Consumer Credit Directive
Consumer Credit Directive denotes Directive 2008/48/EC (European Union) on credit agreements for consumers which harmonises certain aspects of the laws, regulations and administrative provisions of the Member States concerning credit agreements for consumers.
CCD has been reviewed recently with the following recommendations (The reasons why the Directive has been only partially effective stem both from the Directive itself (for instance, imprecise wording of particular articles) and from external factors, such as the practical application and enforcement in the Member States and from aspects of the consumer credit market not covered by the Directive.)
Issues and Challenges
The exclusions from Directive’s scope are significant and encompass certain widely used loans as well as loans that are documented to more easily lead to consumer detriment under certain circumstances, such as zero-interest loans, Payday Loans, leasing agreements that do not impose an obligation to purchase, or agreements with pawnshops.
A high level of consumer protection and the emergence of a well-functioning internal market have both been partially achieved. The most effective provisions in the Directive relate to the provisions on the rights of withdrawal and Early Repayment and the provision regulating the Annual Percentage Rate of Charge.
- Although the provision on the Annual Percentage Rate of Charge existed already in the previous legislation on consumer credit, the Directive entirely harmonised the calculation of the Annual Percentage Rate of Charge by providing a coherent formula for its calculation across all Member States. The Directive thus provides for a common and comparable tool of high effectiveness and value added for consumers
- The consumer enjoys a period of 14 calendar days in which he can withdraw from the Credit Agreement without giving a reason. In addition, the early repayment clause entitles the consumer to fully or partially repay, at any time, the outstanding debt under a credit agreement.
- The Directive obliges the creditor to provide to the consumer, in good time before he/she is bound by any credit agreement or offer, with the information needed to compare different offers and take an informed decision whether to conclude a credit agreement. Such information is provided by means of the Standard European Consumer Credit Information Form which includes key details such as type of credit, Annual Percentage Rate of Charge, number and frequency of payments, and total amount owed.
Harmonization and EU added value
The Directive’s added value lies in the creation of a high level of consumer protection across the EU and in the reduction of fragmentation of the EU regulatory framework through the introduction of certain harmonization articles (for instance, standardised information formats), thereby increasing consumer protection and reducing the barriers to the provision of cross border credit. Yet, provisions regarding the creditworthiness assessments and credit databases have not been fully effective. The Directive does not cover the entire process of credit granting of which many aspects are only partially harmonised or not at all harmonised across the EU (e.g. the content of credit databases). This represents an important barrier to the creation of a real internal market for consumer credit.
Article 8 of the Directive provides for an ‘obligation to assess the creditworthiness of the consumer before granting a credit to the consumer’. The Article states that the creditor needs to assess ‘the consumer's creditworthiness on the basis of sufficient information, where appropriate obtained from the consumer and, where necessary, on the basis of a consultation of the relevant database’, without specifically defining the information to be checked or the conditions under which the creditor can deem the consumer to be creditworthy.
The information to be checked and the decision-making process are defined at Member State level, giving considerable discretion to Member States to further regulate the details of the creditworthiness assessment. A majority of Member States have laid down further provisions about the creditworthiness assessment and access to databases, further defining how the creditworthiness assessment is to be conducted and imposing other obligations on creditors. Most Member States that went beyond the simple obligation of checking the solvency of a borrower have laid down the documents that consumers have to provide to assess their creditworthiness.
The only source of data that the Directive defines for creditworthiness assessment are the credit databases that exist in Member States and that store information on consumers’ existing credit and possible defaults. Article 9 of the Directive, concerning database access, imposes the obligation for each Member State to ensure access for creditors from other Member States to databases used in that Member State. However, the Directive is silent on how such access is to be granted, resulting in different access requirements set by the individual Member States. Moreover, the credit databases – and the information contained therein – differ from Member State to Member State, being either public or private and containing positive data (i.e. data on any credit taken by a person) or negative data (i.e. solely data on defaults on credit taken) or both.
