Consumer Credit (Regulatory Principles)
1. Background and treaty requirements
Consumer credit transactions raise crucial questions of consumer protection (consumers and consumer protection law) because the consumer has proven to be in need of special protection when borrowing money. He risks overestimating his future ability to meet his financial obligations and disregarding hazards. Many times, he is not aware of the extent of his payment obligations. The law of consumer credit, laid down relatively quickly in some Member States and later on a European scale, aims to take these dangers into account.
The need for consumer protection became apparent very early. In the Middle Ages, market regulations and guilds protected those who made use of goods or services in the marketplace. Instalment sales business, though, only moved into focus in the context of the industrial society of the 19th century and the related increase in demand for goods. However, at that time these transactions were still treated without additional legal rules. The point of departure for the modern consumer credit law was marked by the German Repayment Act of 1894. In the middle of the 20th century, the subject also attracted more attention in the debate on legal policy because more complex forms of granting credit were finding their way into everyday business practice.
Consumer protection was explicitly included in Arts 114, 115 TFEU/95, 94 EC in the framework of the Single European Act in 1987 and then later transformed into specific consumer protection authority on the basis of the Treaties of Maastricht and Amsterdam. Previously, consumer protection (consumers and consumer protection law) had been restricted to only a few directives, one of them being the Directive 2008/ 48/EC on credit agreements for consumers (Consumer Credit Directive). This directive forms the essential foundation for the European law of consumer credit and is based on the legislative authority for the approximation of law under Art 115 TFEU/94 EC already mentioned above. In addition to consumer protection, these rules mainly aim at the implementation of the European internal market. Harmonization of legal rules is to avoid distortions of competition between creditors in the internal market. Furthermore, consumers are not to be deterred from borrowing in a different Member State.
2. Legal development
According to the Consumer Credit Directive of 1986 (Dir 87/102) the Member States were required to implement those regulations into national law by 1990. To this end, the directive begins by defining the essential key term of consumer in Art 1(2)(a) and by further specifying terminology with respect to regulated credit contracts and the forms of a grant of credit as well as the possibility of direct liability in linked credit agreements that are characterized by an extension of credit in the form of a supplier-connected loan. At the same time, these issues define the scope of this directive. In this context, the important principle of minimum harmonization still has to be pointed out (Art 15). The 1986 directive stipulates that the Member States are free to establish regulations for a more extensive consumer protection.
Some of the Member States’ regulations are indeed designed for such a protection reaching beyond the scope of the Consumer Credit Directive. The English Consumer Credit Act of 2006, which replaced the Act of 1974 of the same name, stands out because of an even greater scope of application. It partly includes, on the debtor side, entrepreneurs (s 8(1)), and in technical respect it takes into account secured transactions and credit brokerage (ss 105–126). Similarly, disclosure of information regulations, eg with respect to pre-contractual obligations (s 55 to be read with the Consumer Credit (Disclosure of Information) Regulations 2004, which have been replaced by the Consumer Credit (Disclosure of Information) Regulations 2010 following the implementation of the Second Consumer Credit Directive) and with respect to credit advertisement (Consumer Credit (Advertisements) Regulations 2004, which have similarly been replaced by the Consumer Credit (Advertisements) Regulations 2010), go beyond the regulations of the Consumer Credit Directive in order to protect consumers. In France, the norms of consumer credit law (Loi Scrivener, named after the Secretary of State Christiane Scrivener, which has been replaced by the Loi Lagarde following the implementation of the Second Consumer Credit Directive) are included in the Code de la consommation and they also exceed the scope of protection of the Consumer Credit Directive of 1986. To ensure that the consumer be informed, these norms provide for various formal requirements whose violation may have serious consequences, such as the loss of an interest claim (Art L 311-33 Code de la consommation) or even fines (Art L 311-34 Code de la consommation). Comparably, like in England and in France, in Austria only minor adjustments were necessary because the Austrian Consumer Protection Act of 8 March 1979, which has been largely amended in 2010 following the implementation of the Second Consumer Credit Directive, already reached beyond the coverage of the directive. By generalizing the field of instalment payments (§§ 16 ff) and introducing a class action, it followed a more universal approach of consumer protection. Finally, the German law of consumer credit has been transformed into the German Civil Code in the course of the reform of the law of obligations in 2002 (§§ 491 ff), further amendments taking effect as of 11 June 2010, following the implementation of the Second Consumer Credit Directive. Among its rules, the relationship between the debtor’s right of withdrawal and the law of withdrawal in doorstep selling was subject to the fundamental Heininger-decision of the European Court of Justice (ECJ Case C-481/99 – Heininger v Bayerische Hypo- und Vereinsbank AG  ECR I-09945), and finally led to legal changes reconciling the different requirements of rights of withdrawal (Art 25 s 2 Gesetz zur Änderung des Rechts der Vertretung durch Rechtsanwälte vor den Oberlandesgerichten). In addition to the right of withdrawal, the application of consumer credit law to business start-ups and to long-term supply agreements also resulted in a—comparatively—altogether higher protection level under German law.
