36th REPORT: CONSUMER CREDIT IN THE EUROPEAN
UNION: HARMONISATION AND CONSUMER PROTECTION
Letter from Rt Hon Ian McCartney MP, Minister
for Trade, Investment & Foreign Affairs, Department of Trade
and Industry/Foreign and Commonwealth Office to the Chairman
Further to my letter of 29 July,[39]
I am pleased to enclose the Department's official response to
the Inquiry Report.
I apologise for the delay in sending the response
but as my officials explained to your clerk, we have been in the
process of seeking EP Committee clearance for our wider strategy
on the Directive negotiations and it was agreed that it was sensible
for that to be agreed so that it could inform our response to
the Report.
We will shortly be publishing a Government response
to the supplementary consultation on the Directive that was carried
out earlier this year. I will ask my officials to forward a copy
to the Committee as soon as it is finalised.
29 September 2006
Government Response
CHAPTER 1—INTRODUCTION
The Government welcomes the Committee's Report,
which is timely in view of ongoing negotiations on the European
Commission's proposal for an EC Directive on credit agreements
for consumers amending Council Directive 93/13/EC. The Report
exposes the key issues which we believe the proposed Directive
raises and the Government endorses many of the Committee's conclusions
and recommendations. The response to Department of Trade and Industry's
supplementary consultation on the Directive earlier this year
has raised similar concerns.
In particular, the Government shares the Committee's
view that an, amending Directive should maintain existing high
levels of consumer protection and make a real contribution to
opening up markets. It also endorses the Committee's call for
full impact assessment.
CHAPTER 5—FULL
HARMONISATION AS
A MEANS
TO PROMOTE
THE INTERNAL
MARKET
Paragraph 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.
Paragraph 228: On the basis of the evidence
we have been given, we further conclude that:
— At present the lack of a market
in cross-border consumer credit is mainly due to other factors,
such as language, culture and the impracticability of penetrating
a foreign market except by scale entry requiring an establishment
in the target country, and that full harmonisation is unlikely
either to displace the need for separate credit agreements for
each Member State or to facilitate an internal cross-border market
for other reasons.
— The most effective way of creating
an internal market is to encourage a greater convergence of market
development and practice through other means, such as the establishment
or acquisition of branches and subsidiaries and the borrowing
of foreign market products and practices by local lenders, as
is already happening, and the removal of local obstacles such
as legal and administrative impediments to establishment, employment,
conduct of business and taxation policies.
— Full harmonisation may well be
appropriate at the point when a broadly similar range of products
is available throughout the European Union on competitive terms.
Paragraph 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 harmonisation should
be retained but the scope of the Directive should be extended
to cover a wider range of issues.
The Government shares the Committee's view that
the proposed Directive's objectives of opening up markets and
maintaining a high level of consumer protection are laudable,
but that it is not clear that harmonising consumer protection
legislation in this field will necessarily achieve these objectives.
Like the Committee, the Government would welcome a full impact
assessment and the United Kingdom has put the case for an examination
of the extent to which the Directive would meet its stated objectives
in Brussels. At the very least we believe that it will be important
for Member States and the Commission to determine whether or not
any final package would meet these objectives prior to adoption
of a Directive.
As the Report observes, there is probably little
likelihood that harmonising consumer protection legislation on
consumer credit would lead to cross-border trade in the classic
sense—i.e financial institutions in one Member State lending
to consumers in another Member State. The industry has said that
it would simply not do this because of the high level of risk
involved in lending to consumers other than in a market with which
the lender is familiar. Moreover, the industry has indicated that
the way in which a single market in consumer credit is likely
to develop in the European Union is through the removal of barriers
that currently make it difficult for individual lenders to set
up in other Member States, eg through acquisitions, mergers or
joint ventures. Were this to be made easier, lenders would have
the security of understanding local custom and practice as well
as access to available data about their potential customers. According
to the industry, a "scale entry" approach, in which
the potential risks are balanced by the potential returns, makes
sense, whereas lending to individual applicants for credit from
other Member States does not.
