Proposed consumer rights directive - briefing

08 October 2008
by eub2 -- last modified 08 October 2008

The European Commission launched on 8 October proposals for EU-wide rights to make it easier for consumers to shop on the Internet and in the main street.

Summary

The new proposal will guarantee consumers, wherever they shop in the EU, clear information on price and additional charges and fees before they sign a contract. It will strengthen consumer protection against late delivery and non delivery, as well as setting out tough EU-wide consumer rights on issues from cooling off periods, returns, refunds, repairs and guarantees and unfair contract term. The proposed Consumer Rights Directive simplifies 4 existing EU consumer rights directives into one set of rules. It targets e-commerce as part of a wide ranging overhaul and up grading of existing EU consumer rights online and in the high street. The aim is to boost consumer confidence and at the same time to cut red tape which is holding back business within national borders – denying consumers more choice and competitive offers. A standard set of consumer contract terms will cut compliance costs substantially - by up to 97% for EU wide traders. The proposed directive upgrades existing consumer protection in key areas where there have been large numbers of complaints in recent years - such as pressure selling. It adapts the legislation to new technology and sales methods, for example, m-commerce and online "ebay" auctions. There is a clear requirement in the new proposal for clear information about consumer rights to be displayed at point of sale.

SECTION 1 – OVERVIEW

The current situation

Currently, there are four different Directives which cover consumer contractual rights in the EU: Unfair contract terms (Council Directive 93/13/EEC on Unfair Contract Terms), Sales and Guarantees (Directive 1999/44/EC Sale of Consumer Goods and associated guarantees), Distance Selling (Directive 97/7/EC Distance Selling), and Doorstep Selling (Council Directive 85/577/EEC Door to door). These Directives set out the basic consumer rights which apply to consumer contracts across the EU. These include the information you receive on an offer, rules on unfair contract terms which are biased against the consumer, cooling off periods where you can change your mind on distance and doorstep selling contracts, as well as rights on repairs and guarantees for faulty goods.

The problem is that several of these laws date from the 1980s, and all of them set minimum standards. Since individual EU countries have adapted the rules in different ways nationally, a patchwork of laws which has evolved over the last 20 years.

The result is a maze of different rights and practices, from cooling off periods to guarantees, which are as unclear to consumers as they are confusing for business. Guarantees, for example, last for 2 years in one country but can be longer in others; cooling off periods last 7 working days in one Member State and can be 14 calendar days in another. In addition, the existing Directives are not adapted to recent technological developments.

The scale of the opportunity

The steady progression of technology, in the form of digital communications and internet, is on its way to utterly transforming our lives forever. Internet will change the way we conceive social life but also the way we interact economically. It will transform the economic environment of individuals and dramatically expand their range of opportunities.

Internet ensures consumers can find, in a few clicks, the product they want at the best price possible. Millions of individuals have gained easy access to secondary markets that provide good value for money, and thousands individuals are using the internet to develop small scale businesses. This is the result of a ground-breaking evolution of retail distribution online that offers innovative platforms facilitating transactions between individuals and firms.

• Already, three hundred million people in the European Union use the internet.
• One hundred and fifty million already use it for shopping.
• Sixty percent of EU citizens use internet to compare prices and suppliers, and to get real time information on the performance of products.
• The revenues of online commerce are forecasted to be 128 billion EUR in the European Union in 2008. Forecasters expect these revenues to grow by 230% in five years reaching 291 billion EUR in 2013.
• But this is only if we get it right. This is the scale of the opportunity.

At a time when European households are facing pressure on their budgets and watching their purchasing power deteriorate, we cannot afford to ignore this chance to bring such efficient retail to their desktops.

The problem: the Single Retail Internal Market is not functioning

Unfortunately, the reality today is that the EU-wide market at retail level does not yet exist, even when online cross border shopping should be practically costless. This greatly diminishes the opportunities available to consumers and the incentives for business to grow.