In contrast, in the majority of the other Member States the respective consumer credit laws were only enacted as a reaction to the directive. The Belgium Consumer Credit Act of 12 June 1991 resembles the French model especially with regard to formal requirements. It also goes well beyond the Consumer Credit Directive by regulating hire-purchases, instalment sales and the issues arising in linked credit agreements (Arts 1 ff or Art 19 on linked credit agreements respectively) as well as duties to provide information (Arts 5 ff). The Dutch law on consumer credit of 7 March 1990, which has been replaced by the new chapter 7.2A of the Dutch Civil Code as a result of the implementation of the Second Consumer Credit Directive, is similar to the Belgium Act. In Spain, however, the law on consumer credit of 23 March 1995 was largely restricted to an implementation of the Consumer Credit Directive, even though in Arts 14 ff detailed rules on the problems of linked credit agreements can be found.
In view of these different levels of protection, the principle of minimum harmonization proves to be the key question of a harmonization of the European law of consumer credit. In the eyes of the Commission this principle was an obstacle to the completion of the European internal market. That is why the Commission already followed the approach of a maximum harmonization with the first draft of a new Consumer Credit Directive in 2002. Meanwhile, in accompanying regulations, the Commission tried to protect the less-informed consumer from overindebtedness by way of ‘responsible credit granting’. Due to the reservations of the European Parliament towards this practice, the Commission reduced the number and complexity of regulations in its proposal of 2005 and tried instead to compensate for the principle of maximum harmonization by offering several options as well as by partly introducing the principle of mutual recognition. The latter, however, would again have frustrated the implementation of a uniform level of protection and was therefore given up in favour of the principle of maximum harmonization. It is obvious that maximum harmonization can also be implemented only gradually and that there will still remain regulatory authority with the Member States with each harmonizing regulation. That is why the question of maximum harmonization and its extent emerges as the key factor for the future legal development of the new Consumer Credit Directive.
3. Regulatory principles in the European harmonized law
In light of the principle of maximum harmonization of the new Consumer Credit Directive (Dir 2008/48) (EU consumer credit law), its coverage and thus its scope of harmonization is becoming more and more important. That is because according to this principle the Member States are only restricted in their legislation as far as the directive includes harmonized regulations for the respective question. Therefore, the remaining questions for the Member States to deal with are questions of usury, the consequences of withdrawal (right of withdrawal) from the credit contract in linked credit agreements for the delivery of goods or the supply of services (service contracts). Likewise, the consequences of a consumer’s default of payment and the rules of enforcement as well as insolvency have been left open and are, therefore, for the Member States to regulate.
A further important basis for the content of the directive is its personal and substantive scope of application. From a personal respect it requires, as much as the relatively narrow former Consumer Credit Directive, a credit contract between a lender and a consumer. Substantively, the directive covers credit contracts basically including personal loans or other forms of financing aid as well as grants of credit by way of deferral of debt. Notwithstanding, the directive allows for several universal exceptions, eg trivial personal loans taken out for a low fee. There are also partial exceptions, eg special pre-contractual information regulations apply for credit contracts by way of an overdraft, whereas the rules of withdrawal do not. Finally there are, for instance, optional exceptions for contracts of debt restructuring that the Member States may in part regulate differently.
