The Consumer Credit Directive - Update 1
Posted: Wednesday 6 August 2008
Just when we thought we could sit back and relax following the final stages of implementation of the Consumer Credit Act 2006 and associated regulations in October 2008, we are about to be hit with another piece of consumer credit legislation emanating from Europe in the guise of the new Consumer Credit Directive voted in on 17 January 2008 by the European Parliament. The new Directive - for the harmonisation of consumer credit laws - has subsequently been adopted by the Council of the European Union and was published in the Official Journal of the European Union on 22 May 2008, coming into effect 20 days later. For the full text of the Directive see:
http://eur-lex.europa.euLexUriServLexUriServ.do?uri=OJ:L:2008:133:0066:0092:EN:PDF
Member States will have two years from publication in which to implement the provisions of the Directive.
The Directive is a maximum harmonisation measure which allows Member States, where no harmonised provisions exist, to maintain or introduce national legislation other than those laid down in the Directive.As an example the UK Government lobbied extensively to ensure that the connected lender liability provisions were not fully harmonised. This means that the UK can retain its existing provisions which are set out at Section 75 of the Consumer Credit Act 1974.
The intention of this briefing note is to firstly consider some preliminary matters, where we look at:
- the scope of the Directive
- the definition of “consumer”
- agreements falling outwith the scope of the Directive
- implementation of the Directive
We will then turn to highlight a number of the main Articles of the Directive which impact directly on current UK consumer credit legislation and the likely amendments to the UK consumer credit regime which will be required as a result. We will look in particular at:
- Article 4 – Advertising
- Article 5 – Pre-contractual information
- Article 8 – Obligation to assess creditworthiness of the consumer
- Article 9 – Database access
- Article 10 – Contractual information
- Article 11 – Changes in borrowing rate
- Article 14 – Right of withdrawal
- Article 16 – Early repayment
- Article 19 and Annex I – APR
As the implementation process follows its timeline through to June 2010 we will update this briefing note as issues are crystallised with the formulation of regulations by the Department for Business, Enterprise and Regulatory Reform (BERR).
Which agreements fall within the scope of the Directive
In terms of the Directive all consumer credit agreements between €200 and €75,000 will be regulated, subject to certain exemptions (see below). Given that, in the UK, the financial ceiling of £25,000 was abolished in April 2008 BERR will require to consider whether to implement the Directive in the UK to cover all regulated agreements or only those falling within the limits set out in the Directive.
Overdrafts will now be within the scope of the Directive although the Directive limits and restricts the provisions which will apply to overdrafts.
Definition of a “consumer”
The Directive also only covers agreements in relation to credit provided to a “consumer” which is defined as meaning “a natural person who, in transactions covered by this Directive, is acting for purposes which are outside his trade, business or profession”.
This differs from the definition of “individuals” contained in the UK Consumer Credit Acts which also covers partnerships with two partners as well as artificial “individuals” such as unincorporated associations and clubs.
BERR will require to decide whether to implement legislation so that the provisions of the Directive will cover all “individuals” as defined in the Consumer Credit Acts or simply cover the “consumer” as defined in the Directive.
Agreements which are exempt from the scope of the Directive
Certain agreements are exempted from the scope of the Directive, for example: agreements which are land secured or secured by “another comparable security”; agreements for the purpose of acquiring or retaining property rights in land or in an existing or projected building; hiring or leasing agreements where an obligation to purchase the object of the agreement is not set down either by the agreement itself or by any separate agreement; agreements for an overdraft which has to be repaid within one month; agreements which are free of interest and without any other charges; agreements in which the credit is to be repaid within three months and only insignificant amounts are payable; agreements where credit is granted by an employer to an employee free of interest or where the APR is lower than that prevailing in the market and which are not offered to the public generally. As before, BERR may decide to recommend that all or certain of the Articles of the Directive be extended to cover agreements which might otherwise be outwith the scope of the Directive.
The Directive will not apply to any agreements for a fixed term which are already in existence at the date the implementing legislation is brought into force, and to that extent will not operate retrospectively.
Note that the Directive makes no provision for an exemption for high net worth individuals.