Of course, it could be argued that a Directive
harmonising consumer protection legislation would nevertheless
help lenders wishing to set up in other Member States by enabling
them to design products, information etc which could be more easily
adapted for use throughout the EU. But the industry has also indicated
that differences between national rules on consumer credit are
less of a barrier to lenders setting up in other Member States
than other factors such as differences between legal and administrative
systems, local custom and practice, language and consumer preference.
They would argue that the cost and effort required to overcome
these barriers is such that mere differences between consumer
protection legislation on consumer credit are relatively insignificant
and that harmonisation would therefore make very little difference
in terms of paving the way for lenders to enter new markets.
In view of these significant doubts concerning
the potential benefits of the Directive and the lack of evidence
that harmonising consumer protection legislation in the targeted
areas would contribute to a single market, the Government shares
the Committee's view that a full impact assessment should be undertaken.
At the very least, as a first step, a study of the potential benefits
of the Directive needs to be undertaken. If such a study found
that the current approach would not achieve the objectives of
opening up markets while maintaining a high level of consumer
protection, a further study might be conducted to determine what
alternative action, if any, would achieve these benefits.
In the absence of such a study, it is difficult
to predict what further action should be taken and the Government
cannot, therefore, at this stage agree with the recommendation
in Paragraph 229 that the solution would be to broaden the scope
of the Directive to cover a wider range of issues. If a study
found that the current Directive would not deliver the desired
benefits because it did not address the real barriers to the creation
of a single market, the right approach would be to undertake a
thorough examination of those barriers and consider what, if any,
action would overcome them.
CHAPTER 6—DOES
THE DIRECTIVE
PROVIDE A
HIGH LEVEL
OF CONSUMER
PROTECTION
Paragraph 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,
it's 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.
A difficulty with the harmonising approach adopted
in the draft Directive is the significant differences between
national consumer credit markets within the EU. The credit products
on offer as well as consumer preferences differ considerably from
one Member State to another. As a result, the problems faced by
regulatory and enforcement authorities in individual Member States
also differ and national administrations have understandably designed
their consumer protection legislation to deal with problems encountered
in their national markets, including specific abuses which have
arisen.
Hence, for example, some of the detailed requirements
on consumer information in the United Kingdom have been designed
to reflect the kind of products on offer (including, for example,
hire purchase and 0% balance transfers, which are not to be found
in all Member States). In other Member States different products
and practice have resulted in a different approach to consumer
information. Trying to find a single model which will suit the
markets in all 25 Member States is challenging and there is the
danger that the result will impose unnecessary burdens in some
Member States while at the same time undermining important consumer
protection provisions in others.
As it stands, the Government believes that the
draft Directive would require the removal of important UK consumer
protection provisions—for example on advertising and pre-contractual
and contractual information—while imposing unnecessary provisions
in other areas—for example with regard to overdrafts and
credit unions—which will be costly and burdensome and could
lead to significant consumer inconvenience.
However, we do not believe that the limited
scope of the Directive will be detrimental to UK consumers. Member
States will be free to continue to legislate on matters outside
the scope of the Directive according to the needs of individual
markets and local conditions as they already do.
CHAPTER 7—THE
FULL HARMONISATION
PROVISIONS OF
THE DIRECTIVE
AND THEIR
POTENTIAL EFFECT
ON THE
LEVEL OF
CONSUMER PROTECTION
IN THE
UK
Paragraph 231: We recommend that:
— the definition of the word "surety"
in the 2004 draft should be reinstated, and the term "mortgage"
or "security interest" used to denote security in an
asset;
We agree that the meaning of "surety"
in Article 2(2)(a) is unclear and that the drafting could be improved
and have made these points during the negotiations. The Government's
priority here is to maintain the distinction between secured and
unsecured loans while ensuring that unsecured home purchase plans
in the United Kingdom—and, notably, Islamic home purchase
products—are excluded from the scope of the Consumer Credit
Directive (though they will continue to be regulated in the UK).
— hire purchase agreements should
not be excluded from the scope of the Directive;
It is our view that hire purchase agreements
would not be caught by Article 13 in its current form. Our preference
would be to include hire purchase agreements within the scope
of the Directive as they are undoubtedly mainstream credit products
and in terms of a consistently regulated consumer credit sector,
the exclusion of hire purchase agreements is not to be welcomed.
