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Select Committee on European Union Thirteenth Report


Proposed EU Consumer-Credit Harmonisation Directive: Interim Report


Introduction

1.  This Inquiry is being conducted by Sub-Committee G of the European Union Select Committee, which deals with social policy and consumer affairs. This is an interim report setting out where the Inquiry stands and our emerging conclusions to date.

2.  The Members of the Sub-Committee who are carrying out this Inquiry, and details of their declared interests relevant to it, are shown at Appendix 1.

Why are we carrying out this Inquiry?

3.  The European Commission propose to establish the legal conditions to create a single EU-wide market in consumer-credit. We decided to carry out this Inquiry because we wanted to know more about the Commission's proposal and to examine the possible consequences for British credit suppliers and consumers against a background of rising concern about consumer-credit in this country.

4.  We aim to produce a Report to draw wider Parliamentary and public attention to the proposal and to inform the development of United Kingdom policy towards it, especially during the United Kingdom Presidency of the EU.

Background

5.  In September 2002 the European Commission (the Commission) published a proposal for a Directive [1] to harmonise the laws, regulations and administrative provisions of Member States concerning consumer-credit[2].

6.  Following discussion in the European Parliament, the Commission published an amended proposal[3] in November 2004 which was submitted for Parliamentary scrutiny on 30 November 2004.

7.  Our first meeting of the new Parliamentary session after the General Election on 8 June 2005 confirmed the intention of the Sub-Committee in the last Parliament that the proposed Inquiry should go ahead.

8.  Arrangements had already been made for oral evidence sessions with witnesses representing the United Kingdom Government, consumer-credit suppliers and consumers' organisations.

9.  On 15 June 2005, however, the Commission informed us[4] that a revised text of the proposal was not expected to be adopted by the College of Commissioners before mid-July and that it would not be possible for the a Commission representative to give oral evidence to the Inquiry in the meantime.

10.  We therefore decided to:

  • go ahead with most of the oral evidence sessions already arranged to highlight the key features of the Commission proposal as it stood;
  • postpone the oral evidence sessions tentatively arranged with the Government and the Commission until after the Summer Recess;
  • produce an interim Report of our preliminary findings up to the Summer Recess;
  • resume the Inquiry after the Summer Recess, taking oral evidence from the Commission and whatever other evidence might be needed to complete the Inquiry, including oral evidence from the relevant DTI Minister; and,
  • aim to publish a full Report before the Christmas Recess.

11.  At this stage we consider that an interim report would be of value to the House to enable exploration of some of the key issues in advance of consideration of the Consumer Credit Bill and at an early stage during the United Kingdom Presidency.

Conduct of the Inquiry

12.  The oral and written evidence we have received so far is listed in Appendix 3.

13.  We have also noted the recent appearance of the following publications on consumer-credit:

Emerging issues

14.  Based on the evidence we have seen thus far, the main issues arising from the Commission's proposals appear to be:

Emerging Conclusions

15.  In the absence of the Commission's revised text, or any specific evidence from the Commission, it is difficult to draw firm conclusions at this stage. More evidence will be needed once the Commission's revised proposals have been published. But so far we have drawn the following initial conclusions.

SINGLE MARKET IN CONSUMER CREDIT

16.  From the evidence received to date[8] we doubt whether a satisfactory single cross-border market in consumer-credit can be achieved in the near future simply by introducing a new Directive on the lines currently proposed by the Commission. The differences in national laws, commercial practices and consumer habits create a lack of certainty and practical difficulties for consumer-credit suppliers and little or no discernible immediate advantage for most consumers.

17.  At this stage we are not sure whether it might be possible to create a workable single EU-wide consumer-credit market in the longer run by introducing a new Directive. Nor do we yet know, if it was, whether that market would offer significant opportunities for British business or consumers.

18.  Our evidence[9] suggests, however, that a market in consumer-credit is developing spontaneously amongst some Member States in reaction to perceived commercial opportunities through corporate acquisitions, mergers and new business ventures. That commercial activity is clearly not confined to EU-based companies[10].

