Banking on Europe: why the EU Consumer Credit Directive will Impair the Financial Services Sector

An EU Consumer Credit Directive, which is currently being discussed, will not only significantly alter the financial services sector but has so far failed to take into account a thorough impact assessment for the sector. Both the European Commission and the Council have failed to look at what the consequences of this directive would be. The Consumer Credit Directive – governing the agreements covering credit for consumers – was adopted in 1987 and has been pursued with minimum harmonisation. Therefore, there remain important differences in national regulations which have been considered by the Commission as obstacles to the internal market. Hence, the European Commission has been attempting to amend the Consumer Credit Directive – since 2002 – in order to achieve full harmonisation.

However, the Commission’s proposals did not reach agreement amongst Member States. The revised Directive aims at harmonising Member State laws, regulations and administrative procedures in relation to agreements covering credit for consumers. After a long period of negotiation, on 21 May, the Competitiveness Council reached a political agreement on the Commission's amended proposal for a Directive on credit agreements for consumers.

Nevertheless, the Dutch and Greek delegations voted against the proposal and Belgium and Luxembourg abstained. The Council’s negotiations have been focused in the following areas: standard information for advertising, pre-contractual information and contractual information to be included in credit agreements, right of withdrawal, early repayment of the credit and the creditor’s right to compensation and the calculation of the annual percentage rate of charge (APR). The consumers must be able to make an information decision concerning the conclusion of a credit agreement. Therefore, the Council agreed that Member States should provide pre-contractual information on a standard form as such standardisation would be easier for consumers to compare different offers.

Furthermore, consumers will have a period of fourteen days to withdraw from the credit agreement without giving any reason. In relation to early repayment the Council has granted creditors a limited right to compensation for early repayment of the credit. However, it only applies for fixed interest rate credits and: “where the reference interest rate is lower at the time of the early repayment than at the time of conclusion of the credit agreement.” Moreover, Member States “will have the right to provide that the compensation for the early repayment can be claimed by the creditor only on the condition that the amount of repayment within 12 months exceeds a threshold defined by Member States. When fixing the threshold, which should not be higher than EUR 10,000 Member States will take into account, for instance, the average amount of consumer credits in their market.”

As for contractual information, the creditors will have the opportunity of indicating their borrowing rate and the charges or of indicating the annual percentage rate of charge, or of indicating both. With regards to advertising information and pre-contractual information, creditors have to indicate the borrowing rate plus charges and the annual percentage rate of charge.

The Council’s common position will be adopted at one of the Council upcoming meetings which will be forward to the European Parliament for a second reading. According to EUobserver, German Justice Minister Brigitte Zypries, said that “the new legislation would bring clear practical advantages to Europe's borrowers, particularly in terms of boosting transparency so that they can make genuine comparisons among credit offers.”

It should be borne in mind that the banking industry is not pleased with the new rules introduced by the Directive. The financial sector believes that the new measures might make credits more expensive in the EU. Moreover, British Conservative MEPs have been criticizing the Directive. For instance, according to Euractive, Malcom Harbour has said: “whilst conservatives have always welcomed the opening up of new markets, the views of the financial services sector must be properly taken into account through an impact assessment. Both the Commission and the Council failed to look at what the consequences of this directive would be when they should have done so.”