Modern societies need well-functioning retail financial markets to survive and thrive. The global financial crisis of 2007-2008 has shown that innovation in financial contract design can lead to financial products that do not benefit individual consumers and societies at large. The mis-selling of subprime mortgage loans in the US is just one example. Now, more than a decade later, highly risky financial products, such as payday loans, continue to upset retail financial markets across the EU. Moreover, the post-crisis era presents major new challenges in terms of effectively safeguarding public and private interests in the realm of consumer finance in an increasingly digital and sustainability-minded environment.

To bridge the gap between consumer finance and society in post-crisis Europe, the EU and Member States have increasingly resorted to intrusive regulation of the financial sector. This allows financial regulators to intervene, for example, in product development, remuneration structures in the distribution chain, and even the culture in financial institutions. In a chapter in the recently published book ‘Better Regulation in EU Contract Law: The Fitness Check and the New Deal for Consumers’ [1], I argue that the effectiveness of these regulatory efforts is seriously threatened by the gap between the two areas of law that profoundly shape consumer finance—financial regulation and contract law—in the current European policy discourse and legal scholarship. 

The distinction between financial regulation and contract law is not straightforward. Yet, for the sake of analytical clarity, it is helpful to distinguish between the two as ideal types, given the primary focus of each. Following the conventional wisdom, contract law is a set of rules that govern transactions between private parties, whereby enforceable right and obligations are established for each party. While not insensitive to the common good, contract law thus constructs a legal framework that allows the parties to shape their legal relationships as self-determining agents, and that safeguards the balance between their private interests. In contrast, financial regulation is a set of sector-specific EU and national rules imposed by government on the financial sector in the public interest, particularly to ensure well-functioning financial markets and adequate consumer protection. The two main areas of financial regulation include prudential and conduct of business regulation. 

While financial contracting in retail financial markets was traditionally the exclusive province of private law, particularly contract law, today it has also increasingly become subject to financial regulation. Some EU regulatory measures have even accommodated within their ambit certain contract law concepts, such as the duties of care and/or civil liability of financial firms towards their customers, using such concepts as instruments in the pursuit of policy goals. Yet the EU policy discourse has traditionally been concerned with the economic activities of market participants (eg financial services) rather than the legal mechanisms that enable such activities (eg contracts) and enforcement avenues available to private parties. In line with this approach, post-crisis EU financial regulation has been largely insensitive to complex contractual settings and national contract laws.

My analysis shows that the gap between financial regulation and contract law in EU law making is particularly manifest in a contradictory policy agenda for retail financial markets, insufficient attention to contract practice, and a lack of a coherent and effective enforcement strategy. While the effectiveness of EU financial regulation in the prudential and conduct of business domain depends on a broader legal framework that reaches well beyond its regulatory ambit, the post-crisis legal matrix for consumer finance is developing in a piecemeal fashion without a clear vision of how various ‘regulatory’ and ‘contract law’ elements actually fit together.

In order to reduce the gap between financial regulation and contract law in the EU policy discourse, I suggest that the ‘contract law’ dimension of consumer finance should be better integrated into the assessment of existing and new regulatory measures in this area. In this context, I introduce a novel umbrella concept of sustainable consumer financial contracts that could underpin a more integrated approach to EU financial regulation and contract law. I also explore how such an approach can be developed, focussing on the four key areas that shape consumer finance: (a) the financial product life-cycle; (b) remuneration structures in the distribution process; (c) the organisational culture in financial firms; and (d) the alternative finance markets (notably lending-based crowdfunding).

The call for the assessment of EU financial regulation through the ‘contract law’ lens fits into the EU’s Better Regulation Agenda and its Sustainable Development Strategy. These initiatives provide an opportunity to critically rethink the role of contract law in the current regulatory and enforcement landscape, given an essentially hybrid nature of the legal regimes that currently shape consumer finance. Such regimes are neither solely a product of financial regulation nor that of contract law. But contract law plays a particularly important role therein, shaping both contract practice which financial regulation is designed to steer and consumer remedies in case of breach of regulatory standards.

Examining EU financial regulation through the ‘contract law’ lens, in particular, in terms of its regulatory coherence and effectiveness, requires detailed empirical and legal-comparative studies into the interplay between regulatory interventions and contractual settings. A better understanding of the ‘contract law’ dimension of specific EU regulatory measures in turn should inform the ‘fitness check’ of EU financial regulation in the field of consumer finance as a whole. A more integrated approach to EU financial regulation and contract law is crucial for ensuring ‘better regulation’ of retail financial markets and, ultimately, the sustainability of consumer financial contracts in Europe.

Olha O. Cherednychenko is Professor of European Private Law and Comparative Law at the University of Groningen, the Netherlands and Director of the Groningen Centre for European Financial Services Law (GCEFSL). 
---
[1] E. van Schagen & S. Weatherill (eds), Better Regulation in EU Contract Law: The Fitness Check and the New Deal for Consumers, Studies of the Oxford Institute of European and Comparative Law, Hart Publishing