Consumer protection could be seriously undermined by a draft European directive on unfair commercial practices.
The FSA has sent a strongly worded response to the Department of Trade and Industry consultation on the plans.
The regulator believes the directive could dismember its strategy for empowering consumers and remove large areas of consumer protection.
The FSA says the directive would reduce its freedom to develop an effective regime covering fairness after the point of sale. It also feels that the proposed laws would create significant legal uncertainty.
The directive is the cornerstone of the European Commission's consumer policy strategy and is intended to be a radical reform of the current EU legislative framework for the protection of consumers' interests. One of the main objectives is to harmon-ise different national regul-atory regimes which could ultimately broaden competition and choice for consumers.
But there are fears that the legal mechanisms required to promote a cross-border market entail precluding national regulators, including the FSA, from adding measures they might deem necessary for maximum consumer protection.
The legal background to the directive is that, in contrast to most other EU member states, the UK does not currently have a general ban on unfair commercial practices.
The new rules will apply to pre-sale marketing, advertising and selling. They will also apply to any post-sale relationship such as after-sale support.
As well as financial services and consumer credit, other sectors covered by the laws will include advertising, marketing, publishing, direct selling, estate agency, transport, sales promotions, retail, package travel and timeshare.
The DTI says the directive marks a departure from existing consumer protection legislation in that it sets few positive and detailed requirements. The Government has welcomed this approach because it should mean that the directive does not set prescriptive rules which unnecessarily change the way that a business operates.
The FSA, however, is not convinced. Arguably, the most significant feature of the directive is the absence of any “minimum harmonisation clause”.
Such clauses mean member states can introduce or retain any rules that go beyond the requirements of the directive. This means the UK will not be able to enforce laws that provide greater protection for consumers in the field coordinated by the directive and this is at the heart of why the FSA is objecting so strongly to the current scope of the directive.
The directive in its current form could have huge and potentially confusing legal ramifications, including chan-ges to the Sales of Goods Act 1979, the Supply of Goods and Services Act 1982, the Trade Descriptions Act 1968, the Property Misdescriptions Act 1991 and the Consumer Protection Act 1987.
The directive also uses the legal concept of the “average consumer” as the reference point for determining whether a commercial practice is unfair either generally or constitutes a misleading action, misleading omission or an aggressive practice. The average consumer does not feature in UK legislation or case law.
FSA spokesman Robin Gordon-Walker says: “The legal ramifications are huge. Taking 'average consumer' alone, it is very much a continental concept which we do not think will be effective within the UK's framework.” To cap it all, the FSA believes that the embryonic consultation's ultimate aim of facilitating greater cross-border selling would simply not be achieved by the paper.
Perhaps unsurprisingly, IFAs are unimpressed with the directive and feel that consumers will be left more vulnerable. Sofa chairman and Informed Choice managing director Nick Bamford says: “Presumably, the Government would have signed up to this directive. Surely it must have realised the problem of it potentially offering UK consumers less protection than the existing FSA framework? It must take responsibility for this.”
Bamford also describes the situation as another example of a “classic lack of joined-up thinking by the Government”.
Aifa director of public affairs Tracey Mullins says the association agrees with the FSA. “We do not want to see any duplication or disruption,” she says.
In terms of what it may mean to IFAs in the future, Bamford says: “Advisers might think, does this mean I can stick two fingers up at the FSA?, but will conclude that they probably won't – most want to stay in business.”
Although the deadline to the DTI's consultation on the proposed draft paper has long past (last October), expect further drafts, consultations and questions for months and possibly years to come.
In negotiating the final wording of the directive, the Government says it will be seeking to ensure that the proposals are workable, provide certainty and avoid duplication of regulation.
Aifa believes it is possible that for certain business areas which are already regulated, the directive may be “disapplied” and exempt from the new framework.
Mullins says if this happens, it would not be the first time that an EU directive has been limited in this way. She also points out that although the deadline for responses to the draft consultation has passed, there will still be plenty of time for much to change.
The FSA warns that things which might seem a long way off have a way of gaining momentum along the way and to that end, the regulator is ready for a fight.
Gordon-Walker sums up: “This proposal becoming law is a long way off but we cannot be complacent and the FSA is anything but.”