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| Financial Law Update | Back to article summary. |
| Lack of clarity in implementation of consumer credit directive | ||
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| The Consumer Credit Directive (Directive 2008/48/EC) (CCD) is due for implementation on 11th June 2010. It affects credit agreements currently covered by both the Consumer Credit Act 1995 (CCA) and the Consumer Protection Code (CPC). There is a lack of clarity over how precisely the CCD will be implemented and how it will interact with the existing requirements of the CCA and the CPC which will make it difficult from lending institutions to plan for its implementation, write Joe Beashel | ||
Summary of the Directive
- Certain credit agreements are excluded, such as hire purchase and leasing as well as loans secured by way of mortgage. - It standardises the information to be given to consumers pre-contract through the use of a Standard European Consumer Credit Information form (“SECCI”) or European Consumer Credit Information form (“ECCI”) depending on the type of credit being provided. - It will introduce a 14 day cooling off period which cannot be waived by the consumer. - It establishes a common definition of Annual Percentage Rate. - It requires the lender to assess the creditworthiness of the borrower. - Borrowers must be permitted to settle debts early, subject to compensation being payable to the lender with the amount of such compensation limited in the case of fixed rate lending. It is a so called “maximum harmonisation” directive which means that Member States are not permitted to add to the obligations contained in the text, the objective being to ensure a standard approach across all EU Member States. Nevertheless the CCD does contain some discretions, that is, there are areas where Member States are given an option. Although the Department of Finance did, as far back as March 2008, undertake a formal consultation in respect of these discretions, to date, there is no official indication as to how the options will be tackled. With barely six months to go the lack of direction is certainly not helpful for those institutions putting together implementation plans. What type of credit agreements are affected? The Directive applies to credit agreements made with consumers. A credit agreement is “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 insurance cover, 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' which is defined as “…a natural person…acting…outside his trade, business or profession.”. The Directive applies to loans as little as €200 up to €75,000. The lower rate was set to exclude small “SMS” loans, given within minutes by sending a text which have become increasingly common in some Member States. In theory the new CCD rules will not apply to consumer loans over €75,000 but in practice it may be impractical for lending institutions to have two sets of consumer lending documentation depending on whether the loan is above or below this threshold. Pre-contract disclosure and sales process The Directive requires that a summary of the loan offer be given to the consumer in a prescribed form. This is the SECCI or ECCI referred to above. The ECCI will be used for overdrafts and is shorter than the SECCI which will be used for general term loans. It is not permissible to amend the format of these documents as their purpose is to create a system where consumer receives the same format of summary from every institution (across the EU) thereby allowing the consumer to make a more informed choice. There is very little information required in these documents that is not already contained in the CCA disclosures but the format will have to meet the new requirements. Lenders will need to examine their sales process to ensure they meet their obligation to ensure that adequate explanations are given to consumers so that they can assess whether the credit agreement is adapted to their needs and financial situation by explaining any pre-contractual information, the essential characteristics of the product and the specific effects they may have on the consumer and the consequences of default. One new requirement is the obligation on lenders to give borrowers, on request, an amortisation table setting out the payments owing, the periods and conditions relating to the payment of such amounts and a breakdown of each repayment. In addition, lenders are required to assess the creditworthiness 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. Lenders will need to assess the extent to which these obligations add to existing obligations to establish “suitability” under the CPC. Right of withdrawal The Directive allow consumers to cancel any credit agreement within 14 days, from the day a copy of the credit agreement is concluded, or the agreement is received whichever is later, without having to give any reason. A notice to exercise the waiver is valid if sent by the consumer on day 14, even if it is not received until later by the lender. The right of withdrawal cannot be waived. 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. Unless the CCA is appropriately amended credit agreements will potentially advise consumers of a CCA right to withdraw within 10 days which can be waived and a 14 day right to withdraw under the CCD which cannot be waived. If this ambiguity is not clarified it will certainly lead to confusion among consumers. Credit agreements and the CCA The CCD requires credit agreements to be made available in writing or in a “durable medium”. The fact that agreements do not have to be on paper may allow consumer lending to be conducted completely online for example which is something that is not done at present due to the language of the CCA. Of course if the CCA continues to apply then the potential speed and convenience of concluding agreements online will be removed. Summary The CCD will update and standardise the statutory requirements for consumer loans up to €75,000 in value. It will require lenders to amend their documentation but more importantly to examine their processes including their interactions with customers. There are some uncertainties around how the discretions given to Member States will be implemented but the greatest uncertainty is around whether or to what extent both the CCA and the CPC will be dis-applied in the case of CCD loans as the principle of a maximum harmonisation directive is that local additional requirements are not permissible. Clarity was provided when another maximum harmonisation directive, the Markets in Financial Instruments Directive or MiFID was implemented in 2007, that directive, overlapped with both the Investment Intermediaries Act 1995 (“IIA”) and the CPC and this was dealt including a “carve out” from the CPC and the IIA where MiFID applied. We would suggest that using this precedent, both the CPC and the CCA should be dis-applied in respect of credit agreements covered by the CCD. |
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Joe Beashel is a partner in the Asset Management and Investment Funds Group and Head of the Regulatory Risk Management and Compliance Group at Matheson Ormsby Prentice and can be contacted on +353 1 232 2000 or by email: joe.beashel@mop.ie Further information on Matheson Ormsby Prentice is available at www.mop.ie |
