Consumers across Europe look set to be able to make better informed choices when they take out consumer credit loans – paying for holidays, weddings or a new car – following a decision in the European Parliament on 16 January 2008. The proposed EU Directive on Consumer Credit Loans aims to break open the EUR 800 billion EU consumer loans market which remains largely fragmented into national markets denying consumers choice and more competitive prices. The new rules will make the market more transparent for consumers and business competitors. The main effect will be to provide standard, comparable information to customers across the EU taking out a credit loan. Under the new rules, consumers will be assured access to key facts and figures in advertisements. For credit offers, the information given to consumers (e.g interest rates, amount, number and frequency of payments, the obligation to take out an insurance or the charges for defaulting) must be set out in a new comparable EU-wide European Credit Information Form. And there will be a new single EU-wide method for calculating the Annual Percentage Rate of Charge (APR) so consumers can see the real cost of credit. The proposed directive also sets common standards on a right of withdrawal so consumers can change their mind. This Consumer Credit Directive is part of a bigger drive to boost the cross border market in retail financial services as set out in the recently published Green Paper on Retail Financial Services.
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Consumer loans represent on average almost 18% of the gross income of retail banking in the EU. The cost of credit varies greatly across the EU from the lowest rate of 6% in Finland to above 12% in Portugal. In Ireland the average cost of credit is 6.8% in Italy and Spain 9.4%. The internal market is not functioning, and direct cross-border consumer credit currently represents less than 1% of all credit transactions.
The current rules on consumer credit result from Directive 87/102. This Directive contains certain , including in particular a few information obligations, obligations relating to the APR (Annual Percentage Rate of Charge) calculation and a basic right to repay early without any specifications. Most Member States have gone beyond these requirements, and essentially there is a patchwork of different rules across the 27 EU Member States.
The Directive on Consumer Credit aims to give consumers standard, comparable information on:
- If there is a figure in an advertisement on credit, it will be mandatory to provide the same standard list of essential information all over the EU.
- For all offers of credit loans, the consumer will receive the offer with a single European Credit Information Form (to be used by all creditors at EU level). This sets out all the essential information the consumer needs in a clear, standard way which will allow the consumer to compare easily the features of different bank offers, be they local or cross-border. (See standard form in Annex to the Directive).
- The Directive establishes an EU wide method of calculation for the APR – a single figure, calculated in the same way across the EU with all the same costs and charges included. Consumers will by comparing one single figure be able to find out what is the cheapest credit offer.
- Consumers will receive comprehensive information when they conclude the contract, so that they have a reference document describing their rights and their obligations. The Directive contains a detailed list of information requirements.
The Directive also sets out two essential rights for consumers:
Once they have concluded a credit contract, consumers will be able to without having to give any reason, and without any charge.
- In addition, the Consumer Credit Directive confirms the right to repay early at any time. Standards are set on the creditors are entitled to claim in case of an early repayment, in order to lower market entry barriers.
The Directive on Consumer Credit will soon be formally adopted and will have to be implemented early 2010.