19.  We have had no evidence thus far to show whether a significant cross-border credit market currently exists for most ordinary consumers, as distinct from competent international financial operators who may able to raise credit internationally with advantage.

MAXIMUM (OR TOTAL) HARMONISATION

20.  We have serious doubts about the Commission's proposal to create legal conditions for a single cross-border market in consumer-credit by introducing EU-wide maximum (or total) harmonisation of consumer-credit laws to replace a broad range of existing national legislation with a common set of uniform provisions binding on all Member States.

21.  We note that evidence from the Government, as well as from representatives of leading United Kingdom credit-suppliers and consumers organisations and two independent expert witnesses[11] indicates that maximum (or total) harmonisation will cause administrative difficulties for Member States and could reduce some of the existing protection which British consumers currently enjoy from present domestic legislation.

22.  That evidence also indicates that maximum (or total) harmonisation will be too inflexible and could constrain Member States from introducing new domestic legislation to deal rapidly and effectively with developments in national consumer-credit markets which might not be replicated elsewhere in the EU.

AN ALTERNATIVE APPROACH

23.  If maximum (or total) harmonisation is undesirable or impractical in present circumstances our present view is that it would better to try to agree on a set of measures based on appropriate common minimum standards designed to strengthen the present EC Consumer Credit Directive[12] effectively without impeding the flexibility of additional domestic legislation.

24.  We would hope that those measures might create a legal framework to guide, strengthen and promote growing cross-border harmonisation in due course.

25.  We are still not clear what the Government mean when they suggest[13] that the most fruitful approach for the time being would be what they describe as targeted harmonisation. As the Inquiry proceeds we will explore how targeted harmonisation might differ from the expanded minimum standards approach which most other witnesses seem to favour[14].

26.  In any case, we consider that a useful starting point might be to attempt to incorporate a set of basic principles for the conduct of consumer-credit transactions around which appropriate new EU-wide measures could be developed[15].

27.  We suggest that these principles might be founded to some extent on an agreed definition of the concept of responsible lending which has already been suggested, but not yet fully developed, in the Commission's proposal[16].

FURTHER INVESTIGATION BY THE INQUIRY

28.  In addition to examining the Commission's revised proposal, when available, in the light of the above, we will also want to examine what elements might appropriately and usefully be incorporated in new EU-wide legislation.

29.  From the evidence received so far, the aspects for consideration might include:

  • possible rules on transparency such as setting out pre-contractual information in clear, honest and accurate standardised terms that can be readily understood by the average consumer and relied upon in making a sound decision[17];
  • the desirability and feasibility of common measures to curb high-pressure sales tactics, deliberate mis-selling of credit products, extortionate interest rates, irresponsible extension of credit levels and debt consolidation, and coercive debt-collection practices; [18]
  • common arrangements for data sharing; [19]
  • common provisions for consumers rights of withdrawal and early repayment; [20]
  • whether increasing cross-border movement of people within the Union creates a new need for improved common consumer-credit regulation; [21]
  • whether the legislation should prescribe minimum and maximum levels of applicable loans;[22]
  • whether the scope of the legislation should cover aspects of secured lending, such as equity release; [23]
  • how it should deal with bills of exchange; [24]
  • whether and how it should cover joint and several liability; [25]
  • how it should deal with credit unions;[26]
  • clarification of the status of official student loans[27] and;
  • whether the legislation should also cover licensing of credit providers, alternative dispute resolution and independent advice mechanisms.[28]

OTHER CONSIDERATIONS

30.  The Inquiry is taking place against the background of the passage through Parliament of the Consumer Credit Bill. We will want to know whether the Bill, once enacted, might provide a relevant model for European consumer credit legislation.

31.  We will try to take account of the possible relevance for EU, as distinct from national, legislation of reports such as those of the Commons Treasury Committee, the Griffiths Commission and the Centre for the Study of Financial Information.

32.  We will also consider the extent to which it might be appropriate for the Directive to take account of the United Kingdom method of regulating consumer-credit not only by national laws and secondary legislation, but also by bodies such as the Financial Services Authority, the Office of Fair Trading, the Financial Ombudsman Service and local trading standards offices, and by self-regulation.

