The impact of e-commerce developments on consumer welfare - information disclosure regimes

Journal of Financial Regulation and Compliance

Volumn 11, Issue 4, 2003, Pages 329-348

  Hamilton, Jennifer ^a   Gillies, Lorna E ^a  

^a UNIVERSITY OF STRATHCLYDE   (United Kingdom)

Author keywords

Consumers; Decision making; E commerce; Information disclosure

Indexed keywords

EID: 84858427198     PISSN: 13581988     EISSN: 17400279     Source Type: Journal    
DOI: 10.1108/13581980310810615     Document Type: Article

References (82)

1. Governed in the UK by the ‘listing rules’ issued by the UK Listing Authority. These rules require the issuer to publish a ‘prospectus’ before securities can be offered to the general public.
2. In debates preceding the introduction of the Financial Services and Markets Act 2000, Ms Patricia Hewitt, Economic Secretary to the Treasury supported information disclosure as ‘one of the best protections for consumers and … essential if they are to be held as having some responsibility for their decisions’, House of Commons Standing Committee A, 6th sitting, http://www.fsa.gov.uk/fsma/data/ house_of_commons/standing_committee_ a/sit_06/06_Sit_pg3.html
3. EU Financial Services Action Plan 1999 COM(1999)232, 11th May 1999 and see also UK Financial Risk Outlook January 2002, www.fsa.gov.uk/pubs/plan/financial_ risk_outlook_2002.pdf, at s. 6.1 (pp. 48-50).
4. At European level in particular there is a belief that rapid developments in online selling have the potential to transform the internal market in financial services - see eg Financial Services Action Plan: Forum Group on Information ‘Communication codifying clear and comprehensible information for purchasers’, October 1999, http://europa.eu.int/comm/internal_market/ en/finances/actionplan/information1. pdf, para. 2
5. EU Distance Marketing of Financial Services Directive, Directive 2002/65/EC of the European Parliament and of the Council concerning the Distance Marketing of Consumer Financial Services and Amending Council Directives 90/619/ EEC, 97/7/EEC and 98/27/EEC, 23rd September, 2002 available at http://register.- consilium.eu.int/pdf/en/02/st03/0363- r1en2.pdf, UK Financial Services Authority Handbook of Rules and Guidance, conduct of business rules, available at http://www.fsa.gov.uk/vhb/html/cob/COBtoc.html.
6. Not all disclosure has this aim. Sometimes it has other explicit purposes, eg to help enforcement agencies etc to uncover breaches of the law, eg money laundering (see further Breyer, S. (1982) ‘Regulation and its reform’, Harvard University Press, or, in the case of securities regulation, to assist in monitoring management.
7. See eg the Council Resolution of 14th April, 1975 [1975] O.J. C92/1 which lists the right to information as a basic consumer right. See further Weatherill, S. (1994) ‘The role of the informed consumer in EC law & policy’, Consumer Law Journal, Vol. 49.
8. See eg GB-INNO v CCL, [1990] 1 E.C.R. 667.
9. Weatherill (1994) GB-INNO v CCL., p. 49.
10. There have also been a number of international (OECD, UNECE) initiatives for the regulation of e-commerce. For example, the OECD has issued a number of working papers and guidelines on business to consumer e-commerce. The common theme of international organisations is that of increasing information to consumers within a regulatory framework/ environment - see eg ‘Recommendations of the OECDA Council Concerning Guidelines for Consumer Protection in the Context of Electronic Commerce’, April 1998, available at http://www.oecd.org/pdf/M00000000/M0000000363.pdf.
11. It is of course not the only mechanism:authorisation requirements; criminal provisions aimed at market manipulation; rules on financial promotion and provision of alternate redress mechanisms, for example, also provide important protections at both UK and European level.
12. Financial Services and Markets Act 2000, Sched. 2. ‘Regulated activities’ include dealing in investments, arranging deals in investments, deposit-taking, safekeeping and administration of assets, managing investments, investment advice, establishing collective investment schemes. ‘Investments’ include securities, instruments creating or acknowledging indebtedness, government and public securities, instruments giving entitlement to investments, collective investment scheme units, options, futures, contracts for differences, contracts for insurance, deposits, loans secured on land, rights in investments.