• Only one in five people who shop online ventures beyond national borders.
• Although it is still a sizable 30 million people, it is only 7% of the adult population in the EU.
• The trends are not promising. The number of consumers using the internet for domestic purchases increased from 23% to 30% between 2005 and 2008, but cross-border online purchasers only rose from 6% to 7% for the same period. In other words (there are significant variations in online shopping in the EU, see table below for details of online shopping in different countries)
• Across the EU 150 million of the world's wealthiest consumers are already actively buying online. But only 30 million of them do so cross border, even though they spend an average €800 a year when they do make cross border purchases.
• Many people are just not aware of the opportunities that are out there if they shop around online. For example, a digital camera can cost 33% more in Finland than in Germany, with an absolute price difference that would remain substantial even after shipping costs. But 37% of EU citizens still feel more confident buying online from a trader in their own country.
• Two-thirds of Europeans think there are more potential problems in making cross-border purchases rather than domestic purchases.
• Businesses themselves face real barriers to serve cross border.
• 8% of cross border shoppers have been turned down by traders because they lived abroad.
• Currently, only one in five EU retailers sells cross-border.
• This means that 80 percent of them bypass a market of hundreds of million people.
• Large businesses often sell across the Union but in a fragmented way. Some take advantage of borders to price discriminate across the EU.

There is a significant variation in online shopping at country level: 68% of individuals in the Netherlands have made an online purchase in the past 12 months, while this is true for just 4% of Bulgarians. The average value is clearly lower in the EU10 than in the EU15, i.e. 50 to 200 euros and 500 to 1,000 euros respectively.

The opportunity cost for consumers and business.

The internal (B2C) business to consumer market is incomplete. Cross-border retail competition is weak and there is only limited pressure on traders to harmonise retail prices across Europe. Consequently, large differences exist between average price levels of the individual EU Member States which consumers could take further advantage of.

The price differences are striking for particular products that can be normally be bought online either domestically or cross-border.

A small scale online survey of three products was undertaken. The products were: Euphoria perfume by Calvin Klein, 50 ml; an MP3 player (iPod nano 8GB); and a sports shoe (Nike Dart V).

Even though it was only possible to identify prices in a small number of countries, there were significant variations. The same perfume can cost anything from 51.88 Euro in the UK, to 58.5 in Ireland and 66.5 Euro in Germany. The same MP3 player can cost from 179 Euro in Spain, to 199 Euro in France and 231 Euro in Romania. For the same sports shoe you can pay 45.96 Euro in the UK and 50 Euro in France or Germany.

Prices for a Panasonic Lumix DMC-FZ8 digital camera (black) at a major distance selling company, by country (as of 13 March 2008)

In March 2008, a major European distance selling company specialising in electronic consumer goods sold a digital camera in the UK for £152, corresponding to €198.49. The price for the same product was €254 in neighbouring Ireland and €276 in Belgium. On the Finnish website of the trader, the same camera was listed for €306, making it over 54% more expensive for Finnish consumers than those in the UK.

The Belgian consumer magazine Test-Achat similarly reported that the prices of digital cameras can vary up to 30% even between neighbouring countries. Table 2.4 indicates the variations between countries for the camera illustrated in Figure 2.1.

Price differences – clothing, furniture, electronics, cars

In a more systematic way, four categories of consumer goods that are potential candidates for cross-border purchases were examined: clothing, consumer electronics, cars and furniture. Price differences compared to the best EU price were computed for each category.

Overall, the variations in prices are significant for some countries, depending on the product category. For example, the price for furniture is 59% higher in Italy, Ireland and the UK, the countries with the highest price for this category, than in Romania, the country with the lowest price. Bulgaria has the lowest price for cars while prices in Denmark are 61% higher (the country with the highest price for this category).

In consumer electronics, Lithuania was found to have the best price, while Austria had the highest price in this category (34% higher than in Lithuania). As for clothing, Austria was found to have the highest price, which was 69% higher than in Slovakia (best price). The price dispersion (expressed as the standard deviation) was highest for clothing and cars, followed by furniture. Consumer electronics is the category for which prices vary the less.

It is clear that even in neighbouring countries significant prices difference remain. Consumers should have everything to gain from shopping around.

For example, for electronic goods:

• Spain is 12.4% more expensive than Portugal.
• Denmark is 8.8% more expensive than Sweden.
• The UK is 10.4% more expensive than Ireland.
• Austria is 32.8% more expensive than Germany.
• France is 9.5% more expensive than Italy.
• The Netherlands is 4% more expensive than Belgium.
• Estonia is 14.2% more expensive than Romania.

