At a glance - the CCD II

Introduction

The proposed Consumer Credit Directive II (CCD II) was originally put forward by the European Commission in the summer of 2021 as part of the New Consumer Agenda. It is intended to ensure that consumer credit regulation is adapted to the digital era, following the surge in online credit during the COVID-19 pandemic.

The CCD II has recently been approved by both the Council of the EU and the European Parliament and is awaiting publication in the Official Journal of the EU (OJ). The Directive will enter into force on the twentieth day following its publication in the OJ. Member States will then have two years in which to transpose the CCD II into their own laws and regulations. These domestic measures will then apply within three years of the CCD II coming into force. At that time, the current Consumer Credit Directive (CCD I) will be repealed.

The purpose of this article is to briefly summarise some of the key changes that the CCD II will introduce.

Systems and controls

The CCD II makes a number of important changes to the scope of EU consumer credit regulation which will mean that EU consumer credit firms will need to update their systems and controls in due course. In particular, the CCD II provides that credit agreements under EUR 200 and credit agreements up to EUR 100,000 will be covered as well as unsecured loans involving a total amount of more than EUR 100,000 where the purpose of the credit is the renovation of a residential immovable property, and credit granted free of interest and without any other charges. Also within scope are crowdfunding credit services, which are described (for CCD II purposes), as the operation of a digital platform which matches or facilitates the matching of prospective lenders (whether acting in the course of their trade, business or profession, or not) with consumers that seek funding. The CCD II will apply to operators of such platforms where they act as creditors, and also in their capacity as credit intermediaries but does not establish a bespoke ‘P2P’ regime for platforms.

Buy-now-pay-later products provided by third party lenders are explicitly included in scope of the CCD II, effectively switching off certain of the exemptions under CCD I and utilised by some lenders in relevant EU markets where they are applied.

However, the CCD II exempts from scope certain deferred payment arrangements, where a supplier of goods or a provider of services gives a consumer time to pay for goods or services free of interest and without any other charges (except for limited charges for late payments in accordance with national law) and where the payment is to be entirely executed in a limited time-frame of 50 days from the delivery of the goods or services. There are, though important restrictions on the availability of this carve out for certain ‘large online suppliers’ of goods and services which will likely result in new licensing obligations for larger retailers in the EU.

Changes to pre-contract processes for lenders

The requirements concerning the information to be provided before a credit agreement is concluded are also changing under the CCD II. For example, to ensure a higher level of consumer protection, certain advertisements, such as those encouraging consumers to seek credit by suggesting that credit would improve their financial situation or specifying that registered credit in databases have little or no influence on the assessment of a credit application, are prohibited. Lenders will also be required to include in their advertisements a new, ‘clear and prominent warning’ that borrowing costs money (or equivalent wording), in a significant change to advertising requirements.

Creditors, credit intermediaries (or providers of crowdfunding credit services) will be required to give consumers personalised pre-contractual information, which must be provided in good time before and not at the same time as the conclusion of the credit agreement; with certain process-related changes for lenders arising from the reforms, including requirements to remind borrowers of withdrawal rights if pre-contractual information is provided less than one day before conclusion of the credit agreement.

Credit worthiness assessments are also changing under the CCD II. For example, where a creditworthiness assessment involves the use of automated processing of personal data, a consumer has the right to request and obtain from the creditor human intervention. This must provide a clear and comprehensible explanation of the creditworthiness assessment and allow the consumer to express their own point of view to the creditor, and request a review of the assessment.

Conduct of business

Consumer credit firms will have to be mindful of Chapter III of the CCD II which introduces new requirements around bundling practices and advisory services and a ban on tying practices and the unsolicited granting of credit, including in relation to non-requested pre-approved credit cards sent to consumers and the unilateral introduction of a new overdraft facility or credit card spending limit.

There are new conduct requirements located in Chapter X of the CCD II which require careful consideration. These new requirements are being introduced given the substantial differences in the laws of the various Member States. Of particular note is that creditors and credit intermediaries will need to act honestly, fairly, transparently and professionally, and take account of the rights and interests of the consumer when carrying out consumer credit activities or crowdfunding credit services. Member States are also to ensure that the manner in which creditors remunerate their staff and credit intermediaries, and the manner in which credit intermediaries remunerate their staff, does not impede this obligation. Also, where advisory services are provided, Member States are to ensure that the remuneration structure of staff at creditors and credit intermediaries does not prejudice their ability to act in the consumer’s best interest and is not contingent on sales targets. In order to achieve this goal, Member States may also ban commissions paid by the creditor to the credit intermediary.

Chapter X also includes provisions regarding the knowledge and competence requirements for staff. This includes that creditors and credit intermediaries will require their staff to possess and keep up-to-date an appropriate level of knowledge and competence in relation to consumer credit activities, as well as in relation to consumer rights.

Chapter XI dealing with financial education and support to consumers in financial difficulties also contains new requirements. For example, financial education measures are introduced for Member States to improve consumers’ financial literacy. In addition, Member States are to require creditors to exercise, where appropriate, reasonable forbearance before enforcement proceedings are initiated. Forbearance measures may include a total or partial refinancing of a credit agreement and a modification to its existing terms, including extending the term and offering a payment holiday. Where Member States allow creditors to impose additional charges on the consumer in the event of default, Member States shall place a cap on those charges. Where consumers experience or might experience difficulties in meeting their financial commitments, Member States are to ensure that independent debt advisory services are made available to them with only limited charges payable for such services.

Credit agreements

As for the form and content of credit agreements, the CCD II builds on the existing provisions in the CCD I so firms will need to read the new provisions carefully. Furthermore, the CCD II includes certain provisions detailing what information needs to be provided to a consumer prior to any modification to the terms and conditions of a credit agreement.

Overdrafts and overrunning already feature in the CCD I but the CCD II now includes provisions providing that the creditor will keep the consumer regularly informed, at least once a month, about certain aspects of an overdraft facility. Where significant overrunning occurs, which exceeds one month, the creditor must inform the consumer without delay and inform them of the conditions that apply, including any penalties, charges or interest on arrears applicable.

The withdrawal and termination provisions in the CCD II will be familiar to those already acquainted with the CCD I, although it is not a straight copy across so care will need to be taken. The CCD II also provides that Member States will introduce measures to effectively prevent abuse and ensure that consumers cannot be charged with excessively high borrowing rates, annual percentage rates of charge or total costs of credit, such as caps. Whilst this may already occur in some Member States, it is not covered in the CCD I.

Enforcement

The CCD II notes that current Member State rules on penalties differ significantly and that not all Member States ensure that dissuasive fines can be imposed on traders responsible for widespread infringements. Given this, the CCD II requires Member States to lay down rules on the penalties applicable to infringements of the national provisions which are adopted pursuant to the Directive. These penalties are to be effective, proportionate and dissuasive.