House of Lords - EU Consumer Rights Directive: getting it right

EU Consumer Rights Directive: getting it right - European Union Committee Contents

CHAPTER 4: Scope of the Directive

70. In this chapter, we examine the scope of the proposal. Specifically, we consider witnesses' suggestions that this Directive might be usefully extended to cover other EU legislation comprising the consumer acquis and services and digital products. We consider issues relating to mixed contracts containing both goods and service elements, and those relating to business-to-business transactions. Finally, we explore the application of the Directive to financial services.

Contents of the proposal

71. Article 3 of the Directive states that it shall apply "under the conditions and to the extent set out in its provisions, to sales and services contracts concluded between the trader and the consumer."

72. Chapter IV of the proposal applies only to sales contracts and provides that "where the contract is a mixed-purpose contract having as its object both goods and services, this Chapter shall only apply to the goods."[27]

73. The Directive applies to financial services only as regards certain off-premises contracts (see Box 5), unfair contract terms and general provisions.[28]

74. Article 2(4) of the proposal defines goods as "any tangible movable item". Such items sold digitally over the internet would therefore be included but items sold over the internet and downloaded onto a computer would be excluded, such as computer software and music.

General comments

75. Concerns about the scope of the Directive were put to us from many different quarters, with several witnesses counting these amongst their biggest worries in relation to the proposal (QQ 44, 49, 285). We heard that the scope was "very confused", "wide and unclear", and one of the main obstacles in relation to the Directive. The Minister recognised that there were issues in terms of the scope of the Directive and EuroCommerce told us that together with BEUC, BUSINESSEUROPE and UEAPME it had written to the Commissioner seeking clarification of the exact scope of the Directive (QQ 44, 81, 258, 126, 318, 159, pp 25, 27-8, 68-9).

76. BEUC stressed that thanks to the full harmonisation approach of the Directive, the scope "must be crystal clear because anything which falls into the scope of the Directive but would go beyond what is allowed according to the Directive would have to be repealed by the Member States" (Q 261). Diana Wallis said her view would be to "go for a wider, more coherent scope" (Q 184). Malcolm Harbour believed the Commission had to justify having gone for a more limited scope (QQ 212-213).

77. However, not all of our witnesses were unhappy with the scope, with the BRC considering it satisfactory (p 156). Commissioner Kuneva highlighted the fact that "this Directive is not inventing something out of the blue" and that it was based on four of the eight existing Directives that make up the consumer acquis. She therefore felt that the scope was properly circumscribed. She emphasised that the European Parliament had confirmed the scope of the Directive (Q 229).

Application to existing Directives

78. A further four Directives making up the consumer acquis would not be covered by this proposal. Dr Twigg-Flesner stated that "we are achieving greater coherence but we are not achieving full coherence." He recognised that incorporating more Directives into the proposal would complicate matters further but considered that "the end result would be a much more complete and coherent picture at the European level than we have now" (QQ 5, 7).

79. Malcolm Harbour considered that the Package Travel Directive might be included within the scope of the proposal. For example, he identified "a complete anomaly" whereby in the event of an airline going out of business, "if you assemble your own package … you find that you are not covered", while those consumers "who have bought a package from a travel agent with all the same things in it" would be covered (Q 181, p 69). "It does not seem to me to be sensible to introduce one Directive which is essentially just covering goods as a fairly targeted segment of the market and then come back later to have to deal with those other issues". It would not require much extra effort to cover package travel in the new Directive (QQ 168, 181).

80. Citizens Advice went further than this, suggesting that the proposal should also incorporate the Credit, Financial Services and Timeshare Directives (pp 168-69).

Services and digital products

81. The Minister informed us that the Government "have expressed to the Commission disappointment that the remedies for poor services and digital products are not covered within the scope of the Directive thus far." He suggested that if it were possible to extend the scope of the proposal it would be helpful in terms of simplicity for business and consumers alike. He reported that a number of Member States shared this concern, as did consumer bodies, and indicated that the Government had made some progress in their discussions with the Commission (Q 334).

SERVICES

82. The draft Directive does not apply in its entirety to services (see paragraphs 71-74). This was criticised by many of our witnesses, who felt that services should be included throughout. Consumer Focus and Which? commented that poor quality services were a large area of consumer detriment and therefore it would be beneficial to extend the scope to cover services (Q 47, pp 27-8). Malcolm Harbour agreed, suggesting that a more sensible approach would be to include services within the Directive as these were pre-eminently the area where a substantial increase in cross-border provision was desired (Q 181).

83. BEUC recognised that services were covered in principle by the Directive, but suggested that the different levels of scope in different Chapters created confusion and that it would like to see services included in all Chapters of the Directive (Q 259). The OFT thought it would be an odd situation for consumers if they had harmonised rights on goods but not on services, particularly as many transactions included both goods and services (see paragraphs 91-93). The OFT cited data from Consumer Direct showing that during 2008 the number of complaints about defective goods numbered 290,000, while those about sub-standard services amounted to 230,000. As they pointed out, "the detriment levels for consumers are closely aligned when it comes to goods and services" (Q 285, 287).

