Will teleselling survive the EC's cooling-off period

Jenny Frost, the ABI's European affairs manager and secretary to the British Insurers' International Committee, looks at the possible effects of EC legislation.

Telesales operations are under threat from a European Commission draft directive which introduces a cooling-off period in general insurance sales.

Insurers are fighting the plan which could mean that by 2002 – its proposed introduction date – a customer must be in possession of the actual contractual terms before the deal is struck.

Tony Cornell, CGU head of broker relations, said of the plan: "Customers may withdraw at any time. This could mean brokers go on cover without money or the ability to enforce the contract. This means that telesales, where instant cover is given, are stopped."

The Third Insurance Directives were hailed on their adoption in 1992 as providing the framework for the Single Insurance Market. Now, seven years later, the Commission has issued a Financial Services Single Market Action Plan. The fact that an Action Plan is necessary shows that the Single Market for insurance has yet to take off. A number of reasons can be given for this state of affairs:

- the inability of insurers to offer the same products throughout the EU because of the need to comply with local "general good" rules, which include marketing, advertising and consumer protection rules;

- the lack of a clear EU legal regime for intermediaries, who currently have no single passport;

- consumers' lack of access to good quality advice on products offered by insurers in other countries and the absence of effective complaints and redress procedures for cross-border business;

- lack of agreement on the form future EU legislation should take – maximum or minimum basis and home or host country control.

The Single Market Action Plan is intended to tackle the first three issues. Its details include:

- plans to compare general good rules, to see whether they are sufficiently similar to allow mutual recognition;

- a Communication on codifying the information consumers need in order to be able to assess cross-border offers;

- a draft Directive on insurance intermediaries, which will harmonise requirements on registration, PI cover, financial guarantees, professional knowledge and ability, information to be provided to the customer, and sanctions for non-compliance with the directive's requirements;

- liaison between member states' consumer redress systems, such as ombudsmen, in order to ensure that cross-border complaints are dealt with satisfactorily.

The difficulties facing the EU in respect of the fourth issue – the form future legislation should take – are very clearly illustrated by two draft directives currently under discussion, the draft Directive on the Distance Marketing of Consumer Financial Services (Distance Selling Directive) and the draft Directive on Certain Legal Aspects of Electronic Commerce (the E-Commerce Directive). The decisions taken on these directives will set a precedent for future legislation.

Distance selling directive
The main provisions of the current draft are:

Scope
The directive applies to financial services contracts between a supplier and a consumer without any face-to-face contact. The communication means used could be the telephone, electronic means such as the internet or interactive television.

At present the directive applies only to organised distance sales or service provision schemes run by a supplier. Sales through a bank branch or a high street broker which does not have specialised distance selling centres or promotions will continue to be subject to the normal rules governing insurance sales.

Pre-contract information
The directive requires the consumer to be informed of key information before the contract is concluded, with the full terms and conditions being provided subsequently in writing or another durable medium.

Right of withdrawal after conclusion of the contract
Subject to certain exceptions, the directive envisages a right of withdrawal of between 14 and 30 days. In the event of the consumer withdrawing, a refund must be made within 30 days of any payment already made to the supplier, less an amount for the service provided before the right of withdrawal is exercised.

Return of original documents
This provision requires the consumer to return a motor certificate if he wishes to withdraw. Under UK legislation, a motor insurer is on cover until the certificate has been returned.

Unsolicited services
The directive requires member states to prohibit the supply of unsolicited services, when the supply includes a request for immediate or deferred payment, and also to exempt the consumer from any obligation if an unsolicited service is supplied.

Unsolicited communications
This provision reflects a provision in a directive on the protection of privacy in the telecommunications sector (Directive 97/66/EC of December 15, 1997). It requires the consumer's prior consent for the supplier's use of automated calling systems without human intervention or faxes. Other means of communication can only be used for individual communications if the customer has consented or has not expressed an objection to receiving such communications (member states have a choice between these two options).

In the UK, the directive on protection of privacy in the telecommunications sector has been implemented by giving statutory backing to the Telephone and Fax Preference Services, which allows individuals to have their telephone and fax numbers included on a register. Companies can not cold call or send unsolicited faxes to persons whose numbers are on the register.

Electronic commerce directive
This Directive seeks to remove obstacles for service providers established within Europe, by tackling the following key issues:

Place of establishment of the service provider – the place of establishment is defined as the place where an operator actually pursues an economic activity through a fixed establishment, irrespective of where web sites or servers are situated or where the operator may have a mail box.

