Summary: 1. Introduction: a new Supreme Court ruling on the matter of investor withdrawal in off-premises contracts – 2. Unitary nature of the financial transaction. – 3. Scope of application of the right of withdrawal. – 4. Extension of the right of withdrawal to own account security trading transactions before 1 September 2013.
1. Introduction: a new Supreme Court ruling on the matter of investor withdrawal in off-premises contracts.
With judgment no. 7776 of 3 April 2014 the Supreme Court once again ruled on a matter that has been the subject of much debate in recent years in both academic writings and in case law: the effective scope of application of the right of withdrawal (so-called ius poenitendi) recognised to investors in off-premises investment contracts.
The ruling is in line with the recent guidance provided by the Joint Chambers with decision no. 13905 of 3 June 2013 and it features exactly the same underlying principle, that is the need to “protect” the investor, as the “weak” party in off-premises investment contracts. Even if theoretically this legal “protection” potentially runs counter to the interests that it intends to protect and even at the cost of colliding with the action taken by the legislator (see Article 56-quater of the so-called “Decreto del Fare” (Decree for Action), more extensively dealt in paragraph 3 below).
The Court lays down three principles of law concerning:
the unitary nature of the transaction which consists of a loan contract for the purchase of financial instruments and the subsequent deeds of purchase of the single investment products;
the scope of application of the right of withdrawal; and
the extension of the right of withdrawal to own account security trading transactions entered into before 1 September 2013.
The matter specifically concerned a contract involving a complex financial transaction characterised by:
the granting by the bank of a loan to the customer;
the purchase by the bank on the customer’s behalf, with part of the funds arising from the loan, of bonds issued by the same bank and not-listed;
the simultaneous purchase by the bank on the customer’s behalf, with the remaining funds arising from the loan, of units in an investment fund;
the creation of a pledge on the bonds and on the units to secure the loan; and
the assumption by the customer of the obligation to repay the loan to the bank in quarterly instalments.
In the case at issue the investor brought a legal action against the bank claiming, among other things, (i) that the entire financial transaction was null and void pursuant to Article 30(7) of Italian Legislative Decree 58/1998 (TUF – Consolidated Financial Law) as he did not receive notice of the right of withdraw within seven days from the signing, and (ii) the annulment of the contracts pursuant to Articles 21, 27, 28 and 29 of CONSOB Regulation no. 11522/1998 (Intermediaries Regulation) due to breach of the pre-contractual obligations to inform the customer and to offer suitable products.
2. Unitary nature of the financial transaction.
Firstly, the Supreme Court deals with classifying the complex financial transaction consisting in the disbursement by the bank of a loan used to purchase, on the customer’s behalf, predetermined financial instruments issued by the bank itself and pledged as security for the repayment of the loan.
The customer complained that he had signed a unitary investment plan consisting of three different functionally related deeds – a loan contract and two subsequent deeds for the purchase of financial instruments – also observing that, given the unitary nature of the transaction, information concerning the right of withdrawal to which the customer is entitled pursuant to Article 30 of the TUF should have been included in the contract governing the investment plan.
On this matter, the Court confirms that this transaction constitutes a non-standard contract that is unique and unitary in conceptual, legal and practical terms, and where the purpose consists in achieving a “financial profit”.
In fact, the purpose of the contract in question – in terms of both economic-social function and material goal pursued by the contracting parties – is based on a “do ut facies” (one gives, the other promises to do) according to which the investor undertakes to repay by instalments the capital lent by the bank and the bank, for its part, undertakes to purchase profitable securities, the proceeds of which would be paid to the customer. In this way – the Court sustains – the entire transaction should be considered as an investment service pursuant to Article 1(5) of the TUF.
The Supreme Court also specified that the investment purpose underlying the financing transaction cannot mean that the contract is not subject to the rules set forth in the TUF just because the parties classified it differently. In fact, according to the Court, the concept of investment contract includes “every form of financial investment, pursuant to Article 1(1)(u) of the TUF, reflecting the open and non-technical nature of “financial product”, which represents the legislative answer to market creativity and to the array of instruments offered to the public, as well as to the need to protect the investors”.
