Select Committee on European Union Thirty-Sixth Report


CHAPTER 10: Conclusions and Recommendations

Chapter 1—Introduction

226.  We commend this Report to the attention of the House and recommend that it should be debated by the House as soon as possible in the hope of drawing wider attention to the issues raised and as a contribution to further consideration of this Proposal by the Government, the European Commission and the European Parliament.

Chapter 5—Full Harmonisation as a means to promote the Internal Market

227.  We do not doubt the important potential benefits to business and consumers of developing an internal market in consumer credit, but only how best this is to be achieved. The Commission's focus is on the development of a market in cross-border credit, and it sees full harmonisation as advancing that objective. But we conclude that the Commission's case for a move to this approach in the field of consumer credit is based on a questionable premise that this will promote an internal market in cross-border credit by facilitating the use of a single EU-wide credit agreement. That premise is not supported by a proper impact assessment, or by any other evidence that we have seen.

228.  On the basis of the evidence we have been given, we further conclude that:

229.  We therefore strongly recommend that further work on the present draft Directive should be suspended until a proper impact assessment has been carried out. Unless this provides compelling evidence that the full harmonisation proposed would be likely to promote an internal market in cross-border consumer credit, the principle of targeted harmonization should be retained but the scope of the Directive should be extended to cover a wider range of issues.

Chapter 6—Does the Directive provide a High Level of Consumer Protection?

230.  We conclude that, while the draft Directive possesses many good features and may well provide a high level of consumer protection in those Member States whose consumer credit markets and legislation are relatively undeveloped, its very limited scope means that it affords a level of consumer protection which falls well short of that provided by legislation in such countries as the UK.

Chapter 7—The Full Harmonisation Provisions of the Directive and their Potential Effect on the Level of Consumer Protection in the UK

231.  We recommend that:

232.  We recommend that:

  • if Article 4 is intended as a full harmonization measure, that should be made clear, for example by substituting the word "state" for "include.";
  • Article 4(4) could usefully be clarified to show its link with Article 4(2) and the fact that use of a representative example is permitted;
  • in the case of low introductory rates consideration should be given to a requirement to state the go-to rate (i.e. the higher rate charged at the end of the introductory period) instead of a blended rate.

233.  We recommend that:

  • Article 9 should be made a minimum harmonization provision since, as a full harmonization measure, it would deprive UK consumers of a number of items of information currently required to be included in consumer credit agreements, thereby significantly reducing the level of consumer protection;
  • Article 9 should also be amended to cater for cases where the relevant facts required, other than for the calculation of the APR, are not known at the time of the agreement, e.g. by providing assumptions or permitting the use of estimated information;
  • Article 9 should also be amended to address the exchange rate problem in stating the total cost of credit where one party is based in a Member State outside the Eurozone and the other is in a Member State within the Eurozone;
  • the creditor should not be required to provide details of costs incurred by the consumer to third parties which do not enter into the total cost of the credit as defined by Article 3(f);
  • the requirement to provide an amortisation schedule should be dropped.

234.  We conclude that there appears to be general support for uniform rules on the consumer's right of withdrawal as provided by Article 13, and we recommend that the DTI should consider and report to the Committee whether the detail is satisfactory in the light of responses to the its supplementary consultation paper.

235.  We conclude that Article 16, which requires notice of assignment to be given in all cases where the creditor assigns its rights under the agreement, does not represent the present law in the UK and would cause confusion to consumers and disturb a practice of very long standing by which suppliers who block discount consumer credit agreements to finance houses continue to maintain customers' accounts and responsibility for collections without giving notice of assignment.

236.  Article 16 would function perfectly well if limited to cases where the assignee wishes to take steps to collect payment, at which point notice of assignment would be required. We therefore recommend that Article 16 be amended accordingly.

237.  We therefore recommend an amendment to Article 19 to restore the exemption contained in the 2004 draft by which credit institutions authorized in a Member State under the banking consolidation Directive 2000 do not require authorization to conduct business in another Member State.