13. Contained in the FSA Handbook of Rules & Guidance available at www.fsa.gov.uk
14. A longer-term product containing both a cash and an equity investment element.
15. FSA Regulatory Update 76, June 2000, available at http://www.fsa.gov.uk/pubs/ additional/regup76.pdf.
16. See the FSA Handbook of Rules and Guidance, Conduct of Business Section (COB) 6. The detailed information requirements will vary depending on the type of product.
17. On the right to cancel contracts for packaged products see FSA Handbook of Rules and Guidance: COB 6.
18. See eg European Commission Financial Services Action Plan, COM(1999)232, 11th May, 1999.
19. EU Commission (2002) ‘Towards a knowledge-based Europe’, October, available at http://www.europa.eu.int/information_ society/newsroom/documents/catalogue_ en.pdf.
20. EU Commission (2002) ‘Towards a knowledge-based Europe’, October,. at p. 3 et seq.
21. European Commission, RAPID, ‘Financial services: latest report highlights sustained progress in integrating EU capital markets’, IP/02/1785, 2nd December, 2002, available at http://europa.eu.int/ rapid/start/cgi/guesten.ksh?p_action.- gettxt=gt&doc=IP/02/17850RAPID&lg=EN&display=
22. Directive 2000/31/EC on Certain Legal Aspects of Information Society services, in particular Electronic Commerce, in the Internal Market. The Directive came into force in the UK in 2002 by the Electronic Commerce (EC Directive) Regulations 2000.SI 2002/2013. In addition the directive makes certain other provisions, such as permitting individual member states to determine whether it is permissible to send unsolicited communications to recipients.
23. The Directive imposes the ‘country of origin’ principle on providers of ISS, though the presence of various grounds of derogation allowing the imposition of regulations by the recipient member state will doubtless impact on this aim. In effect, this requires member states to impose their regulatory requirements on the outward provision of ISS, and to remove them from inward provision of ISS. In the context of financial services this means that the FSA will impose its disclosure requirements on financial service providers established in the UK (even where the provider only provides services to customers in other member states), but cannot impose its disclosure requirements on financial service providers established in other member states who provide such services to UK recipients via the internet. There is provision in Art. 4 for derogation from the ‘country or origin’ principle for the purpose of protecting consumers, but as the UK has announced that it will no longer exercise this derogation when the DMD directive is implemented, it will not be discussed further. (However, on the derogation power see the Communication by the Commission COM(2003)259 final, published 13th June, 2003).
24. This requirement includes information about the service provider (including name, geographical address and e-mail address - Art. 7) but also information that must be provided concerning the conclusion of contracts (eg the technical steps to follow to conclude the contract, the technical means for correcting input errors, the languages offered for conclusion of the contract - Art. 10).
25. Directive 2002/65/EC of the European Parliament and of the Council concerning the Distance Marketing of Consumer Financial Services and Amending Council Directives 90/619/EEC, 97/7/EEC and 98/27/EEC, 23rd September, 2002 available at http://register.consilium.eu.int/pdf/en/02/st03/0363-r1en2.pdf.
26. Art. 1, Distance Marketing of Consumer Financial Services Directive.
27. Although under Art. 4 the Directive permits member states to ‘maintain or introduce more stringent provisions on prior information requirements when provisions are in conformity with Community law’.