In this regard it is also necessary to observe that “the granting of loans to investors to allow them to execute a transaction in financial instruments, in which the party providing the loan is involved” constitutes an accessory service pursuant to Article 1(6)(c) of the TUF and – regardless of any connection with the subsequent purchase and sale of financial instrument – cannot be ascribed to the list of investment services set forth in paragraph 5 of the said article. This consideration means that, although the Court is of a different opinion, the applicability of Article 30 of the TUF to the related contracts must be excluded, given that the rules set forth for off-premises selling exclusively concern the selling of “investment services and activities” and not also the performance of “accessory services”.
Having clarified the question concerning the legal classification of the transaction in question, the Supreme Court was required to rule on the interpretation of Article 30(6) of the TUF, in the part where it establishes that the effectiveness of the contracts for the placement of financial instruments and for portfolio management concluded off premises it is suspended for a period of seven days, starting from the date when they are signed by the customer and that the customer has the right, to be exercised within this time limit, to notify the intermediary of his withdrawal.
The query submitted to the Court specifically concerned the assessment, which has fuelled intense debate in recent case-law (), of whether the expression “contracts for the placement of financial instruments”, used in paragraph 6, refers to the investment contracts and orders concluded within the framework of the placement service – which is mentioned in Article 1(5)(c) and (c-bis) of the TUF – or is used with a broader meaning and refers to any transaction by virtue of which the intermediary procures for non-professional customers the purchase of financial instruments, outside his working premises, also in execution of the other investment services envisaged by Article 1(5)(a) (own account trading), (b) (execution of orders on the customers’ behalf) and (e) (receipt and transmission of orders).
The delicate nature of the reply, as we know, arises from the fact that the same paragraph 6 requires that the qualified entities mention the right of withdrawal in the standard forms and templates that they use in performing their off-premises selling activity, while the next paragraph (paragraph 7) declares void those contracts that do not expressly contain such a mention. The solution to this query will show whether the right of withdrawal granted to customers and the formal requirement imposed to the intermediaries apply exclusively to the contractual proposals gathered and to the contracts concluded in performance of the placement service, or they extend to the entire range of investment services offered off premises.
On this matter, the Supreme Court refers, without a second thought, to the aforesaid ruling of the Joint Chambers dated June 2013. Specifically, according to the approach taken by the Supreme Court, the rule should apply to both the placement service and to financial instrument purchase and sale contracts concluded within the framework of “investment services” other than placement, including own account trading services and the execution of orders on the customers’ behalf.
As we know, the Joint Chambers reached this authoritative conclusion on the basis of two types of considerations.
Firstly, they observed that, as the reason behind the rule on the right of withdrawal must be identified in the need to ensure that the investor does not find himself bound by contracts on which he has not had sufficient opportunity to reflect, it may be held that there is the same need for protection in both the case of sale of financial instruments for which the intermediary has assumed a placement commitment with the issuer and the case of simple trading of securities.
Secondly, again according to the Joint Chambers, in the face of differing interpretations of the same rule, the interpreter is obliged to adopt the one that is more consistent with the principles of EU law. In this regard, the Court specified that, as Article 38 of the Charter of Fundamental Rights of the European Union sets forth the principle according to which it is a EU’s duty to guarantee a “high level of consumer protection”, the interpreter must prefer the interpretation that provides the saver with greater protection.
However the decision of the Joint Chambers was met with various kinds of criticisms which questioned its conclusion. Similar criticisms can now be raised against judgment no. 7776 of 3 April 2014.
With regard to the teleological-functional aspect, the solution adopted by the Court ends up levelling out the different investment services, overlooking both their distinctive characteristics and the different intensity with which the risk of insufficient consideration can arise from case to case and it is indeed this diversity that justified and justifies the legislator’s decision to confine the scope of application of the right of withdrawal to placement and portfolio management services ().
This diversity is understood by CONSOB which () affirmed that the right to reconsider refers “only” to contracts for the placement of financial instruments and for portfolio management concluded off premises and that it is not instead applicable to order collection and execution contracts and to the transactions implemented under the said contracts. The Commission also states that this interpretation arises not only from the literal wording of paragraph 6 of Article 30 of the TUF, but also from the ratio of the provision, which is designed to ensure that the investor has the necessary time to think about contractual decisions which, given their specific characteristics, require an appropriate spatium deliberandi (period of deliberation).
