Proposal for general duty of care for the financial services industry

December 2012

In September, the Dutch Minister of Finance presented a Bill for a Financial Markets (Amendment) Act 2014 to the public for consultation.

The Bill contains several amendments, including placing clearing and settlement institutions under supervision, the introduction of a general duty of care for the financial services industry, amendments relating to financial reporting and adaption of the rules on the separation of assets for investment institutions and undertakings for collective investments in transferable securities (UCITS). This article examines the proposal to introduce a general duty of care for the financial services industry, which has provoked widespread comment.

The Dutch legislator has stated that it considers it necessary, in view of the imbalance of information between clients and financial services firms, and the increasing complexity of financial products, to incorporate a general duty of care in the Dutch Act on Financial Supervision (or Wft after its Dutch acronym), enabling the Authority for the Financial Markets (the AFM) to take enforcement action where such a duty is breached. The Bill focuses on providers, advisers and brokers of investment products, electronic money, current accounts, credit, savings accounts and insurance. Investment firms fall outside the scope of this Bill.

At present, the Wft contains various standards which give shape to the duty of care of the financial services industry. However, no general legal standard exists for financial services firms to act with due care. In view of this, it is proposed that a new Article 4:24 be added to the Wft. This Article would read as follows:

• A financial services provider must exercise due regard for the interests of the consumer, client or beneficiary.
• A financial services company that advises must act in the interest of the consumer, client or beneficiary.
• In any case a financial services company will refrain from acts or omissions that cause or could cause an obvious adverse affect for the consumer, client or beneficiary.

Comment

A key concern is that the proposed Article 4:24a removes the subtlety and nuance that underpinned the civil law development of a duty of care. The civil law duty of care is not a general standard, but is influenced by the circumstances of each particular case, including the level of expertise and relevant experience of the client, the complexity and risks of the financial product and the regulations applicable to the financial services provider, including the rules of conduct applicable to it under public law. The proposed Article 4:24a as drafted does not take any of this into account.

The Bill also does not appear to recognise that a client also has a responsibility when purchasing a financial product. The underlying assumption in the Bill seems to be that a consumer is by definition confronted by an imbalance in information and that the responsibility for this must lie with the financial services provider. This approach deviates from Dutch case law which provides that, whilst a financial services provider must allow a consumer to make an informed judgment about a particular product or service, equally a consumer has a responsibly to study the information closely and to examine the characteristics and risks of the product to determine whether the product is appropriate for him.

Courts have refused to hold a financial services provider responsible for the behaviour of consumers who purchase a product and who, in spite of adequate provision of information, still do not understand the implications of the information provided.

Finally, there is some concern about paragraph 3 of the proposed Article 4:24a which provides that a financial services company will in any case refrain from acts or omissions that have or could have obvious adverse effects for a consumer. The problem is that if a financial services provider does not refrain from these kinds of acts or omissions, the AFM is authorised, among other things, to impose an order which is subject to a penalty for noncompliance, or to impose a fine.

This provision is contrary to the lex certa principle, because it is not sufficiently clear, foreseeable or known what acts or omission may be subject to sanctions. In addition, this provision may make it very difficult for financial services providers to operate if, in everything they do, they have to decide whether their acts or omissions may in general have adverse effects for their clients. Each financial product may have obvious adverse consequences. In this sense the standard is also not sufficiently distinct and may be unworkable.

Allen & Overy LLP has provided feedback to the Dutch legislator and the consultation phase is now closed. The next step is for the Bill to be submitted to the Council of State for advice. Once the Council of State has rendered its advice, the Bill will be sent to the Lower House of Parliament and it will be public again.

Only then will it become clear whether the responses in the consultation phase have led to an amendment of the Bill. The target date for the entry into force of the Bill is 1 January 2014.