84. The CBI stressed that the Directive focused on goods and suggested that "the remedies that are in it do not easily fit all of the sorts of services that you are talking about." It was not against extending the scope to services in principle, but it did not think this Directive was the right solution for that problem. Instead, the CBI suggested that services should be addressed by a separate proposal (Q 379, p 136).

85. The Minister reported that the Government were pushing hard to include services within the scope of the Directive, particularly in view of changes in the consumption of services by United Kingdom consumers in the last ten to 20 years. The main problem he cited was that the provisions for remedies in the Directive did not apply to services (Q 339).

DIGITAL PRODUCTS

86. Numerous criticisms centred around the exclusion of digital products from the scope of the draft Directive. Consumer Focus thought this was a very important area for cross-border trade and was therefore critical that the proposal did not address the digital economy or digital products (Q 47). The BRC was also supportive, in principle, of extending the scope to cover digital products, as was the Law Society which encouraged further consideration of including digital downloads or software within the scope by widening the definition of "goods" (pp 156, 180).

87. Which? also thought the scope should be extended to cover digital goods, recognising that these were easily tradable across borders, and that there was an increasing market for them. They pointed to the anomaly whereby a consumer might purchase a CD from a website and be provided with one set of rights, while if that same consumer downloaded their music from a website, they would have a completely different set of rights. Which? thought this was confusing for the consumer as they might not appreciate the difference between the two purchases (Q 49, pp 27-8).

88. Malcolm Harbour thought that the problems associated with digital products ought to be tackled, as did BEUC, which felt that new technologies should be taken into account in the proposal. BEUC did not believe that this had been achieved in the current text (QQ 181, 253, 257).

89. The OFT told us "we are disappointed that they are not in there and we welcome the Commission's further study in this area." It wanted to see a clear definition in the Directive of what was meant by digital products, and the extent to which they were covered. However, it stressed that it would not want to rush into this (Q 287).

90. Some of our witnesses were not convinced that it would be possible to include digital products within the scope of this Directive. When we heard from Commissioner Kuneva about digital issues, she concluded that more investigation, more hard data and more co-operation was needed (Q 227). Portugal, while not opposed to the inclusion of digital goods, foresaw significant doubts and problems in their inclusion, and the CBI argued that "the scope of the proposed Directive should not be extended to include digital services, which are altogether different in nature from tangible goods and are subject to intellectual property rights." On the other hand, the CBI was less forthright when we spoke to its representatives in person; they said that they would not necessarily always be against digital goods being included (QQ 81-2, 381-83, p 136).

Mixed contracts

91. The majority of our witnesses did not support the provision that remedies should only be available under the draft Directive in respect of the goods part of mixed contracts (which contain both goods and services); some were doubtful that the Directive had adequately addressed such contracts (QQ 47, 131). Many of our witnesses gave the example of a mobile phone, which is often bought with airtime, and therefore constitutes a mixed contract (QQ 47, 49, 63, 131, 289). Which? suggested that "if, a few months down the track, you find you are not getting very good signal coverage, it is very difficult to know as a consumer whether that is due to a faulty phone or a faulty service provider for the airtime … you can be pushed from pillar to post and it is very difficult for the consumer to get redress unless it is all tied together." It recommended bringing services within the scope for remedies, in order that it would not matter from the consumer's perspective where the fault lay, they would be able to get a remedy (Q 49).

92. The OFT called for greater consideration of the scope in relation to mixed contracts and cited the installation of a kitchen as an example where "the Directive is deficient in dealing with the real situation of shopping in all situations in the United Kingdom" (Q 287). The Law Society suggested it might be helpful to extend the scope to cover the goods and services aspects of mixed contracts (p 179).

93. Mr Harrie Temmink, a member of Commissioner Kuneva's Cabinet, recognised mixed agreements as "one of the issues where the Directive may need some clarification." He stated that these were a subject for debate in the Council and that the Commission "are looking into it and … listening to Member States and to stakeholders to see to what extent we should put them into the scope of the Directive and to what extent the present text still needs to be clarified" (Q 225).

Hire purchase

94. Several witnesses were wary about the lack of inclusion of hire purchase within the scope of the proposal. Consumer Focus told us that, from a consumer's point of view, "it is very unlikely that they will make a distinction between the goods that they buy outright and the goods that they purchase on hire purchase, so we do not really see any tangible rationale for hire purchase being removed from this Directive" (Q 49).

95. The TSI was similarly critical, suggesting that hire purchase remaining outside the regime was an anomaly (QQ 286, 290). The OFT recognised that hire purchase was legally very different from an ordinary purchase, but repeated Consumer Focus' point that for consumers, the legal differences would not translate. The OFT argued that the consumer view point should determine policy on this issue (Q 287, p 97).

