A Third Directive on Consumer Credit

2.1 Small-Scale Financing and Short-Term Credit

CCD 2008 did not apply to credit agreements for amounts below EUR 200 or above EUR 75,000 (Article 2(2)(c)). In contrast, the new CDC 2023 includes all credit4 agreements of up to EUR 100,000 (Article 2(2)(c))^[13] and also covers low-value credit agreements, which are usually below the minimum threshold of EUR 200 (Article 2.8(a)) and are repaid within a very short period (short-term high cost loans, especially payday loans), which have increased considerably as a result of digitalisation. Furthermore, it includes credit agreements where credit is granted free of interest and with no other charges (Article 2.8 letter (b)), in particular, ‘Buy Now, Pay Later’ credit, which involves advance financing of the purchase price of goods and is especially used for online purchases.^[14] However, credit of this type entails making quick decisions, encourages consumers to spend more than they have and contributes to a deterioration of their financial situation, because failure to repay and high late or non-payment fees are part of lenders’ business models.^[15] This group also includes forms of credit that have to be repaid within three months and carries insignificant charges (Article 2.8 letter (c)), which previously fell outside the scope of CCD 2008 (Article 2(2)(f)).^[16] They are now included, but Member States can make provision for partial application of CCD 2023 to one or more of them, in particular with respect to the duty to provide certain information in advertising, at the pre-contractual stage and in the agreement itself (Recital 15, Article 2.8).

2.2 Overdraft Facilities and Overrunning

Overdraft facilities and overrunning are increasingly common forms of consumer credit. An overdraft is a form of credit that was previously excluded from CCD 2008 if repayment had to be made within one month (Article 2(2)(e))^[17] and partially excluded if repayment had to be made on demand or within three months (Article 2(3)). In view of the high commission costs and the risk that lenders may decide to request immediate repayment, CCD 2023 now includes overdrafts in its scope of application, and no distinction is made in relation to the repayment period (Article 24). Overrunning5 (Article 25) is partially covered by the Directive (Article 2(4))^[18] and Member States can also exclude the obligation to perform creditworthiness assessment (Article 2(4)(b)).

2.3 Credit Cards

The deferred debit card payment mode was excluded from the 2008 CCD when the amounts involved had to be repaid within three months and incurred only minimal charges.^[19] Member States can now opt to exclude this payment method when the full amount of the transactions is debited from the cardholder’s current account on a specific date agreed in advance, normally once a month, after 40 days, without payment of interest and if only limited charges linked to the provision of the payment service are debited and is provided by a credit institution or a payment institution (Art. 2(5)).^[20] The Council considered it reasonable not to apply CCD 2023 under these conditions, as this enables households to better manage their expenditure.^[21] The European Parliament, by contrast, suggested including such claims within the scope of CCD 2023 when they had to be repaid within one month, even for the purpose of applying the solvency check and obtaining adequate pre-contractual information.^[22] If the amount due exceeds the positive balance of the current account, the provisions on overdrafts and overrunning apply (Articles 24, 25). Other types of credit card payments, including revolving credit, do fall within the scope of the directive.

2.4 Leasing and Purchase Price

Although pay-per-use is a common form of financing,^[23] both the European Parliament and the Council considered it appropriate to exclude leasing from CCD 2023’s scope of application when it does not include a purchase option (Article 2(2)(g)).^[24] The6 financing of the cost of the goods in hire purchase arrangements does fall within the scope of CCD 2023, but the Council felt that it should not apply to deferred charge-free payments (except for limited late payment penalties) where there is no third party credit provider (which, however, is typically the case with Buy Now, Pay Later platforms) and payment in full is made within 50 days of delivery of the goods or provision of the service, or 14 days for large online goods and service providers (Article 2(2)(h)). If longer time limits are imposed, CCD 2023 does apply.^[25]

2.5 Credit on Immovable Property

CCD 2023 continues to exclude credit for the purpose of acquiring or retaining property rights over land or in an existing or projected building and specifies that this also includes premises for trade, business or professional use; that is, whether they are residential or not (Article 2(2)(b)).^[26] However, like CCD 2008,^[27] it also covers credits which are not secured either by a mortgage or by another comparable security commonly used for immovable property in a Member State or by a right related to immovable property for the purpose of renovating residential (immovable) property (Article 2(3)) (even if it exceeds the amount of 100,000 euros). MCD does not cover credit for purposes unrelated to acquiring or preserving property rights (e.g. to pay for holidays or medical bills) and which are secured by non-residential property (e.g. business premises, storage space and garages, for example) (Article 3(1)(a)). Perhaps surprisingly, CCD 2023 does not include them either.

