4 CONSUMER CREDIT
(26117)
14246/04
COM(04)747
| Amended draft Directive on the harmonisation of the laws, regulations and administrative provisions of the Member States concerning credit for consumers
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| Legal base | Article 95 EC; co-decision; QMV
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| Document originated | 28 October 2004
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| Deposited in Parliament |
10 November 2004 |
| Department | Trade and Industry
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| Basis of consideration |
EM of 30 November 2004 |
| Previous Committee Report |
None, but see (23803) 12138/02: HC 42-xviii (2003-04), para 11 (28 April 2004)
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| To be discussed in Council
| Not known |
| Committee's assessment | Politically important
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| Committee's decision | Not cleared; further information awaited
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Background
4.1 The existing Consumer Credit Directive,[12]
intended to create a common market in credit and to set minimum
standards for consumer protection, is still substantially as drafted
in the 1980s. After consultations, launched in June 2001, the
Commission concluded that the current Directive is no longer in
step with the current credit market. It said there had been little
growth in cross-border transactions. It decided that the Directive
needed to be revised to allow consumers and companies to take
full advantage of the single market. In September 2002, the Commission
proposed a draft Directive which would move from minimal harmonisation
to, with some limitations, total harmonisation. It claimed this
would better provide a high level of consumer protection and promote
a single credit market.
4.2 In April 2004, when we last considered this subject,
we cleared the proposal, even though we had already noted that
there was much to be clarified or amended in the draft if the
new Directive was properly to meet the needs of UK lenders and
borrowers. We did so because we had been told that:
- once the European Parliament
completed its first reading, suggesting amendments which would
substantially alter the proposal, the Commission would re-draft
it; and
- therefore the Government would delay its proposed
written consultation and Regulatory Impact Assessment until the
revised proposal was tabled.
But we said we would wish to consider further the
substance of the proposal once a revised draft Directive was deposited.[13]
The document
4.3 The current document is the amended draft Directive
foreshadowed in April 2004. It is presented in the form of comments
on the European Parliament's 152 amendments with revisions to
be read alongside the original text. The amended draft Directive
would:
- define the Directive's scope
to cover the modern credit market, with a split between consumer
credit and mortgages for property purchase. The effect is to exclude
only those mortgages taken out to buy or renovate a property,
so that lending for equity release or debt consolidation purposes
would be subject to the Directive;
- limit the provisions of the Directive to information
requirements for certain areas including overdrafts and credit
unions;
- improve access by lenders to negative data on
a borrower, permitting a more accurate assessment of risk and
ability to pay;
- harmonise requirements for advertising consumer
credit products and for pre-contractual and contractual information,
to make them more comparable for consumers;
- improve consumer protection measures, including
introducing a duty to advise and a universal 14-day right of withdrawal;
- standardise the calculation of the annual percentage
rate of charge (APR), clarifying costs which must be included
and assumptions used in the calculation;
- introduce a right for a consumer to settle credit
early and entitlement to an equitable reduction in the cost of
credit;
- prohibit the use of bills of exchange or promissory
notes by either consumers or guarantors to guarantee payment of
credit; and
- introduce provisions on linked credit agreements
while maintaining existing provisions on joint and several liability.
The Government's view
4.4 The Minister for Employment Relations, Competition
and Consumers, Department of Trade and Industry (Mr Gerry Sutcliffe)
says:
"The Directive as amended has a number of
policy implications for the UK credit market and existing consumer
protection measures. We expect many of these implications and
UK concerns to be addressed during the negotiation of this text,
so the information given below relates solely to the text as amended.
"The UK credit market is the most advanced
of all the Member States with a highly competitive market bringing
a wide range of consumer choice. It is also by its nature very
complex, therefore it is important that the Directive's provisions
are proportionate to the size and type of credit being provided,
and provide appropriate consumer protection. Some of the proposals
will place undue burdens on the lender, resulting in additional
costs being passed onto the consumer or a reduction in the choice
of products available to the consumer. In addition, the scope
of the Directive and the freedom of Member States to legislate
on issues not covered by the current text has yet to be fully
determined. Finally, some of the proposals may actually inhibit
the achievement of a competitive market, by drawing the consumer
to use credit products, which may not necessarily be the most
appropriate for their needs."
4.5 The Minister then gives us a helpful detailed
commentary on specific provisions and the policy implications
of them:
Scope — mortgages (Article 3)
"We are concerned to ensure that the proposed
Directive does not cut across existing UK regulatory structures
for mortgages. Although the Directive will not apply to loans
that are for the purchase or transformation of private immovable
property, as currently drafted it will cover loans secured on
property for other uses including products such as equity release
loans. If implemented as drafted, a number of mortgage loans in
the UK would be caught by the Directive which would cut across
the new FSA [Financial Services Authority] mortgage rules and
leave lenders having to comply with different regimes depending
on the purpose of the loan. We believe loans secured on property
should be excluded from the scope of this Directive. Such loans
differ not only in their complexity, but also in the lending process.
Moreover, secured loans feature very different risks to other
forms of consumer credit.
