EU Consumer Credit Law
by Norbert Reich and Peter Rott
1. The old Directive 87/102 as amended
As early as the preliminary programme of the European Economic Community for consumer protection and information policy of April 1975, an EU directive on consumer credit was envisaged. The first proposal, published by the European Commission in 1979 ( OJ C80/4), however, met considerable resistance. Only on 22 December 1986, after controversial negotiations in the Council (Council and the European Council) and at a much lower level of consumer protection, was the amended proposal of 1984 (COM(1984) 342 final, 13 June 1984) adopted as Dir 87/102 of 22 December 1986 for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit.
As with all consumer law directives, Dir 87/ 102 pursued two aims: the establishment of the Common Market, or later European internal market for consumer credit, and the protection of consumer-borrowers from information deficits in the non-transparent credit market and from (certain) disadvantageous credit conditions. The final version was not all-encompassing and unsystematic, and it had been further relaxed in the Council negotiations. Social aspects of consumer credit law, particularly in the contexts of overindebtedness and usury, were not tackled by the directive. Due to the minimum harmonization approach of the directive, however, Member States were not prevented from introducing or maintaining more stringent consumer protection laws, something which most Member States have done.
The most important result of the directive, politically as well as doctrinally, was the introduction of uniform rules for all forms of consumer credit, notwithstanding their doctrinal construction as instalment sales, instalment credits, bills of exchange credit, credit card credits. This does not mean, however, that no special rules were established for specific types of credit. For example, credits intended primarily for the purpose of acquiring or retaining property rights in land or in an existing or projected building were excluded from the scope of application. Another important feature was the mandatory written form of Art 4 that was meant to protect the consumer from hasty decisions and to give him or her a solid basis for essential information.
The amendments made by Dir 90/88 of 22 February 1990 and Dir 98/7 of 16 February 1998 amending Directive 87/102 for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit aimed to provide a harmonized method for calculating the annual percentage rate (APR) and the factors to be considered in making this calculation.
The European Court of Justice (ECJ) rarely had the opportunity to interpret the directive. The most important decisions were concerned with the scope and effect of Art 11(2) on linked credit agreements (ECJ Case C-192/94 – El Corte Inglés  ECR I-1281; Case C-492/05 – Rampion  ECR I-8017; Case C-509/07 – Scarpelli  ECR I-3311) and with the non-application of the directive to suretyship contracts (ECJ Case C-208/98 – Berliner Kindl Brauerei  ECR I-1741). In its Heininger judgment, the ECJ confirmed the cumulative application of doorstep selling law and consumer credit law to credit contracts that are concluded at the doorstep (ECJ Case C-481/99 – Heininger  ECR I-9945).
On 11 May 1995, the European Commission published a report on the application of the directive (COM(1995) 117 final). The report revealed that the minimum harmonization approach had enabled widely varying consumer credit laws in the Member States. Moreover, no internal market for consumer credit had developed.
2. The character and scope of application of Directive 2008/48
The legal fragmentation and the continued segmentation of the consumer credit markets triggered a policy change in the field of consumer credit law. After lengthy negotiations that were initiated with a Commission proposal of 2002 (COM(2002) 443 final), the new Consumer Credit Directive (Dir 2008/48 of 23 April 2008 on credit agreements for consumers) was adopted and Dir 87/102 repealed. The implementation period for the new directive ended on 11 June 2010. The Commission aimed at total harmonization of consumer credit law but met the resistance of industry, consumer advocates, Member States and the European Parliament. As a result, the directive was thinned out and the concept of ‘targeted harmonization’ pursued. According to Art 22(1), the directive defines the minimum as well as the maximum standard of protection ‘(i)nsofar as this directive contains harmonised provisions’. Otherwise, where the directive does not contain harmonized provisions, the Member States retain their discretion. Also, compromises which needed to be reached between the EU institutions and between the EU and the Member States find their expression in the granting of regulatory choices, the use of which must be notified to the Commission.
Therefore, the scope of application of the directive is of particular relevance. As to its personal scope of application, the directive is concerned only with contracts between creditors and consumers. Member States may, however, extend its rules to persons who set up a business or to small traders. According to recital 10, the directive should be without prejudice to the application by Member States, in accordance with Union law, of the provisions of this directive to areas not covered by its scope.
