2 Consumer credit
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13193/05
COM(05) 483
| Amended draft Directive on credit agreements for consumers amending Council Directive 93/13/EC
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| Legal base | Article 95 EC; co-decision; QMV
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| Department | Trade and Industry
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| Basis of consideration | Minister's letter of 21 November 2006
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| Previous Committee Report | HC 34-x (2005-06), para 12 (16 November 2005)
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| To be discussed in Council | 5 December 2006
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| Committee's assessment | Politically important
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| Committee's decision | For debate in European Standing Committee
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Background
2.1 The existing Consumer Credit Directive,[3]
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 Directive is no longer in step with the current
credit market, and should be revised to allow consumers and companies
to take full advantage of the single market. It therefore proposed
in September 2002 a draft Directive[4]
which would move from minimal harmonisation to, with some limitations,
total harmonisation, claiming this would provide a higher level
of consumer protection and promote a single credit market.
2.2 The proposal was highly criticised for the burdens it would
put on business and its failure to address the real barriers to
cross-border credit for consumers, but was cleared in April 2004
by the previous Committee because it was to be replaced by an
amended proposal. That amended proposal,[5]
which was also a response to significant amendments by the European
Parliament, was put forward in October 2004, and was cleared by
us on 4 July 2005, because it was in turn to be replaced by a
further amended draft Directive. However, we said that, when the
new proposal was available, we would wish to see the Government's
formal response to the consultations it had been undertaking and
a new Regulatory Impact Assessment.
2.3 As we noted in our Report of 16 November 2005, the further
amended draft Directive is set out in the current document. Although
it is still based on full harmonisation, the proposal's scope
has been reduced, and there would be a degree of flexibility in
the way in which Member States could, subject to mutual recognition,
implement certain of its provisions. The main aims of the modified
proposal remain largely as before, that is to:
- define the Directive's scope to cover the modern credit market
(but now excluding all secured lending);
- limit the provisions of the Directive for certain areas including
overdrafts and credit unions (although the relevant provisions
appeared to be more onerous than previously);
- guarantee non-discriminatory access to existing databases
to permit assessment of risk and ability to pay;
- harmonise the requirements for advertising consumer credit
products, but distinguishing between simple banner advertisements
and those which give an indication of cost;
- harmonise the pre-contractual and contractual information
requirements throughout the Community to make them more comparable
for consumers and to enable consumers to assess whether a product
would meet their needs and financial circumstances;
- improve other consumer protection measures, including a universal
14-day right of withdrawal;
- standardise calculation of the annual percentage rate of charge
(APR) by clarifying costs which must be included and assumptions
used in the calculation;
- introduce throughout the Community a right for consumers to
settle credit early and to entitle them to an equitable reduction
in the cost of credit, with creditors being able to charge a fair
and reasonable fee; and
- introduce provisions on linked credit agreements while maintaining
existing national provisions on joint and several liability.
2.4 However, there are a number of key changes to the earlier
amended draft Directive. The new proposal would:
- clarify that Member States would be free to introduce or maintain
provisions with regard to credit agreements or aspects of credit
agreements outside the Directive's scope;
- provide for mutual recognition in relation to a number of
the Directive's provisions, which appears to allow Member States
a degree of flexibility in implementation, although in some cases
how much room there would be for discretion on the part of Member
States is unclear;
- exclude all secured lending, sureties and guarantees, student
loans and hire/leasing agreements;
- lower the threshold above which loans are excluded from the
scope of the Directive from €100,000 to €50,000;
- require only advertisements which include an indication of
interest rate or cost to comply with the detailed provisions on
advertisements;
- provide a less onerous duty to advise than previously and
give Member States a degree of flexibility on implementation;
- not apply pre-contractual information requirements to suppliers
of goods or services acting as credit intermediaries in only an
ancillary capacity;
- appear to apply a considerably larger number of the Directive's
articles to overdrafts and other loans;
- amend provisions on the consumer's right of withdrawal to
remove any suggestion that the Directive would allow a consumer
to withdraw from a contract for the supply of goods and services
as well as from a supporting credit agreement, or that a supplier
of goods would not be able to seek compensation for non-payment
or depreciation;
- tidy up provisions on linked transactions, but allow Member
States to maintain national rules on joint and several liability;
- change provisions on early repayment so that, instead of relying
on an actuarial formula, the amount of a fair and reasonable indemnity
would depend upon the terms of the original agreement (although
it would be open to Member States to decide what was fair and
reasonable in a given case); and
- drop a requirement for a lender to give prior notice before
withdrawing credit facilities from a defaulting consumer and a
provision banning the use of bills of exchange or promissory notes
by consumers to guarantee payment of credit.
