New EU legislation that aims to enhance protection for consumers applying for credit has been finalised.
The revised EU Consumer Credit Directive (CCD II) was adopted by the Council of Ministers on 9 October. MEPs had adopted the proposed text (183-page / 854KB PDF) last month. The law is expected to come into force later this autumn – once it has been formally signed into law and published in the Official Journal of the EU.
EU member states will have two years after publication to implement the new legislation into national frameworks, though the provisions would not take effect for another year after that. CCD II will ultimately replace the current Consumer Credit Directive, which has been EU law since 2008.
Financial regulation expert Caroline Whitten of Pinsent Masons said: “Numerous factors have contributed to this new directive – one of which is rapid technological developments, while another is the fact that the credit being offered to consumers has also diversified. The main aim of CCD II is to provide greater consumer protection and part of that is by enhancing the way information is presented to customers, when it is presented and the medium in which it is presented.”
CCD II requires that clear and comprehensible general information about credit agreements is made available to consumers by credit providers or, where applicable, credit intermediaries, and that this information is made available “at all times on paper or on any other durable medium chosen by the consumer”. Where that information is made available to consumers at credit providers’ or credit intermediaries’ premises, it must be available “at least on paper”.
Andrew Barber, financial regulation expert at Pinsent Masons, said: "With this approach the EU is recognising that not all consumers have moved away from paper-based information and is seeking to ensure credit providers and intermediaries continue to support the needs of such consumers. The requirements are likely to lead to increased costs for credit providers and credit intermediaries. It will be interesting to see how they manage to accommodate different customer communication preferences on their systems.”
Stricter assessments of consumer creditworthiness are also envisaged under CCD II. The measures are aimed at preventing over-indebtedness and irresponsible lending practices.
The legislation requires creditworthiness assessments to be carried out on the basis of relevant and accurate information on the consumer’s income and expenditure and other financial and economic circumstances, to the extent “necessary and proportionate to the nature, duration, value and risks of the credit for the consumer”.
The granting of credit to consumers without their prior request or explicit agreement will also be prohibited under CCD II.
New conditions around the advertising of credit agreements will also apply. Adverts will have to “include a clear and prominent warning to make consumers aware that borrowing costs money, using the wording ‘Caution! Borrowing money costs money’ or an equivalent wording”, according to the legislation.
The directive will also require member states to introduce measures such as caps to protect consumers from being charged excessively high rates of interest or annual percentage rate of charge (APR) on loans, or total costs of credit.
Like under the existing Consumer Credit Directive, CCD II sets out a raft of pre-contractual information that needs to be provided to customers. Among other things, customers must be informed of their time-limited rights to withdraw from consumer credit agreements. CCD II requires credit providers to send last-minute reminders of this right to withdraw in cases where the consumer credit agreement is put in place less than a day before the consumer would be bound by it.
Whitten said: “Lenders will need to consider how to manage these requirements while at the same time ensuring dynamic and efficient customer journeys”.
A further new feature of CCD II is specific protections for cancer survivors. Because of their medical history, those people can face prohibitively high premiums – even years after they have been cured. Under the new legislation, the cost of taking out insurance products that attach to consumer credit agreements cannot be calculated with reference to an individual’s cancer diagnosis after a certain period of time has elapsed since the individual’s medical treatment for the disease ended. It is up to each EU member state to define the relevant period that should apply – a maximum period of 15 years can be set under CCD II.