Article 2 determines the material scope of application. The directive applies to ‘credit agreements’ as defined by Art 3(c) of between €200 and €75,000. Article 2(2) specifies the situations where the directive does not apply at all. This concerns, for example, mortgage credits and credit agreements the purpose of which is to acquire or retain property rights in land or in existing or projected buildings. In contrast, credit agreements for the renovation or improvement of an existing building are now within the scope of application. The regulation of exempted types of credit agreements remains within the competence of the Member States (see recital 10), and Member States are free to simply extend the scope of application of their implementing legislation. Article 2(3) and (4) contains partial exemptions, whilst optional exemptions are specified in Art 2(5) and (6).
3. The ‘information paradigm’ of Directive 2008/48
As with other recent EU consumer legislation, Dir 2008/48 relies on the reasonable, informed and circumspect consumer and therefore regulates credit advertisement and pre-contractual information and advice in great detail. The provision of information is facilitated by the Standard European Consumer Credit Information form set out in Annex II to the directive which is to be used for supplying information, the form being provided on paper or on another durable medium (Arts 4(1) and 5(1)). The central parameter is the ‘annual percentage rate’ that is defined in Art 19 and illustrated with a number of calculation examples in Annex I. Whether the costs for credit insurance needed to be disclosed was subject to dispute. Under Arts 4(3) and 5(1)(k), these only have to be included in the calculation of the APR if insurance is compulsory. The creditor also has to provide information about the interest rate applicable in the case of late payments and the arrangements for its adjustment, and he has to warn about the consequences of missing payments. Article 5(6) provides for an additional duty of the creditor and, where applicable, credit intermediaries to give adequate explanations regarding the credit needs and the financial situation of the consumer. In the individual case, this may amount to a concrete duty of advice which can be fleshed out by the Member States, whilst the breach of this duty must trigger effective, dissuasive and proportionate penalties, see Art 23.
The first proposal’s much criticized principle of responsible lending appears in a weakened form in Art 8 as the ‘obligation to assess the creditworthiness of the consumer’. Complementing this obligation, the Member States have to ensure access to databases without discrimination in the event of cross-border credit. Again, the breach of this duty must be sanctioned in accordance with Art 23.
4. Content and form of the credit agreement
The necessary content of a credit agreement is determined by Art 10(2). The amount of information to be provided has increased drastically as compared to Dir 87/102. The items of information are in parts congruent with the pre-contractual information obligations. Some items of information that are only relevant for the conclusion of the contract are left out, whilst other information has to be provided in detail. For example, Art 10(2)(i) requires the creditor to present a statement of account in the form of an amortization table if the consumer so requests, an obligation that was long sought by consumer associations. Information on the right of withdrawal, the right to early repayment and the right to terminate the credit agreement must be specified (Art 10(2)(p), (r) and (s)). Moreover, the creditor must provide information on the consumer’s rights in case of linked agreements under Art 15. Another issue is access to out-of-court complaint and redress mechanisms for the consumer, the introduction of which Art 24 explicitly requires.
The directive is meant to foster cross-border consumer credit, and the Commission has identified the internet as the most relevant medium for cross-border trade. Therefore, the repeal of the written form required by Dir 87/102 was envisaged. Article 10(1)1 now allows credit agreements to be drawn up on paper or on another ‘durable medium’ which includes, as is typical in EU consumer law, e-mails, see Art 3(m). An unclear provision is Art 10(1)3, according to which Art 10 shall be without prejudice to any national rules regarding the validity of the conclusion of credit agreements which are in conformity with Union law. Recital 30 explains that the directive does not regulate contract law issues related to the validity of credit agreements. Contextually, one may conclude that Art 10(1)3 is concerned with the way in which the credit agreement is concluded (offer and acceptance) but that it does not mean to allow Member States to require a higher form, in particular the written form. Here, the directive prohibits more protective national legislation. The abolition of the written form requirement, however, does not extend to communications after the conclusion of the contract.
5. The right to terminate open-end credit agreements
Article 13(1) grants the consumer the right to terminate an open-end credit agreement at any time and free of charge unless the parties have agreed on a period of notice, which may not exceed one month. In contrast, the creditor only has the right of terminating an open-ended credit agreement if the contract so provides. In that case, the period of notice may not be shorter than two months. Where the consumer has not yet drawn credit under an open-ended credit agreement, Art 13(2) allows the creditor to terminate the consumer’s right to draw down, if so agreed in the contract and provided there are objectively justified reasons. Justified reasons may include, for example, suspicion of an unauthorized or fraudulent use of the credit (see recital 33) or a significantly increased risk of the consumer being unable to fulfil his obligation to repay the credit.
