EUROPEAN COMMISSION

Brussels, 30.6.2021

SWD(2021) 170 final

COMMISSION STAFF WORKING DOCUMENT

IMPACT ASSESSMENT REPORT

Accompanying the

Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

on consumer credits

{COM(2021) 347 final} - {SEC(2021) 281 final} - {SWD(2021) 171 final}

DISCLAIMER: This is a working document draft which does not reflect the views of the European Commission. The positions expressed therein do not prejudge the official position of the European Commission

Table of Contents

1.    Introduction: political and legal context    

2.    Problem definition    

2.1 What are the problem drivers?    

2.2 What are the problems?    

2.3    What are the consequences of the problems?    

2.4    How will the problem evolve?    

2.5    Intervention logic    

3.    Why should the EU act?    

3.1    Legal basis    

3.2    Subsidiarity: Necessity of EU action    

3.3    Subsidiarity: Added value of EU action    

4.    Objectives: What is to be achieved?    

4.1    General objectives    

4.2    Specific objectives    

5.    What are the available policy options?    

5.1    What is the baseline from which options are assessed?    

5.2    Description of the policy options    

5.3    Options discarded at an early stage    

6.    What are the impacts of the different policy options and who will be affected?    

6.1    Policy option 1: Non-regulatory intervention    

6.2    Policy option 2: Targeted amendment of the Directive to increase legal clarity    

6.3    Policy option 3a: Extensive amendment of the Directive to include certain new provisions, in line with existing EU acquis    

6.4    Policy option 3b: Extensive amendment of the Directive to include provisions going beyond existing EU acquis    

7.    How do the options compare?    

7.1 Effectiveness: expected achievement of the initiative’s objectives    

7.2 Efficiency: impacts on businesses and consumers    

7.3 Coherence with other EU legislation (and policy objectives)    

7.4 Stakeholder views on the options    

7.5 Comparison of options and proportionality    

8.    The preferred option    

8.1    The overall effectiveness of the preferred option    

8.2    Impact on stakeholders    

8.3    Synergies with other legislation    

8.4    REFIT (simplification and improved efficiency)    

9.    How would actual impacts be monitored and evaluated?    

Annexes    

Annex 1: Procedural information    

Annex 2. Stakeholder consultation – Synopsis report    

Annex 3. Who is affected by the initiative and how?    

Annex 4. Analytical methods used in preparing the impact assessment    

Annex 5: Policy options detailed measures    

Annex 6: Market developments    

Annex 7: Glossary    

Annex 8: Mapping of national measures to support borrowers amid the COVID-19 crisis    

Annex 9: Approach to monetisation of cost benefits    

Annex 10: References and documentation reviewed    

Annex 11: List of abbreviations    

1.Introduction: political and legal context

Political context

Directive 2008/48/EC on credit agreements for consumers (“the Consumer Credit Directive” or “the Directive”) aims at securing a consistently high level of protection across the EU for consumers taking out loans, thus contributing to consumer confidence. The Directive also seeks to create the best possible conditions for the free movement of credit offers and to establish a level playing field for providers in different Member States.

The Commission evaluated the Directive in 2018-2019, following a 2017 REFIT Platform opinion on Article 4 of the Directive regarding standard information to be provided when advertising consumer credit agreements. In 2020, the Commission presented the results of the Evaluation in a Staff Working Document and an Implementation Report to co-legislators on the Directive, as well as an externally contracted study. 1 This full-fledged Evaluation, while establishing that the objectives pursued by the Directive remain relevant, highlighted a number of areas for improvement. The main problems identified include the restricted scope of the Directive, issues about the content and disclosure of information to consumers and insufficient safeguards to ensure responsible lending. The Directive also lacks provisions dealing with events of exceptional and systemic economic disruption (such as the one caused by the COVID-19 crisis).

The consumer credit sector has been profoundly transformed by the digital transition. New actors such as peer-to-peer lending platforms have emerged and traditional providers are increasingly using online sales channels. New products such as short-term high-cost loans, that can lead to significant costs for the borrower, are more and more marketed and sold online. The growing use of digital devices affects the way in which pre-contractual information is provided to consumers. Also, automated decision-making for credit scoring and the use of personal data not directly provided by consumers for assessing their creditworthiness raise questions in terms of consumer and data protection and potential discrimination from decisions based on opaque algorithms. Finally, the COVID-19 crisis has greatly impacted the credit market and consumers, especially vulnerable ones, leading to an increased financial vulnerability of many EU households.

The von der Leyen Commission through its Work Programme 2020 2 recognised the significant impact of the digital transition in everyday life and included the need for a Europe fit for the digital age among its headline ambitions. The Commission also committed to giving a new push for European democracy, including by aligning consumer protection with contemporary realities - notably cross-border and online transactions - to empower consumers to make informed choices and play an active role in the digital transformation of society.

In this context, the Commission decided to review the Consumer Credit Directive, in line with Better Regulation principles, to ensure enhanced consumer information and understanding of consumer credits, and to better protect consumers from irresponsible lending practices. The Consumer Credit Directive’s review was included in the REFIT annex of the 2020 Commission Work Programme, with a potential new legislative proposal scheduled for the second quarter of 2021. 3 The Directive’s review is apposite to ensure better consumer empowerment and protection in synergy with other simultaneous initiatives that the Commission is undertaking.

First, the New Consumer Agenda, 4 which presents a vision for an EU consumer policy from 2020 to 2025, includes the key priority areas accompanying the digital transformation and of taking into account specific needs of consumer groups susceptible of being vulnerable. Therefore the agenda already highlighted the intention to revise the Consumer Credit Directive (action 10) but also to devise actions to enhance debt advice services in Member States (action 15). The Agenda also highlights the synergies of such actions with the ongoing review of other existing legislation, such as the Mortgage Credit Directive, the Payment Account Directive and the Distance Marketing of Financial Services Directive.

Secondly, in September 2020, the Commission adopted a Digital finance package , including a Digital finance strategy and legislative proposals on crypto-assets and digital resilience, for a competitive EU financial sector that gives consumers access to innovative financial products while ensuring consumer protection and financial stability. The package supports the EU’s ambition for a recovery that embraces the digital transformation. In 2020, the Commission also published a White Paper on Artificial Intelligence presenting options to promote the uptake of Artificial Intelligence but also to address the risks associated with certain uses of this new technology, followed by a Proposal for a Regulation laying down harmonised rules on artificial intelligence (Artificial Intelligence Act) published in April 2021.

In addition, the new Capital Markets Union action plan , published in September 2020, proposes several actions to support a green, digital, inclusive and resilient post COVID-19 economic recovery, including an action on empowering citizens through financial literacy. The action plan also announces a renewed sustainable finance strategy that the Commission will put forward to increase private investment in sustainable projects and activities.

Finally, the continuous efforts of the Commission towards deepening the Economic and Monetary Union (EMU) by 2025 are to be supported by an increased cross-border integration and risk reduction in the banking system, notably as regard non-performing loans. In 2019 consumer lending non-performing loans (NPLs) represented more than 25% of household NPLs and roughly 10% of total NPLs. 5

Legal developments

The Directive, which was adopted in 2008, covers consumer credit between EUR 200 and EUR 75 000 6 , such as loans granted for personal consumption, including automotive vehicles, household goods and appliances, travels, as well as some overdrafts and credit cards. Overdraft facilities to be repaid within a month, interest-free credits, leasing agreements without an obligation to purchase are among the main types of credits excluded from its scope. 7   

The main objectives of the Directive are to ensure that all consumers enjoy a high and equivalent level of protection across the Union as well as to create a genuine internal market for consumer credit (Member States cannot maintain or introduce in their national law provisions diverging from those laid in the Directive for harmonisation purposes). This means that, where no such harmonised provisions exist, for example due to scope limitation, Member States remain free to maintain or introduce national legislation, and most of them did so. 8

Along the years, a number of relevant pieces of legislation complementing the CCD have been enacted, for instance, the Mortgage Credit Directive (MCD) 9 or the General Data Protection Regulation (GDPR). In fact, there are a number of similarities between the Consumer Credit Directive and the Mortgage Credit Directive: they both share a number of similar definitions and both pieces of legislation are currently struggling with certain similar definitions (example: whether peer-to-peer lenders fall under the definition of ‘creditor’ or ‘creditor intermediaries’). Both pieces of legislation set rules on creditworthiness assessment, with the MCD adopting a more prescriptive approach (ban on negative creditworthiness assessment and more precise text of possible data used for the assessment). The MCD also provides safer and sounder rules with regard to responsible lending, protection of over-indebtedness and regulates practices till now not fully regulated by the Consumer Credit Directive (example: product tying practices, advisory service and knowledge and competence of staff). The GDPR is of particular importance when lenders are carrying out a credit assessment.

The application of the Directive revealed some issues which were not clear, as they rose in subsequent case-law of the Court of Justice. The main issues are the following:

Right of withdrawal: Article 14(1) provides the consumer with a 14 calendar day period in which to withdraw from the credit agreement without giving any reason. The date of commencement of the 14 calendar day start either from the day of the conclusion of the credit agreement, or from the day on which the consumer receives the contractual terms and conditions and information in accordance with Article 10 of the Directive. This latter situation has given rise to a number of pending preliminary rulings for one Member State, namely Germany. The question raised by the national court concern, in particular, whether the right to withdrawal can be invoked forever whenever Article 10 of the Directive is not fully complied with.

Creditworthiness assessment: The Evaluation of the Directive highlighted the Member States’ variant interpretations of the creditworthiness assessment provisions, which created a diverse landscape as regards the requirements for such assessment. The use of new technologies and alternative types of data has led to concerns about personal data protection, particularly about transparency, relevance, proportionality and fairness. There are also concerns, predominantly expressed by consumer organisations in the context of the surveys accompanying the Evaluation and Impact Assessment support studies conducted by external consultants, about granting loans despite a negative creditworthiness assessment. According to the Court of Justice, the obligation to assess the borrower’s creditworthiness is intended to protect consumers against the risks of over-indebtedness and bankruptcy. 10 It has also been ruled that national rules obliging the creditor to refrain from granting credit if there is a lack of the consumer’s creditworthiness, are compliant with the Directive. 11

In May 2020, the European Banking Authority (EBA) published Guidelines on loan origination and monitoring , applying as of 30 June 2021. These guidelines aim to bring together the prudential framework and consumer protection aspects of credit granting.

2.Problem definition 

As demonstrated by the Evaluation, 12 the Directive’s objectives, namely ensuring high standards of consumer protection and fostering the development of an internal market for credit, have only been partially achieved. The link between problems identified in this Impact Assessment as well as in the preparatory study, their drivers and their consequences is visualised in the problem tree below.

Figure 1 Problem tree

2.1 What are the problem drivers?

There are five key problem drivers why the Directive’s two main objectives were only partially achieved:    

1)Since the entry into force of the Directive, the digitalisation has led to new market developments which are not adequately captured by the current limited scope of the regulatory framework: for instance, short-term high cost loans frequently provided online are often below EUR 200. The digital transformation is radically changing consumers’ lives and its wider implications cut across the other problem drivers.

2)Consumer behaviour and preferences have evolved over the past ten years, and for instance a greater emphasis seems to be put on factors like fast access to credit. 13 Behavioural biases are not adequately addressed by the current Directive and this has resulted in consumer protection gaps - for instance, against exploitative practices like cross-selling of expensive payment protection insurances not needed by the consumer.

3)Some of the Directive’s definitions have not withstood the test of time, leading to legal uncertainty (e.g. peer-to-peer lending platforms are not explicitly captured in the definition of ‘creditor’ or ‘credit intermediary’).

4)The Directive does not address adequately equity considerations in the sense that, apart from a recital (Recital 26) alluding to the problem, the legal text does not establish measures to support consumers vulnerable to over-indebtedness.

5)Finally what hampered the full achievement of the two objectives is insufficient harmonisation between Member States, allowed by the vague provisions of the Directive, leading to an unlevel playing field.

These five drivers have led to two overarching problems. On the one hand, when consumers take out loans some of them may engage in very costly credit agreements without being fully aware and/or may become unable to pay back their credit, leading to unexpected fees, and possibly to a dramatic deterioration of their financial situation and to over-indebtedness. On the other hand, the competitiveness of the internal market is not yet fully achieved, and the market for consumer credits remains largely fragmented. Each of these problems is divided into sub-problems, described below.

2.2 What are the problems?

Problem 1: consumers taking out loans face detriment that could be avoided

In the light of market, technological and behavioural developments since the Directive’s adoption, some consumers taking out loans are not adequately protected from arrangements that will become unsustainable for them. Ill-suited credits can prompt debt spirals and over-indebtedness, which have become serious social issues in some EU regions. In 2019, 2% of EU households had arrears on hire purchase instalments or other loan payments, and were at risk of over-indebtedness, with big discrepancies among Member States. 14 The number of over-indebted households is expected to increase due to the COVID-19 crisis, which has deeply disrupted the EU economy in the beginning of 2020. Many consumers have already faced important income losses. 15   A recent survey published by the Commission on 12 March 2021 shows that on average 38% of consumers have concerns on how they are going to pay their bills next month and the situation varies greatly among Member States (from 7% to 71%) 16 .

As shown by the Market Monitoring Survey 2019, just under three quarters of EU27 consumers trust the loans, credit and credit cards market, and 9% of them experienced problems. 17  Of those who experienced a problem, 4 in 10 experienced financial detriment as a result (around 7 in 10 for consumers who find it very difficult to manage financially), and around three in four experienced other, non-financial impacts. The sources of consumer detriment include: insufficient protection e.g. because of loose creditworthiness assessments allowing consumers to take out credits even when this is not warranted by their financial situation; practices and business conduct of credit providers enticing consumers to take out credits they cannot afford; unclear and non-transparent disclosure of prices and fees limiting consumer understanding of the real costs of the credit; and inappropriate use of personal data. 18

The underlying problems are presented below.

Sub-problem 1: Emergence of new potentially or actually risky credit products not necessarily covered by the Directive and new actors not (clearly) regulated

The consumer credit market changed considerably since 2010, as a result of the strong impact of digitalisation, and of the growing presence of new products, such as payday loans, 19 often offered by non-bank lenders. 20 The share of non-bank lending to households has seen a dynamic growth over the recent years. 21  Even though the market for consumer credit is still led by traditional operators, new market players, in particular fintech companies, 22 have also appeared on the market.

One of the most important credit products provided by fintech companies is unsecured loans through peer-to-peer (P2P) lending platforms. 23 These platforms seek to match individual borrowers with individual lenders, often tapping onto a segment of consumer lending underserved by banks (e.g. because they received a negative creditworthiness assessment). Some of the most successful in Europe are Auxmoney in Germany, Mintos in Latvia and Bondora in Estonia. 24 P2P lending may be a convenient and quick way to access credit, however, it may involve important risks for consumers. The fast processes may lead to rush decisions. 25 Since this new type of lending is not explicitly mentioned in the Directive, proper creditworthiness assessments may not be carried out, even when platforms act as creditors or intermediaries (i.e. receive a fee for facilitating the transaction) for professional lenders. Furthermore, consumers might be unsure about their rights and possible recourse in case of problems. Evidence from several Member States confirms that consumers are reporting issues. 26  

The available data on the share of households using a particular product falling under the category of consumer credit is quite fragmented. The most common types of consumer credit in the market are predominantly credit cards (owned by 44% of EU citizens), and personal loans (owned by 13% of EU citizens). 27

The Directive establishes that loans below EUR 200 and above EUR 75 000 are outside its scope of application. Evidence shows that small loan borrowers often have more than one loan. This is particularly dangerous, since their creditworthiness is never assessed. They are therefore likely to experience early payment problems. Concerns raised about the minimum threshold of EUR 200 in the Directive also relate to the fact that in some Member States EUR 200 represent an important share of the monthly income. 28 In 2019, in Ireland around 300 000 people borrowed from moneylenders. 29  

Short term high-cost (STHC) credit, including payday loans, are quick and easy-access personal loans which may be useful for consumers seeking to obtain a loan in a simple and rapid way. These loans have a clear growth potential in a digitalised market with a stronger cross-border element. They can however rapidly lead to a financial detriment, in particular for consumers with low or unpredictable incomes. STHC loans are often likely to be very expensive, far beyond the rate necessary to integrate the credit risk resulting from the borrower profile and the refinancing costs reflecting the monetary policy stance. In a recent mystery shopping exercise conducted in Ireland, Spain and Romania, the average APR for the small value (below EUR 180) payday loans analysed was found to be 2 543%. Payday loans are popular in some countries (e.g. Lithuania) and have been growing fast in others (e.g. Sweden, Poland and Czech Republic), also thanks to digitalisation that allows for quicker, automated processes. 30  Since the amount borrowed is typically lower than the minimum threshold of EUR 200, these loans often fall beyond the scope of the Directive.

In the absence of EU rules covering small amount STHC loans, most Member States have adopted rules to address the design of credit products, denoting the perceived importance of the problem at national level. The most common measure is the introduction of interest rate or APR caps, adopted by 23 Member States. 31 However, the typology of caps and their level vary significantly. Caps have led, in some cases, to lowered default notices and to the disappearance of potentially risky products such as payday loans (e.g. Belgium, Slovakia). 32  STHC loans are growing in Member States with no or high caps and they are the main reason for consumer complaints in some of them (e.g. Bulgaria, Malta). 33

Revolving credit including credit cards warrant attention too. 34 The term revolving credit encompasses any credit that is automatically renewed as debts are paid off, including thus credit cards. The Directive’s evaluation estimated that up to 20 million EU consumers face problems with their credit card in terms of unrequested extensions of the credit line. 35 Revolving credit and credit cards raise concern among consumer associations because of the potential harm that can stem from the flexibility of these contracts due to behavioural biases. 36 The situation of consumers under the impression of having unlimited credit possibilities from the moment they pay back a part of their debt every month, can suddenly become unsustainable because of high costs non-transparently disclosed. 37  These credits frequently amount to less than EUR 200, and are hence exempted from the Directive’s obligations. In France, revolving credit was identified as a key factor behind over-indebtedness linked to credit. Since the introduction of specific rules in 2010, over-indebtedness related to revolving loans decreased by 47%. 38  

Loans above EUR 75 000 are excluded from the Directive’s scope. However, the Mortgage Credit Directive has widened the scope of the Consumer Credit Directive in the sense that the latter shall apply to credit agreements the purpose of which is the renovation of a residential immovable property involving a total amount of credit above EUR 75 000. 39 However there is no comprehensive data on such big amount loans.

