Select Committee on European Union Minutes of Evidence

Barclays PLC



  In theory, a single market for financial services exists based on the concepts of common prudential regulations, home country control by the supervising authorities in the country where the institution is based, mutual recognition of one another's competencies by the supervisors in the various Member States and a single licence enabling financial institutions licensed in one Member State to offer their products via branches or on a cross-border service basis throughout the EU.

  In practice the providers of retail financial services need to abide by 15 different sets of national rules which determine how they may market or sell their products and the design of the products themselves.

  Separate national rules are permitted by the "Passporting" Directives on grounds of the "general good" which is interpreted to include consumer protection. Moreover, proposed Directives which will form an important part of the regulatory framework in which retail financial services are offered and bought, especially those on distance selling and e-commerce, address the issue of consumer protection:

    —  in the case of the proposed Directive on the Distance Selling of Financial Services the issue arises in the choice as to whether consumer protection rules should be predominantly national with minimum harmonisation or whether they should be based on maximum harmonisation;

    —  in the case of the proposed Directive on e-Commerce, the current text adopts the single market concept of home-country regulations, ie those of the country where the supply is based but allows a derogation for the national rules of the customer's country to operate if the State so requires on grounds of consumer protection.

  There appears to be a conflict or trade-off between:

    —  the single market principle of home-country rules (or alternatively maximum harmonisation) so that the service supplier can operate throughout the EU on the basis of a common set of rules rather than face the cost of compliance with 15 different sets of rules.

    —  and, on the other hand, the view which stresses that the consumer should be able to make purchases on the basis of the rules of his/her own country rather than having to understand his/her rights under 15 sets of rules.

  In short, the issue is:

    —  how can a single market for financial services operate in a framework where consumers have the confidence to buy from service providers based in another Member State?

  Complicating factors are the Brussels and Rome Conventions which lay down the rules for deciding which jurisdiction and which laws apply to a consumer contract. The two Conventions are currently being reviewed with the aim of strengthening consumer protection (see Annex 1).

  Given that an efficient and effective single market requires that service providers should operate across the EU on the basis of a common set of rules and given also that consumers need confidence that any grievances will be effectively addressed and redress secured through procedures or mechanism with which they are familiar, in their own language, cheaply and based in their own country, the solution is to develop a structure within which a consumer with a grievance against a foreign bank can approach his/her domestic consumer protection agency/ombudsman which can then take up the matter with its opposite number in the country where the foreign bank is based.


  Consumers will be reluctant to make purchases of products for services offered by a financial institution unless they have confidence in that institution and confidence that any grievances or complaints will be addressed and redress made available if the grievance is upheld by a process which they can understand. Such confidence is needed all the more if the contact with the financial institution is not face-to-face (being eg via telephone/post/internet) and still more essential if the financial institution is foreign. The basis for building such confidence includes information about:

    —  who the provider is;

    —  what the product/service offered really is;

    —  whether the service supplier is supervised, on what basis, by which competent authority;

    —  how to go about obtaining redress.

  It is the last which is the focus of this note.


Court Based Redress

  The option of court based redress has been discussed before (eg COM(96)0013) and the main defects of litigation as far as consumers are concerned can be characterised as cost (lawyers, court fees, expert opinion), risk of having to pay the other side's costs if unsuccessful, delays (processes can be inefficient and involve backlogs of cases), and litigation can be intimidating. Moreover costs notwhithstanding going to court may be ineffective: courts in the country where the customer resides may be unable to enforce judgement against banks beyond their borders whereas going to court in the country where the bank is based is not only extremely expensive but could meet the response that the matter is beyond the court's jurisdiction, the practice complained of having arisen if indeed it occurred at all, in another country.

For all these reasons a cross-border out of court structure is needed.

An Alternative Dispute Resolution (ADR) Process

  In a number of countries dispute resolution processes exist which do not involve the courts, although the private customer retains the legal right to go to court if he/she is dissatisfied. The European Commission published a Recommendation setting out "principles applicable to the bodies responsible for out-of-court settlement of consumer disputes" (COM(1998)198).[6]

  The aim should be to devise a structure on the basis of which such principles could be applied to cross-border disputes between consumers and financial institutions.

  In some countries where out-of-court processes exist they may be voluntary organisations supported by the banking community whereas in other countries they are public agencies but even in the former case they may be subject to oversight by the banking regulator. Membership may be compulsory, so decisions can be enforced, whereas others may be voluntary. Not all may accept a duty of care to non-residents and deal only with domestic complaints.

