Brussels, 10 October 2005
The European Commission adopted today its revised proposal for a new EU law on consumer credit. In October 2004, the previous Commission indicated which European Parliament amendments it could accept. In November 2004, the incoming Commission of President Barroso decided to undertake further consultations on the draft directive and produce a consolidated text that would facilitate agreement.
1) Why does the EU need a new law on consumer credit?
The purpose of the proposal is to level up the rights enjoyed by consumers across the EU in the area of consumer credit, within a genuine single market for such services. The Commission’s objective in revising the 1987 consumer credit law is to establish a set of modern rules that guarantee consumers a good level of protection no matter where in the EU they take out credit, and allow creditors to market a single credit agreement throughout the Union. This will give consumers confidence to sign up for credit products across borders and help make an EU internal market for financial services more of a reality. The current EU law on consumer credit was passed in 1987 and is now outdated. It has not kept pace with innovation in the financial services sector and it has not sufficiently fostered greater cross-border lending in the EU.
2) What are the main changes?
In order for an EU law to be passed it needs to be approved by both the European Parliament and the Council of Ministers. During the normal course of the EU’s legislative process, therefore, the Commission commonly revises its original proposal. In the case of the new consumer credit law, Parliament held its first vote on 20 April 2004 and passed some 150 amendments.
Following the Parliament’s vote, the Commission presented a first revised proposal accepting over 100 of these amendments, either in whole or in part. In November 2004 Commissioner Kyprianou decided to undertake further consultations on the draft law and to present a consolidated proposal. By reflecting many of the concerns expressed by MEPs, Council and stakeholders, the consolidated proposal should facilitate agreement.
The revised Commission proposal has restricted the scope to consumer credit of up to €50,000 to cover the most common consumer credit contracts. Mortgage credit will be addressed separately following the consultations triggered by the Green Paper on Mortgage Credit launched in July by Commissioner McCreevy (see IP/05/971).
Overdrafts, a type of agreements which require simplicity and flexibility, are covered by the directive but subject to specific regulation, mainly relating to information requirements. This specific set of rules applies also to certain credit agreements, such as small loans below 300 € or agreements concluded with credit unions.
Member States are given more flexibility to adapt provisions of the Directive to their national situation in certain clearly specified areas, while there is a mutual recognition clause in a limited number of cases to protect the single market.
The concept of “advice” is more clearly defined: in the new text, creditors now have an obligation to put consumers in a position to take a well-informed decision – they should therefore in certain cases provide explanations to their customers in addition to the normal pre-contractual information requirements.
The proposal requires all existing databases on consumer credit to be opened up to EU credit providers on a non-discriminatory basis, instead of requiring the setting up of new “consumer credit” databases at national level.
Advertisements for consumer credit products will have to feature certain standardised information such as the annual percentage interest rate (APR), the cost of the monthly payments and any fees applied.
3) How does the right of withdrawal work under the revised proposal?
The proposal confirms the right for the consumer to withdraw from the credit agreement within 14 days. In the case of a credit linked to a purchase, the right to withdraw from the sales agreement, if any, triggers a right to withdraw from the credit.
4) Is there a right to repay the credit earlier than foreseen?
The proposal confirms the right for the consumer to repay the credit at any time – with a fair and objective compensation for the creditor.
5) What does the revised proposal do to address the problem of consumers who take on more debt than they can afford to repay?
The revised proposal requires lenders to give standardised information about important elements such as Annual Percentage interest Rate, fees and monthly repayments when advertising consumer credit products. It will also oblige lenders to give consumers comprehensive information about a credit agreement in good time before they sign the contract, to document the agreement properly and keep the consumers properly informed about their respective rights and obligations under the agreement throughout their credit relationship. These information requirements, coupled with the right to cancel a credit agreement within 14 days of signing it (see answer to Question 3), will help consumers to avoid taking on more debt than they can afford.
In addition, the revised law requires lenders to check a consumer’s creditworthiness before concluding a credit agreement with him or her.
6) What happens next?
The draft law will now be debated in the Council of Ministers, with a common
position expected in 2006.