Exemptions for certain buy-now-pay-later products pose risks for consumers in uncertain economic times
On 9 June, the Council of the European Union adopted its general approach on the revision of the Consumer Credit Directive (CCD). Today, the Internal Market and Consumer Protection committee (IMCO) of the European Parliament voted on its position on the revision of the directive. In September, co-legislators will start negotiations (so-called trilogues) on a joint final text.
Finance Watch, the pan-European NGO dedicated to making finance serve society, regrets that the IMCO text voted on today includes a legal loophole allowing certain retailers to offer buy-now-pay-later (BNPL) products without any regulation. BNPLs have rightfully fallen into disrepute. Recent studies, including one by Finance Watch, show that these products are risky and are being mis-sold to vulnerable consumers. Finance Watch urges EU policymakers to agree on a final text that ensures any product that works like credit is in scope of the CCD.
The Brussels-based NGO is also concerned about the text’s creditworthiness assessment (CWA) provisions. Robust CWAs are indispensable to avoid mis-selling of risky loans and over-indebtedness. Therefore, it is crucial that the final text negotiated by the co-legislators ensures creditors must perform a creditworthiness assessment proportionate to the risks of the credit for the consumer.
Peter Norwood, Senior Research and Advocacy Officer at Finance Watch, said:
“Due to the cost-of-living crisis, consumers, especially those with a lower income, are more likely to seek loans to pay off bills for everyday items, such as food. It is more important than ever that robust policies are in place which protect households from becoming over-indebted.
Exempting risky credit products from regulation or introducing rules that could be misinterpreted as allowing a light-touch creditworthiness assessment for smaller value loans, including when sold to lower-income consumers, must be avoided.”
Notes to editors
A recent report by Finance Watch shows that BNPLs are mostly purchased by lower income consumers. BNPLs encourage impulse purchases as they provide consumers with a false impression that their financial situation allows for more spending as creditworthiness assessments are most of the time not performed for these products. Moreover, consumers are often not aware that they are becoming indebted because BNPLs are often advertised as ‘free-interest loans’ and consumers are not told, until it is too late, that they will incur high late payment fees in case of payment difficulties.
The study also shows that smaller value loans are mostly sold to lower income consumers and therefore it is vital that the CCD contains strong creditworthiness assessment provisions to avoid putting vulnerable consumers in particular at great risk. As confirmed by the report, in 62% of cases where a loan is sold to a consumer, a proper analysis of a household’s budget is not performed. Moreover, in 58% of cases, no supporting documents are requested to verify the information/data provided by the consumer for the CWA.
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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