96. The Consumer Credit Association (CCA) expressed concern about the possible interaction between the Consumer Rights Directive and the Consumer Credit Directive (CCD), which was adopted in 2008. The CCA was clear that credit contracts regulated by the CCD are outside the scope of the proposal. Nevertheless, not all credit formats are covered by the CCD, for example: credit of less than €200; hire purchase; "0%" credit; pawnbroking; and bank overdrafts—all of which are excluded (p 171). The CCA stated that "there is no obvious reason for these exemptions" and told us that "they prevent a smooth, seamless 'fit'" between the two Directives. It therefore proposed an amendment to the text to ensure that the Consumer Rights Directive could be disapplied wherever the CCD principles were applied to a product (pp 171-72).

Business-to-business

97. We heard from Consumer Focus that business had also called for clarification about whether the proposal extended to business-to-business transactions (Q 49). CBI acknowledged that the issue around business-to-consumer and business-to-business transactions had always been a challenge, the difficulty being that business-to-business arrangements are dependent upon the contract between the trading parties. They acknowledged that there were also some difficult issues about the balance of power between small and large enterprises and the right to return goods (Q 385). EuroCommerce however was clear that these transactions were not covered (QQ 146-47, 152).

98. Diana Wallis questioned why small businesses, when dealing with larger enterprises, should not have similar protection to that enjoyed by consumers. She found it difficult that all business-to-consumer transactions were covered but that others who were not in an equal bargaining position were left outside the scope of the Directive. Ms Wallis suggested that this was an arbitrary distinction which required reconsideration, a point with which Malcolm Harbour agreed (QQ 195-96).

Financial services and insurance

99. The CBI called for clarity about the impact of the Directive for financial services, a point echoed by Consumer Focus (QQ 378, 63).

100. On the other hand, the ABI were "comfortable that the scope does rightly exclude financial services and insurance to a large extent." From an insurance perspective, they were happy with the clarity of the scope and the limited application to financial services and insurance (QQ 359, 367). However, they had specific concerns about the prohibition in the Directive on inertia selling (see Box 4) (QQ 359, 367, 369-70, pp 131, 134).

BOX 4

Inertia selling and auto-enrolling

Inertia selling involves the unsolicited supply of a product to a consumer. Article 45 of the proposal, on inertia selling, states that: "The consumer shall be exempted from the provision of any consideration in cases of unsolicited supply of a product … The absence of a response from the consumer following such an unsolicited supply shall not constitute consent."

Auto-enrolling is automatically enrolling somebody into something, for example a pension scheme, while providing them with the ability to opt out of that scheme, should they so wish. An example of this would be an employer offering a pension scheme to its employees and automatically bringing them into that scheme, while recognising their right to opt out if they did not want to be brought into the scheme.

101. The ABI was worried that the Directive could prevent employers from auto-enrolling employees (see Box 4) into their workforce pension schemes if this was viewed as inertia selling and suggested that this could lead to employees losing out on employer contributions (QQ 367, 369-70, pp 131, 134). Another concern of the ABI centred around the tacit renewal of insurance contracts, whereby insurance contracts are automatically renewed upon expiry, without the consumer playing an active part in the transaction. It was the ABI's view that people could inadvertently break the law by finding themselves uninsured if this was not allowed under the Directive (QQ 370-76, p 134).

102. Finally, the ABI thought it "very important that the insurers retain the right to vary contract terms where there is a valid reason." Its concern was that the Directive could mean varying the contract would be deemed unfair and thus give the consumer a right to cancel (Q 420).

Conclusions and recommendations

103. We note the view expressed by some of our witnesses that the coverage of the Directive should be widened, particularly to include the Package Travel Directive. We recommend that consideration of including other Directives within the scope of this proposal should be revisited following the extended Impact Assessment we have recommended in paragraph 39.

104. We support the idea that there is room to expand the scope of the Directive and recommend that it should extend to digital products. We consider the application to digital products particularly important given the proposal's aim to future-proof consumer law and update the existing acquis, which has been introduced over three decades and thus does not sufficiently address issues specific to the digital era.

106. We note our witnesses' concerns about the exclusion of hire purchase from the scope of the Directive and urge the Commission to reconsider the rationale for this exclusion. This should include consideration of the possibility to disapply the draft Directive where a trader has voluntarily chosen to comply with the Consumer Credit Directive.

107. While we consider that this Directive should embrace services generally, we recognise financial services as separate and distinct from this category given the specialist nature of these products. We recognise the concerns of the financial services industry about the application of this Directive to the sector. In particular, we note the industry's concern that the ban on inertia selling could prohibit the auto-enrolling of pensions. We therefore recommend that it is made clear in the proposal that the provisions on inertia selling do not apply to pension schemes offered by an employer.

108. We note that the ban on inertia selling would also prevent the tacit renewal of contracts, including insurance policies, and variation of terms without the consent of the consumer. These matters are contentious and we are not convinced that they should be similarly excluded from the scope of the Directive. At the very least, we consider that the possibility of such changes should be mentioned in the contract, and clear notice must be given in advance of the insurance premium being levied upon renewal.

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