There are also other credit agreements, described below, which fall outside the scope of the Directive and can entail risks for consumers: 40

Credit agreements where the credit is granted free of interest and without any other charges and credit agreements where the credit has to be repaid within three months and only insignificant charges are payable are not captured within the scope of the Directive (Article 2(2)(f)). 41 These are generally used to finance the purchase of products such as household appliances, in the form of point of sale financing, concluded between the consumer and the retailer selling the good, acting either as a credit provider or intermediary. Moreover, new digital financial tools that let consumers make purchases and pay them off over time, i.e. ‘Buy Now Pay Later’ products, 42 are growing fast in the EU, and raise concerns among consumer organisations. 43  The number of EU citizens who have contracted an interest free loan has been estimated to be around 7 million. 44 Although interest free credits may appear as very convenient and having low or no costs linked to them, since the lender is paid by the merchant (via a fixed or variable fee), they may entail high fees for late or missed payments. 45 , 46  The risk lies in the fact that consumers are often poorly informed about the conditions of the credit, 47 frequently very strict on delays. Moreover, such financial products promote quick decisions, enticing people to overspend and putting them at risk of taking on financial commitments that they may not be able to honour. 48 Concern at national level is shown by the decision of certain Member States to apply some of the Directive’s provisions to all consumer credits, regardless of the interest rate charged. 49  

Overdraft facilities allow consumers to mobilise amounts for their immediate financial needs, which exceed the balance in their current account. Usually, overdrafts entail high costs if they are not repaid within a certain period, especially for unarranged ones. 50  If the period does not exceed a month, the credit is not covered by the scope of the Directive (Article 2(2)(e)). 51 Overdraft facilities are an example of loans widely used. The number of EU citizens with an overdraft facility is estimated between 20 and 40 million 52 . National data suggest that they more likely to be needed, and therefore frequently used, by lower income households, 53 resulting in detriment for the more vulnerable consumers. 54

According to Article 2(2)(d) of the Directive, leasing agreements where an obligation to purchase the object of the agreement is not laid down either by the agreement itself or by any separate agreement, do not fall under the scope of the Directive. Finance Watch estimates that “hire purchase”, a common type of leasing agreement which envisages but does not require the purchase of the good, represents around 12% of the total credit provided to households, although it accounts for 26% in Member States who joined the Union as of 2004. 55   Leasing agreements are being increasingly used to finance automotive purchases. The number of EU citizens with a car leasing agreement is potentially high as 13 million new passenger car registration are done in the EU annually. 56  In France, the number of leasing transactions increased by more than three times between 2008 and 2019. In Ireland, it represented the largest amount of personal financing by value in 2019, at approximately EUR 3.1 billion. 57  Risks for consumers in taking such financing solution are linked to the absence of information enabling them to compare offers (for example a basic consumer credit arrangement could be less costly) as well as to opaque fees structures. 58

Credit provided by pawnbrokers/pawnshops, 59 offering secured loans using personal property as collateral, is still widely used across the EU, especially by vulnerable consumers who cannot resort to more formal sources of credit (e.g. banks). 60 Consumers are not always clearly informed about the applicable conditions or about the absence of equivalent consumer protections when entering into unregulated agreements. They are often unaware of the high interest rates usually attached to these contracts 61 and they do not always receive the ‘surplus’ money that they are owed in cases where the pawnbroker sells the collateral for a price above the redemption value. 62  It is important to stress that the pawnshop collateralised has no evident cross-border potential.

In the light of the above described problems, in order to ensure effective protection of consumers taking out loans, some Member States opted to extend the Directive’s rules to credit below EUR 200, 63 leasing agreements, 64 or to all overdraft facilities. 65

Sub-problem 2: Limited consumer awareness of the key elements and costs of the credit product they obtain

Articles 4 and 5 of the Directive indicate the elements of the consumer credit agreement about which consumers must be informed before entering a credit agreement. Article 4 concerning standard information to be included in advertising was the object of a REFIT Platform Opinion in 2017. 66  Article 5 specifies that pre-contractual information must be presented in good time before signing the agreement by means of a standard form (SECCI). The Evaluation found that these articles have succeeded in positively impacting the overall level of consumer protection and ensuring a certain level of harmonisation in how information is provided, notably through the adoption of the SECCI. Nevertheless, there are elements that hamper their effectiveness, especially on digital means. 67

With regard to Article 4 of the Directive, although it establishes that information in advertising must be presented to consumers in a ‘clear, concise and prominent way’, it does not establish exactly how the information should be provided. Many national authorities, mentioned that even though credit providers are generally complying with their obligation to provide standard information at advertising stage, key information is often not prominently displayed. 68 , 69 By presenting certain information in (non) prominent way, the advertising message can become misleading. In a mystery shopping exercise 70 conducted in 2020, in almost 20% of cases, malpractices were experienced in advertising material, and in particular for revolving credits online. It is estimated that around 10 million borrowers may be affected by misleading advertising. Consumers are also concerned about profiling and higher prices linked to targeted advertising based on pervasive tracking and monitoring. 71  

From the perspective of consumers, when credits are advertised through certain communication channels such as radio or TV broadcasts, with important information either shown for a very limited amount of time or spoken very quickly, they do not have the time nor the necessary attention span to process detailed information.

Moreover, the lengthy and complex information disclosed to them at pre-contractual stage appears not to be entirely effective in helping them to properly process the information they need in order to compare offers and reach decisions that are in their best interest. For instance, only 46% of the participants to the Finance Watch mystery shopping 72 reported they could compare consumer credit products before making a decision to take out a loan. Behavioural insights show that various factors play a role in this issue: information overload, the complexity of the information provided to consumers, and practical limits to the full efficiency of the “rational consumer concept” due to the numerous behavioural and cognitive biases affecting consumers. 73 Moreover, Art. 5 aims to ensure that consumers are given enough time to reach an informed decision “in good time before” signing an agreement. However, this open worded text has led to a situation whereby consumers are, sometimes, given very little time, or no time at all, to decide. In fact, quite often pre-contractual information is provided at the same time as the signature of the credit contract. 74  It is estimated that up to 9.8 million consumers find the SECCI unhelpful or very unhelpful, and up to 29 million consumers do not seem to understand credit offers. 75

As generally agreed by stakeholders, 76 the need to avoid information overload and to adapt the requirements to digital means of communication are key issues to be addressed. With the further use of digital tools to take out credit, (currently 36% of consumers are doing so online) 77 it can be expected that the risks associated to online models will increase.

Sub-problem 3: Existence of practices by credit providers exploiting consumer’s situation and patterns of behaviour 

Over the years, consumers’ decision-making processes to take up credit have changed as a result of digitalisation and the transformation of consumption habits. Nowadays, the consumer journey is often multichannel (both offline and online) and quicker. Consumers place greater emphasis on factors such as fast provision done from start to end by a single provider (end-to-end processing of the credit agreement) over the location of the physical branch (e.g. in relation to their home location). 78  In context of non-physical interaction between traders and consumers, practices exploiting consumer biases and nudging them into sub-optimal choices, including through dark-patterns 79 can be particularly dangerous for the financial sustainability of consumers, in particular the most vulnerable ones. 

Such practices include pre-ticked boxes or making credit products available quickly, in a small number of clicks (products advertised as ‘one-click’ credit). Consumers with low digital or financial literacy are particularly vulnerable in this context. 80

Another practice employed by credit providers, or intermediaries, which may lead to unsuitable choices for consumers, is cross-selling. Cross-selling is where an additional product is sold together with the loan, as either a mandatory (tying) or an optional element (bundling). It represents a highly profitable practice for credit providers or intermediaries, who usually have agreements with insurance companies and receive commissions when they sell these products. 81 , 82  

The sale of tied insurance policies, 83 especially payment protection insurance (PPI) has raised concerns 84 in some Member States as it is linked to a number of mis-selling scandals in the sector. 85 The Directive deals with cross-selling only to a certain extent: it establishes that when a consumer is obliged to purchase another product together with the credit, the cost of that product must be taken into consideration in the calculation of the APR. However, PPIs can entail disguised high costs which do not always appear to be included in the calculation of the APR. Product tying is considered as very problematic and some Member States adopted measures to limit or ban it. 86  

Unsolicited credit offers may entice consumers to take credits which are not suitable for their situation. The current Directive text does not address these practices, instead leaving it to the Member States or other Union instruments, such as the e-Privacy Directive (2002/58/EC) or the Distance Marketing of Financial Services Directive (2002/65/EC) to regulate them to different extents. 87 While some Member States have imposed a ban or heavily regulated unsolicited credit offers (e.g. Belgium, France, Ireland), they are still common practice in many Member States (e.g. Slovenia, Slovakia), in particular for certain types of products such as credit cards, sent to consumers who have not requested them or whose limit is increased without an explicit request. 88

The Directive does not provide full protection for consumers from making unsuitable choices also because, while under Article 5(6) of the Directive credit providers are obliged to provide ‘adequate explanations’ to consumers before the signature of the contract, it does not impose to advise consumers for example on suitable credit products in the case of ancillary services bundled with a credit agreement. The lack of personalised advice is one of the key problems that consumers face nowadays, according to consumer organisations. 89 The Directive does not include conduct of business obligations when providing credit to consumers either. This is especially relevant given that the performance of staff members of most financial services companies is generally assessed based on their volume of sale.

Without a harmonised approach on the design and marketing of credit products, certain credit providers are expected to continue potentially misleading practices, not in line with responsible lending principles. 90 Further Member States may also adopt measures to limit the incentives for credit providers to make use of them in a non-coordinated manner.

Sub-problem 4: Credits granted without a thorough assessment of the consumer creditworthiness

The Directive, in Article 8, imposes an obligation on the creditor to assess the consumer’s creditworthiness on the basis of sufficient information, where appropriate obtained from the consumer and, where necessary, on the basis of consultation of the relevant database. It also mentions in Recital 26 that creditors should not engage in irresponsible lending or give out credit without prior assessment of the consumer’s creditworthiness. The CJEU has on different occasions highlighted that the article on creditworthiness assessment is fundamental, as it aims at avoiding over-indebtedness, and that the creditors should ensure that this assessment be carried out. 91 There are different reasons hindering the Directive’s creditworthiness assessment provision effectiveness in ensuring the suitability of credit sold to consumers:

·It does not specifically establish whether the assessment should be creditor-focus (i.e. risk assessment) or borrower-focused (i.e. affordability assessment done in the interest of the consumer, as confirmed by the CJEU);

·It does not specify the categories of data that should be considered when conducting a creditworthiness assessment. 92 This has led to the use of personal data by some data controllers (credit lenders, credit bureaus) which may not be necessary and proportionate to the purpose of conducting a creditworthiness assessment. Moreover, a majority of Member States established further requirements, establishing the minimum information to be taken into account or setting out formulas e.g. debt-to-income. 93  

·It does not establish the consequences of a negative creditworthiness assessment, for example some Member States have prohibited the granting of credit following a negative creditworthiness assessment (e.g. Belgium, the Netherlands).

Creditworthiness assessment practices are still seen as a problem area in many Member States, with important issues raised by stakeholders in at least 12 of them. 94 According to the Finance Watch mystery shopping exercise, 95 creditworthiness assessments are worse in the online than in the offline consumer credit market, and worse amongst non-banks than banks. Poor creditworthiness assessment seems to be especially common in certain segments of the consumer credit market, in particular for payday loans and loans provided via peer-to-peer lending platforms. 96

Furthermore as already discussed, digitalisation has transformed the process of collection and analysis of consumer’s information. Credit providers make large use of automated decision-making techniques, including machine learning, for credit scoring. 97 In addition, lenders are making use of different data sources found throughout the digital ecosystem. When carrying out creditworthiness assessments, lenders, through big data analytics, are increasingly making use of large numbers of data points, most of which are either not necessarily provided by the consumer or unknown to the consumer. This use is particularly common among certain non-traditional operators such as peer-to-peer lending platforms, 98 but this practice is not restricted to new operators. 99 The 2020 EBA report on big data and advanced analytics 100 shows that 34% of business respondents declared using or planning to use big data for risk scoring. The use of such technology seem to result in a wider access to credit for consumers, but it raises fundamental rights concerns, in terms of potential infringements of the right to the protection to personal data, privacy and issues concerning direct or indirect discrimination. 101 If left unaddressed, the risks associated with the use of machine-learning technology are expected to worsen since the use of innovative digital tools by credit providers is expected to grow.

Sub-problem 5: Certain consumers (because of individual circumstances or systemic economic disruptions) fall easily into over-indebtedness

Over-indebtedness refers to a situation in which a household is not able to meet its economic and financial obligations over a sustained period. 102 The latest European Union Statistics on Income and Living Conditions (2018) shows that on average, more than 30% of EU households were unable to meet an unexpected expense, with figures nearing 50% in some countries. 103 According to the latest European Quality of Life Survey (2016) 14% of people (over 18) reported they were unable to make scheduled payments related to rent or mortgages, consumer credit, loans from family or friends, or utility or telephone bills (with differences between Member States). Overall, that proportion rises to 21% for people not in arrears but who have trouble making ends meet. Over-indebtedness often arises from unexpected changes in individual circumstances, usually as a result of a combination of circumstances (e.g. unemployment, personal circumstances such as divorce, illnesses, etc.),  104 but can also be linked to irresponsible lending and borrowing practices. 2% of total EU households, and 3.9% of single parents with dependent children, have arrears on loan payments. However, looking at lower income households with arrears (bottom quartile), 10% of them have arrears on consumer credit. 105

In France, debts linked to consumer credit count for 37% of the total debt of over-indebted households. 75% of over-indebted households have debt linked to consumer credit, and 62% of them to a revolving credit. 106 In Sweden, around 70% of those taking out a credit below EUR 195 already had a debt with the company that issued the loan. The majority of new small loan borrowers have at least two loans. 107  Over-indebted households are often also in arrears with consumer credit payments, which can lead to debt spirals.

Several tools are available in Member States to assist consumers at risk or already over-indebted, including the provision of independent debt advice services, 108  forbearance measures, 109 or financial education (as a preventive tool). None of those tools are explicitly included among the Directive’s obligations.

Systemic economic disruptions such as the COVID-19 related crisis often have a direct impact on the financial stability of households, by affecting the income at their disposal and the availability of credit for consumers. For instance the widespread retrenchment in credit that followed the 2008 financial crisis, in combination with the job losses and the economic downturn, resulted in increased financial difficulties for European households. 110 At the end of 2020, six in ten consumers had experienced financial problems since the start of the pandemic, and around four in ten reported a difficult financial situation. 111

However, this crisis is not affecting all population groups equally. Vulnerable groups have less savings, 112 were often already in a precarious situation before the crisis, and may be the most in need to obtain credit to cover their regular expenses, pushing them to obtain higher cost and potentially detrimental credit because they do not have access to alternative, less expensive, products. 113  When asked about the impact of the COVID-19 crisis, up to 5% of consumers surveyed in 7 EU countries in June 2020 said they had to raise the limit on their credit card, up to 14% had to borrow money from family or friends to make ends meet, and up to 15% had to postpone paying at least one bill. Among low-income consumers surveyed, up to 23% had to postpone bill payments, and up to 20% had to borrow from family and friends. 114 Those who are unemployed or working part-time are most likely to say that COVID-19 has already impacted on their personal income. 

Amid the COVID-19 crisis, Member States have adopted a series of relief measures that seek to alleviate the financial burden of citizens and households, such as loan repayment moratoria that were generally extended to consumer credit, next to other credit forms. 115 Most of them have introduced deferrals of loan repayments, but for different periods and with different conditions, as regards for instance eligibility or responsibility for extra costs. Some of these measures had an effect on consumer protection, while the Directive does not address the impact of systemic economic disruptions on consumers. While Member States initiatives proved to be beneficial, 116 the divergence between national measures taken on consumer credit to alleviate the consequences of such disruption should not lead to an uneven consumer protection level.

The majority of respondents to the New Consumer Agenda public consultation believe that EU-level action is needed to safeguard the interests of lenders and borrowers in exceptional and systemic economic disruptions. 117

Problem 2: the competitiveness of the internal market is not fully achieved

One of the key objectives of the Directive is to facilitate the emergence of a well-functioning internal market, through a higher degree of legal harmonisation across the EU on certain key elements of consumer credit (Recital 7). Further harmonisation would level the playing field for credit providers regardless of where they are located and facilitate the provision of credit to consumers in other Member States both directly cross- border or via establishment of subsidiaries, allowing them to broaden the number of their customers, and potentially benefit from economies of scale. From the perspective of consumers, effective competition in the internal market would increase their choices and enable them to shop around for the offer that best suits them. Higher harmonisation should also decrease national market segmentation, allowing better competition among the different players and lower interest rates, especially on smaller national markets which are very concentrated, with the top five main financial institutions representing up to 97% of assets at national level (65% on average in the EU). 118  

More harmonisation and legal clarity should facilitate more financial institutions to provide credit across borders, and this would clearly be beneficial to competition.

Despite a high level of harmonisation of the prudential framework under which banks operate and the creation of the Banking Union in the Euro Area, the consumer credit market has remained highly fragmented. Direct cross-border activities in consumer credit, by a legal entity established in another Member State, remain low. ECB data on outstanding positions of cross-border loans to households provided by monetary financial institutions show that these represented less than 1% of total household loans for the period 2008-2019 (0.8-0.9%) and has not evolved. 119 In 2015 fewer than 3% of European consumers purchased banking products such as credit cards in another Member State, and 5% purchased their loans from abroad. 120 The Directive’s Evaluation confirmed that direct cross-border operations represent 5% or less of credit agreements concluded by the credit providers consulted. 121  This is due to external factor influencing offer and demand, but also to different consumer protection rules, linked also to the way the Directive has been implemented at national level (regulatory choices, vagueness of some provisions). This increases the burden associated to the consumer credit distribution across borders but also reduces incentives for smaller operators to establish cross-border. Moreover, the Directive’s provisions cover only some areas related to the protection of borrowers (for instance they do not harmonise insolvency procedures).

It is to be expected that the increasing role of fintech companies as providers of consumer credit will have an impact on the level of cross-border operations. Contrary to traditional providers of credit, these companies tend to target consumers in various Member States. 122 Their market share is currently small, but in the future their contribution to the development of a cross-border market could be potentially significant. As the digital transition makes cross-border credit operations easier, we can already observe an increasing trend of such operations. For instance, the Latvian peer-to-peer consumer lending platform Mintos is operating in several EU countries (e.g. Denmark, Poland, Czech Republic). Similarly, the Estonian platform Bondora allows users to invest in loans granted through the Bondora Group to borrowers in Estonia, Finland and Spain.

Moreover, a fast and radical change could occur, if major actors of the digital economy, such as BigTech companies, start operating in the area of consumer credit. This development can be observed already today outside the EU. In China, the major e-commerce platform Alibaba has widened its portfolio and started offering consumer credit directly on its website to consumers buying products there. In the US, Amazon Lending offers revolving credit for small and medium sellers in the Amazon e-commerce platform. 123 This trend has not yet reached the EU, even though BigTechs are already partnering up with traditional providers to offer financing options. 124  

This possible tendency is recognised by the Commission in the 2020 Digital Financial Strategy , which says that risks stemming from potential large-scale lending operations by firms outside the banking perimeter should be addressed.

Sub-problem 1: Barriers for credit providers to business expansion across borders

Different regulatory approaches on a number of key Directive’s articles 125 have resulted in different obligations for credit providers depending on the Member State in which they operate. Moreover, it is plausible to assert that legal fragmentation due to the differences in scope of application in the different Member States and different implementation of key terms of the Directive (e.g. ‘sufficient information’ in Art. 8 on creditworthiness assessment) hindered the development of cross-border lending; legal fragmentation can often discourage credit providers from serving consumers in other Member States, either directly or via establishment trade. In fact, credit providers’ lack of knowledge and/or confidence in other Member States’ regulatory framework is singled out as a significant barrier hindering expansion across borders by the business sector. 126  

The issues of enforcement and penalties are another source that leads to high complexity and lack of confidence in the regulatory framework. The choice of sanctions (effective, proportionate and dissuasive) remains at the discretion of Member States (Art. 23). With regard to penalties, Member States have generally established civil and administrative sanctions for infringements of the national provisions transposing the Directive; in addition, some can issue criminal sanctions. As a result, there is considerable disparity in the types and levels 127 of sanctions. With regard to the responsible enforcement authorities, a large number of Member States appointed several bodies to ensure correct implementation of the different aspects of the Directive. Sometimes, the competent authority depends on the type of the credit provider, namely whether it is a bank or a non-bank lender. 128 Having multiple competent authorities with varying sanctioning powers and competent authorities depending on the type of operator has had an impact on the level-playing field between different providers and the consistency of enforcement.

Furthermore the Consumer Protection Cooperation Regulation (N°2017/2394) which is supposed to cover cross border infringement to the consumer legislation included in its annex (including the Consumer Credit Directive), could not be of much assistance in view of the important variations in national implementation of the Directive.

