Select Committee on European Union Thirty-Seventh Report


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


  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.


  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.


  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.


  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.


  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.


  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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