28. Art. 2(b), This will have the practical effect of extending conduct of business rules to the distance marketing of depositbased products - see FSA Discussion Paper 21, Implementing the Distance Marketing Directive, March 2003, para.2.12.
29. Defined in Art. 2(a) as ‘any contract concerning financial services concluded between a supplier and a consumer under an organised distance sales or service-pro vision scheme run by the supplier, who, for the purposes of that contract, makes exclusive use of one or more means of distance communication up to and including the time at which the contract is concluded’.
30. In addition the Directive specifies that consumers must also be provided with other information on the ‘distance contract’ similar to the post-sale information requirements under the UK regime including information on existence and duration of withdrawal rights; its minimum duration; information on withdrawal and ‘practical instructions’ to exercise those rights; out-of-court complaint and redress procedures.
31. ‘Durable medium’ is ‘any instrument which enables the consumer to store information addressed personally to him in a way accessible for future reference for a period of time adequate for the purposes of the information and which allows the unchanged reproduction of the information stored’, Art. 2(b). If an internet website satisfies this definition it can be deemed to be a ‘durable medium’ for the purposes of this directive; Recital 20.
32. See FSA Discussion Paper 21 (2003) ‘Implementation of the Distance Marketing Directive’, March, para 5.8.
33. Whitford, W. C. (1973) ‘The functions of disclosure regulation in consumer transactions’, Wisconsin Law Review, Vol. 2, pp. 400-486.
34. FSA Consumer Research 5, ‘Informed decisions?' November 2000, and FSA Handbook of Rules and Guidance COB 6.1.3
35. EU Distance Marketing of Financial Services Directive, Directive 2002/65/EC, para. 21, and see also the EU Financial Services Action Plan, ‘consumers need information to assess the characteristics of the contract, the service provider, and the proposed investment. Industry must do everything possible to meet such needs’. Supra, Reference 3, at p. 10.
36. FSA Discussion Paper (2000) ‘Informing consumers: A review of product information at the point of sale’, November, s. 4, and FSA Consultation Paper 170 (2003) ‘Informing consumers: Product disclosure at the point of sale, February, para. 2.14, and see also The Consumers’ Association Policy Paper (1998) ‘Disclosure: Protecting consumers’, February.
37. The research findings are synthesised in FSA Consumer Research 5 (2000) ‘Informed decisions? How consumers use key features’, November, a companion document to FSA Discussion Paper (2000) ‘Informing consumers: A review of product information at the point of sale’, November.
38. Informed decisions? How consumers use key features, para. 3.26
39. FSA Consumer Ressearch 5 (2000) Informed decisions? How consumers use key features., para. 3.34.
40. Informed decisions? How consumers use key features., para. 4.4
41. FSA Discussion Paper 4 (2000) ‘Informing consumers: A review of product information at the point of sale’, November, para. 21.
42. FSA Discussion Paper 6 (2001) ‘The FSA’s approach to the regulation of ecommerce’, June, paras. 8.2 and 8.22.
43. FSA Consultation Paper 170 (2003) ‘Informing consumers: Product disclosure at the point of sale’, February, at para. 5.17.
44. The research findings are synthesised in FSA Consumer Research 5 (2000), Reference 38 at para. 3.60
45. The research findings are synthesised in FSA Consumer Research 5 (2000) ., at paras. 5.17 and 5.51. Other proposed reforms include focusing on ‘core’ product information and allowing firms greater discretion as to the treatment of other disclosable information; the use of a question-and-answer format for delivering general information.
46. Hawkins, K. (1992) ‘The uses of discretion’, Clarendon Press, Oxford, p. 21.
47. Hawkins, K. (1992) ‘The uses of discretion’, Clarendon Press, Oxford, pp. 167-168.
48. Langevoort, D. C. (2002) ‘Taming the animal spirits of the stock markets: A behavioural approach to securities regulation’, Northwestern University Law Review, 15th July, forthcoming http://ssrn.com/ abstract=305241.