Another aspect to be considered is access to credit databases across borders. Art. 9 of the Directive establishes the obligation on the Member States to ensure access for creditors from other Member States to databases used in that Member State for assessing the creditworthiness of consumers. While the Directive has set up this obligation, it is silent on who is to run the database (publicly run and/or co-exist alongside privately run ones) or what categories of data are to be processed. The result is that the content of such database varies between countries and can include only negative data (e.g. missed payments) or, both positive (e.g. ongoing financial commitments) and negative data, coming from various sources and updated according to different timescales depending on the database. 129 An additional hurdle to the establishment of a well-functioning cross-border database access, is the reciprocity principle. Many credit registers operate on the reciprocity principle, implying that credit providers are to supply the same type of data that they wish to access through the credit database. 130  

However, there are external factors relating to aspects going beyond the Directive elements hampering the cross-border offer of credit. These include legal and technical barriers (know-your-customer requirements as per anti-money laundering requirements, difficulty in checking the identity of consumers, insolvency regimes, contract law relating to the validity of credit agreements) leading to regulatory and market fragmentation, post contractual issues not covered by the Directive, language barriers and questions around applicable law. 131 Some entities may not qualify to obtain existing EU passports and have to ask authorisation in each Member State where they want to offer credit.

Sub-problem 2: Difficulties for consumers to access cross-border credit

The Directive’s Evaluation has shown that there is a growing interest among consumers for cross-border credit offers. Around one third (29%) of the respondents to the consumer survey conducted for the Evaluation said they had looked for a credit from a creditor located in another EU country. This compares to only 2% respondents to a 2011 Eurobarometer who said that they would potentially buy a personal loan in a foreign EU country. 132 This is a marked increase in comparison to the past and demonstrates that consumers are showing a growing interest to take credits in other Member States. However, as mentioned above, very few of them actually go so far as concluding one.

There are several external obstacles and factors that deter consumers from obtaining a credit from a provider established in another Member State: 133

·Geographical restrictions, imposed by providers to limit access only to domestic consumers, to avoid additional administrative burden related to creditworthiness assessment in another economic environment and credit management, especially in case of default. They include requiring to provide an ID number, address, telephone number or tax declaration from the country where the creditor is based as pre-requisite for the transaction to be accepted, and are often based on geo-blocking techniques. 134  

·General consumer preferences, like finding the offer in the national market sufficient, and preferences for obtaining a credit locally.

·Low trust due to the lack of knowledge among consumers of available redress mechanisms and of applicable legislation in case of cross-border purchase.

·Lack of awareness, since credit providers rarely target consumers in other Member States, many consumers are not aware of the possibility to access credit cross-border.

·Language and cultural barriers.

However, differences in the protection guaranteed by the Directive in different Member States could also play a role in hampering cross-border access.

Moreover, it is important to stress the Directive does not include a specific provision on preventing discrimination on the basis of “nationality or place of residence or by reason of any other ground as referred to in Article 21 of the Charter”, contrary to the Payment Account Directive (Art. 15).

Digitalisation and the change in consumer preferences are expected to lead to an increase in cross-border operations. New digital actors such as fintechs generally target consumers in various Member States more than traditional operators. This strengthen the need to ensure a high and consistent level of consumer protection among Member States.

Sub-problem 3: Information requirements for advertisement on certain channels create unnecessary burden for businesses 

The Directive was evaluated following a 2017 REFIT Platform Opinion focusing on the perceived burden caused by standard information that has to be provided when advertising consumer credit agreements in particular on radio. In the Opinion, radio industry stakeholders flagged that current information requirements at advertising stage entail substantial continuous costs for advertisers, which have to pay for additional airtime, and in turn create losses for them because companies choose to advertise on other media channels. 135

On the other hand, those requirements have seem to have a sub-optimal effects in their main objective of informing consumers. Research carried out by the association of radios in France and in the UK shows that only 3-4% of radio listeners recall the total amount payable immediately after hearing a radio advertisement with a consumer credit offer. 136

This issue was confirmed by most business representatives consulted during the Evaluation (which however could not clearly ascertain whether the Directive could be simplified 137 ), and also more recently for the Impact Assessment. Business associations and credit providers stressed that the reduction of the amount of required information in advertisement and marketing would have a positive impact on the industry. They also indicated that information requirements are among the main issues they face because they are burdensome and not necessarily fit for purpose.

Reducing the information provided at advertising stage on certain channels and streamlining information displayed to consumers at advertising and pre-contractual stage could reduce burden for businesses while helping consumers to better understand the main elements of the credit. The Unfair Commercial Practices Directive already recognises that the limitations of the communication medium have to be taken into account when defining whether a commercial practice has to be regarded as misleading (Art. 7).

2.3What are the consequences of the problems?

The problems identified lead to a variety of consequences for different stakeholders.

·Consumers are harmed when they take a credit not corresponding to their needs, financial situation and repayment possibilities. The detriment concerns higher interest rates paid, or interest rates paid when they should not have been granted the credit (but the assessment of their creditworthiness was not performed thoroughly) and the possible unexpected degradation of their debt situation. In addition a worsening of their situation can have a lot of moral damage on the consumers and on their facilities. Because of ineffective information provision and processing (due to information overload), and practices nudging them, consumers end up making sub-optimal choices, which lead to additional costs incurred and lower level of trust. 138 The lack of provisions to assist consumers when necessary, enhance their financial literacy or address the impact on consumers of systemic economic disruptions, can lead to an increase in over-indebtedness. Insufficient harmonisation between Member States, also reduces the competition and increases the concentration of markets which leads to price increase and lower choices for consumers. Vulnerable consumers, such as low-income or over-indebted consumers, are particularly affected by the identified problems.

·Businesses can easily exploit the gaps in the system to develop irresponsible lending practices. With competition being strong on certain less regulated segments of the market, there is an incentive for the less responsible lenders to set (bad) market standards. Different sets of rules for different kinds of credits and unclear obligations also prevent both the expansion of direct cross border lending and establishment trade by smaller credit institutions, and lead to an unlevel playing field. Moreover, unclear obligations and information related obligations that do not benefit consumers create unnecessary burden for businesses. Uncompliant providers or providers offering products not in the scope have a competitive advantage because they do not bear compliance costs than other operators do bear.

·The burden on national authorities enforcing the Directive increases as a result of consumers being exposed to irresponsible practices that lead to more consumer difficulties that in turn lead to more complaints to be processed. EU public authorities face many requests for preliminary rulings submitted to the CJEU, because of the vagueness of the Directive, an increased number of consumer and stakeholders’ complaints and need to provide more assistance to enforcers.

·Consequences for society are the negative externalities of increased level of over-indebtedness, risks for social inclusion, but also risks for financial stability.

2.4How will the problem evolve?

In case of no EU intervention (baseline scenario), the current market trends can be used as benchmark.

Even though the consumer credit market is at the moment still led by traditional operators 139 , digitalisation is already changing its landscape considerably. Fintech companies have expanded significantly in the last decade and are expected to develop further in the future. 140 In 2018, the total value of the peer-to-peer consumer lending market in Europe remained limited (around EUR 2.4 billion), but grew by 89% year-on-year from 2017. 141 Looking at global developments, peer-to-peer lending to consumers is expected to grow, 142 however the impact of the COVID-19 crisis both on creditors and consumers is unclear. 143 Since peer-to-peer consumer lending is excluded from the scope of the recently adopted EU Crowdfunding Regulation ((EU) 2020/1503) and it is not explicitly under the Directive scope, this development could increase the presence of unregulated risky products. Big Techs such as Google, Facebook, Alibaba or Amazon, who are already offering their own version of mobile wallets, as well as loans and credit lines through store cards in third countries, might enter the EU consumer lending market too. 144  

Growing use of digital tools would also exacerbate the problem of limited consumer awareness of the key elements and costs of the credit product they obtain, because the Directive information requirements are not adapted to digital tools. Online practices from credit providers nudging consumers into making unsuitable choices, not regulated by the Directive at present, would be likely to continue and grow. The use of automated decision-making , including machine learning, for credit scoring is expected to increase too, as well as the use of alternative categories of data (such as social media data), since digitalisation makes the process of collecting and analysing consumer’s information faster and easier. This raises questions as to what data will be used in the future for assessing consumers’ creditworthiness and highlights the risks of discrimination from decisions based on algorithms. 145 Moreover, this could worsen the problem of credits granted without thorough assessment of the consumer creditworthiness.

Another aspect to be taken into account for the future market developments is the medium- to long-term societal and economic impact of COVID-19, which will take time to emerge. In the course of 2020, EU economies were supported by an unprecedented level of economic support packages. 146 When this support phases out, the wider cost of COVID-19 will appear. Consumers are concerned about the worsening of their financial situation. Initial data shows that low-paid workers have been particularly affected by the crisis. 147 There were 6.1 million fewer people in employment in Q2 2020 than in Q4 2019, with temporary employees affected the hardest. 148 Challenges in repaying the credit or accessing new credit, may appear in this subset of consumer’s segment first. 149 This is expected to aggravate the problem of consumers falling into over-indebtedness.

As regards the impact of COVID-19 on the consumer credit market specifically, banks expect a continued net tightening of credit standards. 150 The weaker the contraction in output and faster and more robust the recovery is, the more contained the impact of COVID-19 would be (‘V-shaped recovery’). Conversely, deep recession and prolonged recovery spread over longer period of time (‘L-shape recovery’) would be more detrimental for consumer credit markets. The data from the 2008 crisis shows that originations were noticeably lower soon after the crisis and recovered only in recent years to 2008-levels. However, many consumers in financial difficulties due to the crisis are expected to seek consumer credit, and irresponsible lending practices from certain credit providers in the COVID-19 context can put them at risk. 151

Insufficient harmonisation between legislative frameworks of the Member States leading to unlevel playing field would continue to create barriers for credit providers to business expansion across borders and difficulties for consumers to access cross-border credit offers.    The negative effect of concentration of national markets will continue to negatively affect competition conditions and in particular interest rates levels.    

Finally, green loans for energy efficient renovation of houses are expected to rise, especially in some Member States, as well as available public funding directed towards green investment in the coming years. 152    

2.5Intervention logic

The problems presented above have key regulatory drivers leading to the problems and their effects on consumers, credit providers, public authorities and the society. Those are presented in the problem tree (Section 2). An objective tree is also included in Section 4. The intervention logic diagram, links the policy options with the objectives and the identified problems.

Table 1 Intervention logic diagram

3.Why should the EU act? 

3.1Legal basis

The Treaty on the Functioning of the European Union (TFEU) confers upon the EU institutions the competence to lay down appropriate provisions that have as their object the establishment and functioning of the internal market (Article 114 TFEU).

Article 169 TFEU, related to consumer protection, also states that to promote the interests of consumers and ensure a high level of consumer protection, the Union shall contribute to protecting the health, safety and economic interests of consumers, as well as to promoting their right to information, education and to organise themselves in order to safeguard their interests. Article 169(2) TFEU specifies that these objectives can be reached through measures adopted pursuant to Article 114 in the context of internal market completion. Thus, a thorough examination of the possible legal basis was conducted and the one concerning consumer protection (Article 169 TFEU) points towards Article 114 TFEU.

This is in fact the approach adopted in this initiative. The objectives set out in Article 169 TFEU are attained through Article 114 TFEU, which serves as the legal basis for this Proposal, thus following the same approach as Directive 2008/48/EC. Article 114 TFEU remains the most appropriate legal basis also in light of the objective and necessity to strengthen the cross-border element. In fact, as digitalisation makes cross-border credit operations easier and the possible entry into the credit market of BigTechs companies in the EU market becomes a reality, the cross-border element is expected to increase. Thus, anchoring the revision of the Directive on Article 114 TFEU will ensure the continuity of ensuring a high level of consumer protection and at the same time allowing for the strengthening of the cross-border element.

3.2Subsidiarity: Necessity of EU action

The revision of the Directive aims to modernise the current regulatory framework and fix the areas that the Evaluation has flagged as inefficient. The two overarching objectives of the current Directive, namely to ensure that all consumers in the EU enjoy a high and equivalent level of protection and to create a genuine internal market, remain relevant.

So as to remedy this partial achievement of two overarching objectives of the Directive, legislative amendments to the current framework at EU level are required to attain further harmonisation which could lead to a higher and more uniform level of consumer protection, whilst facilitating the development of cross-border activities. These legislative amendments, including improving certain definitions, such as ‘creditor’ and/or ‘credit intermediary’ laid down in Article 3, widening the provision concerning the scope of the Directive and ensuring that key articles, such as on creditworthiness assessment, will be drafted in a clear and unambiguous manner. Thus amending current provisions of Directive 2008/48/EC by ensuring added clarity and legal certainty, the objectives laid down in the Directive will be rendered more effective.

EU action is also needed to introduce new provisions to cater for situations not envisaged in 2008. Provisions, rather than a recital, on responsible lending and provisions on ways to combat exploitative behaviour will ensure that the Directive keeps ensuring a high level of consumer protection whilst improving EU cross-border uptake of credit agreements.

While the figures concerning the conclusion of cross-border credit agreements has remained constantly low, the aim of the revision of the Directive is to propose a forward-looking legislation which facilitates its two principal objectives. What is more, it is important to stress that most Member States have enhanced the level of consumer protection by adopting measures that go beyond the Directive’s current requirements. This indicates that more efficient EU action is ever more important and necessary to intervene, where national legislation cannot sufficiently protect consumers. The dynamic market developments of recent years, especially in the light of digitalisation, show an increasing or likely to increase number and type of cross-border providers of consumer credit. As explained earlier, with new market players (e.g. peer-to-peer lenders) and possible market developments (BigTechs’ entry in the consumer lending market), the figures concerning the conclusion of cross-border credit agreement are expected to increase. Since digitalisation crosses across the different Member States and in an effort to ensure a revised Directive that is dynamic, EU action becomes necessary.

3.3Subsidiarity: Added value of EU action

Directive 2008/48/EC is a full harmonisation instrument in the areas it covers; thus, Member States could not maintain or introduce national provisions other than those laid down in the Directive in said areas. However, where no such harmonised provisions exist, Member States are free to maintain or introduce national legislation.

With regard to scope, all Member States, except Greece and Cyprus, have adopted transposing measure that extend the scope of the Directive in this sense. Indeed, 15 Member States 153   removed the minimum and/or the maximum threshold (fully or partially) when transposing the Directive in their national legislation. Similarly, most Member States (15) 154 extended the scope of application of the Directive (or certain of its provisions) to consumer credit not covered by the Directive, so as to include leasing agreement and/or overdraft facilities, revolving credit, mortgages, zero-interest rate and pawnshop agreements. However, in respecting the principle of subsidiarity, the proposal does not extend the scope of the Directive in instances when either cross-border potential is low (e.g. pawnshops) or when no comprehensive data and evidence of major consumers issues have been detected (e.g. loans above EUR 75 000). Thus, the principle of subsidiarity points to the option of not including pawnshops and loans above EUR 75 000 in the scope – it has not been obvious that EU action would have an added value in that regard, nor has it been proved that such extension would be beneficial for consumers.

Regarding creditworthiness assessment, most Member State (15) 155 have already laid down further provisions about the creditworthiness assessment, defining how the assessment is to be conducted and imposing other obligations on creditors. These two examples (on the issues of scope and on the creditworthiness assessment) show that most Member States have felt the need to go beyond the current regulatory framework provided by the Directive in order to enhance the level of consumer protection. However, in so doing, their actions have impacted the objective of ensuring a level playing field for creditors, also leading to different levels of protection for consumers. Therefore, action by Member States alone will not solve the problems identified above, particularly as regards scope and creditworthiness assessment. In addition, widening the scope by removing thresholds and improving the article regulating creditworthiness assessment will increase effectiveness in attaining the objective of facilitating cross-border provision of credit agreements, as a harmonised approach will improve the credit providers’ knowledge of the regulatory system in other Member States.

In light of the situation as developed over the past 12 years, improving the current regulatory framework can only be achieved at EU level, as different Member States took different approaches (e.g. when regulating creditworthiness assessment, extending the scope of application of the Directive in differing ways and for different consumer credit products). The EU added value of doing so would be to bring a clearer legislative framework that ensures legal certainty, achieved through more harmonization. 

Regulatory fragmentation among Member States was highlighted as a key issue by all stakeholder groups. Stakeholders tend to agree that the fragmentation negatively impacts both consumers and the development of a cross-border credit market. Consumer organisations mainly raised the need to adopt more prescriptive measures, which was echoed by national authorities, to protect consumers against over-indebtedness.

The recent COVID-19 pandemic has also illustrated that while Member States might be better placed to take specific measures in the area of consumer credit agreements, it is of fundamental importance not to lower the consumer’s level of protection. To cater for any possible situation leading to exceptional or systematic economic disruptions, the revised Directive is an opportunity to clarify and ensure that the rights provided to consumers (such as the right to information) are not lost or mitigated, even in exceptional circumstances which the EU might have to face. Such goal of ensuring that all citizens across the EU enjoy the rights provided by the Directive, even in case of national measures responding to a pandemic, cannot be achieved solely by Member State action.

Further to the above reasons why Member States alone would not achieve the objectives, is the impact of digitalisation. The use of digital tools is not limited to a single Member State. Rules fit for the digital age are needed to foster cross-border activity and competition. Hence, action on provisions of the Directive that are digitally relevant, such as improving how pre-contractual information is displayed online, can be achieved better at EU level: unilateral actions from Member States on this cannot deliver the same fruits as EU action.

4.Objectives: What is to be achieved?

Table 2 Objective tree

4.1General objectives

The general goals of the Directive’s review are to reduce the detriment of consumers taking out loans in a changing market and to facilitate cross-border provision of consumer credit and the competitiveness of the internal market. This is in line with the original objectives of the Directive, namely securing a consistently high level of consumer protection across the EU, thus contributing to consumer confidence, and facilitate the emergence of a well-functioning internal market in consumer credit, creating the best possible conditions for the free movement of credit offers. The Evaluation showed that the Directive is only partially effective in meeting its objectives and pointed to scope for improvement.

4.2Specific objectives

The specific objectives (SOs) of the review are detailed below.

·SO1: Reduce the detriment arising from unregulated credit products by ensuring better regulatory coverage of the consumer credit products raising problems for consumer protection (addressing sub-problem 1.1).

·SO2: Ensure that consumers are empowered by effective information on the risks, costs and impact of credit on their finances, also via digital means, and have enough time to process information prior to commitment (addressing sub-problem 1.2).

·SO3: Ensure that credit granting is based on thorough assessment of the consumer’s best interest, both on the part of credit providers and consumers, by:

oCountering practices exploiting behavioural biases to nudge consumers – in particular vulnerable ones, such as those at risk of poverty and social exclusion - into sub-optimal choices and conduct of business problems (sub-problem 1.3); 

oImproving the creditworthiness assessment process, including in the context of automated decision-making for credit scoring (addressing sub-problem1.4).

·SO4: Prevent specific individual or systemic situations from exacerbating consumer detriment, by helping indebted consumers to better cope with adverse developments including the fallout from major economic crises, and lower their over-indebtedness (addressing sub-problem 1.5).

·SO5:  Reduce barriers for providers offering credit across borders while enabling more choice for consumers, by fostering the level playing field for providers across the EU and competitive pressure from the cross-border provision of credit (addressing sub-problems 2.1 and 2.2). Moreover, a competitive transparent and fair consumer credit market will improve the monetary policy transmission through the price and volume of credit offered to clients.

·SO6: Simplify the existing legal framework and reduce unnecessary burdens, without undermining the aims or benefits of the legislation, by simplifying information disclosure requirements through certain channels (addressing sub-problem 2.3).

5.What are the available policy options? 

5.1What is the baseline from which options are assessed?

The baseline from which options are assessed (Policy option 0) implies the continuation of the current situation, the ‘status quo’, and does not involve the introduction of any new measures, for the period 2021-2030. It would require the Commission to continue regularly monitoring how the Directive is being implemented at national level, and national authorities to continue monitoring and enforcing that credit providers act within the legislative framework.

As happened since the adoption of the Directive, efforts at national level to further develop the regulatory framework for consumer credit are expected to continue, through either legislative or non-regulatory measures. Enforcement authorities would continue to cooperate through the Consumer Protection Cooperation (CPC) network and the European Consumer Centres Network (ECC-Net) supported by the European Commission.

