Report – Tackling causes of over-indebtedness in the EU consumer credit market

24 March 2022

Report

Our latest mystery shopping exercise highlights the need to expand the scope of the Consumer Credit Directive (CCD) to all of the credit products the European Commission  proposed to bring into the scope of the directive in June 2021. It also proves there is a strong need for more robust creditworthiness assessment and advertising rules to avoid over-indebtedness.

This report presents the findings of the study as well as detailed policy recommendations for the CCD review.

Our study provides fresh data confirming the need to expand the scope of the CCD to all of the credit products the European Commission proposed to bring into the scope of the CCD in its legislative proposal from June 2021. These products are: free interest rate credit –  buy now pay later schemes and deferred debit cards – , loans under 200 euros such as  payday loans, peer-to-peer (P2P) lending, car leasing, and overdrafts.

The findings are based on data collected in the winter 2021-2022 from 126 cases using mystery shoppers in France, Italy, Denmark and the Czech Republic, complemented by 5 qualitative questionnaires filled out by experts in the field from Italy, Germany, Denmark, the Czech Republic and the Netherlands. The findings exposed the high risk nature of new credit products that are currently not in the scope of the CCD. These products  are largely sold to lower income (vulnerable) consumers at high costs.

In light of this, and the fact that the size of a loan is always proportional to a consumer’s overall budget, there is not only an urgent need to bring these products into the scope of the directive but also to apply the full CCD regime to them.

Moreover, our study unearthed that there is a serious problem in the consumer credit market with regards to poor creditworthiness assessments (CWAs) and misleading advertisements. Creditworthiness assessments, an assessment of a borrower’s ability to repay and afford a loan, is one of the key tools to avoid mis-selling of loans and over-indebtedness. Therefore, addressing this issue is key. Addressing the current problems with advertising is also crucial as advertising has the power to nudge consumers towards purchasing a product.

Our policy recommendations

Finance Watch recommends the following amendments to the Consumer Credit Directive (CCD):

  1. The scope of the CCD should be expanded to all of the credit products included in the European Commission’s proposal and currently not yet covered by  the CCD. In our view also, the regulation of the borrower side of peer-to-peer lending cannot wait for a potential future standalone regulation on consumer crowdfunding as sales malpractices are currently too significant.
  2. The full regime of the CCD needs to be applied to the products the European Commission proposes to bring into the scope of the CCD. A ‘light regime’, meaning that not all CCD rules would be applied to these products to the full extent, is not proportionate given these products’ high levels of risk for the consumers who typically purchase them. More regulatory requirements are needed for overrunning than are currently in place in the CCD. The CWA, cost cap, and pre-contractual information requirements should also apply to these products to avoid mis-selling and over-indebtedness.
  3. Mandatory cost caps should be in place for the Annual Percentage Rate (APR) of Charge for loans. The calculation method for these cost caps should be harmonised at EU level to ensure an equal level of protection for consumers and a level playing field for credit providers. In addition, the CCD must specify that the APR should also include the cost of any insurance or other financial product purchased along with the credit.
  4. More prescriptive rules are needed in the CCD specifying what kind of data should be used for a CWA to ensure that an adequate assessment of a consumer’s ability to afford a credit is performed. Such requirements should cover financially relevant data needed to assess the borrowers’ household budget based on income and expenditures, as well as their credit and debt installments. The CWA requirements laid down in the Guidelines of the European Banking Authority (EBA) on loan origination and monitoring should become a legal obligation in the Level 1 text of the CCD.
  5. More prescriptive rules are needed in the CCD on the content and format of advertising to ensure that advertising is not misleading and that consumers are informed about the essential features of a credit product. Key information about the loan such as costs and risks must be included and clearly and prominently displayed in the advertisement.
  6. Strong and harmonised forbearance measures should be introduced in the CCD. In addition, there is a need to oblige creditors to have monitoring processes in place to detect consumers’ financial difficulties early so that forbearance measures can be put in place before the situation becomes too aggravated.