Select Committee on European Union Minutes of Evidence


Supplementary memorandum by the UK Cross Industry Group on Credit

OBSERVATIONS ON CERTAIN EXEMPTIONS FROM THE SCOPE OF THE LAW

  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 LAW—PHILOSOPHY AND HISTORY

  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 laws—too often based on form, not substance—made 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 British economy:

    "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.

APPROACH IN 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."

NEW EXEMPTIONS IN THE 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 Article 2.2(d));

    —  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.[11] The reality, however, is that the 2005 text now contains exemptions which—if a Member State's legislature chose to—could 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.

IMPLICATIONS OF THE NEW EXEMPTIONS

  The potential implications of these exemptions—if a Member State did choose to deploy them in its law—are extraordinary. Any sector that benefited could—in theory—avoid 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 explain".

  So any exempt format would enjoy a huge commercial "win" over any regulated competitor. This would amount to a legalised market distortion.

THE POTENTIAL EFFECT ON THE UK'S RELATIVE COMPETITIVENESS

  The UK DTI would not apply these exemptions (and UK CIG—and UK consumer groups—would not expect it to). But if they were applied in other States, this would have an important outcome, placing "UK PLC" at an overall economic disadvantage.

  UK lenders (and hence the UK economy) would have to comply with all the rules and carry the cost of doing so.[12] 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 0.2%.

  By contrast, any State which applied the exemptions would be largely able to avoid this economic damage and these costs.

  So relative to those other States, the law change would make "UK PLC" less efficient.

THE EXEMPTIONS IN THE CONTEXT OF THE AIMS OF THE DIRECTIVE

  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

12   Especially the significant extra cost of complying with "responsible lending" and "duty to advise". Back


 
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