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European Initiative in
Electronic Commerce

Communication to the European Parliament, the Council, the Economic and Social Committee and the Committee of the Regions

Executive Summary
I - The Electronic Commerce Revolution
II - Ensuring Access to the Global Marketplace
III - Creating a Favourable Regulatory Framework
IV - Promoting a Favourable Business Environment

Creating a favourable regulatory framework

The pace and the extent to which Europe will benefit from electronic commerce greatly depends on having up-to-date legislation that fully meets the needs of business and consumers. The objective of the Commission is to implement the appropriate regulatory framework by the year 2000. The existing Single Market regulatory framework has proved its worth for traditional forms of business. It must now be made to work for electronic commerce by achieving two complementary objectives: building trust and confidence and ensuring full access to the Single Market.

Building trust and confidence

35. The first objective is to build trust and confidence. For electronic commerce to develop, both consumers and businesses must be confident that their transaction will not be intercepted or modified, that the seller and the buyer are who they say they are, and that transaction mechanisms are available, legal and secure. Building such trust and confidence is the prerequisite to win over businesses and consumers to electronic commerce. Yet many remain concerned about the identity and solvency of suppliers, their actual physical location, the integrity of information, the protection of privacy and personal data [20], the enforcement of contracts at a distance, the reliability of payments, the recourse for errors or fraud, the possible abuses of dominant position [21] - considerations which are heightened in cross-border trading.

36. Secure technologies such as digital signatures and digital certificates go some way to meeting these challenges. Digital signatures enable the unambiguous confirmation of the identity of the sender and the authenticity and integrity of electronic documents. Unique to the sender and unique to the message sent, digital signatures are verifiable and non-repudiable. Similarly, the exchange of digital certificates ("Internet ID cards") through an automatic "digital handshake" between computers provides assurance that the parties are who they say they are, and helps to assess whether the service provided and the goods or services delivered are genuine.

Copyright protection mechanisms, also based on secure technologies such as encryption and smartcards, ensure the protection of digital material and are a crucial factor in the emergence of a mass-market in electronic content. Also based on cryptographic methods, secure electronic payment mechanisms provide the final element of trust: the ability to pay and to be paid. Such secure technologies are for the most part fully operational and commercially available. However, the necessary regulatory and institutional framework supporting such technologies is not yet complete, particularly in areas such as interoperability and mutual recognition across borders.

Ensuring full access to the single market

37. The second objective is to ensure full access for electronic commerce to the Single Market. Given its size, the Single Market potentially offers businesses a critical mass"of customers before addressing further global markets. However, faced with the new challenges posed by electronic commerce, Member States are responding in different ways. The development of divergent legislative approaches is not only ineffective given the transfrontier nature of electronic commerce but also risks fragmenting the Single Market and thus inhibiting the development of electronic commerce in Europe. The proposed Transparency Mechanism Directive [22] is precisely targeted at reducing the risk that new measures, by being different from one Member State to another, could restrict the free movement of Information Society services.

38. However important it is to avoid regulatory inconsistency by discouraging divergent actions at national level, the Union must also ensure that a coherent regulatory framework for electronic commerce is created at European level. Such a regulatory framework will inevitably be built on existing Single Market legislation which already largely creates the right conditions for online businesses. As part of that framework, specific measures have already been taken to respond to new developments. They include the recently adopted directives on data protection [23], on the legal protection of databases [24] and on contracts negotiated at a distance [25]; and the proposed revision of the Television without Frontiers Directive [26]. In addition, a number of consultation or policy documents have been issued to stimulate debate on various policy areas, including the legal protection of encrypted services [27], copyright and related rights [28], industrial property [29], commercial communications [30], public procurement [31], and the protection of minors and human dignity in audiovisual and information services [32].

Principles of an electronic commerce regulatory framework

39. The application of four principles will provide the Union with an adaptable and appropriate framework of legislation.

