Magister iuris, Lecturer Extraordinary of Civil Law, University of Tartu, Chief specialist for the Financial Policy Department, Estonian Ministry of Finance
On Imperative Regulation of Information Duties in Financial Services Contracts
The principle of freedom of contract is the main principle of harmonised European contract law1. Although a contract creates only relative legal relations (i.e., legal relations between the parties to the contract), it may also concern interests requiring protection of the interests of third persons. The freedom of contract should be restricted where the background of its impact is not compatible with the regime of individual rights2. Modernisation processes - first and foremost, the evolution of the 'cyber' world - and, at the same time, dramatic change in the security situation of society in the wake of 11 September 2001 and the acts of terror that followed, and the crisis of the financial markets that began in 2007, have forced Europe to cherish more the security of society and sustainable development of the economy3. At a time of formation of a 'risk society', one cannot but support the position of Professor M. R. Marella that the general principle of human dignity set forth in Article 1 of the Charter of Fundamental Rights of the European Union should be seen as a potential source for new restrictions of the freedom of contract under European law4. National, supranational, and international imperative legislative or regulatory provisions of public law may affect the validity of a contract - a principle taken into account in Article 15:102 of the Principles of European Contract Law5 (PECL). Article 15:101 of the PECL provides that a contract is of no effect to the extent that it is contrary to principles recognised as fundamental in the laws of the Member States of the European Union. Essentially the same idea is expressed as a key value in the Draft Common Frame of Reference (DCFR), prepared by the Study Group on a European Civil Code and the Acquis Group, which was presented to the Commission of the European Communities on 28 December 20076.
In the information society, which is a product of the modernisation process, most of the values created by mankind are contained in information. In modern society, information is increasingly found to be a subject of legal regulation: its prerequisites, consequences, content, and form may all be subject to regulation7. The amount of information disclosed in pre-contractual negotiations is closely linked to business ethics and the prevailing practices in the concrete locality and area of activity, and it is complemented by the impacts of a society that pursues specialisation. In this age, information duties are a sensitive legal-political issue. One can find opposing treatments of this particular obligation in the legal literature. Some approaches rely more on the general principles of the freedom of contract; others take a position contrary to freedom of contract8.
The problems related to provision of information are extensive and multifaceted in the case of financial services contracts. Promotion of security, sustainability, and general reliability of commerce is what contract law provisions should ensure, and, to this end, an ex ante approach must be guaranteed with contractual relations in financial services. Because of the limited scope of this article, it focuses on the specifics of the problems surrounding the information duties in entering into financial services contracts. It also discusses the imperative regulations with regard to notification applicable to financial services contracts under current Estonian law as part of the aftermath of the changing security situation in society. The security of society is a prerequisite for the preservation of human dignity, thus outweighing other values. The author considers to what extent the legislator has, in order to protect this prevailing public interest, imposed on the credit and financial institutions the obligation to gather information on customers. For the purposes of this article, the term 'financial services contracts' refers to contracts for provision of investment services and services allowed to management companies, as well as services specified in § 6 (1) of the Credit Institutions Act (CIA)9 and insurance contracts.
Modern legal provisions concerning the financial market are largely based on the market failure thesis. This theory proceeds from the premise that an unregulated market is the norm and regulation is necessary only when well motivated, in cases of special cause. According to the thesis, the role of the government in the economy is negligible and the market in its natural state must be restored. However, the market is not ideal and markets may collapse10. Regulation is necessary where the private sector may cause collapse of the markets or other sub-optimal consequences11.
One of the central premises of that theory is that any establishment of imperative regulation of information needs to be justified. According to the prevailing viewpoint, financial markets are incapable of giving investors information that would be at the socially optimal level. It is becoming increasingly difficult for an individual to understand, with financial services contracts, the economic benefit of the contract or to choose a proper goal - i.e., to furnish, upon entering into the contract, for themselves the objective criteria for reasonability. The options provided in contract law for solving the problem of asymmetry are considered to be insufficient12. Upon the use of financial services, especially in the case of long-term contracts, two problems exist simultaneously:
1) the problem of availability of information (i.e., asymmetric information) and
2) the problem of comprehensibility of information and that of the ability to use information.
In specialist literature, financial services are often referred to as products of trust, because their actual benefits will not usually be clear until much later, well after the contract is signed13 , or as intangible and abstract legal products that are defined in the terms of contract such that generally it is difficult to estimate the mutual rights and obligations of the parties or to evaluate, in detail, the price-to-quality ratio14.
In the case of using a financial service under a long-term contract, often problems are encountered that are related to the timeliness and reliability of the information available to the parties. On the one hand, the information available to a service provider regarding the customers and their needs changes. Information is of paramount importance for enterprises in the financial sector in their everyday practice in evaluating risks15 and making management decisions16. According to the new regulation on the adequacy of the banks' capital, the amount and quality of information have a direct effect on the calculation of capital requirements17. Therefore, the economic value of information, including information on the person of the customer, changes over time and the provider of the service wants, at all times, more information on the customer.
On the other hand, over time the actual value becomes less and less transparent for the customer18. It is difficult and costly for the customer to obtain relevant information about the financial services because collecting information on the usefulness of a service requires specific knowledge about the realm of financial risks. In using services, especially those provided over the Internet, investors have at their disposal many different sources in addition to the information disclosed to them by the contract partner. Those other sources include the information disclosed by enterprises providing services of advising about financial information and related consultancy services and that are not subject to regulation under public law. The legal regulation of advising and consultation focuses more on the methods of providing traditional financial services19. Overabundance of available information does not necessarily ensure reasonable decision-making, as it makes it more difficult to evaluate the existing information.
The problem of comprehensibility of information and the ability to use it may, in other words, be treated also as a problem of forming a declaration of intention. In the realm of financial services there is a huge difference between the objective content of reasonableness and the ability of a person to rationally weigh his decisions. A customer does not necessarily know which kind of information would aid his decision-making, and, from his existing experience, the customer is incapable of foreseeing future development trends.
The customer's ability to understand and use information and to act on the basis of the available information is cognitively restricted. People behave in line with their perceptions, prejudices...