Some Member States, including the UK, have introduced a certain minimum period that needs to elapse between the time when the creditor asks for reimbursement and the day on which the credit has to be reimbursed. Such consumer protection legislation may be maintained—Member States remain free to maintain national legislation where no such harmonized provisions exist (recital 9). Also remaining untouched is national law in the area of contract law regulating the right of the contracting parties to terminate the credit agreement on the basis of a breach of contract and also the right to avoidance due to mistake, misrepresentation, fraud or duress.
6. The right of withdrawal
With Art 14, the EU introduces the right of withdrawal that many Member States have provided for a considerable time. The rules laid down largely follow the model of Dir 2002/65 of 23 September 2002 concerning the distance marketing of consumer financial services. The period of withdrawal is 14 calendar days and the dispatch rule applies. Specifically, the period begins to run on the day on which the contract is concluded, provided that the consumer has received the contractual terms and conditions and information in accordance with Art 10; otherwise the period begins on that later day.
The consequences of the withdrawal are set out in Art 14(3) and (4). The consumer has to pay to the creditor the capital and the interest accrued thereon from the date the credit was drawn until the date the capital is repaid, without any undue delay and no later than 30 calendar days after notifying the creditor of the withdrawal. The interest shall be calculated on the basis of the agreed borrowing rate. The only other compensation to which the creditor may be entitled is compensation for any non-returnable charges paid by the creditor to any public administrative body. The consumer who exercises his right of withdrawal shall also not be bound to an ancillary service relating to the credit agreement, in particular credit insurance, that is provided by the creditor or by a third party.
The right of withdrawal provided by the Consumer Credit Directive prevails over those of Dir 2002/65 and of the Doorstep Selling Directive (Dir 85/577 of 20 December 1985 to protect the consumer in respect of contracts negotiated away from business premises).
7. Early repayment
Another controversial issue was the consumer’s right of early repayment, or more precisely: the creditor’s claim for compensation for not obtaining the expected interest for the remaining duration of the credit agreement. Political agreement could only be achieved through the inclusion of numerous regulatory choices. Article 16(2) to (4) deals with the calculation of the compensation. The creditor is to be prevented from claiming lump sum compensation where his ability to lend the returned money at a higher interest rate results in his not suffering any damage. Article 16(2) fixes ceilings that depend upon the time between the early repayment and the agreed termination of the credit agreement.
8. Linked credit agreements
Linked credit agreements were also touched upon in Dir 87/102, but Art 11 of that directive was of little use for consumers. Problematic issues were the very narrow description of the linked credit agreement and the subsidiarity of the creditor’s liability vis-à-vis the liability of the trader of the linked contract.
Directive 2008/48 provides, in Art 3(n), a new and much broader definition of a linked credit agreement. It is defined as an agreement where (i) the credit in question serves exclusively to finance an agreement for the supply of specific goods or the provision of a specific service, and (ii) those two agreements form, from an objective point of view, a commercial unit; a commercial unit shall be deemed to exist where the supplier or service provider himself finances the credit for the consumer or, if it is financed by a third party, where the creditor uses the services of the supplier or service provider in connection with the conclusion or preparation of the credit agreement, or where the specific goods or the provision of a specific service are explicitly specified in the credit agreement. Beyond this definition, Member States are free, according to recital 10 to include agreements where the credit in question only partially serves to finance an agreement for the supply of specific goods or the provision of a specific service.
Article 15 deals with two areas: the effects of the withdrawal of a contract on the sale of goods or the provision of services on a linked credit agreement; and with the consumer’s claims against the creditor that arise from the linked contract on the sale of goods or the provision of services.
According to Art 15(1), the consumer who has exercised a right of withdrawal, based on Union law, concerning a contract for the supply of goods or services, shall no longer be bound by a linked credit agreement. The exercise of a right of withdrawal that is not based on EU law, but is of a purely national nature, remains within the competence of the Member States. The effect of the withdrawal from the credit agreement on the linked contract also remains within the competence of the Member States, as confirmed in recital 37.
Article 15(2) confers the right on the consumer to pursue remedies against the creditor if he has pursued his remedies against the supplier but has failed to obtain the satisfaction to which he is entitled according to the law or the contract for the supply of goods or services. According to recital 38, the competence to specify the subsidiarity requirements remains with the Member States. The Directive does not specify the remedies that the consumer can pursue. Article 15(3) explicitly allows Member States to maintain or introduce the UK system of joint and several liability of the creditor and the supplier, but Art 15(2)2 also allows lesser forms such as the mere right to reject further payment to the creditor, or the right to claim the return by the creditor of payments made to the supplier.