  • No regulation for regulation's sake: in many cases, the free movement of electronic commerce services can be effectively achieved by mutual recognition of national rules and of appropriate self-regulatory codes. This means that companies engaged in cross-border business operate under the law of the country of origin ("home country control"). Only where mutual recognition does not suffice to remove obstacles in the market or to protect general interest objectives, will there be a need for Community action . Any legislative action should impose the fewest possible burdens on the market and keep pace with market developments.
  • Any regulation must be based on all Single Market freedoms: electronic commerce cuts across a wide range of cross-borders activities. Whether companies engaged in electronic commerce are providing one or several goods and/or services, freedom to do so - easily and effectively - must be at the heart of future policies. Equal weight must be given to all the freedoms offered by the Single Market: the realisation of the free movement of goods, persons, services and capital together with the freedom of establishment. Only in this way can the crucial objectives of coherence, predictability and operational simplicity be achieved.
  • Any regulation must take account of business realities: in any electronic commerce operation, a trader needs to set up business, to promote its products or services and to sell, deliver and finance them. This is part of the normal process of trading - a commercial chain. In many cases, legislation will not be necessary to tackle actual or potential problems. Where it does, it must seek to facilitate operations throughout the commercial chain, for it makes no sense to remove barriers in only one part of that chain whilst leaving others untouched.
  • Any regulation must meet general interest objectives effectively and efficiently: a Single Market for electronic commerce will not develop without the effective safeguarding of recognised general interest objectives such as privacy or consumer protection and other public interests such as wide accessibility to the networks. Without such protection there is a real risk that national regulatory borders will remain in place as individual Member States seek to safeguard the legitimate concerns of their citizens.

The essential features of a regulatory approach

Based on these four principles, an appropriate regulatory response must be developed where necessary. In some cases, responses have already been identified; in other cases, responses need to be found urgently. To ensure that electronic commerce freely flows across national frontiers, different legal issues need to be addressed at each step of business activity.

From the establishment of the business ....

40. A wide range of regulations at national level could inhibit the establishment of service providers across frontiers. These include differing professional requirements, differing prudential and supervisory systems, and notification or licensing requirements (for example for regulated professions or financial services). The Commission is therefore examining how best such obstacles can be tackled while respecting general interest objectives and will come forward with policy proposals.

41. The new virtual environment also makes it more difficult to determine who are the contracting parties, where an electronic commerce operator is established and whether that operator is complying with all relevant legal conditions. This can create legal uncertainty about which Member State will be competent and about the applicable law in disputed cases. It also complicates the application of Single Market principles, in particular the principle of country of origin control. The Commission will examine these and related issues to clarify any areas of doubt or inconsistency - including the application of the Rome Convention [33] and the Brussels Convention [34] in the new electronic context - and will work to improve consumers access to justice, in particular the possibilities for redress.

To the promotion and provision of electronic commerce activities ...

42. Any online service provider or company establishing a website is subject to divergent national regulations including those on commercial communications (covering advertising, direct marketing, self-promotions, sponsorship and public relations). This hampers the use of efficient and creative cross-border commercial communications strategies and creates legal uncertainty. As a follow-up to the Green Paper on Commercial Communications, the Commission will come forward with detailed proposals to remedy actual or potential difficulties.

43. At present, Member States apply certain restrictions to the marketing of particular financial services to protect the public interest. The effect of such restrictions is that the Single Market for financial services, including financial services provided electronically, is fragmented. Before the end of the year, the Commission will put forward a proposal for a directive on financial services contracts negotiated at a distance which will seek to remove obstacles to cross-border provision whilst safeguarding consumer protection.

Through negotiation and conclusion of contracts ...

44. A directive on contracts negotiated at a distance which covers electronic transactions and a certain number of horizontal directives (on unfair contract terms in consumer contracts, on misleading advertising) and sectorial directives (on consumer credit, travel packages, timeshare) have been adopted. Furthermore, a proposal on the sale of consumer goods and associated guarantees is in the pipeline. These directives are establishing a minimum level of protection for consumers which is also applicable to electronic commerce transactions within the EU.

