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The Actuary The magazine of the Institute & Faculty of Actuaries

The E-Commerce Directive and Regulations

The E-Commerce Directive 2000/31/EC came into force in January 2002. It represents a small, but significant, step towards the important goal of an open financial services market within Europe, in line with the European Communities’ intention of making cross-border provision of financial services within the European Economic Area much easier than it has been in the past.
The European Commission has drafted a financial services action plan, listing numerous measures, which it hopes to enact before the Lisbon European Council meeting in 2005. These measures, of which the E-Commerce Directive is just one, are intended to enable financial services providers to sell financial services throughout Europe without many of the legal hindrances that have made such transactions difficult in the past.

In order to make an integrated financial services market possible, it is necessary to harmonise rules and regulations across the various EU member states.
Previous EU directives within the area of financial services have enhanced cross-border financial services provision, going a certain way to reduce regulatory and legal burdens. For example, the Third Life Directive makes it possible for insurance companies to sell their products from one EU member state in another EU member state on the basis of home regulation. However, while this has been a welcome move and has facilitated cross-border activity, the EU and the financial services industry still regard this as only a stepping stone to obtaining the desired integrated financial services market within Europe.
The use of electronic communications as a method of distribution has significant economic advantages for financial services providers as it can open up the possibility of accessing new markets efficiently. The E-Commerce Directive has been ratified to provide the regulatory and legal framework to allow business to be conducted electronically across borders on the basis that home law will be applicable. Financial services product providers will no doubt be interested in using Internet technology to access the financial services market within the EU.
The following provides a brief overview of the way the directive has been implemented into UK law in the form of the E-Commerce Regulations.

UK E-Commerce Regulations
The E-Commerce Directive was implemented by the UK on 21 August 2002 in the form of the E-Commerce Regulations. At the time of writing, only three other countries Austria, Germany, and Luxembourg have implemented e-commerce legislation in line with the directive.

Information society service
The E-Commerce Regulations cover the provision of ‘information society services’ (ISS). An ISS is defined as any service which is normally provided for remuneration at a distance by electronic means, and at the individual request of the recipient of the service. The following are excluded from this definition:
– any information provided electronically without remuneration;
– information provided in hard copy form;
– any services which are provided at a distance but not undertaken by electronic means.
The EU is proposing a distance marketing directive, due to be implemented in 2003, which will cover the issue of distance selling which is not undertaken electronically as a part of the overall financial services action plan.

The E-Commerce Directive does not specify the extent to which it will apply to existing regulatory regimes. It merely defines a term known as the ‘co-ordinated field’ to generally cover member states’ legal systems that will be subject to the directive. The UK regulations have incorporated this term and define it broadly as those requirements for the taking up and pursuit of the ISS activity. The Treasury published two consultation papers on this issue within its review of the E-Commerce Directive. It has stated that financial services permissions, prudential supervision, conduct of business rules, financial promotion, and single market provisions relating to financial services fall within the ambit of the directive. This pretty much covers all of the regulatory rules and regulations governing financial services in the UK, which means that the E-Commerce Directive’s country-of-origin approach will apply to virtually all financial services business provided electronically.

Disclosure requirements
In order to protect consumers the E-Commerce Regulations demand that specific information about the service provider is disclosed to the recipient of the information when conducting business electronically. The specific information includes items such as the name of the service provider and their contact details, including email addresses.
A service provider is also obliged to ensure that any commercial communication provided is clearly identifiable as a commercial communication and identifies the person on whose behalf it is made.
Any promotional offers, and the conditions which must be met to qualify for the offers, must be identified and presented clearly and unambiguously. In the same way, any unsolicited commercial communications sent by email must be clearly identifiable as such as soon as they are received.
Specific information must be disclosed by the service provider to the contract party, if a contract is to be concluded via electronic means.
Where service providers’ terms and conditions are applicable, they must be made available to the contract party in a way that will allow the contract party to store and reproduce them.
If an order is placed with the service provider, the order must be acknowledged without undue delay and by electronic means.
There are circumstances where the above requirements do not apply. Some of the requirements can also be omitted on a business-to-business basis if the participants agree.

Any service provider that does not provide the relevant information could be liable for damages and regulatory action. A consumer has the ability under the regulations to seek a court order to ensure that the service provider complies with the requirements. A consumer also has the opportunity to rescind the contract if the service provider has not enabled the consumer to identify and correct input errors in accordance with the regulations.

Other changes
On the back of the E-Commerce Regulations three new statutory instruments have been implemented to make the necessary changes to the Financial Services and Markets Act 2000.
Another interesting point is that the directive allows member states to preserve host state regulations in certain circumstances. These include rules concerning consumer contracts and parts of certain insurance directives. There is a consensus that market abuse and market manipulation issues will be subject to the rules of the country that has closest connection with the abused or manipulated market.

Future impact
It is at present too early to say whether the implementation of the E-Commerce Directive and the E-Commerce Regulations will have a significant effect on financial services activity within the EU. There are still substantial issues that need to be considered in order to open up the financial services market.
For example, one issue that the E-Commerce Regulations do not address is that in practice most financial services providers may wish to follow up any communications undertaken electronically by conventional means, for example by sending an application form and other contractual documentation in hard copy format to the consumer. The regulations do not apply to this process and this would mean that the laws of the consumers’ rather than the suppliers’ member state will apply. Clearly this would not be helpful and is still a major hindrance for any practical implementation of cross-border activity.
The EU is preparing further legislation to take care of these and many other anomalies. It is likely that the full financial services action plan will need to be implemented before a significant platform has been established for financial services providers to undertake business in a truly open and effective manner.