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The rise of consumer credit and EU regulation

The past two decades have seen a marked increase in consumer credit, which has become a common feature in the European Union. 1 8 Lending first appeared in the form of payment by instalments provided directly by the seller, and was eventually supplemented by the involvement of the financier, as a third party. Accordingly, banks or financial intermediaries have today become the usual lender. The expansion of the credit sector has occurred for two main reasons. First, the reduction of the welfare state has transformed credit into a necessity for many of the poor in order to balance their budget. Secondly, the liberalization of financial services has led to easier access to credit, which is now increasingly available to all groups in society. This development has been described as the ‘democratization’ of credit.[1] [2]

For many years, consumer credit has developed freely in the European Member States, without any specific regulation. However, the apparent ease of access to borrowing led to over-indebtedness on the part of consumers.[3] Thus, there were different reasons that called for a particularly high level of protection for the consumer. First, in many cases, there was a considerable amount of money involved and long-term commitments in agreements had the potential to seriously affect consumer well-being and autonomy. Secondly, consumers lacked the experience to judge the impact of complex credit contracts, something which only became apparent after some time.[4]

In order to prevent any abuse by financial institutions and consumer over-indebtedness, the European Community and Member States gradually adopted legislative measures.[5] The Community regulated consumer credit for the first time through the Consumer Credit Directive 87/102, in 1987.[6] The 1987 directive aimed at promoting competition and greater transparency in contractual clauses and at providing detailed information on the costs and conditions of consumer credit. The information requirement consisted of establishing strict rules to ensure that the signing of the contractual agreement would be treated with due seriousness, drawing the consumer’s attention to the economic and legal contents of the operation. These information conditions have influenced the contract law of the Member States, standardizing the rules on the rights of withdrawal and the remedies available for private individuals.

While the directive harmonized national measures in the field of consumer credit, it also contained a ‘minimum-harmonization formula’. As we saw in Chapter 2, this meant that Member States were still allowed to provide a higher level of consumer protection, if they decided that this was necessary.[7] As a result, most Member States had gone far beyond the minimum EU standards.[8]

Owing to the fast development of the credit sector, the EU developed a new consumer credit proposal in 2002.[9] The reason was that markets had, by then, changed considerably, requiring an extension of the legal scope to cover new types of payments. Furthermore, Member States had included new types of credit agreements in their legislation, with provisions often more detailed and stringent than those contained in the directive itself. These different provisions, for example in terms of the periods of time for a withdrawal or for the cancellation of a contract, had led to a fragmentation of the market,[10] imposing legal challenges on firms that wanted to offer products in different Member States.[11]

Aimed at reducing market fragmentation, the first proposal of the new directive in 2002 moved away from the initial minimum-harmonization trend and opted for a maximum harmonization of consumer credit provisions.[12]

In practice, this meant that Member States would have been prohibited from maintaining stricter rules in the area covered by the directive.

An important shortcoming of this full-harmonization strategy was its failure to capture the variety of financial needs and resources of consumers in different Member States. As mentioned earlier, a large number of scholars have, criticized the full-harmonization trend.[13] This would leave Member States without sufficient autonomy to determine their own consumer policy and learn from each other through a cooperative process.[14] Full harmonization might also be too inflexible, hindering Member States from introducing new legislation promptly to address developments in national consumer credit markets.[15] These problems were soon recognized by the Commission and so the draft directive was modified and made more flexible, allowing Member States, in some cases, to provide higher protection. In particular, the scope of the draft directive was reduced, with the result that most of the harmonized rules related to the provisions of contractual and pre-contractual information.

The draft directive also intended to extend the scope of its 1987 predecessor (which applied only to credit agreements) to include guarantors, stating that they should be provided with a minimum amount of information and protection, similar to that enjoyed by the consumer. Moreover, the proposal focused on enhanced market stability by putting in place a set of provisions on responsible lending, obligatory consultation of databases, and providing information and protection both when the credit agreement is concluded and during its performance. After six years of debate, the new directive on credit agreements for consumers was finally adopted on 7 April 2008 and became effective on 21 June 2008.[16] In the final version, several protective provisions were reduced or dropped (among them, that on guarantors’ protection and some aspects on responsible lending).[17] However, the complex drafting process of the directive at least demonstrates that new concerns and objectives are now present in the policy debate, and that EU consumer law may be evolving from the narrow market-building approach of its beginnings.

