EC’s collective redress proposals ‘extremely harsh’ on business and risk managers: source

The EC’s proposed pan-European collective redress system put forward last week is much tougher on business than observers feared and would have huge implications for companies in terms of liability, insurance and risk management, a source in Brussels close to risk and insurance managers told Commercial Risk Europe. With key safeguards previously put forward by the EC to stop abuse of any collective redress system missing, the source said it is time for bodies representing European business, insurers and risk managers to regroup and decide how best to lobby for changes more palatable to their members. In its New Deal for Consumers package announced last week, the EC put forward plans to introduce pan-European Union collective redress and penalties of up to 4% of annual turnover for organisations that fall foul of consumer law, among other measures. “This potentially has huge implications. We saw collective redress coming but not in this form,” said the source. He described the collective redress proposals as “extremely harsh” on business and missing recommendations put forward by the commission in 2013 to ensure mass US-style litigation is not seen this side of the Atlantic. “The proposals will mean increased costs for business and could hurt companies’ reputation. From an insurance perspective, you can imagine huge implications for any policy connected to liability,” said the source, before stressing that the new rules are very much a risk management issue. “I think risk managers will now start looking seriously at this subject. At the very least they need to understand the implications of this on their business in terms of liability, reputation damage, insurance, compliance with investigations and other areas,” said the risk management insider. He noted that there is clear political will behind the plans. The fact that several sources have told Commercial Risk Europe that the EC’s proposals were even stronger and have been watered down to be more business-friendly in the weeks before publication supports this view. But the source, with experience of how European legislative bodies work, told the risk and insurance management community not to panic just yet. The EC is asking member states, European parliament and council to work together over the next year to agree the legislative changes before the European Parliament elections in May 2019. But the source believes that the May 2019 date seems “very ambitious” and explained that business and insurance representatives will fight back. “I don’t think the date is necessarily realistic because there are so many contentious issues and much need for clarity,” the source told CRE. “Although the texts are very strong, it is very likely that MEPs will look to make changes and there will be a lot of lobbying in Brussels by organisations like BusinessEurope,” he added. The source stressed that representative bodies such as Insurance Europe, BusinessEurope and Ferma will need to regroup and decide how best to respond on behalf of members. A crucial decision is whether to try and get the two directives that will usher in the new rules approved under the current parliament, or spin the dice and wait until after the elections when its make-up will have altered dramatically, not least because the UK will no longer be represented, he explained. “If not passed by next May the proposals would continue because there is continuity between parliaments, but the make-up of the parliament may change and work for or against our interests,” the source said. “Is it best to close down this file before the election because we know the European parliament currently and we could manage a better deal? Or do we wait for the next parliament with the hope things may improve, but the risk they will get worse? Remember that the British are usually pro-business. So once they are removed from the equation, which is likely by May next year, we may be less likely to get any changes we want,” he added. European business and insurance industry associations this week came out against the EC’s proposals to introduce collective redress across the EU, not least because they believe they do not safeguard against abuse and could add unfair costs to their members. Both Insurance Europe, the insurance industry body, and BusinessEurope, which represents European business associations, are concerned that the system put forward by the EC lacks safeguards. Ferma said it “will remind the commission of the importance of proportionality between the nature of the offence and the harm caused”. The proposals are contained in a directive on representative actions for the protection of the collective interests of consumers. Having looked at its text, the source, who is a legal expert, shares the same concerns as Insurance Europe and BusinessEurope about the absence of safeguards. While the key safeguard that only a qualified entity can launch a collective redress on behalf of consumers is in the proposals, two other crucial measures – the loser pays principle and the need to consent to be part of an action, known as opt in – are both missing, he explained. Exclusion of the loser-pays principle will only encourage litigation, the source confirmed. On no opt-in clause, he said: “As a company it’s an issue because you cannot know the extent of the damages and the redress measure you will have to take because any affected consumers could say months after ‘I am part of it too’. There is a potential safeguard whereby you need to opt in and give your consent to an organisation to benefit from any redress that would be better for business.” The source also flagged several others details within the directive that will cause concern for risk and insurance managers and are likely to be at the centre of lobbying efforts. The directive says that under the collective redress system punitive damages “should be avoided”. The source feels that this wording is “too light”. “They say it should be avoided but was does this mean legally? I don’t think it is the prohibition of punitive damages that the EC claims and put forward as a safeguard in 2013. So that is a concern. It should be amended and turned into an article towards clear prohibition,” he told CRE. Ferma this week stressed that punitive damages should not be allowed under any collective redress system “in order to limit the impact on the liability insurance market”. The directive also contains measures that would place huge disclosure demands on companies and could compromise confidentiality. It places an “obligation for the organisation to inform all consumers concerned about the final outcome of the collective procedure”. The source said this sounds like a “heavy” burden on companies, but explained that there is not much detail on how this would work in practice. However, he noted that recital 31 and 32 of the directive says organisations must disseminate information through websites, social media, online market places or in popular newspapers. “There is a lot of business disclosure in the directive. This could become a real problem for business to inform all of the consumers that are affected, but also in terms of giving qualified entities the evidence they demand,” said the source. The directive also contains the right for a “claimant to request the disclosure by the organisation of evidence relevant to their claim”. This has big implications for confidentiality, sensitive information and reputation, noted the source. When the EC announced the measures last week, it stressed that as part of safeguards against frivolous litigation, the funding of any qualified entity would need to be transparent and assessed by a judge. This is to ensure that a qualified entity bringing a collective action is not funded by anyone with a conflict of interest, such as a competitor of the firm being litigated. But the source said the proposal does not make clear how this would work. “The directive says transparency is needed but nothing about what if there is a lack of transparency and what if there is a doubt about the source of the funding. It says member states should ensure that the qualified entity is not funded by a competitor or someone with a conflict of interest, but it is not clear at all about how this will be done. So, we think there will be some amendment needed here to explain exactly what is meant,” he said. Adding: “So even on qualified entities there are concerns that the EC proposals do not have the safeguards we would like because of this funding issue. Furthermore, it is not clear how you would become a qualified entity. "Under the collective redress proposals, qualified entities would have mutual legal recognition across member states. This means that if Greenpeace, for example, is prosecuting a company in Germany, it can also act on behalf of consumers in another EU country. “So there is no safe harbour. This measure is really empowering for consumer organisations to act across border in the EU,” said the source. The separate directive on better enforcement and modernisation of EU consumer protection rules announced last week, proposes heavy fines if companies fall foul of consumer law. These fines provide a “nuclear” option for authorities, said the source, but look like they will only be given to the very worst offenders. “The EC is encouraging member states to put in place this penalty and they use the exact same wording as the GDPR. In the public enforcement proposal, they are saying at least 4% of annual turnover. They also say the member states can decide to go higher. So it is like a nuclear weapon, but not one that will be easily triggered. The 4% figure will get a lot of attention, but that fine will only be for the most serious cases. So, we need to not panic over this just yet,” he said.

EC’s collective redress proposals ‘extremely harsh’ on business and risk managers: source

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