Legal aspects to consider when digitalizing the execution of automotive finance contracts at the dealership
In recent years, in order to increase sales, car manufacturers have increasingly integrated the provision of finance products into the customer’s car purchase experience at the car dealer-ship, regardless of whether such finance products are provided by the manufacturer’s captive bank or through cooperations with a white label financing provider. More and more dealers, car manufacturers and financing providers are now looking further digitalize the interaction with their customers. The goal is to reduce time and effort spent on executing documentation and meeting KYC requirements. Ideally, the customer provides his signatures and any KYC documentation digitally on a tablet or smartphone without having to print out any documents.
In order to achieve this goal, financing providers and dealers have started to cooperate with FinTechs which offer apps that promise a digitalization of the whole process around the execution of the finance products.
With a view to any of these projects, there are a number of aspects under German law that the financing providers and the dealers should keep in mind. These include statutory form requirements and compliance with anti-money laundering law provisions or consumer protection laws. Furthermore, compliance with data protection laws is more important than ever in the light of recent legislative developments such as the General Data Protection Regulation.
In this alert, we provide a short overview over some of the legal obstacles that arise in connection with the digitalization of the sales process at car dealerships.
Consumer protection and Compliance with form requirements
Consumer protection laws may apply. This can be the case for two different reasons. First, the financing agreement in question may be a distance contract (Fernabsatzvertrag) according to section 312c German Civil Code (Bürgerliches Gesetzbuch, “BGB”) if the financing provider and a consumer (Verbraucher) exclusively avail themselves of means of distance communication on negotiating and concluding the contract except where the conclusion of the contract does not take place in the context of a sales or service-provision scheme organized for distance sales. In order to determine whether a financing agreement in fact constitutes a distance contract, a case-by-case evaluation is necessary.
Secondly, the contract could also be classified as a consumer loan (section 491 (1) BGB) or a non-gratuitous financing assistance (entgeltliche Finanzierungshilfe, section 506 (1) BGB). With regards to the latter, there is widespread debate whether the provisions regarding non-gratuitous financing assistance are applicable by way of analogy to leasing contracts with mileage allowance.1 Considering this question has not yet been decided by Germany’s Federal Court of Justice (Bundesgerichtshof), many companies decide to comply with the respective consumer protection provisions just in case.
If consumer protection laws apply, the seller has to provide the buyer with a broad range of legal information on, inter alia, the consumer’s right to revoke the contract. The means by which such information is to be provided depends on the specific product in question. Also, if the contract is qualified as a consumer loan agreement or a non-gratuitous financing assistance, then it needs to be concluded in written form (Schriftform). Generally, that requires that a physical document is signed by each party by hand and then physically provided to the contractual partner.
With a view to the latter, instead of having the customer sign the paperwork by hand, it is also possible to use qualified electronic signatures which under German law satisfy the written form requirement (so-called electronic form, elektronische Form, section 126a BGB). When using an electronic signature, a graphic is digitally generated under the document. Thereby the identity of the signatory is verified and the integrity of the document can be guaranteed. Therefore, the use of the apps mentioned above can help to meet formal requirements for the conclusion of contracts more easily. However, before accepting a customer’s electronic signature under a document, financing providers should always verify that the technology provider takes the necessary steps to comply with the respective requirements under European and German law regarding the electronic form.
Anti-money laundering regulation
When entering into financing agreements, anti-money laundering provisions have to be complied with. According to section 2 (1) of the German Money Laundering Act (Geldwäschegesetz, “MLA”), banks and other financial institutions are obliged entities under the MLA. As a result, they have to identify their contracting parties and, if applicable, persons acting on their behalf, before establishing a business relationship or executing a transaction (section 10 (1) and 11 (1) MLA). Pursuant to section 13 (1) MLA, the obliged entity has to examine the document presented physically or may employ another equally suitable procedure. This requirement does not necessarily have to be fulfilled by the obliged entity itself. A third party which is either an obliged entity under the MLA (section 17 (1) MLA) or another suitable person/company (section 17 (5) MLA) can be engaged in this process. If a financing provider uses an application to verify customers’ identities, however, it must comply with provisions regarding the outsourcing of KYC procedures and it is obligated to, inter alia, conduct random checks of the application provider’s work.
If done right, the digitalization of point of sale processes can improve the customer journey without compromising the legal validity of the execution or bearing any other risks for the dealer and the financing provider. Authentication apps can be a useful tool to simplify the process of contract conclusion and offer the consumer a more comfortable option to provide all relevant information.