Consumer credit - draft directive

This page contains information on:

• Legislative process directive: co-decision procedure
• The political process
• European Parliament first reading 20 April 2004
• November 2004 text
• Recent developments

A copy of the Consumer Credit Directive (CCD) is now in force and is attached below.

In September 2002, the commission published proposals for a revised directive on credit for consumers. The purpose of the directive is to harmonize the laws, regulations and administrative provisions of member states concerning credit for consumers. Almost as soon as it was published, the text of the draft directive drew considerable criticism, not only from member states, but also from the rapporteur appointed to steer it through the parliamentary process. The rapporteur, Mr Joachim Würmeling – announced his reservations about aspects of the proposals, pointing out that it was not the place of the European Parliament to make credit more difficult or expensive for consumers to obtain.
 
From the UK’s point of view, the proposals as drafted could introduce new requirements in relation to pre-contract information and advice. In our view, the various measures would be likely to increase the cost of credit to consumers, though further clarification is being sought.  

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The political process
 
The draft proposals were initially referred to a council working group, made up of civil servants from each member state. The group held a number of meetings from 1 October 2002 and identified a great many technical problems with the draft.
 
The proposals were also considered by three separate committees of MEPs - the Environment and Consumer Affairs Committee, and the Economic and Monetary Affairs Committee and the Legal Affairs Committee. 
 
On 11 September 2003, the Legal Affairs Committee voted to reject the commission’s proposals for a directive and asked it to present a new proposal by the next plenary session of parliament. The commission replied that it had no intention of presenting revised proposals, and lobbied MEPs heavily ahead of a vote, which was expected to take place on 6 November 2003.
 
In the event, no vote took place on 6 November. Instead, the parliament decided to refer the proposal back to the Legal Affairs Committee, rather than voting to reject it. The rapporteur, Mr Würmeling, wrote a new report, and presented this to the Legal Affairs Committee at its meeting on 21 January 2004. The committee voted on the revised report after which it went for first reading by the European Parliament on 20 April 2004. 

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European Parliament first reading 20 April 2004
 
The key point from the perspective of secured lenders was that mortgages, or property secured lending remained outside the directive (c.f. article 3 paragraph 2 (a) and amendment 10 to recital 7). The new provision in article 3 stipulated that credit agreements secured by a mortgage on immovable property or another comparable surety shall not fall within the scope of the directive. In addition, the parliament also amended the proposal so that credit agreements (secured or unsecured) where the aim was purchase or transformation of private immovable property would also fall outside the directive. This was a reasonably clean carve out and an improvement on previous drafts. This provision was the overriding objective for the CML and its members and had been argued for strongly by the CML. 

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November 2004 text

Following the first reading in the European Parliament, the CCD returned to the commission who had the task of preparing a new text incorporating or rejecting the amendments added at first reading. This process was delayed by disagreements within the commission between DG MARKT (Internal market directorate) and DG SANCO (Health and consumer protection). DG SANCO has overall responsibility for the CCD. Eventually the commission issued its amended proposal in early November 2004. Unfortunately, the commission departed from normal practice and simply issued a schedule of actual and proposed amendments to the CCD as amended by the European Parliament at first reading. The Commission did not follow the lead of EU Parliament and accept the amendment excluding secured lending from the directive. This was a major disappointment for the UK industry.

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Recent developments
 
Following a change in commissioners in October 2004, the commission reconsidered its position. A new consolidated draft of the CCD appeared in late Autumn 2005. All secured lending was removed from the scope of the CCD and the pre-contract information and advice provisions represented significant concessions to the industry though some problems remained. This represented a significant victory for the CML and others who had lobbied for change. Mortgage credit is now being dealt with by DG MARKT in the form of its green paper on mortgage credit, which was followed by a White Paper published in December 2007.

The German presidency began in January 2007 with a commitment to drive through an agreement in Council. A stream of compromise texts of the CCD were published, culminating in a text dated 16 May 2007 which achieved political agreement in Competitiveness Council on 21 May 2007.

Key features of the agreement were:

• Pre-contract information. A "Standard European Consumer Credit Information" similar to the European Standard Information Sheet for mortgages has been accepted.
• Right of withdrawal. The consumer will have a 14 day period to withdraw from a contract without giving a reason.
• Early repayment. A restriction on the conditions under which lenders may levy early repayment charges has been agreed along with a cap on the rate of charges.
• APRC. Under article 9 creditors are obliged to indicate the APRC. The APRC will be calculated on the basis of the total cost of credit, which will include the full range of fees and taxes paid by the consumer and known to the creditor though not notary fees. This represents a widening of the definition of APRC compared to the earlier official text.

The Council reached a formal common position based on the text above. The CCD then went to the European Parliament for 2nd Reading in October 2007. On 16 January 2008, the Parliament voted to support an agreed and amended text (attached below). 

This effectively completed the legislative process for the CCD, but it formally came into force on 22 May 2008 when it was published in the Official Journal. It will be two years before it must be implemented in member states.

As agreed and amended, the CCD has some significant changes from earlier texts:

• Scope:  the CCD now covers agreements of 200 euros or more and  £75,000 euros or less.
• There are provisions for a "light touch regime for overdrafts".
• The advertising provisions no longer require standard information to be put in a particular order, and the requirement to state the duration of the credit agreement has been qualified.
• Member states have discretion as to how the requirement to determine customer credit worthiness will be carried out.
• The requirement to provide an amortisation table for a fixed-term credit agreement has been modified so that it is required only at the customer's request.
• The early repayment charge provisions have been simplified.
• Intermediaries are able to charge a fee from both lender and customer.
• There are some technical changes to the calculation of APRC.

For mortgage lenders, the result is directly benign since secured lending remains excluded from the scope of the CCD. Indirectly, however, the agenda of the EU White Paper on mortgages has been shaped by the inclusion of provisions on APRC, prescribed pre-contract information, responsible lending and early repayment provisions in the CCD. The exclusion of ALL secured lending from the CCD raises the question of the future regulatory status on 2nd charge lending in the UK. In terms of its continued regulation by the Office of Fair Trading (OFT) rather than the Financial Services Authority (FSA) and its continuing within the scope of the CCA 1974.

The focus of the industry will now shift to implementation of the CCD in the UK. The Department for Business, Enterprise and Regulatory Reform (DBERR) will oversee implementation. This is likely to be via secondary legislation, and the implementation must be within two years of the directive coming into force (ie, 2010), though precise dates have yet to be agreed.

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