2.5 We were told that the Government would now respond to the
comments of interested parties on the earlier amended text in
the light of the current modified proposal by means of a supplementary
consultation, and that the initial Regulatory Impact Assessment,
relating to the previous text, would be updated as necessary to
reflect the new text. We therefore noted that the proposed legislation
was of continuing significance both for UK credit providers and
consumers, and we said that we wished to see the outcome of the
Government's supplementary consultation and its revised partial
Regulatory Impact Assessment before considering the new draft
further. In the meantime, we did not clear the document.
2.6 We subsequently received from the Government in March 2006
a copy of its revised consultation document, which incorporated
a partial Regulatory Impact Assessment. The latter noted that
the UK had the largest consumer credit market in the Community,
accounting for over 30% of such credit, but that consumer credit
markets were very segmented, with most trading taking place within
domestic markets, due to such factors as differences of culture
and language, personal preferences for products of national lenders,
and different legal systems. It suggested that reducing these
barriers could increase cross-border trading, and provide access
to new markets for UK operators, but that it was difficult to
see the emergence of such a market resulting from the proposal
as it stood, since it did not fully address the underlying barriers
which currently existed. It also noted that harmonisation would
create considerable one-off costs for UK lenders, as well as creating
some new regulatory burdens, and that this could result in a fall
in the number of credit products on offer, an increase in the
cost of credit, and a reduction in consumer confidence. It therefore
suggested that rejection of the proposal might be advantageous
for the UK as a whole, but recognised that this would not result
in any opening of the market to genuine cross-border trade in
consumer credit, and that there was also a risk of a proposal
harmful to both UK business and consumers being adopted by a qualified
majority, despite our opposition.
2.7 In view of this, the Assessment went on to address the possibility
of supporting those aspects of the proposal which would lead to
more choice and competitive prices for consumers, whilst seeking
to secure amendments which would strike a better balance between
the costs and benefits. Those provisions in the former group included
the harmonisation of APR calculations, data sharing, regulation
of pre-contractual and contractual information, advertising, right
of withdrawal from linked credit arrangements, and the harmonisation
of the principles of early retirement, whilst the latter included
the exemption of credit unions, the need for a light touch as
regards overdrafts, removal or modification of the 14 day right
of withdrawal, the mutual recognition of national supervisory/regulatory
systems, the position of indemnities on loans of less than one
year, improvements in the requirements for pre-contractual and
contractual information, and certain amendments to the APR calculations.
Minister's letter of 21 November 2006
2.8 Whilst noting both the Regulatory Impact Assessment and the
consultation document, our Chairman wrote to the Minister concerned,
saying that we would return to the proposal when the results of
the Government's consultation exercise were available, and we
have now received from the Minister for Trade, Investment and
Foreign Affairs at the Department of Trade and Industry (Mr Ian
McCartney) a letter of 21 November 2006 on this. However, he also
indicates that the Finnish Presidency could be seeking political
agreement at the Competitiveness Council on 5 December, and he
has therefore sought to identify the state of play on those aspects
of the text which have given rise to particular concern (see Annex).
In doing so, he notes that the Government is concerned about the
extent to which the amending proposal will maintain existing high
levels of consumer protection and make a real contribution to
the opening up of markets, and says that the UK also believes
that a full impact assessment should have been undertaken. Despite
this, he concludes that it would on balance be better if the UK
had discretion to join the Common Position if political agreement
is sought on 5 December, largely on the grounds that this would
enhance the prospects of securing further improvements both now
and during the European Parliament's second reading of the proposal.
He has therefore asked us to lift our scrutiny reserve on the
proposal.
Conclusion
2.9 The emergence of successive drafts, and their inherent
complexity, has made it difficult before now for both us and our
predecessors to take a clear view on these proposals. However,
it is evident that they address an important subject with major
implications for providers and consumers of credit, and that there
have been serious doubts — reiterated by the Minister in
his letter of 21 November — about both the extent to which
this latest proposal would in reality open up the market to genuine
cross-border trade and its impact on the provision of consumer
credit in the UK.
2.10 In view of this, we believe that there is a strong case
for it being considered by the House before any agreement is reached
in the Council. In particular, we are conscious of the absence
of any full impact assessment by the Commission, and of the concerns
which still exist in areas such as the treatment of overdrafts,
the right of withdrawal, and information requirements, despite
the progress which has been made. Consequently, notwithstanding
the Minister's request that we should now lift the scrutiny reserve,
we are recommending that the document should be debated in European
Standing Committee.