45. A number of Member States' rules governing the formation and the performance of contracts are not appropriate for an electronic commerce environment and are generating uncertainties relating to the validity and enforceability of electronic contracts (for example the requirements for written documents, for hand written signatures, or the rules of evidence that do not take into account electronic documents). The Commission will take concrete steps to address the problem of how to eliminate barriers for the legal recognition of electronic contracts within the Single Market. Furthermore, as regards consumer protection in the field of electronic commerce, this point shall be dealt with in the Communication on the consumer dimension of the Information Society.

46. Book-keeping, accounting and audit rules will also have to be adapted to electronic commerce and will have to allow, for example, for electronic verifications without any paper copies or for electronic invoices. National rules could develop in a divergent way and threaten the Single market. The Commission will initiate discussions with the Member States in order to prepare appropriate action.

... To the making and receipt of electronic payments

47. Electronic commerce will not develop without sound, user-friendly, efficient and secure electronic payment systems. The Commission, the EMI and the Member States are currently considering the appropriate supervisory framework for the issuance of electronic money. In the light of this discussion the Commission intends to present by the end of 1997 (i.e. the target date for completion of the work) a proposal for a Directive on the issuance of electronic money, so as to ensure the stability and soundness of issuers of such payment products. This will contribute to boosting consumer confidence. Meanwhile, the Commission envisages modernising and updating the Recommendation of 1988 concerning payment systems [35] before the middle of 1997 in order to provide guidance for the relationship between issuers and users of all new means of payment (e.g. on liability, transparency and redress procedures).

48. Compatibility between electronic payment systems, which is in the interest of both consumers and business, will mainly rely on agreements among operators. Such agreements must be in conformity with the Community's competition rules. To provide guidance, the Commission will in the course of 1998 issue a competition notice which will clarify the application of competition rules to new means of payments.

49. Fraudulent use and counterfeiting, which is a serious concern for means of electronic payments, is only punishable in a minority of Member States. The financial industry and users have requested the Commission to take initiatives covering all non-cash means of payment to improve the security of new payment systems. The Commission is presently considering a regulatory response that would meet these concerns.

A regulatory approach that develops appropriate horizontal policies

Ensuring Data Security and Privacy

50. The use of strong encryption which ensures the confidentiality of both sensitive commercial and of personal data is one of the foundation stones of electronic commerce. Widely divergent national laws restricting the use, exportation importation and offering of encryption technologies and products are adding substantial barriers to the development of electronic commerce in Europe. The removal of such cross border barriers is crucial for the implementation of the Single Market in electronic commerce. The Commission will seek to develop a policy which will aim to guarantee the free movement of encryption technologies and products while safeguarding public security concerns. The Community will work at international level towards the removal of trade barriers for encryption products. The recently adopted OECD Cryptography Guidelines constitute a first attempt to achieve international consensus on this matter.

51. A more specific issue is that of digital signatures, which will be the subject of a Commission initiative. This initiative will aim at ensuring a common legal framework encompassing the legal recognition of digital signatures in the Single Market and the setting up of minimum criteria for certification authorities. Worldwide agreements on digital signatures will also be needed.

52. Key amongst confidence-building measures is the need to safeguard the individual's and a company's right to privacy while avoiding obstacles to the cross-border provision of electronic commerce services. The EU Framework Directive on the protection of personal data meets these two objectives. It remains to be seen whether further regulatory measures may be needed to address specific issues emerging from the developments of electronic commerce. In particular, privacy principles need to be safeguarded in the area of electronic payment systems, taxation and copyright management systems. The Commission will pursue a WTO initiative aiming at a multilateral agreement on trade-related aspects of global information flows whilst protecting the right to privacy and personal data.

