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Distance Marketing of Distance Marketing of Financial ServicesFinancial Services

Assoc. Prof.Assoc. Prof. Christian Christian TanushevTanushev

April 19, 2023April 19, 2023

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AgendaAgenda

•Pitfalls in Distance E-commercePitfalls in Distance E-commerce

•Legal Issues in Distance Legal Issues in Distance Marketing of financial servicesMarketing of financial services

•Structure of the relations in IM Structure of the relations in IM

•EU Directive 2002/65/ECEU Directive 2002/65/EC

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Pitfalls in Distance E-Pitfalls in Distance E-commercecommerce• Jurisdiction and applicable lawJurisdiction and applicable law

•TaxationTaxation

• Intellectual property rights Intellectual property rights

•PaymentsPayments

•Protection of personal Protection of personal informationinformation

•Protection of investorsProtection of investors

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JurisdictionJurisdiction

• Electronic site from Hungary offers Electronic site from Hungary offers securities traded on the stock securities traded on the stock exchange in Budapestexchange in Budapest

• Bulgarian consumer buys these Bulgarian consumer buys these securitiessecurities

• His/Her credit card is debited but His/Her credit card is debited but there is no delivery of the securitiesthere is no delivery of the securities

• Where should be decided the dispute: Where should be decided the dispute: in Hungary or in Bulgariain Hungary or in Bulgaria

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Applicable LawApplicable Law

• Investment company wants to sell its Investment company wants to sell its shares abroadshares abroad

• It creates a special site where the It creates a special site where the securities could be purchased by securities could be purchased by entering an electronic orderentering an electronic order

• Is it supposed to respect only the Is it supposed to respect only the Bulgarian legislation Bulgarian legislation ((the home the home countrycountry)...)...

• Or should it comply with the law of Or should it comply with the law of each country of its clients in Europe?each country of its clients in Europe?

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Rights of intellectual Rights of intellectual propertyproperty•Financial product is proposedFinancial product is proposed in an in an

Internet siteInternet site

•Financial institution in other country Financial institution in other country copies the overall view of the site: copies the overall view of the site: colors; allocation of windows, colors; allocation of windows, graphs, information; style of lettersgraphs, information; style of letters

•Are the rights of the institution that Are the rights of the institution that created the product protected?created the product protected?

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TaxationTaxation

• Are profits from e-trading of shares Are profits from e-trading of shares tax deductible?tax deductible?

• How do tax payer prove the How do tax payer prove the “historic” “buy” price? And “sell” “historic” “buy” price? And “sell” one?one?

• What if there are an “arbitrage’ What if there are an “arbitrage’ opportunities? Will one catch them or opportunities? Will one catch them or consider the tax implications? consider the tax implications?

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PaymentsPayments

•Trust, irrevocability and Trust, irrevocability and assurance for the consumers and assurance for the consumers and the financial institutionsthe financial institutions

•Creation of possibilities for Creation of possibilities for competing with the other competing with the other members of EU in the electronic members of EU in the electronic trade with financial productstrade with financial products

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Personal Information Personal Information ProtectionProtection

•Synonymous identification of the Synonymous identification of the clientclient

•E-signature: liability of certification E-signature: liability of certification service providersservice providers

•Personal information protection Personal information protection guarantees in case the deal is guarantees in case the deal is cancelledcancelled

•Host service provider’s liabilityHost service provider’s liability

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Jurisdiction – an answer?Jurisdiction – an answer?

•Brussels Convention – 1968Brussels Convention – 1968– Defendant’s place of domicileDefendant’s place of domicile

•Rome Convention - 1980Rome Convention - 1980– Consumer can choose if she Consumer can choose if she

has been “intentionally has been “intentionally targeted”targeted”

– Does the website “target” the Does the website “target” the consumer?consumer?