The Government is however conscious that equivalent "leasing"
products in some other Member States may not be caught within
the scope of the Directive even though the outcome from the consumer's
point of view is the same—i.e, that ownership of a product
transfers from the supplier to the consumer.
Although we would prefer to see hire purchase
agreements covered by the Directive, the current text of Article
13 concerning the universal right of withdrawal would pose particular
difficulties for hire purchase and conditional sales agreements
as consumers would be able to withdraw from all credit agreements
(including face-to-face agreements) without penalty for a period
of 14 days following their conclusion (see also the discussion
of paragraph 234). If the only way to overcome these problems
is through the exclusion of hire purchase agreements from the
scope of the Directive, we would have to consider this approach.
Of course, regardless of whether or not hire purchase agreements
fell within the scope of the Directive, they would continue to
be fully regulated in the United Kingdom alongside other credit
agreements.
— the provisions relating to contract
and pre-contract information should not apply to overdrafts which
should continue to be governed by the other provisions of the
Directive so far as applicable;
Overdrafts are regulated in the United Kingdom
in a way which ensures that consumers are adequately protected
without compromising convenience and flexibility. Their treatment
in the draft Directive is a major concern for UK industry which
has made strong representations that overdrafts should be outside
the scope of the Directive.
The Government acknowledges this concern and
believes that the additional provisions which would apply to overdrafts
under the proposed Directive would reduce their flexibility and
would inconvenience consumers without offering any additional
consumer protection. We also believe that the requirement to apply
an APR to overdrafts could be positively misleading and might,
in some circumstances, point consumers in the direction of alternative
credit products which would prove to be considerably more expensive.
Other key difficulties with the proposal are the need for advanced
written information (which would undermine flexibility); and the
need to notify consumers individually of interest rate changes
(which would prove unduly burdensome in the case of changes to
the base rate and would provide little additional benefit to consumers).
Our ideal position would therefore be to exclude overdrafts altogether
from the provisions of the Directive and to continue to apply
the provisions of the 1986 Directive, which form the basis of
UK regulation. DTI and the Treasury are continuing to work with
the banking industry to prioritise our concerns here.
— ideally credit unions should be
excluded from the Directive altogether on the basis that it would
be open to any Member State to regulate credit unions in its domestic
legislation if it considered that local conditions make this desirable;
— but if credit unions are to be
kept within the Directive the concept of the common link embodied
in Article 2(4)(b) should be expanded to encourage this other
types of link on which credit unions are based and the "light
touch" regime applicable to credit unions should be made
lighter;
We agree. Credit unions do not engage in cross-border
trade and, at least in the UK, do not compete directly with other
mainstream lenders. They are also relatively small organisations
for whom the requirements of the Directive would be excessively
burdensome—especially given that there is no evidence of
consumer detriment caused by credit unions. Finally, credit unions
serve an important role in combating financial exclusion in the
United Kingdom and their promotion is therefore an important plank
of Government policy in this area.
However, other Member States which have credit
unions—principally Poland and Ireland—want their credit
unions to be regulated by the Directive, The reason for this may
be explained by the fact that in Poland and Ireland, credit unions
tend to be larger organisations, more akin to mainstream lenders,
than is the case in the UK. Hence the arguments for excluding
from the scope of the Directive Credit Unions in Poland and Ireland
are less compelling than in the UK.
Officials are therefore working with their Polish
and Irish counterparts to find a solution which will be acceptable
to all parties. Our aim would be to exempt UK credit unions from
the provisions of the Directive.
The United Kingdom is also working to improve
the definition of credit unions to ensure that this is sufficiently
broad to cover all existing UK credit unions and sufficiently
flexible to allow for the approval of credit unions formed on
the basis of new kinds of common bond, We believe that this element
of future proofing is necessary to support the Government's policy
of encouraging the growth of the credit union sector.
— the wording of Article 3(c) should
be amended to distinguish the provision of pay-as-you-go services
from services provided on credit;
The Government agrees that a distinction should
be made between genuine credit agreements and pay-as-you-go arrangements.
