Susana Fernández Caro reports on negative responses to the European Commission’s draft legislation promoting ‘responsible lending’.

European consumers will soon be enjoying more protection when obtaining a personal loan. A bit too much, in fact, according to the banking industry. The European Commission is preparing a new directive aimed at harmonising legislation on consumer credit in all European Union (EU) countries. Designed to increase consumer protection and enhance transparency in the over €500bn ($574bn) European consumer credit market, the new law – which is in its consultation period – is arousing significant criticism throughout the European financial services sector.

Increases in costs and bureaucracy are emphasised as counterproductive effects arising from what the European Commission defines as “responsible lending”. This principle – which was absent in the 1987 consumer credit directive, which the new law intends to update – means that “the lender must identify the most favourable or least expensive product for a consumer”, according to the draft legislation.

Banks and financial institutions will also have to assess the borrower’s ability to repay before granting new credit.

Frederic Nze, head of the consumer finance division at UK bank Barclays says: “The consequences for the consumer would be loss of flexibility, increased costs of credit and tightening of credit availability.”

Too much protection

German banks have also shown their disagreement with the presumed consumer overprotection that the “responsible lending” would entail.

Stephan Steuer, deputy general executive manager and chief counsel of the German banks association Bundesverband Deutscher Banken (BdB) says: “New rules and more bureaucracy by no means lead to more security for consumers. Much of the regulation is unbalanced and out of touch with current practice.”

The BdB argues that “ultimately the overregulation proposed in the EU consumer credit directive would effectively put an end to the overdrafts” that are highly popular among Germans. As of end of 2001, German banks’ credit consumer portfolio amounted to €222.4bn, representing 3.5% of the lending to the German domestic private sector.

Implementation costs

Barclays, the UK’s fourth-biggest bank with 15 million customers, estimates that adapting its overdraft policy to the new regime’s requirement would cost about Ł10m ($16bn) a year. “There needs to be a balance between responsible lending and responsible borrowing. It would be uneconomical to serve certain parts of the market,” Mr Nze says.

The British Bankers Association talks about “the EU controversial consumer credit directive”, which reflects a widespread worry in the British banking industry about the impact of the new legislation. As of July 2002, the UK credit consumer market amounted to £783bn, 52% of which was mortgages – which will remain out of the scope of the directive – 7% was personal loans, 3% credit cards and 1% overdrafts.

The new legislation has also raised concerns in the Spanish financial sector. The “responsible lending” issue is again subject to criticism. “It does not seem reasonable that the whole burden of fulfilling this principle falls on the lender whereas the consumer is exonerated,” says Pedro Guijarro, chairman of the Spanish National Association of Financial Credit Institutions.

Two additional controversial measures in the draft legislation are the right for consumers to withdraw from a loan within 14 days and free of charge, and the allocation to the lender of the liability when the supplier does not fulfil its contractual obligations with the client. Mr Guijarro says: “These measures would entail operational changes that, given the higher risk involved, would ultimately make loans more expensive and difficult to obtain.”

Banks also point out that the limitations in the use of databases with consumers’ personal data would have a direct impact on the management of the loan contracts, making it difficult to fulfil the Basel II Accord risk management procedures when calculating the total equity. The new directive bans the use of clients’ data for purposes other than assessing borrowers’ solvency.

Transparent terms

The commission’s objective of increasing transparency shows on the harmonisation of the “total cost of credit to the consumer”. The annual percentage rate (APR) will be replaced by two new terms: the sums levied by the creditor (SLC), representing the amount of money that the consumer pays to the lender; and the total lending rate (TLR), which expresses the SLC as a percentage.

A plenary session of the European Parliament to discuss the directive is scheduled for September. The parliament will then send its suggestions to the European Council, which will submit its views back to the parliament. In case of disagreement with the proposals, the European Commission will respond with the relevant amendments.

The directive is not expected to come into force next year, due to European Parliament elections – with the new state members of the enlarged EU also joining in. Any draft legislation not passed this year is unlikely to be adopted any time before 2005.

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