Select Committee on European Scrutiny Forty-First Report


6. CONSUMER CREDIT


(23803)

12138/02

COM(02) 443


Draft Directive on the harmonisation of the laws, regulations and administrative provisions of the Member States concerning credit for consumers.

Legal base:Article 95 EC; co-decision; qualified majority voting
Document originated:11 September 2002
Deposited in Parliament:27 September 2002
Department:Trade and Industry
Basis of consideration:EM of 18 October 2002
Previous Committee Report:None
To be discussed in Council:Not known
Committee's assessment:Politically important
Committee's decision:Not cleared; further information requested


Background

  6.1  The existing Consumer Credit Directive[8], intended to create a common market in credit and to set minimum standards for consumer protection, is still substantially as drafted in the 1980s. After consultations, launched in June 2001, the Commission has concluded that the current Directive is no longer in step with the current credit market. It says there has been little growth in cross-border transactions. It has concluded that the Directive needs to be revised to allow consumers and companies to take full advantage of the single market.

The document

  6.2  The Commission has now proposed a draft Directive which would move from minimal harmonisation to, with some limitations, total harmonisation. It claims this would better provide a high level of consumer protection and promote a single credit market. The Directive would include:

  • definition of the Directive's scope, with a split between consumer credit and mortgages for property purchase. Only those mortgages taken out to buy or renovate a property would be excluded. But lending for equity release or debt consolidation purposes, and probably straightforward remortgages, would be subject to the Directive;

  • more stringent controls on credit intermediaries;

  • improvements to access by lenders to adverse data on a borrower to permit a more accurate assessment of risk and ability to pay; to information for the borrower; to transparency of agreements; and to consumer protection measures, including a responsible lending requirement and a universal 14-day right of withdrawal.

The Government's view

  6.3  The Parliamentary Under-Secretary of State for Competition, Consumers and Markets (Miss Melanie Johnson) tells us the proposal raises a number of concerns about the UK credit market and existing consumer protection measures. She hopes many of these will be addressed during negotiation of this text.

  6.4  The Minister says:

"The UK credit market is the most advanced of all the Member States with a highly competitive market bringing a wide range of consumer choice. It is also by its nature very complex, therefore it is important that the Directive's provisions are proportionate to the size and type of credit being provided, and provide appropriate consumer protection. The Directive is a consumer protection measure and places requirements on lenders that are not necessarily counter-balanced by appropriate demands on borrowers. Some of the proposals will place undue burdens on the lender, resulting in additional costs being passed onto the consumer or a reduction in the choice of products available to the consumer. In addition, the scope of the Directive and the freedom of Member States to legislate on issues not covered by the current text has yet to be fully determined. Finally, some of the proposals may actually inhibit the achievement of a competitive market, by drawing the consumer to use credit products, which may not necessarily be the most appropriate for their needs."

  6.5  The Minister comments on a number of specific points as follows:

"Scope — mortgages (Article 3)

"We are concerned to ensure that the proposed Directive does not cut across existing UK regulatory structures for mortgages. The Directive will not apply to loans secured on property that are for house purchase or transformation. However, it will cover loans secured on property for other uses including products such as equity release loans. This approach does not mirror that adopted for the UK mortgage market, where the FSA will regulate all first-charge mortgages secured on property, irrespective of use, from autumn 2004. If implemented as drafted, a large number of mortgage loans in the UK would be caught by the Directive as well as the new FSA mortgage rules. This would have implications for UK regulation of mortgages and possibly leave lenders having to comply with different regimes depending on the purpose of the loan. We believe loans secured on property should be excluded from the scope of this Directive. Such loans differ not only in their complexity, but also in the lending process. Moreover, secured loans feature very different risks to other forms of consumer credit. Instead, if any measures are to be addressed towards secured lending, the approach should reflect the voluntary European Mortgage Federation's Code which has been developed with the support of DG SANCO and DG MARKT.

"Credit Unions (Article 3)

"Credit Unions are not specifically excluded from the scope of the draft Directive. This may have the effect of over-burdening what is essentially a developing market in the UK providing a valuable service for the more vulnerable consumer, typically unable to qualify for mainstream lending and savings activities, We were able to negotiate with the Commission an exemption which covered credit unions under the current directive and want to continue with an environment that allows credit unions to develop. The regulatory burdens of the draft directive would be too great for many credit unions. We consider therefore that the Directive should continue to exempt 'social lending'. It is understood that the Commission is sympathetic to this point but on the face of the proposed Directive there is nothing that reflects this.

"Unsolicited credit (Article 5)

"The Directive bans the negotiation of unsolicited credit away from trade premises. Broadly UK legislation prohibits such conduct in relation to 'connected' credit (debtor — creditor — supplier) agreements and also provides the consumer with a cooling off period. The Commission proposal would have a significant impact on the home collected credit industry as well as other doorstep selling such as double-glazing, with associated credit. We are pressing the Commission on the reason for extending the protections beyond the current cooling off period.