We believe that this is what is intended by the definition of
"credit agreement" in Article 3(c), but the wording
may need improving. The requirement that goods or services should
be supplied "in the same quantity" has, with the United
Kingdom's support been deleted in the most recent Presidency text
and we believe that this may help resolve the issue.
— the definition of "credit
intermediary" should be narrowed to exclude those for whom
it is inappropriate, for example, mail order traders.
The Government's view is that the provisions
of the Directive should not apply to individuals such as mail-order
catalogue agents and home credit agents where the principal lender
takes responsibility for their actions. The European Commission
and some Member States argue that, in its current form, the only
article of the Directive which applies to intermediaries is Article
20 concerning transparency with regard to the independence of
an intermediary and the issue of fees, but we are not convinced.
Articles 5 and 6 specifically refer to "the creditor and,
where appropriate, the credit intermediary's" obligation
to adhere to the principle of responsible lending and to provide
pre-contractual information and adequate explanations. Although
Article 7 disapplies these provisions in the case of suppliers
of goods or services acting as credit intermediaries in an ancillary
capacity, it is not clear that this would include mail-order catalogue
and home credit agents. A specific provision making clear that
the provisions of the Directive do not apply where the principal
lender takes responsibility for an agent may be needed. This would
probably need to extend to Article 19 concerning the supervision
of intermediaries.
Paragraph 232: We recommend that:
— if Article 4 is intended as a
full harmonisation measure, that should be made clear, for example
by substituting the word "state" for "include";
The Government agrees that substituting the
word "state" for "include" would make clear
that Article 4 constitutes full harmonisation. However, it is
not clear that full harmonisation would be in the United Kingdom's
interest. As discussed in relation to paragraph 230, trying to
impose a single set of consumer information requirements on all
Member States is difficult to achieve and may lead to the undermining
of essential consumer protections in some cases and the imposition
of unnecessary burdens in others. We are concerned that the search
for a standard set of advertising requirements may lead to the
sweeping away of the existing UK requirement for an APR to be
indicated in certain circumstances where the advertiser makes
implied claims concerning the advantages of his products or supplies
some other inducement. We are working to achieve alignment of
the provisions in Article 4 with the UK consumer credit advertising
rules and have had some success, Depending upon the outcome of
the negotiations, minimum harmonisation may, nevertheless, be
more appropriate in this case to enable Member States to maintain
essential consumer protections.
— 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 (ie the higher rate charged at the end of the introductory
period) instead of a blended rate.
Further discussion with the Commission and in
the Council Working Group have suggested that the intention behind
a "representative example" is actually very similar
to the UK notion of a "typical APR". The European Commission
has even indicated that it believes the UK typical APR requirement
could continue to be used as the means of implementing the requirement
for a representative example. The word "representative"
is, we understand, deliberately not defined to allow Member States
some flexibility in interpretation. However, given its opposition
to be used of blended rates, the Government would prefer a more
straightforward requirement for the go-to rate to be quoted rather
than allowing a combination of an introductory offer and the go-to
rate.
Paragraph 233: We recommend that:
— Article 9 should be made a minimum
harmonisation provision since, as a full harmonisation 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;
The downside of minimum harmonisation is that
it can had to different legal provisions in different Member States
and can therefore be less effective in overcoming barriers to
trade. Differences between the ways in which Member States have
implemented the existing 1986 Directive is cited as one of the
reasons why the Commission is now proposing a full harmonisation
approach. However, the Government nevertheless believes that full
harmonisation is not the only approach to overcoming barriers
to trade and should not be used where it would disrupt market
by imposing unnecessary burdens on business and removing essential
consumer protections. Our doubts about the extent to which the
proposed Directive even targets the real barriers to trade (and
would therefore deliver significant compensating benefits) make
it even more imperative that there should be no disruption of
markets.
The Government therefore agrees that, if the
quest to standardise contractual information across the EU would
result in a set of requirements which would undermine existing
consumer protection and impose additional cost on business, minimum
harmonisation would be preferable. As it stands, Article 9 of
the draft Directive would, indeed, deprive UK consumers of information
currently required under UK law—for example, the requirement
to provide information about the allocation of payments.