Establishing Appropriate Protection for Intellectual Property Rights and Conditional Access Services

53. The protection of copyright and related rights is essential for the development of electronic trade. The Commission will take a legislative initiative to deal with certain aspects of copyright and related rights [36]. It will focus on online communications, reproduction and distribution of protected material. This will be flanked by adequate legal protection against the circumvention of anti-copy devices and electronic management systems. The two international treaties adopted in December 1996 under the auspices of WIPO, the World Intellectual Property Organisation (the WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty) are essential to stimulate and facilitate electronic commerce internationally. The Community shall aim for their early entry into force. Moreover, a successful outcome of the present WIPO negotiations on the legal protection of the substantial investment made in databases will constitute a further milestone in facilitating electronic commerce worldwide. The work on this issue will continue in the framework of WIPO, during the second half of 1997 and the Commission considers it of importance to adopt an international convention in the near future on this topic.

54. Trademarks are major commercial instruments that will play an important role in the electronic market place. However, in an open network environment the trademark owner is faced by severe difficulties in controlling the legitimate use of his trademark. The Commission is now consulting interested circles about this and related issues and will take appropriate steps to resolve conflicts between the allocation of Internet domain names and trademarks. The Commission will seek to ensure that European interests are duly taken into account in the reorganisation of the Internet Domain Name System (DNS). In the context of the WIPO Consultative Group on Trademarks and Internet Domain Names, the Commission is actively contributing to the definition of internationally acceptable solutions, such as online arbitration, mediation and challenge panels.

55. A secure distribution of services will require adequate legal protection of conditional access services across the Single Market. Many services will use some form of encryption or other conditional access system to ensure proper remuneration. Service providers will need to be protected against the piracy of their services by illicit decoders, smart cards or other piracy devices. The Commission will propose a directive to establish an equivalent level of protection for service providers across Europe.

Ensuring a Clear and Neutral Tax Environment

56. To allow electronic commerce to develop, it is vital for tax systems to provide legal certainty (so that tax obligations are clear, transparent and predictable), and tax neutrality (so there is no extra burden on these new activities as compared to more traditional commerce).The potential speed, untraceability and anonymity of electronic transactions may also create new possibilities for tax avoidance and evasion. These need to be addressed in order to safeguard the revenue interests of governments and to prevent market distortions.

57. Indirect taxation, and particularly VAT, is the area in which the Community rules are most harmonised. Electronic trade in goods and services clearly falls within the scope of VAT, in the same way as more traditional forms of trade do. However, thorough analysis is needed to evaluate the possible impact of electronic commerce on present VAT legislation (on issues such as definition, control and enforceability) and to judge if, and to what extent, present legislation needs to be adapted while ensuring tax neutrality. Adaptations should avoid putting excessive burdens on small companies. While some commentators have suggested that there might be a need to look at alternative taxes such as a bit tax, the Commission is of the opinion that this is not appropriate, since VAT already applies to these transactions.

58. The territorial concepts which underlie direct taxation systems ("residence" and the "source" of income) also need to be examined in the light of commercial and technological developments. As with indirect taxation, the goal is threefold: to provide legal certainty, to avoid undue revenue losses, and to ensure neutrality.

59. The Commission and the Member States have recently decided to start an analysis of the impact and consequences of electronic commerce on customs and indirect taxation. The Commission will use the Taxation Policy Group to explore these issues at EU level with Member States. Further work will be done in the OECD Committee on Fiscal Affairs.

Working towards a consistent global regulatory framework

60. At present, the pioneers of electronic commerce are operating in a fragmented regulatory environment despite the fact that a number of aspects of electronic commerce are already covered by international agreements such as WTO/GATS (General Agreement on Trade in Services) and WIPO. As in the case of the Single Market existing and new national legislation in diverse areas (for example encryption, digital signatures, data protection and privacy, contract law, new electronic means of payments) can create trade barriers which will hamper the development of electronic commerce at a global level. Solutions need to be found to provide for a consistent international regulatory framework for electronic commerce.