Similarly, the CJEU can be expected to receive further requests for preliminary rulings, through which it will continue to interpret the provisions of the Directive, shedding further light on some of the unclear provisions, if required to do so.

Several potential market developments are likely to influence the identified problems, as explained in section 2.4 (How will the problem evolve?).

The evidence collected for the Directive’s Evaluation suggests that the share of consumers reporting problems decreased since 2010. More generally, there was a reduction in the personal detriment of borrowers, also thanks to the introduction of the Directive. 156 Although it is difficult to assess to which extent, it can be expected that this trend will continue in the future to some degree even in the absence of further EU-level action, especially if more Member States decide to adopt stricter measures to regulate issues affecting consumers in their territory; this would however contribute to increasing the uneven level of consumer protection across the EU.

The estimated number of consumers affected by problems linked to key provisions of the Directive, varies from around 3 to 46 million people, depending on the provision (see Annex 4). The detriment from products offered online which are not explicitly under the scope of the Directive (e.g. loans from peer-to-peer lending platforms) would not be tackled. Moreover, the COVID-19 crisis can be expected to lead to higher levels of over-indebtedness in the near future, especially among economically vulnerable consumers, which are disproportionally affected by the crisis. Finally, existing barriers for accessing databases across borders would remain and there would be no decrease in costs stemming from the Directive incurred by providers willing to offer credit cross-border.

Stakeholder consultation seems to confirm this analysis. The responses to the validation survey on the policy options suggest only a minority of respondent believes that Option 0 would be effective in addressing the initiative’s objectives. The objectives relating to the scope of the Directive and to responsible lending/borrowing are those least effectively tackled by Option 0. 157 With regard to its impact on the level of over-indebtedness, most stakeholders consulted indicated that no change should be expected under this option. 158 Consumer representatives, in particular, indicated that this option would not solve the problems that consumers are currently facing. Nevertheless, several industry stakeholders noted that the regulatory stability provided by Option 0 would be beneficial to them, particularly in the COVID-19 context.

5.2Description of the policy options

Besides the 2021-2030 baseline scenario, the policy options analysed in this impact assessment are the following:

Table 3 Summary of the options assessed in the impact assessment

The analysis of this multifaceted and complex subject was structured around options that are (as much as possible) mutually exclusive. So, while Option 2 only addresses the provisions currently included in the Directive, to clarify certain definitions and terms, and further develop several obligations contained therein, Option 3a and 3b focus on new measures to be included in the Directive. The latter options would also include a limited number of relevant measures from Option 2, where necessary to cover any gaps (i.e. to address problems not tackled by new provisions, such as enlarging the Directive’s scope).

As shown in the intervention logic, the options considered would address the problems identified with the aim to achieve the initiative’s objectives (for more details see Annex 5).

Table 4 Policy Options considered

Policy option 1 envisages the adoption of non-regulatory measures that seek to provide clarity on certain aspects of the Directive or to address elements that are currently not (sufficiently) covered in the Directive:

·Issue a recommendation to Member States clarifying the definitions of ‘credit provider’ and ‘credit intermediary’, specifying the new types of consumer credit (e.g. peer-to-peer lending) that fall under the scope of the Directive.

·Clarifying the terms of the Directive that may be subject to interpretation (e.g. information to be provided ‘in good time’, ‘adequate explanations’ on pre-contractual information).

·Implement awareness raising campaigns through the European Consumer Centres to promote responsible lending and borrowing, and providing clarity to consumers on elements that are identified as unclear (e.g. APR).

·Issue a recommendation on how to regulate aspects not harmonised by the Directive which are relevant to ensure responsible lending (e.g. limiting cross-selling practices, setting interest rate caps, establishing an obligation for credit providers to advise consumers on suitable products, limiting or banning rollover practices).

·Issue a recommendation on the type of information that should be considered for creditworthiness assessments, including on the use of alternative sources of data and automated decision-making, in line with the EBA guidelines on loan origination and monitoring. 159 Establish a recommendation on measures that can be adopted by Member States to support indebted consumers whose financial situation is impacted by an external economic disruption (e.g. moratoria on credit payments), based on existing best practices.

·Increase support to capacity building of consumer organisations and public bodies via funding on financial education and debt advice.

·Establish a recommendation on the type of negative information that credit databases should contain to improve reciprocity and cross-border provision of credit.

Option 2 includes targeted amendments to the Directive’s provisions, to clarify certain definitions and terms, and further develop several obligations contained therein.

Under this option, the lower and upper thresholds of application of the Directive (EUR 200 and EUR 75 000) would be removed, so the Directive’s obligations would be extended to cover small value loans which are currently creating risks for consumers (e.g. short-term high-cost loans) and all loans above EUR 75 000 (at the moment, only loans above EUR 75 000 whose purpose is the renovation of a residential immovable property are included in the scope of the Directive, 160 as amended by the Mortgage Credit Directive). Moreover the credit products currently excluded from its scope of application (including but not only, leasing agreements, overdraft facilities, loans granted free of interest, pawn shops) would be included. A more detailed definition of some key terms which affect its scope of application (e.g. ‘credit provider’, ‘credit intermediary’) would also be provided, to address market developments linked to digitalisation (e.g. peer-to-peer lending).

The amount of information to be provided to consumers in advertising would be adjusted to focus on key information when provided through certain channels (audio advertisement on radio broadcasts), therefore increasing its effectiveness for consumers and leading to simplification and burden reduction for providers and for certain media channels. The presentation of pre-contractual information would be made more effective through a ‘tiered disclosure’ approach, i.e. a summary of few key elements helping consumers to compare offers provided on top of the SECCI, which would remain unchanged to provide all the necessary information to consumers while avoiding burdensome changes for providers. Detailed requirements in relation to when the pre-contractual information would be provided, through a clarification of “in good time before the consumer is bound by any credit agreement or offer”, and on how information should be provided in a “prominent” way would be included too.

The revised Directive would also provide a clarification of some key terms related to the obligations contained in the Directive (e.g. ‘sufficient information’, ‘prominently’, ‘adequate explanations’), improving legal clarity and fostering harmonisation between the implementation of the Directive at national level, thus enhancing competition between providers across borders and creating a stronger EU framework for consumer protection facilitating cross-border lending.

The revised Directive would provide more detailed requirements in relation to how the assessment of consumer creditworthiness should be conducted, by defining which categories of personal data may be processed. It would also include an obligation for credit databases to hold certain reliable negative data, to improve cross-border access based on reciprocity.

To improve conditions for enforcement, with regard to the penalties applicable to infringements of the national provisions adopted pursuant to the Directive, under Option 2 the revised Directive would complement current Article 23 with non-exhaustive and indicative criteria that enforcement authorities may take into account for the imposition of penalties. Article 20 on regulation of creditors would also be reinforced.

By expanding the scope of the Directive, strengthening information provision requirements and creditworthiness assessment requirements, and strengthen enforcement, practices exploiting consumer’s situation and patterns of behaviour would be tackled. These changes would also help to create a more resilient framework for consumer protection, also in the event of specific individual situations or systemic economic disruptions exacerbating consumer detriment, especially of vulnerable consumers, while helping to prevent over-indebtedness.

Option 3 (through its two sub-options) would address the problems identified and meet the objectives through an extensive amendment of the Directive, including new provisions and obligations in line with existing EU acquis or going beyond it.

Option 3a consists in amending the Directive to include new provisions and obligations in line with other relevant EU legislation, in particular the Mortgage Credit Directive (‘MCD’) rules in order to address similar issues. 161 This option would also include all the relevant measures from Option 2, where necessary to cover any gaps (i.e. address problems that not addressed by additional provisions).

In line with Option 2, certain definitions and terms would be clarified, the scope of application of the Directive extended through the deletion of lower and upper thresholds and the inclusion of credit products currently excluded from the its scope of application. Furthermore, a new provision addressing specifically peer-to-peer lending would be included.

To enhance consumer empowerment through effective information, a provision tailoring the principles of the European Accessibility Act (Directive (EU) 2019/882), in particular on the display of information in an adequate way on different channels, to consumer credit would be included and detailed requirements would be established to provide adequate explanations, drawing on provisions in the MCD.

Moreover, to ensure consumers are not nudged into sub-optimal choices, the revised Directive would request express consent from the consumer, banning the use of pre-ticked boxes, in a way similar as provided for under Article 22 of the Consumer Rights Directive (2011/83/EU). It would also prohibit product-tying practices (similar to Article 12 of the MCD), establish conduct of business rules (similar to Article 7 of the MCD) and a legal obligation for credit providers and credit intermediaries to promote responsible lending (i.e. to act honestly, fairly, transparently and professionally, taking account of the rights and interests of consumers), and adopt standards on the provision of advisory services (similar to Article 22 of the MCD).

Also drawing on the MCD, under Option 3a, new rules would oblige Member States to ensure that the procedures and information on which the creditworthiness assessment is based are established, documented and maintained. In addition, the revised Directive would provide more detailed requirements on how to conduct the consumer creditworthiness assessment. However, differently from the MCD, credit can be granted following a negative outcome of the consumer creditworthiness assessment.

The revised Directive would include a provision concerning the use of alternative sources of data to conduct creditworthiness assessments reflecting the General Data Protection Regulation (‘GDPR’, (EU) 2016/679) principles, in particular the principles of data minimization, accuracy, storage limitation as laid down in Article 5 of the Regulation (EU) 2016/679. Furthermore, it would establish a right of consumers to request and receive an explanation on how and on what basis a decision on their creditworthiness was reached, mirroring the GDPR principles concerning automated decision-making.

With regard to the penalties applicable to infringements of the national provisions adopted pursuant to the Directive, under option 3a, the revised Directive would introduce, in case of a cross-border provision of credit constituting a widespread infringement in the sense of the CPC Regulation,  162 the possibility for the supervisory authority to issue a fine whose maximum amount would be at least 4% of the trader’s annual turnover in the Member State or Member States concerned. This rule is inspired from the Omnibus Directive on Consumer Protection ((EU) 2019/2161, Articles 1, 3(6), 4(13)). The revised Directive would also complement Article 20 on regulating creditors with an article on ‘Competent Authorities’, inspired from Article 5 (‘Competent Authorities’) of the MCD.

To prevent that specific individual or systemic situations exacerbate consumer detriment, Option 3a would introduce obligations on Member States to adopt measures encouraging creditors to exercise reasonable forbearance, including by limiting the charges on default payments, and to promote financial education/digital literacy initiatives and require that the Commission monitors and assesses them.    
These measures, drawing on the MCD, would empower consumers to fully understand and make the best of available choices, and contribute to prevent over-indebtedness situations.

As in Option 2, a non-exhaustive list of categories of data, including reliable negative data of the consumer, to be collected by credit databases would be proposed, in order to improve access to databases cross-border, based on a reciprocity principle. The non-exhaustive list may include instances of repetitive failure of repayment by the consumer of a credit. The possible non-exhaustive list of categories of data will be based on the principle of necessity and proportionality and in line with data protection principles, in particular the principle of purpose limitation and the processing of lawfulness, fairness and transparency.

Option 3b: Extensive amendment of the Directive to include provisions not addressed by the EU acquis

Option 3b consists in an extensive amendment to include additional obligations and provisions that go beyond the alignment with other relevant EU legislation, either because they cover new aspects (e.g. interest rate/costs caps, unsolicited credit) or because they go beyond what is established in other relevant EU legislation (e.g. further requirements for financial education initiatives). This option would also include any relevant measures from Options 2 and 3a, where relevant to cover any gaps (i.e. address problems that would not be addressed by more detailed provisions) or complement the legislative action.

Option 3b would be aligned with Options 2 as regards the extension of the scope of application of the Directive, the clarification of definitions, and the new provisions on information disclosure at advertising and pre-contractual stage.

More detailed requirements on the way information should be displayed at advertising and pre-contractual stage (e.g. format, font size), and an obligation on creditors to provide information about changes in the conditions of the credits in case special measures are applied following systemic and exceptional economic disruptions would be included.

Furthermore, an obligation upon Member States to set interest rate/APR caps would be introduced, to avoid excessive rates far beyond the rate necessary to integrate the credit risk resulting from the borrower profile and the refinancing costs, together with an obligation to adopt measures to limit to the additional costs that credit providers can charge when a credit is rolled over. To prevent exploitation of consumer biases and irresponsible borrowing, unsolicited credit sales would be prohibited.

Moreover, it would also include relevant measures from Option 3a concerning responsible lending and business conduct obligations, standards for advisory services and detailed requirements in relation to the provision of adequate explanations, ban of product-tying practices and pre-ticked boxes, the creditworthiness assessment process, and forbearance. When granted to low scoring consumers or following a negative creditworthiness assessment, an obligation would be imposed on banks to monitor the situation of vulnerable debtors and redirect them to debt advice services (‘early detection’).

To support consumers vulnerable to over-indebtedness, the revised Directive would establish an obligation upon Member States to provide – directly or indirectly – independent debt advice services for over-indebted or otherwise vulnerable consumers (including consumers with a low credit scoring), and adopt minimum standards for the provision of these services. It would also include an obligation for creditors to inform consumers at risk of over-indebtedness that debt advice services are available, and include an obligation on Member States to promote financial education/digital literacy initiatives, in line with Option 3a.

Finally, the revised Directive would include an obligation to include specific contractual clauses intended to cover cases of exceptional or systemic economic disruptions (e.g. debt relief/payment moratorium).

To enhance cross-border provision of credit and access for consumers, a basic credit product that providers should make available to consumers would be introduced to enhance their trust in credits purchased abroad, and public centralised databases at national level, holding (at least) reliable data recording late payments and containing identification of national residents, would be set up by Member States.

5.3Options discarded at an early stage

The case for (partial) repeal of the Directive does not seem supported. The Directive is a full harmonisation instrument in the areas it legislates, building on a 1986 Directive regulating consumer credit (repealed by the 2008 Directive). As confirmed by the Evaluation, the Directive’s added value lies in strengthening consumer confidence in the use of consumer credit across the EU by ensuring the development of a specific and robust legal framework to protect consumers concluding a credit agreement. Thus, repealing the Directive, or parts of it, would lead to regulatory fragmentation. Concretely, this could lead to different formulas for the calculation of the annual percentage rate of charge and different requirements in terms of content and format for creditors to provide information, while the SECCI has proved very effective. In addition, with the lack of harmonised consolidated rights, such as the right of withdrawal and the right of early repayment, Member States could decide to abandon these rights or adopt less protective provisions. For instance, before the Directive, Member States applied very different timeframes and procedures for consumers to withdraw from a credit agreement. Finally, even though the current creditworthiness assessment rules resulted in limited harmonisation, and in a variety of rules applied at national level, this is rather an argument to reinforce the provision.

The EU economy needs strong household consumption (accounting for around 53% of EU GDP) and part of this consumption (around 12%) is financed by credit. Accordingly, repealing the Directive or its parts would affect both the objective of ensuring a high and consistent level of consumer protection and the objective of fostering a cross-border consumer credit market. In addition, stakeholders consistently agree that consumer credit, and consumer protection pertaining thereto, benefits from EU-level action. This was confirmed by the results of the Evaluation, by the 2020 public consultation, and by a 2019 European Economic and Social Committee survey, in which 83% of the respondents considered that the Directive increased transparency and fairness. 163  

The option to adopt a regulation directly applicable under the national legislation of Member States instead of a directive was also discarded at an early stage, due to the possible non-compliance with the principles of subsidiarity and proportionality. A directive will enable Member States to amend the legislation in force (subsequent to the transposal of Directive 2008/48/EC) to the extent that is need to ensure compliance, containing the impact of such a reform on their legislative systems.

6.What are the impacts of the different policy options and who will be affected? 

This section presents an overview of the impacts of each of the policy options, on different categories of stakeholders, against three main criteria:

·Effectiveness, i.e. how successful the policy option is expected to be in addressing the specific objectives outlined in the intervention logic. The effectiveness of each option is rated using a scale ranging from 0 (neutral) to +++++ (extremely effective).

·Efficiency: this assesses the impacts of the revision of the Directive on the stakeholder groups, which can be either positive or negative. The impacts were scored from -5 (very negative impact) to 5 (very positive impact). The attribution of scores and the description of the assessments are the result of an analytical exercise detailed in the supporting study which has examined, analysed and triangulated the evidence collected – also for the Directive’s Evaluation - including the feedback expressed by stakeholders consulted. A wide array of economic, social, environmental, and overarching impacts have been considered. Based on their expected magnitude, likelihood and relevance for stakeholders, 164  six main categories of significant impacts were selected (see Annex 4). Since the policy options are expected to have a negligible effect on environmental impacts 165 (e.g. on environmental risk or climate change), those were not assessed.

Table 5 Selected significant impacts

·Coherence, which assesses how the measures planned would interact with existing EU legislation. The score ranges from 0 (no change to the level of legal coherence) to 5 (increase of EU legal coherence to a very great extent). It also includes a legal feasibility assessment including necessity, proportionality and subsidiarity.

6.1Policy option 1: Non-regulatory intervention 

+ (Slightly effective) ++ (Moderately effective) +++ (Effective) ++++ (Very effective)

Policy option 1 would allow to make very limited progress towards the initiative’s specific objectives. It would somehow facilitate the interpretation of some Directive provisions. It would also provide a reference framework for Member States wishing to regulate aspects not covered by the Directive. However, two key limitations affecting its effectiveness have been identified: some of the issues identified (e.g. limited scope of the Directive) cannot be fully tackled through non-regulatory measures; and its effectiveness would ultimately depend on the will of national legislators and credit providers to follow the non-binding guidance. Increased support to financial education and debt advice initiatives could help reducing over-indebtedness. As regards awareness campaigns, to provide clarity on elements identified as unclear (e.g. APR) or to promote responsible borrowing, they could have a positive effect on the behaviour of consumers, especially if targeted to population groups with a lower level of financial literacy, but their effectiveness is not expected to be high. Option 1 would not be effective in simplifying the existing legal framework. According to the feedback gathered, industry representatives are the main group that believes that Option 1 would be effective in addressing the identified problems.

(from -5 to +5)

·Consumers: Compared to the baseline, Option 1 is expected to (slightly) improve the consumer trust and inclusion. Consumers could be more aware of the potential risks of credit, better understand information disclosed by credit providers and empowered to make better choices. Consumers could be better protected, thanks to strengthened creditworthiness assessments, enhanced responsible lending and borrowing but also in situations of exceptional systemic crises. However, the non-binding nature of most measures under Option 1 means that the impact on consumer choice should be quite low.

·Society: Supporting Member States’ efforts to raise the level of financial literacy and provide debt advice, these measures could have a slightly positive impact on the level of over-indebtedness and inclusion of vulnerable consumers.

·Businesses: Option 1 is not expected to trigger major compliance costs for credit providers. Because the measures are non-binding, credit providers/intermediaries might avoid implementing any changes which would entail important costs (unless Member States decides to adopt national legislation/binding guidelines at national level, following the EU-level guidance). The clarification of the definitions contained in the Directive, would only impact providers who offer products currently under the Directive’s scope. Option 1 would have a negligible impact on the level playing field and competition in the consumer credit market, as well as on the provision of cross-border credit.

·Public administration: EU public administration would be impacted by Option 1, given that non-binding guidance documents would require time and resources for their development, stakeholder engagement, dissemination and monitoring. The support to national organisations or the launch of awareness raising campaigns through the European Consumer Centres would generate costs too. The implementation of this option would require national authorities to dedicate time and resources to contribute to the development and implementation of the measures. On other hand, the clarification of obligations could benefit, to some extent, enforcement authorities by improving legal clarity and facilitating the interpretation of the Directive.

The implementation of Policy option 1 can enhance EU legal coherence as long as the measures envisioned are in line with existing EU legislation. For example, providing guidance on the type of information to be assessed in creditworthiness assessments, would complement the existing EBA guidelines on loan origination and monitoring. Similarly, establishing guidelines on the use of automated decision-making to conduct creditworthiness assessment would reflect the data protection principles established by the GDPR in Article 5. Nonetheless, their overall impact would be limited in addressing the problems identified due to their non-binding character.