9. Overdraft facilities and overrunning
Overdraft facilities do not come under Art 5 on pre-contractual information and the duty of advice. Instead, the reduced information programme of Art 6 applies. Information on, for example, the repayment of credit is replaced by information on the conditions and procedure for terminating the credit agreement, an indication that the consumer may be requested to repay the amount of credit in full at any time and some other items. Member States may decide, according to Art 6(2), that the APR need not be provided.
Special rules also apply to the content of the contract where Art 10(5) specifies the reduced number of details to be provided. In addition to this, Art 12 reflects the fact that the amount of credit changes with every draw of credit by the consumer. Therefore, the consumer shall be kept regularly informed by means of a statement of account, on paper or on another durable medium. Article 12(2) protects the consumer from surprising changes of interest rates: the consumer shall be informed of increases in the borrowing rate, or in any charges payable, before the change in question enters into force. The only exception is where the new interest rate is determined by a reference rate that has increased, the new reference rate is made publicly available by appropriate means and the information concerning the new reference rate is also kept available at the premises of the creditor.
If an agreement to open an account includes the possibility to overrun, Art 18(1) requires the creditor to provide, on a regular basis, information on, inter alia, the borrowing rate and the charges applicable. In the event of a significant overrun exceeding a period of one month, additional information obligations come into play, under Art 18(2). These relate to the overrunning itself; the amount involved; the borrowing rate; and any penalties, charges or interest on arrears which are applicable. This reflects the fact that interest rates in the event of overrunning are usually much higher than interest rates in a ‘normal’ credit contract. National legislation that requires the creditor to offer a normal credit product when the duration of the overrunning is significant is not affected by the directive (Art 18(3)).
10. Credit intermediaries
The pre-contractual information obligations under Arts 5(1) and 6(1) and the duty of advice under Art 5(6) are not only imposed on creditors but also on credit intermediaries. Only the duty to assess the consumer’s creditworthiness rests solely with creditors. According to Art 7, the suppliers of goods or services that are acting as credit intermediaries in an ancillary capacity are exempted, ie those traders who only hand over the credit application forms of the creditor. Obviously, in such a case the creditor himself remains responsible for pre-contractual information and advice.
Specific rules on credit intermediaries are laid down in Art 21 that aim at transparency. Under Art 21(a), the credit intermediary has to indicate in advertising and documentation intended for consumers the extent of his powers and, in particular, whether he works exclusively with one or more creditors or as an independent broker. Fees are only payable to the credit intermediary if they were disclosed to the consumer and agreed between the consumer and the credit intermediary on paper or another durable medium before the conclusion of the credit agreement. The European Parliament rejected a previous version of Art 21, under which the fee would only have become payable if the credit intermediary did not receive a fee from the creditor and if the credit agreement was actually concluded. Member States are, however, free to go beyond the minimum requirements of the directive, see recital 17.
The new Consumer Credit Directive has increased the level of consumer protection significantly, as compared to Dir 87/102. Its provisions are mandatory and cannot be circumvented as a result of the way in which agreements are formulated (Art 22(2)–(4)). They are also internationally mandatory. Where the Member States have retained leeway for national legislation, Art 6 of the Rome I Reg 593/2008 applies, eg with regard to usury.
Article 23 obliges the Member States to lay down rules on effective, proportionate and dissuasive penalties applicable to infringements of the national provisions adopted pursuant to this directive and to take all measures necessary to ensure that they are implemented. The directive does not provide for legal standing of consumer associations, but this is one option for Member States.
Even in comparison with national legal orders that have provided for a much higher level of protection than Dir 87/102, the new Consumer Credit Directive brings about improvements in consumer protection. This applies, in particular, to the pre-contractual stage where the transparency of credit conditions and therefore their comparability is increased, and a certain degree of protection is provided against unwise borrowing decisions and against overindebtedness. Some protective instruments, however, including the written form, are sacrificed in favour of facilitating cross-border credit. Whether or not this can be compensated through the right of withdrawal remains to be seen. Until now, that right has not played a major role in practice.
12. Remaining areas of exclusive national competence
Many elements of the national legal orders remain intact notwithstanding the total harmonization concept of the new Dir 2004/48, including legislation outside the personal and material scope of application, details on the regulation of linked credit agreements, usury laws and consumer protection related to the performance stage. Also, procedural law including the judicial and extra-judicial enforcement of claims for repayment is not addressed by the directive, although this is of enormous importance for creditors. Thus, the continuing legal fragmentation in these areas, together with continuing language barriers, might remain as significant obstacles in achieving an internal market for consumer credit.
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