CROSS-BORDER REDRESS MECHANISMS
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
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:
what the product/service offered
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).
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
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
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
C. which legal framework should apply, the
seller's or the consumer's?
D. what are the obligations of any scheme
F. enforcement of awards?
These are considered below.
A. A 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 interestsa "real neutral"
| remote from consumers|
may not have local leverage on companiesdifficulties 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 firmsease 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
B. COMPULSORY OR
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
Conversely, an advantage of an optional scheme is that it
allows reputable firms to demonstrate their trustworthiness by
participating in the scheme.
C. WHICH LEGAL
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 Directiveapart
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.
D. WHAT ARE
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
or whether the ADR in the consumer's county of
residence advises him on his prospects and how to present
or whether the two ADRs jointly arbitrate on
Whichever of the above is chosenand the last is the
one most likely to provide an efficient and effective out-of-court
dispute resolution mechanism for consumersthey 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 andfundamentally
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
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
size of business
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.
F. ENFORCEMENT OF
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
(ii) Regulatory pressure.
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.
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
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 agencysuch 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:
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
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.
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