For clothing:

• Spain is 0.8% more expensive than Portugal.
• Denmark is 0.6% more expensive than Sweden.
• Ireland is 9.1% more expensive than the UK.
• Austria is 28.5% more expensive than Germany.
• France is 18.6% more expensive than Italy.
• The Netherlands is 2% more expensive than Belgium.
• Estonia is 47.9% more expensive than Romania.

The problem: The low level of consumer confidence

Two-thirds of Europeans think there are more potential problems in making cross-border purchases rather than domestic purchases. 68% of EU citizens consider there to be a greater risk of falling victim to scams and fraud when purchasing from suppliers located in another EU country than from providers in their home country. A clear majority (56%) of Europeans agree, while only one-quarter (24%) disagree, that providers from other EU countries are less likely to respect consumer protection laws than suppliers from their home country.

There are three main causes for this problem.

• Reasons of a practical and regulatory nature (e.g. language, geography, tax regimes etc.) which are unrelated to EU consumer law;
• Reasons of a practical and regulatory nature, which are affected by EU consumer law (e.g. delivery and complaint handling problems);
• Other factors that are linked to EU consumer law, such as insufficient knowledge of the law by consumers, difficulties in obtaining redress and poor enforcement.

Business reluctance to trade cross border.

Regulatory fragmentation is one of the main obstacles to cross-border trade identified by the traders in the Eurobarometer 2008 (Flash Eurobarometer 224) on Business attitudes towards cross-border sales and consumer protection. According to the survey results, the additional cost of complying with different national laws regulating consumer transactions – which is in the scope of the current review of the EU Consumer Acquis – was identified a an important barrier by a majority of respondents (60%).

According to the 2008 Eurobarometer, 75% of the traders who do not currently sell cross border indicated that they would start doing it if regulations were harmonised. This figure clearly indicates that retailers would be much more open to engage in cross border sales if the risks of failing to comply with various national regulations could be eliminated by establishing EU level rules in this regard. The cost of fragmentation is a heavy burden on business. For businesses which currently only sell domestically, the estimated administrative cost linked to complying with consumer laws as they now stand is 5525,9 Euro for distance sellers and 6625 Euro for direct sellers.

These costs would increase to 9775,9 Euro for distance sellers and 10375 Euro for direct sellers who wish to sell to consumers located in one or two other EU countries. The estimated administrative costs for a business wanting to sell in all 27 Member States are 70525,9 Euro for distance sellers and 71625 Euro for direct sellers.

Practical Consumer complaints

In concrete terms, it is clear that a range of regulatory problems are holding consumers back. According to the European Consumer Centres, problems with delivery, defective products and after-sales service are the main issues causing consumer complaints.

Complaints and disputes reported to an European Consumer Centre office by type of problem

Source: The European Online Marketplace: Consumer Complaints 2005

These trends are widely reflected in a range of other studies from the UK and France and from focus groups and the feedback from Consumer Organisations. The other clear trend is a lack of information for consumers about their rights.

• Delivery is especially problematic in distance selling. Non-delivery of ordered goods is the most problematic issue within the European e-commerce market. It accounted for 38% of all consumer complaints submitted to the ECC Network during 2005. Almost one in four European consumers have encountered delivery problems in a distance purchase – delay or non-delivery – in the past 12 months. According to an OFT study on Internet shopping, delivery problems in the UK account for nearly half (48 per cent) of all the problems people said they had experienced (most typically as late or non-delivery).
• Guarantees: 15% of European consumers tried to assert their guarantee rights in 2004, and almost all of them had done so in their home countries. Complaints mainly related to defective products that the trader did not want to repair, replace or refunds. In online cross-border transactions, problems relating to the conformity of a product are the second most common complaint received by the ECCs (25% of complaints).
• Withdrawal Rights: Overall, based on the complaints received and information requested by consumers, the ECCs considered issues with withdrawal rights the third most important problem of the Consumer Acquis. Most cross-border complaints relate to how to withdraw (and whether the trader will accept the notification) and the costs imposed.
• Problems with lack of pre-contractual information and consumers' lack of awareness of their rights are widespread. For example, in distance selling, the ECC study on Internet shopping found that in 28% of all cases, web-traders had not informed the consumer about the cooling-off period prior to the purchase. In the OFT study on Internet Shopping, more than half (56%) of the internet shoppers did not know about their right to cancel. One third also did not know where to turn to get advice on their rights.