  They may resolve disputes on the basis of voluntary banking codes of conduct or on the basis of civil law but any cross-border alternative dispute resolution mechanism will need to be based on the principal of mutual recognition, at least initially, ie the agencies in the different countries involved may be either voluntary or public and the disputes may be resolved on the basis of codes or regulations provided that the basis on which the financial product/service was offered and according to which any dispute should be resolved is made clear in the initial marketing material and subsequent contract documentation, including that published on websites.

Practical Implementation

  A number of issues need to be resolved before an ADR structure can be implemented:

    A.  a single body to act across the EU, or individual bodies in each Member State acting as a network?

    B.  compulsory membership/participation of all relevant sellers, or agreement to participate at seller's option?

    C.  which legal framework should apply, the seller's or the consumer's?

    D.  what are the obligations of any scheme operator?

    E.  funding?

    F.  enforcement of awards?

  These are considered below.


Single body

—  consistent approach across EU
—  scale of efficiencies possible
—  international body more able to work across borders eg language skills

—  not seen as defending national interests—a "real neutral"
—  remote from consumers
—  may not have local leverage on companies—difficulties of enforcement

—  centralisation is a "political issue"
—  funding issues could be harder to resolve
—  would have to be built from scratch

  The centralised model appears to have a number of serious disadvantages. An alternative is to create a network of the individual consumer protection agencies/ombudsmen/out-of-court settlement organisations across the Member States. The structure would embody the following features:

    —  a consumer purchasing a product from a financial institution with a presence in his/her own country (whether parent organisation, subsidiary or branch) would approach the domestic ADR in the event of a dispute; if the institution is the branch of a foreign-owned/based institution, the branch nonetheless is subject to the competence and authority of the ADR in the country in which it is located.

    —  in the case of products purchased via the website of a foreign financial institution without a physical presence (branch) in the country where the consumer resides, the ADR in the consumers country of residence approaches the ADR of a country where the financial institution is based.

    —  the ADR in the country where the financial institution is based (ie a branch in the same country of the consumer, or the head office/subsidiary/branch supplying services to an aggrieved consumer resident in another country) accepts a duty of care to the complaining consumer.

  An important practical matter to be resolved concerns the language in which the complaint of a consumer in one country is conveyed to a bank in another country and who (the consumer? his/her national ADR?) is responsible for organising and paying for any required translation.

Individual body in each Member State within EU Network

local to consumers
already in existence in many/most Member States
may have significant leverage over local firms—ease of enforcement
very familiar with local legal and cultural background
ADRs could be seen as nationally biased
may lead to distortion of competition through uneven application across Member States
Do not exist in every Member State
the memberships and/or scope of schemes may be different across Member States


  The advantage of a compulsory scheme across Member States is that all consumers would know that the non-judicial means of redress would be available to them thereby contributing to an increase in consumer confidence.

  A compulsory scheme, along the lines of those operated in the UK, would necessarily remove from suppliers the rights to have the matter resolved in court at the option of consumers if the decisions of the ADR are binding on the suppliers but not the consumers.

  Conversely, an advantage of an optional scheme is that it allows reputable firms to demonstrate their trustworthiness by participating in the scheme.


  There are complex arrangements (see Annex 1) set out in the Rome and Brussels Conventions covering applicable law and relevant jurisdiction. The problems would not arise if there were maximum harmonisation of all consumer protection/conduct of business rules throughout the EU but that is not feasible in the foreseeable future and may well be undesirable in any event. Some legislative proposals are for minimum harmonisation (eg the Consumer Affairs Council position on distance marketing), some are for maximum harmonisation (the European Parliament First Reading Position on distance marketing), some stress the home country rules of the service supplier (basis of the prudential regulations in the Passporting Directives and the proposed E-Commerce Directive—apart from a possible derogation on grounds of consumer protection). Also proposed amendments to the Rome and Brussels Conventions create uncertainty because, if adopted and implemented into Community law, they would always allow the consumer the right for the dispute to be settled according to the law of his own choice irrespective of what might have been stated in the documentation and marketing of the service provider.

  However, the issue here is not about the choice of the legal base but the creation of an out-of-court redress procedure in cross-border disputes and for that purpose the basis should be whatever was agreed by the consumer and the financial institution when the contract is completed, eg the code of conduct to which the institution claims it subscribes or the consumer protection/conduct of business rules of the country where the consumer resides or the consumer protection and conduct of business rules in the country of the service supplier and the relevant national ADRs would operate according to whatever the basis of the product offering and contract.


  The broad principles of any scheme have been set out above (see Footnote 1) but may need to be extended where cross-border disputes are being handled.