6.2Policy option 2: Targeted amendment of the Directive to increase legal clarity

+ (Slightly effective) ++ (Moderately effective) +++ (Effective) ++++ (Very effective)

Policy option 2 would be particularly effective in reducing the detriment arising from unregulated products, by ensuring that products identified as particularly problematic (e.g. credits below EUR 200) are brought under the Directive’s scope. This option would also tackle effectively the inadequacy of requirements for the provision of information, thanks to: the simplification of information provided at advertising stage on certain channels (in line with behavioural evidence on the way that consumers read and process information); detailed requirements on how and when the pre-contractual information should be provided; and the more detailed definition of ‘adequate explanations’. The streamlining of information would also be effective in simplifying the current legal framework and reduce unnecessary burden.

Option 2 would improve the conditions for credit providers to lend responsibly by providing more clarity on the minimum requirements for creditworthiness assessment checks, including a more detailed definition of ‘sufficient information’. However, it would not ensure a high degree of harmonisation, as it does not specify the information to be assessed. Option 2 would also moderately tackle practices exploiting consumer’s situation and patterns of behaviour, and create a more resilient framework for consumer protection also in the event of individual situations or systemic economic disruptions, while helping to prevent over-indebtedness.

The broadening of the scope and the amendment of definitions are likely to be quite effective in levelling the playing field for providers by ensuring that the Directive’s rules are applied to a greater share of credit providers across the EU.

(from -5 to +5)

·Consumers: The measures included in Option 2 would positively influence consumer behaviour and consumer choice. Consumers would receive information in a more effective way and have enough time to process it. As a result of the broadened scope, improved creditworthiness assessment and enhanced enforcement (thanks to improved legal clarity), consumer protection would increase, especially for vulnerable consumers, often using small value short-term high-cost loans. The price of consumer credit currently outside of the Directive’s scope could increase as higher costs for providers would be passed on to consumers, but this should stabilise over time.

·Society: Several measures included in Option 2 could lead to stronger prevention of over-indebtedness, but no remedies are considered.

·Businesses: The measures featured in Option 2 are likely to entail implementation costs for businesses, but also to increase the level playing field within and across Member States, thanks to the reduction in legal fragmentation. Competition in the consumer credit market may decrease to some extent due to the impact on credit providers offering currently unregulated products, some of which may disappear from the market because of their business models, 166 will no longer be profitable. However, continued competition in the very competitive landscape of banks and non-bank lenders would mitigate this risk.

·Public administration: Any legislative amendment is expected to generate higher costs for EU authorities than non-legislative intervention (adoption, monitoring the transposition). However, the costs would mostly be one-off, while the benefits would be maintained over time. Similarly, national authorities are expected to incur some unavoidable costs (transposition, reporting, dissemination), even though higher legal clarity should facilitate enforcement and ultimately have a positive impact.

Policy option 2 involves a series of targeted amendments to provisions that are already included in the Directive. The proposed measures would build upon the existing principles of the Directive but change some of the elements that have proved insufficient or inadequate in achieving the main objectives of the Directive. Such intervention is deemed legally feasible, and necessary to avoid fragmentation of national regulatory regimes and provide a harmonised EU-level framework In general, the measures considered (scope extension, streamlining information, clarifying creditworthiness assessment) should not affect the EU legal coherence. However, the amendments to key definitions would reduce legal coherence with similar definitions in the Mortgage Credit Directive, currently under review.

6.3Policy option 3a: Extensive amendment of the Directive to include certain new provisions, in line with existing EU acquis

++ (Moderately effective) +++ (Effective) ++++ (Very effective) +++++ (Extremely effective)

Overall, this policy option is considered effective. In terms of reducing the detriment arising from unregulated products, Option 3a includes the same scope-related measures presented under Option 2, which would effectively reduce the detriment caused by these products. Moreover, this option would include a specific provision on peer-to-peer consumer lending, to effectively capture platforms offering this kind of credit. Concerning information provided to consumers, this option would introduce more details on the obligation to provide adequate explanations (drawing on Art. 16 of the Mortgage Credit Directive), and on the display of information in an adequate way on different channels (in line with the European Accessibility Act principles). The requirements on the presentation of information and the clarification of existing provisions, would create a more coherent framework for credit provision, improving legal clarity for businesses and leading to a moderate reduction of unnecessary burden.

The inclusion of certain provisions on responsible lending drawing on the Mortgage Credit Directive are expected to be effective in improving the protection of consumers, but they would not tackle responsible product design. The changes to creditworthiness assessment rules and provisions on the use of alternative data and automated decision-making would help ensuring that credit granting is based on thorough assessment of the consumer best interest. To strengthen the enforcement of these provisions, Option 3a would introduce a provision referring to the 4% rule set in the Omnibus Directive. 167  

On the protection and assistance of indebted and over-indebted consumers, the provision on forbearance measures is expected to be rather effective. Finally, on top of broadening of the scope and the amending of definitions, enhancing the level playing field, this option would reduce legal fragmentation and hence barriers for providers offering credit across borders. 

(From – 5 to +5)

·Consumers: Policy option 3a is expected to have a positive impact on consumer trust, in particular new rules on business conduct and remuneration and on financial advice. Measures limiting practices exploiting consumers’ situations and patterns of behaviour would influence positively consumer choice. Extended scope, measures on information to consumers and more precise rules on creditworthiness assessments would reduce consumer detriment. Moreover, those measures would increase legal certainty, making enforcement easier, and thereby further enhancing the protection of consumer rights. Option 3a is also expected to ultimately reflect positively on the reduction of consumer detriment across the EU (e.g. forbearance measures).

·Society: The promotion of responsible lending combined with the broadening of the scope is expected to contribute to limit over-indebtedness and to increase financial stability.

·Businesses: Several of the measures under this option would require businesses to familiarise themselves with the new legislative requirements (even though for the provisions which draw on the Mortgage Credit Directive the impact for lenders who offer mortgage credit, such as banks, would be lower than for those who only provide consumer credit), increase internal communication and training staff. These factors could create a high (albeit one-off) cost burden for industry. The relatively higher degree of harmonisation, together with the broadening of the scope, would result in a more level playing field for credit providers across borders.

·Public administration: This option would create a cost burden for EU public administrations, but since the amended provisions would be modelled after existing legislation, less resources to develop them would be required. National authorities will bear costs linked to the transposition of the revised Directive and to some of its obligations. However, the expected positive impact on enforcement due to enhanced legal clarity and alignment with other EU legislation would offset them.

Alignment with other EU legislation, is deemed beneficial because it allows for more uniform rules, improving legal clarity. The Evaluation found that the most common examples of legal incoherence mentioned by stakeholders concern the Mortgage Credit Directive, particularly its requirements for responsible lending and specific obligations in some areas that are relevant to prevent over-indebtedness. This option would also include measures in line with other EU legislation (e.g. GDPR or the Omnibus Directive).

6.4Policy option 3b: Extensive amendment of the Directive to include provisions going beyond existing EU acquis

++ (Moderately effective) +++ (Effective) ++++ (Very effective) +++++ (Extremely effective)

Overall, Option 3b would address effectively the initiative’s specific objectives and is also expected to result in a decreased level of over-indebtedness. 168

It would entail the broadening of the scope of application of the Directive in the same way as Options 3a, thus responding to the scope-related issues identified in an extremely effective manner. It is also deemed to be very effective in addressing issues related to the information-related requirements, facilitating offer comparison, and in reducing the chances that consumers are misled into buying products they do not need. Option 3b would also address aspects related to product design (e.g. APR/interest rate caps) which are expected to reduce the incentives to provide some of the products that are riskier for consumers. This policy option is also the most effective in terms of supporting and protecting indebted and over-indebted consumers. This is because it establishes obligations for Member States and credit providers concerning the provision of debt advice services, and it establishes an obligation for creditors to inform low-scoring consumers that debt advice services are available (early detection mechanism). At the same time, this option would only be moderately effective in reducing barriers for providers offering cross-border credit, and unnecessary burden for businesses (mostly due to the reduction of information provided in advertising on certain channels).

(From -5 to 5)

·Consumers: Bans on unsolicited credit offers or on the use of pre-ticked boxes, as well as provisions on the display of information are likely to impact consumer behaviour very positively by promoting a more informed and careful purchase decision-making process. Consumers would be significantly better protected against irresponsible or otherwise questionable lending practices and thanks to measures on debt advice services, including early detection. The establishment of APR/interest rate caps as well as the limits to the costs that can be charged for rollover practices are expected to lead to a reduction in consumer detriment, especially coupled with the extension of the scope of application of the Directive. This will have a particularly positive impact on vulnerable consumers, as they are the main group using high-cost credit.

·Society: This option is likely to originate the greater positive impact on the reduction of over-indebtedness, thanks to measures on product design and enhanced support to over-indebted people. It would also have a positive impact on increasing financial stability.

·Businesses: Some of the measures under Option 3b will require significant implementation costs as they are likely to lead to many changes. Price caps will also lead to lost revenue, in particular for providers offering products currently exempted from the Directive, and possibly push them out of the market, thus decreasing competition. Considering the high degree of legal harmonisation it offers, this option has the highest potential to facilitate the cross-border sales of consumer credit.

·Public administration: This option would generate important costs for EU public administration, the highest among the options considered. This is also true for national administration, but the fact that some measures set an obligation without establishing standards or precise details (e.g. debt advice services, price caps) would limit costs. Moreover, some of these costs are likely to be offset by the efficiency gains expected in relation to the enforcement of the obligations at national level, because of lower level of problems faced by consumers due to a very protective framework, and clearer provisions.

Measures proposed under this policy option are inspired by legal measures that have been implemented at national level and which go beyond the requirements of the Directive. For instance, caps on interest rate/APR have already been implemented by 23 Member States (even though they vary widely). These measures would ensure a high level of harmonisation across the EU and guarantee more coherence than individual, potentially heterogeneous initiatives to respond to the identified problems. However, they would lead to a lower coherence with existing EU legislation. The obligation to include specific contractual clauses to cover cases of exceptional and systemic economic disruptions might create the risk of possible future overlaps, since EU institutions might consider adopting horizontal legislation to address the same matters, in the light of the COVID-19 crisis.

7.How do the options compare?

This section compares the performance of the five policy options considered, based on the elements developed in Section 6.

7.1 Effectiveness: expected achievement of the initiative’s objectives

The main objective of an EU-level intervention is to address the main problems identified in the field of consumer credit. Therefore, ensuring that the policy option proposed by the Commission effectively addresses the problems observed - in line with the specific policy objectives - is paramount to justify an EU intervention.

Table 6 Effectiveness (from 0 to +++++)

Option 1 would not achieve one of the specific objectives, while the other options would achieve all of them, to a varying extent. Option 3b would be the most effective in achieving the initiative objectives, especially in terms of guaranteeing a high level of consumer protection (SO1, SO3), thanks for instance to the introduction of APR/interest rate caps; but also on preventing that individual or systemic situations exacerbate consumer detriment (SO5), mainly thanks to the measure on debt advice services, which is deemed to be very effective in reducing the risk of debt cycles and remedying over-indebtedness. Option 3a would achieve all the defined objectives and especially ensure high consumer protection (even though to a lesser extent than Option 3b) and would improve the level playing field, and reduce legal fragmentation and barriers for offering credit across borders, but would address the objective on simplification only to a limited extent. Option 2 would also achieve all the defined objectives, but to a lesser extent than 3a and 3b in terms of consumer protection. However, it is the Option which is more likely to achieve the specific objective on simplification. All the legislative options would be very effective to achieve SO1 on reducing the detriment arising from unregulated products because of the extension of the scope to currently exempted risky products and the clarification of terms and definitions leading to enhanced legal clarity.

7.2 Efficiency: impacts on businesses and consumers

The decision to adopt EU-level measures should also carefully consider the potential benefits and costs of implementing it. To compare the efficiency of the different options, we have used a Multi-Criteria Analysis looking at a set of impacts: three benefits and three costs (see Section 6). The overall score for the efficiency of each of the options is made up of six individual scores, one for each impact assessed (see Section 6), which has been attributed a certain weight, depending on its importance.

We decided to take a conservative approach, allowing overall 50% of the total weight to benefits and 50% to costs. It is rather conservative because in fact, benefits should be expected to be more important than costs. Better compliance and clearer procedures, mean increased consumer confidence, and a more business friendly environment (less problems, less litigation costs, less recovery costs, etc.). So the one-off costs to adapt to the revised Directive, on the longer run could be offset by a business gain. Moreover, the measures to prevent/remedy over-indebtedness and increase social inclusion are expected to generate positive externalities. However, with this approach we want to ensure our analysis would thoroughly address the compliance of the options with the proportionality principle, clearly striking a balance between the benefits for consumers and credit providers, and the costs for credit providers and intermediaries (eventually passed on to consumers 169 ), and EU-level and national authorities. Each impact assessed has been attributed a certain weight:

·Benefits for consumers and the compliance costs which industry would have to incur to achieve these benefits are balanced out, each representing 40% of the total weight.

·Within the two types of benefits for consumers, ‘consumer protection and reduced detriment’ is the main one and represents 30% of the total weight, while ‘consumer trust, behaviour, choice and social inclusion’ is secondary and consequently represents 10%. Benefits for industry in terms of level playing field and increased cross-border sales represent the remaining 10%.

·Costs for national public administration, and especially for the EU public administration are expected to be quite reduced. Public administrations are already in charge of the implementation and enforcement of consumer credit legislations, thus a change in the legislation would give rise to a moderate one-off costs. Hence, those costs represent respectively 8% and 2% of the total weight.

Under the Multi-Criteria Analysis, the policy option that would represent the best course of action is Policy option 3a (score of 0.16), followed by Option 2 (0.08). In contrast, the negative values for Options 1 and 3b, indicate that implementing them would be less efficient than the baseline option.

Since there was limited evidence to determine the impact of different measures with regard to the baseline, in the supporting study only a limited number of measures (11 of around 50) were subject to a partial quantitative analysis, entailing a non-exhaustive set of costs and benefits for these measures for the period 2021-2030. 170 The model assessed costs of drafting and transposing legislation and for enforcement and monitoring (EU and national authorities) and the main type of compliance costs incurred by banks (e.g. staff training, costs of adapting IT infrastructure, incremental labour costs stemming from the adoption and ongoing implementation of a measure). However, the model did not take into account that the costs of implementing provisions which draw on the Mortgage Credit Directive for lenders who already offer mortgage credit, such as banks, could be mitigated by the fact that these lenders have already procedure in place for mortgages. Moreover, it was not possible to determine to what exact extent, but it is expected that costs are going to be passed on to consumers. Benefits were assessed in terms of reduction in consumer financial detriment and in time losses suffered by consumers, but not in terms of benefits for industry stemming from legal clarity or increased level playing field, so they are expected to be higher. Finally, the model did not estimate specific costs for non-bank lenders, as well as consumer benefits that could be generated because of a given measure implemented by non-bank lenders, which could be very important because those actors are often less regulated than banks and often offer products not covered by the Directive which can be risky for consumers. For these reasons, this exercise should be interpreted prudently. 

According to this partial quantification, most of the considered measures would be cost effective, as benefits for consumers would outweigh costs for businesses: for instance, the removal of the minimum and maximum threshold (2.1), inclusion of some of the currently excluded loans within its scope of application (2.2), the reduction of the amount of information to be provided to consumers in advertising focusing on key information, especially when provided through certain channels (2.4), the presentation of key pre-contractual information in a more prominent way (2.5) and the prohibition of unsolicited sale of credit (3b.6).

The model finds that for few measures costs would outweigh benefits. The measures on amending the definition of some key terms which affect its scope of application such as ‘credit provider’, ‘credit intermediary’, and providing a more detailed definition of some key terms related to the obligations contained in the Directive such as ‘sufficient information’, ‘in a timely manner’, ‘prominently’, ‘adequate explanations’ (2.3 and 2.7, assessed together) would be quite costly for industry. However, as mentioned above, the model does not capture benefits for industry in terms of increased legal clarity, level playing field, and increased consumer confidence leading to increased business development. Those could be very relevant for these measures, which are included in all the legislative options, and are expected to be very effective in meeting the Directive’s objectives. The measure establishing an obligation upon creditors to inform low-scoring consumers whether debt advice services are available (3b.9) would also entail a slightly negative net benefit.

The measure on setting up debt advice services (3b.8) was not among those assessed in the supporting study. However, the potential benefits of deploying a universally available and freely accessible system of debt advice, was calculated in a recent study by VVA and CEPS. 172  The study identifies the benefits of debt advice using ranges of estimated returns: per EUR 1 spent this will provide between EUR 1.4 – 5.3 in terms of equivalent benefits, mainly referring to the social costs of over-indebtedness avoided. 173 Debt advice has a direct, beneficial impact on consumers, helping them to resolve financial difficulties, to face employment issues and improving their quality of life and mental health. 174 Furthermore, it has also a very positive impact on creditors, since they improve the recovery of debt from the borrower and lower the cost of pursuing a debtor.  175  

7.3 Coherence with other EU legislation (and policy objectives)

Ensuring legal coherence with other EU legislation is an important consideration, since legal clarity and simplification of the regulatory framework are desirable. Among the options considered, Option 3a is the one that would lead to the highest level of coherence with other EU legislation, followed by Option 2 and 3b.

Table 8 Coherence (score from 0 to 5)

Moreover, looking at the coherence with EU policy objectives, such as its digital priorities, Option 3a, together with Option 3b would better guarantee a future-proof approach. In fact, on top of tackling information provision online and automated decision making used in creditworthiness assessment, they would tackle online practices exploiting consumer’s situation and patterns of behaviour.

7.4 Stakeholder views on the options

This overview builds on different consultation activities (public consultation, interviews, surveys, workshops, bilateral exchanges). 176

Consumer organisations favour an extensive revision of the Directive (Options 3a & 3b). They consider that including all types of credit under the Directive scope would benefit consumers and decrease the risk of over-indebtedness linked to risky credits. 177 They highlight the potential for positive impact on consumers if the effectiveness of the disclosure of information is improved, especially in the digital environment. 178 They also support further harmonisation in the creditworthiness assessment process, in alignment with the Mortgage Credit Directive, and a strong regulatory framework to ensure data protection, transparency and avoid potential discrimination. 179  Concerning measures to respond to systemic and exceptional economic disruptions, consumer organisations support the provision on forbearance measures (Option 3a), but they would favour a more ambitious EU approach in line with Option 3b. 180 From Option 3b they also consider very effective caps on APR/interest rates and debt advice services. Consumer organisations support a fully harmonised framework at EU level to ensure an equivalent level of protection to all EU citizens.

Most industry representatives favour non-regulatory intervention (Option 1) or targeted changes to the Directive (Option 2) to adapt it to the digitalisation developments. Some of them are in favour of scope extension to include credit below EUR 200, which would help tackling the unlevel playing field with creditors mainly offering products falling outside the current scope, such as certain non-bank lenders. 181 However, nearly half of business associations consider that the scope of the Directive should not be extended. 182 The large majority call for a simplification and reduction of information provided at advertising and pre-contractual stage. 183 With regard to creditworthiness assessment, industry representatives generally argue that a revision should follow proportionality principles, as too prescriptive measures would impose high costs on credit providers and potentially reduce access to credit. 184 However, some industry actors such as representatives of online lending platforms support the harmonisation of creditworthiness assessment rules across Member States. Creditors and in particular non-bank lenders are also opposed to APR or interest rate caps introduced in Option 3b; however, they appreciate the positive impacts of debt advice services on consumers and praise their cost effectiveness. 185 Concerning exceptional and systemic disruptions, industry representatives commonly indicated that national responses and self-regulatory mechanisms would be more adapted; in their responses to the public consultation 186 they generally indicated that extra measures at EU level are not necessary. Regarding the cross-border provision of credit, industry representatives believe that low cross-border credit is predominantly due to external barriers (e.g. language, consumer preference for national products). 

