Consumer credit rules for the 21st century
European Commission - IP/02/1289 11/09/2002
Brussels, 11 September 2002
Consumer credit rules for the 21st century
The European Commission adopted today a proposal for a new directive on consumer credit. The existing EU-wide rules from 1987 have not kept pace with the important evolution in this sector and, at the same time, only set minimum standards. They have largely been overtaken by national regulation. The absence of common rules reduced cross-border transactions and led to differences in consumer protection in Member States. New EU-wide rules for consumer credit will be expanded to modern forms of consumer credit today. Home loans remain outside the scope. Borrowers will gain improved transparency on products (costs, terms and conditions) and can more easily compare offers on a cross-border basis. Lenders will gain improved opportunity to assess borrower risk, but in return they will be subject to "know thy client" obligations before granting any credit. Consumers will also have the right of withdrawal within 14 days, free of charge and without justification. Harmonised consumer credit rules throughout the Union will not only increase the protection of consumers across borders but also their confidence and thus strengthen the functioning and the stability of the consumer credit market in the EU.
"Consumers in the euro zone owe € 500 billion", Health and Consumer Protection Commissioner David Byrne said, "It has been my ambition to make sure that their interests are well-protected within a framework that acknowledges the importance of credit for our modern lifestyles". Internal Market Commissioner Frits Bolkestein said: "A new consumer credit directive has long been on the to-do list of actions for building the Internal Market in financial services and improving opportunities for e-commerce. The rules are comprehensive and common to all. They are crucial to building an Internal Market in consumer credit. People need to know exactly what they are paying for credit and to be able to compare offers from all over Europe. Only then will they have the confidence to use the opportunities the Internal Market offers for cheaper cross-border borrowing, including through e-commerce."
Main elements of the proposal for a new consumer credit directive
Harmonised rules: Unlike the present directive, which lays down only the foundations of regulation leaving a large scope for Member States to go further, the new directive explicitly prevents Member States from adding to the new rules unless specifically stated.
Enlargement of the scope to cover present-day realities: The new directive covers all consumer credit no matter the form (loan, hire-purchase, overdraft facilities, rolling credit, financial lease, etc.), amount (no floor, no ceiling) and any surety (a guarantor or a mortgage) or insurance. Regarding mortgage credit: The directive will cover mortgage-backed consumer credit ("equity release") but classical home loans remain outside the scope. They were subject of a recent Commission Recommendation and a European Code of Conduct.
Improved transparency and comparability of credit offers: The classical concept "total cost of credit to the consumer", which is expressed in the "Annual Percentage Rate" (APR), is harmonised to improve comparability. The APR expresses the total cost from the perspective of the consumer, i.e. no matter whether he or she pays the lender, an intermediary, the taxman or another third party. Two new terms are introduced, the "Sums Levied by the Creditor" (SLC) and the "Total Lending Rate" (TLR): The SLC covers what the consumer pays to the lender and the TLR expresses this in a percentage. They will provide a comparison of lender's offers on a national and cross-border basis. The need for improvement is demonstrated in a recent EU-wide opinion poll which revealed that one consumer in two thinks that "you never know beforehand how much it is going to cost to borrow money", approximately 40% of Europeans say the contrary (Eurobarometer 56, question 14.5, December 2001).
Consumer disclosure and lender respect: The borrower is obliged to disclose all relevant information when asked by the lender. In return, the lender must "know thy client" by advising on the most appropriate product in his product range and by conscientiously assessing the borrower's ability to repay before granting new credit ("responsible lending"). This means that the lender must identify the most favourable or least expensive product in his product range for a consumer.
Improved freedom of circulation of quality solvency data across borders: The lender's right of access to solvency data is strengthened (i.a. to facilitate "responsible lending"). The quality of this data is strengthened by ground rules on the operation of existing databases on "payment incidents" (failure of consumers to reimburse).
Rights of withdrawal: within 14 days and free of charge and without justification and early repayment against, in most cases, payment of an indemnity.
Registration of lenders and credit intermediaries (except, for the latter, if another lender or intermediary covers) and ground rules for the operation of intermediaries.
Liability of lenders if suppliers of goods and services act as their credit intermediaries, e.g. in case of loans linked to a purchase (like a car loan) or of cards issued by retailers. Credit disconnected from sales such as credit by cards remain outside the scope.
Protection of personal guarantors: (right to same information as the borrower) and of consumers not fulfilling their contractual obligations (ground rules for repossession of goods and debt recovery). The latter rules not only protect consumers against abuse, they also improve lenders' scope for calculating the risk/cost of non-performance.
The provisions of the 1987 Consumer Directive (87/102/EEC) effectively go back to the "cash society" of the 1970's. It included a "minimal clause" allowing Member States to go further than the rules of the directive. The combined effect was a segmentation of the Internal Market into separate national markets and discrepancies in consumer protection.
A large-scale consultation of Member States and stakeholders identified six guidelines for the revision:
Redefinition of the Directive's scope in order to adapt it to the new market situation in this area;
inclusion of credit intermediaries;
introduction of a structured information framework for the credit grantor in order to allow him to better appreciate the situation of the borrower;
more comprehensive information for the consumer and any guarantors;
more equitable sharing of responsibilities between the consumer and the professional;
improvement of the arrangements and practices for solving problems related to reimbursement incidents, both for the consumer and for the credit grantor.
The new directive is as an application of the Commission's policy for further harmonisation of EU consumer protection regulation in financial services. Two initiatives of the Commission explained this policy as a necessary step to build consumer confidence:
Consumers do not have enough confidence in the Internal Market in this field. A key reason is the absence of an appropriate level of common rules. Results from a Eurobarometer opinion poll (Eurobarometer 56.0, December 2001, see question 16) reveal that a large majority of consumers (53%) consider consumer protection as a proper matter for full harmonisation throughout the EU (19% of those interviewed think harmonisation should only be partial and 10% think these standards should not be harmonised at EU level).