4.1 Better Understanding of Relevant Information

With the aim of enhancing consumers’ understanding of information, the Council has merged the Standard European Consumer Credit Information sheet and the Standard European Consumer Credit Overview form into one document with a maximum of two pages.^[35] This may help to simplify matters, but the fact that a single document contains the essential credit data, prominently displayed, and then arranges the pre-contractual information in a more detailed presentation is not necessarily synonymous with greater clarity. For example, the first part of page 1 of the Standard European Consumer Credit Information should contain the borrowing rate, or all the borrowing rates if different rates apply in different circumstances (Article 10(3)(d)), the annual percentage rate of charge and the total amount payable by consumers (Article 10(3)(e)). Where different rates apply, the conditions governing the application of each borrowing rate and, where applicable, the index or reference rate applicable to each initial rate should appear separately on another page, as well as the deadlines, conditions and procedures for altering each borrowing9 rate (Article 10(5)(c)). A representative example illustrating the percentage rate and the total amount to be paid by consumers, mentioning all the assumptions used to calculate the rate (Article 10(5)(f)), must also be provided. The information is not in fact summarised, but repeated in different ways on the first and second pages, and this can be confusing rather than helpful.

4.2 Timing of Information Provision

All an offer’s terms and conditions must be supplied ‘in good time’ before the agreement is concluded or the consumer commits to a binding offer (Article 10(1)).^[36] Recital 36 explicitly stresses that pre-contractual information cannot be provided at the same time as the conclusion of the credit agreement. This is to ensure that consumers have sufficient time to read and understand the pre-contractual information, compare offers and make informed decisions, a particularly useful warning with regard to online contracting, which enables consumers to move quickly through the different interfaces by ticking boxes or clicking on options.^[37] However, if the information is provided less than a day before the transaction, all that happens is that lenders must remind consumers separately within 7 days that they have the option of withdrawing, and explain the procedure (Article 10(1) II). The measure may be effective for credits for which a simplified pre-contractual information scheme has been chosen, but otherwise the provision’s usefulness is doubtful.^[38] In any event, the rule shows that the legislation places no restrictions on the fast granting of credit.^[39] National legislators can maintain and/or extend cooling-off periods, which could be necessary in order for adequate explanations to be provided,^[40] and can decide on the validity of the consent of consumers who accept the contractual offer prematurely (Article 44).^[41] 10

8.1 Right to Withdraw from Agreements

Article 26 CCD 2023 maintains a consumer’s right to withdraw from agreements at will.^[59] Member States cannot dispense with the recognition of the right to withdraw, even if they retain the cooling-off period (Article 26(9)).^[60] The time limit for exercising the right to withdraw is 14 days from the date on which the contract was concluded, or later, when consumers have received all the information regarding the agreement (Article 26(1)). The right expires 12 months and 14 days after the conclusion of the credit agreement if consumers have not received the contractual terms and conditions and all mandatory information in accordance with Article 20 (form of the agreement) and 21 (mandatory information) beforehand. However, if the information omitted is precisely that relating to the right to withdraw, then the period for exercising the right does not end until that specific information is provided in accordance with the provisions of Article 21(1)(p);^[61] in other words, not only if the right is not disclosed, but also if it is not disclosed in accordance with the legal requirements.

Since nothing is said to the contrary, this seems to be the case even if the agreement has been fully executed. Nonetheless, the fact that a breach of the lender’s duty will not always prevent the consumer from withdrawing should not be overlooked.^[62] The issue is that Recital 64 removes the requirement for the right not to be exercised in bad faith, contrary to what the Commission had originally provided for.^[63] Therefore, CCD 2023 does not unequivocally answer the question as15 to whether this means that opportunistic exercise of the right in order to obtain credit elsewhere on better terms is still possible, or whether what ultimately counts is, on the other hand, sanctioning lenders for failing to properly inform consumers of their right.^[64]