33.  We are conscious that most of the evidence we have had so far has focussed on conditions prevailing in the United Kingdom and do not know to what extent that evidence may be relevant to the situation in other Member States.

34.  Our evidence to date raises doubts whether the Commission have researched and consulted adequately when preparing and amending this proposal.

Next Steps

35.  As soon as we have received the Commission's revised proposal, and the Government's Explanatory Memorandum about it, we intend to issue a fresh Call for Evidence inviting written evidence on the revised text, and the above considerations. We will examine that additional evidence as soon as Parliament resumes after the Summer Recess.


1   12138/02 COM (2002) 443 Back

2   These proposals were initially considered by Sub-Committee D of the European Union Select Committee and transferred to Sub-Committee G when it was set up in December 2003. Back

3   14246/04 COM (2004) 747 Back

4   Email dated 15 June 2005 to the Clerk from Dirk Staudenmayer (DG SANCO) Back

5   HC 274 Back

6   "What price credit?", published by the Centre for Social Justice, March 2005 Back

7   "Not waving but drowning: over indebtedness by misjudgement" by Antony Elliott, March 2005,
ISBN 0-9545208-7-4 
Back

8   Q 9, Q 69, QQ 72-74, Q 126, QQ 165-167, Q 207, QQ 219-221, pp 28-32, pp 48-51, pp 63-66 and
pp 90-100 
Back

9   QQ 69-74, Q 80, pp 28-32 and pp 76-78 Back

10   Q 86 and Q 165 Back

11   QQ 4-6, Q 13, QQ 18-19, Q 70, QQ 75-77, QQ 149-151, Q 160, QQ 170-173, Q 191, Q 200,
QQ 207-213, QQ 220-221, pp 100-107, pp 28-32, pp 79-80, pp 48-51, pp 63-66, pp 76-78, pp 84-88, pp 90-100, pp 80-84 and pp 88-90 
Back

12   Directive 87/102/EEC Back

13   Q 9, Q 24 and Q 62 Back

14   Q 70, Q 77, QQ 168-169, QQ 172-176, QQ 207-211, QQ 220-221, pp 100-107, pp 28-32, pp 79-80,
pp 48-51, pp 63-66, pp 84-88, pp 90-100 and pp 88-90 
Back

15   QQ 168-171 and pp 48-51 Back

16   Q 20, QQ 98-100, QQ 149-156, QQ 168-171, QQ 177-188, QQ 213-217, QQ 220-221, pp 28-32,
pp 79-80, pp 48-51, pp 63-66, pp 84-88 and pp 80-84 
Back

17   Witnesses have suggested (QQ 37-40, Q 128 QQ 212-213, Q 215, pp 63-66, pp 76-78) that this might include developing an agreed template on the lines of the summary box used for United Kingdom credit cards or the European Standardised Information Sheets for home loans. Back

18   QQ 21-22, QQ 89-93, QQ 152-156, Q 168, QQ 177-184, QQ 189-191, QQ 213-214, Q 217, Q 220,
pp 100-107, pp 48-51, pp 63-66, pp 84-88, pp 90-100 and pp 88-90 
Back

19   Q 110, Q 212, Q 216, Q 222-223, pp 100-107, pp 63-66, pp 76-78 and pp 88-90 Back

20   QQ 42-48, QQ 130-136, Q 216, pp 100-107, pp 107-110, pp 90-100 and pp 80-84 Back

21   Q 167, QQ 175-176 and Q 207 Back

22   Q 2, Q 15, Q 170, pp 79-80, pp 48-51 and pp 76-78 Back

23   QQ 26-33, QQ 120-126, QQ 224-225, pp 107-110 and pp 63-66 Back

24   Q 49 Back

25   Q 6, Q 207, pp 100-107, pp 107-110, pp 76-78 and pp 80-84 Back

26   pp 100-107, pp 79-80 and pp 80-84 Back

27   Q 50 and QQ 54-57 Back

28   Q 2, QQ 94-99, Q 156, Q 189-190, QQ 192-195, Q 215, Q 227, pp 100-107, pp 48-51 and pp 88-90 Back


 
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