by the CJEU. It is also of interest as certain terms (such as ‘an organised distance sales or service-provision scheme’) are also used in the Consumer Rights Directive. A refit of the Distance Marketing Directive may be in the pipeline as it was listed in the European Commission 2020 work programme. Hence, it may well be the case that we see the opinion of AG Sharpston seeping in the likely revised wording of this Directive.

This article was published on the Malta Independent on 8th April 2020.

Dr Ria Micallef is an Associate at GANADO Advocates.