Implementation
BERR are currently discussing with the industry the implementation of the requirements set out in the Directive and we comment below on the current position in relation to the specific Articles of the Directive which require to be implemented by 2010. A number of informal discussion groups led by BERR and with industry representation are already in place to look at areas covered by the Directive. This initial informal process, including impact assessments, will continue through to the end of 2008. This will move to the formal consultation process with draft regulations in the first half of 2009. The target date for implementing the final regulations is June 2010, though BERR have admitted informally that this is very optimistic. Failure to meet the deadline may mean sanctions (“impositions”) being imposed on the UK, though this may well depend on how well other Member States have been able to progress matters in their own jurisdictions.
BERR acknowledge that, following on from the recent experience of implementing the Consumer Credit Act 2006, industry need certainty and then as long a lead in time as possible prior to implementation, particularly where there are IT implications. To that end they will focus on areas with potential IT implications as a priority and may look to bring measures forwards before the June 2010 deadline where this is possible.
Turning now to look at the requirements under the main Articles of the Directive:
Provisions from the Directive which require to be implemented in the UK
The underlying principle of the Directive is to harmonise consumer protection regulation across Member States, opening up markets for credit providers, while maintaining a high level of consumer protection. To that end the Directive aims to give consumers standard pre-contractual and contractual information, to establish a uniform EU wide method of calculation of the APR and require the provision of standard information if a credit advertisement includes an interest rate or figures relating to the cost of credit.
In addition the Directive gives the borrower a period of 14 calendar days to withdraw from the credit agreement without giving any reason. This will require changes to the current UK legislation which provides that in certain circumstances some credit agreements are non-cancellable.
The Directive also gives borrowers the right to repay in full or in part at any time which differs from the current UK regime which only allows the borrower the right to repay any credit in full. The Directive also enables lenders to claim compensation and provides rules for the calculation of the compensation, limits the period during which compensation can be claimed and sets thresholds for the upper level of compensation that can be claimed.
Article 4 – Advertising
In terms of this Article any credit advertisement that includes any interest rate or any figures relating to the cost of credit must include standard information by means of a representative example. The UK no longer uses such representative examples, their use having been phased out following the introduction of the revised Consumer Credit (Advertisements) Regulations 2004. The standard information will include: amount of credit; borrowing rate and charges; APR; duration; cash price of goods (where appropriate); and total payable instalments (where appropriate).
There is an important provision in Article 4.1 which will allow UK creditors to retain their current practice in certain circumstances. This provision states that under national legislation, if an APR requires to be stated in the advertisements in circumstances where an interest rate or figures relating to cost are not included in the advertisement, the requirement for the standard information is not triggered. This will allow creditors in the UK to disregard the requirement to provide standard information by way of a representative example where the requirement to disclose a typical APR has been triggered, for example, by a non-status or comparative indication or where the credit advertisement states the amount of credit, any deposit on account, the cash price of goods or services or any advance payment.
It does leave the possibility that the UK will have two different statutory requirements unless BERR decide to reintroduce the requirement for a representative example in all credit advertisements – this would have the advantage of all credit advertisements being dealt with in the same manner. Member States will certainly have the ability to require lenders to provide standard information in all advertisements.
There remains a danger that by making the advertising requirements too onerous, specifically the requirement to use a representative example where any interest rate or cost is shown, this will make the use of credit advertising which shows no cost or interest rates much more attractive. If this were to occur the result would simply be that consumers would receive less information than at present.
Article 5 – Pre-contractual information
When is pre-contractual information to be provided
Article 5.1 requires that “in good time before the consumer is bound by any credit agreement or offer the creditor provides the consumer with such information”, as set out at Article 5.1, on paper or another durable medium by means of the Standard European Consumer Credit Information Form. This form is set out in Annex II to the Directive. The consumer should be able to take away this information which will enable them to compare it with any other offers and come to a decision in full knowledge of the facts.
There is no definition of “in good time” and BERR have stated they are unlikely to provide any definition in any legislation implementing the Directive. BERR consider that this will not impose any minimum period which must have expired before the agreement can be concluded. They consider that the period required for the provision of the pre-contractual information will differ depending on the type of credit agreement in question and the preferences of the consumer. They also consider that the phrase must mean that the lender cannot unreasonably delay the provision of the pre-contractual information.