49. Simon, H. A. (1965) ‘Administrative behaviour’, Free Press.
50. Sunstein, C. (2000) ‘Behavioural law & economics’, CUP, Chapter 1
51. Montier, J. (2002) ‘Behavioural finance: Insights into irrational minds & markets’, John Wiley & Sons.
52. Tversky, A., Slovik, P. and Kahnehman, D. (1982) ‘Judgment under uncertainty, heuristics and biases’, CUP.
53. Langevoort, D. C. (1996) ‘Selling hope, selling risk (stockbrokers and sophisticated customers’, Californian Law Review, Vol. 84, No. 3, pp. 627-701.
54. FSA Discussion Paper 4 (2000) Californian Law Review. (Reference 42), para. 63.
55. Montier (2002) Californian Law Review. (Reference 50).
56. There are a number of studies from the USA which appear to find overconfidence as a general phenomenon in stock market investors - eg De Bondt, W. (1998) ‘Portrait of the individual investor’, European Economic Review, Vol. 42, Nos 3-5, pp. 831-844
57. Shiller, R. J. (2000) ‘Irrational exuberance’, Princeton University Press, pp. 171-190
58. Shefrin, H. (2000) ‘Beyond fear and greed’, HBS Press, p. 142.
59. Supra, (Reference 52) at p. 692.
60. Montier (2002) Beyond fear and greed.
61. Sunstein (2000) Beyond fear and greed. (Reference 50) for further discussion.
62. Ennew, C. and McKechnie, S. (1998) ‘The financial services consumer’, in Gabbott, M. and Hogg, G. (eds) ‘Consumers & services’, John Wiley & Sons.
63. FSA Discussion Paper 4 (2000) Consumers & services. (Reference 42), see Table 2: Consumer buying processes and information needs.
64. Ennew and McKechnie (1998) Consumers & services. (Reference 58), p. 187.
65. Sunstein (2000) Consumers & services., (Reference 50).
66. McKechnie, S. (1992) ‘Consumer buying behaviour in financial services: An overview’, International Journal of Bank Marketing, Vol. 10, No. 5, pp. 4-12.
67. Campbell, D. (2001) ‘The relationship theory of contract: Selected works of Ian Macneil’, Sweet and Maxwell, London.
68. Of course the FSA does regulate the provision of advice, but this only applies where the consumer seeks advice (see FSA Handbook of Rules and Guidance, COB 5) and will not apply to ‘execution only’ type trades.
69. FSA Consumer Research 5 (2000) The relationship theory of contract: Selected works of Ian Macneil. (Reference 38), para. 3.44.
70. The development of More Effective Product Disclosure, March 2003, paras. 5.5, 5.6.
71. FSA Consumer Research 5 (2000) The relationship theory of contract: Selected works of Ian Macneil., (Reference 38), paras. 3.44 and 3.52.
72. Brener, A. (2001) ‘E-commerce marketing:Issues and guidance’, Journal of International Financial Markets, Vol. 3, No. 6, p. 216.
73. Brener, A. (2001) ‘E-commerce marketing:Issues and guidance’, Journal of International Financial Markets, Vol. 3, No. 6,. at p. 216. In addition, as he notes, ‘legal warnings and disclaimers, as like as not, will be unread and in any event, almost certainly do not apply to all the sites visited’.
74. Bradley, C. ‘Online financial information:Law and technological change’, (unpublished paper on file with the author).
75. FSA Financial Risk Outlook 2002, available at http://www.fsa.gov.uk/pubs/plan/ financial_risk_outlook_2002.pdf
76. See eg Bernard, M, L., ‘Criteria for optimal web design’, available at http:// psychology.wichita.edu.optimalweb/
77. Krug, S. (2000) ‘Don’t make me think! A common sense approach to the web’, New Rider.
78. FSA Consultation Paper 170 (2003) Don’t make me think! A common sense approach to the web. (Reference 37), para. 5.17.
79. Don’t make me think! A common sense approach to the web., para. 6.44
80. Bradley (unpublished) Don’t make me think! A common sense approach to the web.
81. Brener (2001) Don’t make me think! A common sense approach to the web.
82. The evidence shows that charges for certain types of products have fallen since the introduction of the disclosure regime. The FSA speculate that this may not be the result of any marked increase in shopping around by consumers, but a response by suppliers to the potential for consumers to shop around. FSA Discussion Paper 4 (2000) ‘Informing consumers:A review of product information at the point of sale’, November, para. 27.