Early this morning, the European Commission, European Parliament and Council of the European Union reached an agreement to update EU consumer credit rules. The proposed changes include regulating buy-now-pay-later products and clarifying what data can and cannot be used by creditors. In the midst of a cost-of-living crisis, this is a timely step forward for consumer protection.
The rules on consumer credit currently being applied in the EU date back to 2008. Since then, the consumer credit market has changed dramatically. Finance Watch is glad that risky new loans, such as payday loans and buy-now-pay-later schemes (BNPLs), will be regulated under the updated rules. These products represent a huge over-indebtedness risk for vulnerable consumers. As highlighted in a Finance Watch study published in March, this is because they have high costs, encourage impulse purchases and consumers are at risk of becoming over-indebted when using them due to poor and misleading information and advertising and poor or no creditworthiness assessments. BNPLs are mostly purchased by lower-income consumers and if unregulated, put vulnerable consumers who are already feeling the impact of the cost-of-living crisis the most, at high risk.
Another big improvement is that the rules clarify the data that creditors are not allowed to use when assessing a person’s creditworthiness, such as information on their ethnic origin, political beliefs, health data or social media data. A Finance Watch study from 2021 revealed that credit providers used this kind of data in the past, leading to financial exclusion and mis-selling of financial products.
Peter Norwood, Research & Advocacy Officer at Finance Watch said: “Due to the cost-of-living crisis, more and more consumers, in particular vulnerable ones, are turning to consumer credit to cover everyday living expenses. I’m glad that EU policymakers have taken action to make the consumer credit market safer and fairer in a time of great uncertainty.”
EU consumers are increasingly feeling the impact of the high inflation on their everyday lives as their disposable income is declining significantly. Due to this and the rising interest rates to battle inflation, an increase in the number of existing borrowers struggling to repay their debts is expected. Finance Watch welcomes proposed updates to the rules that will better help existing borrowers struggling to repay their loans. The revised rules will improve access to independent debt advisory services for struggling debtors and oblige creditors to provide forbearance measures where needed.
Research published in November by the Financial Conduct Authority (FCA) in the United Kingdom shows just how vital proper forbearance measures are, such as extending the term of a loan agreement. The FCA found that during the Covid-19 pandemic, only 30% of firms – 15 out of 50 – sufficiently explored customer’s specific circumstances, which meant forbearance agreements were often unaffordable and unsustainable. They informed 32 firms that improvements must be made in how they treat their customers, while 7 firms have agreed to pay £12 million in compensation to nearly 60,000 customers. That’s £12 million for applying inadequate forbearance measures.
Despite the significant improvements the revised rules represent, Finance Watch does regret that the co-legislators have left it to member states to determine whether to regulate deferred debit cards. Unlike traditional debit cards, card purchases made with deferred debit cards are not debited from someone’s bank account immediately. Consumers do not have to have sufficient funds in their payment account on the date where the purchases are made. However, they must have sufficient funds in their payment account on the date the card payment is due. Otherwise, their account will be overdrawn and they will have to pay high interests and fees to the bank. This can easily result in over-indebtedness for vulnerable consumers.
We are also disappointed that the final text is not more ambitious with regards to cost caps. Cost caps are important given the high costs associated with loans sold to vulnerable consumers, such as payday loans or overdrafts. The revised text allows for national usury laws instead of an actual cap. In some Member States, usury laws are far less effective than a cap given that they are not sufficiently clear and are only enforceable if consumers have the time and money to go to court.
To arrange an interview with Peter Norwood, Research & Advocacy Officer at Finance Watch, please contact Alison Burns at alison.burns@finance-watch.org or call on +32 (0)471577233
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.