Legibility or prominence requirements
The current regime in the UK in relation to pre-contractual information is governed by The Consumer Credit (Disclosure of Information) Regulations 2004 which sets out the required information to be disclosed as well as the manner of disclosure, for example, legibility and prominence requirements. These rules will fall when the Directive requirements are implemented, although the new provisions regarding required information are largely in line with these Disclosure Regulations.
The Directive requirements in terms of Article 5 do not specify any requirements in relation to legibility or prominence.
Additional information – interspersing
The Standard European Consumer Credit Information Form sets out the order in which the specified information is to be set out. In the final paragraph of Article 5.1 the Directive permits the creditor to provide additional information to the consumer. However, any such information must be given in a separate document which may be annexed to the Standard European Consumer Credit Information form. It is clear therefore that any further information cannot be interspersed within the information contained in the Standard European Consumer Credit Information Form.
BERR have indicated, as an example, that they consider that the current credit card summary box which is provided by credit card companies to prospective card holders, prior to the credit card agreement being concluded, will still be able to be sent once the Directive requirements are implemented by simply being attached as a separate document to the Standard European Consumer Credit Information Form.
Distance Contracts
Articles 5.2 and 6.4 set out the minimum information, being the main characteristics of the financial service to be provided, to be given to the consumer if a voice telephony communication has been used.
In addition, where the agreement has been concluded at the consumer’s request using a means of distance communication which does not enable the full pre-contractual information to be given to the consumer before the consumer is bound by the agreement or offer, the creditor must provide the consumer with the full pre-contractual information using the Standard European Consumer Credit Information Form, including Section 5 which gives details of the additional information required in the case of distance marketing of financial services, immediately after the conclusion of the agreement.
Amortisation statement
If the credit agreement provides that any repayments do not give rise to a corresponding amortisation of the total amount of credit drawn under the agreement the pre-contractual information shall include a statement explaining that such agreements do not provide for a guarantee of repayment of the total amount of credit, unless such a guarantee is given.
This statement is included at Section 2 of the Standard European Consumer Credit Information Form but it is considered unlikely that the general public would understand the term “amortisation”. BERR have recommended that where such a statement was required an explanation of the term could be given in plain English in a separate document to be attached to the Standard European Consumer Credit Information Form.
Duty to provide adequate explanations
Article 5.6 requires Member States to ensure that creditors and, where applicable, credit intermediaries provide adequate explanations to the consumer. The Article permits the assistance to be adapted both in the manner by which and the extent to which it is given, as well as by whom it is given, taking into account the particular circumstances of the situation, the person to whom the credit is offered and the type of credit offered.
There appears to be a degree of flexibility for Member States in the implementation of this provision as it appears to allow the explanation to be given by someone other than the lender, for example by a shop assistant offering credit at the point-of-sale. In addition it appears to permit the explanation to be tailored to the consumer’s knowledge or experience and some consumers will be more financially aware than others and thus require less explanation. It also differentiates between different types of credit and thus appears to permit differing levels of explanation to be provided depending on whether the credit is made available by way of loan, overdraft or credit card.
It is clear that the Directive requires lenders to consider various factors in determining whether a particular consumer requires an explanation to be provided and, if so, what level of explanation is required. There will not be a universal solution for all consumers. The Directive will require the following to be considered:
- the circumstances and the manner in which the credit agreement is concluded for example, face-to-face, distance, telephone, internet;
- the type of credit product offered and perhaps the amount of credit involved; and
- the extent to which the consumer needs or wants additional explanations.
Greater clarity is required than is provided by the Directive to ensure that lenders will have legal clarity and are not subject to allegations of failure to comply with the regulations. This is a matter which is being considered both by the BBA and BERR and it will be interesting to learn, in due course, the result of those deliberations. It is to be hoped that the results will not cause too great an administrative or financial burden on lenders without any added value being provided to the consumers.
Article 8 – Obligation to assess creditworthiness of the consumer
A lender must ensure that the consumer’s creditworthiness has been assessed on the basis of sufficient information and, where necessary, on the basis of a relevant credit reference database consultation.