SECTION 2. THE NEW PROPOSALS

The new proposals

The Consumer Rights Directive concerns contracts for sales of goods and services from business-to-consumer (B2C). Generally all contracts are covered, i.e. purchases made in a shop, at a distance or away from business premises. On top of that, the Directive includes rules specific to particular situations (e.g. providing for a right of withdrawal in the case of distance and off-premises contracts).

A distance contract means any sales or service contract where the trader, for the conclusion of the contract, makes exclusive use of one or more means of distance communication, for instance sales by Internet, mobile phone or catalogue.

An off premises contract is a sales or service contract concluded away from business premises with the simultaneous physical presence of the trader and the consumer (e.g. a salesman offers a good in the consumer's home, at his work, in the street or at a home party) It also covers contracts concluded on business premises (e.g. in a shop), but negotiated away from business premises (e.g. a door salesman makes an offer, but the contract is later concluded in his shop).

The proposed Consumer rights Directive aims to put in place clear EU wide rules covering:

• Pre-contractual information. Before concluding a contract, the Directive obliges the trader to provide the consumer with a clear set of information requirements, for all consumer contracts, so that the consumer can make an informed decision on whether or not to buy. These include, for example, the main characteristics of the product, geographical address and identify of the trader, the price inclusive of taxes, all additional freight, delivery or postal charges; arrangements for paying, delivery, performance and complaint handling policy, if applicable the existence of a right of withdrawal, or additional charges relating to deposits or financial guarantees, the existence of commercial guarantees or after sales service.
• Rules on delivery and passing on risk to the consumer (currently not regulated at EU level): The trader must deliver the good to the consumer within a maximum of 30 calendar days from signing the contract. Under the new rules, the trader bears the risk and the cost of any deterioration or destruction/loss of the good until the moment the consumer receives the good. When a trader fails to fulfil his obligation to deliver, the consumer is entitled to a refund as soon as possible and no later than 7 days from the date of delivery.
• Cooling off periods (distance and pressure sales): A single EU-wide cooling off period of 14 calendar days is set down, along with rules on the beginning of the withdrawal period. The withdrawal period is extended to three months in all cases where the trader fails to provide information. An easy to use, standard withdrawal form, is also introduced. The trader must reimburse the consumer no later than 30 calendar days from the day that the consumer exercises the right of withdrawal.
• Repairs, replacement, guarantees. A standard set of remedies available to a consumer who has bought a faulty product (i.e. repair or replacement in the first place and the reduction of the price or the reimbursement of money only in specific circumstances) is set out.
• Unfair Contract Terms: The Directive contains a new black list of unfair contract terms which are prohibited across the EU in all cases and an EU wide grey list of contract terms deemed to be unfair if the trader does not prove the contrary.

The Directive strengthens protection for consumers in relation to 2 key issues – online auctions and pressure selling.

• Online auctions: the Directive has common rules for auctions, including e-auctions, providing for information obligations (new) – price, geographical address of trader, delivery costs etc - but exempting auctions from the right of withdrawal, due to the nature of the auction bidding process.
• Tougher protection against pressure selling: Following a high number of consumer complaints, the protection against pressure selling will be tightened up on several fronts. First, the definition of what is covered by consumer protection rules is made much wider. The definition of "off-premises contract" is broadened to avoid, as is the case at present, a large number of off- premises contracts falling outside the scope of the Doorstep Selling Directive. Pressure selling in the street, or at home parties, will now be covered. Most importantly, consumers will benefit from an extension of consumer protection rules to cover solicited visits, which had been causing a high number of complaints. The new rules aim to facilitate online supermarket sales with home delivery, and solicited craftsmen services, by clearly exempting them from the right of withdrawal.

SUMMARY OF THE 12 MAIN IMPROVMENTS FOR CONSUMERS

1. Tough new rules on delivery.

Delivery is the biggest problem for consumers in cross border shopping. At present the definition of delivery is not elaborated in EU consumer law. Different rules apply in different Member States. Now goods must be delivered in 30 days everywhere in the EU. Consumers are fully protected with new rules covering any damage which occur during transport. For late delivery, or non delivery – as a consumer you have a new right to get your money back in 7 days.