National authorities generally support a legislative amendment. Several Member States seem to favour an extensive legislative change to address the problems identified. Some of them also flagged the feasibility of certain measures, e.g. the extension of the Directive scope, because they have already been implemented in several Member States. 187 The majority supports the need to adapt information to digital tools and show it prominently. 188 In the public consultation, one third supported higher harmonisation in the creditworthiness assessment process. Several Member States highlighted the effectiveness of APR/interest rate caps (already implemented in 23 Member States) and that measures to improve the effectiveness and coordination of enforcement actions could help increasing compliance. National authorities also seem to agree that legislative measures on debt advice services would positively affect the level of over-indebtedness and support vulnerable consumers. 189 With regard to exceptional and systemic disruptions, national authorities appear to favour a national response, even though only a minority of those responding to the public consultation replied that EU action is not needed in these cases. 190 A majority of national authorities recognise that harmonising rules would support the development of the cross-border market.

7.5 Comparison of options and proportionality

Table 9 Ranking of policy options (from 1= better performing to 4=worst performing)

The performed analysis highlights that even though Option 3a ranks first, Option 2 scores similarly to Option 3a in terms of effectiveness and efficiency (but still slightly lower under both criteria) and lower in terms of coherence. Option 3a would entail higher costs, but would also constitute a more ambitious and future proof approach leading to higher benefits for consumers. 191  

Option 3a is therefore the policy option considered optimal in this impact assessment. However, some measures from other options appear to be very cost beneficial, such as the prohibition of unsolicited sale of credit. Moreover, measures to simplify information in advertising and make information provided to consumers at pre-contractual stage more timely and prominent, not included in option 3a, would lead to burden reduction for businesses and would improve the effectiveness of information disclosure for consumers. According to recent studies, the setting up of independent debt advice services seems to have a very cost beneficial impact on society.

In accordance with the principle of proportionality, the proposed rules will not go beyond what is necessary in order to achieve the objectives set out in section 4. The initiative will cover only the aspects that Member States cannot achieve on their own (for example, the establishment of a uniform definition of creditor and/or credit intermediary in light of new forms of lending created by digitalisation or the widening of the scope of application of the Directive - these two measures will help reduce the detriment arising from unregulated products) and where the administrative burden and costs are commensurate with the specific and general objectives to be achieved (for example, the articles on improving conditions for enforcement by introducing an article on Competent Authorities’ and reinforce enforcement coordination by introducing a provision in line with to the 4% rule set in the Omnibus Directive for cross-border cases will help achieve the Directive’s two overarching objectives).

As such, proportionality will be embedded in the provisions of the Directive such as the article concerning the scope of application of the Directive, the rules on advertising, the rules on creditworthiness assessment and credit database and the article on penalties. None of the options analysed in this impact assessment goes beyond what is necessary to achieve the objectives. EU action is therefore justified on grounds of proportionality.

8.The preferred option

Based on our analysis, and considering the support from consumer organisations and several national authorities for a comprehensive amendment of the legislation, the preferred option is Option 3a, i.e. an amendment of the Consumer Credit Directive to include new provisions, in line with existing EU acquis. Taking into account subsidiarity considerations, the scope of the Directive will be extended to cover (explicitly) peer-to-peer lending platforms, loans below EUR 200, interest free credit, all overdraft facilities and all leasing agreements (measure 2.1 and 2.2), but it will not be extended to pawnshops agreements or loans above EUR 75 000. Regarding pawnshops, the reason for their exclusion is that they do not have an evident cross-border potential, so an EU intervention would not be justified under the principle of subsidiarity. Similarly, no extension of the scope seems necessary for loans above EUR 75 000, since there has been no comprehensive data on such big amount loans that evidently call for EU action. 192

Considering their estimated cost effectiveness and impact on simplification, the following measures from other Options will also be included in the preferred option

ØMeasure on the reduction of the amount of information to be provided to consumers in advertising focusing on key information (2.4), when provided through certain channels (e.g. audio advertisements on radio broadcasts) and on how and when pre-contractual information is presented to consumers to make sure it is done in a more prominent way (2.5, 2.6);

ØMeasure to prohibit the unsolicited sale of credit products (3b.6); and

ØMeasure to enhance the availability of debt advice services (3b.8). Although this measure was not subject to a comprehensive quantitative assessment in the support study, evidence from other studies demonstrate clearly the positive impact on consumers, creditors and the avoidance of social costs of over-indebtedness.

Considering the results of the partial quantitative analysis, the measure on introducing an ‘early detection’ mechanism (3b.9) will not be included in the preferred option.

Moreover, the following one would be included as well:

ØMeasure establishing the obligation upon Member States to set interest rate/APR caps, without specific rules or guidelines on how these should be calculated (3b.4).

Introducing an obligation to set interest rate or APR caps at national level (with national discretion at what level to put such caps) has not been assessed quantitatively due to lack of consistent data. However, such caps have proved very effective in protecting consumers, often leading to the disappearance of products which entail high risks for borrowers. Those benefits outweigh possible costs which should be very limited. Considering that such caps have already been introduced by 23 Member States (plus four with caps that apply to defaulted loans only), its implementation should not bring any additional costs for most national public administrations and for credit providers active in those countries, so no major impacts are expected.

The overall impact of the final combination of measures is very beneficial, as explained below under the overall effectiveness part (8.1). The selected measures from other Options were chosen because they are deemed to be very positive, based on the analysis performed. The additional measures that are added from other Options interact in a complementary, rather than an overlapping or contradictory way, with Option 3a. This beneficial overall impact renders reasonable and justifiable the composition of the preferred option. Thus, the preferred option may entail higher costs, but it also leads to higher benefits for consumers, and it is therefore considered to be proportionate.

8.1The overall effectiveness of the preferred option

The preferred option is deemed to be very effective in tackling the problems identified and in achieving the initiative’s objectives.

·It would be very effective in reducing the detriment arising from unregulated products (SO1), by expanding the scope of the Directive (measure 2.1 and 2.2). It would also amend the definition of some key terms which affect its scope of application (2.3) to make sure they are fit for purpose add a new provision addressing specifically peer-to-peer lending (3.1).

·It would also effectively ensure that consumers taking out a credit are empowered by effective information, also via digital means (SO2), in particular by establishing detailed requirements in relation to the provision of adequate explanations to consumers (3a.2). Moreover, measures simplifying the information requirements at advertising stage for certain channels (e.g. radio), and measures ensuring that consumers are presented with clearer information, shown more timely and prominently (2.4, 2.5, 2.6), would allow consumers to process and understand information more easily. The clarification of existing provisions and the reduction of information requirements at advertising stage on certain channels would also create a clearer and simpler legal framework for credit provision at EU level, and reduce burden on businesses (SO6). 

·Credit granting based on thorough assessment of the consumer best interest (SO3), would be guaranteed by the obligation for providers and intermediaries to promote responsible lending (3a.6). Practices by credit providers exploiting consumer’s situation and patterns of behaviour would be tackled through the ban of product tying (3a.9), on the use of pre-ticked boxes (3a.12) and on unsolicited sale of credit products (3b.6). They would be also addressed through the adoption of conduct of business rules on remuneration policy and on rules on ensuring that staff members have the proper set of skills and knowledge (3a.10, 3a.11), as well as via the adoption of standards on advisory services and an obligation for creditors to inform consumers whether such services are available (3a.7, 3a.8). The introduction of interest rate/APR caps at national level would ensure a high and consistent level of consumer protection, in particular for vulnerable consumers, in all Member States (3b.4). The initiative would also introduce new measures to make sure credits are granted after a thorough assessment of the consumer creditworthiness, based on information on financial and economic circumstances that is necessary, sufficient and proportionate (3a.13). The issue of alternative sources of data will be tackled through a specific provision (3a.14), together with a right for consumers to receive an explanation on what basis a decision on their creditworthiness was reached (3a.15).

·To prevent that specific individual or systemic situations exacerbate consumer detriment and increase over-indebtedness (SO4), preventive measures such as an obligation on Member States to promote financial education/digital literacy initiatives (3a.16), and on the Commission to regularly assess such initiatives (3a.17) would be introduced, as well as remedies such as the obligation upon Member States to adopt measures to encourage creditors to exercise reasonable forbearance (3a.18). The measure regarding the setting up of debt advice services (3b.8), considered to be very effective in helping both consumers to resolve financial difficulties and creditors to improve the recovery of debt from the borrower, would also be included in the preferred option.

·The preferred option would also effectively reduce barriers for providers offering credit across borders while enabling more choice for consumers (SO5) via a non-exhaustive list of categories of data, including reliable negative data, to be collected by private and public credit databases (2.10), as well as through the new provisions in line with other EU legislation and the clarification of existing provisions, creating more even conditions for the provision of consumer credit across borders.

·Finally, it would also improve conditions for enforcement by introducing an article on Competent Authorities’ (3a.3) and reinforce enforcement coordination for cross-border cases 193 (3a.4). This would improve the effectiveness of the Directive in achieving all the specific objectives, and in particular SO2, SO3 and SO5.

8.2Impact on stakeholders

The preferred option would have different impacts on stakeholders (more details on the results and methodology of the partial quantification of a limited number of measures can be found in Annex 3 and Annex 9):

·The impact on consumers would be very positive. In particular both consumer trust, protection and reduction of consumer detriment would be affected positively. According to the limited quantification of some measures, the preferred option would entail a reduction in consumer detriment linked to products offered by banks of around EUR 1 990 million for the period 2021-2030, in particular thanks to the extension of the scope of the Directive, the prohibition of unsolicited sales of credit and pre-ticked boxes and the simplification of information disclosure. Moreover, the measures on debt advice and caps on APR/interest rates are deemed to be very beneficial measures for consumers.

·The impact on society is also deemed very positive, thanks to measures preventing and addressing over-indebtedness, thus improving social inclusion, such as those on strengthening creditworthiness assessments, and introducing forbearance measures and debt advice services. As mentioned above, per EUR 1 spent on debt advice, this will provide between EUR 1.4 – 5.3 in terms of equivalent benefits, mainly referring to the social costs of over-indebtedness avoided.

·The impact on credit providers would be less straightforward. In fact, on the one hand they would have to face most of the implementation costs of the new Directive, and some measures (e.g. caps) would be more costly for providers currently offering products not covered by the Directive. On the other hand, the enhanced legal clarity and the higher degree of harmonisation, together with the broadening of the scope, would result in a more level playing field for credit providers and to some extent facilitate the conditions to provide consumer credit cross-border. Moreover, the simplification of information requirements would reduce costs for providers on the longer run. The cost of the partially quantified measures for banks is estimated to be around EUR 1 460 million, in particular due to scope extension and more detailed definitions (but the model does not take into account benefits for industry in terms of level playing field and in terms of increased legal clarity). 194

·Public authorities would also face costs. In particular, the EU administration would face costs for the legislative amendment of the Directive. National administration would also face a moderate burden, but the alignment with other EU legislation could facilitate enforcement, by simplifying the legislative framework applicable to credit. The costs of the partially quantified measures for public administrations would amount to around EUR 3 million. The provision of debt advice services in all Member States would amount to EUR 22.57 million per year, 195 so EUR 230 million until 2030. But the linked benefits would outweigh those costs (see above).

·Among other market participants, credit intermediaries would be affected by the changes included in the preferred option, in particular from the provisions on providing adequate explanation. The preferred option would also bring benefits to radio broadcasts.

8.3Synergies with other legislation 

The preferred option would include several measures in line with other EU legislation.

Several measures proposed under this policy option, e.g. the alignment on responsible lending requirements and the categories of data to be used for creditworthiness, have been inspired by the Mortgage Credit Directive (‘MCD’ 2014/17/EU) requirements. This would achieve a more harmonised legal framework for credit agreements in general.

The provision on the use of alternative sources of data to conduct creditworthiness assessments would reflect the General Data Protection Regulation (EU 2016/679, ‘GDPR’) principles in particular the principles of data minimisation, accuracy, storage limitation as laid down in Article 5 of the Regulation (EU) 2016/679. This measure, without prejudice to the GDPR, aims to address the concerns (e.g. processing of disproportionate amounts of personal data) identified in the processing of personal data that are specific to practices observed in the consumer credit market, i.e. the use of alternative sources of data for creditworthiness assessments or the transparency those assessments when they are carried via machine learning techniques. The preferred option would also include provisions in line with the Omnibus Directive (EU 2019/2161) and the Consumer Rights Directive (2011/83/EU). Legal coherence between these legal instruments and the Directive would be increased.

8.4REFIT (simplification and improved efficiency)

The review of the Directive is included among the Commission Work Programme REFIT initiative. 196 As mentioned above, the Directive’s revision would entail costs for businesses, but is also expected to reduce burden on them, thanks to enhanced legal clarity. Moreover, several measures considered in the preferred options (e.g. scope extension) are already implemented in several Member States, so businesses present there would not need to face additional costs.

The potential for simplification of the proposed initiative stems mainly from measures simplifying information requirements. 197 In fact, the initiative will reduce the advertising costs for credit providers/intermediaries (on certain channels e.g. radio) while ensuring that consumers are presented with clearer information, easier to process and understand. Credit providers would have to face some limited implementation costs, but would eventually benefit from cost reductions in advertising credits, together with the radio industry. Compliance costs to advertise consumer credit will be reduced thanks to simplified information requirements which could in turn lead to higher investment in advertising via radio broadcasts, hence in increased revenues for them. According to the supporting study, the potential for simplification of requirements for advertising consumer credit on radio broadcasts can be estimated at EUR 1.4 million a year, so 14 million over the period 2021-2030.

The burden reduction of adapting information requirements for digital use is difficult to ascertain. Adapting the form for mobile use has an initial cost but once these have been prepared, it could be less burdensome to provide these online than the full SECCI (which would still need to be provided anyway, such as via e-mail). In view of the fact that 36% of consumers entered a credit agreement online 198  this burden reduction could ultimately impact over 25 million personal bank loans annually.

As regards reduced burden for public administrations, the higher degree of legal clarity and the simplified regulatory framework applicable to credit (also thanks to synergies with other existing legislation) is expected to reduce the number of complaints and increasing the level of certainty and compliance, which would render enforcement procedures more efficient. Specific measures to reinforce coordination and improve conditions for enforcement are also expected to result in efficiency gains in relation to the enforcement of the Directive’s obligations. Moreover, the initiative should reduce the need for interpretation by the CJEU, ultimately reducing the burden on EU public administration.

9.How would actual impacts be monitored and evaluated?

The Commission will monitor the implementation of the revised Directive, if adopted, after its entry into force. A commitment to evaluate the impacts of the new legislation, will be included in the draft proposal. The indicators proposed to monitor the impacts of the new legislation focus on the achievement of the specific objectives, in order to be able to assess the Directive’s effectiveness, but also on its efficiency and coherence. The Commission will be mainly in charge of monitoring the Directive’s impact, based on the data provided by Member States authorities and credit providers, which will be based on existing data sources where possible to avoid additional burdens on the different stakeholders.

Annexes

Annex 1: Procedural information

Lead DG, Decide Planning/CWP references

·Lead DG: DG Justice and consumers

·Decide Planning: PLAN/2020/6978

·CWP 2020 – Annex II (REFIT Initiative No. 42) 199

Organisation and timing

The impact assessment took place between March 2020 and December 2020 and was announced in the 2020 Commission Work Programme – Annex II Refit Initiatives. It was carried out by Unit E1 "Consumer Policy" of the Commission, DG Justice and Consumers.

Representatives from the Secretariat General (SG), the Legal Service (SJ), DG Justice and Consumers (JUST), DG Financial Stability, Financial Services and Capital Markets Union (FISMA), DG Competition (COMP), DG Communications Networks, Content and Technology (CNECT), DG Economic and Financial Affairs (ECFIN), DG Employment, Social Affairs & Inclusion (EMPL), DG Energy (ENER) and the Joint Research Centre (JRC) were appointed to the Interservice Steering Group.

The Interservice Steering Group met three times between April 2020 and December 2020. The first meeting was held on 6 April 2020, the second meeting on 16 October 2020 and the third meeting on 15 December 2020.

Exceptions to the better regulation guidelines

The Better Regulation Guidelines and Tools were followed without any exception.

Consultation of the RSB

An upstream meeting was held with the Regulatory Scrutiny Board (RSB) on 17 July 2020, to informally discuss questions concerning how to prepare the best possible report for the Directive’s revision. The draft of the impact assessment was submitted to the RSB on 6 January 2021 and discussed at the RSB hearing of 3 February 2021. The RSB delivered a negative opinion on 5 February 2021. Following this development, a revised version of the draft impact assessment was resubmitted to the RSB on 26 March 2021. The RSB delivered a positive opinion with reservations on 23 April 2021. The comments formulated by the Board were addressed and integrated in the final version of the impact assessment, stemming both from the first and second opinion of the RSB.

1st RSB opinion:

·The Draft Impact Assessment was redrafted to better illustrate the expected evolution of the consumer credit market and why the EU should create a harmonised market for consumer credit while ensuring a protective framework for consumers.

·Some parts of the problem definition were shortened, but risks associated with new types of credit and their cross-border potential are described with more granularity. New figures from recently published materials were added to substantiate the problems.

·The Draft Impact Assessment was redrafted to better demonstrate that while the conclusion of direct cross-border credit agreements is still low, this situation could change fast. Digitalisation is constantly changing the market and new market players are expected to change the consumer lending market. In this light, the subsidiarity argument was strengthened.

·The Draft Impact Assessment was revised to better explain the fact that a thorough examination of the possible legal basis has been conducted.

·The possibility to (partially) repeal the Directive has been added and there is an elaboration on why it should be discarded.

·The differing views of stakeholders are now more clearly presented.

·The description of the options in the main text has been enriched.

·The benefit estimates have been reviewed, based on the supporting study which has been revised by the contractor. The updated (partial) quantification analysis shows that there are only two measures with negative net benefit. The measure on improving definitions and terms of the Directive (but as explained in the Draft Impact Assessment, the model does not take into account benefits in terms of enhanced level playing field for industry thanks to further harmonisation); and the measure on ‘early detection’ (with a slightly negative net benefit). A case study based on simplified hypothesis, has been added to complement the quantification analysis and illustrate the benefits stemming from improved creditworthiness assessment.

·The comparison of the options looks at the three criteria considered: effectiveness, efficiency and coherence.

·In order to better reflect the costs of the different measures, a multi-criteria analysis has been performed for the efficiency analysis rather than for effectiveness, coherence and efficiency. In addition, the impacts considered in the multi-criteria analysis have been re-arranged to have a balanced approach between benefits and costs, and performance scores have been adapted. The analysis also balances the weights of costs and benefits (50% each).

·The preferred option (Section 8) has been adjusted to reflect the revised analysis, it now includes the measures on simplification of information and on the ban of unsolicited credit. Although a comprehensive quantitative analysis on it could not be performed in the support study, the measure on debt advice services remains part of the preferred option, because other evidence shows its high cost effectiveness. By contrast, the ‘early detection’ measure, showing a negative net benefit in the partial quantification, was removed. The proposal will be restricted to elements for which EU action is needed. For instance, the scope has been extended, but taking into account subsidiarity considerations, not to loans above EUR 75 000 or to pawnshop agreements.

·The report was revised to better present the potential for simplification of the proposed initiative, elaborating on reduced burden for businesses and public administration and including cost estimates where possible.

2nd RSB opinion:

·The report was reinforced to even better demonstrate the necessity for EU action, showing that national legislation cannot sufficiently protect consumers when the number and type of cross-border providers of consumer credit is increasing or is likely to increase, especially in view of digitalisation and recent market trends.

·The methodology was revised to take into account the Board’s comments, following the first opinion. In particular, the assumed increase in the effectiveness attributed to certain measures was updated based on expert judgment. Following the second opinion, the report now better highlights the reasonable justification of the assumed effectiveness of individual measures in annex 9.

·The report now better illustrates the composition of the preferred option and highlights its proportionate character. The measures added from other options that compose the preferred option act complementarily and have a very beneficial impact overall.