238.  We conclude that the current UK legislative provisions and cross-border collaboration arrangements appear adequate to fulfil the requirements of the Directive relating to out-of-court dispute resolution. We therefore have no recommendations to make concerning Article 23.

239.  In addition to the difficulties of full harmonization to which attention has already been drawn, we are concerned that it would remove the flexibility which Member States currently have to respond rapidly through new regulations to the emergence of new products and practices. We therefore recommend that, except in relation to those full harmonisation provisions which we have identified as generally acceptable, the concept of minimum harmonisation should be retained.

Chapter 8—Mutual Recognition

240.  We conclude that the mutual recognition provisions contained in Article 21(2) are confusing, unnecessary and detrimental to the interests of consumers. To allow a foreign creditor ( as regards provisions relating to the right of withdrawal, claims against the creditor for the supplier's breaches, and early payment and rebates), to invoke the mode of implementation of the Directive prescribed by its own law rather than that of the consumer causes serious problems. In the first place, it exposes consumers to two different sets of mandatory rules without their even being aware of that fact. Secondly, it prevents consumers from obtaining local advice as regards the foreign mandatory rules. Thirdly, in the event of proceedings by the creditor in the consumer's Member State, the parties would incur delay and considerable expense in arranging for experts on both sides conversant with the foreign law concerned to give evidence (and possibly conflicting evidence) of its content and effect. This is particularly inappropriate for proceedings against a consumer.

241.  We therefore recommend that, in relation to mandatory rules, the debtor should be governed solely by his or her own law and therefore that Article 21(2) should be deleted.

Chapter 9—Responsible Lending

242.  While the amount of over-indebtedness in the UK does not appear to have risen significantly relative to the amount of credit extended, we conclude that it nevertheless gives cause for concern. Moreover, we see a serious risk of a substantial increase in the level of default if interest rates were to rise or there were to be a significant deterioration in the economic environment.

243.  We accept that the concept of responsible lending, in the sense of not lending irresponsibly, is accepted by all interest groups in the UK, and that codes of practice already require prior assessment of creditworthiness and the provision of information on key features of products offered. But we conclude that making of offers of credit on the basis of inadequate information in a highly-pressured marketing environment contributes to the causes of over-indebtedness.

244.  We further conclude that, while self-regulation, including the adoption of codes of practice, has an important role to play in ensuring responsible lending, it should not displace the need for legislation.

245.  On the whole, we accept that, for the time being, necessary measures to protect consumers from irresponsible lending are best left for Member States to evolve in the light of local circumstances, as has been done in the 2006 Consumer Credit Act. Nevertheless, we conclude that there is a need for some Community-wide framework for the regulation of irresponsible lending.

246.  But we have reservations about the concept of responsible lending as a satisfactory basis for a legal requirement. Moreover, it is unclear from Article 5 whether the requirement of responsible lending is limited to fulfilment of the conditions specified in Article 5(2) and (5) or is a general concept of which these conditions are merely illustrations. We recommend that Article 5(1) be revised to clarify this point.

247.  If Article 5(1) is intended to prescribe a general duty relating to responsible lending, we recommend that it should be amended to make it a duty not to engage in irresponsible lending. For the time being, the interpretation should be left to Member States through their own national laws, regulations and regulatory practices.

248.  We also recommend that consumers should be given the information prescribed by Article 5(2), and that Article 5(5) should be reworded so as to limit the lender's duty to the provision of further information about the products offered which the consumer may reasonably require and which is known to the lender and practicable for the lender to furnish.

249.  We conclude that effective regulation is a vital safeguard, given the uncertainty of Article 5, which must be taken fully into account when the Directive is reviewed 5 years after entry into force under Article 24. We therefore recommend that practical guidelines on interpreting responsible lending, recognising important national differences and avoiding being unduly prescriptive, should be drawn up after full consultation with national regulators as part of that review process.


 
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