Consumer credit

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Following years of negotiations, EU member states found an agreement to amend the consumer credit directive, harmonising credit rules across the Union and allowing consumers to choose the best deal.

Background

The current consumer credit directive dates from 1987 and has been amended twice. The resulting rules are too complex and do not cater for the increase in the use of credit since the 1980s. 

The Commission has been trying since 2002 to recast the three existing directives into one simpler whole. The original 2002 proposal gave rise to 150 Parliamentary amendments. It was revised but again failed to gain agreement. 

In October 2005 the proposal was revised a second time to include the Parliamentary amendments to date. But until May 2007, the proposal failed to gain agreement among member states, which feared that a harmonisation of rules could reduce the level of consumer protection.

Issues

Aims of new legislation

Since the late 1980s, consumer credit has changed dramatically and its use has greatly increased. There are new ways of obtaining credit such as instalment loans, cards with deferred payment/credit cards, cash credit and overdraft facilities. Some of these are only partially covered by the present directive. 

In addition, the current directive does not meet the needs of the single market. It lays down only basic standards for consumer protection and many member states have enacted higher standards. The resultant Europe-wide situation is diverse and over-complex, inhibiting the provision of credit across borders.

The new proposal seeks to cover all the new types of credit and to apply harmonised provisions while offering member states flexibility on implementation. 

Restricted scope

The proposed directive includes almost all types of consumer credit, up to €75,000. It does not cover loans secured on property (house purchase or home improvement). These are dealt with separately in the Mortgage credit Links Dossier.

Harmonised APR

The method used for calculating the annual percentage rate (APR) will be harmonised. This is the average rate of interest paid per year on the loan, expressed as a percentage and calculated over the life of the loan. It allows the consumer easily to compare the cost of one loan with another.

Mutual recognition

Member states will be left free to adapt general rules to their own laws in some areas. To cater for this and allow proper functioning of the single market, a principle of mutual recognition of other member state rules will apply.

Consumer rights

The directive gives consumers the right to:

  • Receive specified information prior to contract regarding fees, monthly repayments and APR;  
  • withdraw from contract within first 14 days; 
  • repay early (subject to ‘fair and objective compensation’ to cover lenders’ costs), and; 
  • withdraw from credit contract if associated purchase is cancelled.

Early repayment

The issue of early repayment emerged as one of the main sticking points. The most recent compromise-formula grants creditors a limited right to compensation for early repayment of credit. Compensation may not exceed 1% of the amount of debt that has been repaid early. If debtors repay within a year before the sums are due, compensation is brought down 0.5%. However, member states have the possibility to make exceptions to these thresholds and allow compensations to exceed the 1% threshold in certain cases.

Positions

Consumer Commissioner Meglena Kuneva said: "At the moment, trying to compare different credit offers across the European market is like trying to compare apples and pears. Standard, comparable information for all EU credit loans will make the market more transparent for business and consumers."

Rapporteur Kurt Lechner (EPP-ED) said "the law as a whole is a positive outcome" but that there was "still room for improvement" regarding the scope of the directive and pre-contractual information requirements. He added that he was now sceptical and had "mixed views" regarding the effects of the directive.

"I believe that Socialists and Liberals have struck a decent compromise in the interests of the European consumer," said Evelyne Gebhardt, Socialist Group spokesperson on the Internal Market. "If it manages to conclude this dossier at the end of the arduous negotiations with the member states, the European Parliament will have chalked up a notable success. A positive outcome should then prompt the Commission to bring forward its long-awaited mortgage legislation," stressed Evelyne Gebhardt.

Liberal MEP and ALDE spokesperson on consumer credit Diana Wallis said: "At its best this directive could have the effect of stimulating Europe's credit market by enabling and promoting cross-border consumer lending and providing greater choice of products, whilst always maintaining the backdrop of harmonised consumer protection rules that give consumers the possibility to compare what is on offer and make informed decisions."

Green MEP Heide Rühle was more critical: "This directive promised so much to consumers but, based on today's vote in the European Parliament, the end result would be legislation that ensures neither a high level of consumer protection nor a sufficient degree of security for cross-border credit engagements."

Monique Goyens, Director General of the European Consumer Organisation BEUC, stated: "Even though the result is a long way from our initial demands, there have been some improvements, particularly in terms of the information which should be provided to consumers. However, we regret that all the efforts of the last five years have not led to a more ambitious solution to an issue which affects almost every household in Europe."

European consumer credit association Eurofinas said the consumer credit directive was a "missed opportunity". Its Director General Tanguy de Werve said: "From a single market perspective, the result is disappointing. We are still far away from the initial objective. This is at, at best, a step in the right direction."

The European Banking Federation (EBF) voiced similar concerns and said that the directive would introduce a "disproportionate overload of information and bureaucracy" while "not delivering the additional consumer choice".

Stephen Sklaroff, Director General of the Finance & Leasing Association (FLA) said: "We are pleased to see that the European Parliament has amended some of the directive's original proposals, which would have adversely affected our customers. But some concerns remain. We will work closely with the UK Government to ensure that these are addressed when the directive is implemented in the UK."

Xavier Durieu, secretary-general of European retail association EuroCommerce, said: "By trying to find a consensus at any cost, the council risks giving birth to a text that will betray the former expectations of business and consumers alike".

Alain Gourio of the European Mortgage Federation (EMF) said: "The principle of full targeted harmonisation has been adopted in the final Directive. The approach in itself is very efficient, because it is simply not realistic to aim at covering all of the aspects of the credit regime. However, the Directive proves less than ambitious in this respect: there is no harmonisation of the key elements, such as the right of a withdrawal regime or the provisions relating to linked credits." 


 

Timeline

  • 4 Dec. 2006:  Political agreement was planned, but no decision was taken at the competitiveness Council.
  • March/April 2007:  An impact assessment on the modified directive proposal was requested by the Parliament.
  • 21-22 May 2007: Member states found an agreement on the directive at the competitiveness Council.
  • 21 Sept. 2007: Commission issues a communication on the common position adopted by the Council. The Commission said it did not support all changes, but considered that the compromise could be supported.
  • 10 Dec. 2007:  Parliament's Committee on internal market and consumer protection (IMCO) passed some 236 amendments to the proposed directive.
  • 16 Jan. 2008: Parliament adopted a compromise package of amendments in second reading.
  • 7 Apr. 2008: The Council approved the changes made by Parliament, marking the text's final adoption.

Further Reading

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