2. An End to hidden charges – no display no pay!

The new rules target hidden charges – a new plague for consumers – with tough new transparency requirements. The new directive makes it very clear where the consumer was not informed upfront, in pre-contractual terms, about extra costs and hidden charges they are not obliged to pa the charge and they are entitled to a refund. This breaks new ground for EU consumers.

3. A strengthened EU wide 14-day "cooling off" period and right of withdrawal for consumers.

Cooling off periods are strengthened to build confidence. The new 14 day right is a significant forwards from the situation (7 day minimum) It is essential for consumers to have peace of mind buying at a distance and under pressure. They need to be able to "cool off" and change their mind. For many member states this is a significant step forwards.

4. A new ban on default pre-ticked opt-in boxes.

There is new protection to crack down on default options which are being increasingly used deny consumers a real choice. All pre-ticked box which apply to payments are banned – for example, for travel insurance, priority boarding and baggage. Consumes have to expressly consent to such additional payments by for example ticking a consent box. Under the new rules consumers, for the first time, have a right to be reimbursed any the sums unduly paid using these default options.

5. New "see through clauses" - full pre-contractual information must be provided in all contracts.

Independently of hour a consumer concludes a contract – in the face to face situation, over the internet, on the phone or on the street, he will be entitled to the same information. For the first time, omissions in the information provided to the consumers will have a mandatory contractual remedy. Full information for consumers is essential not an-add on luxury. National courts will decide on the remedy depending on the scale of the omission– from refunds, to replacement or declaring a contract void.

6. A major crackdown on pressure selling.

The new rules significantly extend protection against pressure selling to cover all "off premises selling." This has been one of the biggest areas of complaints for consumers. All direct transactions which are carried out (face to face), away from a business premises will be covered, compared to the old limited rules covering only "doorstep" sales at home. The loopholes exempting "solicited" visits and causing a very high number of complaints are closed."

7.Closing loopholes for distance selling

New definitions means that ALL distance contracts are fully covered - closing existing loopholes. For example, contracts negotiated away from business premises, but concluded by means of distance communication will now be covered. In fact, all distance sales are covered.

8. New transparency obligations

New transparency to inform on any deposits or guarantees to be taken by the trader eg blocking a sum on a credit card or debit card and there is obligation to reveal if the trader is acting as an intermediary (as B2C rights do not then apply). These are two areas that have been causing a high number of consumer complaints.

9. New protection for Mobile-commerce and Tele-commerce:

EU Consumer rights are extended to cover m-commerce and tele-commerce for the first time. The new rules make it possible for traders selling - often using small screens - to provide only key information on price and product to the consumer. But they put in place a mandatory obligation for full information on the consumers rights to be provided via web link, or toll free number- so they are clearly available to the consumer.

Updating the existing rules, to allow modern technology such as Email, and pdf files (e.g. scanned letter) to be easily used by consumers to notify the trader They are now considered a "durable medium."

10. New EU Black list and grey list of unfair and abusive contract terms –

so that consumers cannot be caught out by hidden clauses in the small print. These binding lists of unfair terms are a significant improvement for consumers compared to the current situation. Now some Member States have purely indicative lists – that in practice offer weaker protection to consumers.

11. New EU wide protection for online auctions:

Protection for online auctions for consumers is significantly strengthened across the EU. Now all online auctions are covered by the information provisions. The biggest problems online auctions come from the goods not being as described and consumers not being able to contact the trader.

12. Information for consumers rights at point of sale

There is a specific requirement in the directive for Member States to ensure that consumers are given clear information about their rights at point of sale. The low level of awareness about rights has been raised by consumer organisations throughout the consultation process. Rights are no good unless people know about them.

THE MAIN IMPROVEMENTS FOR BUSINESS – REDUCTED COMPLIANCE COSTS – BY 97% FOR EU WIDE TRADERS

Traders will be able to use the same contract terms in all countries. The Impact Assessment Report shows that for instance a distance seller already trading in his home country will be able to expand his sales to 26 Member States by incurring a cost, to comply with relevant legal requirements, of 2,153 euro instead of 70,526 euro. For a newly established distance seller the cost of setting up a new business that complies with the regulation of 27 Member States will diminish from 70,526 euro to 5,526 euro.