Furthermore, the position taken by the Court runs the risk of harming – rather than benefitting – the interests of the investors, who can no longer obtain immediate execution of their transactions, whether investment or divestment, at the prices in force at the time they make their decision.
This risk, which was underestimated by the Supreme Court, was instead fully understood by the EU legislator. The choice made in regulating distance marketing of financial services, in a context that still recognises the customers’ right to reconsider the advisability of their purchase decisions, was, as we know, that of excluding the right of withdrawal in the cases in which the prices applied in the provision of financial services depend “on fluctuations in the financial market outside the supplier’s control and that may occur during the withdrawal period” ().
Ultimately, it is difficult to escape from the impression that the authoritative solution drawn up by the Joint Chambers and endorsed by recent judgment no. 7776 of April 2014, achieves a balance of interests that is detached from the system, restricting the investors’ freedom to have unhindered access to the opportunities that arise on the financial market, and in discordance with the legislative options that have been reached in European Union law.
4. Extension of the right of withdrawal to own account security trading transactions before 1 September 2013.
The last principle of law expressed by the Supreme Court concerns the definition of the time limits for the applicability of Article 56-quater of Italian Decree Law 69 of 21 June 2013, containing urgent measures for reviving the economy (the so-called “Decreto del Fare” (Decree for Action)) (), which amended Article 30(6) of the TUF. The conversion law, no. 98 of 9 August 2013, was published in Official Journal no. 194 of 20 August 2013 and entered into force the next day.
The new law had expressly extended the investor’s right of withdrawal, together with the related right to information, to off-premises investment contracts concluded within the framework of own account trading services, entered into after 1 September 2013.
Hence the problem of the possible retroactive effects of the new rule arises, a matter that affects both proceedings pending at the date of entry into force of Article 56-quater and transactions and contracts concluded in the past whose validity could be questioned in the light of the Supreme Court decision.
In this regard, the Court lays down the principle according to which if, on one hand, the legislative amendment of Article 30 of the TUF extends the right of withdrawal to security trading contracts concluded after 1 September 2013, on the other, it does not explicitly state that the right of withdrawal must be considered excluded with regard to contracts entered into prior to the said date. Accordingly, the legislative amendment would not have the effect of rectifying the invalidity of contracts entered into prior to 1 September 2013, in the cases where the relevant standard forms did not include information to be provided to the customer with regard to the existence of the right of withdrawal.
According to the Supreme Court, Article 56-quater of the Decreto del Fare, in particular, does not constitute a rule of authentic interpretation, given the absence of the necessary requirement of every interpretative rule, that is the possibility of conflicting interpretations of the rule concerning off-premises selling; provided that – the Supreme Court adds – we do not wish to “pass off” as legal uncertainty “any discontent generated by the aforesaid decision of the Joint Chambers” which, according to the Court, had instead eliminated that uncertainty.
Furthermore, even the legislative procedure that preceded the adoption of the rule does not appear to attribute an interpretative function to the said rule, as it cannot be presumed that, with Article 56-quater, the Government had “the not very commendable intention of disregarding a judgment of the Joint Chambers and therefore infringing the principle of separation of powers of state”.
According to the Court, an opposing interpretation would also conflict with the provisions of Articles 47(1) and 3 of the Italian Constitution, as (i) it would give rise to a favourable regulation to credit institutions that entered into off-premises security trading transactions prior to 1 September 2013 and (ii) a stronger protection would be given to savers who concluded the same contracts after said date.
Lastly – the Court adds – a differing interpretation would also be in open contrast with Articles 101 and 104 of the Italian Constitution, as it would frustrate, with retroactive effect, the dictum of the Joint Chambers.
However, once again, the conclusion reached by the Supreme Court does not appear acceptable. For several reasons.
Firstly, because the merely confirmative and non-innovative nature of the legislator’s intervention appears inherent in the literal wording of the new provision and, on one hand, it evokes a pre-existing regulation destined to also apply in the future - “without prejudice” – and, on the other, determines the scope of Article 30(6) of the TUF, identifying it in one of the alternative meanings previously attributed by academic writings and by case-law which dealt with the rules governing the right of withdrawal in off-premises selling.
Moreover, the legislative provision stating that a certain rule may be applied only “with effect from 1 September 2013” – to the contrary of what the judgement in question stated– appears to logically imply that the rule cannot and must not be applied before the date established in this way.
