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Commission CCD review proposal: A much-needed, significant improvement with room for more

Retail & financial inclusion

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Proposals on new rules regulating the consumer credit market introduce much-needed improvements to protect consumers, but a few tweaks still needed in some key areas.

The following statement comments on the legislative proposals published 30 June by the European Commission on the review of the Consumer Credit Directive (CCD). 

BRUSSELS, 2 July 2021

The European Commission legislative proposals published on 30 June take an important step in the right direction to better protect consumers in key areas in a dicey consumer credit market.

Much-needed widening of the scope of the directive to fold in risky new loans was long overdue, as these products have emerged on the consumer credit market in recent years, including payday loans, peer-to-peer loans, “buy now pay later” schemes, short-term overdrafts and interest-free credit. Bringing these loans under the scope of the directive would allow regulators to address the many sales malpractices witnessed over the years with these loans such as usurious costs, poor creditworthiness assessments and inadequate pre-contractual information.

Likewise, the proposals make clear that all non-bank entities – both online and offline – must be registered and supervised by a competent authority to enforce these players’ compliance with the Directive. With the digital trend in financial services, this is a much needed rule change.

The Commission’s proposal to ban product tying, pre-ticked boxes and unsolicited credit sales must happen. The cross-selling of loans with insurance has been a highly problematic practice in several Member States and selling of consumer credit without the consent of consumers has driven up over-indebtedness.

Pre-contractual information provision to consumers gets a needed improvement. Finance Watch spotted gaping holes in legislation after conducting a mystery shopping exercise in 2020, which found 60% of consumers are not able to make an informed choice when concluding a credit contract. The proposed rules upgrade could make a valuable contribution in addressing this problem, especially the tabled proposal obliging creditors to provide pre-contractual information on loans’ key features to consumers at least 24 hours prior to the conclusion of the credit contract. A proposal to adapt the pre-contractual information requirements to digital media will also help.

Proposals on creditworthiness assessments and cost caps: strong proposals, more changes needed 

The proposals introduce important and welcome stricter rules on creditworthiness assessments, clarifying that the assessment should be carried out on the basis of relevant, accurate and verified information on the consumer’s income and expenses. The proposal matters because more prescriptive rules were needed on what kind of data are to be used for a creditworthiness assessment. In addition, where such assessments involve profiling or automated processing of personal data, consumers will finally have a right to demand human intervention and to contest the decision.

However, Europe faces a worsening over-indebtedness problem which affects vulnerable consumers the most. The CCD must strictly forbid the sale of consumer credit if the result of the CWA shows that the consumer is not able to afford the loan. While the proposals say that creditors should not lend to consumers if the assessment is negative, it contains a troubling legal loophole allowing creditors to circumvent this ban. As the proposals now move along the legislative process, we hope that any such legal loopholes are struck down to ensure the protection of vulnerable consumers and address over-indebtedness.

Ensure cost caps harmonised at EU level, applied only to the annual percentage rate (APR) or total cost of credit

The inclusion of much needed cost caps will allow consumers to breathe easier. Consumers in Europe for far too long have been facing unreasonable and even exploitative costs to their credits, impacting the vulnerable the most and exacerbating over-indebtedness.

However, cost caps are best set at the EU level, not by Member States. EU-set loan cost caps make for an even playing field for credit providers across Europe. It stops Member States from setting scant levels of consumer protection covering exploitative costs. This cap must be applied to the total charge of the credit or the APR, however, and not simply to interest rates.

Advertising rules: stricter rules needed to protect consumers  

The proposals on advertising lack much needed ambition to protect consumers. A Finance Watch study from 2020 uncovered serious problems that persist with consumer credit advertisements. Many times linked to misleading advertisements, problems arise due to the content and also the presentation of the information. As the proposals move along the legislative process, the proposals should evolve to include much-needed tightening of advertising rules. Introduce prominent warnings in advertising that borrowing costs money and put a ban on unsolicited, personalised advertising.

Finance Watch Head of Research and Advocacy Thierry Philipponnat said: “The Commission proposals can help the European credit market spur much-needed growth and greater financial system stability. People face a growing risk of over-indebtedness and the financial system a worsening non-performing loan problem if the Commission proposals fall on deaf ears. Such an outcome would be an untimely blow to the EU economy and to its ability to work for its citizens.”

Finance Watch Senior Advisor Peter Norwood added: “New players and products have entered the market in recent years which bear consumer protection risks but were to date not in scope of the CCD. These products must be met with explicit consumer protection measures and a clear expansion of the CCD umbrella. 

“The over-indebtedness problem in Europe will improve if the Commission proposals get approved. We see scope for more, however, especially around harmonising caps on costs and tightening rules on advertising.”

For more information, contact James Pieper, Finance Watch, on +32 496 51 72 70 or at james.pieper@finance-watch.org

Notes to editors:

Report: Consumer credit market malpractices uncovered

Finance Watch released in February 2021 an in-depth study of consumer credit markets in Spain, Romania and Ireland and what it means for the Consumer Credit Directive (CCD) review. See the report

About Finance Watch:

Finance Watch is an independently funded public interest association dedicated to making finance work for the good of society. Its mission is to strengthen the voice of society in the reform of financial regulation by conducting advocacy and presenting public interest arguments to lawmakers and the public. Finance Watch’s members include consumer groups, housing associations, trade unions, NGOs, financial experts, academics and other civil society groups that collectively represent a large number of European citizens. Finance Watch’s founding principles state that finance is essential for society in bringing capital to productive use in a transparent and sustainable manner, but that the legitimate pursuit of private interests by the financial industry should not be conducted to the detriment of society.

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