By incurring the cost of change, existing distance and off premises businesses will comply with the relevant legal requirements across the EU and will be able to trade freely in 27 Member States. This will result in a significant reduction of the burden for companies wishing to sell cross-border in the EU. For example, a distance or off premises seller already trading in his home country will have the same cost for trading in for instance 5, 10 or 27 Member States as in one, given that the rules will be the same. No additional burden is envisaged for face-to-face retailers.

ADDITIONAL INFORMATION ON THE LEGAL DETAIL OF THE CONSUMER RIGHTS DIRECTIVE

• Contracts between intermediaries: Clear information requirements in relation to intermediaries are included in the proposed Directive. Today, consumers purchasing a product from an intermediary acting in the name of or on behalf of a consumer are often not aware that they are not protected by consumer protection legislation. With the new rules, the consumer must always be informed whether the trader is selling to him on his own behalf, or as intermediary for another consumer. This will make it clear to the consumer whether or not he is protected by consumer legislation. It is also made clear in the proposal that online platforms (such as e-Bay) are not considered to be intermediaries.
• A black list of unfair contract terms which are prohibited across the EU in all cases is set out in the proposal. For instance, terms enabling the trader to unilaterally alter the terms of the contract, including the characteristics of the product, without a valid specified reason will not be allowed. Other examples of black list terms are: "The trader is not responsible for mistakes made by his agents"; or "the trader will deliver the goods on the condition that the trader's warehouse is still in operation at the agreed time of delivery".
• An EU wide grey list of contract terms, deemed to be unfair if the trader does not prove the contrary, is set out. An example of such terms is the automatic renewal of a subscription contract where the consumer does not indicate otherwise (example: telecoms or energy contracts concluded for one or two years being automatically renewed unless the consumer sends a registered letter 3 or 4 months before the anniversary date of the contract). Another term which may be relevant today with the energy price increase is the following: "allowing the trader to increase the price agreed with the consumer when the contract was concluded without giving the consumer the right to terminate the contract".
• Repairs, refunds. Under current rules, a consumer who has bought a faulty product may require a repair or replacement in the first place, and the reduction of the price or the reimbursement of money only in specific circumstances. The new Directive will maintain those rights, but the same rights will apply all over the EU, to avoid the differences that exist today between various national legislations. There is an obligation on the consumer to inform the seller of the defect within a certain period, which should be less than two months from the moment of discovery.

WHAT SECTORS ARE EXCLUDED?

Financial services are covered by the new directive’s rules on unfair contract terms and mortgages or other loans on real estate negotiated at the consumer's home by the rules on off premises sales. For the rest, there is an exclusion because there is special separate legislation in place (for example, the Distance Marketing of Financial Services Directive of 2002 applies to distance sales of financial services; the Consumer Credit Directive applies to credit agreements concluded at doorstep).

Timeshare and Package travel, only the new directive's rules on unfair contract terms apply, since there is separate specific legislation in place for other aspects.

Exemption from the information requirements and the right of withdrawal regarding distance sales and off-premises contracts:

Sale of immovable property. The sale of a house is about rules on ownership and therefore outside the scope of the Treaty (Article 295).

Distance contracts for the provision of accommodation, transport, car rental services, catering or leisure services, where the trader undertakes, when the contract is concluded, to provide these services on a specific date or within a specific period. The reason for this is that in transport legislation, there are already a considerable number of information obligations and the introduction of a right of withdrawal would not fit very well with the price setting of transport where, for instance, the price of an airline ticket may change several times a day, and if the reservation is made shortly before departure a 14-day withdrawal period would make no sense.

Other excluded areas are: Automatic vending machines; the use of phone boxes; the supply of foodstuffs or beverages by regular roundsmen (e.g. the milkman in the UK).

Services are excluded from the two-year guarantee eg, energy water gas. Services are excluded from the right of withdrawal in distance contracts when the consumer has given his express consent to waive such a right (for example, when the consumer has downloaded music on the Net and has given his prior express agreement, he cannot later withdraw from the contract since he has already enjoyed the service. It would be unfair to ask for a refund while he has downloaded the music file on his computer).

Source: European Commission