8.2 The Right to Terminate Open-End Credit Agreements

Consumers can still terminate open-ended credit agreements at any time, free of charge. Although there is no special procedure to follow, the parties can agree on a notice period, which must not exceed one month. Lenders also have this right if it is stipulated in the agreement, but must give consumers at least two months’ notice (Article 28(1)). Member States have the option of setting the minimum period that has to elapse between the time at which a lender requests repayment and the date on which this has to take place (Recital 13). Furthermore, agreements may provide for a lender’s right to terminate a consumer’s drawdown for justified reasons, for example, suspicion of unauthorised or fraudulent use of the loan or a significant increase in the risk of not being able to meet the repayment, without prejudice to possible effects on the termination of the contract (Recital 68, Article 28(2)). Lenders must give prior notice of the loss of this right and the reasons for it, preferably before the measure is taken or immediately afterwards, unless providing such information is prohibited (Article 28(2)).

8.3 Early Repayment

The Consumer Credit Directive maintains consumers’ right to settle all or part of their obligations before the date stipulated in the credit agreement (Article 3(22)). This is an ex lege right which must be stated in the pre-contractual information as well as in the agreement (Article 21(1)(s)) and entitles consumers to a reduction in the total cost of the credit (Article 29(1)). This includes all costs that are known to the lender, within the meaning of Article 3(5) CCD 2023, i.e. interest, commissions, costs relating to ancillary services and, in particular, insurance when it is compulsory. Payments for notary services are excluded. At the Council’s suggestion, Recital 70 specifies that only lender-imposed costs should be taken into16 account, but not fees or taxes charged to consumers that are paid directly to third parties.^[65] As a result of CJEU C-383/18 of 11 September 2019, Lexitor,^[66] Recital 70 specifies that the right to costs reduction also embraces those that do not depend on the duration of the contract, including any already paid or fully exhausted at the time that the credit is granted (e.g. formalisation fees). It is surprising that the ECJ does not apply the same criterion to credits on immovable property, therefore creating the risk that lenders will change the payment method for the costs in order not to be affected by the reduction.^[67] With the exception of the cases provided for in Article 29(3), lenders are entitled to compensation, which Member States can limit (Recital 71, Article 29(4)(a)). This still requires a fixed interest rate to have been agreed or early repayment to take place within a period in which the borrowing rate is fixed (Article 29(2)). This excludes compensation in the case of variable interest rates, which is understandable, but in these cases lenders should also be able to claim for administrative costs incurred by early repayment. Perhaps this is not because these costs are thought to have been largely passed on in interest rates, but this should have been clarified.^[68] Compensation cannot exceed the amount of interest that would have been paid during the period between early repayment and the credit agreement’s agreed termination date (Article 29(5)).17

12.1 Why Two Consumer Credit Directives?

The European legislator has enacted a new CCD that is adapted to developments in the consumer credit market, which coexists with the MCD, which only applies to credit on immovable property. Notwithstanding the need for a differentiated approach at times, many of the proposed changes, such as those concerning creditworthiness assessments, the oversight of lenders and intermediaries and the need to monitor refinancing or modification of the terms and conditions of a credit agreement measures are based on MCD provisions. Likewise, a consistent approach to consumer protection suggests that future reform of the latter regulation, which is already underway,^[92] will also take into account the new developments recently included in CCD 2023. It is not unreasonable to wonder about the logic of pursuing and continuing to retain two different and complementary rules, with the risk of arbitrarily different interpretations,^[93] especially if CCD 2023 turns out to include (as the previous CCD 2008 did) unsecured loans for the purpose of renovating residential property (Article 2(3)). This doubling-up is even less understandable if it is noted21, firstly, that mortgages have often been used to secure the purchase of consumer goods, and secondly, that the marketing techniques used for credits of both types are the same. In short, it is not clear why all consumer credit, including credit on immovable property, should not be covered by a single rule, nor why, in the end, neither directive refers to consumer credit secured by non-residential property. Article 46(1)(a) proposes performing an assessment six years after the date of entry into force of the Directive and every four years thereafter to analyse whether the latter solution is appropriate (see also Recital 93), a conclusion that will not be unrelated to decisions that the legislator may have taken earlier in the reform of the MCD.