"Central database (Article 8)

"The Directive requires a central database or network of databases to be established in each Member State. The UK has a competitive market for credit reference material and we are concerned to ensure this does not preclude databases provided by a number of providers. We would also oppose the provision requiring lenders to consult a central database before granting credit. For some sectors, e.g. home collected credit, this would be an inappropriate and undue burden on the lender, and the checks set out in the Directive need to be proportionate to the size and type of loan.

"There should be a requirement to provide positive as well as negative data as this is an important measure for tackling over-indebtedness and enabling lenders to fulfil the responsible lending requirements of Article 9. The use of negative data alone will not give an indication of the consumer's ability to afford a loan, merely their current ability to repay existing loans.

"Responsible lending (Article 9)

"We agree with the importance of responsible lending/borrowing, but we have concerns that the current text places all the requirements solely on the lender. The consumer is ultimately best placed to decide if they can afford the credit — so it is important that they accept responsibility for their borrowing decisions, but with lenders having provided them with the information needed to make the right decision. In addition, it is our view that a responsible lending requirement cannot be fulfilled if the lender is only able to access negative data on the potential borrower (as proposed in Article 8) and is unable to take account of positive data.

"Right of withdrawal (Article 11)

"We have concerns over a universal right of withdrawal, and the impact this might have on retail sales with associated credit. Such a provision may also skew the market as retailers will be reluctant to release goods until the right of withdrawal period has expired so as to avoid them being returned in a used condition. Such a development will encourage consumers to use alternative, but probably more expensive, forms of credit e.g. credit cards in order to be able to take the goods home immediately.

"Total Lending Rate (Article 13)

"We are opposed to the introduction of another figure for consumers to consider — particularly as it appears to offer no greater value than the APR which has been promoted as the most appropriate tool consumers should use when comparing different credit offers. The Commission considers that the TLR will be a valuable piece of additional information for consumers as it will provide a comparator of the lender's costs of providing the loan, as opposed to the total cost of the loan. We have seen no evidence to suggest that consumers would benefit from another set of figures being provided in advertisements and offer documents — indeed our own research on consumers use of advertising suggests that this will confuse consumers, who tend to focus solely on the lowest figure.

"Early repayment (Article 16)

"This proposal provides for consumers to be able to settle a loan early, and for lenders to require an early repayment indemnity only where it is identifiable as a fair one to recover his costs. It proposes to exclude variable borrowing rate loans from any indemnity as the costs of early repayment are seen as being recovered through the rate.

"We recognise that lenders incur costs that they expect to recover through the full course of the agreement. Any early settlement proposal should be fair, equitable and transparent to the consumer, but also take account of the lender being able to recover his costs. In addition, the removal of an indemnity in certain circumstances means an element of undesirable cross subsidisation, with consumers who pay to term subsidising those who settle early — though figures for the UK suggest that around 70% of consumers settle loans early, therefore cross subsidisation would not be particularly great. We are currently consulting on making the early settlement provisions in our own Consumer Credit Act fairer to both parties and propose to feed the outcome of this exercise into the negotiations.

"Bills of exchange (Article 18)

"The effect of this Article is unclear, but it possibly bans the use of cheques and bills of exchange for credit. The UK has an extensive industry providing a service of delayed presentation of a personal cheque for between £50 and £100. We would oppose this move on the basis that some UK consumers, particularly those who may not have access to mainstream lenders use post-dated cheques as a means of securing credit. We consider that we should be looking instead to ensuring that consumer protection measures are appropriate.

"Joint and Several Liability (Article 19)

"UK consumers currently enjoy the protection under the Consumer Credit Act of joint and several liability on the credit provider and supplier when purchasing goods or services on credit. An example of the protection this affords is that a consumer using a credit card could have an equal claim against the issuer and the supplier in the event of a dispute. As currently drafted, the Directive would restrict this joint and several liability to cases where the supplier has acted as a credit intermediary, so this valuable protection for UK consumers would be lost. In addition, because the joint and several liability will cover storecards, given that the retailer has acted as an intermediary between the creditor and consumer, it may encourage consumers to use an often more expensive form of credit in order to gain this protection."

  6.6  The Minister adds that her Department has started an extensive programme of consultations on the document and that a Regulatory Impact Assessment (RIA) will be prepared when the proposed changes are clearer.

Conclusion

  6.7  The Minister tells us that the Government agrees with the Commission that the present Directive needs updating and that the view of stakeholders consulted so far is, albeit with reservations, generally welcoming towards the draft. But in her Explanatory Memorandum the Minister amply demonstrates that there is much to be clarified or amended in the draft if the new Directive is properly to meet the needs of UK lenders and borrowers.

  6.8  Before considering the document further we should like from the Minister a report on the outcome of her consultations and the Regulatory Impact Assessment. At the same time it would be helpful to have a report on progress in the negotiations on the text. We may then wish to recommend the document for debate.


8  Council Directive 87/102/EEC, OJ L 42, 12.2.1987, p.48. Back


 
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