PR - European Parliament to vote on Consumer Credit Directive

Consumers across Europe would be able to make better informed choices when they take out consumer credit loans – paying for holidays, weddings or a new car – following a vote in the European Parliament on Wednesday 16th January 2008. The proposed EU Directive on Consumer Credit Loans aims to break open the €800 billion EU consumer loans market which remains largely fragmented into national markets denying consumers choice and more competitive price.

The new rules will make the market more transparent for consumers and business competitors. The main effect will be to provide standard, comparable information to customers across the EU taking out a credit loan. Under the new rules, consumers will be assured access to key facts and figures in advertisements. For credit offers, the information given to consumers (e.g interest rates, amount, number and frequency of payments, the obligation to take out an insurance or the charges for defaulting) must be set out in a new comparable EU-wide European Credit Information Form.

And there will be a new single EU-wide method for calculating the (APR) Annual Percentage Rate of Charge so consumers can see the real cost of credit. The proposed directive also sets common standards on a right of withdrawal so consumers can change their mind. This Consumer Credit Directive is part of a bigger drive to boost the cross border market in retail financial services as set out in the Green Paper on Retail Financial Services adopted by the Commission in December 2007.

The current rules on consumer credit result from Directive 87/102. This Directive contains certain minimum requirements, including in particular a few information obligations, a basic right to repay early without any specifications, and a common calculation method for the Annual Percentage Rate. Member States were allowed to go beyond these provisions to better protect their consumers, and a very large number of them did so, but to a different extent. Therefore, credit legislations still differ strongly in the EU.

Consumer credit plays an important part in the EU economy. According to data from 2005, outstanding credit is at a level equal to nearly one tenth of EU GDP. It plays an especially great role in countries like the UK, Ireland, Germany and Austria, where it accounts for around one fifth of household private consumption, and a growing role in countries like Poland and Hungary, where it accounts for nearly one tenth. Consumer loans represent on average almost 18% of the gross income of retail banking in the EU.

Across the EU the picture is varied, as markets are in different stages of development. The outstanding consumer credit per person ranges from less than 100 EUR in some Member States like Lithuania or Slovakia to over 3000 EUR in Member States like the UK or Ireland with the highest level of consumer credit.

The consumer credit market in the EU is already worth over 800 billion EUR, with an average annual growth rate of over 8%.

That shows the potential for big savings for consumers, if increased competition brings even a small reduction in the interest rates charged to consumers on such a significant amount.

According to ECB data the average rate charged on a consumer credit in the Euro area in 2007 varies from around 6% in the cheapest country (Finland) to over 12% in Portugal, the country with the highest interest rate. Other examples illustrate this variety of situations: 9.4% in Italy and Spain, 7.1% in France or 6.8% in Ireland. This suggests there are considerable potential benefits, for banks and consumers, in developing a cross border market in consumer credit.