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Applicable Law Applicable Law • Rome ConventionRome Convention

– General rule – choice of lawGeneral rule – choice of law– For consumers – law of the country of For consumers – law of the country of

residenceresidence– Equals “Country of destination” if Equals “Country of destination” if

consumer has been “targeted”consumer has been “targeted”

• A Clash of InterestA Clash of Interest– Consumer protection: country of Consumer protection: country of

destinationdestination– E-business development: country of originE-business development: country of origin

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Investors’ ProtectionInvestors’ Protection• Adequate info provided to the consumer for Adequate info provided to the consumer for

a reasonable decisiona reasonable decision• Consumers should be protected against Consumers should be protected against

unsolicited servicesunsolicited services• Expression of the consent to conclude the Expression of the consent to conclude the

dealdeal– Open and clearOpen and clear– The absence of reply is not signifying consentThe absence of reply is not signifying consent

• No expenses for consumer when the deal is No expenses for consumer when the deal is brokenbroken

• Securing effective procedure for laying Securing effective procedure for laying claims against suppliers from the consumersclaims against suppliers from the consumers

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The European DirectivesThe European Directives

• Creation of regulative frameworkCreation of regulative framework

• Supporting for self regulationSupporting for self regulation

• DirectiveDirective 2002/65/EC 2002/65/EC fromfrom 23 23 SeptemberSeptember 2002 2002 concerning the distance marketing concerning the distance marketing of consumer financial servicesof consumer financial services

• DirectiveDirective 97/7/EC 97/7/EC fromfrom 20 20 MayMay 1997 1997 concerning protection of the consumers concerning protection of the consumers to concluding distance contractsto concluding distance contracts

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Structure of the Relations in Structure of the Relations in IMIM

Environment abroad:PESTN

Environment in the country:PESTN

Controlled factors: product, price, distribution, communication

Target market

Country Country AACountry Country BBCountry Country CC

PricPricee

ProductProduct

DistributionDistribution

PromotioPromotionn

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Stages of Internationalization Stages of Internationalization (Marketing Strategy)(Marketing Strategy)

ІІ-st-st stage stage – – Primary penetration Primary penetration – – experimental approachexperimental approach

ІІІІ-nd-nd stagestage – – Expansion on the Expansion on the external markets external markets (engagement for adapting(engagement for adapting))

ІІІІІІ-rd stage-rd stage – – Global rationalizationGlobal rationalization

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I. Primary PenetrationI. Primary Penetration

Markets in other countries

Home country

Key decisions

• Choice of country• Choice of strategy• Choice of time

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II. Local Expansion in External II. Local Expansion in External MarketsMarkets

Key decisions:

• Standardization or adaptation

• Research - new products

Home country

Markets in other countries

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III. Global Rationalization III. Global Rationalization

The world market

Key decisions:

• Portfolio of countries, markets

• Increasing effectiveness

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Directive 2Directive 2002/65/EC 002/65/EC

•Objectives Objectives

•Key ConceptsKey Concepts

• Information to the consumer prior to Information to the consumer prior to the conclusion of the distance contractthe conclusion of the distance contract ((artart.3).3)

•Additional information requirementsAdditional information requirements ((artart.4).4)

•Right of withdrawalRight of withdrawal ( (artart.6).6)

•Unsolicited communicationsUnsolicited communications ( (artart. 10). 10)

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ObjectivesObjectives • Securing competitiveness on the Securing competitiveness on the

consolidated European market of financial consolidated European market of financial servicesservices

• Guarantee of access of the consumers to Guarantee of access of the consumers to wide number of quality financial serviceswide number of quality financial services

• Increasing the confidence of consumers in Increasing the confidence of consumers in new technologies and electronic tradenew technologies and electronic trade

• To harmonize the legislation and To harmonize the legislation and administrative procedures in the member administrative procedures in the member states about distance offering of financial states about distance offering of financial servicesservices

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DefinitionsDefinitions• ““Distant contractDistant contract”. ”. Concluded as a Concluded as a

result ofresult of::– An organised distance sales or service-

provision scheme run by the supplier: : ““center for servicescenter for services”, ”, internet siteinternet site

– Using Using means of distance communication up to and including the time at which the contract is concluded

• ““Financial serviceFinancial service”: ”: bankingbanking, , creditcredit, , paymentpayment, , insurance, pension and insurance, pension and investment servicesinvestment services

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Participants and Participants and CommunicationCommunication

