WEEK 4 ADMINISTRATIVE LAW AND MARKET REGULATION | Quizlet

Product lifecycle

Material extraction / processing —> manufacturing —> distribution —> use —> disposal

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 (manufacturer) —> extra-contractual relationship with a consumer

- Distributor / seller —> (pre)contractual relationship with a consumer

Problem often incurred business-to-consumer relations

Information asymmetries / imbalance of bargaining power between business and consumers

3 regulatory goals

1. European market integration —> a level playing field for businesses through (minimum or maximum) harmonisation of national law

2. Consumer protection —> to correct a market failure resulting from information asymmetries between business and consumers

3. Sustainable production and consumption

7 regulatory tools

1. Product safety standards

2. Product liability

3. Prohibition of unfair commercial practices

4. Information requirements

5. Right of withdrawal

6. Contract terms control

7. Remedies for non-conformity of goods

Nature and relations of EU regulatory tools with national law

- EU consumer protection rules are mandatory —> parties may not deviate therefrom by contract

- Lex specialis —> EU consumer protection rules as implemented in national private law prevail over general rules of national private law

Product safety standards

EU product safety regime:

- Only safe products can be placed on the market

- General safety standard (ex ante):

1. A product under normal or reasonably foreseeable conditions of use doesn't present any risk or only the minimum risks to the safety and health of persons

2. A product which fails to meet this standard is a 'dangerous product'

- When does a product meet the general safety standard?

1. A major role for co-regulation —> private organisations set harassed technical standards within a public regulatory framework

2. The product that complies with technical standards is presumed to be safe

- e.g. Toyota recalls 1.4 million cars for airbag problems; Phillips issues recall notification to mitigate potential health risks related to the sound abatement foam component in certain sleep and respiratory care devices

General safety standard process

1. Manufacturers design and produce products in conformity with harmonised technical standards

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2. Manufacturers place only safe products on the market and provide risk warnings

- Distributors don't supply unsafe products

- NCAs (national competent authority) may restrict or prohibit the supply or marketing of potentially dangerous products

- Note —> in case of serious product risks to the health and safety of consumers in various MS, the European Commission may require NCAs to take action

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3. Manufacturers and distributors conduct on-going product safety monitoring of products already on the market

- NCAs conduct market surveillance

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4. If necessary, producers take appropriate action (incl. product withdrawal or recall)

- NCAs may order withdrawal or recall of dangerous products

Product liability

EU product liability regime for tangible goods: Product Liability Directive

- 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 (with a lower threshold of 500 euros)

- Producer is liable where a product is 'defective', i.e. doesn't provide the safety which a person is entitled to expect

-- Given the relevant circumstances —> e.g. presentation of the product, its reasonably expected use, the time when the product was put into circulation, applicable technical standards

-- Producer may invoke a defence —> e.g. regulatory compliance defence (but very limited); development risk defence

- e.g. Thalidomide tragedy (1960s)

Prohibition of unfair commercial practices

Regulatory framework: Unfair Commercial Practices Directive

- Unfair commercial practices are prohibited

- Unfair commercial practices are those which:

1. Are contrary to the requirements of professional diligence —> industry codes of conduct as a reference point AND

2. Distort or are likely to materially distort the economic behaviour of the average consumer —> certain consumers enjoy a higher level of protection due to their particular vulnerability to the practice or the product

Level 1: a general clause on unfair commercial practices

Level 2: specific unfair commercial practices —> misleading (omissions and actions) and aggressive

Level 3: 'blacklist' of commercial practices

Blacklisted commercial practices e.g.:

- Displaying a trust mark, quality mark or equivalent without having obtained the necessary authorisation

- Falsely claiming that a product has been approved, endorsed or authorised by a public or private body

- Claiming that products are able to facilitate winning in games of chance

Information requirements

- e.g. Consumer Rights Directive art. 6(1) information requirements for distance and off-premises contracts

How effective are information requirements?

- Problem of information overload

- Mostly lack clear remedies

Right of withdrawal

- Consumer Rights Directive, art. 9(1) —> Save where the exceptions provided for in Article 16 apply, the consumer shall have a period of 14 days to withdraw from a distance or off-premises contract, with-out giving any reason, and without incurring any costs other than those provided for in Article 13(2) and Article 14.'