Important steps have already been taken in a variety of different international forums such as WIPO, WTO, OECD (Organisation for Economic Cooperation and Development), the World Customs Organisation, UNCTAD (United Nations Conference on Trade and Development), UNCITRAL (United Nations Commission on International Trade Law), the Export Credits Arrangement, and the Council of Europe.

Building on this, the Community should further work through appropriate international forums and bilaterally with its major trading partners to establish a coherent global regulatory framework.

61. An International Ministerial Conference on "Global Information Networks: Realising the Potential" will be organised by the Commission and German Government in Bonn on 6-8 July 1997 which will address international policy-making amongst others for electronic commerce with a view to adopting a Ministerial Declaration.

[20] Privacy is a particular concern of consumers. According to the survey "Information Technology and Data Protection", Eurobarometer 46.1, January 1997, two-thirds of respondents are worried about trails of personal data that are left behind when using digital information networks.

[21] Additionally, virtual shopping malls which operate across borders could become very dominant once they achieve a substantial size. Some adaptation of retail legislation may be required.

[22] Proposal for a European Parliament and Council Directive amending for the third time Directive 83/189/EEC laying down a procedure for the provision of information in the field of technical standards and regulations, COM (96) 392 final, 30 August 1996.

[23] Directive 95/46/EC of the European Parliament and the Council on the protection of individuals with regards to the processing of personal data and the free movement of such data. OJ L281, 23.11.95, p.31.

[24] Directive 96/9/EC of the European Parliament and of the Council on the legal protection of databases OJ L77, 27.03.96, p.20.

[25] Directive 97/7 of the European Parliament and the Council of 17 February 1997 on the protection of consumers in respect of distance contracts (to be published in the Official Journal).

[26] Proposal for a European Parliament and Council Directive amending Council Directive 89/552/EEC on the coordination of certain provisions laid down by law, regulation or administrative action in Member States concerning the pursuit of television broadcasting activities. COM (95) 86 Final of 31 May 1995, OJ C185, 19.07.95, p. 4.

[27] Commission Green Paper "Legal Protection of Encrypted Services in the Internal Market", COM (96) 76 final, 6 March 1996.

[28] Communication from the Commission "Follow-Up to the Green Paper on Copyright and Related Rights in the Information Society", COM (96) 568 final, 20 November 1996.

[29] Questionnaire on "Industrial Property Rights in the Information Society". Version 5.0, September 1996, DG XV/E/3.

[30] Green Paper on "Commercial Communications in the Internal Market", COM (96) 192 final, 8 May 1996.

[31] Green Paper on "Public Procurement in the EU: exploring the way forward", COM (96) 583 final, 27 November 1996.

[32] Green Paper on the "Protection of Minors and Human Dignity in Audiovisual and Information Services", COM (96) 483 final, 16 October 1996.

[33] Convention on the law applicable to contractual obligations. Rome 1980. OJ L266, 09.10.80, p.1.

[34] Convention on jurisdiction and enforcement of judgements in civil and commercial matters. Brussels 1968. OJ C97, 11.04.83.

[35] Commission Recommendation of 17 November 1988 concerning payment systems, and in particular the relationship between card-holder and card issuer. OJ L317, 24.11.88, p.55.

[36] For further details see Communication from the Commission "Follow-Up to the Green Paper on Copyright and Related Rights in the Information Society", COM (96)568 final, 20 November 1996.

Executive Summary
I - The Electronic Commerce Revolution
II - Ensuring Access to the Global Marketplace
III - Creating a Favourable Regulatory Framework
IV - Promoting a Favourable Business Environment

This document is located at http://www.cordis.lu/esprit/src/ecomcom3.htm
It was last updated on 16 April 1997 by esprit@dg3.cec.be