12.2 Not a Trace of Financing for Sustainable Consumption

Zero-interest loans, which are included in CCD 2023 for the first time, must be repaid in less than three months and are therefore probably not the type of instrument that consumers can rely on to purchase electric cars. They could be used to buy other types of energy-saving household appliances, but the fact is that there is no reference to green consumer credit in CCD 2023, not even with regard to loans for the purpose of home renovation (Article 2(3)) (for example, installing solar panels and thermal insulated doors and windows).^[94] These are loans that could benefit from an increase in capital or lower interest rates; of course, the provision set out in Article 31 could also be used to cap interest rates on this green consumer credit. However, the legislator preferred to wait for market developments before regulating the conditions under which these loans should be put on the market (Recital 93, Article 46(1) (c)).^[95]

12.3 For the Future, Crowdfunding Platforms

On the Council’s initiative, direct crowdfunding credit services between private individuals were deleted from the Commission’s Proposal.^[96] The upshot is that when22 providers of crowdfunding credit services lend directly to consumers, the provisions of CCD 2023 relating to lenders will apply to them. When, on the other hand, they merely facilitate the granting of loans between lenders acting in the course of their trade, business or profession and consumers, the crowdfunding service providers act as credit intermediaries and must therefore be subject to the obligations imposed on credit intermediaries by CCD 2023 (Recital 17), as defined in Article 3(12).^[97] Two years after CCD 2023 comes into force, the Commission is expected to assess the need to protect consumers who borrow and invest through crowdfunding platforms, when these platforms do not act as lenders or credit intermediaries and facilitate consumer-to-consumer lending (Article 46(2)).^[98]

12.4 Classic Protection Instruments

CCD 2023 continues to rely on traditional consumer protection instruments. In line with tradition, it provides legal operators and consumers with pre-contractual information sheets that aim to make it easier to understand and compare offers. The expansion of online credit and the need for information to be appropriately displayed on different communication channels would have required taking further steps to standardise the presentation on different devices.^[99] The possibility of providing consumers with a standard digital tool for comparing offers would certainly have been welcome.^[100]

On the other hand, the exercise of the right to withdraw is strengthened. In the regulation of this right, which is so important in fast contracting by means of algorithms that facilitate the process, some of the consequences of its exercise are not explained. In particular, the legislator does not make it clear whether lenders must return any other amounts received from consumers which are not the interest to which they are entitled. In short, it is unclear whether lenders can retain other23 costs.^[101] This contrasts with the regulation on early repayment, in which it is explained for the first time that the reduction of the total cost of a loan includes fees for services already provided and paid. It may also be asked whether eliminating lenders’ rights to receive interest on amounts owed by consumers would have been a deterrent to possible breaches of the duty to inform about the right to withdraw, or, at least, whether it would have been advisable to reduce the amounts to the legal level when this was lower than that agreed. The extension of the right’s existence sine die is not a new development; what may be is that this only applies when lenders omit to mention the right to withdraw. Since other rules of the acquis do impose limits, the reason for the differences should have been explained.^[102]

12.5 New Measures to Prevent Indebtedness

CCD 2023 recognises the business nature of the activity of granting credit and does not aim to ensure that consumers necessarily receive the credit they request. It is not clear how providing personalised prices can affect the prohibition on discrimination (Article 6 I) but a priori this is recognised to be a justifiable commercial strategy even when automated processing is used (Articles 6 II, 13). This may come as a surprise because it leads to higher, perhaps exclusionary prices for a sector of the population, while at the same time the requirements for assessing creditworthiness are tightened precisely in order to avoid the risks inherent in the inability to repay (Article 18(6)). This aims to prevent loans from being given to individuals who are known from the outset to be unable to repay them and is thus an incentive to eliminate the granting of high-cost credit, which is only profitable for lenders when borrowers default. However, this is where Member States can play an important role in capping the cost of credit in order to end the worst conditions under which it is offered to some people. Rather than representing a paternalistic approach,^[103] the European legislator’s decision is to be applauded, both from the financial stability perspective and also for the respect that it shows24 for human dignity.^[104] It should also be noted that the special circumstances suggested in Recital 55 that allow for the relativizing of hypothetical negative creditworthiness should be taken into consideration, especially those that take into account the possibility that credit can be useful for improving consumers’ financial situation. CCD 2023 deems it necessary for consumers in financial difficulties to be directed to independent advice services (Article 18(9), 21(1)(x), 25(2) II, 36) but at the same time maintains their options for dealing with unforeseen expenses or temporary solvency problems (for example through deferred debit cards or the possibility of overdrafts or overrunning), without prejudice to the higher charges that are generally imposed on lenders.