week 4 Flashcards
why regulate consumer transactions?
- product lifecycle
- every tangible product has a lifecycle
- manufacturing => distribution => use => disposal
- regulation of consumer transactions has primarily focused on product manufacturing and product distribution so far
business to consumer (B2C) relations?
- person that consumes the good => consumer
- entity that distributes the good => business
- consumer: any natural person who is acting for purposes which are outside his trade, business or profession
- business: any natural or legal person who is acting for purposes relating to his trade, business or profession
–> producer: extra-contractual relationship with a consumer
–> distributor: (pre-) contractual relationship with a consumer
regulatory goals?
=> European market integration:
- a level playing field for business through harmonization of national laws
=> consumer protection:
- to correct market failure resulting from information asymmetries between businesses and consumers
- to ensure interpersonal justice between the parties as an intrinsic value
=> sustainable development
how are consumer transactions regulated by the EU (regulatory tools)?
- product safety standards
- product liability
- prohibition of unfair commercial practices
- right of withdrawal
- remedies for non-conformity of goods
- contract terms control
- information requirements
product safety standards?
=> only safe products can be placed on the market
=> general safety standards (ex ante):
- a product under normal or reasonably foreseeable conditions of use does not present any risk or only the minimum risks to the safety and health of persons
- a product which fails to meet this standard is a ‘dangerous product’
=> when does a product meet the general safety standard?
- product complies with technical standards is presumed to be safe
- if serious risk to health and safety => EU Commission may take action
(product withdrawal = product has not reached the consumer yet; product recall = removal of the product that has already reached the consumers)
product liability?
=> strict liability of producers for damage caused by defective goods
- aims at both compensation (ex post) and deterrence (ex ante)
- damages for death or personal injury, destruction of any item of property other than the defective product itself or of destruction of data
=> producer is liable where a product is ‘defective’
- producer may invoke a defense (ex: regulatory compliance defense; development risk defense)
prohibition of unfair commercial practices?
1) are contrary to the requirements of professional diligence
2) distort or are likely to materially distort the economic behavior of the average consumer (certain consumers enjoy a higher level of protection due to their protection due to their particular vulnerability to the practice or the product, their age, their naivety or their mental pr physical infirmity)
=> level 1: a general clause on unfair commercial practices
=> level 2: specific unfair commercial practices
- misleading
- aggressive
=> level 3: ‘blacklist’ of commercial practices
- displaying a trust mark, quality mark or equivalent without having obtained the necessary authorization
- falsely claiming that a product has been approved, endorsed or authorized by a private or public body
- falsely claiming that a product is liable to cure illnesses, dysfunction or malformations
…
information requirements?
- the problem of information overload
- mostly lack clear remedies
- ex: information requirements for distance and off-premises contracts
right of withdrawal?
- consumer shall have a period of 14 days to withdraw from a distance or off-premises contract, without giving any reason, and without incurring any costs…
contract terms control?
=> scope of application:
- not individually negotiated terms
- terms related to the price and the main subject matter of the contract are excluded as long as they are in plain and intelligible language
=> unfair contract terms are not binding on the consumer
=> the terms are unfair if they:
- are not transparent (formal fairness)
- cause of significant imbalance in the parties’ rights and obligations to the detriment of the consumer (substantive fairness)
=> level 1: general clauses
- formal fairness (transparency)
- substantive fairness
=> level 2: ‘indicative list’ of unfair contract terms
- terms that may regarded as unfair
- an essential element in determining substantive fairness
why specific remedies for non-conformity of consumer goods?
=> in case of non-conformity the consumer can first ask for repair or replacement
- choice lies with consumer
- seller may refuse repair or replacement if it would be impossible, disproportionate or cause ‘unreasonable costs’
=> if there is no room for repair or replacement, the consumer is entitled to price reduction or contract termination
how to regulate consumer transactions so as to ensure sustainable production and consumption? => towards a circular economy
=> what is a circular economy?
- use and re-use of the earth’s resources in a continuous flow
- opposite to the linear economy in which resources are used to create goods and services and then discarded
=> need to regulate both the supply side (sustainable production) and the demand side (sustainable consumption)
relationship between consumer protection and environmental protection?
- may be compatible but may also conflict with each other
- need for a holistic approach to consumer and environmental protection
(potential) regulatory tools to ensure sustainable production and consumption?
