EU Consumer Credit Overhaul on the way

At the EU level, there are changes on the horizon in relation to the Consumer Credit framework. In June 2021, the European Commission published a proposed Directive to revise and replace the Consumer Credit Directive (CCD II). In May 2022, the European Commission published a proposal for a Directive repealing the Distance Marketing Directive and transferring the rules to the Consumer Rights Directive. The CCD II and DMD II form part of the EU's 2020 Consumer Agenda, which was conceived in part to ensure that consumer rules are fit for changes taking place as a result of  the digital transformation.

The CCD II and DMD II are now at the final stages of the EU legislative process (a political agreement was reached by EU co-legislators in respect of the DMD II in June 2023 and in respect of the CCD II in May 2023 and EU legislators have formally approved CCD II and DMD II). CCD II was published in the Official Journal on 30 October 2023.

The new regime will mean changes to creditworthiness assessments, advertising and promotion of consumer credit, pre-contractual information and conduct of business. The EU also appears to be clamping down on predatory practices. As we have noted in our earlier briefings, this comes at a time when the UK is also expected to embark on significant overhaul of its consumer credit regulatory framework. The briefing below outlines 10 key aspects. 

Ten things you need to know about upcoming changes to EU consumer credit framework

• Types of agreements covered: The scope of the CCD II is broader than the existing CCD. It applies to: credit agreements under EUR 200; credit agreements up to EUR 100, 000 (except where the purpose is to renovate residential immovable property); hiring or leasing agreements with an option to buy goods or services (e.g. motor finance); credit agreements where the credit is granted free of interest and without any other charges, and where the credit has to be repaid within three months (i.e. buy now pay later loans). The provisions of CCD II relating to creditors will also apply to providers of crowdfunding credit services directly providing credit to consumers. The obligations for credit intermediaries under the CCD II will apply to providers of crowdfunding credit services facilitate the granting of credit between creditors acting in the course of their trade, business or profession, and consumers.

• Creditworthiness assessment: New Article 18 of CCD II expands existing requirements in article 8 of the existing CCD. In light of increasing concerns in relation to the use of artificial intelligence in this area (the proposed Regulation on Artificial Intelligence deems AI systems used to evaluate the credit score or creditworthiness of natural persons as high-risk AI systems), consumers will have the right to obtain human intervention on the part of the creditor whenever the creditworthiness assessment involves automated processing. Consumers will also have the right to obtain a meaningful, comprehensible explanation of the assessment made and of the functioning of the automated processing.

• Advertising/promotion of consumer credit: Article 7 and Article 8 of CCD II introduce requirements providing that any advertising and marketing communications relating to credit agreements must be fair, clear and not misleading. It also prohibits wording in communications that may create false expectations for a consumer regarding the availability or the cost of credit or the total amount payable by the consumer. Existing provisions in article 4 of the CCD are largely mirrored in Article 8 of CCD II, which deals with the form and content of information to include in advertising.

• Limiting high interest rates: The new regime provides for caps to be introduced to prevent consumers being charged with excessively high borrowing rates, annual percentage rates of charge.

• Clamping down on predatory practices: The EU is concerned about supposed exploitation of consumer weakness and is clamping down on this area with a number of new requirements concerning so called "tying practices" and "bundling practices" . Tying practices (defined as the offering or the selling of a credit agreement in a package with other distinct financial products or services where the credit agreement is not made available to the consumer separately) are to be prohibited (save for certain exceptions), while so-called bundling practices (i.e. the offering or the selling of a credit agreement in a package with other distinct financial products or services where the credit agreement is also made available to the consumer separately but not on the same terms or conditions as when offered bundled with those other products or services) are permitted. Granting of credit to consumers without their prior request and explicit agreement is also expressly prohibited.

• Conduct of business and requirements for staff: Staff will be required to possess and keep up to date an appropriate level of knowledge and competence. The minimum knowledge and competence requirements for the staff of creditors and of credit intermediaries are to be established by Member States. These requirements are contained articles in 32 and 33 of CCD II. The rules also require potential of conflicts arising from remuneration polices for staff responsible for creditworthiness assessments to be managed.

• Pre-contractual information: Article 10 of the CCD II requires in-scope firms to provide consumers with personalised pre-contractual information, to be provided via the Standard European Consumer Credit Information form set out in Annex I of the Directive. Pre-contractual information is to be provided in good time before and not at the same time the credit agreement is concluded. Key elements of the credit are to be provided in a prominent way on the first page of the form, so that consumers can see all essential information and on the screen of a mobile telephone. Annex II to CCD II contains the content and layout of the Standardised European Consumer Credit Overview. Where pre-contractual information is provided less than one day before the consumer is bound by the credit agreement or offer, the creditor/ the credit intermediary will be required to send a reminder to the consumer about the possibility to withdraw from the credit agreement. CCD II also requires consumers to be informed where they are presented with a personalised offer that is based on automated processing of personal data.

• Diverging UK approach: As discussed in our briefings (see here and here), the UK itself is also planning a major overhaul of the Consumer Credit regime and will be changing many of the provisions in Consumer Credit Act 1974 so that it is fit for the modern age. Areas to be tackled include information requirements; rights and protections; and scope. This overhaul is likely to take place over a number of years and will be aligned with the implementation of the Smarter Regulatory Framework (see our briefing here). Like the EU, the regulatory framework will cover BNPLs, with the UK government publishing detailed plans to bring BNPL within the scope of regulation (see our briefing here) in 2023.

• Distance Marketing: DMD II repeals DMD I and transfers provisions concerning contracts concluded at a distance as an additional chapter of the Consumer Rights Directive. DMD II allows the possibility of use of a withdrawal button for contracts concluded at a distance via a "withdrawal function" in the provider's interface.  DMD II also updates provisions concerning the manner and timing of pre-contractual information and content, and also introduces a right to request human intervention on sites displaying automatic information tools (e.g. chatbots). It also clamps down on the use of so-called dark patterns marketing practices aimed at influencing consumers' choices.

• Transposition: CCD II will enter into force on the twentieth day following its publication in the Official Journal of the European Union. Member States will then be required to adopt and publish transposing measures by 20 November 2025. The transposing measures will need to apply from 20 November 2026. DMD II will enter into force 20 days after publication in the Official Journal and Member States will have 2 years to transpose it and another six months to apply it.