The directive was proposed by the Commission in autumn 2002 and given a first reading by Parliament in April 2004. It took the Council until September this year to reach a common position on the issue. At Monday's committee vote, some 236 amendments had been tabled to that common position. The political groups reached agreement before the vote on 10 compromise amendments covering some of these. The major changes adopted by the committee concern the scope of the directive, advertising, pre-contractual and contractual information (in particular for overdraft facilities) and, in particular early repayment terms.
What will change?
The day the new directive enters into force, all EU consumers will have the right to the same information for choosing the best offer in their country or another EU Member State. Consumers will also be able to benefit from bank products that are not available in their own country. The directive also lays down the standard information that must be mentioned in advertising containing financial information on a loan. But MEPs chose to leave more room for manoeuvre than either the Commission or the Council proposed when it comes to this basic information. With the aim being to enable consumers to take fully-informed decisions, lenders will also be expected to provide information on both the benefits and the drawbacks of the loan offer.
Harmonisation will go further as regards the information to accompany the signing of the contract. It will also be easier to calculate the total cost of a loan. Definitions will be standardised EU-wide and will be used as a basis for calculating the annual percentage rate of charge (APR). Other definitions will be standardised, for example concerning overdraft facilities. But the text adopted by the Internal Market Committee is less strict than that in the Council's common position when it comes to contractual and pre-contractual information which lenders are obliged to provide to their customers in the case of overdrafts.
Avoiding taking on too much debt
One priority is to protect consumers against taking on too much debt. The information provided by the lender must enable the borrower to take a responsible decision. The lender must also assess the solvency of the consumer before concluding a contract. Databases accessible by banks should make it easier to meet this requirement. But if the banks refuses a loan on these grounds, the customer will have the right, according to Monday's vote, to see, without charge, the information in that database and where necessary correct any errors. Where legislation providing for similar measures already exists in a Member State, these mechanisms will be preserved. In other cases, they will have to be set up.
Right to pay off early
The new directive will give consumers the right to pay off loans early while also stipulating the rules by which the lender can calculate the compensation to be paid by the client. The justification (which must be honest and objective) for the amount of compensation required must respect the national law of the country concerned, say MEPs in the committee. The directive should not itself set a ceiling on the level of compensation, but this amount should not go beyond the interest charges the client would have paid had the term of the loan not been reduced.
A right of cancellation within 14 days will also apply EU-wide. But MEPs in the committee say that for linked credit agreements this period could be reduced to three days at the request of the customer.
What loans are covered by the directive?
The new legislation will cover consumer loans between €200 and 50 000, the committee decided, as opposed to the Council's preferred upper limit of €100 000. It will only cover credit contracts, not guarantors and other aspects of credit agreement law. The directive will apply only to loan contracts on which interest is paid, and not products such as deferred payment cards (charge cards).
What will be the benefits?
The new legislation should enable the European economy to take advantage of the potential for the development of cross-border trade in consumer credit. Removing obstacles should boost competition and prompt credit institutions to improve performance, by diversifying and enhancing their products for Europe’s consumers.
Finding the right balance
The situation varies greatly from one Member State to another, both in legal terms and as regards the credit habits of households, a situation which does not make harmonisation easier. In addition, the right balances must be struck. On the one hand, easier credit must not lead to a debt burden on households. On the other, consumer protection must not generate costs that could be intolerable to the financial health of banking institutions. On the one hand, better consumer protection means strengthening customers' rights to information; on the other hand, too many bureaucratic requirements might discourage banks from offering credit on favourable terms. This balancing act explains the long delay in arriving at a second reading. There are differences of view both within the Council (which took years to reach a common position) and within Parliament (where a series of very close votes in committee mean it is not yet clear in every case how the plenary will decide).
Next steps
The draft directive, currently at the second reading stage, has been in the pipeline since autumns 2002. MEPs have tabled 236 amendments to the common position of the Member States. The text will be put to the vote at Parliament’s plenary session in January. Parliament and Council are expected to hold negotiations ahead of the vote in the hope of reaching a compromise. These talks will begin before the end of the current Portuguese presidency of the Council.
