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| Financial Law Update | Back to article summary. |
| Further important changes to consumer credit market planned | ||
| Joe Beashel |
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| A constant challenge for regulated firms is to keep up with new regulatory developments. Many, particularly those driven by the EU, can take several years to evolve into legislation and some can come upon us quite quickly, writes Joe Beashel. In the area of consumer credit we have had examples of both in the last few weeks. | ||
The Markets in Financial Instruments and Miscellaneous Provisions Act 2007 (MiFID Act) introduced, at very short notice, quite radical proposals to regulate the provision of credit in Ireland. Following a rapid response from industry and an understanding and open attitude from the Department of Finance these initial proposals were narrowed to more specifically regulate parts of the industry for the provision of credit to consumers which were not previously regulated. 'Retail credit firms' and 'home reversion firms' must, by end April, apply to the Financial Regulator for authorisation. Such firms will then be subject to the full supervision of the Financial Regulator and will become subject to the Financial Regulator’s Consumer Protection Code (CPC).
A 'retail credit firm' is a person whose business consists of providing credit (defined as a cash loan) directly to borrowers but does not include credit intermediaries or regulated financial service providers. A 'home reversion firm' is a firm that enters an agreement with a vendor for the conveyance by the vendor to the home reversion firm of an estate or interest in land for a discounted sum and the vendor retains the right to live in the residence until the occurrence of a specified event detailed in the agreement. A more typical 'slow burn' type process is the agreement reached on 16 January by the European Parliament for a new Consumer Credit Directive (the proposed Directive). The original 1987 Directive (Directive 87/102/EEC) was the subject of detailed proposals from the Commission in 2002 and has struggled to move forward ever since. Indeed, Parliament’s agreement on the proposed Directive has received a less than enthusiastic reception. Ms Goyens, Director General of the European Consumer Organisation is quoted as saying that 'even though the result is along way from our initial demands, there have been some improvements, particularly in terms of the information which should be provided to consumers. However, we regret that all efforts of the last five years have not led to a more ambitious solution to an issue which affects almost every consumer in Europe’. The European Banking Federation is quoted as saying that the directive would introduce a ‘disproportionate overload of information and bureaucracy’ while ‘not delivering the additional consumer choice'. Not exactly a ringing endorsement from either side, consumer or industry. Summary of the proposed Directive The proposed Directive will: Apply to loans from €200 to €75,000 Standardise the information to be given to consumers pre-contract Introduce a 14 day cooling off period Establish a common definition of Annual Percentage Rate (APR) setting which charges must be included in the APR calculation Require the lender to assess the solvency of the borrower Permit borrowers to settle debts early, subject to compensation to lenders. Limits have been set for such compensation. The proposed Directive will be a so called 'maximum harmonisation' Directive, that is, Member States will not be allowed to introduce any extra measures over and above those set out in the directive itself. It will require changes to the Consumer Credit Act 1995 (CCA) which is the key piece of Irish legislation governing the provision of credit to consumers. A discretion has been included which would permit Ireland to exclude Credit Unions from having to comply with all of its requirements. What Type of Credit Agreements are Affected? The proposed Directive applies to credit agreements and surety agreements. A 'credit agreement' means 'an agreement whereby a lender grants or promises to grant to a consumer, credit in the form of a deferred payment, loan or other similar financial accommodation except for agreements for the provision on a continuing basis of services or for the supply of goods of the same kind, where the consumer pays for such services or goods for the duration of their provision by means of instalments.' The latter part of the definition would apply, for example, to the supply of gas or electricity, where the continuous supply of the services is in step with a corresponding payment but where no ‘credit’ is granted. There is no change to the definition of a 'consumer' in the proposed Directive, that is '…a natural person…acting…outside his trade, business or profession.' The proposed Directive applies to loans as little as €200 up to €75,000. The lower rate was set due to the up take of small ‘SMS’ loans, given within minutes by sending a text. Currently there is no upper limit in respect of what constitutes a loan to a consumer under the CCA, therefore the proposed Directive may benefit certain lenders by providing that loans of over the €75,000 threshold are excluded from these new consumer credit rules. Credit agreements, not covered by the proposed Directive include products such as deferred payment cards which are free of charge, overdrafts where the credit is to be repaid within one month and mortgages. Streamlined Credit Loan Information and Assessing Consumer Creditworthiness The proposed Directive lays down the standard information that must be given to the consumer. It concerns information mentioned in advertising (when containing financial information on a loan), pre-contractual and contractual information. The information given to consumers in relation to interest rates, amount, number of payments and charges for defaulting for example, must be set out in a new comparable EU wide European Credit Information Form. The information provided in the form is not particularly new but the form will ensure there is a standard presentation of the information across Member States. The information provided by the lender must enable the consumer to take 'a responsible decision' therefore avoiding taking on too much debt. The proposed Directive specifically requires the lender to assess the solvency of the consumer before concluding a contract on the basis of information obtained from the consumer and where necessary, on the basis of consultation of the relevant credit database. We presume that these obligations are similar to those general obligations imposed by the CPC although because they will be part of a directive they will eventually have a statutory basis and on that basis could be more onerous that the CPC itself. Right of Withdrawal The proposed Directive will allow consumers to cancel any credit contract within 14 days, from the day a copy of the credit agreement is concluded without having to give any reason. The consumer is required to pay any interest due for the period during which credit was drawn, calculated on the basis of the agreed APR. The CCA currently allows a consumer to cancel a credit contract within 10 days and the consumer has the option to waive this right of withdrawal. There is no equivalent provision for waiver of this right in the proposed Directive. The extended right to withdraw and the inability to waive this requirement will be a significant change for the industry in Ireland. Compensation for the Lender Under the proposed Directive a lender is entitled to gain compensation when consumers settle their debts early. A limit of 1 per cent of the amount of debt that has been repaid early has been set which is reduced to 0.5 per cent if the consumer repays within a year before the sum is due. Single Method of Calculating APR Although the proposed Directive will not standardise interest rates, it does detail how the APR is to be calculated. A single method of calculating APR is not a new concept but the proposed Directive standardises the definitions used in the calculations and requires that the same costs and charges are included across all Member States. This EU wide method for calculating APR is to ensure that consumers can compare services easily and therefore see the real cost of credit. Summary Although not due for implementation until 2010 some important changes are proposed. These will need to be implemented in national legislation and the Consumer Credit Act will need to be reviewed and amended. There are many areas of ambiguity that could usefully be resolved at national implementation stage therefore it is important for lenders to stay ahead by considering these proposals now and lobbying either directly or via industry bodies to make sure that the changes, when eventually introduced, are as clear and as well understood as possible. |
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Joe Beashel is a partner in the Banking and Financial Services Department at Matheson Ormsby Prentice and is Head of the Regulatory Risk Management and Compliance Group. For further information please contact Joe at email: joe.beashel@mop.ie or telephone +353 1 232 2000 Further information on the firm is available at www.mop.ie |
