The banking industry is about to go through a shake-up that will open the whole of the EU market to consumer credit. Among other things, this should allow EU residents of Cyprus who continue to be denied credit just because they have not yet got round to applying for permanent residency to find another taker for their interest payments.
On October 10, the European Commission adopted its revised proposal for a new EU law on consumer creidt.
The purpose of the proposal is to equalise the rights enjoyed by consumers across the EU in the area of consumer credit, within a genuine single market for such services.
The new set of rules are designed to guarantee consumers a good level of protection no matter where in the EU they take out credit, and allow creditors to market a single credit agreement throughout the Union.
This will give consumers confidence to sign up for credit products across borders and help make an EU internal market for financial services more of a reality.
The Commission believes that the current EU law on consumer credit, passed in 1987, is now outdated. It has not kept pace with innovation in the financial services sector and it has not sufficiently fostered greater cross-border lending in the EU.
The proposal has already undergone several amendments following suggestions from the European Parliament and a consultation process undertaken by Consumer Affairs Commissioner, Markos Kyprianou.
By reflecting many of the concerns expressed by MEPs, the European Council comprising member states and the Commission, and stakeholders, the consolidated proposal should facilitate agreement.
50k limit
The revised Commission proposal has restricted the scope to consumer credit of up to EUR 50,000 to cover the most common consumer credit contracts. Mortgage credit will be addressed separately following consultations triggered by the Green Paper on Mortgage Credit launched in July 2005.
Overdrafts, a type of agreements which require simplicity and flexibility, are covered by the directive but subject to specific regulation, mainly relating to information requirements. This specific set of rules applies also to certain credit agreements, such as small loans below EUR 300 or agreements concluded with credit unions.
Member States are given more flexibility to adapt provisions of the Directive to their national situation in certain clearly specified areas, while there is a mutual recognition clause in a limited number of cases to protect the single market.
More advice needed
The concept of “advice” is more clearly defined: in the new text, creditors now have an obligation to put consumers in a position to take a well-informed decision – they should therefore in certain cases provide explanations to their customers in addition to the normal pre-contractual information requirements.
The proposal requires all existing databases on consumer credit to be opened up to EU credit providers on a non-discriminatory basis, instead of requiring the setting up of new “consumer credit” databases at national level.
Advertisements for consumer credit products will have to feature certain standardised information such as the annual percentage interest rate (APR), the cost of the monthly payments and any fees applied.
Right to withdraw
The proposal confirms the right for the consumer to withdraw from the credit agreement within 14 days. In the case of a credit linked to a purchase, the right to withdraw from the sales agreement, if any, triggers a right to withdraw from the credit.
The proposal confirms the right for the consumer to repay the credit at any time – with a fair and objective compensation for the creditor.
Checking creditworthiness
The revised proposal requires lenders to give standardised information about important elements such as Annual Percentage interest Rate, fees and monthly repayments when advertising consumer credit products. It will also oblige lenders to give consumers comprehensive information about a credit agreement in good time before they sign the contract, to document the agreement properly and keep the consumers properly informed about their respective rights and obligations under the agreement throughout their credit relationship.
These information requirements, coupled with the right to cancel a credit agreement within 14 days of signing it (see answer to Question 3), will help consumers to avoid taking on more debt than they can afford.
In addition, the revised law requires lenders to check a consumer’s creditworthiness before concluding a credit agreement with him or her.
The draft law will now be debated in the Council of Ministers, with a common position expected in 2006.
The text of the revised proposal is available at:
http://europa.eu.int/comm/consumers/cons_int/fina_serv/cons_directive/index_en.htm
