Socially distanced contracts that aren’t distance contracts

The 2002 Distance Marketing Directive (DMD) wasn’t drafted with social isolation and Covid-19 in mind but it contains an exception to the concept of a “distance contract” which is helpful for financial services firms.

A financial services contract which is “entered into on a strictly occasional basis outside a commercial structure dedicated to the conclusion of distance contracts” does not amount to a DMD “distance contract” and does not therefore have to comply with the Financial Conduct Authority’s (FCA) conduct of business rules implementing the DMD. The classic scenario for this exception is the customer with an appointment to see their financial adviser face-to-face, who breaks their leg in the meantime and wants to do the meeting as a call from their hospital bed.

It is also correct to say though that old Financial Services Authority guidance at the time of DMD implementation (DP21) suggests that this exception is of very limited scope.

Despite DP21, our view is that the DMD offers a welcome solution here to firms which need to continue servicing their customers in these wholly exceptional and emergency times. As a result of this exception, while the UK Government’s emergency advice to socially isolate remains in place, firms which have sales channels set up for face-to-face distribution of their financial services products, can in our view contract with customers remotely even if their sales model and disclosures do not comply with all DMD derived rules. FCA rules in COBS and ICOBS confirm that a firm with no facilities in place enabling a consumer to deal with it customarily by distance means, can effect a one-off transaction exclusively by distance means to meet a particular contingency or emergency.

Obviously firms have to decide whether this exception can be extended to multiple contracts or even all sales, while the UK Government’s “stay at home” advice remains in place. These decisions may be especially pressing where clients’ transactions are time limited (for example investment transactions undertaken to use up tax allowances and reliefs before the end of the current tax year). Overall it strikes us as rather unlikely that any firm which focuses exclusively on the best outcomes for consumers during these difficult times and takes decisions accordingly, will later be found to have fallen foul of DMD derived rules designed to protect their clients’ interests.