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Financial Consumer Protection and Credit Regulation

The EU established rules for financial services operators in order to enhance consumer protection in the key areas of financial services, including banking,[1] insurance,[2] and securities.[3]

Moreover, the recent financial crisis placed a renewed focus on stronger supervision of the financial markets and on consumer protection.[4] In 2010 the European Commission presented several reforms in the financial sector, focusing on four core principles, one of which consisted of strengthened responsibility and consumer protection to restore confidence in the financial markets. The other principles were: transparency in the financial market; effective supervision through new independent authorities and enforce- ment;[5] and finally enhanced resilience and financial stability.[6]

As a result of the EU reforms, three supervisory authorities and a European System Risk Board were established at the beginning of 2011.[7] The three supervisory authorities are responsible for supervising different financial areas at the micro-financial level, covering banking, insurance, and occupational pensions and securities. They were also given specific powers and tasks to protect consumers. Their regulations expressly state that they ‘shall take a leading role in promoting transparency, simplicity and fairness in the market for consumer financial products or services across the internal market’.[8] They can do this by different means, including collecting, analyzing, and reporting on consumer trends, reviewing and coordinating financial literacy and education initiatives, and by developing training standards for the industry.[9] The European Banking Authority (EBA) is responsible for banking supervision, dealing also with issues of consumer credit and over-indebtedness.

The regulation of consumer credit, a key area of EU consumer protection, has already existed for some time. However, retail financial services have evolved rapidly over the last decade. On the one hand, credit products available to consumers have become more varied and widespread; on the other, financial innovation has allowed lenders to more easily sell on their loans, making the credit intermediation chain longer and more articulated. While creating benefits, this process has also introduced new risks, and thus new challenges for regulation.

The diffusion of credit and the creation of new credit products have increased consumers’ choice and purchasing power, benefitting buyers and sellers alike. At the same time, the abundance of credit and the proliferation of complex credit products have made financial exposures higher and more difficult to understand and manage. This has increased the risk of consumer over-indebtedness, which may crystallize following a fall in income (due to e.g. redundancy or illness)[10] or following a change in general economic conditions which may negatively affect financial commitments.

Similarly, the possibility for lenders to sell on their loan portfolios has increased credit supply, but has also weakened the incentives for lenders to assess the ability of consumers to sustain their financial commitments. As shown by the recent crisis, this has resulted in reckless lending and over-indebtedness, imposing considerable costs on the economy and ultimately on consumers— in particular on weak consumers. The Council of Europe highlighted in a Memorandum on ‘legal solutions to debt problems’ the serious negative effects that over-indebtedness can have on the welfare of individuals, which may impinge on the human right to dignity.[11]

This issue raises difficult questions on how the access to credit in the market can be regulated in a coherent way, in order to facilitate financial participation, but at the same time prevent over-indebtedness. EU consumer law seems to have provided only a partial answer to this dilemma, focusing in particular on the issue of information in credit regulation. The following section will analyze the evolution of consumer credit regulation in the EU and assess the current Consumer Credit Directive.

  • [1] E.g. Directive 2008/48/EC of 23 April 2008 on credit agreements for consumers, OJ L133/66-92, 22.5.2008.
  • [2] E.g. Directive 2002/92/EC of 9 December 2002 on insurance mediation, OJ L 009,15/01/2003.
  • [3] E.g. Directive 2004/39/EC of 21 April 2004 on markets in financial instruments, OJ L 145,30.4.2004.
  • [4] At the international level the World Bank issued a document on ‘Good Practices for FinancialConsumer Protection’, June 2012.
  • [5] See .
  • [6] Communication from the Commission of 2 June 2010—Regulating financial services for sustainable growth [COM(2010) 301—Not published in the Official Journal].
  • [7] Regulation 1093/2010 establishing a European Banking Authority; Regulation 1094/2010establishing a European Insurance and Occupational Pensions Authority, Regulation 1095/2010establishing a European Securities and Markets Authority (adopted on 24 November 2010).
  • [8] See Art. 9 of Regulation 1093/2010 establishing a European Banking Authority; Regulation1094/2010 establishing a European Insurance and Occupational Pensions Authority, Regulation1095/2010 establishing a European Securities and Markets Authority (adopted on 24November 2010).
  • [9] Furthermore, they have to monitor financial activities and ‘may adopt guidelines and recommendations with a view to promoting the safety and soundness of markets and convergence of regulatory practice’ and can temporarily prohibit or restrict certain financial activities in the Union.
  • [10] G. Howells, ‘Whose Responsibility to Plan for Future Changes in Circumstances—Debtor,Creditor or the State?’, in T. Wilhelmsson & S. Hurri (eds), From Dissonance to Sense: Welfare StateExpectations, Privatization and Private Law (Aldershot: Ashgate Publishing, 1999), p. 438.
  • [11] See the Council of Europe, Explanatory Memorandum to Recommendation on LegalSolutions to Debt Problems, June 2007; see also G.M. Duhl, ‘ International Developments inConsumer Financial Services Law 2007-2008’, (2009) 64 Business Lawyer, pp. 683-4.
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