·The non-extension of the scope of the Directive to pawnshops and to the removal of the upper threshold is better explained in the subsidiarity section and also in the beginning of the preferred option.

·Annex 1 now indicates how the comments and recommendations from the Board’s first and second opinions have been taken into account.

Evidence & External expertise

For the purpose of this impact assessment, Commission services collected data through various sources and consultation strands.

The impact assessment relies and builds on the Evaluation of the Directive, which took place in 2018-2019 and was announced in the 2019 Commission Work Programme, also following the commitment made in the 2017 REFIT Platform Opinion on Article 4 of the Directive. To this end, the Commission published an Evaluation Staff Working Document, an Executive Summary of the Evaluation, as well as a Report to the European Parliament and the Council on the implementation of the Directive. The Evaluation of the Directive received a positive opinion from the RSB. 200 The Commission previously outsourced to an external contractor a study supporting the Evaluation of the Directive, whose final report is also published. 201

In 2020, the Commission outsourced a new support study to provide sound evidence and analysis for preparing this impact assessment for potential EU action to revise the Directive, of both quantitative and qualitative nature.

The Commission published the Inception Impact Assessment of the Directive and received public feedback on it from 23 June 2020 to 1 September 2020.

The Commission also based the impact assessment on the evidence gathered from the New Consumer Agenda Public Consultation,  which included a section on the review of the Consumer Credit Directive, and was held from 30 June 2020 to 6 October 2020.

Two participatory workshops were organised with external stakeholders from both the consumer side and the industry side (in September 2020 and November 2020), to verify and validate impact assessment aspects and gather specific feedback on the problem definition and the assessment of policy options, i.e. in terms of expected effectiveness and efficiency.

The Commission consulted twice its dedicated Member State Expert Group on the Implementation of the Consumer Credit Directive (in May 2020 and December 2020). The first meeting was targeted to discuss the measures taken at national level in the area of consumer credit to face the COVID-19 crisis, considering preliminary lessons learnt from the crisis and discussing how to integrate them in the Directive’s review. The second meeting discussed more broadly the impact assessment for the potential revision of the Directive.

A stakeholder dialogue was organised by the European Commission, in light of the COVID-19 pandemic, to discuss inter alia credit payment moratorium measures. Two virtual roundtable meetings took place in May and June 2020, whose outcome was the adoption of a set of Best practices in relation to relief measures offered to consumers and businesses in the context of the COVID-19 crisis .

The Commission consulted the Financial Services User Group (FSUG) on the Directive’s review, also holding in November 2020 a dedicated presentation regarding the Directive’s impact assessment, enabling members of the FSUG to provide feedback on the Options.

The issue of financing the clean energy transition through consumer credit, and specifically credits for energy efficient renovation of buildings, were discussed at the Citizens’ Energy Forum 2020 , through a dedicated panel on the topic.

Annex 2. Stakeholder consultation – Synopsis report

Introduction & Consultation strategy 

The stakeholder consultation collected information and feedback on various aspects of the Consumer Credit Directive (‘CCD’) and the consumer credit market from a wide range of key stakeholders representing consumers, industry, national authorities, researchers and other relevant interest groups. It included four online surveys and three short questionnaires, semi-structured interviews, the analysis of the responses to the questions related to the CCD in a Commission-run public consultation on the Consumer Agenda and two workshops organised by the contractor ICF at different stages of the study, for which the first covered the problem definition and the second aimed to validate the policy options. It also included the analysis of the feedback to the Commission’s Inception Impact Assessment (IIA) as well as ad hoc contributions from stakeholders provided through other channels and consultation tools.

The aim of the stakeholder consultation was to gather feedback and information (qualitative and quantitative) from key stakeholders to support the definition of the key trends in the consumer credit market and problems faced by stakeholders related to the CCD. It also informed the development and selection of the policy options, with key stakeholders at EU and national level providing feedback on the impact of policy measures adopted by Member States and the preliminary policy options and measures developed.

Consultation activities and tools

The impact assessment relies extensively on the evidence findings of the external supporting study prepared by the contractor ICF (Study on possible impacts of a revision of the CCD) which fed into the analysis of the Commission. The study was carried out under close guidance of DG JUST. The consultation strategy was underpinned by a number of key activities using multiple tools to target a wide range of stakeholders through different channels and gather insights from as many relevant stakeholders as possible.

Several scoping interviews with representatives from relevant EU institutions, i.e. the Directorates for Justice and Consumers (DG JUST), Economic and Financial Affairs (DG ECFIN) and Financial Stability and Capital Markets (DG FISMA) as well as several researchers from the Joint Research Centre (JRC) were conducted ahead of other consultation activities.

The surveys and interviews aimed at gathering views from the various key stakeholder groups. The four online surveys ran between end of July and mid-September. They targeted EU and national level representatives of consumer organisations, credit providers / intermediaries / other businesses involved in the marketing of consumer credit, business associations and national authorities. They sought to obtain data, supporting information and views on the recent and expected trends in the field of consumer credit, key problems faced by the various stakeholders, potential solutions to the problems and the expected impact of preliminary policy options and measures (including costs and benefits).

In addition to the online surveys, three questionnaires were developed targeting Alternative Dispute Resolution (ADR) bodies and members of the European Consumer Centres (ECC) and the Consumer Protection Centres (CPC) centres. The questionnaires focused on key issues faced by consumers and credit providers and the enforcement of CCD obligations. Feedback from ADR bodies was collected between mid-August and mid-September. ECC and CPC survey were distributed by the Commission in mid-August.

A validation survey was also developed targeting a specific group of stakeholders to gain feedback on the designed policy options. The validation survey ran from 11 November until 18 November. A total of 76 stakeholders were invited to complete the survey. In addition to attendees and registered participants to the validation workshop (49 stakeholders), discussed below, willing stakeholders who completed the survey in August or participated in an interview (27 stakeholders) were also invited to contribute to the validation survey.

Table 10 Stakeholder groups consulted (planned number in brackets)

Source: ICF assessment, impact assessment supporting study

The responses to the questions relating to the CCD included in a public consultation on the New Consumer Agenda, which ran from June to October 2020, were also analysed. The consultation received a total of 393 responses, and 250 respondents answered at least one question in the CCD review section (including EU and non-EU citizens, business associations, business organisations/companies, public authorities, consumer organisations, NGOs, academic and research institutions, and others). Table 3 presents the profile of the respondents (stakeholder group) who answered this section of the public consultation, and the percentage of responses received from each group.

Table 11 Profile of respondents to the Consumer Credit Directive review section of the New Consumer Agenda public consultation

Source: Factual Summary Report – public consultation on the New Consumer Agenda

Stakeholder feedback was received on the Inception Impact Assessment between June and September 2020, following the Commission Proposal to review the CCD as part of the REFIT Annex of the Commission Work Programme 2020. A total of 25 contributions were received, analysed and taken into account. Their input covered the assessment of the expected economic, environmental and social impacts of a potential EU action to revise the Consumer Credit Directive.

A participatory workshop was organised by ICF in September 2020. It gathered a total of 54 participants (20 active participants and 34 observers), mostly from EU-level organisations representing the interests of credit providers and intermediaries, consumers and other relevant businesses, but also a subject-matter expert. In addition, 11 representatives of the Commission joined and 4 members of the ICF study team. The workshop covered the key issues affecting consumers and credit providers (and other business operators involved in the marketing and provision of consumer credit), structured around five main problems, each of them broken down in sub-problems. The workshop also gauged stakeholders’ preference in terms of policy solutions, ranging from non-regulatory measures to measures going beyond legislation.

A validation workshop was organised by ICF in November 2020. Invitations were extended to the participants of the first workshop, complemented by further national level organisations. It gathered participants from 58 organisations (21 active participants and 37 observers), mostly from EU-level organisations representing the interests of credit providers and intermediaries, consumers and other relevant businesses. The Commission was represented by 7 participants (2 active and 5 observers); 4 members of the ICF study team were also present. This second workshop built on the findings of the participatory workshop and gathered feedback on the policy options designed to address the problems that were refined based on feedback from the participatory workshop. The workshop offered participants a chance to discuss the various policy options, covering aspects such as their expected effectiveness and efficiency in addressing the problems identified and the impacts that they are likely to have on key stakeholders, and to vote for their preferred measures. In particular, discussions addressed both positive and negative aspects of feasibility, effectiveness and EU added value of the policy options, as well as the benefits and risks or costs on both consumers and industry. Other impacts were also addressed.

Ad-hoc contributions were received from the European Commission or directly from stakeholders. In addition, a few stakeholders provided their responses to the survey by email or shared their answers to the interview questions in writing. These contributions were not treated differently but analysed together with the others.

A presentation at the Financial Services User Group (FSUG) was held on 19 November 2020, enabling members to provide feedback on the Options. Specific views were shared (in writing) after the meeting.

The Commission also consulted its dedicated Member State Expert Group on the Implementation of the Consumer Credit Directive twice (May 2020 and December 2020). The first meeting was targeted to discuss the measures in the area of consumer credit taken at national level to face the COVID-19 crisis, and to consider preliminary lessons learnt from the crisis and discuss how to integrate them in the Directive’s review. The second meeting discussed more broadly the impact assessment for the potential revision of the Directive.

A mini-sweep exercise on consumer credit took place in February/March 2021. Namely, a coordinated compliance check of online advertising and offers to purchase consumer credit products was conducted by a dedicated group of Consumer Protection Cooperation (CPC) authorities (members of the CPC network) (“Mini-sweep”) . The activity was steered by the Commission pursuant to Article 29 of the Consumer Protection Cooperation (CPC) Regulation. In line with the strategic priorities of the New Consumer Agenda, the exercise of the CPC network has aimed to monitor and prevent proliferation of unfair practices in the consumer credit sector. This is to ensure that consumers who have found themselves in need of a credit in the midst of the COVID-19 crisis can rely on national public enforcement authorities to protect them in national as well as cross-border context. The primary objective of the Mini-sweep was to check on various technical devices (PC, tablets, smartphones), whether traders comply with EU consumer rules on standard information in online advertising of consumer credit, if the overall presentation of the consumer credit offers cannot mislead consumers, and if the offers do not aggressively exploit consumer vulnerabilities.

Other inputs were received through bilateral meetings with stakeholders, specific ad-hoc reports and data from consumer associations, industry representatives and researchers.

The evidence collection for the Staff Working Document is also based on the Commission’s experience in monitoring and implementing the Directive.

Evidence, sources and quality

Thorough desk research and legal analysis were conducted.

The implementation of the stakeholder consultation encountered various challenges, some of which affected most consultation activities. The first obstacle observed relates to the impact of the COVID-19 pandemic. The uncertainty of the period generated new concerns and a shift of priorities for stakeholders. The low level of participation registered can also be attributed to multiple stakeholder consultations running simultaneously and the often limited resources to address these queries. The high level of responsiveness of industry representatives in the public consultation, compared to a low participation in surveys and interviews, may suggest that they considered their contribution to the public consultation sufficient.

The timing of the consultation also constituted an obstacle as it coincided with the summer period, when many stakeholders take their annual leave. Stakeholder fatigue may have also contributed to the low response rate. Most stakeholders had been already contacted in the previous year to participate in the Evaluation of the CCD and some of them argued that they had no additional time or new views to share over such a limited period of time.

Main stakeholder feedback per consultation activity

Interviews

The analysis of the interview responses shows that all groups of stakeholders have similar views on the market trends in the field of consumer credit during 2015 – 2020. Among all stakeholder groups interviewed, the digitalisation of the market was highlighted as the key trend. Other recurring trends mentioned by stakeholders refer to the low level of cross-border provision of consumer credit (i.e. consumer credit in the national market is still mostly provided by national banks, and the demand and supply for cross-border credit remains low) and the emergence of new types of credit and players.

The general opinion of all participants is that there are other market trends that follow technological advances, such as new types of credit providers and the way consumers search for and access credit. Industry representatives and consumer organisations agree that the CCD did not anticipate the technological disruption. The majority of consumer organisations highlight the negative impact on consumer protection resulting from, for example, unregulated new entities and the overload of information. Industry representatives also acknowledge the negative impact on consumer protection, but highlight the challenges related to the required information that needs to be provided, which imposes unnecessary costs and fails to protect the consumer. Industry representatives involved in advertising and marketing of credit called for a revision of Article 4 of the CCD, to reduce the amount of information that needs to be provided in advertisement, especially on radio.

Stakeholders generally believe that it is too early to predict the impact of the COVID-19 pandemic and subsequent economic downturn. Nonetheless, most national authorities and consumer organisations interviewed expect it to lead to a reduction on the demand of consumer credit, an opinion which is shared only by a minority of industry representatives. A few national authorities noted a decrease in credit supply due to imposed national measures in response to the pandemic, such as decreased interest rates. Reflecting on the impact on over-indebtedness, a majority of consumer organisations also noted an increase of over-indebtedness among consumers as a result of the pandemic.

Regarding the cross-border provision of credit, a great majority of consumer organisations support a fully harmonised framework at EU level to ensure a level-playing field for credit providers and intermediaries and ensure the same level of protection of all EU citizens. Harmonisation would be beneficial with regard to creditworthiness assessments, regulations regarding access to databases and information requirements to avoid legal uncertainty. This opinion is shared by a majority of national authorities and national industry representatives, although a few of national industry representatives disagreed and do not see the need to revise the CCD.

When asked about the reasons explaining the small share of the cross-border market for consumer credit, all stakeholder groups highlight language or cultural factors as the main barriers preventing consumers to access credit cross-border. A majority of national consumer organisations put forward the low demand of cross-border credit from the consumer side. Industry representatives argue that supply is low due to the difficulty of credit providers to assess the creditworthiness of consumers resident in another country, the lack of specific skills and incentives to operate cross-border due to a low demand and the legal complexity inducing high costs (i.e. need legal experts). A majority of national authorities recognises the need to harmonise the rules to conduct a creditworthiness assessment and define clear guidelines in order to support the development of the cross-border market and tackle over-indebtedness. This was echoed by a majority of consumer organisations. However, national authorities also caution for over-prescriptive rules, which impose costs on credit providers and might lead to consumer discrimination.

Online surveys

The digitalisation of the consumer credit market and the prevalence of national credit providers in the national market are the main market trends observed in the past years across all stakeholder groups. A majority of industry representatives and public authorities also indicated that consumer credit in the national market is mostly provided by banks, as opposed to other non-bank credit providers. While the emergence/growth of new credit providers was highlighted by many industry representatives, national authorities and consumer organisations.

On future market trends expected for 2025-2030, respondents mainly indicated a continuation of the main trends observed in the past few years. Overall, all respondents commonly considered that technological advances will further change the way in which consumers search for and access consumer credit. The emergence or growth of new types of credit providers/ intermediaries is expected by the majority of public authorities and consumer organisations, contrasting with the industry’s view.

There is a high level of consensus among stakeholders that the demand for cross-border consumer credit has not increased in their country since 2015, with language and cultural barriers playing an important role. While all groups of stakeholders also argued that consumers’ lack of knowledge of the legal framework or a lack of confidence in redress mechanisms in other countries is an important obstacle in the cross-border provision of consumer credit.

A majority of all groups of stakeholders reported that their country has adopted rules at national level on not harmonised aspects by the CCD. The most common measures were interest rate or APR caps, the extension of the scope to other types of credit, and stricter rules concerning the process to perform creditworthiness assessments (CWAs) or the data to be used for the CWA.

On problems faced by credit providers, industry representatives agree that the requirements of information to be provided both at the advertising and at pre-contractual stage are the most challenging aspects. In addition, different regulatory approaches adopted by countries seem to undermine the level-playing field amongst credit providers in the view of industry representatives and national authorities.

When it comes to problems faced by consumers, national authorities and consumer organisations generally argued that vulnerable consumers do not have the tools that would allow them to improve their financial situation and that that the information provided to consumers in advertising does not allow consumers to properly read and process the key information. While problems with the provision of information at pre-contractual stage are indicated by national authorities and consumer organisations.

On the impact of different policy options on consumers, a possible amendment of the CCD to simplify the rules on pre-contractual information and legislative measures on debt advice services are believed to be the most beneficial for consumers, according to consumer organisations and national authorities. Respondents further elaborating their answer indicated that information requirements imposed by the CCD should be revised to ensure a balance between ensuring that consumers have all information and that they are able to understand all information provided, avoiding information overload. It is suggested by national authorities and consumer organisations that there is potential for very positive impact for consumers if the effectiveness of the disclosure of information is improved – while also considering the digital environment. When assessing the impact of potential policy options on credit providers, the simplification of rules on pre-contractual information and the non-regulatory measures to promote responsible lending are believed to be the preferred policy options as credit providers would eventually benefit from lower default rates.

Consumer organisations and national authorities tend to agree that legislative measures on debt advice services and amending the CCD to establish the obligation to provide debt assistance for over-indebted or otherwise vulnerable consumers would positively affect the level of over-indebtedness. Overall, stakeholders reported that the overall level of compliance among credit providers and intermediaries would remain the same irrespective of the policy option chosen. However, an important number of national authorities and business associations pointed to an increased level of compliance among credit providers in their Member State following the implementation of a simplification of rules on pre-contractual information and the adoption of measures related to the content and access to credit databases.

Additional questionnaires (CPC and ECC networks, ADR bodies) 

The analysis of the ECC survey reveals that the main issues that consumers face when trying to access/obtain consumer credit cross-border relate to i) geographical restrictions imposed by credit providers; ii) lack of awareness about the possibility to obtain credit in other Member States; iii) fear of fraud or crimes; iv) lack of sufficient (online) information about credits in other Member States. Most stakeholders indicated that these issues are the result of the functioning of the market. Moreover, a group of stakeholders also identified the regulatory framework as a cause of the above-mentioned issues. Another group believed that these issues are also the result of external factors, namely the lack of knowledge, awareness and confidence of consumers in cross-border financial service providers.

Responses to the CPC survey show that the overall level of compliance with the CCD is considered to be high by a majority of respondents. Half of all respondents indicated that the level of compliance with other national rules is high. A large majority of respondents argued that there are several areas and/or specific obligation which are problematic in terms of compliance. A majority of them pointed to other issues strictly related to advertising, pre-contractual information, creditworthiness assessment and cross-selling. Some respondents reported that many credit providers and intermediaries do not comply with advertising requirements given the lack of information, the provision of misleading information, the absence of representative examples or misleading examples. As regards pre-contractual information, a few indicated that the SECCI form is problematic. A larger group found the creditworthiness assessment problematic as well. They highlighted the insufficient control over the information provided by the consumers, the increasing automation of the decision, the limited number of questions for a thorough creditworthiness assessment and the fact that a credit is often nevertheless granted, despite the debt to income ratio is negative. The overall view of respondents is that the three main issues brought up in enforcement decisions against national entities involve the information included in advertising, the creditworthiness assessment and the calculation of the annual percentage rate of charge.

ADR bodies participating in the survey did not refer to cross-border cases, but only to national ones. Most ADR bodies indicated that common issues on the provision of consumer credit found in their country relate to i) consumers’ inability to pay back; ii) the provision of information to consumers at pre-contractual stage; iii) right of withdrawal; iv) right of early repayment.

Inception Impact Assessment (IIA)

Stakeholders’ feedback on the IIA also pointed to the digitalisation of the market as the main trend. According to the contributions received, the overload of information available to consumers due to technological advances and the requirements for providing pre-contractual information for credit providers has led to a decreased level of consumer protection. Other market trends mentioned by respondents included: i) the emergence of new types of credit products and credit providers not covered by the CCD, ii) the availability of big data, including from alternative sources and iii) changing consumer behaviour in the way consumers search for and access credit.

Generally, respondents across all stakeholder groups and EU Member States agree that information provided to consumers in the advertisement stage and at pre-contractual level needs to be reduced, simplified and reflect the growing use of digital devices as it fails to achieve its objective to protect the consumer.