There is an additional requirement that where the total amount of credit is changed, after conclusion of the credit agreement, the creditor requires to update the financial information he holds which relates to the consumer and assesses the consumer’s creditworthiness before any significant increase in the total amount of credit.
There is no definition of “significant increase” and as yet BERR have not provided any guidance on this point. At present therefore it remains for the lender to consider commercially what they consider to be a significant increase.
Article 9 – Database access
One of the aims of the Directive is to create a genuine internal market which will provide for cross-border competition in the provision of credit to consumers. As part of the initial assessment of the consumer, as required by Article 8, the Directive imposes a requirement for each Member State to ensure that creditors can access databases in other Member States for the assessing of the creditworthiness of consumers who may be resident elsewhere in the European Community.
If the credit application is rejected as a result of information found on a credit database the lender must inform the consumer immediately and without charge of the result of such consultation and of the particulars of the database consulted. This obligation to inform is included at Section 4 of the Standard European Consumer Credit Information Form.
Article 10 – Contractual information
Content of Agreements
Article 10 sets out comprehensive information to be included in the credit agreement which is subject to the requirement that the information shall be specified in a “clear and concise manner”. The new information requirements are largely in line with existing UK legislation.
The credit agreement must be drawn up on paper or another durable medium and all of the contracting parties must receive a copy of the credit agreement. BERR consider that this means a copy of the executed credit agreement.
Article 10 does not, unlike Article 5, set out a prescribed order for that information and BERR consider that Member States will have no flexibility to impose legislation requiring the information to be set out in a particular order or impose rules in relation to the prominence of the information. This leaves open the possibility that lenders will develop their own practices in relation to the content of the Agreements which could cause consumers difficulty when comparing agreements from different lenders for a similar type of loan.
BERR are currently considering therefore whether they should develop best-practice regarding the format of the agreement, which guidance would be “non-binding”, and which would include guidance on the meaning of the term “clear and concise”.
In relation to overdrafts the Directive, at Article 10.5, applies a “light touch” regime and restricts the amount of information which must be included in the agreement – for example, no APR required, and some flexibility around pre-contract information.
Amortisation table
Where a credit agreement is for a fixed duration and capital amortisation is involved, the consumer has the right to request an amortisation table which must be provided free of charge. A reference to this right must be contained in the credit agreement.
The table must contain a breakdown of each repayment showing the capital amortisation, the interest calculated on the basis of the borrowing rate and where applicable any additional costs. Where the interest rate is variable the amortisation table shall indicate, clearly and concisely, that the information contained in the table only remains valid until the interest rate or the additional costs are changed in accordance with the terms of the credit agreement.
Execution of agreements
Article 10 contains no provision requiring a signature box. Article 10.1 states that the Article is without prejudice to any national rules regarding the validity of the conclusion of credit agreements which are in conformity with Community law and on that basis BERR conclude that a lender could add a signature box. BERR have stated that, while a signature box could be added, they consider that the right of Member States to introduce rules on signature boxes or where they appear within the credit agreement is questionable.
The British Bankers’ Association (BBA) intend to discuss with BERR further changes regarding the signing requirements which the UK could implement to ease the difficulties caused by the current requirements that the agreements be signed personally by the debtor within the signature box. This can cause difficulties for disabled borrowers who either are unable to sign but have appointed an attorney to sign for them, or can sign but cannot confine their signature within the signature box on the agreement. It also appears to be at odds with the requirements of the Disability Discrimination Act to make “reasonable adjustments”.
The BBA also intend to discuss with BERR proposals for the conclusion of an agreement to be evidenced other than by signature, for example electronically.
Additional information/warning boxes
While Member States have no ability to require the inclusion in credit agreements of any information not specified at Articles 10.2 or 10.5, the Directive requires other contractual terms and conditions to be included and in addition, requires “a warning regarding the consequences of missing payments” to be included in the credit agreement. It is therefore competent for lenders to include, for example in a credit card agreement, the summary box or any information not specified in Articles 10.2 or 10.5.
Copies of the credit agreement
urrently, in terms of Sections 62 and 63 of the Consumer Credit Act 1974, a lender requires to provide a copy of an unexecuted or an executed agreement to a borrower when the agreement is presented to him personally or sent to him for his signature. Section 63 requires a copy of the executed agreement to be sent to the borrower within 7 days of the making of the agreement except in certain circumstances.
