Consumer Credit [EU]

Consumer Credit Directive

EU states must ensure persons offering credit obtain authorisation. They must be regulated and inspected; Bodies must be established to provide information and advice to consumers in relation to credit agreement and complaints.

The EU directive on consumer credit harmonises many of the general conditions and information obligations in the area of consumer credit.  It does not cover consumer credit for the purposes of

• acquiring property, renovating buildings;
• leasing agreements without the option to purchase;
• interest-free agreements where the consumer repays in a single payment;
• current account advances other than credit card accounts.

Credit-related advertising must contain certain information including a statement of the annual percentage rate of charge. Consumer credit agreements must be in writing and contain the essential terms of the contract.

Where the credit is granted on a current account, the consumer must be informed in writing of the credit limit, the annual rate of interest and charges and the procedure for terminating the agreement.

In the case of credit for goods, the states must lay down the conditions under which goods may be repossessed and must ensure that neither party may be unjustly enriched.

The consumer may discharge his obligations before time, in which event he is allowed an equitable reduction in the cost of credit.

Member states must ensure that the existence of the credit agreement does not affect the rights of consumers as regards suppliers and service providers. Consumers may seek redress against the supplier  when the following conditions are fulfilled:

• the  consumer has entered a credit agreement with a person other than the supplier;
• the grantor and the supplier of the goods have a pre-existing agreement under which credit is made available to the former;
• the consumer obtains his credit under that agreement;
• goods and services covered are not supplied or do not conform to the contract;
• the consumer has sought redress against the supplier but has failed to obtain satisfaction.

Updated Directive

The updated directive on Consumer Credit Act is similar in scope to the earlier legislation.  It does not apply to property loans. During the pre-contract phase, creditors or intermediaries must supply clear information relating to features of the credit offered including

• duration,
• total amount,
• borrowing rates
• the annual percentage rate of charge;
• total owed by the consumer;
• cash price for goods or services;
• costs linked to or resulting from the agreement;
• consumer rights;
• contractual obligations;
• sureties;
• the consequence of late payments.

This must be provided in a standard form provided for in the directive.

Creditors must supply consumers with adequate explanations so they may choose to contract which corresponds to their needs and financial situation.

The contract must restate the main information specified above.  If the borrowing rate is modified, the consumer must be informed.

Consumers may exercise their right to withdraw by notifying their intention without any reason.  This may take place within 14 days of the agreement.

Consumers have the right to make early repayment.  They may exercise this right at any time provided the creditor receives their compensation which is objectively justified.

Deposit Guarantees

Am EU directive from 1994 provides for a minimum level of deposit guarantee scheme throughout the EU.  The deposit scheme must become operative as soon as funds are unavailable.

Credit institutions must join a deposit guarantee scheme.  Each member state must ensure one or more deposit schemes are introduced and officially recognised.  A credit institution may be exempted from belonging to a scheme where a certain alternative provision is made.

There are procedures for when credit institution does not comply with its obligation.  Ultimately authorisation may be withdrawn for failure of compliance.

A scheme introduced and recognised by a state must cover deposits at branches in other states. If the head office is outside, the EU branches must have deposit cover equivalent to that under the directive. The minimum deposit insurance is €100,000. Information must be made available to depositors about the scheme.  If there is no scheme, customers must be informed.

Duly notified claims must be paid within 3 months, reduced to 20 days after 2010.  The time limit may be extended in certain circumstances.

Distance Sales

In addition to the general distance selling regulations, there are specific regulations dealing with distant sales of financial services to a consumer. Consumers have a right to cancel the transaction within a certain time limit.  The supplier must furnish a contract to the consumer in a writable or durable medium indicating all the contract terms.

The cooling-off period is 14 days during which the consumer may exit the transaction without any reason.  Thirty-day periods apply to life insurance and personal pensions under certain circumstances.  There are exceptions to the right of withdrawal which seek to prevent speculation.

There is a right to cancel payment or to obtain reimbursement in the event of fraudulent use of a credit card.  There must be adequate complaint mechanisms and redress procedures,  administrative or out of court.

Mortgage Credit Directive

The Mortgage Credit Directive’aims to ensure that all consumers who take out a mortgage to purchase a property are adequately informed and protected against the risks.

The directive applies to all loans made to consumers for the purpose of buying a home, including loans that are guaranteed by a mortgage or by another comparable security.

It provides for better information to consumers on available mortgage products including:

• an obligation on lenders to provide consumers with a standardised information sheet (European Standardised Information Sheet – ESIS) which allows them to shop around to identify the right product for them;
• inclusion in the ESIS of worst-case scenarios regarding variable interest and foreign currency loans so as to alert consumers of potential interest rate variations;
• a guaranteed period of reflection or a right of withdrawal for borrowers prior to being bound by the credit agreement;
• new EU-wide standards to assess the creditworthiness of mortgage applicants so as to ensure that borrowers can meet their repayment obligations.

The directive establishes business conduct principles. These ensure that lenders and credit intermediaries (i.e. persons or companies providing information and assistance to consumers looking for a mortgage loan) act honestly and transparently in the consumer’s interests.

Lenders and intermediaries must ensure that their staff have up-to-date knowledge on loan agreements and that customers are provided with all the necessary information before signing any agreement.

Consumers have a general right to repay their loans early, thus benefiting from a reduction in the total remaining cost of the mortgage. In such cases, EU countries may entitle lenders to fair compensation for any costs directly and exclusively linked to early repayment.

The directive establishes an EU passport regime for credit intermediaries. This means that in principle once authorised in one EU country, a credit intermediary is allowed to provide services throughout the EU.