Introduction
Personal loans and overdrafts, credit cards and short-term credit products are amongst the commonest consumer lending products offered by banks and financial institutions to satisfy a variety of consumer needs.These products need to be distinguished from home loans (typically secured by hypothecs over immovable property) and which are the subject of a different, albeit complementary regulation. Consumer credit regulation also may however also impact other “non-bank” lenders (or creditors) such as merchants or businesses offering their customers deferred payments options for goods and services.
On the 9 October 2023, the European Council adopted the revised Consumer Credit Directive (“CCD II” or the “Revised Directive”) which forms part of the European Commission’s ‘New Consumer Agenda’. CCD II supersedes Directive 2008/48/EC (“CCD I”) implemented a decade and a half ago across the EU. CCD I had been transposed into Maltese law in 2010 by the Consumer Credit Regulations, Subsidiary Legislation 378.12. These will now need to be replaced by a new set of local regulations to reflect the Revised Directive. The European Union’s recent endeavours to update the current framework were necessitated primarily by the need to adapt to digitalisation challenges in the consumer credit market and to remedy certain shortcomings in the current regulation in so far as protecting against irresponsible consumer lending.
This two-part article will consider some of the salient aspects of the Revised Directive.
A wider scope of application
It is evident that lenders will be required to reassess which of their products fall within the Revised Directive and to prepare for the relative implications since CCD II has a wider scope of application. In terms of value, the current framework is limited to consumer credit agreements ranging between €200 and €75,000. In the Revised Directive, while the €200 minimum threshold has been removed the maximum value has been increased to €100,000. Unsecured loans of more than €100,00, where the purpose of the credit is the renovation of a residential immovable property are however captured by the Revised Directive. Credit agreements in the form of an overdraft facility to be repaid within one month have also been brought within the purview of CCD II.
Moreover, it is significant that hiring or leasing agreements with an express option to buy and certain “buy now pay later” (“BNPL”) credit contracts traditionally exempted from regulation have been brought into the fold. On the guise that these BNPL products may lead to high costs in the event of late payments or promote hasty uninformed decisions from consumers considering the ease with which these contracts are entered into, the legislator significantly revamped the current BNPL exemption. For an agreement to fall outside the CDD, sellers will have to offer BNPL products without the intervention of a third party, the deferred payment must be totally free of charge and the repayment deadline cannot be longer than 50 days, 14 days for large online suppliers. Otherwise, the deferred payment arrangement will be considered as consumer credit, although a light touch regime is contemplated, and certain obligations may be disapplied.
In this regard, it is noteworthy that certain merchants or businesses which may qualify as creditors under CCD II (other than banks and financial institutions) will find themselves subject to a new admission, registration and supervision regime which Member States will be required to put in place, although certain exemptions are being contemplated.
Additional Rules Regarding Pre-Contractual Information
Significantly CCD II reinforces the rules relating to the provision of pre-contractual information. Amongst other things, the Revised Directive divides the precontractual information which the creditor is bound to provide consumers into two – prescribed key information which must be exhibited prominently in the first part of the Standard European Consumer Credit Information form (the so-called “SECCI form”), and preferably on one page (two pages at most), and other information which must follow in a clearly delineated manner. Creditors must also ensure that the information is tailored to the technological mediums through which it will be digested by the consumer, including mobile phone screens. Changes to creditors documentation and systems will be necessary to ensure compliance.
Creditworthiness Assessments
The Revised Directive regulates more stringently the quality of creditworthiness assessments aiming to combat the risk of mis-selling and potential over-indebtedness. While deviations may be made in certain circumstances such as in case of loans for medical expenses, creditors are now expressly prohibited from lending money to consumers if the creditworthiness assessment shows that the consumer is unlikely to meet his obligations. Information on consumers can be obtained from a variety of sources, including from the consumer himself and from databases, although such information must be appropriately verified by the creditor. Information should include at least the income and expenses of the consumer but should not include special categories of personal data such as health data including cancer data, nor information obtained from social networks. Considering the increased use of profiling and other automated processing of personal data, the consumer is being given new rights including the right to request an explanation of the assessment, to express his own views and to request a review of the assessment and the relevant decision.