As opposed to other stakeholder groups, a majority of industry representatives expressed views against or not in favour of more prescriptive rules defining the creditworthiness assessment. Further standardisation of the assessment would increase credit provider detriment and consumer discrimination according to the respondents. A few industry representatives expressed their appreciation for stricter measures and an EU framework to support creditworthiness assessments and increase efficiency and effectiveness. Reference was made to the guidelines of the European Banking Authority to inspire new measures. In general, consumer organisations and national authorities are in favour to put in place specified criteria. Almost half of consumer organisations explicitly argued in favour of specific criteria and the inclusion of additional measures, such as sanctions for creditors not adhering to the rules and specific consequences for negative creditworthiness assessment outcomes.

A majority of national authorities and a few consumer organisations advocated for the adoption of policy measures to anticipate unforeseen market disruptions, such as those caused by the COVID-19 pandemic. Half of the industry representatives argued, however, that self-regulatory mechanisms are more effective than prescriptive regulations trying to account for exceptional circumstances.

While all national authorities and a great majority of consumer organisations expressed appreciation of the idea of extending the scope of the CCD to include harmful credit products and new credit providers, industry representatives’ opinion diverged. Half of them agree to revise the scope and include either all types of credit or credit providers, while a minority are not in favour to extend the scope. Generally, they call for proportionality and to consider the cost-benefits of such measures. A Member State also flagged the effectiveness of national measures addressing revolving credit to reduce over-indebtedness linked to it, and stressed existing issues with ‘buy now pay later’ free interest rate credits.

Participative workshop

Discussions on the key problems in the field of consumer credit revealed that most participants agree that the scope of the CCD appears to be insufficient in addressing all risks identified. Some stakeholders both from the consumer and industry side also expressed concerns about the potential detrimental effects of the COVID-19 crisis and about the increasing risks of cross-selling practices observed. Stakeholders that commented on the cross-border market for consumer credit, also both from the consumer and industry side, agree that there are still several barriers that need to be tackled such as fragmented legislation, access to databases or a low level of demand.

In terms of possible policy solutions, the majority of stakeholders who intervened (from business associations and consumer organisations) indicated that they welcome a higher level of harmonisation in the way CWAs are conducted and stronger safeguards to ensure responsible lending across EU. On the contrary, some representatives of the industry warned about the risk of over-regulation. Several industry stakeholders raised concerns about the risk of creating an information overload for consumers if new information requirements are to be implemented. Finally, a great majority of stakeholders have expressed their preference for targeted legislative action (business associations), among which many have indicated a mix of different forms of extensive legislation action (majority of consumer organisations).

Validation workshop

Discussions on the policy options and their expected effectiveness and efficiency in addressing the problems identified and the impacts revealed that in general business associations and credit providers are in favour of either maintaining the status quo (policy option 0) or non-regulatory action (policy option 1) as it offers stability to the sector, which has already greatly been affected by the impacts of COVID-19, and was considered to effectively address the problems identified without imposing high costs on the industry. To the contrary, consumer organisations expressed to be in favour of extensive amendment to include provisions not addressed by EU regulation (policy option 3b) and even suggested to go beyond the proposed measures. Non-binding measures would not ensure a high level of consumer protection or effectively address the over-indebtedness and detrimental lending practices. EU and national authorities acknowledged the arguments and concerns of both stakeholder groups. A few industry representatives also referred to the recently published European Banking Authority (EBA) Guidelines that have introduced new measures and will already impose costs on the industry.

In terms of feasibility, for obvious reasons, non-regulatory measures would be easily implemented (policy option 1), while extensive amendment to include provisions not addressed by EU regulation would most likely receive resistance from the industry because of the additional costs imposed (policy option 3b). Extensive amendment of the CCD to include new provisions, in line with EU regulation (policy option 3a) would potentially encounter burdens in terms of feasibility risking an overlap with data protection regulation across member states.

In terms of effectiveness, stakeholders both from the consumer and industry side agreed that non-regulatory action will not achieve further harmonisation regarding, for example, the right of early repayment and withdrawal or the creditworthiness assessment. Including certain obligations on the information to consider during the creditworthiness assessments was not considered to be effectiveness in tackling consumer detriment and over-indebtedness.

Regarding EU added value, stakeholders (credit providers, business associations and consumer organisations) agreed extensive amendment of the CCD (policy option 3a and 3b) would contribute to the creation of a level-playing field for the industry and ensure same level of protection for consumers across the EU. A level-playing field would help reduce legal uncertainty and boost the development of a cross-border market offering benefits for both consumers and the industry.

In terms of impacts on consumers and credit providers, discussions confirmed that the more extensive the revision of the CCD, the more costs will be imposed on the industry, except with regard to amendments related to information requirements, which would lead to cost reduction. Extensive revision was considered to have a beneficial impact on consumers as expressed by the majority of consumer organisations. However, this does apply to the creditworthiness assessment. While consumer organisations argue in favour of stricter criteria, they also recognise the potential negative impacts on both consumers, such as consumer discrimination, and the industry, such as high administrative burdens.

Follow-up survey

Results of the follow-up survey revealed diverging views on preferred policy options between consumer organisations and business associations and credit providers. While consumer associations are in favour of extensive revision of the CCD (policy options 3a & b), the industry prefers non-regulatory action (policy option 1). However, stakeholders agreed on the need for amendment of the information-related requirements (policy option 2). Stakeholders who provided answers to the open-ended questions indicated that amendment would be favourable to simplify and reduce the amount of information that needs to be provided at pre-contractual stage, as well as with regard to the provision of information in the marketing of credit. Multiple stakeholders, including national authorities and business associations acknowledged the limitations related to policy option 1 in achieving regulatory harmonisation across EU member states. They appreciate the comprehensiveness of extensive revision of the CCD ensuring a high level of consumer protection (policy option 3a & b), while recognising the need to leave enough space for the implementation at national level. Nevertheless, the industry argues in favour of proportionality and the need to select relevant measures to adequately tackle the problems identified.

In terms of feasibility, national authorities and consumer organisations cautioned limitations related to policy option 1 in achieving regulatory harmonisation across EU member states. This could create legal uncertainty and curb the development of a cross-border credit market. A minority of business associations echoed the concern and highlighted the risk of unequal access to databases across member states resulting from regulatory fragmentation. The majority of business associations, as well as credit providers, highlighted feasibility issues with extensive review of the CCD (policy option 3a & b). A few stakeholders cautioned for aligning provisions in the CCD with the MCD without thorough analysis, proposed in policy option 3a. Finally, the industry also expressed resistance regarding the provision in policy option 3b to introduce APR caps.

In terms of effectiveness, non-binding measures would fail to achieve regulatory harmonisation across member states, according to all stakeholders who provided feedback. This would result in legal uncertainty regarding the creditworthiness assessment, the issuance of credit and responsible lending. As opposed to consumer organisations, business associations consider policy option 2 to be effective in tackling the problems identified in particular with regard to creating a level-playing field for the industry and ensuring consumer protection. Consumer organisations and national authorities indicate that policy option 3b would be most effective to ensure sufficient level of consumer protection, including vulnerable consumers who are more likely targeted by harmful products.

In terms of potential impacts on consumers, analysis of the survey revealed positive to very positive impacts on consumers for policy options 3a and b, according to national authorities and consumer organisations. The results also show that the majority of national authorities indicates the positive impact of extensive revision on the industry. This contrasts with views of the industry. Business associations and credit providers highlight the negative impacts of extensive revision of the CCD imposing additional costs on the industry. Only the provision to reduce the amount of required information in advertisement and marketing was considered to have a positive impact on the industry.

CCD-related questions from the public consultation on the New Consumer Agenda

The public consultation questionnaire focused on the exploration of possible solutions to different issues identified. Responses to the public consultation showed that most stakeholder groups agree on the extension of the scope of the CCD, particularly to cover loans obtained via peer-to-peer lending and credits below EUR 200. Although this contrasts with the view of business associations, indicating that no scope extension is needed. In this regard, it was suggested that the extension of the scope of the CCD i) should be left to Member States considering differences in national markets; ii) and that better application of the existing rules would be more proportionate to the actual risk. While consumer organisations and citizens also argued to include all currently exempted credits.

The provision of information at pre-contractual stage is expected to be improved by simplifying information and focusing only on key features of the offer. The use of comparison tables is also commonly suggested, especially amongst consumer organisations and academic institutions. Views across stakeholder groups differ when it comes to the moment to provide pre-contractual information. While industry representatives prefer right before signing the contract, the rest stakeholder groups argued that pre-contractual information should be provided with a longer notice (one day or even five days in advance).

On the provision of information at the advertising stage, consumer organisations, national authorities and citizens supported the introduction of warning messages and that the information should be given particular prominence. While the reduction of information provided in all communication channels was mostly suggested by business associations and companies.

Respondents generally indicated that rules on responsible lending could be further improved by i) prohibiting the provision of credit in case of negative creditworthiness assessment; ii) introducing caps on interest rates; iii) preventing online credit purchasing without enough time for reflection; iv) introducing binding principles; v) and by banning unsolicited credit offers. However, a significant group of business associations and companies argued that no further measures are needed. It is observed that while industry representatives call for non-standardisation and higher flexibility, authorities and consumer organisations support further harmonisation of rules.

Views on the need of additional EU rules on access to credit databases are divided between stakeholder groups. On the one hand, business associations and companies commonly agreed that EU rules should not be changed neither for CWA nor for credit databases as the current principles-based approach provides a sound basis for responsible lending. On the other hand, the other stakeholder groups generally indicated that EU law should provide for common standards both on data/methodology for CWA and categories of data collected for CWA purposes.

On standards and methodology that should be used, respondents further suggested i) a common European database; ii) a minimum (mandatory) set of information to determine CWA for all credit products; iii) limitation of the use of data to avoid intrusive assessment (e.g. social media and online shopping data). As to categories of data that should be used, stakeholders generally referred to negative, positive, and historic credit data. In addition, they indicated to study best national practices.

Two groups of stakeholders can be distinguished when it comes to their opinion on possible measures to safeguard the interests of both lenders and borrowers in situations of exceptional economic disruption (e.g. COVID-19 pandemic). Industry representatives believed that no action at EU level is needed and/or that flexibility embedded in the prudential framework for banks could be used to facilitate lending. It was reported by a group of industry representatives that extra measures are not necessary, given national responses and the Commission’s Best Practices, which captures the measures adopted to protect consumers. While the rest (consumer organisations, national authorities, citizens, NGOs, research institutions) generally supported i) the implementation of specific rules allowing Member States to enact payment moratoria measures; ii) the adoption by Member States of measures encouraging creditors to exercise reasonable forbearance when a borrower is in financial difficulty; iii) new measures to strengthen services to support over-indebted consumers.

Member State Expert Group on the Implementation of the Consumer Credit Directive

Feedback from national authorities was also gathered through the Directive’s dedicated Member State expert group. Member States generally welcomed the review approach and generally seemed to favour a comprehensive amendment of the Directive, to address problems in terms of scope, information to consumers and creditworthiness assessment, but also to tackle other problems such as practices by credit providers exploiting consumer’s situation and patterns of behaviour, especially in the digital context.

Citizens’ Energy Forum 2020

The 2020 Citizens’ Energy Forum had a dedicated panel on how to empower citizens to finance their transition to clean energy. The Forum acknowledged the importance of enabling consumers to finance sustainable projects, in particular through consumer credit. It also stressed that since substantial investment is needed to achieve climate neutrality in Europe, green loans can contribute to it while directly benefitting consumers, including vulnerable ones, thus enabling to finance sustainable consumption.

Mini-sweep exercise on consumer credit (2021)

13 Member States and 2 EEA countries participated in the exercise and 118 websites were swept in total. A cross-border element was confirmed in 32 out of 118 cases (27 %) of traders, in 10 cases traders offering credit were established in another Member State. In 22 instances, the trader was established in at least two Member States.

Regarding information in advertisement, it appeared that online lenders often omit important information, such as the credit cost in the advertising of consumer credit, which can mislead consumers. In 35 cases out of 118 (30%), the advertising of consumer credit, which indicates an interest rate or any figures relating to the cost of credit, did not include all the standard information by means of a representative example in a clear, concise and prominent way as required by the Consumer Credit Directive.

Regarding creditworthiness assessment, in 29 cases out of 85 of checked creditor websites (34%), Member States mentioned that, based on the information on the creditor’s website, it was unclear how the creditworthiness assessment is performed, including the personal data used for that purpose and the possible use of machine learning. It is noteworthy that discrepancies were noted regarding the lack of clarity in the information provided between different devices, for example, this seemed to be particularly problematic on smartphones. 202

Regarding the short-term high-cost products swept, in 47% of the cases (8 out of 17 products that Member States identified as short-term high cost), the website/ad was flagged for further investigation for potential irregularities. In the vast majority of these cases, this was because the standard information required for advertising was not presented by means of a representative example in a clear, concise and prominent way.

Regarding the COVID-19 crisis, in cases where the Member States had adopted extraordinary measures related to consumer credit (such as payment moratoria), the mini sweep looked into if the required information was provided on the website. In 23 out of 36 cases (64 %), the information was not provided in a clear and comprehensible manner. However, in most of these cases (16 out of 23, nearly 70%) the trader was not required to inform consumers about the measures on its website under national rules and therefore, the website was not flagged for potential irregularities by the sweeper.

Participating authorities will follow up on the cases that were flagged for potential irregularities with EU consumer law based on their national rules on investigation and enforcement.

Annex 3. Who is affected by the initiative and how?

Practical implications of the initiative

Consumers would be affected very positively. Consumer trust would increase thanks to measures tackling practices exploiting consumers’ situations and patterns of behaviour and more effective information provision. New rules on business conduct and remuneration and on financial advice the streamlining of information would ensure better and more informed consumer choices. A higher consistent level of protection would be guaranteed for borrowers, thanks to the extension of the scope of the Directive, caps on interest rate/APR, better creditworthiness assessments and measures to support over-indebted consumers both at an early stage (strengthened prevention) and via remedies (debt advice). Consumer detriment stemming from currently unregulated products would be reduced, and the effectiveness of the Directive in ensuring the protection of consumers would be increased, thus leading to less problems encountered by consumers, and to reduced financial detriment and time losses.

The impact on society is also deemed to be very positive. The promotion of responsible lending practices combined with the broadening of the scope is expected to contribute to limit over-indebtedness. 90% of the over-indebted households in the EU currently have no access to debt advice, but might use it. Moreover, measures on debt advice would contribute to reduce over-indebtedness linked to consumer credit.

The impact on credit providers would be less straightforward. In fact, on the one hand they would have to face most of the implementation costs of the new Directive, as shown by the cost assessment of specific policy measures, to adapt their infrastructure and in terms of personnel costs. However, it can be expected that these one-off costs would be passed on to the customer and thereby covered by the profit margins credit agreements, and as such less burdensome for businesses. Caps on interest rate/APR would be particularly costly for non-bank lenders, since they are more likely to offer high-cost credit. On the other hand, the relatively higher degree of harmonisation, together with the broadening of the scope, would result in a more level playing field for credit providers and to some extent facilitate the conditions to provide consumer credit cross-border credit. It should be mentioned that the impact on bank and non-bank lenders could differ. Non-bank lenders are more likely to offer small value short-term high-cost loans below EUR 200, and seem to perform less thorough creditworthiness assessments and to be less compliant with the Directive. Hence, the extended scope of application, coupled with clearer rules on creditworthiness assessments and reinforced enforcement would affect those actors more than bank lenders. 203  

Public authorities would also face costs. In particular, the EU administration would face costs for the legislative amendment of the Directive, even though the legislative process could be facilitated by the fact that the amended provisions would be modelled after existing legislation, requiring less resources to develop them. National administration would also face a moderate burden. The revised Directive would need to be transposed into national law. Moreover, establishing conduct of business rules pertaining to remuneration policy may give rise to higher costs, since some national labour laws may also need to be amended. Public administrations would also be required to monitor compliance with the new requirements, and some of them might result in high costs given how complex the matter is (e.g. monitoring the use of alternative sources in credit scoring systems using machine learning). Further costs would stem from the provisions on financial education and debt advice. Member State-level public administrations would also bear ongoing costs associated with reporting to the EU and for enforcement of the requirements, but in this context the alignment with other EU legislation could facilitate enforcement, by simplifying the legislative framework applicable to credit.

As regards the impact on other market participants, credit intermediaries would be also affected by the changes included in the preferred option, in particular from the provisions on providing adequate explanation. Since the size of the intermediary market is not known, the costs on this market participants could not be estimated. However, the demand for credit intermediary services seems to be quite low: only 11% of consumers surveyed for Directive Evaluation accessed credit through a comparison website or intermediary. 204 The inclusion of a specific provision on peer-to-peer lending could affect peer-to-peer lending platforms acting as intermediaries (i.e. presenting/offering credit agreements, assisting consumers or concluding credit agreements on behalf of creditor(s), for a fee) by explicitly including them under the scope of the Directive. The preferred option would also have an impact on advertisers on radio broadcasts, whose costs to advertise consumer credit would be reduced thanks to simplified information requirements, which could in turn lead to higher investment in advertising via radio broadcasts, and so increased revenues for them.

Summary of costs and benefits

The tables below present the costs and benefits of some of the measures which are part of the initiative which have been identified and assessed during the impact assessment process.

Table 12 Overview of benefits (direct benefits only include benefits that could be generated as a result of a given measure implemented banks – and not by non-bank lenders) 205

The (partially) quantified benefits for consumers stemming from the assessed measures amount to around EUR 1 990 million.

Enhanced legal clarity is expected to reduce burden on businesses. Moreover, the burden reduction stemming from measures simplifying information requirements represent around EUR 14 million for advertising consumer credit on radio broadcasts. The burden reduction linked to adapting information requirements for digital use is expected to be quite relevant, because it would represent a reduction in costs for providers on at least 25 million personal bank loans annually (personal loans that consumer enter online).

As regards reduced burden for public administrations, the higher degree of legal clarity and the simplified regulatory framework applicable to credit (also thanks to synergies with other existing legislation), together with specific measures to improve enforcement, is expected to render enforcement procedures more efficient (reducing the number of complaints and increasing the level of certainty and compliance).

Table 13 Overview of costs (only including costs generated as a result of a given measure implemented banks – and not by non-bank lenders, in thousands of EUR)

Source: ICF support study to the impact assessment.

Some of the (partially) quantified costs for businesses (around EUR 1 460 million) are expected to be passed on to consumers.

Funding needs for debt advice services for all EU Member States - where such services are either well developed, available, sporadically available or need to be completely set up - would amount to EUR 22.57 million per year. For the period 2021-2030, costs linked to the setting up of debt advice services have been estimated around EUR 230 million. 206 They would be largely borne by public administrations.

Annex 4. Analytical methods used in preparing the impact assessment

Consumers affected in the status quo

Based on the data collected in the impact assessment supporting study the possible number of consumers affected for key provisions of the Directive, key types of credit and key elements of the measures presented in the options considered. A distinction has been made between personal loans and credit card, for which figures could be derived. 207 The figures below should be considered as indicative of the number of consumers affected by the issue. In addition, the figures do not distinguish between the different extents to which consumers are affected by the various issues, possible measures or credit products falling outside the scope of the Directive. As figures are based on different assumptions, and include extrapolations from the UK, which however was a member of the EU until 31 January 2020, they should be treated with caution.

Table 14: Consumers affected annually in the status quo (estimate) based on EU-27 figures

Source: ICF assessment, impact assessment supporting study

Assessment of the policy options’ impacts

With regards to the assessment of impacts, the Impact Assessment supporting study has considered a wide array of economic, social, environmental, and overarching impacts and determine their expected magnitude, likelihood and relevance for stakeholders. An overview of the score given to each impact for each of these elements is presented in the table below. Based on this table, nine main categories of significant impacts were selected (see section 6).

Table 15 Significance of impacts for all the policy options under consideration

Key: ‘●’ low; ‘●●’ moderate; ‘●●●’ high