Scope - Credit Unions (Article 3)
"We are pleased that Credit Unions which
were not specifically excluded from the scope of the draft Directive
are now subject to a 'light regime' of information requirements.
This means we will avoid over-burdening what is essentially a
developing market in the UK providing a valuable service for the
more vulnerable consumer, typically unable to qualify for mainstream
lending and savings activities.
"The amended proposal no longer requires
a central database or network of databases to be established in
each Member State. Instead, each Member State must ensure access
to creditors from other Member States under non-discriminatory
conditions. As the UK has a competitive market for credit reference
material we are pleased that the drafting no longer precludes
databases provided by a number of providers.
Pre-contractual information (Article 6)
"We support the Commission's amended position
on Responsible Lending which has been incorporated into Article
6 on Pre-Contractual Information, and includes obligations regarding
the provision of pre-contractual information and the requirement
to assess the consumers' creditworthiness on the basis of the
information provided by the latter and a consultation of the database,
where appropriate. We will be seeking clarification that the need
to consult the database only 'where appropriate' introduces the
flexibility we require for lenders to decide whether or not they
need to consult the database, for example for small amounts. However,
we are concerned that the Commission has maintained the provision
requiring the creditor to seek to provide advice on the most appropriate
type — among the products they offer — and total amount
of credit for the consumer. This will be costly for creditors,
may skew the competition in favour of one product lenders and
is not practical, especially for retailers. The consumer is ultimately
best placed to decide if they can afford the credit — so
it is important that they accept responsibility for their borrowing
decisions, but with lenders having provided them with the information
needed to make the right decision.
Right of withdrawal (Article 11)
"We have concerns over a universal right
of withdrawal, and the impact this might have on retail sales
with associated credit. Such a provision may also skew the market
as retailers will be reluctant to release goods until the right
of withdrawal period has expired. Such a development will encourage
consumers to use alternative, but probably more expensive, forms
of credit e.g. credit cards in order to be able to take the goods
home immediately.
Total Lending Rate (Article 13)
"We are pleased with the deletion of the
Total Lending Rate as we have seen no evidence to suggest that
consumers would benefit from another set of figures being provided
in advertisements and offer documents.
Early repayment (Article 16)
"We recognise that lenders incur costs that
they expect to recover through the full course of the agreement
and that any early settlement proposal should be fair, equitable
and transparent to the consumer, but also take account of the
lender being able to recover his costs. For this reason, we support
the provision allowing for the consumer to be able to settle a
loan early in which case the consumer will be entitled to an equitable
reduction in the cost of credit. However, the article proposes
to exclude variable borrowing rate loans from any indemnity as
the costs of early repayment are seen as being recovered through
the rate, and loans where repayment is made under an insurance
contract and we will need to consider the impact of these exclusions.
Bills of exchange (Article 18)
"The Commission has maintained this article
which prohibits the use of bills of exchange or promissory notes
by either consumers or guarantors to guarantee payment of credit.
The UK has an extensive industry providing a service of delayed
presentation of a personal cheque for between £50 and £100.
We would oppose this move on the basis that some UK consumers,
particularly those who may not have access to mainstream lenders
use post-dated cheques as a means of securing credit. We consider
that we should be looking instead to ensuring that consumer protection
measures are appropriate, as set out in the 1987 Directive on
consumer credit.
Linked Credit Agreements (Article 19)
"UK consumers currently enjoy the protection
under the Consumer Credit Act of joint and several liability on
the credit provider and supplier when purchasing goods or services
on credit. An example of the protection this affords is that a
consumer using a credit card has an equal claim against the issuer
and the supplier in the event of a dispute. In its draft proposal,
the Commission restricted this joint and several liability to
cases where the supplier has acted as a credit intermediary. The
European Parliament adopted contradictory amendments in this area
introducing the concept of 'Linked Credit Agreements' with the
right to withdraw from the goods and credit, as well as extending
joint and several liability beyond credit intermediaries. The
Commission position on this article is unclear from the amended
proposal but we are determined to maintain UK provisions on joint
and several liability to protect consumers.
Total harmonisation (Article 30)
"The Commission has maintained total harmonisation
for this directive which would mean that Member States are bound
by the regulations as set out; additional national regulation
is only possible outside the scope of the Directive. This is despite
the European Parliament adopting an approach which combined total
harmonisation in core areas with minimum harmonisation in all
other areas. We are assessing the impact of total harmonisation
on the diverse and dynamic credit market in the UK but will oppose
an approach which would limit the flexibility of the UK market.
We will also be seeking clarification of the impact of total harmonisation
on areas such as overdrafts and credit unions which are subject
to a partial exclusion from the Directive."
4.6 The Minister also tells us that the Government
is now to carry out a formal consultation on this proposal and
to prepare a Regulatory Impact Assessment.
Conclusion
4.7 This amended proposal is clearly of continuing
significance for both UK credit providers and consumers. We will
wish to consider it further when we see the outcome of the Government's
consultation and its Regulatory Impact Assessment.
4.8 Meanwhile we do not clear the document.
12 Council Directive 87/102/EEC, OJ No. L 42, 12.2.87,
p.48. Back
13
See headnote. Back
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