- Consumer Rights Directive, art. 16

Contract terms control

- e.g. a clause in the membership contract under which the liability of the gym for any harm or injury caused by the use of the facilities and equipment is excluded

Regulatory framework: Unfair Contract Terms Directive

- Scope of application:

1. Not individually negotiated terms

2. 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 not binding on the consumer

- Terms are unfair if they:

1. Are not transparent, i.e. not drafted in plain and intelligible language (formal fairness)

2. Cause a significant imbalance in the parties' rights and obligations to the detriment of the consumer (substantive fairness)

Remedies for non-conformity of goods

Regulatory framework: Consumer Sales Directive 2019

- In case of non-conformity the consumer can first ask for repair or replacement:

-- The choice lies with the consumer

-- The 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

What is a circular economy?

1. Use and re-use of the earth's resources in a continuous flow

2. 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

What are financial services?

- Payment

- Credit —> simple (non-mortgage) credit and mortgage credit

- Investment

- Insurance

Financial product lifecycle

- Financial product is a contract

- Development —> distribution —> 'use' —> 'termination'

Types of financial institutions e.g.

Credit institutions; credit intermediaries; investment firms; insurance companies

Relations between financial institutions and consumers / potential clients

1. Information asymmetries / imbalance of bargaining power between financial institutions and consumers / potential clients

2. Consumer behavioural biases in financial decision-making (e.g. overoptimism, myopia)

3. Negative third party effects of individual transactions

5 financial regulatory goals

1. European market integration —> a level playing field for financial institutions through (minimum or maximum) harmonisation of national laws

2. Financial stability —> a state in which the financial system is capable of withstanding shocks

3. Orderly functioning and integrity of financial markets —> markets operate in a fair, transparent and efficient way

4. Consumer / client protection

- To correct a market failure resulting from information asymmetries between financial institutions and consumers / clients

- To ensure interpersonal suite between the parties as an intrinsic value?

5. Sustainable development —> sustainable finance as a prerequisite

Major challenges for regulation of financial services ?

Characteristics of financial markets:

1. Complexity

2. Uncertainty

3. Fragmentation

4. Ungovernability

5. Dynamism

- Need for public regulation undisputed but many questions about the appropriate regulatory design

Main building blocks of financial regulation

1. Prudential regulation

- Concerned with the safety and soundness of individual financial institutions (micro-prudential regulation) and with systemic risks to the financial system as a whole (macro-prudential regulation)

- Micro and macro-prudential regulation complement each other in ensuring financial stability

- Tools: e.g. requirements on authorisation, capital and management bodies

2. 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: e.g. product regulation, information requirements, duties of care and loyalty

Authorisation requirements

- Prudential regulatory tool

- Markets in Financial Instruments Directive

- e.g. Requirements for authorisations Markets in Financial Instruments Directive; Procedures for granting and refusing request for authorisation

Bank capital requirements

- Prudential regulatory tool

What are bank capital requirements?

- Regulatory standards for banks that determine how much liquid capital (easily sold assets) they must keep on hand in relation to their overall holdings

How are bank capital requirements set in the EU?

- Basel Committee of Banking Supervision has issued non-Binding capital adequacy rules

- The EU has transposed these rules in a public regulatory framework (Capital Requirements Regulation and Capital Requirements Directive V)

Requirements on management bodies

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 NCAs against 5 criteria:

1. Experience

2. Reputation

3. Conflicts of interest and independence of mind

4. Time commitment

5. Collective suitability

Group level —> controlling group dynamics and decision-making in the boardroom to ensure safeguards against risky behaviour:

- Foundational element 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 by the EU in case of consumer credit

General:

- Prohibition of unfair commercial practices

- Contract terms control

Specific:

- Information requirements for lenders

- Lender's duty to assess consumer creditworthiness

-- But only a modest version (soft paternalism) —> no duty to refuse granting credit in case of the negative result (MS may impose such a duty)

-- The duty is typically further specified by the codes of conduct adopted by professional associations of lenders (e.g. Dutch Banking Association)

- Right of withdrawal for consumers

- Consumers Credit Directive 2008

Potential regulatory tools e.g.

- Stricter lenders' duty to assess consumer creditworthiness —> including duty to deny credit in case of negative result

- Interest rate caps?

- Product regulation —> prohibition of potentially dangerous credit products?