1. What is the current situation?
The current rules on consumer credit result from Directive 87/102. This Directive contains certain minimum requirements, including in particular a few information obligations, a basic right to repay early without any specifications, and a common calculation method for the Annual Percentage Rate. Member States were allowed to go beyond these provisions to better protect their consumers, and a very large number of them did so, but to a different extent. Therefore, credit legislations still differ strongly in the EU.
Consumer credit plays an important part in the EU economy. According to data from 2005, outstanding credit is at a level equal to nearly one tenth of EU GDP. It plays an especially great role in countries like the UK, Ireland, Germany and Austria, where it accounts for around one fifth of household private consumption, and a growing role in countries like Poland and Hungary, where it accounts for nearly one tenth. Consumer loans represent on average almost 18% of the gross income of retail banking in the EU.
Across the EU the picture is varied, as markets are in different stages of development. The outstanding consumer credit per person ranges from less than 100 EUR in some Member States like Lithuania or Slovakia to over 3000 EUR in Member States like the UK or Ireland with the highest level of consumer credit.
The consumer credit market in the EU is already worth over 800 billion EUR, with an average annual growth rate of over 8%.
That shows the potential for big savings for consumers, if increased competition brings even a small reduction in the interest rates charged to consumers on such a significant amount.
According to ECB data the average rate charged on a consumer credit in the Euro area in 2007 varies from around 6% in the cheapest country (Finland) to over 12% in Portugal, the country with the highest interest rate. Other examples illustrate this variety of situations: 9.4% in Italy and Spain, 7.1% in France or 6.8% in Ireland. This suggests there are considerable potential benefits, for banks and consumers, in developing a cross border market in consumer credit.
2. What is the problem?
Direct cross-border consumer credit represents less than 1% of the volume of credit transactions, which shows that the internal market is not functioning. Creditors therefore tend to establish themselves abroad when they want to reach foreign markets. They cannot use the internal market to a full extent, and this deprives consumers from access to a greater diversity of offers and more competitive prices.
3. What are the reasons?
For consumers, according to the Eurobarometer of 2005, the two biggest barriers to purchasing a financial service from another Member State are to do with communicating in another language (31%) and lack of personal contact (26%). However five of the next six barriers given are to do with consumer confidence and quality of information. The Commission wants to tackle those barriers that can be tackled. If we can remove these barriers, with better information, and harmonised levels of protection, there is an opportunity to open up cross border trade. As regards the banks, if they want to provide credit directly across borders, they need to adapt each time to a new national legislation and therefore face more costs, for instance they cannot use the same IT platform throughout the EU.
4. What are the new proposals?
The proposal for a Directive in its current form aims to start to open up the market in cross border credit with new rules with the main effect to provide certain key information to consumers in a standard format. This will make the market more transparent for consumers and for business competitors. Consumers will have the information they need to make informed choices and, if they decide to, to shop cross border.
The Consumer Credit Directive focuses on transparency and consumer rights. It aims to give consumers standard, comparable information on:
* Advertising. 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.
* Pre-contractual information. The Directive obliges creditors to provide consumers with all the necessary information to compare offers in good time before they conclude the contract. Consumers will receive the Annual Percentage Rate of charge, a single figure representing the cost of the credit and which consumers can use to compare and to establish the cheapest credit all over Europe) included in a standard form to be used by all creditors at EU level. This will make direct comparison between offers much easier, even across borders.
* Contractual information. Once consumers make a choice which loan to take out, they need to receive comprehensive information when they conclude the contract, so that they have a reference document describing their rights and their obligations. This is provided for by the Directive, which contains a list of information requirements. This guarantees the exact same level of information for consumers throughout the EU.
The Directive also sets out two essential rights for consumers:
* Once they have concluded a credit contract, consumers will be able to withdraw from the credit without having to give any reason, and without any charge. This right (a new feature in almost half of the Member States!) will apply to all consumer credits in the EU. This will avoid the risk of taking a hasty decision under pressure without being able to step back. It will also enhance competition among creditors, who will not want to risk consumers withdrawing, if they can find much better rates available.
* In addition, the Consumer Credit Directive confirms the right to repay early at any time. It sets standards on the compensation creditors are entitled to claim in case of an early repayment, in order to lower market entry barriers.
5. The bigger picture
The Consumer Credit Directive is an important first step in improving transparency and competition in Europe. But it is just a part of a much bigger drive to boost the internal market in retail financial services. The recent Green Paper on retail financial services highlighted three important aims:
* lower prices through better choice,
* enhancing consumer confidence, and
* empowering consumers.
All of which are central to Commissioner Kuneva's consumer policy strategy.
The Consumer Credit Directive will deliver on all of these, by giving people good standard information, which is easy to compare. The APR figure, indicating the cost of the loan, which they can compare all over Europe, the right to withdraw or to repay early without excessive charges, and a transparent presentation of their rights and obligations will give them confidence to shop around. It will bring competitive pressures to the market, resulting in a better choice, and lower prices.