The Directive does not state any requirements in this respect other than the requirement stated above that all of the contracting parties must receive a copy of the credit agreement. As noted, BERR consider that this means a copy of the executed credit agreement.
BERR also consider that the existing rules regarding the period within which the executed agreement must be given to the borrower could be retained provided that in all cases a requirement to give a copy of the executed agreement is included. It is unlikely however that the UK could retain the current exemption in Section 63(2)(b) allowing a lender not to supply a copy of the executed agreement where the unexecuted agreement was sent to the borrower for his signature and on the occasion of his signing it it became an executed agreement.
The duty to provide a copy of an unexecuted agreement to a borrower when the unexecuted agreement is handed to him personally, but does not become an executed agreement when he signs it, or when it is sent to the borrower for his signature under Section 62, does not appear to be impacted by the Directive.
The BBA intend to discuss these requirements with BERR in an attempt to simplify the current provisions and to remove the current requirements for multiple copies.
Article 11 – Changes in borrowing rate
Where a change in the borrowing rate takes place the consumer must be informed of the change on paper or another durable medium before the change takes place. The information must state the amount of the payments after the change takes place and, if the number or frequency of the payments also changes, the new particulars of those items must be shown in the notice.
Article 14 – Right of withdrawal
Existing rights of withdrawal from credit agreements
Currently there is no universal right allowing a borrower in the UK to withdraw from a credit agreement. There are some agreements that are cancellable by virtue of being signed off trade premises where prior face-to-face discussions took place and, for those agreements, there are differing periods of cancellation depending on whether the borrower has received an unexecuted agreement for signature or when he receives a copy of the executed agreement. There are also some agreements which are concluded at a distance that provide for the borrower to have a 14 day period in which to give notice of cancellation.
The existing requirements of the Consumer Credit Acts cover what is required post cancellation, for example, the return of goods financed by the agreement, repayment of the sums drawn and payment of interest, and cancellation of any linked transactions.
Rights of withdrawal from credit agreements conferred by the Directive
Article 14.1 gives consumers a period of 14 days in which they can withdraw from a credit agreement without giving any reason. That period shall commence either (a) from the day of conclusion of the credit agreement, or (b) from the day on which the consumer receives the contractual terms and information in accordance with Article 10, if that day is later than the day of conclusion of the credit agreement.
In order to exercise his right of withdrawal the consumer must notify the lender by giving notice on paper or another durable medium. This notice must be sent before the deadline expires.
The borrower will also have to repay the sums drawn and any interest on the sums drawn from the date of drawn until the credit is repaid. Interest will be calculated at the rate specified in the credit agreement. The repayment of the capital and interest must take place no later than 30 days after the notification of withdrawal has been sent to the lender by the borrower.
As noted in the immediately preceding paragraph the treatment of the payment of interest differs slightly from the existing UK provision which provides that interest is not payable where the credit is repaid, following notice of cancellation, if the credit is repaid prior to the date on which the first instalment is due or within one month of the notice of cancellation (whichever is the earlier). The Article provisions are therefore to the benefit of lenders.
The lender is not entitled to be paid any compensation by the borrower by virtue of the borrower’s withdrawal from the credit agreement.
Changes required to UK legislation
The new 14 day right of withdrawal will require to be introduced in relation to all agreements falling within the scope of the Directive, including those agreements within scope which are presently non-cancellable.
BERR are currently considering whether to introduce this right for all credit agreements regulated by the Consumer Credit Act which are outwith the scope of the Directive i.e. including those that are for credit in excess of €75,000, hire purchase agreements, and those that are land secured. Although no decision has yet been taken BERR may conclude that, for the reasons of consistency, the right of withdrawal should apply to all credit agreements regulated by the Consumer Credit Act. This would clearly have significant implications for hirers if they were brought into scope.
Where a consumer exercises a right of withdrawal in respect of a contract for the supply of goods Article 15.1 states that the consumer will no longer be bound by any “linked credit agreement” (as defined at Article 3(n)). This provision will also require to be introduced to the UK legislation albeit a similar provision already exists by virtue of Regulation 15 of the Consumer Protection (Distance Selling) Regulations 2000 (as amended) where, in general, cancellation of a distance contract concerning goods and services results automatically in the cancellation of a “related credit agreement”.
