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Negotiators from the European Council and the European Parliament have reached a provisional agreement on the Consumer Credit Directive. The revised legislation repeals and replaces the current 2008 directive on consumer credit agreements.
In a revision that is intended to modernise and enhance protections for European consumers when they apply for credit, EU lawmakers have agreed on new rules that account for new forms of online credit, including buy now, pay later (BNPL) and short-term, high-cost loan schemes.
“Consumers can easily apply for credit online but might not always be well-informed on the consequences of this application,” said Jozef Síkela, Czech minister for industry and trade, in a statement following the agreement.
Síkela, who is also an investment banker and consultant, stated that consumers need to be able to know what they are signing up for and how much they eventually have to repay. “This agreement will ensure that citizens have sufficient and clear information about their credit agreements.”
The amended directive aims to promote responsible and transparent practices by all players involved in consumer credit; for example, by ensuring that credit information is presented in a clear and understandable way, and is adapted to digital devices.
To keep up with the trend of digitalisation, the new credit rules will now also apply to certain risky loans that are excluded from the scope of the directive currently in force. This includes loans below €200, loans offered through crowd-lending platforms and BNPL products.
Work such as this has already been taking place in some EU member states. Ireland was a first mover, and Denmark too has begun to set up tougher oversight of BNPL and online loans.
Beyond the EU, countries including the UK, New Zealand and Australia have also begun taking legislative steps in this field. In Singapore, regulators have worked alongside local market players to create a voluntary code.
Credit rules and new measures
The new EU rules will require lenders to make sure that consumers have easy access to all necessary information before signing a credit agreement and that they are informed about the total cost of the credit.
Lenders must also assess a consumer's creditworthiness and check if someone is able to repay their credit. It is hoped that the new requirements will protect consumers from irresponsible lending practices that could lead to over-indebtedness.
For example, when a creditworthiness assessment is negative, a creditor cannot make the credit available to the consumer. This will protect consumers from receiving credit that they are not able to repay.
Member states will also have to ensure that consumers have the right to withdraw from a credit agreement without any reason within 14 days. Consumers will also have the right to early repayment and to reduce the total cost of their credit, with pre-contractual information clearly specifying how this compensation can be calculated.
Non-bank creditors and credit intermediaries, except micro enterprises and small businesses, will be subject to an admission process, and registration and supervision by national independent authorities.
Meanwhile, negotiators from the European Parliament secured a provision in the agreement so that credit advertising should always contain a clear and prominent warning that borrowing money costs money.
MEPs also succeeded in including measures, such as caps, to prevent abuses and ensure that consumers cannot be charged excessive interest rates, annual rates, or charges on loans or the total cost of credit.
At the insistence of MEPs, forbearance measures, to deal proactively with emerging credit risk at an early stage, will be obligatory. Creditors will be required to assist consumers in case of difficulties with repayment and impose charges no higher than necessary to compensate for costs resulting from a default.
Commenting on the agreement, Kateřina Konečná, one of the Parliament’s negotiators, said “in this time of economic crisis, we have prepared legislation that will really protect consumers in the field of consumer credit”.
The provisional agreement that has been reached is now subject to approval by the Council and the Parliament.
From the Council’s side, the provisional political agreement is subject to approval by member states' representatives before going through the formal steps of the adoption procedure.
In the Parliament, the provisional political agreement reached by the negotiating team will now have to be approved first by the Internal Market and Consumer Protection Committee (IMCO) and then by a plenary vote.
