In June this year, the Council of the European Union issued a general approach to the proposal of the new Consumer Credit Directive, which is to replace the existing Consumer Credit Directive of 2008. Currently, the proposal is pending the official position of the European Parliament. It remains to be seen whether or not the European Parliament will take the Council’s general approach into consideration in its position, but we will still have to wait for the Directive’s final form. However, based on the position expressed by the Council, the direction of discussions concerning the consumer credit regulation is now predictable.
Considering the gradual shift of consumers’ activities to the online environment and the emergence of new products often offered across borders, the European Commission decided to replace the existing Directive of the European Parliament and of the Council 2008/48/ES on credit agreements for consumers and repealing Council Directive 87/102/EEC of 23 April 2008 (the “Original Directive”) with a new directive, currently under discussion as the Directive of the European Parliament and of the Council of 30 June 2021 on consumer credit (the “New Directive”).
Whereas the scope of the Original Directive excluded loans of less than EUR 200 or exceeding EUR 75,000, the New Directive should also extend to small loans of up to EUR 200. The upper limit for loans not regulated by the New Directive has been increased to EUR 100,000 in view of the rise in inflation since 2008. However, small loans up to EUR 200 are already regulated in the Czech Republic by the Act No. 257/2016 Coll., on Consumer Credit, as amended (the “CCA”), which implemented the Original Directive.
Another novelty is the repeal of the exemption from the scope for rental or leasing contracts where there is no obligation to purchase the asset. Therefore, if the New Directive is not further amended in this respect, operating leases, which are currently outside the scope of the regulation, will also be affected.
The New Directive also distinguishes between overdraft facilities, i.e. overdrafts on current accounts, including previously excluded overdrafts due within one month. Overdrafts will be newly distinguished as overdraft facilities (overdrafts under contract) and overrunnings (tacitly acknowledged overdrafts, where the creditor makes funds available to the consumer that exceed the current balance on their current account, or agreed overdrafts).
Other credits falling within the scope of the New Directive should include credits granted without interest or charges and credit agreements with a maturity of up to three months. The regulation will now also affect deferred payments (BNPL credits), which are offered to consumers by a creditor through a supplier of goods or services and allow them to purchase a product and pay for it later, usually in a few instalments. Providers of these deferred payments will be subject to similar obligations under the New Directive as providers of other consumer credit, including the obligation to assess the creditworthiness of the consumer.
The BNPL services were also addressed by the recent final report of the European Banking Authority (EBA), which assesses this way of funding as risky, as it may encourage the consumer to excessive spending and creation of financial payables which they will be unable to settle. Particularly with a large number of credits with different maturities, it is easy for consumers to lose track and become over-indebted. A certain degree of regulation of BNPL services was therefore probably reasonable to expect, yet the providers of these payments might still be surprised by the resulting scope of the obligations imposed.
The New Directive also complements the Regulation on European crowdfunding service providers for business, which currently excludes consumer crowdfunding services from its scope. The new regulation will also affect providers of crowdfunding services, i.e. operators of P2P lending platforms.
P2P service providers that directly provide credit to consumers (i.e. they raise funds through a platform for the purpose of lending, but then act as a creditor to the borrower) will have obligations under the New Directive to a similar extent as other creditors.
However, if the P2P service provider does not provide the credit itself, but facilitates the provision of credits to individual creditors through the platform, the scope of the provider’s obligations will depend on whether the creditors are entrepreneurs (e.g. persons performing this activity on the basis of a trade licence) or not (consumers). If the credit provider is an entrepreneur, the obligations of creditors pursuant the New Directive will apply directly to that creditor. However, if a consumer provides credit to another consumer via a platform, then under the New Directive, the P2P service provider will be subject to obligations such as those related to creditworthiness assessments and provision of pre-contractual information.
In the area of information obligation, the New Directive specifically regulates how and when pre-contractual information is to be provided to consumers and introduces a new form, the Standard European Consumer Credit Information Overview, which is intended to be a one-page document summarising the key elements of consumer credit in question. The aim is in particular to enable consumers to compare and better understand credit offers. A similar standardised document is already compulsory for non-life insurance offering.
The New Directive further extends the obligation for creditworthiness assessments to be carried out by the creditor in the interest of the consumer to prevent irresponsible lending practices and over-indebtedness. Specific requirements will be introduced to verify the source of the information obtained by the creditor within the creditworthiness assessment. In the case of creditworthiness assessments using automated decision-making systems, the New Directive introduces the consumer’s right to human intervention, an explanation of the assessment, or the possibility to appeal against the creditor’s decision.
The consumers should only be granted a new consumer credit if the result of the creditworthiness assessment suggests that they are likely to meet their obligations. At the same time, however, the New Directive permits Member States to allow an exception in specific situations, for example, where the creditor has a long-term relationship with the consumer or in the case of credits to fund specific expenses (healthcare, student loans, loans to people with disabilities).
Another novelty is also the explicit prohibition of certain commercial practices such as tying practices, inferred agreement for the purchase of ancillary services through pre-ticked boxes or the prohibition of unsolicited credit sales, including the sending of non-requested pre-approved credit cards or unilateral increases in credit card limits or overdrafts. Equally important innovations include the obligation for Member States to introduce caps on interest rates, APRs or the total costs of credit.
Position of the Council of the European Union
Despite the generally positive position of the Council of the European Union (the “Council”), the New Directive has undergone several amendments in the Council’s “general approach”. For example, the Council proposes to extend the reduced list of exemptions and to exclude operating leases and interest-free deferred debit cards from the scope of the New Directive or to distinguish for the purposes of the exemptions between BNPL services provided by creditors other than the supplier of the goods/service provider and deferred payments offered by the supplier of the goods/service provider which, according to the Council, do not require regulation as they do not provide credit to the consumer. The Council also proposes to allow Member States to apply a more moderate regime to certain financial services (in particular small loans up to EUR 200, overdrafts and interest-free credits).
The Council also excludes from the New Directive the regulation of platforms for the provision of crowdfunding. Providers who are creditors are already subject to the provisions on creditors. If the provider merely facilitates lending to other creditors, these creditors themselves will be in the position of creditors. The Council thus excludes the third option mentioned above, which protects consumers who provide credit to consumers.
In addition, the Council has simplified the provision of pre-contractual information by merging the forms into another document. In doing so, it proposes that essential information enabling the consumer to compare credits should be provided on the first page of the document provided.
When to expect changes in the Czech Republic
In view of the complexity of the regulation, Member States must implement the amendments in national legislation within two years of the adoption of the New Directive. At the same time, however, Member States will have another six months (even a year and a half in the case of SMEs) before they have to enforce the new rules. It can therefore be expected that the new rules will not be implemented until two and a half years after the directive is issued, while the final text of the New Directive and its adoption by the European authorities will take some time. However, creditors can already prepare themselves for the areas most likely to be regulated by the New Directive.
Independently of the preparation of the New Directive, an amendment to the CCA is undergoing the comment procedure. The amendment should introduce a new provision regulating the method of determining the creditor’s reasonable costs associated with the early repayment of a consumer housing credit. The amendment should also extend the set of cases in which early repayment of a consumer housing credit is completely free of charge, namely in cases of sale of the real estate to which the credit relates and in the case of settlement of the community property of the spouses, if the settlement concerns the real estate funded by the credit or used as collateral. The amendment is proposed to take effect from 1 January 2024 at the earliest.
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