The differences in the content of each respective Member State’s database make the creditor’s task harder in cross-border operations. In addition to the differences in the way Member States operationalized the generic requirements of Articles 8 and 9, some Member States imposed a range of other obligations on creditors with respect to creditworthiness assessment, such as rules that prohibit the creditors from terminating the credit agreement or from imposing penalties and charges for late payments in case the creditworthiness assessment was not correctly done. As a result, the current provisions of the Directive have led to a fragmented situation with respect to creditworthiness assessment rules as well as database interoperability which hamper better functioning of the internal market for consumer credit.
Most of Directive’s definitions are still relevant to the current market situation. However, there is a growing level of uncertainty about new forms of lending that have appeared online. Article 2(2) of the Directive does not explicitly mention such new forms of lending - there is no reference, for instance, to Peer-to-peer Lending amongst the exclusions for the scope (Article 2(2)), meaning that the Directive should in principle cover peer to peer lending. However, the definition of Creditor uses the words ‘in the course of his trade, business or profession’ which might not fit with the concept of peer-to-peer lending.
Legal uncertainty is also resulting from imprecise wording of some provisions of the Directive such as those on standard information to be included in advertising, on pre-contractual information and on creditworthiness assessment which employ terms such as ‘sufficient information’ and ‘in good time’ without further specification.
The format and length of the consumer credit form does not suit modern mobile digital technology used by many consumers. Thus, the aim of the Standard European Consumer Credit Information form of providing useful pre-contractual information leads to obligatory disclosure of information difficult for the consumer to access and comprehend in an online environment, thus defeating its original purpose.
Another transparency-related issue that has surfaced over the course of the past decade concerns advertisements for consumer credit aired on television and radio. The provisions of Article 4 of the Directive19 lead to important information being either shown for a very limited amount of time or spoken very quickly, not giving consumers enough time to process and recall it. This indicates the practical difficulty involved in making the current Article 4 of the Directive consistently effective across all media types.
The entry into force of the Directive has led to a number of initial and on-going costs (for instance, staff training and initial set up costs for private companies; monitoring, compliance and enforcement costs for public authorities). However, the main finding is that the principal benefit of the Directive, namely the reduction in consumer detriment, outweighs the costs.
The Directive is generally coherent with and complementary to other EU-level consumer policy and legislation. While there are no major inconsistencies with other relevant EU-level legislation, further alignment or synergies with such legislation may help improve legal clarity for consumers and creditors. One such instance concerns the Creditworthiness assessment and the possible need for the Directive to align itself better with the Mortgage Credit Directive and General Data Protection Regulation respectively.
The two main objectives of the Directive, namely achieving higher consumer protection standards and the emergence of a cross-border market, remain relevant. However, in order to sustain its relevance in the short and medium term, the Directive may need to cover the new emerging consumer habits and emerging market developments brought by digitalisation. This does not require changing the objectives themselves, but possibly an adaptation of some of the Directive’s provisions.
Article 23 of the Directive establishes that Member States are to lay down rules on penalties applicable to infringements of the national provisions transposing the Directive and that such penalties must be effective, proportionate and dissuasive.
In doing so, Member States have generally established civil and administrative sanctions for infringements of the national provisions transposing the Directive; however, some Member States, provide, in addition to civil and administrative sanctions, the possibility to issue criminal sanctions. The result has been that there is considerable disparity in the types and levels of sanctions used by national authorities when enforcing the Directive.
In addition, while a small majority of Member States have only one enforcement body responsible for compliance of the Directive, a large number of Member States have appointed several bodies to ensure correct implementation of the different aspects of the Directive; in some Member States, the competent authority depends on the type of the credit provider, namely whether it is a bank or a non-bank lender. Having multiple competent authorities with varying sanctioning powers and competent authorities depending on the type of operator has had an impact on the level-playing field between the competitive position of different categories of providers and the consistency of enforcement.
- REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the implementation of Directive 2008/48/EC on credit agreements for consumers