Article 16 – Early repayment
There are three basic principles contained in this Article: the right to repay whether in part or in full at any time; the right to a reduction in the cost of credit; and the right for the lender in certain circumstances to compensation within certain limits.
Right to repay early at any time
Unlike the present UK legislation, which provides a right to repay early but only where the debtor repays in full all amounts payable by him to the lender under the agreement, the Consumer Credit Directive requires the consumer to be able to repay “fully or partially at any time”. If the consumer exercises his right to repay early at any time he is entitled to a reduction in interest and other charges due for the remaining duration of the agreement.
The Directive is silent on the method of effecting early repayment, e.g. there is no requirement for the consumer to give notice to the lender. In addition it does not set any limits within which a lender must respond to a consumer’s request to repay early or set a maximum period in which the agreement must be settled following the consumer’s request.
There are no minimum amounts of early repayment set out in the Directive and given that the consumer is entitled to make an early repayment at any time it is possible that a consumer, who had fallen out with his lender, could manipulate the system to make daily “overpayments” of £1 or less to cause maximum administrative difficulty to his lender. This would require the lender to recalculate the amount of the loan to the consumer, to take account of the reduction of interest and costs mentioned above, each time the minimal “overpayment” was made.
As there are no provisions in the Directive regarding the method of recalculation of the amount of the loan on “overpayment”, the setting of a time limit within which the lender must respond to a consumer’s request to make early repayment or specifying the method of establishing a settlement date for use when calculating the rebate due to the consumer, it is open to the UK government to retain the existing requirements for these items.
BERR are considering whether to retain the current exemption for the provision of a statement where a statement has already been provided in the previous month. Given our comments above regarding the possibility of a consumer (or a large number of consumers – for example in a similar fashion to the Bank Charges cases where a mass campaign was orchestrated urging customers to request copies of Bank Account statements) manipulating the system if this exemption was not retained, this could possibly cause difficulty for lenders in complying with the Directive.
Consumer’s entitlement to a reduction in the cost of credit
There is currently a standardised formula for calculating a rebate due to a borrower when they repay a loan in full under the existing UK legislation.
BERR are currently considering whether the existing formula for calculation of the rebate would be suitable for use both when a loan is repaid in full and also when a partial repayment of the loan is made.
BERR are also considering whether the UK could retain the current provision where a lender can set a settlement date 28 days after notice of repayment under Section 94 CCA 1974 or whether this would be in breach of the Directive’s provision that a consumer could repay early at any time.
Compensation for early repayment
The Directive provides that lenders shall be entitled to “fair and objectively justified” compensation for possible costs directly linked to early repayment.
When payable
Compensation can only be claimed where early repayment takes place during a period for which the borrowing rate is fixed.
Compensation cannot be claimed for overdrafts.
Compensation cannot be claimed if the repayment is covered by payment protection insurance.
What amount can be claimed?
The Directive states that the compensation may not exceed 1% of the amount repaid early where the remaining term of the loan exceeds a year and 0.5% of the amount repaid early where the remaining term of the loan is less than a year.
In addition the Directive provides that any compensation shall not exceed the amount of interest the consumer would have paid during the period between the date of early repayment and the termination or expiry date stated in the credit agreement. This provision is not currently included in the UK legislation and will require to be implemented by 2010.
These provisions will provide very limited compensation, even in the case of a large loan in a period of low interest rates, and will not provide great comfort for lenders. As an example a loan of £100,000 for 3 years at fixed rate of 2% where an amount of £95,000 is repaid within the first year of the loan will only provide for a maximum compensation of £950 rather than the £3,800 of interest which could have been earned on the amount repaid if the loan had been repaid over its original three year term.
The higher the interest rate the bigger the gap between the interest that could be earned and the amount of compensation which would be payable.
Ceiling/thresholds for compensation
The Directive allows Member States to set a threshold of up to €10,000 below which compensation for early repayment cannot be claimed. BERR have indicated that they do not intend to implement this provision as they see no reason why larger loans will be subject to the provisions while smaller loans will not. In addition they are of the view that the use of the 1%/0.5% calculation will result in the compensation being smaller for the smaller loans in any event.