• ““SupplierSupplier”: ”: natural or legal person; public or natural or legal person; public or privateprivate

• ““ConsumerConsumer”: ”: any natural person who is any natural person who is acting for purposes which are outside of his acting for purposes which are outside of his trade trade ((doesn't include sole proprietorship, doesn't include sole proprietorship, general partnershipgeneral partnership))

• ““Means of communicationMeans of communication”: ”: does not require does not require simultaneous physical presence of the simultaneous physical presence of the supplier and consumer (for example phone, supplier and consumer (for example phone, internet, fax, electronic mailinternet, fax, electronic mail))

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Distance ContractDistance Contract• The two polesThe two poles

– Concluding a contract for pension insuranceConcluding a contract for pension insurance ““over the counterover the counter””

– Concluding a contract for pension insuranceConcluding a contract for pension insurance byby ““electronic mailelectronic mail””

• Picking an advertising brochure withPicking an advertising brochure with ““Application formApplication form” ” and sending the and sending the application into a special mailbox in the application into a special mailbox in the pension company without a contact with an pension company without a contact with an employeeemployee

• Call on the cell phone from the office of the Call on the cell phone from the office of the pension company to pension company to ““call centercall center””

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Ministry of finance

Financial Supervision Commission Central Bank

Central Depository

Stock exchange

Regulated markets of securities

Investment companies

Leasing (credit) companies

Managing companies

Obligatory and voluntary pension funds

Issuers

Insurance sector

Insurance companies

Insurance brokers

Insurance agents

Bank sector

Commercial banks

Branches of foreign banks

Financial ServicesFinancial Services

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• The supplierThe supplier

• The financial serviceThe financial service

• The distance contractThe distance contract

• RedressRedress

• In the case of phone callIn the case of phone call– The data about the supplier and the aim The data about the supplier and the aim

of the phone call should be completely of the phone call should be completely cleared at the start of the talk with the cleared at the start of the talk with the consumerconsumer

Disclosure of Prior Disclosure of Prior InformationInformation

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Prior Contract Info – The Prior Contract Info – The SupplierSupplier• The identity, main business and addressThe identity, main business and address• The identity of the representative in the The identity of the representative in the

host country of the consumer and its host country of the consumer and its addressaddress

• Communication with an agent of the Communication with an agent of the supplier supplier – – data about the agent, his addressdata about the agent, his address

• Registration in the trade registerRegistration in the trade register• Supervisory authority, if the supplier’s Supervisory authority, if the supplier’s

activity is subject to authorizationactivity is subject to authorization

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Prior Info - The Financial Prior Info - The Financial ServiceService• A description of the main characteristics A description of the main characteristics

of the financial serviceof the financial service• Common price which should be paid by Common price which should be paid by

the consumer to the supplier including the consumer to the supplier including all the expenses, taxes paid via the all the expenses, taxes paid via the supplier or the way for defining the supplier or the way for defining the price which allows the consumer to price which allows the consumer to check itcheck it

• Description of the risks of the financial Description of the risks of the financial instruments and indication that the instruments and indication that the price in the past does not guarantee price in the past does not guarantee profit in the futureprofit in the future

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The Financial Service – cont. The Financial Service – cont. •Warning for existence of tax Warning for existence of tax

obligation which are not paid by obligation which are not paid by the supplierthe supplier

•Period for which the info provided Period for which the info provided is validis valid

•Arrangements for paying and Arrangements for paying and receiving the financial benefitreceiving the financial benefit

•Additional cost for the consumer of Additional cost for the consumer of using the means distance using the means distance communicationcommunication

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Prior Info - The Distance Prior Info - The Distance ContractContract• The existence or absence of a right of

withdrawal, its duration and the conditions for exercising

• The minimum duration of the contract in the case of financial services to be performed permanently or recurrently

• Any rights the parties may have to terminate the contract early or unilaterally, including any penalties imposed

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The Distance Contract – The Distance Contract – cont.cont.• Practical instructions for exercising the

right of withdrawal• Member State whose laws are taken by the

supplier as a basis for the establishment of relations with the consumer prior to the conclusion of the contract

