Cicero Policy Briefer

Issue 21, February 2008

Consumer Credit—another missed opportunity

By Michael Cooper

After six years of negotiations, inter- and intra-institutional squabbles, inertia and renegotiations, the much-disputed Consumer Credit Directive has finally passed through the European Parliament and can now make its way to the Council for rubber stamping before finally reaching Member States.

The 2002 proposals, which looked to update existing legislation from 1987 in order to give EU citizens the same rights and provision of information when comparing and accessing credit across the Union, looked set again to be heading for the back burner after the European Parliament and Council had failed to reach agreement in early January following a final round of negotiations. To the rescue, however, came the Socialist and Liberal groups in the Parliament, with their last-gasp effort to save the directive in the form of a package of amendments that were deemed acceptable to fellow MEPs and Member States alike.

The directive will standardise the information that consumers receive when they take out any loan ranging between €200-75,000. As such, consumers should be able to calculate and compare the cost of a loan more easily. Furthermore, it gives lenders throughout the EU the right to withdraw from a loan agreement within 14 days—current practice in less than half of Member States. The remaining sticking point in the legislation came in the area of compensation to lenders when clients clear their debt early. In the end it proved impossible to keep this area as flexible as possible by ensuring that compensation simply be “fair and objectively justified”; instead, figures will need to be explicably stated. Common ground was reached on this wherein compensation may not exceed 1 per cent if repayment of debt is early, to be slashed to 0.5 per cent if a client pays off their debt more than a year before required.

So does the Consumer Credit Directive go down as another success story for European policymakers and another great step in the further integration of the internal market for financial services and ‘ever closer union’? Well, not quite. As much as an agreement over a sensitive area of retail financial policy is to be applauded, what has been agreed upon is a drastically watered-down set of compromises which inspires no one to sing from the rooftops about consumer protection or cross-border liberalisation. The back-slapping in Brussels which usually follows the adoption of a directive in Strasbourg has been suspiciously absent.

Even the rapporteur of the dossier, German MEP Kurt Lechner, has lamented the final outcome, labelling it “too complicated” and unclear as to the impact it will have on consumers. For many observers, including Lechner, the directive imposes far too many binding rules on consumers instead of leaving a degree of flexibility and personal responsibility.

As a general point, retail financial services in the EU, as the Commission itself conceded last year when publishing its green paper, will remain fragmented along national lines for the foreseeable future—with barriers such as language often being cited as reasons why retail consumers won’t shop cross-borders. As a consequence, the usefulness of directives such as this one – and, for that matter, the efficiency of the institutions which have deliberated over it for over half a decade – must be called into question.

What is growing in the European Parliament appears to be the argument for more hard-hitting protection rules for products such as mortgages. This is an area not covered by the Consumer Credit Directive; instead, it forms part of the Commission’s mortgage credit initiative, which decided in a White Paper last December not to regulate the market for now. But with policymakers in Brussels looking for reasons to be cheerful about what they have achieved with the directive, attention is now shifting to whether the Commission can continue to champion its hands-off policy towards mortgage regulation.

Michael Cooper can be contacted on +44 (0)20 7665 9530 or click here to email.