Creditors to exercise ‘Reasonable Forbearance’
Enforcement proceedings should be seen as a last resort for both creditors and consumers and against this backdrop, the CCD II requires creditors to exercise reasonable forbearance measures and make attempts to resolve the situation through other means. CCD II proposes that forbearance may include extending the term of the credit agreement, changing the type of the credit agreement, partially or totally deferring payments of instalments for a period, reducing the borrowing rate or the total or partial refinancing of the credit agreement. In addition, Member States may allow creditors to impose charges on consumers who default on payment and in doing so they may also require that such charges are no greater than necessary to compensate the creditor for costs which it has incurred due to the default. Additionally, the national legislator is also given discretion to decide whether to allow creditors to impose additional charges on the consumer in the event of default. However, if such a practice is allowed, Member States must necessarily put in place caps on those charges. Although this remains an area where leeway is given to the Member States to shape their laws relating to arrears, default and forbearance and creditors also have considerable discretion, creditors will arguably need to revisit their forbearance policies as well as their practices vis-à-vis a defaulting consumer.
Measures against costly lending
Member States are obliged to introduce measures aimed to effectively protect consumers from excessively high borrowing rates, annual percentage rates of charge (“APR”) or total costs of credit. the Revised Directive proposes caps on borrowing rates, caps on APRs as well as prohibitions or limitations regarding specific charges or fees as ways to achieve this on the lines of what is already happening in other jurisdictions. Notably, this is left to the discretion of the Member States and therefore creditors and consumers alike will need to await the approach which will be taken by the local legislator on such a sensitive matter.
Additional consumer protection measures
A Prohibition of Discrimination: Creditors must not discriminate against consumers legally resident in the Union on ground of their nationality or place of residence, or on other grounds of discrimination set out in the Charter of Fundamental Rights of the European Union. This does not exclude the possibility of offering different conditions for accessing credit where those divergent conditions are duly justified by objective criteria.
Advertising: The rules on advertising are being considerably broadened by CCD II and there is clear focus on how these rules should apply in the context of digital advertising. For instance, the preamble to CCD II makes it clear that the standard information required in an advert should be shown upfront and saliently, in a clear way and in an engaging format and adapted to take into account the technical constraints of certain media such as mobile telephone screens. Temporary promotional conditions, such as a ‘teaser’ rate with a lower borrowing rate for the initial months of the credit agreement, should be clearly identified as such. Consumers should be able to see all essential information at a glance, even when they watch it on the screen of a mobile telephone.
A Prohibition of Tying Practices: Tying practices where a creditor sells a credit agreement in a package with other distinct financial products or services and does not make the credit available to the consumer separately are, subject to certain exceptions, prohibited by the Revised Directive.
“The Right to be Forgotten” for Cancer Survivors: Life insurers will be required not to use personal data concerning consumers’ cancer diagnoses for the purpose of an insurance policy related to a credit agreement after a period following the end of the consumer’s medical treatment. Such period (which is to be set by the Member State) shall not exceed 15 years.
Next steps and concluding remarks
The Revised Directive was published in the Official Journal of the European Union on the 30 October 2023 and came into force on the 19 November 2023. Member States have until 20 November 2025 to transpose CCD II, with the relative national measures to apply from 20 November 2026. While the Revised Directive goes a long way and introduces a wide array of new measures aimed at protecting consumers, it is equally true that the extent of its effectiveness will depend to a considerable extent on how certain discretions will be implemented by each of the Member States.
Authors: Catherine Formosa & Kelly Cini
This article has been published in Business Today in two parts, on the 7th and 14th of December 2023.