The Consumer Credit Directive

The draft Consumer Credit Directive was published in September 2002. It aims to completely overhaul the provision of consumer credit throughout Europe. The directive is now in its consultation period. The current Consumer Credit Directive was published in 1987. Most accept that it is now out of date and does not adequately reflect the range of credit products now available. The 1987 directive was also based on minimal harmonisation, which has resulted in each member state having different consumer credit regimes; the UK in particular has laws that provide high levels of consumer protection. The European Commission (EC) now favours maximal harmonisation, which does not permit member states to add their own rules to those in the directive. The overall aim of the directive is to create a single market for credit to promote cross-border competition and improve the quality of lending.

The directive seeks to introduce a number of new provisions regarding credit to consumers, some of which have proved very controversial.

Mortgages used for acquiring or improving real estate will be excluded from the directive, but all other forms of mortgage (such as equity release) are included. This proposal has been criticised in the UK. Loans secured on property differ in complexity from other forms of consumer credit. They involve property law, and there is a different lending process with different risks. To include mortgages would be to overregulate consumer credit and underregulate mortgage credit. The Council of Mortgage Lenders has said that mortgage credit and consumer credit cannot be regulated by the same rules.

The concept of 'responsible lending' will operate so that the lender is required to ensure that consumers “can reasonably be expected to discharge their obligations under the agreement”. It also requires that the lender must identify the most favourable or the least expensive product in their range for the particular consumer. This may result in loans becoming more expensive because the lenders are making less profit on their loans. Responsible lending is designed to prevent overindebtedness, yet this does not often result from a simple accumulation of debt. As a recent study has shown, overindebtedness tends to be the result of economic or personal events, such as unemployment, which affect the consumer's ability to pay and cannot be foreseen by the lender at the time of granting the credit. Responsible lending may also leave those people who are less eligible for loans unable to get credit.

The directive proposes a 14-day right of withdrawal for all credit transactions. The cooling off period for credit transactions in the UK is restricted to certain agreements and is only available for five days. While this will provide more protection to the consumer, the lenders may be adversely affected financially by the provisions and may increase the costs of loans, passing such costs on to the consumer.

The directive will introduce a new definition of the APR. At present the various national legislations require different elements to be included in the APR. A definition of APR across the member states would permit consumers to correctly compare the rates they are being offered. However, the use of a number of definitions – borrowing rate, total lending rate and sums levied by the creditor – may be confusing for some consumers.

The directive will apply to loans of any size. Small loans have been specifically included, as the EC believes they are typically provided to the weakest members of society. The EC has not considered the need for proportionality in relation to the size and complexity of the credit. Regulations that apply across the board are unlikely to be able to regulate all sizes of loan effectively.

Section 75 of the Consumer Credit Act 1975 will be lost if the directive is adopted in its present form. It protects UK credit card users by making retailers and credit card issuers jointly liable in the event of a dispute about goods and services supplied in transactions of between £100 and £30,000. There is a form of joint and several liability retained in the directive, but it is only applicable where the retailer acts as an intermediary.

Will cross-border competition work? There are different credit patterns in the different European countries. Consumers in some countries receive most of their credit on current account overdrafts, others on personal loans and others on credit cards. Some consumers remain wary of credit. It may prove too difficult to regulate all the member states effectively, simply resulting in poor regulation and less protection for the consumer throughout Europe. The directive has been described by the Finance & Leasing Association as a “fundamental attack on the credit industry in the UK”. While the intention to update the European consumer credit laws is a positive step, and many of the provisions in the directive will benefit both consumers and lenders, the use of maximal harmonisation as presently reflected in the directive may result in an overall reduction of the level of protection UK consumers enjoy, and this should not be given up without a fight.