A new dawn for consumer credit?

After six long years of countless drafts, endless negotiations
and some frenzied last-minute horse-trading, the Consumer Credit
Directive (CCD) was finally voted on by members of the European
Parliament on January 16 2008. Only technical formalities remain
before the directive is officially adopted. Member states will then
have two years to implement it.

The good news is that the directive is much improved from the
earlier drafts. The Finance
& Leasing Association
(FLA) and other UK trade
associations, along with the European industry federation, Eurofinas,
have lobbied hard and successfully to remove or amend provisions
which would have impaired the functioning of the UK credit market,
with serious implications for prices and availability. Earlier
proposals for a new central EU database, common definitions of
responsible lending, and an end both to balloon payments and to
credit agreements made off business premises, have all now gone.
The European parliament has been willing to listen to the industry,
and the result is a better directive.

What does the directive mean in practice?

The directive aims to improve the functioning of the EU single
market in credit by creating a common format for credit offers.
This includes standardised advertising, pre-contractual and
contractual information requirements, and a consistent way of
calculating APRs. The directive also standardises elements of
consumer protection like cooling-off periods and the right to
terminate agreements early.

 The UK consumer, who already enjoys one of the most
comprehensive protection regimes in Europe, may not notice much
difference. Whether the directive will foster much more
cross-border trade in retail credit remains to be seen. Of course,
many businesses already operate in other member states via
subsidiaries – for example, the captive motor finance houses.

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 There may be particular groups of people – e.g.
inhabitants of the various multi-national common language areas of
the EU, and migrant workers – who could in principle benefit from
the directive.  But potential cross-border lenders will face
creditworthiness and debt recovery issues. It is not yet clear that
the directive’s provisions will really support much more
cross-border lending.

 And there are one or two potential downsides for the
consumer. Exactly how the directive’s 14-day cooling off period
will impact on the hire purchase (HP) market, for example, needs to
be thought through. In the case of a car bought on HP, the lender
may decide to hold on to the vehicle rather than take the risk of a
significant depreciation in its value if it is returned. Lenders
prepared to take this risk would have to factor the likely cost
into the overall price. 

 Another potential problem is that if the customer
terminates an agreement early, lenders will only be entitled to
recoup some of their costs on fixed rate deals, and compensation –
except in “exceptional” circumstances – will be limited to 1 per
cent of the amount of the early repayment, or 0.5 per cent for
agreements with less than a year to run. This will have a cost to
lenders, and an effect on prices. The less well-off, who tend not
to settle early, may end up subsidising those who can afford to do

 But there is some flexibility in these areas for member
states as they implement the new directive (e.g. the definition of
“exceptional”). The FLA is therefore working closely with the
Department for Business, Enterprise and Regulatory Reform to ensure
that as many as possible of the remaining wrinkles are ironed out
during implementation.

The author is head of public affairs at the FLA