• Any contractual clause on law applicable to the distance contract and/or on competent court;

• Language used to provide preliminary information and to communicate during the implementation of the contract

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Prior Info - RedressPrior Info - Redress

• Does an out-of-court complaint and Does an out-of-court complaint and redress mechanism exists and the redress mechanism exists and the methods to implement it methods to implement it

• The existence of guarantee funds or The existence of guarantee funds or other compensation arrangements other compensation arrangements without deposit guarantee schemes without deposit guarantee schemes and investor compensation schemes and investor compensation schemes (Directive 94/19/EC of 30 May 1994 (Directive 94/19/EC of 30 May 1994 and Directive 97/9/EC from 3 March and Directive 97/9/EC from 3 March 1997)1997)

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Additional informationAdditional information• Member states may introduce more Member states may introduce more

stringent provisionsstringent provisions

• European Commission will exert efforts to European Commission will exert efforts to bring that requirements to the knowledge bring that requirements to the knowledge of the suppliers and consumersof the suppliers and consumers

• The contract should be given to the The contract should be given to the consumer in writing or on a hard disc in consumer in writing or on a hard disc in good time before the conclusion of the good time before the conclusion of the treatytreaty

• The consumer has the right to receive the The consumer has the right to receive the contractual terms at any timecontractual terms at any time

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Right of WithdrawalRight of Withdrawal

• The consumer has the right to The consumer has the right to withdraw from the contract in 14 withdraw from the contract in 14 calendar days without penalty and calendar days without penalty and without giving any reason. (30 days for without giving any reason. (30 days for life insurance and pension operations)life insurance and pension operations)

• The period for withdrawal begins:The period for withdrawal begins:– From the day of the concluding of the From the day of the concluding of the

distance contractdistance contract– The day on which the consumer receives The day on which the consumer receives

the contractual termsthe contractual terms

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Exempt from the Exempt from the ““Right of Right of WithdrawalWithdrawal””• Financial services whose price depends on Financial services whose price depends on

fluctuations in the financial market outside fluctuations in the financial market outside the supplier’s controlthe supplier’s control

– Foreign exchange– Money market instruments– Transferable securities– Units in collective investment undertakings– Financial futures– Forward interest rate agreements– Interest rate, currency and equity swaps.– Options on currency and on interest rates

• Insurance of travelers and luggage or Insurance of travelers and luggage or insurance policies of less than one month insurance policies of less than one month durationduration

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Exempt from the Exempt from the ““Right of Right of WithdrawalWithdrawal”” cont. cont.

• Contracts whose performance has been fully completed by both parties at the consumer's express request

• Contracts which execution is finished before Contracts which execution is finished before using the right for refusalusing the right for refusal

• The Directive allows the Member states to The Directive allows the Member states to decide whether they should allow decide whether they should allow withdrawal in case of mortgage contracts withdrawal in case of mortgage contracts – – enough time for reflectionenough time for reflection

• The Directive allows the contracts to start The Directive allows the contracts to start after the deadlineafter the deadline

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• The consumer is obligated to pay only:The consumer is obligated to pay only:– For the services already providedFor the services already provided– Does not owe defaultsDoes not owe defaults

• The Member States may provide that The Member States may provide that the consumer cannot be required to pay any amount when withdrawing from an insurance contract– Proportional payment, the insurance carries the risk Proportional payment, the insurance carries the risk

during the period of refusalduring the period of refusal

• The supplier is obliged immediately but not later The supplier is obliged immediately but not later than 30 days tothan 30 days to restore all received paymentsrestore all received payments

Payment of the Service Provided before Withdrawal

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Protection of the ConsumerProtection of the Consumer

• Payment with electronic cardsPayment with electronic cards– Cancellation of a payment where fraudulent Cancellation of a payment where fraudulent

use has been made of his payment carduse has been made of his payment card ( (after after informing the institution-issuerinforming the institution-issuer))