Annex 1: Recent Changes
in Areas of Concern to the UK
Home purchase plans
The Commission and the Presidency have accepted the
case for treating Islamic home purchase plans in the same way
as other equivalent mortgage products. The result is a limited
purpose test which exempts from the scope of the Directive credit
agreements for the acquisition or retention of property rights
in land or in existing or projected building.
Credit unions
Following lengthy discussions with Ireland and Poland
(who also have credit unions but have very different policy objectives)
as well as with the Commission, we believe that we are now on
the verge of a satisfactory outcome, although we need to ensure
that this is not opposed by other Member States in the Council
Working Group.
The solution would allow UK credit unions to be exempted
from the scope of the Directive on the basis of a market share
test applied both to individual credit unions and to the UK sector
as a whole. At the same time, Ireland would be able to apply the
light touch regime envisaged in the original Commission proposal,
and Poland would be able to apply the full requirements of the
Directive. This looks complex and risks arousing suspicion amongst
other Member States that this is simply special treatment for
UK credit unions, but we have warmed up other key Member States
and our proposal did not encounter significant opposition at the
last Working Group meeting.
Overdrafts
We have as yet had little success in persuading other
Member States that there is a problem here despite a degree of
lobbing by the industry at both national and European levels.
Our key concerns are: first, that the application of an APR to
overdrafts will result in an indication of cost which might be
positively misleading for consumers; second, that the requirement
for written information in advance might reduce flexibility and
inconvenience consumers seeking urgent overdrafts facilities;
and third, that the requirements for notifying consumers individually
of interest rate changes would be unduly burdensome.
We have had some success in reducing the burden on
lenders to provide information to consumers about interest rate
changes immediately and individually, and the Presidency has accepted
our view on the APR, although we will need to work to convince
other Member States that this is the right outcome.
Right of withdrawal
Although we do not believe that the case has been
made for a right of withdrawal in face-to-face contracts, other
Member States do not share our point of principle. Nevertheless,
a number of Member States, including France and Ireland, share
our concerns about how this provision would work in practice in
the case of linked transactions for credit and goods. We are continuing
to work towards improving the wording of the relevant Article,
as well as seeking further information from the industry about
the extent of the problem. We are also considering with legal
advisers how far we might be able to implement this provision
in a way which would meet the spirit of the Directive without
creating problems for traders selling goods on credit.
Responsible lending
Despite the general level of support for including
a responsible lending principle in the Directive, we have so far
succeeded in moving references to responsible lending from the
substance of the Directive to a Recital. We believe that this
would remove the legal uncertainty which originally caused us
concern, and would allow the UK to continue to take appropriate
action against irresponsible lending. We will need to ensure that
there is no reversion to the earlier position as a result of pressure
from other Member States.
Information requirements
We had problems with advertising (Article 4), pre-contractual
information (Article 5) and contractual information (Article 9).
In our view, many of the original Directive's requirements for
information would have been unnecessary, imposing additional cost
and risking information overload for consumers. The information
requirements in all three articles have now considerably improved,
and are more in line with UK practice. Nevertheless, a major difficulty
on advertising is that it would not be possible for Member States
to require lenders to show an APR in certain circumstances without
triggering full information requirements.
This would undermine the UK's existing 3-tier approach
and might cause difficulties in the case of media advertisements.
The key outstanding problems with pre-contractual and contractual
information requirements are that lenders would be required to
provide amortisation tables (which we believe are of limited use
to consumers and can be burdensome) and that we would no longer
be able to require wealth warnings to be included on standard
documentation. In most other respects, the list of pre-contractual/contractual
information requirements has been more closely aligned with UK
requirements and a catchall provision allowing Member States to
require other contractual terms to be shown is helpful.
APR assumptions
We are having some success in arguing that go-to
rates are more applicable than blended rates in respect of the
APR assumptions contained in Article 18.
3 Council Directive 87/102/EEC, OJ No. L 42, 12.2.87,
p.48. Back
4
(23803) 12138/02; see HC 152-xli (2001-02), para 6 (6 November
2002) and HC 42-xviii (2003-04), para 11 (28 April 2004). Back
5
(26117) 14246/04; see HC 38-ii (2004-05), para 4 (8 December 2004)
and HC 34-i (2005-06), para 40 (4 July 2005). Back
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