Lastly, it has to be said that the intention of the legislator – commendable or not in the eyes of the Court - was doubtless that of providing an authentic interpretation of Article 30 of the TUF in response to the position of the Joint Chambers, as it is proved by both the preparatory work () for Article 56-quater - “the rule adds […] a provision of authentic interpretation” – and the proximity in time of the legislative intervention to the Supreme Court decision.
In the presence of a legislative restriction that could not be overcome in interpretative terms, the Supreme Court was faced with only one viable solution; which is that of relying on the constitutional unlawfulness of Article 56-quater before the Constitutional Court.
() On the matter, to provide further references, we mention, C. Scognamiglio, Offerta fuori sede di strumenti finanziari e servizi di investimento. Commercializzazione a distanza di servizi finanziari, in I contratti per l’impresa, vol. 2, Bologna, 2013, page 212 et seq., F. Parrella, Offerta fuori sede, sub art. 30, Il Testo Unico della Finanza, Turin, 2012, II, page 487 et seq., M. Maggiolo, Servizi ed attività di investimento, Tratt. dir. civ. e comm., Cicu-Messineo-Mengoni-Schlesinger, 305 et seq., F. Accettella, Sui contratti di collocamento di strumenti finanziari conclusi fuori sede ex art. 30, comma 6, t.u.f., Banca, borsa, tit. cred., 2012, II, 343 and by the same author, Ancora sui contratti di collocamento di strumenti finanziari conclusi fuori sede ex art. 30, comma 6, t.u.f., Banca, borsa, tit. cred., 2013, II, 137 et seq. in which are also published Supreme Court, Division I, 14 February 2012, no. 2065 (different precedent) and the order for referral to Joint Chambers, Supreme Court, Division I, 21 June 2012, no. 10376.
() While the placement service is distinguished by the commitment to distribute financial instruments undertaken by the intermediary towards the issuer (or the offerer) as part of a public offer – and therefore presents the risk that the intermediary’s solicitation activity, when carried out off premises, may have a distorting effect in the process by which the customers make their investment choices -, the management service is distinguished by the breadth of the mandate that the investor assigns to the intermediary and, therefore, by the particular delicacy of the choice through which the investor entrusts to another person the entire process of considering and making decisions in investment matters. Instead, the order execution and collection services, on one hand, do not normally have any of the typological features mentioned, on the other, are characterised by the presence of a common feature: that the prices of the financial instruments may vary over time and that the intermediary has no control over them. Now, this specific aspect means that it is difficult to put into practice the mechanism of suspension of effectiveness of contracts and contractual proposals promoted off premises for the entire duration of the time limit granted for withdrawal. While this suspension does not cause particular problems for the placement service (given that the offer price tends to remain fixed during the subscription period) and for the management service (of which activation is subordinate to expiry of the time limit), instead in the case of the other investment services it leads, on one hand, to the need for the intermediary to postpone conclusion of the customers’ purchase orders and, on the other, to the risk for the customers that the price limits specified in the purchase orders issued to the intermediary can rapidly become obsolete in the period of time (seven days) established by the law.
() CONSOB communication no. DIN/12030993 of 19 April 2012.
() Article 6 of Directive 2002/65/EC and Article 67-duodecies(5), of the Consumer Code.
() Article 56-quater of the Decreto del Fare – Right to reconsider with regard to off-premises selling of investment services “The following has been added, after the second sentence, to Article 30(6) of the consolidated law set forth in Italian Legislative Decree 58 of 24 February 1998: “Without prejudice to the application of the rules set forth in the first and second sentence to the investment services referred to in Article 1(5)( c),( c-bis) and (d), for contracts signed with effect from 1 September 2013 the same rules also apply to the investment services referred to in Article 1 (5)(a)”.
() Reading sheets and financial profiles, Dossier of documentation for examining draft laws, “Urgent provisions for reviving the economy”, Italian Decree Law 69/2013 – A.C. 1248-B, 7 August 2013, where in commenting Article 56-quater it is stated that “The rule adds, after the second sentence of paragraph 6 of Article 30 of the TUF, a provision for authentic interpretation that considers already applicable the first part of paragraph 6 (right to reconsider for off-premises selling) to the investment services referred to in Article 1(5)(c), (c-bis) and (d)”.