The directive conceptually follows an information-based approach in its instruments for protection. By drawing on transparency rules, it considers it vitally important that the consumer searches for information and that information asymmetries be reduced. To this end, the directive includes specifications for credit product advertisements; in order to improve comparability they have to indicate, eg, the interest rate or other cost-related figures as standard descriptions of the credit terms (Art 4(2)). In contrast, the Unfair Commercial Practices Directive (Dir 2005/29) applies to advertisements not specifying interest rates or cost-related figures (Art 4(4)). These requirements for standardization continue to be reflected by pre-contractual duties of disclosure imposed on the lender, who has to provide the consumer with the essential credit information on the form ‘Standard information for European consumer credits’ that is used throughout Europe. In this context the lender’s duty to evaluate the creditworthiness of the consumer has been newly introduced (Art 8(1)). Herein one can recognize the Commission’s original but at the time politically unattainable attempt to codify a responsible grant of credit whereby the lender is also assigned a certain responsibility for the making of a loan. In the aftermath of the financial crisis of 2007/08, the notion of responsible lending and borrowing has regained influence, as becomes clear in the Proposal of the European Commission of 31 March for a Directive on credit agreements relating to residential property.
Likewise, the increased requirements for the terms of a contract which have to be presented in writing or in electronic form (Art 10(2) Consumer Credit Directive) reflect the guidelines of the information model. Similar to the pre-contractual duties of disclosure, the lender has to submit an amortization schedule. He has to do so, however, only on demand of the consumer. Furthermore, the disclosure that must be provided at the point of the contract’s conclusion extend to information on the right of withdrawal, the right to an early repayment, the right of cancellation as well as the special rules on linked credit agreements. The directive grants the consumer a right of withdrawal for a specified period of 14 days immediately after the conclusion of the contract (Art 14 Consumer Credit Directive). The computation of time (computation of time limits) for this fixed period starts at the earliest when the consumer receives the terms of contract and essential information. It is therefore also required—as noted by the European Court of Justice in the Heininger decision—that the consumer has been correctly instructed on his right of withdrawal. In consumer credit law such a right of withdrawal is a novelty, even though it was established earlier in other consumer protection directives such as the directive to protect the consumer in respect of contracts negotiated away from business premises (Doorstep Selling Directive, Dir 85/577, doorstep selling), the Timeshare Directive (Dir 94/47) (timeshare contracts) or the Distance Selling Directive (Dir 97/7) (distance contracts).
The execution of the consumer credit contract is affected by the consumer’s right to early payment and the immediately resulting question of the adequate early repayment indemnity. The directive prescribes adequacy and an objective justification for the latter (Art 16(2) Consumer Credit Directive), defining upper limits that are assessed partly in relation to the early repaid amount, partly in relation to the remaining term. Moreover, the directive deals with linked credit agreements (Art 15 Consumer Credit Directive), without, however, implementing the concept of joint and several liability as originally envisaged. Instead, it confines itself to specify the consequences of withdrawal (right of withdrawal) from the connected contract with regard to the loan agreement such that the consumer is no longer bound to a linked credit agreement. On the other hand, the directive refers to the law of the Member States if the consumer has claimed his right against the supplier but cannot enforce it. The consequences of a withdrawal from the loan agreement on the connected contract are still completely unregulated and therefore subject to the authority of the Member States.
4. Conflict of laws
In cross-border consumer credit law the conflict of law rules of private international law (PIL) apply. The main question is how far the principle of choice of law by the parties in contract law has to be restricted in favour of the interest in effective consumer protection. The Convention on the law applicable to contractual obligations of 1980 (Convention of 1980), which all Member States have entered into, stipulates such a restriction only for certain types of contracts, especially contracts for the supply of goods and services as well as for contracts providing finance for such underlying contracts. It does not, however, include pure consumer credit. The new regulation of the Council on the law applicable on contractual obligations of 17 December 2008 (Rome I, Reg 593/2008), which transformed the Convention of 1980 into an EC regulation and which entered into force on 17 December 2009, provides for consumer contracts (PIL) that the law of the consumer’s residence applies in cases where there is no explicit choice of law (Art 6 Rome I Reg). If the parties do make a choice of law, according to Art 6(1) Rome I Reg this may not deprive the consumer of the protections provided by his law of residence. This provision covers all contracts a consumer has entered into such that consumer credit contracts are also included.
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