Higher compensation
It is permissible for Member States to implement legislation to allow lenders to claim a higher level of compensation where the lender can prove that the loss suffered from early repayment exceeds the 1%/0.5% ceiling. This right is also coupled with the right of the consumer to challenge such a claim on the grounds that the loss suffered by the lender is actually lower than that which is claimed. As mentioned earlier it appears that any compensation will be very limited and it is likely that a “loss” will be suffered in many cases of early repayment.
If this was to be implemented in the UK our existing legislation would need to be amended. At present BERR have not decided whether to include such a provision. In addition they are considering whether, if they do proceed to implement this provision, they will prescribe the precise circumstances in which the higher compensation can be claimed. If it is implemented the calculation of the higher loss as set out in the Directive is the difference between the initially agreed interest rate and the rate at which the amount repaid early can be lent on the market at the date of early repayment, and shall take into account the impact of early repayment on administrative costs.
Article 19 and Annex I – APR
Article 19 and Annex I of the Directive set out the equation as well as the basic assumptions to be used in calculating the APR. BERR believe that the formula has an equivalent mathematical effect to the calculation of the APR contained in the UK’s Total Charge for Credit Regulations.
The Directive contains a single set of assumptions to be used when calculating an APR with a further set (Annex 1) to be used where necessary. This differs from the current provisions in the UK where various assumptions are set out in the Consumer Credit (Total Charge for Credit) Regulations 1980, the Consumer Credit (Advertisement) Regulations 2004 and the Consumer Credit (Agreements) Regulations 1983 which allow different assumptions to be used for different situations. The Directive assumptions do not differentiate between running account credit and other forms of loans.
Where a credit limit has not yet been agreed the limit to be used is €1,500 which is lower than the current limit (£1,500) used in the UK. This will affect the UK advertisements regulations which will, once the Directive provisions are implemented, require to use the €1,500 limit to calculate the typical APR.
The Directive requires an APR shown for overdraft agreements but allows Member States, under Article 10.5(f), to decide that an APR need not be shown for an overdraft. BERR have indicated that the UK will take advantage of this partial dispensation.
As this is a maximum harmonisation Directive the UK will require to use the assumptions contained in the Directive in relation to any agreements falling within the scope of the Directive. BERR are presently considering whether to implement the Directive in order that the UK regulations will simply contain one set of assumptions based on the Directive’s requirements or whether they may introduce further assumptions to be used for agreements which fall outwith the scope of the Directive, for example, hire-purchase agreements, pawnbroking agreements or loans secured on land.
Some final thoughts
The move towards harmonisation of consumer credit protection within the European Community is now an unavoidable inevitability with the adoption of the Consumer Credit Directive. In some respects it has been a long time coming, with the existing 1986 Directive making provision based on minimum standards, though these were amended in 1990 and 1998. While we in the UK may like to think that our own consumer credit regime is “market leading”, change is upon us again – and as early as June 2010 if the timeline is met.
As we have highlighted, some of the changes which will be required to the current UK consumer credit legislation are far reaching. With the recent history and experience of implementing the CCA 2006 and associated regulation, BERR have acknowledged that the timescales for bringing forward regulations to implement the Directive are very tight. While the consumer credit industry were perhaps hoping and longing for an opportunity to draw breath and let the dust settle after CCA 2006, this is not a luxury it can afford. It is in your interest to engage with BERR at an early stage, either in the initial informal discussion groups, or by making representations direct to them on areas of concern. Industry bodies such as the BBA, CML and FLA have and continue to play a central role in voicing these concerns, and are all lobbying hard on your behalf. Particular assistance is needed in collecting cost projections as part of the various impact assessments required as BERR move into the formal consultation process in the first half of 2009, and in identifying and prioritising areas which will involve significant IT change.
While not all credit agreements are “in scope”, it is possible that BERR may extend the operation of any new regulations across the board. What are the likely implications of this across your customer base and product range? The opportunity to have your say is now.
Contact Details:
Name:John Lunn
DDI:0131 247 1066
Email:john.lunn@morton-fraser.com
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