The Consumer Credit Law brings the benefits of Europe's single market to retail financial services.
By ARI SYRQUINcredit card logo 88(photo credit: )
Credit costs in Europe vary depending on where you are in Europe. Consumer credit rates differ by as much as 6 percentage points depending on the country. While consumers in Finland pay only 6.3 percent for their loans, in Portugal consumers pay 12.2%. The EU is now acting to level the playing field.
The Consumer Credit Law, approved by the European Parliament on January 16, brings the benefits of Europe's single market to retail financial services. Consumers reportedly will now be able to shop around for the best offer from banks and credit companies in other EU countries.
Transparency and consumer rights are hoped to become the new order of the day as credit advertising is required to provide the same essential information Europe-wide. It is hoped that it will be easier to compare details such as interest rates and charges for defaulting. A standard form will be used throughout the EU to clearly show the cost of the loan. Once a consumer signs a contract, he will still have 14 days to cancel if he changes his mind. This will bring new rights to almost half of the EU.
The new legislation covers loans from €200 to €75,000. It does not cover mortgages and charge cards. The lower limit was set to cover quick loans made by cellphone text messages. This practice, which means money can be transferred to the borrower within 15 minutes, is on the rise; it is reportedly particularly popular in Sweden and Estonia.
Financial services have a very significant impact on consumers' lives. It is therefore important that consumers make well-informed decisions and feel confident that they are adequately protected if something goes wrong. The Consumer Protection Directorate General said it was committed to ensuring a high degree of consumer protection as an essential feature of a smoothly-functioning EU market for financial services. Its work focuses on consumer credit, the distance marketing of financial services and ensuring that consumer interests are considered in other EU financial legislation.
Consumer credit
Twenty years after the adoption of the first directive on consumer credit in 1987, a new EU initiative in the area is necessary due to the constant and fast evolution of financial products and to the continued fragmentation of the EU market. There is also evidence that more needs to be done to encourage the provision of consumer credit across national borders.
Further integration of the markets and a high level of consumer protection are the main objectives of the new Commission proposal for a directive on credit for consumers. The Commission proposal foresees key rights for consumers, such as a 14-day right of withdrawal from the contract, the right to repay the credit early at any time, and protection measures by pre-contractual and contractual information requirements including the annual percentage rate of charge.
The essential modules should be fully harmonized in all EU countries to enable consumers to take full advantage of offers of foreign banks. Providers of financial services should be in the position to market their products all over the EU without having to adapt them to different national legislation.
Distance marketing of financial services
Unlike goods, when financial services are bought and sold over the Internet or by telephone/fax, the "financial service" as such is a contract between a consumer and a bank, a credit card company, an investment fund, an insurance company or another financial institution. To boost consumer confidence in these distance-marketing techniques - and in particular in Internet transactions across borders - the EU has adopted in 2002 a directive laying down fundamental rights for consumers:
• An obligation to provide consumers with comprehensive information before a contract is concluded;
• A consumer right to withdraw from the contract during a cooling-off period;
• A ban on abusive marketing practices seeking to oblige consumers to buy a service they have not solicited ("inertia selling");
• Rules to restrict other practices, such as unsolicited phone calls and e-mails ("cold-calling" and "spamming").
Mortgages
A mortgage credit is often the most important financial operation for an ordinary consumer. The Commission has therefore undertaken a number of initiatives aimed at ensuring that consumers make an informed choice.
In 2001 the Commission endorsed the guidelines on harmonized information on "home loans" (mortgage or housing credit) to be made available by lenders to consumers. The guidelines were agreed in the form of a Voluntary Code of Conduct between the EU mortgage-lending industry and consumer groups. Their aim is to make it easier for consumers to compare loan products available from different lenders, including lenders from other Member States, and to allow consumers to make an informed choice.
When signing up to the code, mortgage lenders commit themselves to giving prospective borrowers two sets of information before they sign a contract:
• General information as to the different types of products offered, including the types of interest rate (fixed, variable or combinations thereof) and all additional costs associated with taking up a mortgage credit;
• Personalized information for the specific product the consumer is interested in, indicating, for example, the exact amounts to be paid over the full time span of the loan, as well as any possibility and conditions for early repayment.
In 2006 the Commission launched a Mortgage Dialogue between the lending industry and consumers, with the aim of finding common solutions to some specific issues, such as pre-contractual information and advice.
syrquin@013.netAri Syrquin is the head of the International Department at Joseph Shem-Tov Law Firm
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