— 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, eg by providing assumptions or permitting the use of
estimated information;
We agree that Article 9 needs to make some allowance
for times when the creditor will not know the exact amounts to
be included in the agreement and in such situations the use of
assumptions or estimates should be permitted.
— Article 9 should also be amended
to address the exchange-rate problem in stating the total cost
of credit when one party is based in a Member State outside the
Eurozone and the other is in a Member State within the Eurozone;
This seems a sensible proposal and the Finnish
Presidency has now come forward with a form of words dealing with
the exchange rate issue.
— 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);
Paragraph 131 of the Report suggests the reason
why there should be no such requirement is that the creditor could
not be expected to know the amount of costs in all cases. However,
Article 9.2(j) already makes clear that costs only need to be
indicated where they are known to the creditor so we do not see
why it would need amending with regard to this concern.
— the requirement to provide an
amortisation schedule should be dropped.
The Government believes that that the inclusion
of amortisation tables in credit agreements would be very burdensome
for business and of limited value for consumers and should therefore
be dropped from the Directive.
Paragraph 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 its supplementary
consultation paper.
The Government is not convinced that the case
has been made for an across-the-board 14-day right of withdrawal
from credit agreements. Special arrangements already apply in
the case of distance and doorstep sales because of the peculiar
features of such arrangements—for example, in the case of
distance selling, the consumer does not have access to full information
at the point of agreement (and, in the case of goods cannot examine
the product) and, in the case of doorstep selling, a consumer
is recognised to be at a greater potential disadvantage because
of the physical presence of a trader in his or her home and the
fact that business may not have been proactively invited. In the
case of face-to-face transactions these factors do not apply and
we believe that the proposed withdrawal period would therefore
become more akin to an extension of the pre-contractual phase
We are concerned at the possibility that consumers will simply
be more willing to sign credit agreements before they have fully
made up their mind and at the legal uncertainty that this could
create for businesses given the risk of consumers bringing goods
back after 13 days, particularly ones that devalue quickly or
would be costly to put on the market due to having to repackage
them.
As mentioned in response to Paragraph 231, the
right of withdrawal could create particular difficulties in the
case of hire purchase and conditional sales agreements (although
as discussed in relation to paragraph 231, hire purchase agreements
would appear to be outside the scope of the Directive at present),
where the supply of goods/services and the provision of credit
are integrally linked. Hire purchase is an affordable means of
obtaining credit for consumers who might find it difficult to
source a loan for the same purpose elsewhere and we would not
want to see consumer choice and competition reduced by the withdrawal
of such products. As it stands, the Commission's proposal could
leave the supplier of goods—especially high value electrical
goods and cars—exposed to a level of risk normally borne
by the lender. This could lead to considerable consumer inconvenience
if suppliers of goods refused to release them until the 14-day
withdrawal period has expired or even to the demise of hire purchase.
Officials have been working to reduce this risk but most other
Member States do not recognise the problems.
Responses to the supplementary consultation
largely concurred with our concern. Even those who supported a
14 day right of withdrawal for the most part admitted that it
would have an impact on hire purchase agreements—either
forcing consumers to wait to take possession of goods or leading
to alternative, possibly more expensive, credit products displacing
hire purchase altogether.
Paragraph 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.
Paragraph 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.
The Government agrees that, as drafted, Article
16 of the proposed Directive does not reflect the current position
in UK law. It would require consumers to be informed of assignment
in a wider set of circumstances than we believe to be necessary.
We share the Committee's view that informing consumers in the
case of block discounting, where the consumer's relationship with
the creditor has not materially changed, could cause unnecessary
confusion and, indeed, even alarm. The important thing is that
consumers should be informed where assignment of debts has a real
impact. The United Kingdom has already proposed that Article 16
should exempt block discounting from the requirement to inform
consumers. A possible solution would be to replace the specific
exemption for "securitisation purposes" with a more
general principle that consumers would not need to be informed
where the original lender, in agreement with the assignee, still
performed the functions of creditor vis-a"-vis the consumer
on the assignee's behalf. The Finnish Presidency has recently
proposed an amendment along these lines.