  • [1] J. Niemi-Kiesilainen, I. Ramsay, & W. Whitford (eds), Consumer Bankruptcy in Global Perspective(Oxford: Hart Publishing, 2003), p. 2.
  • [2] Niemi-Kiesilainen, Ramsay, & Whitford (eds), Consumer Bankruptcy in Global Perspective (n 18), p. 2.
  • [3] Howells, ‘Whose Responsibility to Plan for Furture Changes in Circumstances' (n 16), p. 438.
  • [4] See P. Rott, ‘Consumer Credit’, in H.-W. Micklitz, N. Reich, & P. Rott, Understanding EUConsumer Law (Antwerp: Intersentia, 2009), pp. 177-212.
  • [5] See e.g. the French Act no. 78-22, 10 January 1978, concerning the information and protection of consumers in certain credit operations.
  • [6] Council Directive 87/102/EEC concerning consumer credit OJ [1987] L042, p. 48. This waslater complemented by other Acts and culminated in the adoption of a new Directive 2008/48/ECof 23 April 2008 on credit agreements for consumers repealing Council Directive 87/102/EEC.
  • [7] N. Reich and H.-W Micklitz, Europdisches V, 4th edn (Baden-Baden: Nomos,2003), p. 45; G. Howells & T. Wilhelmsson, EC Consumer Law (Aldershot: Dartmouth Publishing,1997), pp. 315-20; N. Reich.
  • [8] S. Weatherill, EU Consumer Law and Policy (Cheltenham: Edward Elgar Publishing, 2005), p. 88.
  • [9] COM/2002/443 Proposal for a Directive of the European Parliament and the Council onthe harmonisation of the laws, regulations and administrative provisions of the Member Statesconcerning credit for consumers, Brussels, 11.9.2002.
  • [10] More on the credit proposal in K. Nemeth & H. Ortner, ‘The Proposal for a New Directiveconcerning Credit for Consumers’, (2003) 4 German L. J., pp. 801-13.
  • [11] COM/2002/443 Proposal for a Directive of the European Parliament and the Council onthe harmonisation of the laws, regulations and administrative provisions of the Member Statesconcerning credit for consumers, Brussels, 11.9.2002. See also the EESC Opinion of 07/17/2003,OJ, C/2003/234.
  • [12] COM/2002/443 Proposal for a Directive of the European Parliament and the Council onthe harmonisation of the laws, regulations and administrative provisions of the Member Statesconcerning credit for consumers, presented by the Commission Brussels, 11.9.2002.
  • [13] See chapter 2 of this book. See also T. Wilhelmsson, ‘The Legal, the Cultural and the Political—Conclusions from Different Perspectives on Harmonisation of European ContractLaw’, (2002) Eur Bus. L. Rev., p. 541; U. Reifner, aus Normen und Begrtindung aus der Sicht des Verbraucherschutzes des Geanderten Vorschlags fur eine RichtlinieVerbraucherkreditvertrage und zur Anderung der Richtlinie 93/13/EWG des Rates, 7.10.2005 COM(2005) 483 (Hamburg: Institut for Finanzdienstleistung e.V., 2005), p. 1 etseq; for a different view,see Nemeth & Ortner, ‘The Proposal for a New Directive concerning Credit for Consumers’ (n27), pp. 809-12.
  • [14] See more on this debate in chapter 2 of this book.
  • [15] House of Lords, European Union Committee, 13th Report of Session 2005-06, ProposedEU Consumer Credit Harmonisation Directive, Paper 37, p. 8.
  • [16] Directive 2008/48/EC of 23 April 2008 on Credit Agreements for Consumers, OJ L133/66-92,22.5.2008.
  • [17] Rott, ‘Consumer Credit’ (n 21).
 
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