The Consumer Credit Directive

Lest we forget, the consumer credit market across the EU is worth over €800 billion with an estimated average annual growth rate of 8%. Although the picture is varied with national markets at different stages in their development.

The new Consumer Credit Directive (CCD) must not be considered solely as an issue of compliance as it is of far reaching strategic importance to all lending institutions. The EU Commission views the forthcoming CCD primarily as a means for consumers to make big savings through the availability of more competitive interest rates.

The major European banks will undoubtedly seek competitive advantage and hope to expand their loan books but all lenders will naturally be more than a little concerned at the prospect of new cross-border rivalries stimulated by use of the Internet. In terms of consumer protection the various requirements in the CCD will reinforce the FSA's focus on 'treating customers fairly' although in the UK consumer credit has been regulated by the Office of Fair Trading (OFT).

Background

In mid-January 2008 all parties in the European Parliament gave their final approval to a new Consumer Credit Directive (CCD). The next step will be for the EU Council to confirm the CCD sometime before the middle of 2008 which in turn will give Member States 2 years to transpose the Directive into their national legislation (i.e. by mid-2010).

Acknowledging that consumer credit is still largely governed by national legislation this new Directive seeks to harmonise consumer credit contracts across the EU in a number of areas including standardising calculations governing the true costs of a loan, the provision of essential pre-sale information and the rights to cancel and to repay a loan early. There has been a very long and tortuous gestation period for this Directive with a political process that has included several revisions of the main text. The original text with far greater coverage appeared as long ago as September 2002. Undoubtedly, the arrival of the German presidency in January 2007 acted as a catalyst and gave real impetus to resolving the many outstanding issues.

At present consumer credit in the UK is primarily governed by the Consumer Credit Act 1974 and it should be noted that it is regulated by the OFT (Office of Fair Trading) rather than the FSA. Going forward the Department for Business, Enterprise and Regulatory Reform (DBERR) will oversee implementation of the CCD which is likely to be via secondary legislation.

It is important to stress that secured lending is excluded from the scope of the CCD. That being said, mortgages have already been impacted indirectly. It is clear the EU White Paper on Mortgages published in December 2007 has been influenced by provisions contained within the draft CCD text (e.g. APR calculation, prescribed pre-contract information, mandatory early repayment rules and the promotion of responsible lending). The CCD covering unsecured credit also raises a very important issue regarding the future regulatory status of second charge lending in the UK.

The final CCD text is 72 pages long (including annexes totalling 17 pages). The key information is summarised below although it is essential to read and comprehend the full text to appreciate fully the importance of this new Directive and to understand the mandatory changes it will bring about in the provision of consumer credit in due course.

Key features of the CCD

• Scope: The Directive will apply to all unsecured credit agreements between €200 and €75,000 (roughly £150 to £56,000). It will only apply to loan contracts on which interest is paid and not to products such as charge cards (deferred payment cards). Guarantors are also excluded. Credit agreements in the form of overdraft facilities and where the credit has to be repaid within one month are excluded.
  
  
• Pre-contractual information and contractual information requirements: The CCD sets out new requirements on the information to be provided including the type and duration of credit, borrowing rate, APR and the total amount of credit and charges. Pre-contractual information must be provided by means of a Standard European Consumer Credit Information (SECCI) form as set out in the Annex to the Directive. This document is similar to the European Standard Information Sheet for mortgages. In the final draft of the Directive the requirement to provide an amortisation table for a fixed term credit agreement has been modified so that it is required only at the customer's request.
  
  
• APR (annual percentage rate of charge): This is an important area of change as there will be mandatory technical changes in the calculation of APRs. A new standardised APR is to be introduced across the EU member states based on a formula set out in detail in the Annex to the Directive. Under article 9 creditors must provide an APR. The APR will be calculated on the basis of the total cost of credit including the full range of fees and taxes paid by the consumer and known to the creditor (although not notary fees). This is a wider definition of APR than appeared in the earlier texts.
  
  
• Right of withdrawal: Under the CCD there is a standard 14 day 'right of withdrawal' period (this is apparently a new feature in 14 EU States) during which time consumers can withdraw from the contract without the need to give a reason. This period is reduced to three days in the case of linked credit agreements at the explicit request of the consumer. This might apply where a consumer purchases a white good and wishes to take immediate delivery.
  
  
• Advertising: The CCD sets out new mandatory requirements on standard information to be provided in advertising covering unsecured lending. These must include the borrowing rate and any charges included in the total cost of credit to the consumer together with a representative example.
  
  
• Creditworthiness: Although over-indebtedness is not one of the Directive's primary aims a lender must assess the solvency of a lender. In the final draft of the CCD, Member States have been given discretion over how to assess customer credit worthiness. However, such assessments of solvency must be made on the basis of sufficient information be it obtained from the consumer and/or by reference to a suitable credit agency/database. Before granting any significant increase in credit, the creditor must update this information. If a consumer credit application is rejected following a database search the creditor must inform the consumer immediately and provide details without charge.
  
  
• Early repayment: The Directive gives the consumers the right to early repayment. Lenders are entitled to claim compensation for justifiable costs directly linked to the early repayment of credit. Rules are set out for calculating compensation and the Directive also defines specific situations where compensation cannot be claimed. There is a cap on the rate of charges and 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 this compensation is brought down 0.5%. Although the early repayment charge provisions have been simplified the situation is made more complicated as the text does give scope to individual Member States to permit creditors exceptionally to claim higher levels of compensation.
  
  
• Intermediaries: Under the terms of the CCD, intermediaries are able to charge a fee from both lender and customer.

The bigger picture

The CCD is considered by EU Commissioners to be an important first step in improving transparency and competition in Europe. It is also part of a much bigger drive to boost the internal market in retail financial services where currently it is estimated that only 1% of consumer credit business is transacted cross-border. We should always remind ourselves that the recent Green Paper on retail financial services highlighted three important aims:

• lower prices through better choice
• enhancing consumer confidence
• and empowering consumers.

We should, however, not expect a harmonised internal market for unsecured lending to be achieved overnight. Indeed, the transposition of the IMD (Insurance Mediation Directive) has only just been achieved across all EU States long after the original January 2005 deadline!

Roger Davies BA ACIB APMP

Principal Consultant
eacg

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