Paragraph 237: We therefore recommend
an amendment to Article 19 to restore the exemption contained
in the 2004 draft by which credit institutions authorised in a
Member State under the banking consolidation Directive 2000 do
not require authorisation to conduct business in another Member
State.
The Government agrees with this recommendation
and the European Commission has already indicated that the omission
of a reference to the Banking Consolidation Directives is an oversight
and this has been put right in the latest working text.
Paragraph 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.
Like the Committee, the Government supports
Article 23 as drafted.
Paragraph 239: In addition to the difficulties
of full harmonisation 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.
As discussed in answer to the Committee's recommendation
concerning the level of consumer protection in paragraph 230,
a difficulty with devising an inflexible set of rules to cover
25 different consumer credit markets is that the result risks
not being fit for purpose in any one of them because it may fail
to deal with the very different problems which regulators face
in different Member States. In the same way a single inflexible
set of rules will not be able to cope with the new challenges
which will arise as a result of future innovations and the Government
agrees that Member States need to retain the possibility of taking
urgent action in order to protect consumers from hitherto unforeseen
problems. From time to time the UK Government has had to consider
updating its consumer credit legislation in order to deal with
new problems and maximum harmonisation would probably not allow
us to continue to do this.
However this is an issue which applies to pretty
well all prescriptive aspects of the Directive which regulate
lenders' behaviour. Hence, it is equally applicable to Article
4 concerning advertising and Articles 5 and 9 concerning pre-contractual
and contractual information. Even where a full harmonisation provision
may be acceptable now insofar as it conforms with the United Kingdom's
current practice and would therefore deal satisfactorily with
existing potential abuses, market developments may lead to new
problems which would need to be tackled by means of new provisions.
CHAPTER 8—MUTUAL
RECOGNITION
Paragraph 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.
Paragraph 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.
In general the Government supports mutual recognition
(an established Treaty principle) as one possible means of overcoming
barriers to trade. In some circumstances it is to be preferred
to harmonisation—especially where full harmonisation may
not be appropriate or practicable. We therefore believe that the
impact of mutual recognition in the proposed Directive should
be examined article by article. This is difficult to do in the
absence of an overall impact assessment.
Article 21(2) applies to parts of Article 5
(responsible lending/pre-contractual information), Article 13
(right of withdrawal), parts of Article 14 (linked transactions),
Article 15 (early repayment) Article 17 (overrunning of credit),
Article 19 (regulation of creditors/credit intermediaries) and
Article 20 (obligations of credit intermediaries). It is arguable
that mutual recognition would only impact on a consumer's contractual
rights in the case of Articles 14 (the exact circumstances in
which a consumer could pursue remedies against a creditor where
good/services are defective) and Article 15 (the amount of indemnity
which a lender could claim for early repayment). Even here, it
has to be borne in mind that Article 21(2) does not automatically
apply the law of the lender's Member State; it simply says that
Member States may not restrict the activities of creditors established
in another Member State and operating within their territory in
accordance with the Directive. In other words, the lender's national
law would only apply where the implementing legislation of the
consumer's Member State acted in such a way as to restrict the
activities of a foreign lender.
The Government recognises that where a consumer's
contractual rights could be governed by the law of another Member
State this might be problematic and might not be in the interests
of the consumer (although it has to be remembered that this will
only be an issue where a dispute arises and in the case of Article
15 (early repayment)—although not in the case of Article
14 (linked credit agreements)—the consumer's rights will
be spelt out in the agreement. It also has to be recognised that
the out-of-court dispute resolution procedures foreseen in Article
23 should also go a long way to resolving cross-border disputes.
In practice the question of whether or not an
element of mutual recognition should be included in the Directive
has become largely academic since almost all Member States oppose
it. A possible solution may be to apply mutual recognition only
to those articles which would not impact on consumers' contractual
rights. For example Article 19 concerning the regulation of lenders/intermediaries.
CHAPTER 9—RESPONSIBLE
LENDING
Paragraph 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 they were to be a significant deterioration in
the economic environment.
Paragraph 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 credit worthiness
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.
