This Finance Watch report provides an analysis of data collected from a mystery shopping exercise to identify what are the reasons for the mis-selling of consumer credit and irresponsible lending in three EU Member States – Ireland, Romania and Spain. Analysis of data collected in summer 2020 identifies many troubling malpractices by lenders that are putting consumers, in particular vulnerable groups, at risk of becoming over-indebted.
Data findings confirm other studies as well as feedback from public authorities, consumer groups and other sources during the past years regarding the need for regulatory and supervisory action to ensure consumers are protected and existing high level of over-indebtedness is properly addressed in the European Union. Analysis of aggregated data collected show:
- Many credit providers do not provide pre-contractual information about a consumer credit before the conclusion of a credit contract. The information provided is often unclear. As a result, only 40% of consumers find themselves able to make an informed choice when purchasing a credit. Worrying in this regard is also that, often, in 25% of the cases, information is unclear about costs in the pre-contractual information provided to consumers.
- Most credit providers do not make sure that the most suitable products are sold to consumers. Only 13% of consumers receive advice on the type of product sold with regards to their needs and situation and only 2% of consumers receive advice regarding the affordability of the credit offered.
- Serious advertising malpractices occur in the consumer credit market.
- Many creditworthiness assessments (CWAs) are not adequate as they do not use the right set of data to assess a borrower’s ability to afford a loan, do not use a sufficient amount of information, and are based on unverified declarations made by the consumer.
- The selling of payday loans and revolving credits bear a number of worrying risks for consumers, marked by unreasonably high costs (APR). Pre-contractual information often proves inadequate. In addition, the CWAs for payday loans are often poor.
- The causes for mis-selling of consumer credit are more prevalent in the online credit market and in cases where loans are sold by non-bank entities.
To address the shortcomings in the market, a number of changes are needed to the Consumer Credit Directive (CCD). The report provides a set of recommendations that cover the Directive’s scope, pre-contractual information and advertising rules, rules concerning the online market, and CCD rules on creditworthiness assessments. In addition, based on report findings, Finance Watch makes the case that rules should be introduced on pricing of credit (price caps) and specific rules aiming to make sure that suitability is considered by the credit provider when credit is sold to a consumer.
Why the study matters
If consumers are sold a credit that they are unable to afford, they can quickly find themselves not only in a situation of financial distress but also in a spiral of over-indebtedness. Moreover, lending practices giving rise to the mis-selling of consumer credits worsen the already existing non-performing loan (NPL) problem in the European Union. This stems from many indebted consumers driven to purchase additional credit to pay back outstanding credit and to make essential purchases needed to survive. Revising the Consumer Credit Directive (CCD) can help tackle these problems in Europe.