human development, social justice and sustainable social systems
The EU must prevent over-indebtedness
The review of the Consumer Credit Directive
For years consumer credit and its over-use have been identified as key elements that contribute to the financial vulnerability of households in Europe. This means that unexpected situations can put these households at risk of becoming over-indebted.
In 2008, the consumer credit market was regulated at EU level through the Consumer Credit Directive (CCD) (DIR 2008/48/EC) aimed at creating a safe market. Eleven years on, the European Commission is evaluating the impact that the Directive has had and considering whether or not adjustments should be made to improve it.
The European Commission is expected to publish the results of the evaluation of the Directive in early 2020. These conclusions could then lead to a new regulatory initiative being launched to amend the Directive. The start of a new Commission mandate in November 2019 will also likely play a role here.
Finance Watch has carefully analysed the current Directive and along with a series of experts in the field come to the conclusion that amendments are needed. There are a number of key areas and principles that are needed to limit the negative impact of consumer credit use by European citizens, which can be introduced in an improved version of the Directive.
The EU consumer credit should be free of dangerous products
The dangers of over-indebtedness emerge from market failures rooted in the asymmetry of power between creditors and debtors – especially when the debtor is vulnerable and /or poor – and that allow:
Exploitative, unscrupulous or irresponsible lending practices:
Terms and conditions that are significantly different from mainstream practices and to which the most vulnerable people have little alternative but to agree.
High cost credit:
The costs are significantly higher than the average on the mainstream market.
Complex credit contract terms and conditions:
Borrowers do not understand their liabilities, or the way the product should be used to avoid penalties and extra-costs. Misleading teaser rates apply for a short period of time.
Responsible lending based on a strict creditworthiness assessment
Adequate personal budget analysis (income and expenditures), on-going credit and debts that should lead to an offer adjusted (in amount and in duration) to the needs of the borrower or to a refusal when the financial capacity is not sufficient.
Creditworthiness should be reinforced to be effective. The judgment of the Court of Justice of the Union of 18 December 2014 (Consumer Finance), Case 449, set a positive precedent for stricter assessment based on documents as it states that the obligation to assess the creditworthiness of the consumer can be carried out “from the only information provided by the consumer, provided that such information is sufficient in number and that mere declarations of it are accompanied by supporting documents.”
We need to regulate what happens when the result of the creditworthiness assessment is negative. Some people seem to say that the acceptance of credit by consumers is the exclusive responsibility of consumers. We believe that the directive should specify that the lender has the duty to refrain from granting credit when the result of the creditworthiness assessment is negative.
We also recommend that the lender should have the obligation to collect and store evidence of the fulfilment of the information and explanation obligations, as stated in the cited Case 449, and that the purpose (or aims) of the credit should be noted in the contract.
A clear difference should be defined in the CCD between the creditworthiness assessment and the credit risk assessment. In addition, the liability of intermediaries to carry out these assessments (at least, the significant ones in the market, whether or not credit is an accessory activity) should be equivalent to that of credit providers. We are targeting here supermarkets, for example, which are massively selling revolving credit and other high cost credits to potentially vulnerable group of clients.
Decisions over whether or not to grant credit should be transparent and should allow the consumer to learn what improvements or changes to their budget and budgeting practices could improve their credit access, if the demand has been denied.
The creditworthiness assessment is, when properly done, the best way to implement responsible lending. The assessment should:
a) identify the remaining amount (incomes from which the unavoidable expenditures have been deducted) of the budget that can be used for credit repayment, and
b) allow the credit provider to adjust its credit offer in amount, duration and cost in order to be affordable for the customer.
About the author
Olivier Jérusalmy is Senior Research & Advocacy Officer for the European NGO Finance Watch and a Member of the European Commission Financial Services User Group (FSUG).
He is specialised in financial inclusion issues. He previously worked as a credit advisor in a credit cooperative, before developing a personal micro-credit offer for private persons, excluded from mainstream credit supply in the Walloon Region. For the past 12 years, he has been Chairman the CAMD, the Brussels Region Umbrella Organisation of Debt Counsellors.
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