Supplementary memorandum by the UK Cross
Industry Group on Credit
Following the Committee's request at the hearing
on Thursday 2 February 2006, we write with our observations on
the exemptions in the Commission's latest text of 7 October 2005.
The original 1987 Directive (87/102/EEC) contains
a number of exemptions. In some cases, the purpose of these is
clear; in others the rationale for the exemption is much more
obscure. UK law, for the reasons explained below, subjects different
types of credit as to broadly the same rules.
CURRENT UK LAWPHILOSOPHY
The UK's approach to credit regulation changed
in 1974, when the UK Consumer Credit Act was enacted. Up to that
point, a patchwork of lawstoo often based on form, not
substancemade for an inefficient and distorted market.
Some suppliers could lend without any formalities; others faced
harsh, virtually unworkable, bureaucracies. The rules applying
to different product formats were also often wildly different.
The blueprint for the 1974 law had been laid
out in the Crowther Committee's 1971 report (Cmnd 4596). Crowther
recognised the damage the current patchwork was causing to the
"We urge that reform of the existing
legal tangle is badly overdue, and that liberation of the consumer
credit industry from the antiquated provisions, and from the official
restrictions, that hobble it will enable it to make an increasing
contribution to the efficiency of the national economy and to
the standard of living of the public." [page iv, Cmnd.4596]
Crowther concluded that credit was credit, no
matter what form it took and that the old form-based system had
to be swept away. The 1974 achieved this objective; all credit
was now subject to broadly the same rules in terms of advertising,
contracting, price disclosure and so on.
This system has proved hugely effective (in
the way Crowther envisaged it would) and has the full support
of the UK CIG and its member organisations. We believe it has
increased choice, democratised credit and generally benefited
the UK economy.
THE 2002 COMMISSION
TEXT (COM (2002) 443 FINAL)
In its 2002 text, the Commission appeared to
have moved towards this more modern, efficient approach. The 2002
text swept away all the exemptions in the 1987 Directive. There
are clues in the 2002 text which suggest that the Commission was
well aware of credit formats which were not fully regulated in
some Member States:
"Legislation governing consumer credit
in a number of Member States regulates leasing to private individuals
with a purchase option, in other words even the lease itself for
movable property held by consumers, whereas other Member States
have included no such agreements in the scope of their legislation.
This means that the various styles of credit agreement calculate
rates and costs in a way which differs from one style of credit
to another and from one Member State to another." COM
(2002)443 final, page 5
The 2002 text then notes at page 10 that:
"the exemptions permitted by Article
2 of Directive 87/102/EEC concerning . . . free credit or credit
at a reduced rate of interest, hiring agreements with an option
to purchase goods or services . . . need to be removed."
COMMISSION 2005 TEXT
(COM (2005) 483 FINAL)
However, in this latest 2005 text, new exemptions
have now appeared. For the purposes of this paper the key areas
which are now exempt are:
hire purchase (Article 2.2(c) and
credits repayable within three months
without the payment of interest or any other charges (Article
2.2(e)) (ie "interest-free" retail credit); and
pawnbroking (Article 2.2(j)).
The 2005 Explanatory Memorandum offers no comment
on these new exemptions. It has been suggested to us that the
German motor finance sector and the French retail credit sector
may have been benefiting from local laws replicating the 1987
Directive exemptions. This may or may not be the case.
The reality, however, is that the 2005 text now contains exemptions
whichif a Member State's legislature chose tocould
be used to completely exempt business sectors using these formats.
It may also be relevant that pawnbroking is
more commonplace in continental Europe and that it is often a
state-run, or municipal, concern.
The potential implications of these exemptionsif
a Member State did choose to deploy them in its laware
extraordinary. Any sector that benefited couldin theoryavoid
all the rules on advertising, contracting and price disclosure.
In addition, that sector would not have to trouble itself with
the rules on "responsible lending" or "duty to
So any exempt format would enjoy a huge commercial
"win" over any regulated competitor. This would amount
to a legalised market distortion.
The UK DTI would not apply these exemptions
(and UK CIGand UK consumer groupswould not expect
it to). But if they were applied in other States, this would have
an important outcome, placing "UK PLC" at an overall
UK lenders (and hence the UK economy) would
have to comply with all the rules and carry the cost of doing
To show the scale of this, OXERA calculated that the key new changes
(still mostly in the latest text) would adversely affect UK GDP
By contrast, any State which applied the exemptions
would be largely able to avoid this economic damage and these
So relative to those other States, the law change
would make "UK PLC" less efficient.
However, the Commission holds up the Directive
as a way to create a true internal market in credit. In our view,
the existence of these exemptions makes that position untenable.
Any Member State which applies these exemptions
will distort its credit market. Any exempt credit format will
become a dominant format, since regulated products will find it
impossible to compete.
Such an approach does not make economic sense,
and is unlikely to be in the interests of consumers.
11 Although we do know, for example, that the German
and Austrian motor finance sectors offer products that, if these
exemptions did apply, would be exempt. Back
Especially the significant extra cost of complying with "responsible
lending" and "duty to advise". Back