Home country control – in principle, the service provider is subject to the control of the country of establishment. However, significant derogations are envisaged for insurance, with it being proposed that insurers will still need to comply with the following provisions of existing insurance directives:

- the provisions on setting up a branch or starting to write services (cross-border) business in other countries, including the articles requiring compliance with the "general good" rules of the host country;

- the provisions on choice of law;

- the rules on compulsory insurance, which require compliance with host country rules.

On-line contracts – the Directive will require member states to amend their national legislation to remove any prohibitions or restrictions on the use of electronic media for concluding contracts. In order to remove uncertainty as to when a contract is concluded, the Directive states that, save as otherwise agreed by professional persons, and in the case where a recipient is required to express his consent to accept a service provider's offer by using technological means, such as clicking on an icon, the following principles apply:

- the contract is concluded when the recipient of the service receives from the service provider, by electronic means, an acknowledgement of receipt of the recipient's acceptance, and confirms receipt of the acknowledgement of receipt;

- the acknowledgement of receipt is deemed to be received and the confirmation is deemed to be given when the parties for whom they are destined are able to access them.

Liability of intermediaries – the Directive provides for intermediaries to be exempted from liability where they play a passive role as a "mere conduit" of information from third parties. It also limits service providers' liability for other activities such as the storage of information.

Commercial communications – a definition is given of what constitutes a commercial communication and makes it subject to certain transparency requirements to ensure consumer confidence and fair trading.

Different approaches to legislation
Suppliers of goods operate under the principle (laid down in the 1979 Cassis de Dijon case) that if they meet the standards of the country in which the goods are produced they can legally be marketed throughout the EU without having to meet additional requirements imposed by other countries (the home country principle) unless these can be justified on the grounds that they are necessary for, in particular, the protection of public health or the consumer.

This principle does not at present apply in insurance, where it is accepted that insurers must comply with the "general good" rules of the host country, ie the country of the customer. The general good rules include the marketing, advertising and consumer protection rules of the host country, although the extent to which such rules can be applied is restricted by principles laid down by the European Court of Justice (in particular that they must not duplicate rules in the supplier's country, must be non-discriminatory and must be proportionate to the objective being sought).

The Distance Selling Directive is currently drafted on a maximum basis, which means that the harmonised rules it contains must be implemented by member states strictly as they stand, with a lower or higher level of consumer protection not being possible. Where EU legislation follows this approach, the rules in the home country of the supplier and in the host country will be the same, and the supplier can comply only with the rules of his own country within the area harmonised. The opposite approach, which is supported by most member states, is the minimum basis, which allows member states to have a higher level of protection than that laid down in the directive and to require foreign insurers to comply with that higher level.

Proponents of the maximum basis argue that uniform rules are necessary to introduce a true single market and that consumers will be protected if the rules are at a sufficiently high level. Those who support the minimum basis argue that a maximum basis would lead to the existing level of consumer protection in some countries being reduced.

The E-Commerce Directive, as noted earlier, provides for home country control, but lays down significant derogations for insurance. If this approach is maintained, insurers will continue to have to comply with the general good rules of the host country. Again, the arguments for and against the home country approach relate to whether it is seen as being essential for a genuine single market or as being detrimental to consumers.

Possible solutions
A way forward, which should overcome the apparent disadvantages of the home country and maximum approaches would be to move to a home country approach (by stages if necessary) accompanied by safeguards for consumers. These safeguards are the ones already being tackled under the Single Market Action Plan:

- the Directive on insurance intermediaries, which will regulate the taking-up of the activity of intermediary and also the information needing to be given to the customer;

- the Communication on the information consumers need in order to be able to assess cross-border offers; effective consumer complaints and redress procedures, for both domestic and cross-border insurance.

In the area of e-commerce, an additional safeguard will come from international (not just EU-wide) agreement on how e-commerce transactions should be regulated, given the scope for fraud opened up by the new technology. However, care will need to be taken that any additional measures are not so onerous that they hinder the development of the use of such technology, which could be just as detrimental to consumers as lack of regulation.

At present, there are no clear signs as to the way the debate on home or host country control and a maximum or minimum basis will go, and the issue may end up being the subject of a compromise which is neither the one thing nor the other.

What can safely be said is that whatever is agreed will have a direct impact on whether the single insurance market becomes a reality.