– Restoring the amount paid from the cardRestoring the amount paid from the card

• Unsolicited servicesUnsolicited services. . Except on the tacit Except on the tacit renewal it is prohibitedrenewal it is prohibited::– To supply the service without a prior requestTo supply the service without a prior request– The lack of answer cannot be interpreted as an The lack of answer cannot be interpreted as an

agreement and the consumer does not carry agreement and the consumer does not carry responsibility for rendered servicesresponsibility for rendered services

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Unsolicited CommunicationsUnsolicited Communications• Prior consent of the consumer is needed for Prior consent of the consumer is needed for

using ofusing of::– Automated calling systemsAutomated calling systems– FaxesFaxes

• Rules about restriction to use of phones and Rules about restriction to use of phones and electronic mail. Two variantselectronic mail. Two variants::– They may be used after receiving confirmation from They may be used after receiving confirmation from

the consumerthe consumer “ “opt-in”opt-in”– They may be used if the consumer does not express They may be used if the consumer does not express

his objectionhis objection “ “opt-outopt-out” (” (SpainSpain), ), for example by for example by including his name in the respective registerincluding his name in the respective register

• They cannot load up with expenses the They cannot load up with expenses the consumerconsumer

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Implementation of the Implementation of the DirectiveDirective• The Member states are obliged to impose The Member states are obliged to impose effective, proportional, dissuasive sanctionseffective, proportional, dissuasive sanctions

• The consumers may not waive their rightsThe consumers may not waive their rights• The Member states secure the protection of The Member states secure the protection of

the rights of their consumers against third the rights of their consumers against third countries which are not memberscountries which are not members

• The countries assign the execution to:The countries assign the execution to:– Public institutionsPublic institutions– Organizations for protection of the consumersOrganizations for protection of the consumers– Self regulating professional organizationsSelf regulating professional organizations

• The burden of proof on respect of supplier’s The burden of proof on respect of supplier’s obligations to inform the consumer and obligations to inform the consumer and consumer’s consent to conclude the consumer’s consent to conclude the contract is placed on the suppliercontract is placed on the supplier

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Entry into Force and Entry into Force and ImplementationImplementation• ArtArt. 19 . 19 takes this directive to the list with directives takes this directive to the list with directives

for protection of the interests of the consumers for protection of the interests of the consumers which forces supplementation of the legislationwhich forces supplementation of the legislation

• The member states were supposed to reduce their The member states were supposed to reduce their legislation in accordance and to create conditions for legislation in accordance and to create conditions for implementation of the Directive till 9 October 2004implementation of the Directive till 9 October 2004

• On the On the 6.04.2006 6.04.2006 European Commission receives European Commission receives data for implementation from 20 member states, data for implementation from 20 member states, partial communications were sent from 2 countries, partial communications were sent from 2 countries, 2 countries are discussed in the Court of Justice and 2 countries are discussed in the Court of Justice and 1 is under consideration1 is under consideration

• The review for implementing was transferred to The review for implementing was transferred to 2008 in order to evaluate not just the creation of the 2008 in order to evaluate not just the creation of the legislation but the implementation of the directivelegislation but the implementation of the directive

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The Four Pillars of the The Four Pillars of the DirectiveDirective• Prohibition of marketing practices which oblige Prohibition of marketing practices which oblige

the consumers to buy services which they do the consumers to buy services which they do not want ("inertia selling")not want ("inertia selling")

• Rules for prohibition of unwilling telephone Rules for prohibition of unwilling telephone calls and e-mails ("cold calling" and calls and e-mails ("cold calling" and “spamming") “spamming")

• Obligations for the supplier to provide detailed Obligations for the supplier to provide detailed information about the contract and the service information about the contract and the service prior to its conclusionprior to its conclusion

• Right of the consumer to withdraw from the Right of the consumer to withdraw from the contract in a period of timecontract in a period of time (“ (“cool-off periodcool-off period”)”) -  - except in cases when there is a risk from except in cases when there is a risk from variations of the prices of the financial marketsvariations of the prices of the financial markets

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Contact infoContact info

ctanushev@yahoo.comctanushev@yahoo.com

Tel. +359 88 78 78 789Tel. +359 88 78 78 789

Fax +359 2 962 48 62Fax +359 2 962 48 62

Christian TanushevChristian Tanushev