  The additional principles which may need to be added for such cases include:

    —  whether or not the ADR are merely conduits between consumers and financial institutions in different countries:

    —  or whether the ADR in the consumer's county of residence advises him on his prospects and how to present his case;

    —  or whether the two ADRs jointly arbitrate on the dispute.

  Whichever of the above is chosen—and the last is the one most likely to provide an efficient and effective out-of-court dispute resolution mechanism for consumers—they need to be able to conduct business in the consumer's own language as well as that of the financial institution, each needs to be familiar with consumers rights in their respective countries and—fundamentally—

    —  the ADR where the financial institution is based needs to accept a duty of care to customers of institutions which subscribe to its scheme or are compulsory members of it, wherever they reside in the EU.

    —  and the ADR in the country where the consumer resides accepts a duty of care towards that consumer by being set up to help him/her through intermediating on the consumers behalf with the ADR of the country of the financial institution if it is located in another country (see A above).


  In line with the Commission's Recommendation (COM (1998) 198) an essential ingredient of any scheme is that it is cheap or free.

  There will always be two elements to cost, those of the parties and those of the system. There are a number of ways system costs could be covered:

    —  small "flat" fee to consumers

    —  levy on all/participating service providers based on:

      —  cases brought

      —  flat rate

      —  size of business

      —  EU funding

or a combination of these.

  In terms of the costs of the parties, then the inference must be that parties pay their own costs with, possibly, costs against the supplier where the consumer's claim is upheld.


  What a consumer really wants is to know that if their complaint is upheld then they will get ther money back. The levers available to consumers to force companies to compensate them can be classified as:

    (i)  Moral/Bad PR.

    (ii)  Regulatory pressure.

    (iii)  Legal.

1.  Moral/Bad PR

  A corporate will be mindful of the negative effects on its business of being portrayed as treating customers badly. However, this is not always sufficient to persuade corporates to provide compensation. This will exist just as well in cross-border cases as domestic ones.

2.  Regulatory Pressure

  Where a corporate was seen to have had numerous complaints upheld against it by an ombudsman this might indicate to the Regulators that something in the corporate's management was not functioning correctly. All the more so if awards were not being honoured. The regulatory authority does have at the very least the ability to make a corporate think twice before reneging on awards.

3.  Legal

  The ultimate method of securing redress is through the courts against assets of the corporate.

  The main point about ombudsmen schemes is that the consumer is being provided with a method of seeking redress which is outside the court system.


  This debate is driven by a desire to improve customer confidence in cross-border retail financial services. To the extent that trade is being conducted by parties within a single Member State then the means of settling disputes remains very much an internal affair.

  Real difficulties occur where the two parties come from different countries. Looking at the possibilities from a consumer's point of view they would almost certainly wish to deal in their own language and on the basis of legal and cultural norms they are familiar with, probably they would also prefer to deal with someone geographically proximate to them.

  If this interpretation is correct it points to the need for consumers to have access to a cross border out-of-court dispute resolution and redress system via an agency—such as an ombudsman in their own country. The national scheme would provide the gateway into a cross-border network of national agencies, whether voluntary or public authorities, which would arbitrate the disputes and make binding awards.

  The only practical way in which this could be made to work is if schemes in different countries agree to act on each others behalf in at least the enforcement element of any findings but also, possibly, the arbitration process.


  In order to take resolution of this issue forward we believe the following steps should be considered by the European Commission:

    —  fact based understanding of what the real practical differences are between Member States' laws;

    —  fact based understanding of what ADR schemes exist in each Member State and on what basis they operate eg accept cross-border complaints or not:

      products/services covered;

      voluntary compulsory;

    —  fact based understanding of the role which Regulators play in relation to complaints against service providers and ADR schemes, especially oversight;

    —  development of similar ADRs in each Member State to cover financial services;

    —  consideration by national regulators to oblige regulated firms to participate in ADR schemes;

    —  analysis of the interaction between the relevant existing and proposed Directives to establish exactly what choices of applicable law and jurisdiction are available in theory;

    —  consideration to ADR schemes applying principles of equity;

    —  consideration of how to establish a mechanism whereby ADR schemes across Member States can work with each other (series of bilateral or multilateral agreement);

    —  continuing dialogue between regulators, the commission, consumer groups and industry.

6   Independence of the body to ensure impartiality, transparency of procedures and rules, all parties to be able to make their case, efficient/cheap, speedy processes without the need for legal representation, the consumer to retain the right to go to court, decisions to be binding on both parties if they were given prior notice of this and agreed, the right to be represented; the Recommendation did not specifically comment on the issue of cross-border dispute settlement. Back

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