- prohibition of ‘greenwashing’ as an unfair commercial practice?
- information requirements to facilitate ‘green choices’?
- repair instead of replacement of defective goods?
- better regulation of services to stimulate the shared use of goods through ‘servitisation’?
(servitisation implies a shift from buying a product to using products and from selling products to selling services)
main types of financial services?
- payment
- credit
–> (non-mortgage) consumer credit
–> mortgage credit - investment
- insurance
financial product lifecycle?
=> financial product is a contract!
- product development => product distribution => product ‘use’ => product ‘termination’
types of financial institutions?
- credit institutions
- credit intermediaries
- investment firms
- insurance companies
different roles of financial institutions?
=> financial product manufacturers
=> financial intermediaries = financial product distributors = finance service providers
=> trading platforms
relations between financial institutions and consumers/(potential) clients?
=> information asymmetries/imbalance of bargaining power between financial institutions and consumers/(potential) clients
=> consumer behavioral biases in financial decision-making (ex: overoptimism)
=> negative third-party effects of individual transactions
regulatory goals (financial services)?
=> European market integration
- a level playing field for financial institutions
- very important objective
=> financial stability
- a state in which the financial system is capable of withstanding shocks
=> orderly functioning and integrity of financial markets
- markets operate in a fair, transparent and efficient way
=> consumer/client protection
- to correct a market failure resulting from information asymmetries between financial institutions and consumers/clients
- to ensure interpersonal justice between the parties as an intrinsic value
=> sustainable development
how to regulate financial services (major challenges)?
=> characteristics of financial markets:
- complexity
- dynamism
- uncertainty
- fragmentation
- ungovernability
=> need for public regulation undisputed but many questions about the appropriate regulatory design
main building blocks for financial regulation?
=> prudential regulation
=> conduct of business regulation
prudential regulation?
- concerned with the safety and soundness of individual financial institutions (i.e. micro-prudential regulation) and with systemic risks to the financial system as a whole
- micro- and macro- prudential regulation complement each other in ensuring financial stability
- tools: requirements on authorization, capital and management bodies
conduct of business regulation?
- concerned with the orderly functioning of financial markets and consumer/client protection
- increasingly covers not only product distribution but also product development
- tools: product regulation, information requirements, duties of care and loyalty
prudential regulatory tools?
- authorization requirements
- bank capital requirements
- requirements on management bodies
authorization requirements?
- legal or regulatory obligation that individuals, businesses, or organizations must fulfill before engaging in certain activities
- ensures compliance with laws, safety standards, and ethical practices
bank capital requirements?
regulatory standards for banks that determine how much liquid capital (easily solids assets) they must keep on hand in relation to their overall
how are bank capital requirements set in the EU?
- the Basel Committee of Banking Supervision has issued non-binding capital adequacy rules
- the EU has transposed these rules in a public regulatory framework
requirements on management bodies (towards the right culture in financial institutions)?
=> at an individual level - the fit and proper test for board members:
- primary responsibility lies with financial institutions
- but public financial regulators decide on the appointment of new board members
- in the case of systematically significant banks, the fitness and propriety of new board members is jointly assessed by the ECB and NCA’s against five criteria: experience, reputation, conflicts of interest and independence of mind, time commitment and collective sustainability
=> at a group level - controlling group dynamics and decision-making in the boardroom to ensure safeguards against risky behavior:
- foundational elements of a sound risk culture according to the Financial Stability Board (FSB): tone from the top, accountability, effective communication and challenge, and incentives
key regulatory tools currently used for consumer credit?
=> general
- prohibition of unfair commercial practices
- contract terms control
=> specific
- information requirements for lenders
- the lender’s duty to access the consumer’s creditworthiness
–> but only a modest version: no duty to refuse granting credit in case of the negative outcomes (MSs may impose such a duty)
–> the duty is typically further specified by the codes of conducts adopted by professional associations of lenders
- the consumer’s right of withdrawal
access to credit vs. consumer protection: payday loans?
- small installment loan to be repaid over a short term (until ‘payday’)
- quick and easy access to credit on mart phone apps or online
- but excessive interest rates, high additional costs after a missed payment, often multiple rollovers
- consumer vulnerability in a dehumanized environment
other potential regulatory tools for consumer credit?
=> stricter lender’s duty to assess the consumer’s creditworthiness
=> interest rate caps
=> product regulation
- prohibition of potentially dangerous credit products