The Government recognises that offers of credit
on the basis of inadequate information is one cause of over-indebtedness
and is one of the main reasons why there has been an emphasis
on improving transparency for consumers in the changes that have
been made to the Regulations concerning the advertising of credit
products and on the disclosure of information to consumers at
both the pre-contractual stage as well as when the agreement is
completed. However, evidence suggests that there are a number
of contributors to a state of over indebtedness, such as a life
changing event—for example, redundancy or illness as well
as deeper rooted socio-economic factors.
Paragraph 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.
The Government believes that legislation in
this area should be cast in general terms to avoid creating loopholes
or a culture of minimal compliance. Hence, the approach taken
in the Consumer Credit Act 2006 foresees the possibility of action
against irresponsible lending without the legislation spelling
out exactly what this means. Such an approach is more flexible
and can best reflect the needs of the market and consumers at
any given point in time. At the same time UK consumers are given
appropriate tools to challenge lenders.
Paragraph 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.
Paragraph 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.
Paragraph 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.
The Government is concerned that introducing
a vague responsible lending principle will be ineffective in tackling
the real issue. Encouraging responsible lending and, conversely
discouraging irresponsible lending, will not come about by simply
saying that lenders must lend responsibly, but will depend upon
specific actions—for example, guidance in codes of practice
and the ability of regulators to impose appropriate sanctions
having regard to the circumstances of individual cases. On the
other hand, any attempt to define "responsible" lending
in a narrow sense is likely to encourage an attitude of minimal
compliance. The way in which Article 5(1) of the proposal is drafted
appears to run both these risks. At the same time it runs the
risk of creating legal uncertainty for lenders. We are also concerned
that, because the Directive introduces maximum harmonisation,
the linking of responsible lending to the provision of pre-contractual
information and an assessment of the consumer's credit worthiness,
might limit the circumstances in which regulators could take action
against irresponsible lending, since maximum harmonisation prevents
Member States from going further than provisions in the Directive.
The Government therefore accepts the Committee's
recommendation that it would be better to frame any requirement
in terms of a prohibition on irresponsible lending. Furthermore
we believe that it would be more appropriate for the Directive
to impose an obligation to take action against irresponsible lending
on Member States, rather than impose an obligation on lenders.
We also believe that any such provision should be removed from
Article 5 (and transferred to Article 19 concerning the regulation
of creditors and intermediaries we have submitted a textual amendment
to this effect) and that, as the Committee has recommended, it
should not spell out specific details of how Member States should
tackle the problem.
Paragraph 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.
The Government agrees with the Committee that
consumers should be given adequate pre-contractual information,
although we do not agree that the current requirements in Article
5(2) are the right ones. We think there are some important items
contained in UK law that are missing from Article 5.2, in particular:
— The total amount payable under the
agreement.
— The name, postal address and where
appropriate any other address of parties.
— A description of the goods services
land etc to be financed by credit.
— Constituent parts of the total charge
for credit.
Although we believe that the current wording
of Article 5(5) probably provides sufficient flexibility, we recognise
that it risks creating legal uncertainty for lenders and we agree
that it needs to be clear that the lender's duty to provide "adequate
explanations" should be confined to information which the
consumer might reasonably require and which is practicable for
the lender to furnish. The current provision remains open to very
different interpretations and the needs of individual consumers
will vary considerably as well as the complexity of individual
credit products. We believe it is important that consumers themselves
should take ultimate responsibility for the choice of credit product,
provided that they have been given the mandatory pre-contractual
information and have not been misled.
Paragraph 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 five 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.
The response to Paragraphs 245-247 explains
why the Government believes that it would be inappropriate to
attempt to define responsible lending (in particular, the dangers
of encouraging minimal compliance and reducing regulators' scope
for taking action). On the other hand informal best practice guidance
might have a role to play, taking account of the needs of the
differences between individual consumers and credit products as
well as differences between national markets, and this is something
we will consider further. The Office of Fair Trading will be providing
guidance on irresponsible lending as part of its overall guidance
on fitness.
39 Letter to Chairman of Sub-Committee G, Baroness
Thomas of Walliswood. Back
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